Alexandria Real Estate Equities Inc (ARE) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second-Quarter 2012 Alexandria Real Estate Equities Inc Earnings Conference Call. My name is Deanna and I'll be the operator 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 conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Miss Rhonda Chiger. Please go ahead.

Thank you and 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 the second-quarter conference call. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, and Paul Robell.

I guess I'd like to start out with a bit of a macro view, and one quote for I guess the second quarter, which really epitomizes I think where we see things today from a strategic vantage point. And that is scientific advancement is a team sport that can be best done in a biopharma hub with multiple players. That's what Boston is to us. And this was a quote recently in an interview by Elias Zerhouni, who is President of the Global Research at Sanofi, and as many of you know he was former head of the NIH who really pioneered translational research in areas best positioned to take maximum advantage of this.

I'd kind of like to label the macro industry comments today, what I'd call the gathering pipeline momentum. We're witnessing a powerful explosion of biotech products, earnings, and expansion, really what I call the biotech business. And just to name a few companies that are participating, many of which are our clients, Amgen, Celgene, Biogen Idec, Gilead, Elexion, Vertex, and Onyx. If you look at the markets, the Supreme Court's confirmation of the constitutionality of essentially Obamacare will move US to full coverage of over 300 million people, which means the market will be increasing and clearly the increasing of the emerging markets is where big Pharma is heavily focused as well.

Last year the US spent $320 billion on medicines, so there certainly is a robust business. Today's climate is actually a lot better than you might think. The FDA has been doing, over the last year or two, a much better job I think from the industry perspective of approval of new medicines. And if you look at through today 7/31/12, 18 drugs have been approved and an amazing 50% of which were ARE client tenants. The PDUFA law that was just enacted included some very important helpful attributes for the Biotech and Pharma industry, including confirmation of 12 year data exclusivity, fast track approval for new novel drugs, which we were involved with. And I think it's also fair to say that, based on what we hear from Washington, it appears that the NIH will be spared cuts if we get an election that makes sense here. So we're hopeful about that.

From the technology standpoint, the lifeblood of Biotech and Pharma, we're seeing really a variety of emerging new highly disruptive first in class drugs, including things like small molecule inhibitors for cancer stem cells, which really potentially have the ability to someday reduce or maybe even eliminate radiation and chemotherapy. So the outlook, we're really entering a second wave of Biotech successes and we are extremely well positioned as the leader in each of our key adjacency sub markets to take maximum advantage of this second wave expansion.

Moving to the balance sheet and capital allocation, I think it's clear, and Dean will speak to this a bit, our goal over time is as we've said is to operate in about the 6.5 times debt to EBITDA range, achieved through a variety of strategies, including on boarding of additional NOI, continued use of the ATM and pay down of debt, continued sales of selected non-income-producing land parcels. You'll see some coming up here in the third quarter. And we'll likely seek an equity partner for Asia operations to share CapEx for what we consider to be a big opportunity.

We see significant near-term opportunity to take advantage of two converging macro forces. Pharma penetration of our adjacency clusters as we've referred to, and now the emergence of this second wave of Biotech expansion, primarily greater Boston, San Francisco and New York City. We'll selectively continue to allocate capital, including recycled from suburban asset sales, including some even closed today, to our core cluster development sites with quality tenants where yields are significantly better than prevailing cap rates on sales of stabilized assets in such sub markets. So there's a real good business there.

And in the second quarter, we did acquire a modest redevelopment site in the Triple A location in Torrey Pines for almost $14 million. When we look to the second-quarter internal and external growth, I think one thing that is I think we're very proud of and kind of an amazing statistic is an astounding 48% of our annual base rent is from investment-grade tenants. Once again, and Steve will speak to this, we had very strong leasing quarter, almost 960,000 square feet with pretty solid staff. Boston kind of won the prize, 29% of leasing, San Francisco about 22%, and Maryland about 18%. And this included landing the new NIH's mission critical end caps requirement, which we're very proud of.

Other than East Jamie and the Gates Seattle headquarters conversion, and again Steve will talk a little bit about this, we had solid returns on development and redevelopment. We've had pretty solid returns on our India projects, and with pretty high-level credit, and we're working on expansion there. South China, which was originally a failed joint venture with a US and European firm really represented our first test case. Could we actually build a building in China ourselves and then ultimately lease it. It's about a 300,000 square foot, two building flex manufacturing complex in South China. Hopefully after we fully lease it up, we'll exit that asset and it's a non-lab asset.

In northern China, we're working on technical infrastructure. Working hard to lease that development. And the challenge in China, as I've said a number of times, is the incentive system. It's when you bring a client to China, there are about 30 offers to go all over the country. I was, just last week, in Beijing and met with the officials to ensure that we have a incentive scheme in place to land some of our important tenants, so stay tuned there.

Steve will talk a little bit about 499 Illinois. We do continue to be disappointed with the slowness of lease up of this at asset, particularly in light of strong tech demand in the Bay Area. And we hope as we enter the third quarter, we'll see a little bit more robust, and certainly into 2013, in our core internal growth, but we understand we're obviously in a dramatically slower growth macroeconomic environment.

So with that kind of as a setting, I'm going to ask Steve to do a bit of a detailed review of leasing this quarter.

Hello everybody. I'll talk about the leasing activity on key projects. The 2012 roll over status for the balance of the year, and a little preview on the 2013 roll overs. Really, the emphasis for our fully integrated regional leasing and asset management teams in the second half of this year will be an intense focus on the three critical development and redevelopment projects we have outstanding.

The first one is 499 Illinois. We do continue to have conversations with tech companies and life science institutions, but no active negotiations are underway, as Joel mentioned, and that is a bit disappointing. However, the Veterans Affairs lease of 51,000 square feet of lab space at 1700 Owens was indicative of mission-base continued strong appeal and a must-have location for life science companies. And we continue our aggressive pursuit of a quality anchor tenant for Illinois.

