Alexandria Real Estate Equities Inc (ARE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First-Quarter 2012 Alexandria Real Estate Equities, Incorporated Earnings Conference Call. My name is Caris, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to your host for today, Ms. Rhonda Chiger. Please proceed, ma'am.

Thank you, good afternoon. This conference call contains forward-looking statements within the meaning of the Federal Securities Laws. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's Form 10-K, annual report, and other periodic reports filed with the Securities and Exchange Commission.

Now, I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Thanks, Rhonda, and welcome, everybody, to our -- actually 60th quarterly conference call as an NYSE-listed Company, and the 15th anniversary this month of our IPO in May of 1997. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, and Krupal Raval.

It actually struck me, driving into work today as I was listening to sports radio and the Dan Patrick Show, that yesterday is gone, and it's all about today and tomorrow. So, we're going to focus with that as our theme -- focus on today and tomorrow. 1Q was actually a pretty solid quarter, and we have, though, much work to do through the rest of 2012, and that's really our laser focus. I'm going to start off really with balance sheet and capital allocation thoughts. We did have, I think, a very productive first quarter when it comes to the balance sheet, as you saw from both the press release and supplemental, the consummation of our debut bond offering, the perpetual preferred, the line of credit, which we just closed, and the, I think, really hallmark high-quality JV capital -- or JV transaction with JV Capital.

We've got much more to do through the balance of 2012, focused on suburban asset sales, as well as other non-core asset sales for our capital recycling program. Dean's going to talk -- refer to that. Obviously, we're focused on land sales, and we'll be reporting some in the quarters to come, and potentially another potential JV relationship that we are exploring.

But as you know, or should know, asset sales in the lab space world are more complex and time-consuming than simple generic [office]. That's important to keep in mind. As we think about some of our markets, and this recycling program, obviously Seattle, San Francisco, Maryland, Massachusetts are areas that we're focused on. As many of you know from our press release, and then the -- previously, we did complete a very high-quality joint venture in the key Longwood medical sub-market, a market we've held a critical -- probably one of the best locations in all that sub-market, highest concentration and density of research hospitals, and really teaching platform.

We consider our Main-and-Main location truly a triple location, which we're always focused on. We will, once we open the Longwood Center, will be the best-in-class building there, by far. We're looking, and we'll report next quarter, at a strong yield, and no net future capital outlay, which we were pleased about. We completed partial sale of the land at a gain, and we match-funded the future capital with both the construction loan and our JV capital, as you know.

We did make one small acquisition in a -- really, one of the best locations in all of Research Triangle Park, with a solid yield. It wasn't something we were necessarily looking to do, but it was a very opportunistic situation, and we took the opportunity. And it will create kind of a platform for other things we're doing down there.

One key new build-to-suit that Steve's going to discuss a little bit more in south San Francisco, which help moves another key parcel from our land bank in south San Francisco, which has been a challenging sub-market into the development process for future cash flow at a solid yield. It's really one of the best locations in south San Francisco, and it certainly is a best-in-class tenant. Steve will tell you a little bit more about that, with whom we have a very close relationship, and we're proud that they chose Alexandria over numerous other potential landlords and land sites down there, or up there. We continue to be very focused on attracting high-quality tenants to key land parcels for NOI creation, or to liquefy certain land holdings. Clearly our target is the lower non-income-producing land as a percentage of GAV to about 15%.

When we move really to operations for the first quarter, it's important to remember, as many other teams have reported, the macro market still remains challenging, and the political climate clearly in disarray. Following our fourth-quarter highest volume-leasing quarter in the history of the Company, as well as the highest-leasing year in the history of the Company in 2011, we're very pleased to report really solid leasing demand in the first quarter -- 63 leases signed for 912,000 square feet. And really balanced by region -- 19% coming from San Diego; 24% from San Francisco; 15% from RTP; 13% from Maryland; and 27% from Boston.

This really confirms the solid life-science demand really for our best-in-class properties, and our best-in-class sub-market adjacency locations. There are lower-quality lab space over-hanging some sub-markets, which are keeping somewhat of a lid on rents, and some of those landlords are making, in some cases, hard-to-understand deals, but when you have the best locations and best quality assets, we feel good about the outcomes that we have and will be having.

On the development side, we've got six projects that are in development. Steve will talk to you somewhat in depth about 499 Illinois, but our 225 Binney with Biogen Idec, our Onyx deal in south San Francisco, Illumina in San Diego, another small build-to-suit in UTC with a 100% occupied tenant, and our small Canadian development with GlaxoSmithKline are all 100% leased. We know our challenge at 499 Illinois, and as I say, Steve will highlight that in some detail.

On the redevelopment leasing, we've made, I think, very good progress on four principal urban redevelopments for Hunter Tech Square. We're almost 40% leased. We have two or three good prospects that we have good dialogue going on, and we expect to have some good results in the coming quarter or two.

Johns Hopkins is now in move-in mode, so that's put to bed. At Campus Point, we actually only have 17,000 or 18,000 square feet un-leased, and that's under a hard option to Celgene. Finally, at our 1551 Eastlake, the former Gates Foundation, we're almost half leased, and we expect to have good progress over the next quarter or two. Steve will update East Jamie for you.

