Alexandria Real Estate Equities Inc (ARE) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Alexandria Real Estate Equities Incorporated first-quarter 2014 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded.

And at this time, I'd like to turn the call over to Rhonda Chiger. Please go ahead.

Thank you, and good afternoon.

This conference call contains forward-looking statements within the meaning of federal securities laws. Actual results may 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.

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

Thanks, Rhonda, and welcome, everybody, to the first-quarter 2014 conference call. With me today are Dean Shigenaga, Peter Moglia, Steve Richardson, Marc Binda, Andres Gavinet, and Amanda Cashin.

So, my take on the first quarter really echoes our theme that was presented at Investor Day, December 13, on a return to stable growth with increasing FFO per share growth, NAV per share growth, really a very clean quarter, strong core, solid operating metrics and very positive external growth.

As many of you have read, Michael Porter of Harvard has spoken often and written often about the urban clusters, and it's useful to reflect that ARE has really chosen to focus the bulk of its efforts and the bulk of its precious capital in the leading urban innovation clusters, with a focus on quality buildings, locations and tenants in each of those submarkets, ultimately reaping higher-value, stronger, more durable rental streams in up-and-down cycles, deeper and more credit-worthy tenant base, tenant rollovers more protected on re-leasing, stronger rental rates, more pricing power, lower cap rates and lesser CapEx.

We also noted in our press release that we celebrated our 20th anniversary as a company, and proud of our exceptional track record, starting with a mere $19 million back in 1994, and a vision; and today a total market cap approaching $9 billion, and we're proud that we've been able to generate a return of about 579% from IPO through the end of the first quarter.

On macro comments, the FDA -- there have been actually 12 FDA new drug approvals through April 24 of this year, and 50% were ARE client tenants; very proud of that. There is part of the 2012 Drug Act. The new breakthrough designation corridor, if you will, was introduced, and there have been 48 breakthrough designations through May 5, 2014, and Alexandria client tenants have reaped 66% of those breakthrough designations. And as you may know, those are promising drug candidates with in-clinical development with remarkable clinical activity. And this has really been unveiled since the breakthrough designation was part of the Prescription Drug User Fee Act passed in 2012, July, which Alexandria actually helped draft the breakthrough designation provision; we're very proud of that.

The Affordable Care Act, which has been much in the news, is forecast to add 25 million new insured lives by 2023, and will fuel strong demand for innovative medical products. Large pharma now has 56% of its Phase III pipeline from external sources, up from 38% a decade ago. So, I think it's fair to say the intensity of the interaction with biotech in the heart of the urban clusters really continues unabated.

And as many of you know, much in the news these days, pharma M&A has been front and center. I think it's fair to also say that the most successful, based on past history, are those where thriving biotechs are acquired, and their research units continue as independent competitive units. This was really the formula Roche used with Genentech many, many years ago. Big pharma will increasingly focus on activities which benefit from scale, and subcontract out, so to speak, the scientific work that doesn't primarily to biotech.

If we move to operations and internal growth, greater Boston and San Francisco primarily contributed to the strong cash and GAAP rental rate increases, and Steve will talk more about the details there. First-quarter leasing -- about 563,000 square feet; greater Boston had 42%, San Francisco 19%, and Maryland 14%. And a lot of smaller spaces were involved in these leases, so somewhat shorter-duration lease terms were evident. We feel very confident about increasing GAAP leasing spreads, and Dean's adjusted guidance in that regard, and occupancy across the regions continue to trend up at all-time highs.

Moving to external growth quickly, acquisition activity has been fairly substantial. Year to date, approaching $150 million, primarily because of the strong sector demand from our growing and expanding tenants is really driving our need to find additional facilities to retrofit for their use, as our occupancy drives to all-time highs in existing assets. So, we're actually running out of space for some of our tenants, so we've had to look at opportunities to acquire, and this is good for them and certainly good for us. And this is partly a consequence of accelerated FDA approvals and a heavily cash-flush biotech sector. Steve will also detail the very strong large-tenant demand which we're seeing in both greater Boston and San Francisco.

On the development front, we've had good, steady lease-up progress ahead of our pro forma in New York City, now approaching 70%. On 75/125 Binney, we're on target there. We have frequent dialogues and meetings with ARIAD. We're making solid progress on the development of another Class A facility in this best science and technology cluster market at 75/125. As all of you know, ARIAD has a contractual lease commitment for 99% of the project with contractual rent payments. Target rent commencement date is contractual and defined under the lease as March 22, 2015.