The UCSF Hospital continues to bring a strong sense of completion to the southern portion of Mission Bay as the curtain wall is nearly complete, and the substantial nature of this facility is becoming very evident. The technology companies continue to gravitate and grow in SoMa and MidMa, primarily to be amongst their peers. And given the right opportunity, we believe an anchor tech tenant would change this dynamic for attracting these types of tenants to Mission Bay.

The tech sector is clearly focused on SoMa and MidMa and it's driven really by three factors -- first, the immediate adjacency to the Bart or Caltrain transportation lines; second, the mature amenity infrastructure; and third, the more edgy urban nature of the setting and the buildings as they're appealing to a younger demographic there. The second project in Cambridge at 400 Tech Square has us very pleased. We have serious negotiations underway with letters of intent signed with two prospects totaling another 50,000 square feet that would boost occupancy to approximately 80% in this 212,000 square foot facility. And we're hopeful to have those leases consummated by year end.

Kind of a more detailed floor by floor review of this facility looks like the following. The lower level in the first floor is substantially leased to Reagan and Alexandria's regional offices. The second, third and half of the fourth floor are anticipated to be leased to the two prospects mentioned above. Half of the fourth floor and the fifth floor are leased to Epizyme, and Reagan has the option on the sixth floor and leases the seventh, eighth, and ninth floor, and the tenth floor is currently being marketed.

Moving back over to the West Coast, 1551 Eastlake. We do have early discussions underway with an important current tenant of ours for 30,000 to 40,000 square feet on the second and third floors that would bring occupancy up to approximately 90% by year end in this 117,000 square foot building. Again, a floor by floor review, we have the lower level and first-floor leased to the Puget Sound Blood Center, portions of the second floor is leased to Adaptive TCR, and the balance of the second floor is in discussions with the tenant that we noted above. The WBBA for the life science industry activities that is really kind of energized this building and is part of South Lake Union leases a portion of the third floor. And the balance is actively being marketed.

Looking over the next two quarters at the 2012 rollover status, we started the year with 694,000 square feet of leases remaining to be resolved. And the regional teams have worked very effectively to reduce that figure to just 178,000 square feet as of June 30, 2012. The majority of the final lease roll overs are concentrated in the following markets, and we expect them to be resolved in a satisfactory fashion. We have 40% in the greater Boston region, more specifically about 26,000 square feet in Cambridge where demand is very strong and lease rates for these particular spaces are in the mid-$40s. Another 12,000 square feet in Waltham along Route 128 where demand is also healthy and lease rates are close to $30. And then another 30,000 square feet in Wister in the Route 495 corridor where demand is weaker and lease rates are in the mid-$20 range.

We have another 20% in the San Francisco region, primarily comprised of three leases in Mission Bay where demand is strong. And it looks like one of the tenants right now would renew, and we're starting conversations with a tenant for the balance of the space and lease rates remain steady in the mid-40s. Another 20% in the Seattle region substantially located in one facility in the Pill Hill sub markets. Lease rates for product in this sub market are in the $20 range, but are generally in the mid-$40s for the South Lake Union sub market where most of our asset base is located and where demand is the strongest.

Finally, the San Diego and suburban DC markets comprised the balance of our renewal and releasing activity across the country. And San Diego's demand has in fact slowed from its torrid pace during 2011, but is still steady with lease rates ranging from the mid-$20s to mid-$30s. And suburban DC's demand remains weak, although we do have a few highlights this quarter with lease rates in the $20 range.

Just real quickly, a preview for 2013, we have a total of 1.2 million square feet of rollover slated for the year and we are in active negotiations for more than 300,000 square feet. The remaining 900,000 square feet is too early to forecast in a definitive fashion, but as a framework, those remaining roles are concentrated in the following markets -- 200,000 square feet in the greater Boston market, with a mix of suburban and urban facilities; 220,000 square feet in the Bay Area market, spread pretty evenly throughout the Stamford, South San Francisco, and Mission Bay clusters; about 130,000 square feet in the San Diego market, primarily in the Sorrento Valley and Sorrento Mesa markets; about 190,000 square feet on the suburban DC market, distributed across its sub markets; another 61,000 square feet in Seattle, again, principally in the Pill Hill sub market; and finally, about 50,000 square feet in the North Carolina market. We'll provide additional details on the 2013 roles as we approach the end of the year.

And with that I'll hand it over to Dean now for further commentary.

Thanks Steve. Let me jump right into our core operations. Second-quarter 2012 NOI was slightly ahead of our expectations at about $103.8 million. This is before the $5.8 million realized gain and other income. And that NOI is up from the $101.4 million for the first quarter of 2012. The increase in NOI was driven across multiple properties and included value add project deliveries slightly ahead of schedule, the acquisition of a property in San Diego, earlier lease up of a few suites in Boston, and delivery of space in India to a top-tier pharmaceutical company.

Our overall occupancy, including space undergoing redevelopment in the greater Boston market, was about 85% as of 12/31, and about 83% as of 3/31. We have leased and delivered spaces resulting in an increase in overall occupancy, including our redevelopment space, to approximately 84.1%. We anticipate further improvement in overall occupancy in greater Boston in the second half of 2012. The occupancy gains were realized through quick re-tenanting in 300 Technology Square, and through occupancy gains at 790 Memorial Drive and 99 Erie Street, all of which are located in Cambridge.

Overall occupancy, including space undergoing redevelopment in San Francisco Bay, was approximately 96.7% as of 12/31, and 93.9% as of 3/31. We have an increase in overall occupancy through lease up to 94.7% as of June 30, really through short-term tenancy for temporary space for Onyx while we complete their build to suit development. Occupancy in the suburban Washington, DC market reflects the anticipated rollover of 97,000 square feet related to one tenant that occupied a mix of office, warehouse, and laboratory space in a non-core sub market. As previously highlighted, we expect this space to require several quarters to re-lease.