And I think it's important to remember that a very significant portion of active development and redevelopment are actually leased, and make up much of the projected NOI ramp-up for the fourth quarter. We think we go into the rest of the year with good momentum.

And I'm going to ask Steve to now comment on detailed leasing activity.

Hello. This is Steve Richardson, and I'll go ahead and comment on the significant key trends, primarily focused on the greater Boston and San Francisco Bay area cluster markets. From a broad pattern perspective, we're really seeing the life-science sector in these markets experiencing demand from a critically important segment of the industry's ecosystem. And that is an emerging second cohort of companies that are driving towards commercialization and significant product revenue sales.

Large biopharma enterprises, historically that provided a foundation of excellence for the industry -- Genentech, Amgen, Biogen, are now being followed by companies that have been working diligently for many years on product research and development, with the promise of delivering novel therapies, and that promise is now becoming fulfilled. Commercialization from these companies is a very exciting and compelling evolution in the industry, as the roster of biotechnology companies joining the ranks of the aforementioned giants with significant product revenue is growing, and on the move.

With that backdrop, focusing on Cambridge's Kendall Square District, we really see the lab market demand today dominated by companies in the second cohort. They're really organic growth from home-grown enterprises at the cusp of commercialization, and this demand ranges between 1 million and 1.5 million square feet today. The companies are seeking to consolidate in high-quality headquarters facilities that will provide a platform as a commercial company moving forward.

The lease rates today in Kendall Square range from the [mid-50%s] triple net, to [low-70%s] triple net for existing space and build-to-suit opportunities, respectively, and has a market vacancy rate of approximately 15%. Alexandria's asset base in Kendall Square is performing very well, with a 4.4% vacancy rate, and as Joel mentioned, we're in the midst of good activity in the 400 Tech Square re-development project, although we are experiencing some competition from chronic vacancy in other projects in the market.

Turning to San Francisco, and in particular the south San Francisco cluster, we've consistently indicated or cautioned regarding this important cluster, as we've exercised discipline and restraint regarding capital allocation for acquisition opportunities during the past few years, and focused exclusively on our existing asset base and build-to-suit opportunities. With that, we're pleased that this discipline and focus has been rewarded, as we are announcing the execution of a long-term lease with Onyx Pharmaceuticals for 171,000 square feet at 259 East Grand Avenue. This is Onyx's second facility on Alexandria's fully integrated East Grand campus, and brings their footprint up to approximately 300,000 square feet. Onyx really represents one of the best of the second cohort of companies mentioned before, as they are enjoying significant product revenues today, and have great promise with additional products in their pipeline. And we are delighted to grow our partnership with the company.

The overall south San Francisco lab market is incrementally improving, with a vacancy rate at approximately 9.4%. Lease rates remain in the low- to mid-30%s triple net for existing space, and our asset base in the sub-market is performing well, with a vacancy rate of 3.2%. We continue to be engaged and in negotiations with an existing tenant and a new tenant at our East Jamie Court development, for a total of 1.5 floors, or approximately 40,000 square feet in its 163,000-square-foot facility, and we'll be targeting Q2 to Q3 to consummate these transactions.

Moving north a bit up to Mission Bay, it remains a tight market, with vacancy in our portfolio of just 1% or so, when excluding a couple of retail suites. The 499 Illinois project represents the only block of space available for life science use, as the China Basin building has been fully absorbed with tech users. Given the high-quality waterfront location, we are exercising patience as we continue dialogue with institutional life science users. We've been here before in Mission Bay, as we've brought 1700 Owens, 1500 Owens, and 455 Mission Bay Boulevard South to the market in a similar state, and ultimately secured excellent anchor tenants.

Salesforce.com is in a pause mode, as they're evaluating their options during the next six months, as we've mentioned before. But UCSF continues to make very significant and meaningful investments in Mission Bay, with the grand opening of their $200 million, 237,000-square-foot neuroscience center on their campus, and rapid progress on the $1.6 billion medical center's hospital complex.

Moving for a moment to the 2012 roll-overs, we're making steady progress in that realm as well. At the end of Q4 2011, we reported 694,000 square feet of remaining leases to be resolved, and are pleased to have reduced that figure to 352,000 square feet. We signed 36 leases in the roll-over category, totaling 275,000 square feet during Q1, at lease rates that provided a cash basis increase of 1.1%, and a GAAP-basis increase of 7.6%, when excluding the one lease in the secondary Sorrento Valley sub-market of San Diego.

The remaining 167,000 square feet of space that's rolled this quarter is concentrated about 50% in Cambridge in very high-quality assets, so, we expect to do fine; 33% in Maryland, which may present some challenges; and just 13% in San Francisco, where we should also do fine. The forecast for the balance of the year at this time from a lease rate perspective is consistent with guidance that was provided at the end of 2011, cash basis of relatively flat, and a GAAP basis up to 5%.

Thank you, and I'll turn it over to Dean.

Thanks, Steve, and good afternoon, everyone. Our results for the quarter really reflects a $0.01 increase in our interest expense net for one month, related to our debut 4.6% unsecured bond offering, and approximately $0.005 increase in preferred stock dividends related to the overlap of our 6.45% series E preferred stock with our 8.375% series C preferred stock. Additionally, our results included a loss on early extinguishment of debt of approximately $623,000, or $0.01 per share, related to the write-off of unamortized loan fees from the early retirement of our 2012 term loan.