We had some good news in Longwood. We expect to have another full floor leased by around the end of this quarter, and activity is picking up in that regard. And on our 50/60 Binney corridor project, two 250,000-square-foot entitled shovel-ready buildings, we will shortly commence marketing with one of the buildings of 250,000 square feet, given the very large market tenant demand, and we're proceeding on our joint venture as well.

In San Diego, we have very strong demand there; Spectrum One is 40% pre-leased and 40% in negotiation. We're getting close to signing the LOI with Illumina on their 150,000-square-foot build-to-suit. Same thing at Campus Pointe, 120,000-square-foot build-to-suit out of the 140,000 we'll build. And we're also in build-to-suit negotiations with Spectrum Two in San Diego.

Dean will talk about the balance sheet in detail, but -- and confirm our land sales of about $145 million to $245 million. We feel comfortable with that number. Our forward active pipeline is about $35 million; right behind that is another $95 million, plus maybe $50 million on the horizon, so we'll keep you posted as our negotiations move forward. And we feel good about where we've guided the street.

And then, finally, on the dividend, the Company intends to continue its policy to share increasing cash flows with shareholders as we maintain a continuing low pay-out ratio of about 60%. So, Peter?

Thanks, Joel. I'd like to run you guys through, or highlight two notable Life Science trades that offer further proof that life science real estate in the core markets is achieving cap rates at or near those of Class A office product. And in addition, I'd like to present some office trades that occurred in and around our submarkets to offer additional context for your valuation of our operating portfolio.

So, first, I'd like to discuss the pending sale of the Vertex Headquarters Research Building in the Seaport Fan Pier submarket of Boston. Outside of HCP's purchase of the Slough portfolio in 2007, this is the largest life science real estate transaction we have seen, with a purchase price of $1.125 billion, or $1,022 per square foot. Vertex occupies 100% of the 1.08 million square feet of lab and office space. The project also contains 50,000 square feet of retail space and 740 parking spaces.

Based upon publicly disclosed information and our own estimates, we believe the cap rate of this trade was in the low-6%s, likely near 6.2% upon lease-up of the retail space. If the property had been located in Cambridge, we believe that cap rate would have been much lower.

We know that there was at least one other bidder at that price point, but Senior Housing Properties Trust was the buyer. We had a very early look at this transaction through our relationship with the developer and the brokerage firm marketing the property. Although the real estate is Class A, and Vertex is a solid tenant, we are unsure if Fan Pier will be able to compete with Cambridge for life science tenancy over the long term, as it lacks the ecosystem of Kendall Square. That ultimately led to our exit from the bidding process of that transaction.

Outside of the cap rate conversation, we believe that this trade offers further evidence that life science real estate has become acceptable to a wider range of investors. This is S&H's first life science real estate investment, and we know that a number of other bidders included pension fund advisors and a sovereign wealth fund. This trade also illustrates that lower cap rates are driving up price per square foot statistics, as we also see in Kilroy's purchase of 401 Terry in Seattle for $106.1 million, or $755 per square foot.

401 Terry is a laboratory office building located in the South Lake Union submarket that garnered considerable national attention with over 30 initial bidders. The building is relatively new and 100% leased to the Institute for Systems Biology, with moderate term left on the lease. The cap rate on this transaction was 6.0%, and considering that the tenant is not credit and a small research non-profit, we believe it could have been lower. Like the Fan Pier transaction, this trade also offers further evidence of the widening audience for life science real estate.

So, before I hand it over to Steve, I wanted to briefly mention that 221 Main Street, a 379,000-square-foot office building located in San Francisco South Financial District just north of Mission Bay, traded at a 4.0% cap rate in April, with a price per square foot of $725. A posting about the trade on the website, The Registry, mentioned that many in the brokerage industry saw that cap rate as a little high for a large institutional quality building. We believe that as Mission Bay continues to be developed into an in-fill location, it will become more and more integrated into SoMa and the Financial District. The northern edge of Mission Bay is only 1 mile away from 333 Brannan Street, where Dropbox recently signed a lease with a new high in rental rates for the area.