Same property growth in NOI for the second quarter was down 0.2% on a cash basis, and up 1.6% on a GAAP basis. Same property cash performance would have been stronger this quarter, however, last year one tenant had a larger contractual payment due under the lease of approximately $2.5 million driving up cash same property performance in the second half of 2011 to 9.4%. Overall, same property occupancy was flat to up slightly, but does not reflect some vacancy absorbed during the quarter. During the quarter, we absorbed some vacancy temporarily in San Francisco and in Boston, and these vacancies resulted in lower expense recoveries and cash same property performance.

Straight-line rent for same property has also declined resulting in higher cash NOI, due to the start of approximately $5.7 million of annual cash rents from one lease, which the cash began in February of 2012. We also had a couple of other leases with slightly higher steps in cash rents, one in San Francisco and one in Maryland. Same property operating expenses increased about 4.5%, primarily due to increases in recoverable repairs and maintenance by approximately $900,000. Excluding this increase in repairs and maintenance, same property operating expenses increased about 1.6%. We are expecting stronger cash same property performance in the second half of 2012, primarily due to the recovery of occupancy in the greater Boston market. In addition, same property performance for the second half of the year will not be impacted by the larger contractual cash payment received in the first half of 2011.

Moving onto our value added projects, during the second quarter we completed the redevelopment of 98,000 square feet at John Hopkins Court for an affiliate nonprofit entity of Novartis and a leading industrial biotechnology company that yields slightly ahead of our original estimate. Cash yields were 8.9%, up 30 basis points, and GAAP was 9.1% up 10 basis points. We also completed the development of 26,000 square feet in Canada for Glaxo Smith Kline, also at yields slightly ahead of our original estimate. Cash yields ended up at 7.7% and GAAP at 8.3%, both up about 10 basis points.

We also updated our total cost to completion for a development at 225 Binney Street in Cambridge by $17.7 million as a result of certain design requirements for Biogen. The increase in this cost will generate a return, and as a result does not impact our overall estimated yields for cash and GAAP of 7.5% and 8.1%, respectively. Lastly, we updated our revenue forecast for our redevelopment project at 1551 Eastlake in Seattle and our estimate of cash and GAAP yields to about 6.7%. Our revenue assumptions were updated to reflect about 17,000 square feet of this project, ending up as pure office space at office rents. And we expect our lab tenants to expand into this space over time, at which point we'll generate triple net lab rents. Our yields also assumed higher concessions or free rent.

As of June 30, we're 75% leased on 954,000 square feet undergoing development in North America, and 76% leased or negotiating on 812,000 square feet undergoing redevelopment in North America. Moving on to our balance sheet, as of June 30, we had approximately $1.1 billion of availability under our unsecured line of credit, and about $81 million of cash and cash equivalents. During the quarter, we closed a construction loan for our development project in South San Francisco with commitments aggregating $55 million. Funding under this loan began in July, and the loan is expected to cover the remaining costs of the project.

During the quarter, we issued approximately $40.5 million under our at the market common stock offering program. As of quarter end, and as of today, we have approximately $209.5 million available under the program. We expect the remainder of the program to be utilized over a four quarter period for funding a portion of the equity needs related to our value added development and redevelopment projects. As disclosed in our first-quarter earnings call, in April, we also completed the amendment to the pricing and maturity date of our unsecured line of credit and redeemed our Series C preferred stock.

Moving on to the asset sales, again we remain very focused on our asset sales target for $112 million for 2012. In summary, we completed $33 million as of June 30, located in Boston and Seattle, $22 million as of June 30 was under contract, $8 million of which was sold in July and that was located in the Route 495 suburbs of Boston. That left us with about $56 million remaining as of June 30. Today we completed the sale of two assets located in Pennsylvania for about $20 million. The P&S for this deal was just executed and, as a result, this transaction did not meet the criteria for health for sale as of June 30. We also have about $15 million related to an asset up in San Francisco that we expect closing later this year. That leaves us about $21 million to resolve and we have a number of assets moving along to cover this amount. We are also focused on continuing our asset disposition program into 2013. And we plan to provide an update on our target disposition amount later this year. 2013 asset sales will likely be from a range of markets including Seattle, San Francisco, Maryland, Massachusetts, Pennsylvania, and San Diego.

Our net debt to EBITDA was 7.1 times or 7.6 times, excluding the $5.8 million realized gain from an equity investment in the life science entity. 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 some from equity or through our ATM program. Our debt to EBITDA will also benefit from the significant amount of NOI and EBITDA contribution through the fourth quarter of 2012 and thereafter from the delivery of our significantly leased redevelopment and development projects. Again, our goal over time is to improve our debt to EBITDA to sub 6.5 times.

Lastly on guidance, our guidance for 2012, including the fourth quarter of '12, reflects the significant leasing status of our active development and redevelopment projects. East Jamie Court is now 78% leased. Four development projects are 100% leased. And we are working on the lease up of Illinois. Our redevelopment projects are now 76% leased or under negotiation. One lease under negotiation is for 91,000 rentable square feet, and is expected to be executed this week. We updated FFO per share guidance for 2012 for the $5.8 million or $0.09 per share of additional other income in the second quarter, primarily from an equity investment. We also slightly adjusted the range for interest expense net for the year by about $1 million, and the fourth quarter by about $500,000, and slightly adjusted the range for the fourth quarter NOI by about $0.5 million for the upper and lower end of the range.

These slight adjustments reflect the timing of completion of construction and commencement of rent related to spaces aggregating about 75,000 square feet. No other significant changes in our overall guidance assumptions, as highlighted in our press release on pages 6 through 8, have been made since our guidance from the first-quarter earnings. Looking forward, again, NOI's is expected to increase from the $103.8 million before the $5.8 million realized gain for the second quarter to a range from $110.5 million to $112.5 million for the fourth quarter of '12. Roughly 20% to 30% of this NOI growth will occur in the third quarter and 70% to 80% will occur in the fourth quarter of '12.