Our results also included a D42 preferred stock redemption charge of approximately $6 million, or $0.10 per share, upon calling for redemption our 8.375% preferred stock. NAREIT FFO, including these items, aggregating the $0.11, was approximately $0.97 per diluted share, and FFO per share, as adjusted, was reported at $1.08. Earnings per share diluted was $0.41 before the loss on our early extinguishment of debt and the preferred stock redemption charge.

Turning to core operating metrics, first-quarter 2012 NOI was as expected at $101.6 million, and consistent with fourth-quarter 2011 NOI of $101.8 million. Last quarter, we highlighted 2012 occupancy declines in south San Francisco, greater Boston, and the suburban Washington, DC markets. The San Francisco Bay overall occupancy declined from 96.7% to 93.9%, primarily due to the 54,000 rentable-square-foot move-out at Oyster Point. Occupancy should increase in the second quarter from leases scheduled for delivery at 951 Gateway, and a couple of other properties. Additionally, occupancy is also projected to continue to increase in the second half of 2012.

Greater Boston occupancy declined from 93.9% to 91.7%, primarily due to move-outs at 300 Technology Square and 790 Memorial Drive. We expect occupancy to increase to the 93% to 94% range in the second quarter from executed leases and expected deliveries at 790 Memorial Drive, 99 Erie Street, and 68 Preston Court.

Lastly, suburban Washington, DC, as you recall from our last conference call, we have one large user of approximately 95,000 rentable square feet at Virginia Manor that is planning to move out in May at the end of their lease term. These spaces are both part lab and part traditional office, and we expect this space to require some time to re-lease. Another user of 105,000 rentable square feet at 1413 Research Boulevard, that was evaluating which research groups would remain in occupancy, recently confirmed that they will be vacating the space in May of 2012. We had assumed a 50% chance of renewal previously, so, this change was partially included in our guidance. This tenant at 1413 Research has been in the building since the 1990s, and the older brick building is currently planned for future development or redevelopment.

Looking forward, NOI is expected to increase in the second quarter and the third quarter, and our estimate for NOI for the fourth quarter remains in the range of $111 million to $113 million. Our same-property growth in NOI was approximately 1.7% on a cash basis, and a decrease of 0.7% on a GAAP basis. The cash performance was primarily driven by contractual rent steps; rent commencement on the development project at 249 East Grand starting on April 1 of 2011; and rent commencement on a significant amount of space in the East Tower in the Manhattan Project in New York.

Same property performance also reflects the impact of anticipated roll-overs in Cambridge at 300 Technology Square and 790 Memorial Drive in the first quarter, resulting in a reduction in both rent and recoveries. We are expecting an increase in occupancy in Cambridge related to deliveries in the second quarter from executed leases. Same property operating expenses increased 1.3%, reflecting an increase in property tax expenses, offset by a reduction in steam and snow removal expenses, due to the mild winter in the first quarter of 2012.

Briefly, on our leasing stats, rental rate changes from new or renewal of previously leased spaces increased 3.3% on a GAAP basis, and decreased 2.8% on a cash basis. We actually had one lease for about 18,000 rentable square feet driving the statistics down for the re-leasing of the space to a new tenant in the Sorrento Valley market. This particular sub-market, by the way, is the lowest rental rate sub-market in the San Diego lab market region for Alexandria. If you excluded this one lease, the rental rates would have been up 1.1% on a cash basis, and up 7.6% on a GAAP basis.

Our G&A run rate has moved ahead of schedule with the hiring of additional personnel and continued build-out of our fully integrated regional operations. Since December of 2011, we have added 6% to our number of employees. Additionally, Joel's employment contract was amended in April, and now includes a total stock return performance and other key changes to retain and reward Joel for performance, while also closely aligning with the interest of our shareholders. G&A expenses are expected to be fairly consistent for the full year of 2012 with 2011 at 7% to 8% of total revenues.

Moving next to our balance sheet. As clearly highlighted in our press release and supplemental, we had a very strong quarter of balance sheet management milestones. Briefly, the 4.6% unsecured notes resulted in higher interest expense on a net basis in the first quarter by $0.01, related to being outstanding for about one month in the quarter, and is expected to result in additional interest expense net in the second quarter by an additional $0.02.

The 6.45% Series E perpetual preferred issuance did overlap with the outstanding Series C until the redemption on April 13, resulting in an increase in preferred dividends in the first quarter in the range of $0.005. The second quarter will not realize a benefit from the refinancing due to the overlap of the two securities for a couple weeks in April. In the third and fourth quarter, this refinancing will reduce preferred stock dividends by approximately $0.01 per share, again, in each of the third and fourth quarters of 2012.

The amendment to our unsecured line of credit reduced pricing by over 1%, from 2.4% over one-month LIBOR, plus a 40 bp fee for unused commitments, for an annual rate of approximately 2.55%. The new pricing under the amendment is 1.2%, plus an annual facility fee of 25 bps. This amendment will reduce interest expense net by approximately $0.01 per quarter.