The recently announced Warriors Event Center, which will be located on 12 acres of land adjacent to our 409-499 Illinois property, and in close proximity to 455 Mission Bay Boulevard, will accelerate this integration by further enhancing Mission Bay as a 24/7, live, work, play environment, and an unparalleled destination to recruit and retain top talent. So, even if you applied a discount to our Mission Bay assets that are long-term leased to credit tenants such as Bayer, Pfizer, Celgene, UCSF, and the VA, a cap rate in the high-4%s to low-5%s is justified.

Lastly, I'd like to note that SL Green is selling 673 First Avenue in New York at a 4.7% cap rate. This was actually passed on to us by one of our coverage analysts who thought it would be applicable to our New York City assets, given its location a half mile due north of the Alexandria Center for Life Science, its NYU School of Medicine tenancy, and that it is a leasehold interest. With our assets being long-term leased to credit tenants, newly constructed, fully amenitized, and lacking in competitive product, we have argued for a rate lower than this.

So, with that, I'll pass it over to Steve.

Thank you, Peter, and good afternoon, everyone.

I'd like to highlight two key points during my brief remarks to really underline the theme of stable growth that Joel referred to earlier, as it's well underway in our gateway cities where we've concentrated our significant capital allocation in Class A urban, science, and technology campuses. First, we'll discuss the truly stellar performance of our core, due in great part to our best-in-the-business fully integrated regional teams. Second, the ability of our teams to capture additional growth opportunities in the best locations, such as the recent 500 Townsend Street acquisition in the SoMa district in San Francisco.

First, the core is performing very well, as we reported cash and GAAP increases of 10.4% and 18.2%, respectively, this past quarter for renewals and releasing of space. The business imperative for our investment grade tenants to commit to space is clearly evidenced by the truly stellar 96.6% occupancy rate for North American operating properties, up 240 bps from Q1 2013. And just 292,000 square feet of rollovers remain to be resolved in 2014, or just 1.9% of our operating asset base. We're seeing tenants with 2015 rollovers also pursuing early renewals to ensure they secure a high-quality space in these key clusters.

Drilling down a little further in Alexandria's key innovation clusters, we can see the broad and strong business patterns, outlined by Joel, manifesting themselves in these healthy real estate indicators. In Cambridge, we're tracking demand of more than 2 million square feet in the market from both life science and tech users. We expect our mark to market on rollovers for the balance of the year to be in the 9% range on a GAAP basis, as these suites are concentrated in Cambridge where we can continue to drive rents in the high-$50s to low-$60s triple net for existing product.

As we discussed earlier, the Binney Street marketing and prospect discussions are continuing, and we continue to see rents in the low-$70s triple net for ground-up project. Direct vacancy rates remain very healthy at 10.2%, contributing to the overall sense of urgency in the market.

Moving out to the west coast, the San Francisco Bay Area continues to experience exceptional demand, as we've hit an all-time high of 99.8% occupancy in the operating and development portfolio. We're tracking approximately 1 million square feet of life science demand and another 6.5 million square feet of tech demand, and note two recent very substantial leases signed in San Francisco with Salesforce taking down 700,000 square feet and LinkedIn another 400,000 square feet, driving lease rates for new product in the mid-$50s triple net. Mark to market for our Bay Area 2014 rollovers is anticipated to be in the high-teens with lease rates in the high-$40s in Mission Bay, the mid-$30s in south San Francisco, and low- to mid-$40s in the Stanford cluster. The market continues to tighten as vacancy rates dropped 100 basis points in Mission Bay and SoMa to 0.1% and 6.4%, respectively, and 40 bps to 6.4% in south San Francisco.

Moving south, San Diego is also in a strong demand cycle, with 800,000 square feet of requirements in the market and rents along Torrey Pines pushing through the $40 triple net mark for high-quality product, an increase of nearly 10% from last year. UTC's submarket has a direct vacancy rate of 6.4%, and Torrey Pines' vacancy rate of 10% will be dropping into the single digits during the next quarter. We expect the mark to market on the modest rollover remaining in 2014 to also contribute to core growth.

Seattle, Maryland and RTP will also provide mark-to-market gains in the range of 5.9%, to flat, to 20%, respectively, for 2014. Vacancy rates are tight in these markets as well, with Seattle's South Lake Union at 4.9%, Rockville at 10%, excluding the [HDS] big block, Gaithersburg at 5.6%, and RTP at 10%. Demand is very healthy, again, with almost 900,000 square feet in the Seattle science and tech sector, 220,000 square feet in Maryland, and another 125,000 square feet in RTP.