We also provided a range for FFO per share and diluted guidance for the fourth quarter of $1.15 to $1.17. Nareit FFO per share diluted for 2012 was provided -- our guidance was provided in the range from $4.32 to $4.36. Again up $0.09 over our prior range for guidance related to the other income recognized in the second quarter. Our guidance for EPS diluted was $1.36 to $1.46. Now, in closing as a reminder we have reported nareit FFO per share diluted of $0.97 for the first quarter, $1.13 for the second quarter, and we've provided a range for the fourth quarter at $1.15 to $1.17. These figures result in a range for our third quarter 2012 FFO per share diluted of about $1.07 to $1.09 per share.

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

Operator, we would like to open it up for Q&A if we could, please?

(Operator Instructions) Jamie Feldman, Bank of America.

Great, thank you. Can you guys dig a little deeper on what's going on in Cambridge? I know when we spent some time out there, it seemed like you had several developments -- irons in the fire. I'm just trying to get the latest thoughts on what's going on and is there something that's changing in terms of sentiments in people's pace of signing leases?

No. I think I would just say on the build to suit side, I'd say stay tuned. I don't want to preannounce anything, but we've talked about significant demand there. And our Alexandria Center at Kendall Square along the Binney Street corridor I think has been the target of quite a bit of interest of a range of this second generation biotech companies that are experiencing significant commercialization today, so I think that is unchanged. And I think you'll see some of that manifest itself and unfold pretty soon.

I think when you get back to the Tech Square area and overall, just demand there, I think as Steve said, we're seeing pretty strong demand. My guess is we'll be out of space at 400 Tech Square by the end of the year. We're already -- assuming we sign leases for these two latest LOI's that have been signed, that gets us pretty close to where we want to be. So we're seeing continuing solid demand in that market. I don't know if Steve, you have any other comments or thoughts?

Yes. Using 400 Tech Square specifically, we talked about the stacking diagram. Once you start factoring the option that Reagan has there, we'll just have 10,000 feet or so left on the top floor, assuming Reagan did move forward with that. So it continues to be a very, very healthy market.

And Reagan, just for those of you who don't know, it's a nonprofit Institute of Massachusetts General Hospital. And the other two LOI's that we signed, one is a very large credit tenant, and then the other one is kind of an emerging company. But I'd say the demand is coming heavily overall from -- the big demand is coming heavily from this second generation of companies that are experiencing the commercial stage. So it stayed strong. I'm a little less focused on the tech sector there. I don't know, Peter, Steve, if you guys have any comments. I think it's still pretty strong, but I haven't seen anything specific that I could comment on.

I haven't seen anything announced recently, but it obviously Google and Microsoft have grown. I think Microsoft actually took more space at Cambridge Center. So that was the last deal that was announced.

So I don't know if that's helpful color, Jamie?

Yes, definitely. And then switching gears, Joel, congratulations on the Board of Directors for the NIH or the foundation for NIH.

Thank you very much. I appreciate it. It was a high honor.

Good.

Honored to have been considered.

So can you talk a little bit more about what that means in terms of what you'll be doing and your time commitments and how would you think about that related to --

Yes. I wouldn't say that -- it's a quarterly board meeting in Washington, but I would say I'm kind of a 24/7 guy, so it won't have any impact whatsoever. Other than it gives me a chance to interface directly with the -- and we have at our recent conference with Francis Collins and a number of people who were on the Hill requesting NIH funding. So in a sense it gives us a direct pipeline to that discussion and negotiation between the NIH and the government and Congress as far as continued funding for critical stage basic research here in the US. I think it will be a big plus. But yes, it doesn't impact me day-to-day.

Okay. All right. Thank you.

Steve Sakwa, ISI Group.

thanks, good afternoon. Joel, I just wanted to know if you could talk a little bit about New York. I know there was a story about the New York Genome Center and the fact that they had signed 170,000-foot lease down more in the -- I guess it was a little further south. And I'm just curious if that type of tenant was something that you could have looked at to kick off the West project. The timing didn't fit, or if there was just something about your project and that tenant that maybe didn't allow that deal to happen?

Yes. Let me give you a -- maybe more macro view. I think that we see, as I mentioned, the second wave of Biotech commercialization successes coming to New York as well. We also see maybe even more importantly in New York, has really become an important destination for new research or development units of big Pharma. And the Wall Street Journal documented that last year with Pfizer. We've seen it certainly in Lilly and Pfizer. It's clearly true that there are a number of Pharma's looking to place a unit into the New York area. We think that's one of the most attractive targets that we would look at obviously internal demand from our existing clients.

Yes, the New York Genome Center I'd say for two reasons was not of great interest to us although I think it's a great for New York. I think number one, timing was a little too early for us. And then secondly, I think our own underwriting of that kind of an entity would basically say that we would be more comfortable seeing them move into a more robust funding environment than they are today. If you compare that to the -- they kind of want to be a broad institute. They're not there yet, but maybe someday they'll work up to that. They don't have any anchor donors at the moment. They've just gotten donations from a number of the institutions. But you compare it to what Steve mentioned in 400 Tech Square with Reagan, Reagan is a fully funded institute of the Massachusetts General Hospital. That's the kind of tenant we feel pretty comfortable about underwriting. So for New York, we just for timing and for underwriting purposes we just weren't there.

Okay. And then secondly on page 33, I want to just thank you for providing a lot more detail on the China and India development projects that you've got going. But it obviously begs the question -- and you did allude to this that you've got your two projects in China but not really going forward, but I guess the cost seemed excessively high for at least the product under development. I'm curious if you could provide us the information for the operating property, I guess the roughly 300,000 that's open? Is that cost much different than $82 million that is expected to be spent on the other 300,000-foot building?