In summary, in the first four quarters of 2012, we have been very successful in tapping a variety of sources of capital. Going forward, we expect to close another small, but important, construction loan for approximately $50 million to $55 million. This loan is currently under negotiation for our recently announced development in south San Francisco at 259 East Grand Avenue. We will also actively pursue asset sales to meet or exceed our targeted dispositions for 2012. We are currently 42% through our targeted dispositions for the year. We remain committed to lower leverage, and will require capital to balance our incremental construction spending over time. Some of this capital will come from land in operating asset sales, and we may consider implementing a modest ATM program.

Our debt-to-EBITDA will also benefit from the significant amount of NOI and EBITDA contribution beginning in the third quarter of 2012, and ramping up into the fourth quarter from the delivery of our significantly leased redevelopment and development projects. Again, our goal over time is to improve debt-to-EBITDA to sub-6.5 times.

Turning to page 7 of our press release, I'd like to rattle through some key assumptions underlying our guidance. Same-property NOI performance, targets for cash and GAAP have not changed from previous guidance. On a cash basis, we're expecting it up 3% to 5%. On a GAAP basis, up 0% to 2%. Our expectations on rental rate steps have not changed as well, and we expect the renewals and re-leasing of space to be up, up to 5% on a GAAP basis, and slightly negative, slightly positive on a cash basis.

Straight-line rents have not changed in our projections, and are expected to average about $6.5 million per quarter; FAS [141] at $800,000 per quarter has not changed either. G&A expenses are expected to be up meaningfully at 12% to 14% over 2011. Capped interest has been adjusted downward slightly to a range of $55.5 million to $61.5 million, and is somewhat dependent on timing of construction activities. The decline is really reflective of our lower interest rate on our line of credit. Similarly, our interest expense net has also declined in our forecast to $73 million to $79 million.

Moving to page 8 of our press release, we continue to make progress on our target NOI growth for the fourth quarter, a significant amount of this NOI growth is contractual pursuant to executed leases. We updated key assumptions for the fourth quarter, and re-confirmed the range of NOI expected at $111 million to $113 million; updated G&A slightly to $11 million to $12 million; also updated interest expense to $20 million to $23 million; preferred dividends reflective of our preferred refinancing down to $6.5 million; and re-confirmed FFO at $71 million to $73 million, and FFO per share of $1.15 to $1.17.

Importantly, let me turn to the sources and uses table on page 8 of our press release, and just highlight what we've completed and what has changed since our last guidance that was reported on February 22. Our asset sales remain at $112 million for full target, and as I mentioned, we're 42% of the way through that target. Our unsecured senior notes was updated for the final offering, increased by $50 million.

We continue to negotiate our secured construction financing for the project in south San Francisco, and there's no changes to the estimated proceeds from that. The total loan will aggregate closer to $50 million to $55 million. We've updated our sources for the Series E preferred stock offering at $125 million of net proceeds, and our debt equity and JV capital increased from $238 million to $247 million, just slightly. The remaining projected number at $331 million for the last three quarters of the year includes about $130 million of borrowings under our line of credit to redeem our Series C preferred stock.

Turning to uses of capital, our construction spending has increased from $584 million to $612 million for the full year of 2012, really up about $28 million, primarily related to acceleration of timing of construction payments from 2013 into 2012. Combined with some expansion construction spending related to Illumina's expansion requirements, and a little bit from our Longwood project that we intend to reinvest some of our proceeds that we cashed out. Acquisition assumptions are up slightly -- still very minor number for the year. No other changes, other than updating our Series C preferred stock redemption in our uses of capital.

In closing, our range of guidance for 2012 was reported as follows -- normalized FFO per share diluted remains unchanged at $4.37 to $4.41; NAREIT FFO per share diluted was provided at $4.23 to $4.27; and the earnings per share diluted was provided at $1.36 to $1.46. Just keep in mind, our guidance for 2012 was updated to reflect $0.14 of charges, $0.03 of it related to the write-off of a portion of loan fees related to the modification of our line of credit, $0.10 for the D42 preferred stock redemption charge. Previously, we had provided a guidance charge of $0.01 related to the write-off of unamortized loan fees from the early retirement of our 2012 term loan.

With that, I'll turn it back to Joel.

Okay. Operator, if you'd open it up for Q&A?

(Operator Instructions) Ross Nussbaum, UBS.

A couple questions for me. First, I understand the language regarding the increase to the budget for G&A expense this year. What I'm trying to understand though, is why wasn't any of that known or contemplated when the guidance was given a few short months ago?

That's actually pretty easy. That's because the effort -- actually, maybe the easiest thing to do is refer you to our proxy. We spent a good deal of time in the proxy outlining the process that we undertook to look at the ISS issues. That took the study of two independent comp groups, plus the Board, plus the comp committee, plus myself on the Joel side; and then on the expansion side, we're always looking at opportunities in the market, and we're actually pretty somewhat busier than we thought in a number of markets with the activities we have. So those are things that just evolve over time, as you know, Ross.

Okay, fair enough. In your very expansive supplemental, I think it's page 20, same question I asked last quarter. The yields on the suburban redevelopment, are those still targeted mid- to high-single digits?

Yes. I think they vary by individual projects. Some at the upper range actually are north of 10% and some at the lower range are in the mid-single digits.

Is there any reason for the second quarter in a row that those numbers got left out of the supplemental?

I don't know that they're left out, but they're not all that material to the other projects that are much bigger.