Second is the 500 Townsend Street parcel acquisition and strategic plan to perfect entitlements, design and construct nearly 300,000 square feet of Class A science and tech space is really a testament to each of the regional teams' ability to execute on meaningful and compelling new growth opportunities. This location at the geographic intersection of Mission Bay and SoMa mirrors the deep industry intersection and, really, trend of collaboration and overlap in the science and technology innovation realms. SoMa's extraordinary demand cycle of 4.5 million square feet of absorption during the past three years is continuing, as it added another 1.1 million square feet with the leases noted above.

500 Townsend, with its best-in-class development team -- this is a team that has decades of experience in wide-ranging expertise delivering Class A, high-quality projects in the city of San Francisco, including driving the occupancy rate to 99.8% for its 1-million-square foot Mission Bay cluster, is on track to create an iconic and state-of-the-art facility that captures the architecturally historic charm of the SoMa district at the absolute gateway entry to San Francisco.

With that, I'll turn it over to Dean.

Thanks, Steve. Dean Shigenaga here. Good afternoon, everybody.

I've got three important topics to cover. First, I want to provide an update on our balance sheet, which is positioned to support stable per-share earnings growth. Second, I want to provide key updates on important strategic capital-related events for 2014. And lastly, I'll provide a summary of key drivers of our $0.05 growth in guidance for 2014 FFO per share, and continued confidence in our ability to deliver solid growth in cash flows, net asset value, and per-share earnings in 2014 and beyond.

Starting with the balance sheet update, we continue to focus on a strong and flexible balance sheet, which will allow us to execute on our business strategy. We have almost $9 billion in gross assets, up 32% since we received our initial investment grade rating in 2011. We have over $1.3 billion in liquidity. We have only $20 million and $61 million of debt maturing in the remainder of 2014 and in 2015, respectively. We anticipate continued improvement over time in net debt to adjusted EBITDA on a trailing 12-month basis, driven by growth in EBITDA and near-term projected land sales.

Our fixed charge coverage ratio continues to improve as our business benefits from the continued migration of high-quality tenants into Class A collaborative science and technology campuses in urban innovation clusters. Our fixed charge coverage ratio has improved significantly to 3.3 times, or up about 50% since our initial credit rating assessment.

Our unhedged variable rate debt of 26% is currently at a level to support an opportunistic bond offering in 2014 without having to terminate swap contracts as we use the proceeds from the offering to reduce outstanding variable rate bank debt. We expect unhedged variable rate debt to be approximately 11% as of year end.

Moving on to an important capital update for events for 2014 -- first with our bond offering. We remain focused on our strategy to maintain a strong and flexible balance sheet. Specifically, our bond offering will focus on extending our maturity profile, appropriately laddering maturities, and refinancing outstanding bank debt.

We have increased our targeted size of our bond offering by $150 million to a midpoint of $550 million, and anticipate executing this offering in the near term. The proceeds of this bond offering will be used to reduce $100 million of our 2016 term loan, with the remaining proceeds to reduce outstanding borrowings under our line of credit. We will continue to focus on execution of our strategy, including further reductions in our 2016 term loan in 2015 and 2016, issuing long-term bonds for growth capital, and driving steady growth in FFO per share quarter to quarter, and solid growth year over year.

Briefly, on land sales, our guidance for land sales in 2014 will focus on generating important capital from non-income-producing assets for investment into high-value development projects. Our land sales will also include the first part of important capital from a programmatic JV partner, with the sale of an interest in our near-term development opportunity in 50, 60 and 100 Binney located in Cambridge, Massachusetts. We are comfortable with the range of guidance for land sales of $145 million to $245 million, or a midpoint of $195 million for 2014, and anticipate providing more details over the next quarter or so.

Lastly, on guidance, I want to touch on two important topics: leasing activity expectations for the remainder of the year, and key drivers of the solid $0.05 increase in FFO per-share guidance for 2014. We reported strong rental rate growth on lease renewals and re-leasing of space for the first quarter of 18.2%, and 10.4% on a cash basis. These stats were solid, with 53% of the renewals and re-leasing of space related to leasing in Cambridge, Massachusetts, with rental rate increases of over 18%, and 12% on a cash basis.

We remain on track to achieve solid rental rate growth on leasing activity for 2014, and remain optimistic that we'll hit the upper end of the ranges for guidance for rental rate growth. We are pleased to announce a solid $0.05 increase at the midpoint of our FFO per-share guidance for 2014 to a range of $4.70 to $4.80. The new midpoint of our guidance of $4.75 represents solid growth of approximately 8% over 2013.