Yes. Their fundamentally, I'll let Dean comment on the specifics, but they're fundamentally different projects. The -- as I said, we started South China really with a US company, actually the requirement came out of a company that we're close to in the Mission Bay area. Teamed up with a European company and we've then acquired this site, this land -- it's a 50-year land use in South China near Macau. It's a region we wouldn't have normally gone to, but we decided we'd use it as our first ability to have our own team because we don't joint venture there see if we could really build a product. And then once the joint venture fell apart, and we were faced with we've got to finish this development, because in China when you sign a deal if you're a foreign company and you just don't go forward, you're not likely to do anything else in China. So we wanted to preserve reputation and we're developing it and it's an area that really is a manufacturing and flex market. It'd be kind of like an industrial area in the US, so the costs there are considerably lower than we would expect if we built a lab product. But Dean can give you some highlights.

Yes, just to give you some rough sense, Steve, I think if you think of what's in service, you'd probably have roughly a 50/50 allocation between China and just on the in-service assets.

But on that specific asset on cost on the southern China --

Yes, I guess --

Steve, you cut off.

Do we have more color on the cost?

Hello, can you hear me?

Let us work on that and we'll try to give you a little more color on the costs in southern China, but we would see them to be considerably lower than building a lab building.

Yes. I agree. We're probably about $70 a foot there in South China.

Okay. And then Joel could you just comment it does look like you're leasing activity in India seems to be much stronger. I think your lease three buildings are 100% leased, one building is about two thirds leased. But maybe just talk a little bit about the demand drivers that you're seeing in India? It did sound like you were much more optimistic about that market and it sounds like you might bring in a joint venture partner to fund that? How far along are you on that?

Yes. So let me maybe just say one or two other things about China and then I'll speak to India. I think when it comes to China, we've realized the basic challenge in China is less the demand in China. It is more the incentive system. And Steve and I have both spent considerable time in China. I was just there last week. You bring a client over and literally, that client, once they go shopping in China, can end up with a dozen, two dozen different offers from any number of different economic development zone cities, provinces. And it creates a challenge of stickiness of tenants. So our view is I don't think we'll be doing much more in China. But if we were ever to do it, it would have to be done on a pre-leased build to suit, because otherwise it's just a very hard to go. But we need to work out of the two projects we're on. We hope to complete them. And ultimately, we would probably exit those projects.

In India, we think because you can actually own land, there is no government interference. There's no real incentives. It is much more of a normal environment, although India still is -- it is an emerging world country. There is huge demand from really what we would consider to be life science, the health science industrial uses of laboratories. We think it's a big opportunity in a number of clusters throughout the country. We like the South, but the North and the Northwest are particularly good, Delhi is an interesting location. We've tried to establish critical mass. We've got our own team on the ground.

We've put in to construction and development a number of projects where we had -- we tried to do a little bit like we did pre-crash where we would try to meet existing demand with a product that we're actually constructing. I think going forward, we would really go forward only on a either 100% build to suit or a substantial pre-lease for future developments. But we think the demand is really substantial. It's a country of -- as you well know, of well over 1 billion people. Healthcare is -- and health science is an important part of what they're doing. There still is a bit of a battle over patent protection, but fundamentally, most of the big Pharma's and a lot of the industrial companies who use laboratories for their R&D aren't looking at India's novel discovery platform. They're using as a base to penetrate that huge market and one where they can do process work. So it's a pretty fertile market. It produces I think the most engineers of any country on earth.

There's an emerging big middle-class the size of greater than the US. So we think that the demographics and the pieces are in place for good, productive work. We think the yields are pretty good. And we think the locations, when you can cluster in a knowledge center, make a lot of sense. But we do think, given where we are in the capital side of things, where the US is in macro-wise, it'd be to our best interest much like we did with Longwood to team up with a financial partner there. Not -- we don't need an operating partner, but a financial partner that we could split the upside but also split the capital costs. And I think we're proceeding with that effort. So I'd be happy to answer anything more specific than that.

Is that something you think you could get done this year? Or is that a 2013 event?

I think that's probably a first -- my experience in India, I don't know I've been there maybe 40 times, is -- it kind of depends. If it was a US firm that operates there it could go fast. If it is a firm in Asia, somewhat slower. So I'd say six to nine months would be kind of an estimate. It could beat that. Our effort with Clarion and Longwood went pretty fast, but again, India is different. So I would say probably early part of 2013 first half.

Okay. Thanks.

John Stewart, Green Street Advisors.

Thank you. Couple questions for Steve, actually. Steve first of all, just curious, what is the Veterans Administration doing with lab space in Mission Bay? And then if you could give us an update on sales force? And then last but not least, you and Joel both sort of alluded to 499 Illinois, and I guess just given the perceived strength of that market, would've expected to see more leasing there. So could you give us kind of an -- I guess the question is, what do you think has held you back there? Has it been -- are tech users gun shy on Mission Bay or is there you need to put more capital in the building? What's going on there?

I think it was the regional managers held us back. (laughter)

That's always a contributing factor. On the VA, they had an existing research facility. It's really their leading research facility in the entire country for veterans as they have various maladies. And they relocated from a location in the Presidio based in San Francisco that was very antiquated. So we've been talking with them literally for a number of years. I think we first chatted with them five years ago just shortly after we purchased the property there in Mission Bay. So they were very keen to locate a must have type of location, and we were able to pull together a lease with the government actually in record time. It went very, very quickly because they really wanted to seize the opportunity there.

On the sales force land, there's really nothing new to report. They had said that it would be two or three quarters while they were in a pause mode looking at their existing headcount needs, trying to find existing facilities to accommodate that. And then revisit whether or not they would move forward with actually building out a campus. It's really not clear at this point. I don't know that we're overly optimistic or pessimistic. It's just under further consideration by their team.