Well, $234 million -- I'll leave that one in the eye of the holder. Similar questions on India and China. Looks like there was about $7 million spent in the first quarter, $38 million budgeted for the remainder of the year, it looks like. Can you give us a sense of exactly what kind of activity is going on there? I noticed the square footage also looks like it changed a little bit.

As you know, we have two projects that we're working on in China, a small one in the south and a little bit larger one, but by and large, they're not super-material projects in China. We continued to enhance the buildings and work on leasing in those markets. We'll report over time on that our success, although China, we've said publicly, is a tough market for a lot of reasons. In India, our footprint is larger. We think it's a big future market, but as we've said both at Investor Day, where you attended, and then certainly on the fourth quarter call, that we had cut our capital allocations to India based on just overall spend this year by about 50%. We're primarily working with credit tenants who are at the top of our credit tenant roster to fulfill their needs over there, so we're pleased about that, as well.

Ross, it's Dean here to close out your last question on the change in the square footage in Asia under construction. It had to do with the completion of some pre-construction activities on a land parcel, so it dropped off capitalization and is sitting at idle land today.

Okay. Just to be clear, on the $152 million that's budgeted to be spent, $114 has already been spent. Is there actually anything physically there, or is that all moving dirt and pre-development work?

No. There are actual operations, building, et cetera.

But nothing's leased at this point?

Nothing leased at this point? No. Considerably leased, actually.

The stuff that's under construction has some pre-leasing on it.

We're also operating properties with some top-tier pharma that are already in operations.

Okay.

Over time, when that operation becomes more material, we will probably even tour people out there, so if you want to fly to India over the coming year or two, we will take you there.

Okay.

You will be amazed.

There's nothing there on the leasing in terms of the percentages. That's why the question comes up.

No. We actually have considerable leasing.

Okay, it might be helpful to--

Our model for India is not to do spec developed, by and large. Our model in China was to see if we could build in China. We know we can do a great job. As I said, I think, many times, our challenge in China is when we bring one of our pharma tenants over there they end up with 30 bids from local economic development groups, economic zone cities, provinces that creates a real distraction. We've kind of figured out how to overcome that, but we're not sure we want to commit more capital to the Chinese market, certainly in the short term.

Thank you.

Anthony Paolone, JPMorgan.

Are you seeing any lift in lab rents in the Bay Area, given how much rents have moved for conventional office from all the tech demands?

Tony, it's Steve. In Mission Bay, again, we've got the only lab facility there, so I think consistently as we've said in the past, we pro forma the project at rents that we've already completed at 1500 Owens, at 455 Mission Bay, so I think we'll certainly do that or better. Moving to south San Francisco, we are seeing some incremental improvement. I would say it's modest at this point, though. There still are a couple of sub-lease opportunities that need to be burned off, but I think we're finally turning the corner over the next -- it will be a few quarters, it's not going to be the next couple of weeks. We will see some uplift in rental rates there towards the end of the year and in the beginning of next year.

I think, Tony, what really -- and Steve and I were talking about this earlier -- what really has fundamentally changed the Bay Area, at least the mid-peninsula, which would be south San Francisco market, is really the acquisition by Roche of Genentech, the full acquisition. That powerhouse of spin-out, spin-offs, expansion, just has changed fundamentally, because Roche being a big pharma just operates very differently, even far differently than Novartis, which is another Swiss company. I think until things settle down with that, I don't think at least in the south San Francisco -- set Mission Bay aside -- I don't think you'll see dramatic increases there. I think Palo Alto remains very strong, there's virtually no space available down there. Mid-peninsula's not so much a huge lab market other than the cluster at south San Francisco, and I think East Bay is the same thing.

Is there in Mission Bay, with your Illinois Street assets, would you consider leasing those to tech? Is there demand for tech, other than just lab space at this point there?

Yes. Well, we I think we've commented before, and I'll let Steve expand, we clearly have looked at and had a lot of interest from tech users. It's not like in Cambridge, it's not our primary focus, but if somebody's willing to pay us a significant amount of money and it makes sense on that opportunistic situation, we would look at it much like we did Google's first campus I mentioned. Steve can give you a sense of how tech has viewed it.

We have had serious discussions with a couple of tech groups, Tony. The way we are warming up the building, we are able to accommodate that use, and not over-invest in the building, so I think we're providing flexibility from that perspective. To the extent a floor or two out of the six-story building ends up becoming a tech use, and then further downstream becomes a life science use, we've seen that happen occasionally in the portfolio, but it's not necessarily the top priority at all for us.

Okay. Steve, did I catch this right? In Cambridge, you said -- was it 1 million to 1.5 million square feet of demand? Did I hear that?

Yes, that is accurate.

That's lab, Tony. That's not including tech.

What's availability across the whole market?

I think you would have a mix of existing facilities and build-to-suit opportunities. There is a 15% vacancy rate, but as far as large blocks of space that provide flexible expansion opportunities, you really don't have too many of those at all.

I guess what I'm getting at is, it seems like a lot of demand is there, do these folks have options, or is it going to be really a requirement that stuff will have to get built?

More likely a build-to-suit, correct, for the bigger requirement.

Okay. Last question -- Joel, you had mentioned exploring potentially some other joint venture relationships. Just was curious whether that was for perhaps development, or existing assets, or just any color there?