The increase in guidance reflects the continued execution of our business strategy to deliver solid and stable earnings growth, and consisted of the following key drivers: a $0.02 increase from core operations, driven by solid early renewals, including 130,000-square-foot lease in Cambridge; a $0.01 increase from the value creation projects, including lease-up of an additional 25,000 square feet at 499 Illinois in Mission Bay, now 98% leased, and a renewal of a lease in the peninsula area of the San Francisco Bay market; a $0.01 increase from acquisitions; and a $0.01 increase from various other items, including updated assumptions for our bond offering in 2014.

The delivery of certain pre-leased value creation projects in 2014 is anticipated to be primarily in mid to late 3Q. Our expectation for FFO per share through 2014 is in line with our goals, and is expected to show steady growth of $0.01 per share each quarter going forward.

In closing of my comments, we are pleased to be in a solid position with our balance sheet, with continuing solid core operations, and demand from high-quality science and technology companies to drive stable growth in FFO per share and net asset value in 2014 and beyond. With that, I'll turn it back to Joel Marcus.

Operator, if we could open it up for Q&A, please.

Thank you.

(Operator Instructions)

Emmanuel Korchman, Citi.

Dean, maybe we'll start with you. Looking in your sub, you have a comment on the marketable securities balance on realized gains going up pretty significantly, but it didn't look like the biotech index went up the same amount. Could you talk about what might be happening there? Is that just sort of a single name that's really outperforming, or something else?

I think in follow-on to our comment, Manny, last quarter, we had touched briefly on the upside in the value of our investments being easily two times cost, and most of those investments are held at cost. So you did have a couple securities, but driven primarily by one that had a significant increase in value during the quarter, and that's reflected through equity. Just for everybody's note here, that is not part of our P&L or our income statement.

But what I think you're going to find is from time to time, you'll see some pretty meaningful growth in the value that we reflect in our investment holdings on the balance sheet, primarily as privately held or private investments in private companies transfer into a public security and that really occurs in two methods. One, if the companies go public or two, they're acquired by a publicly traded company and we end up with an unrealized increase in valuation, and that will allow us to have liquidity events over time as we deem fit, providing a little bit of other income from time to time.

Thanks for that explanation. Your exposure in India went up in the quarter. Previously you had spoken about decreasing that exposure. Can you help me reconcile that idea?

That's all FX.

But it looked like your number of assets went up, unless I'm mistaken.

We brought one asset from redevelopment into operating that was fully vacant.

You have increased your debt issuance guidance with the notes, but you haven't increased any of your sales guidance. And given the environment that Peter spoke about with assets trading at pretty low cap rates, have you thought about selling more stabilized properties and rolling those into either land sites or other development properties rather than going out to the bond markets?

Well, as you well know, we did that in a couple of submarkets during the latter part of 2012 and early part of 2013, and so that program is done and we're really focused more on the land sale opportunities we have to use together, obviously, with bonds to invest in both redevelopment and development projects.

Jamie Feldman, Bank of America Bank of America-Merrill Lynch.

I know you touched on it a couple different ways on your JV prospects. I think you mentioned something like contributing land. Can you just clearly state exactly how we should be thinking about the JV going forward and when we might see some activity and how?

Well, I think as I said a quarter or two ago, we would hope to have a JV in place where we would be the majority partner. Hopefully sometime late second or early third quarter, and it would be focused on the 50/60 Binney properties and potentially on100 Binney because the opportunities there on leasing are pretty sizable, the dollar amounts of building that project out approach $750 million, so it's ideal for a JV opportunity where we can also earn fees and promote, et cetera. So that hasn't changed from the discussion we had maybe at Investor Day or thereafter.

And then reading the press release, if I read it correctly, you talked about potentially taking on the Executive Chairman role in several years. Can you talk more about what that means and if that means maintaining the CEO spot or not?

Well, I think it's probably the easiest way to think about it is that under the new contract, I'll continue as CEO of the Company through December 31, 2016. Beyond that, the contract will be what it is or it may change. I don't know but I'm focused on this quarter.

If you were Executive Chairman would you stay as CEO? Or those are two distinct roles? You can't do both?

I think they'd be two distinct roles.

Finally, when you were quoting rents you talked a lot about tech rents and life science rents. As you think about your major markets, are you tempted to go more down the tech route at this point than life science and how are you thinking about that decision?