And then finally with Illinois, it absolutely has been disappointing there. You see somebody like the VA, who has to be in Mission Bay, wants to be in Mission Bay, so they moved quickly. We just haven't seen additional demand in the window of time we've had since we've acquired the asset from a high profile, high credit tenant. And the tech companies really have wanted to stay very, very close to their peers. I think there's a little bit of frankly, a lemming mentality where they get concerned about recruiting people if we're next door to twitter and Zynga and their brethren, then they just have more comfort. Mission Bay hasn't really been identified as a clear tech destination. I think if we were to secure an anchor tenant with a floor or two, I think that would change literally overnight, but we're just not there yet.

You might just talk about when the hospital gets delivered, because that's clearly a game changer.

Yes. That couldn't be a bigger part of Mission Bay with $2 billion of investment going on right now. And you do see the full substantive impact of a 1.1 million square foot facility there. Just like we saw when a number of the research buildings were being built out, that drove a lots of the clinical demand that has now resulted in 100,000 square feet of leasing by UCSF at 1500 Owens. We do expect additional demand, and it doesn't necessarily have to be UCSF at all, but other entities that really make it imperative for them to be nearby if not adjacent to the hospital to look at 499 is a very logical location. That's still is a ways off from ultimately being up and operational, but I think the fact that the curtain wall is completed and it looks much more like a finished product will have a meaningful impact on how people perceive this area over the next couple of quarters.

Have you had any contact with sales force or have they just gone radio silent?

No. We're in very close contact with them because -- consistent contact. We're obviously neighbors. And they just haven't changed their view on their plans for the future.

Okay. And then, Joel, just on the asset sales, a couple of questions. One, what is the mix for the $57 million that sort of targeted to get -- hit the full-year guidance? What's the mix, the breakout between income-producing and land sales?

I'm looking at that right now. So we just closed -- of the 56 remaining we closed $20 million today to Pennsylvania assets that were operating. Maybe $15 million or so would be land. The last $21 million is still to be determined. I don't think there's any significant land in there, so I would say it's more operating in that bucket.

Okay.

I think that's correct.

Okay. And then it may not be entirely fair to draw inferences from the discontinued operations on page 18, but if you do look at -- you had the one income producing asset and just if you do take the disclosure, it looks like you're talking a double-digit cap rate on the Route 495 asset. Is that what we're looking at for a suburban lab, non-cluster asset?

Yes. I think you're taking the implied information from the P&L and balance sheet disclosures on page 18 of the supplemental. And I think what you have to keep in mind is the 196,000 square feet is more of a land type --

Right. So I would have expected the NOI would be entirely attributable to the income producing asset.

On $8 million? I don't recall the cap rate. There is income related to the land parcels. They are operating, but just not at office or lab rents. There is income being generated. I don't have the breakdown, John. I could give you some better color off-line.

We're to follow up off-line. One last --

I wouldn't read too much into the $8 million sale as a benchmark for yields on dispositions or even a cost per square foot.

Yes. Because it's kind of a one-off asset. It's not even clustered. It's not part of the Wister asset group.

Sure, and it's obviously a small deal but we just don't see a lot of comp, so that's why I'm interested. And lastly for you, Dean, if I may, and I apologize if I missed this, your disclosure obviously continues to improve and thank you for that. But do you break out anywhere the NOI that runs through the P&L from properties that are still in the development pipeline?

We do. It's on page -- it's in the AFFO reconciliation, which shows up on page 12. And it's actually burning down fairly significantly. Most of the revenue -- let me find it here -- it was 72 -- so it was $478,000 in Q1, $72,000 in Q2. So it's really burning down. We used to be running -- if you go back to June of the second quarter of '11 we are about $1 million a quarter. What's happened is most of that income was being generated out of the Cambridge and Binney Street development site. And as we moved closer to vertical construction, we slowly vacated tenancy in the buildings and since then have taken down most of the buildings out there. So if you've been up to Cambridge lately, you'd see most of the sites leveled now.

Okay. Thank you.

Michael Bilerman, Citi.

Hello yes, it's Quentin Velleley here with Michael. Thanks again for the China and India development disclosure. Would you be able to give us some kind of sense for what the stabilized development yield expectations would be for China and for India? My sense is that China would be pretty low. Somewhere in the low single digits, but India looks like it's probably going to be above a 10% or an 11%. Would that be kind of right?

Yes. I think in China, the South China being kind of a flex manufacturing, our guess is that's going to be low single digits. Again, because of both being our first effort and in a market that we would not have chosen had it not been for this original group that asked us to go there. And northern China, I'm not sure we can tell you anything yet. We don't know enough ultimately, because the rents could vary if we were able to land a -- and we're working actually with one specific tenant right now that's a tenant of ours in the US, if we are able to land a bigger incentive package the rent would correspondingly be higher. So I'm not sure we can give you any guidance there yet, so I'd say stay tuned. But again, I don't view China as really a core international operation given what we've said to you.

In India, however, I think the level of credit of the tenants by and large is very high. Most of our tenants -- and over time we'll try to break that out more specifically, are fairly large international players. There aren't a lot of startups or early-stage companies, by and large there. There are some service companies. So it looks a lot like China in that sense. And I would say yields probably will range from low double digits to mid-to high double digits kind of a range based on a variety of factors. And so I think that's kind of where we see things. And if we're able to achieve in a great market here in the US, maybe and 8% yield, those yields probably I think are going to be somewhere between 300 and 700 basis points, above that. Just on average. But you'll see those develop over time. And I think that's pretty fair.

Joel, just a question, it's Michael Bilerman speaking. As you think about sort of the balance sheet and in terms of raising equity, you did launch the ATM in the quarter, looks like you hit it pretty hard at least in the couple of weeks that it was open in June with about $40 million raised. And I think Dean said expect the next $210 million over the next four quarters. I assume that's subject to market conditions, and if you had the opportunity to you may accelerate that. And you sort of line that up relative to disposition volumes of $112 million, which you've held pretty firm all year. Part of that disposition is obviously going right back into development with the one land sale in Longwood. So I sort of treat that a little bit separately. Why not be more aggressive in terms of the asset base in terms of selling substantial more of the assets rather than continuing to raise equity? Or even try to do a large joint venture on some of your assets or even clusters to raise that capital more efficiently than through the marketplace?