Yes. I think primarily development. We've thought about it for existing assets, but that's almost like creating a preferred equity structure. I'm not sure that's what we wanted. We've spent time thinking about that. I think on the development side, if we're fortunate and land some significant developments that are out there, we might look much like we did on the Longwood project, at a creative structure.

Okay, thanks.

Quentin Velleley, Citigroup.

Just in terms of the build-to-suit, 259 East Grand, there's speculation that Bayer, supposedly being in talks for take-over of Onyx. If that was to eventuate, what might that mean for that project and some of the other space that you have Onyx in?

I'll let Steve comment again on the ground, but from a pharmaceutical perspective and a biotech perspective, we would expect, given the nature of Onyx, their platform, and their operation, that they would leave that fully intact and operate out of south San Francisco. It certainly wouldn't change Bayer's research presence in Mission Bay. They're really separate and apart from that. I think for us, it would be credit enhancement. Frankly, it might be interesting from the standpoint that they would use that to further expand in the south San Francisco area, as well, so that could be very good. Steve can comment on the ground.

I think that's exactly right. We have a long-term lease commitment from Onyx. They've worked very hard on the design to build out a fully integrated operation, and the trend in the clusters over the past couple of years has been for pharma to keep the operations intact and grow the operations, so I would be hopeful we'd see the same thing here.

I think you have to be careful, too, not to generalize every big pharma really stands on its own, and Bayer is one that we be looking for a bigger footprint, where others who already have a very large footprint might want -- might not have the same view of maintaining as big a base or expansion. Each one really is considered separate and apart.

Joel, it's Michael Bilerman speaking. I just had a quick follow-up. You mentioned having income from India and China, but looking on page 38 of the supplemental, there's no -- the only international assets listed here are from Canada. The question is, when you look at page 42 and the $767 million growth that's been spent on the development pipeline, of which you have $114 spent in India and China, is there any income coming off of that today that's been recognized in NOI?

On the projects in Asia, Michael, that are under construction, there's no income associated with those projects. There is a small amount of completed space in India that's probably generating--

Maybe about $1 million?

In that range, it's shy of $1 million in revenues at the moment.

On a quarterly or an annualized basis?

On an annual basis. I suspect over the next four quarters, we'll be able to complete some of the build-to-suit projects, build-to-suit pre-leased credit projects. You'll start to see some additional information on projects in India.

What else -- at least my impression was everything that's in CIP, the $767 million that you spent is earning buckets, zero, on it right now. Is that not the case? Are you actually earning income from this capital?

No. That's true, Michael. The basis in CIP is not earning any revenue. It's all under construction.

So the India that you're referring to, we wouldn't be able to pick that up anywhere, because it's not in the property listing? That's separate from the money you've spent in CIP? In terms of the million dollars that you were talking about?

Yes, that's correct, Michael. It's a small piece of real estate that's operating in rental properties today.

You're still earning some income, if I remember correctly, off of some of the Binney Street stuff from those existing buildings, correct?

A little bit, and it shows up in our AFFO reconciliation. It's about just shy of $500,000 for the quarter.

I apologize, I jumped on late and Joel, I caught the end of a sentence where you said something about not understanding other landlords' deals? I just didn't know what that was in reference to.

I think in some markets you find somebody who's got chronic vacancy that's willing to make such a sweetheart deal that doesn't make necessarily market sense. When you talk to brokers or you go out, they set -- I mean, this happened at San Diego, up on Torrey Pines, a landlord leased a building that had chronic issues for $1.50. This was about two years ago when the lowest price ever leased in -- for similar quality properties were at least $1 higher than that. We see some of that around, and until that chronic vacancy is absorbed, ultimately that does tend to not allow rents to lift as much as possible. We see a little bit of that in south San Francisco, a little bit in Cambridge, a little bit in a few markets, Seattle. That's something that is out there.

On 409, 499 Illinois, have your -- I understand you're conservative and pushing out the initial occupancy by six months, but I guess have your return expectations changed at all, or your capital needs for that project changed at all in how you've looked at it?

Michael, it's Dean here. No. The capital investment has not changed, and our return expectations have not, either.

Okay. Thank you.

Connor Finnerty, Goldman Sachs.

Joel, you mentioned the re-development conversations you guys are having. How much of that potentially could come in 2012, and how much have you guys included in your guidance, if any?

Guidance, there's no incremental redevelopment's I could think of beyond what's on our schedule that could come into the guidance.

No. I meant what Joel referenced, conversations you guys were having with potential tenants for redevelopment assets.

I think the only one that has some incremental NOI potential for delivery is really the 400 Tech Square Project in Cambridge, where we've got a few discussions with prospects that could deliver in the fourth quarter. That's not a meaningful component of our NOI ram-up. It probably represents maybe $300,000 of potential NOI from that project in the fourth quarter of 2012.

Okay. Just looking at the $934 million left of land on the balance sheet, I realize the bulk of that's the West Tower and Kendall Square. What else is included in there?

Hang on, I'm trying to get that page. The $934 million of book value is really two buckets. $550 million of land undergoing pre-construction activities, and $387 million of land held for future development, which is not under-capitalization. That detail, actually for both buckets shows up on the last page of our supplemental, a couple pages beyond the table you were just referring to. It provides the breakout, land undergoing pre-construction activities, which is part of our CIP category, and under-capitalization, the bulk of that is our development site in Cambridge, 1.6 million square feet; 250,000 square feet, roughly, in San Diego; the second tower in New York City is the third component.