Well, I think if you focus on what we said and how the supplement is presented and the press release, we haven't changed our focus from these critical core urban science and technology clusters. I mean, if you walk into Mission Bay in our lobby, you've been there many times, you'll see, I think the moniker is Alexandria Science and Technology Mission Bay Campus.

And of so we have focused primarily on the life science industry, but as Steve said, it's clear that the integration of information technology, engineering and other disciplines with life science continues unabated, especially as we get into the digital health care age. And so these markets tend to meld together. So I think our focus won't change, we'll continue to focus on Class A buildings, AAA locations, urban campuses, innovation clusters.

But as you think about the rent growth you're seeing in the markets, is it rising faster for traditional tech space? I shouldn't say for traditional; for modern tech space than it is for life science space?

I think the rate of increase is probably a bit higher in the technology sector than it is the life science sector. Having said that, we've seen healthy rental rate increases in Mission Bay and Cambridge and Seattle and San Diego, as well. They're all very healthy.

Sheila McGrath, Evercore.

Joel, I was wondering if you could talk a little bit more about the land acquisition in SoMa, how long you think it'll take to entitle the pricing? And also you mentioned in your prepared comments that your recent acquisitions were tenant-driven. I was just wondering if you're already in discussions with tenants at that site.

I'll let Steve comment on that and then I'll come back to some other items on the acquisitions.

On 500 Townsend, the entitlement process we've actually submitted to the city as of last Friday, so the development team is a very experienced team. We were able to go ahead and execute on that very quickly.

We expect that to take anywhere from 12 to 18 months and we are on that full-time. And as far as the pricing, I think as you'd think as you think about the pricing, and there were two other bidders as well who were essentially at that price point; relative to the rental rate increases it's very consistent with the pricing that we've seen in the past for other high-profile parcels like this one.

And our internal team and external team have ongoing discussions with potential tenants. So that is -- that actually, even to some extent, began in a shadow fashion before we closed on the transaction.

I think if you look at the acquisitions, both in San Diego and in greater Boston, those have primarily been driven by either existing tenants or new tenants who have come to us needing real estate solutions where we couldn't accommodate them with existing assets. So that, as I said in my prepared remarks, has driven some of the acquisition activity and again, it's driven a lot by FDA approvals and the biotech sector being among many of the companies being pretty flush with cash and ready to do expansion, undertake expansion.

And Dean, a couple quick questions. If you were in the bond market today for 10-year debt, where do you think you could execute, roughly?

Let me say while Dean is giving some thought to that, if you look at our last two bond deals, both were 10-year. It's entirely likely we wouldn't do a 10-year bond deal. We would look to ladder maturities and we might have them maybe somewhat shorter and somewhat longer duration bonds as we're thinking about this.

Yes, I'd have to say probably somewhere -- depending on Treasuries and Treasuries have been moving around quite a bit, but call it somewhere in the low 4% range on 10-year money.

And then Dean, any comments on other income was a little bit higher than we had forecast in the quarter, what was that? And if the quarter -- if you think you had any weather impact in the quarter.

Two questions, Sheila. The first one regarding other income, I'd say nothing really unusual in other income in the first quarter. I would say if you're thinking about a run rate, you should think about roughly $3 million a quarter, $12 million of other income for the year.

And as far as weather, because that's been a key topic for earnings for REITs this quarter, we're no different in the sense that our portfolio did -- was exposed to the weather conditions in the quarter across the country, but the benefit we have is we do have a triple net lease portfolio, so the tenants do bear the cost of cold weather or heavy snow, as well as heating and cooling costs, depending on hot or cold weather. So the true difference here is we had limited P&L exposure as a result of our triple net portfolio.

Next is Steve Sakwa with ISI Group.

I just wanted to go back to the JV and just make sure, Dean, in the supplemental where you've got the guidance page and you talk about the land sales/strategic joint venture capital, that's roughly $150 million to $250 million. Are basically all the sales effectively tied up in this Binney project? And if not, are there other assets that you've got currently on the market today for sale?

Yes, let me say before Dean takes you through that, no, they aren't all Binney. We've got about $35 million having nothing to do with Binney, that's in the forward part of the pipeline, and then Dean can give you some of the Binney stats.