Yes. I think that's a fundamental question that we think about and discuss almost on a constant basis. And I would say to you, the Longwood process was -- and that Longwood venture and the yields are actually pretty good and they're likely to be higher rather than lower over time. In the one sense, it's a great opportunity to bring in a money partner to off lay capital costs. On the other hand, you can't get better real estate, and you've got by and large, credit tenants and really good yields.

I mean if you could build to an $8.5 million cash yield in Longwood, and if you exited that market, my guess that's got to be a low $6 million or a mid $5 million probably. I don't know if Peter could talk about that. That's a hard thing to necessarily just give up. So we have to think very carefully about do we really want joint venture partners for Kendall Square, as an example, and that's an issue that's not easy to digest. When it comes to sales of assets, we've really looked through each of the regions. We've worked hard to tee up a variety of sales.

You've got an environment today where obviously capital is cheaper and available, but in many cases we're not interested in selling our cluster assets. We're interested in selling really some of the suburban and you really have to do that in a measured fashion. It would be hard just to put an entire sub market for sale in this particular environment. We're not in '05, '06, '07, we're really in a market that still is a little different. So we're working hard to take it step-by-step, but it's hard to jump to large volumes. We also have to be mindful that where we have critical tenant relationships, as we do in a number of these cases, just to simply offload an asset we have to be mindful of that.

We also obviously have taken the decision to seek an equity capital partner in India. I think that's something that is easy to reflect on because it's a new market. It's one that has great promise. There's a lot to do there. And so it makes good sense. So we're trying to attack it in a pretty dogged, methodical, analytical fashion, but it's not so easy. Just to simply exit and entire market -- sub market. And many of the markets we're in, we really don't want to exit. So it's really those suburban assets and there's only one or two locations. And you just can't wholesale, sell them all. I don't know, Peter you can comment because you're -- you've spent a lot of time on this effort.

One thing you don't want to do is dilute the market. You don't want to go out with a bunch of assets that are all in the same place. It's going to cause someone to want to take a big discount to take those assets. And so that's not really a strategy we want to do. But one of the things we are looking to do are take certain operating assets that could be high cap rate assets, because the reason they are is because their credit isn't very good. And we want to take that capital and recycle it into something like Binney Street, where we could get a much lower cap rate for that asset. So overall, I think we're going to get our NAV much higher by selling some suburban assets and putting them into urban.

I don't know if that's a helpful perspective, but --

No. It is.

That's how we're approaching it and thinking about it.

And then in terms of the at the market equity program, you did the $40 million in the three weeks of -- the last three weeks of June. From when you launched it. At a price of $70.64 with the stock higher today. Is there not a desire to do that quicker than over the next four quarters? Just from the standpoint of where leverage is today and understanding that you want to get back into the mid-6s? Obviously, raising that $200 million would equate to almost a half a turn.

Yes. I'm going to ask Dean to comment. But I would say we just had face-to-face meetings with the rating agencies, and I think to keep in mind too it isn't quite like a balance sheet point in time. It really is a process and an operating mode, modality, and level. And so we do believe we could operate very comfortably within a boundary of around 6.5 times. But it's also a process to get there, not just an automatic gulp, and suddenly we're there. So I think that's how we're thinking about it, but Dean will comment specifically.

Yes, I agree with Joel's comment. There's not a goal or pressure in our view to jump to the 6.5 times. We're going to get through there through the delivery of our EBITDA and NOI ramp-up, which occurs in the fourth quarter and obviously thereafter, because we have a lot of product behind that's leased and scheduled for delivery. The ATM program, we've kept a little bit of capital in June. We have -- it wasn't clear -- we've been off the program in July. And we'll look for opportunities over the coming four quarters to execute a little more equity over time.

Yes, but I think, Michael, it is true, though, that if we do move forward with additional construction spending, we would ramp-up the pace of that program. There's no doubt about that.

And just lastly on 499, you haven't changed your yield expectations or your cost expectations, but it definitely sounds like things are going slower than you had hoped when you purchased the asset. So I'm surprised that nothing has changed from a yield or cost. And if you think that things are going to take a little bit longer I would assume you'd capitalized interest longer, maybe you have to provide a little bit more incentives to land that anchor tenant. I don't know where rents are today relative to what you originally underwrote. I think it was like $350 net a month. So maybe just talk a little bit about what's happening there?

Yes, I don't think you have an eroding rental rate market. And I don't think concessions are the issue. Obviously, Kerry will also always be important, but Steve, you could comment on general economics.

Michael, we originally underwrote this conservatively, looking at lease rates that we've already achieved at the three facilities they're operating in Mission Bay. And really, what's changed, it has taken longer and ultimately, we've pushed out just by two quarters the delivery of that. So that in and of itself hasn't had an impact given the other considerations with the lease rates, but the original underwriting I think was fairly conservative.

Okay. Thank you.

Philip Martin, Morningstar.

Yes, good afternoon. I just wanted -- a bit of a macro question, Joel, could you provide us with a sense of how the uncertainty in Europe may be affecting tenant needs and growth strategies and what that may mean for Alexandria in terms of more or fewer opportunities, or maybe a shift towards strategies to the emerging markets? Again, just seeking a little more macro level.

Yes, I can give you one recent example. Well I think if you look at the big players in Europe, there's not a lot of expansion going on in Europe for Pharma. There is some Biotech, but a lot of that is really sales and marketing, not core research. Novartis has obviously moved worldwide headquarters from Basel to Cambridge. Roche has obviously paid a lot of money and acquired Genentech as their oncology platform. And really, their engine of product pipeline and beyond that based in the US, you recently had Sanofi, Chris Viehbacher about a week or two ago announced that he was shutting down sites in southern France.