Land for future development is really spread across multiple markets -- a little bit in Boston, a little bit up in Mission Bay, about 1 million square feet in San Francisco. 1 million in suburban Washington, DC, 1 million in Seattle. Other markets, about 1 million, and internationally about 6 million square feet of potential development product.

Okay. Lastly, on the balance sheet, is any of the secured debt that comes due in 2013, 2014 pre-payable?

Generally, 2013 and 2014 debt maturities on the secured side only have the standard pre-payment window of roughly 90 days.

Okay, thanks.

I do not expect any early retirement of any of the secured debt.

Okay, thanks.

George Auerbach, ISI Group.

Dean, you mentioned in your comments that you set up an ATM program. Can you quantify how large you could see that program being, and would you be using potentially equity to fund the 2012 development or redevelopment spend?

I think most companies typically size their ATM programs roughly -- not that every company does it the same -- but roughly at 10% of their market -- equity market cap, just to limit the size of the program. For a company like Alexandria, you probably see no reason for it to be much outside of the $250 million to $350 million range in size. It's not intended to replace a traditional follow-on offering, but in smaller needs for equity capital, you can raise it in a much more cost-effective manner, as we're all aware of, over time.

I guess just on the timing of use, would you see yourself using that over the next 12 months to fund development?

I'd say over the next 12 months, it's fair to say that without any significant news in a big way on the asset disposition front, we would likely use an ATM to raise some equity capital.

All right. Lastly, in terms of the disposition program, I know you sold the Longwood property and you have another property on the market, or under contract. Can you quantify something beyond the $64 million that you show here as additional business and plan for this year what's on the market, how interest is in those assets, and maybe in terms of pace of sales how you see the rest of the year playing out?

I think beyond the few that are under contract, which gets us to 42% of the way, the $65 million you're referring to is the remaining of the $112 million. I would say that we have some early discussions on a couple assets that could close over the next two, three, four quarters that could aggregate a little north of $100 million. I'm cautious about banking on that number, because those discussions are still early and there's no contract in place. We continue to evaluate a number of assets for potential disposition. I think our product type is a little different than the traditional assets that go to the market. We are very careful about wish assets we sell and the buyers that ultimately we want to sell these assets to, so it sometimes takes a little more time to execute.

I think two points, George, one would be, I think you'll definitely see more activity on the sales side, both at the asset level and we would have to be careful what we say here, for disclosure purposes, both on the land and even, as I said, buildings both non-core and suburban. Then on the ATM, I would say the way to think about that is, we will over time probably put an ATM in place, we probably will think of it as a very modest program, and I think we think of it is, our goal is to try to keep guidance where it is for the year, while maintaining our credit metrics where they should be, so we're obviously focused on minimization of dilution, very laser-like. That's how to think about that.

Great. Thank you.

Philip Martin, Morningstar.

I wanted to just follow up with Steve on the second cohort. These tenants now that are playing a larger role, it would appear, in your going-forward leasing plans, what sort of differences, challenges, benefits, does this second cohort mean for in terms of square footage demands, costs, lease terms, et cetera?

Yes. Let me take a first crack, and then I'll ask Steve to comment, Philip. I think Steve really put his finger on one of the -- I consider it to be -- principal future growth engines of this industry. You've got pharma's kind of reinvention of itself as one, and we've seen a big movement out of their antiquated and isolated facilities into the hubs, and that's been well-documented. We've seen a lot of product and service companies, the Illumina's of the world and others who are out there pretty aggressively marketing new-generation product. We've seen the institutional side obviously grow to some extent, but I think that's in the biotech industry.

If you look at that separate and apart from pharma, this so-called second cohort that Steve referred to really is the generation of companies that have been around some 10, 15, 20 even some I can think of more than that, heavily based in the Cambridge/Boston area and in the San Francisco Bay Area, although there are some in other markets. What they're doing is, they're creating mini Amgens, if you will, smaller, more nimble fully integrated companies that will -- that have done research. They're now moving from R to D, and now D to C. They'll have strike forces of sales operations. They have more targeted products

Ultimately, they may be picked up one by one or from time to time by big pharma, but these are companies that really have and will maintain fully integrated operations in more likely the cluster markets. Onyx is a good example. There are several now that have significant requirements that have come to market in the Boston/Cambridge area, and I think that gives you a sense of who these companies are. Steve, you can talk further about what you see in the Bay Area there.

I was actually meeting with the CEO of one of these companies yesterday, and he was very enthusiastic about having four products in the clinic, a $0.5 billion in cash in the bank, and the ability to really build out to the next phase. I think it's a combination of the large blocks of space they'll be requiring, the credit foundation that they have now, and the potential for, in this industry, for some very significant, meaningful growth. That's what we're excited about in our core clusters, with the availability we have of different build-to- suit opportunities, in particular, to offer the to these types of companies.

Are the square footage demands pretty similar to what this portfolio, Alexandria's portfolio has experienced historically? Are they a bit smaller? Can you're existing portfolio handle most of this demand, or are we going to see a ramp-up in development and re-development potentially, over the next 12 to 18 months to meet this demand?

I think many of these companies, and I can think of a half a dozen right now, Cambridge-based and San Francisco-based, that are looking to have small, fully integrated campuses that could run from a 0.25 million square feet to potentially 1 million square feet. Hard to piecemeal those together. The new generation of leaders want to be as close to each other as possible, meaning different functions of the Company. I think if you look at what's available, trying to piece together in a hodgepodge way multiple buildings in a particular market, probably not ideal. We know a number of these management teams for more than a decade or so, and I think many of them will be forced to go to development.

Okay. Is it fair to say that at least in the Cambridge market we could see the development ramp up over the next 12 to 18 months, potentially?

I think there's no doubt that as Steve described, currently, deals on the market that range from 1 million to 1.5 million square feet development will be one of the primary vehicles, yes, absolutely.

Okay. Thank you very much.

Thanks, Philip.

(Operator Instructions) John Stewart, Green Street Advisors.

Joel, how many square feet are the three assets that are under contract for sale?

Dean?

Give me one second. It shows up --

Sorry if I missed it in the supplemental.

Bear with us one moment.

It's about 100,000 square feet.

Okay. Now that they are under contract, can you let us know what markets those are in?

I believe two up in Seattle.

One in Pennsylvania.

And one in Pennsylvania.

Okay.

And more to come. As I described, John, there are at least four markets we're looking at, and pretty actively engaged in this process of identifying assets for sale. I think I mentioned Seattle, San Francisco, Maryland, and Massachusetts.

Okay.

Again non-core and suburban, primarily.

Right. How about the markets where you added head count?

Yes. Seattle, San Francisco, San Diego, Massachusetts, New York.

Okay.

Pasadena? Forgot.

Got it.

To keep up with the supplement disclosure demands of this brief, we've expanded our accounting group immeasurably.

It's definitely appreciated.

Thank you.

Two housekeeping ones for Dean, if I may. Dean, just the language in the Press Release wasn't quite clear if the preferred redemption charge, if that was original issuance costs, or if you paid above par to retire that?

Oh, it was the original issuance costs. We redeemed it at par, John.

Okay. Can you clear up for us what the current status what's going to happen with the milestone payments at Mission Bay with the Salesforce campus in pause mode?

Nothing changes from our view of the world. We -- in the transaction, when we sold those parcels to Salesforce, the Company recognized a liability for an estimate of potential payments. If the estimates pan out to be true to the tee, those payments will be made over the next several years. That's -- from what we understand with Salesforce, nothing at the moment has changed our view on the timing of those potential payments. Quite honestly, it will be a few years, John, before we really know what happens.

Right. Which from memory was on the order of $30 million, right?

No. It was closer to $14 million, John.

Okay, sorry if I got that wrong. Okay. One last one for Joel, if I may. Obviously, a lot has changed in terms of the capital structure and balance sheet just in the last 90 days. It's been a while since I remember hearing an update in terms of the long-term strategy in India. Can you give us an update there, based on where you are today, which is obviously a much different situation than where you were a year or two years ago?

That's a good question. I think Michael was asking about that as well, and maybe Ross as well. I guess there are two thoughts. One is my desire and our desire as a Company, but I personally have had a vision for Asia as a pretty big market over time. Clearly, post Lehman and post the financial -- I guess the deep recession we've had here, obviously we've have to re-think the pace and the scale at which we could really build out in India, in particular. So we've done that.

Even more recently where we looked at -- I mean 2010 was a pretty strong year up until the US, I think got downgraded kind of late July or early August, when we were about to go to the bond market, we remember those dates well. Clearly, we re-focused our capital allocation pretty substantially and cut our spend in India by about 50%. We think India is a big market. There are a lot of different aspects of the life science industry that can go on there. There's not only pure healthcare life science. There is industrial biotech, which is big there. Companies like DuPont and others that use a similar platform.

I think, and ultimately the goal was to try to get to critical mass to take an entity public on the Singapore exchange that would be publicly traded and self finance that operation in which Alexandria would have a nice share, and hopefully a liquidity event and value. I think our pace of seeing that come to fruition post-Lehman and then just post given where the world is today, that period is just elongated, unfortunately. We're just doing what we do in a much more measured and careful pace, as opposed to one that would be more optimistic. You listen to Mort Zuckerman on Boston Properties' call, and he's got a pretty dim view of the world economic situation. I think that's how most people think today. Things are pretty good in the US, but they could get a lot better, hopefully, and the rest of the world is challenged.

That's exactly what I was getting at. The Singapore listing would still be the long-term game plan, but the time line has just --

Absolutely. We thought we could probably do it by 2014. Now it's clearly a couple years later, but it is our goal, because we think that's the most effective and efficient way and also represents the best liquidity path for our investment. We've got -- we hope to do a tour there, I would say over the next 12 to 24 months, and we welcome -- I think you'll be blown away by the quality of what we've done and the quality of our team. Clearly, the pace of what we can do and how we can do it just capital allocation wise, and certainly now that we're an investment grade Company, just has to be much more measured.

Understood. We'll look forward to the property tour.

Okay, excellent.

Thank you.

At this time, there are no further questions in queue, and I would like to hand the call back over to Mr. Joel Marcus for closing remarks.

Okay. Well, thank you. We're 67 minutes into the call, so I appreciate your attention. We'll see you at NAREIT, and then we be reporting, I think, toward the end of July. Thanks, everybody.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.