These are core research facilities. Remember, this is a French company. I think in Toulouse. And I forgot where the other location was, but both in the South of France. And so what that tells you is he said that they have been historically maybe over the last two decades pretty unproductive as far as new molecules, whether it be chemical entities or Biologic's into the Sanofi system. And so for a French company in a fairly -- with a new leader who is pretty socialistic to be willing -- and he's obviously Canadian, but being willing to step up and close sites down in France, that's a pretty big deal.

And he's obviously made clear statements as well as the quote I used from his head of research, Zerhouni, that they view Boston as the main place they'd like to grow their core research. It seems to me, European Pharma is moving across the pond to the US into the hubs and not really focused on much expansion in Europe. So that's the reason we've not focused on Europe, because we don't see it as a real growth opportunity. And I think those three examples give you a little bit of taste of what's going on over there.

And I know in some past discussions I've had with you, I came away with the sense that there was some pent up expansion demands even within your own tenant base. And you were being a little more cautious given the world we live in today, et cetera on trying to balance all of that out. What types of pent up demand expansion organic growth exists in this portfolio of Alexandria's today? Are you having to say no in some cases? Or pushing it out further a bit?

Go ahead. Sorry.

No, no. Or pushing it out further a bit?

Well, I think we still maintain we're pretty careful on underwriting. I answered one question about New York and how we looked at demand there. We want to wait for a real strong credit anchor tenant. We don't want to compromise with just an entity that may need a bunch of space, but that we don't view as highly credit worthy. In the Boston market, the Cambridge market in particular, there's a number of fairly sizable transactions that are requirements. I think we've done a good job of sorting through those and making sense of what those are and what those mean.

So I think it's pretty clear that there's some good opportunities and we're maybe best positioned out of all the players in Cambridge to take advantage of that. MIT's got a lot on their plate. Forest City has got a lot on their plate. They're the big Boston properties does as well, and we've got some opportunities. So I think we will be energized. So I think New York City obviously, the Cambridge opportunity, and clearly if something moves in Mission Bay, we could take advantage of that. So I think those are the primary pent up demand opportunities that were looking at today.

Okay, okay. Thanks for the insight.

Michael Carroll, RBC Capital Markets.

Hello guys. Can you give us some color on the upcoming Science Park redevelopment project? How extensive will that activity be?

The new acquisition?

Exactly. Yes.

Yes. Probably too early to say. We have one existing tenant that is looking at some or all of that. But nothing to announce at the moment. It clearly is a critical piece. It sits across from one of our prime campuses in Torrey Pines. And next to one of the major institutions there, so it's probably almost as good as you can get as far as location. So we're looking at doing a combination of redevelopment on part and potentially ground-up development on the other part. But I'd say stay tuned, but it's a really -- I think it's a high quality credit opportunity in a Triple A location.

Do you know how much capital you'd have to spend on that redevelopment?

I don't know, Dean, do we have any estimate at the moment?

No. The estimates are still being built, Mike.

Okay.

Too early.

And then according to your guidance you have about, what, $377 million left to spend on your development and redevelopment projects? But you only have about what $225 million left to spend on your in process developments? What the rest of that capital coming from?

Yes, there's actually a pretty good breakdown, Mike, on page 32. Of the supplemental. It shows the breakdown for the last half of 2012 at $377 million. For those of you that don't have it for reference, let me just rattle off some numbers. $95 million for development is on the back half of this year. $131 million for redevelopment. And these are North America numbers. About $43 million for pre construction. Generic infrastructure, building improvements in North America of about $55 million. Future, construction projects in North America of about $30 million. And redevelopment and development projects in Asia of about $23 million. And that totals the $377 million.

All right. Thanks.

John Stewart, Green Street Advisors.

Thanks for sticking around. Just two quick ones. Joel just wondering if you have an assessment of what potential overlap or exposure you may have from Bristol-Myers Squibb's acquisition of Amylin with that -- random square that space is potential for rationalization?

Yes. We have our exposure to Amylin over the next I think there lease goes out another three or four years, as I recall. I think it's about 75,000 square feet in San Diego. We see that rolling. We don't see Bristol-Myers taking that space. And in fact, Amylin has been -- Steve or Peter you could chime in, I think it's been on the sublease market for a while. So it's been kind of non-core. I don't see Bristol using San Diego as a major expansion hub, but I think they'll keep certainly certain parts of the operation. It's much more of a development and commercialization effort than it is really an R&D hub for them.

Yes. Amylin has been shrinking for quite a while in the market. They've got a lot of space for sublease. So I think once their R&D phase was over with, and they were concentrating mostly on development and commercialization, they just stopped using a lot of space. So I wouldn't expect BMS to take any of it.

Okay.

Yes, so we have a targeted -- I don't know if it's in '16, '15, '16, whatever the date is I don't have it right in front of me, but we've assumed actually even before the acquisition, that, that would roll and not be renewed. And I think that probably true of a bunch of their other space down there. Would be my guess.

That's helpful. And then, Dean, I know you gave a run rate for straight-line rent on a quarterly basis, but just wondering if you've got the fourth quarter number just given the ramp-up of NOI coming online, what's the cash contribution? Or rather, what's the straight-line rents adjustment for fourth quarter?

It's probably -- I don't have the two quarters on the back half of this year but they're averaging about $6.5 million. I'd say I think my expectation is a little bit more straight-line rent in 3Q, a little bit less in 4Q.

Okay. Thank you.

This concludes the question-and-answer portion for today. I would now like to turn the call back to Mr. Joel Marcus for closing remarks.

Yes. Thank you everybody. Sorry we ran a little bit over here and we'll look forward to talking to you on the third quarter call. Thanks again.

Thank you. Once again, ladies and gentlemen, this concludes today's conference. You may now disconnect, and have a great day.