I think the way, Steve, to think about Binney is, if you turn to the supplemental near the very back in our future- and near-term projects, on page 31 of the supplemental our book value on 50/60 and 100 Binney is roughly $286 million. So our goal would be to bring in and still maintain a majority position, but sell an interest in the land for development there.

And you can imply a factor. If you want to assume something just short of something in the 45% range for a partner for the sake of doing some math, and we expect to be north of book, as we sell an interest in that opportunity there.

So Binney's an important component, but nowhere near -- we still have a number of transactions that Joel mentioned that are smaller that are moving through, and we think we're going to close the gap here on the remaining that has not been discussed, somewhere in the $60 million to $65 million range. And we'll provide more details probably over the next quarter.

So that means about $35 million near-term, you've got another chunk for Binney, and then a chunk that Dean just described that could be in the $50 million to $65 million range that's behind Binney. So we hope to accomplish those during 2014.

And Joel, I can appreciate you're not giving too many details on the joint venture as you negotiate it, but are there -- do you have one partner that you're actively going through right now, or are you still courting partners? Or are there any kind of issues that have come up in the discussions?

No, we're negotiating with one partner.

And then just on the bond deal, is there anything that triggered sort of pushing this off? I know back at the Analyst Day you had talked about setting conservative guidance and having this deal in effectively at the beginning of the year, and I can appreciate this deal might happen in the second quarter, but basically it got pushed off six months.

Is there anything specific that pushed that back? Obviously it was to your benefit to have waited, but I'm sure you wouldn't have forecasted rates going down, per se. So was there something that drove that decision?

Yes, I noted in your note that you had indicated that we said it would be early in the year. I don't know that we said that precisely. I think what we said is we had modeled it as if it would be earlier in the year, which would be the most conservative approach to it.

But we have always thought about opportunistically taking advantage of that. We wanted to see -- we wanted to get through the tech square payoff. We've looked at the secured debt market, because we now have a huge amount of un encumbered NOI, over 80%.

So we've been busy looking at that market as well, and I think we still see an opportunistic chance to do what we want to do that may be outside the tens, but within the ten and outside the ten. I think the comment was, we modeled it early but we never committed to do it day 1 of 2014. I don't think that was ever on our mind.

Lastly, Dean, in terms of the land sale gains, maybe I missed this in your comments. Would the land sale gains be related of to the Binney sale or would they be separate land sales?

Well, we haven't given guidance on gains for land sales and any gains would be excluded from our core FFO numbers. But we do expect the assets that are currently under advanced negotiations would be sold at a modest gain or small gain.

Jeff Theiler, Green Street Advisors.

Hi, it's Kevin Tyler here with Jeff.

I had a question, there was an article about a potential Alexandria partnership with Rice University's BioScience Research Collaborative. I know you have had success with deals like this, and recently with the NYU deal in New York at the Alexandria Center for Life Science. But can you fill us in a bit on your current appetite for university-related transactions, and more broadly, for a larger footprint in Houston?

Yes, I don't want to comment on future markets, but I would say that our focus is not so much on university-related transactions. We don't think that's where we want to keep our focus. I think one, because the NIH budget is muted, that our experience in Longwood clearly would indicate that those budgets are more difficult to take operating monies for rental payments. And we've never historically tried to tie our business to that factor.

I think our focus has always been on these science and technology urban cluster innovation locations and we want those to be near major urban centers, multiple centers, which spawn technology, which provide clinical trial opportunities, et cetera. I mean, New York is the paradigm example, Longwood is another great example, obviously UCSF.

But we wouldn't just go to some random city and do a one-off deal with a university; that's not what we do. It would be an integrated campus, made up of quite a number of participants in the ecosystem and that's how we think about it. So if we do something in another location, it would be according to our strategic plan, not like a one-off deal.

Michael Carroll, RBC Capital Markets.

I'm not sure if you talked about this yet or not, but can you give us an update on the ARIAD situation? I know the tenant has had some positive announcements. Has there been any update about the amount of sublease space they want to do at 75/125 if any?

I think I specifically indicated in my comments, Mike, that we have frequent dialogues and meetings with ARIAD, obviously because they're the tenant in our development project at 75/125. I don't have any news or update on their subleasing activities.

As I said, the last I heard, they were interested in subleasing all or a portion of the smaller building and that's as far as we know. We know that they have had discussions with a number of parties on that, but there's no update that I have specifically.

And then was the increase at the bottom end of your guidance, was that largely due to the -- pushing back the bond offering in your model? Or pushing -- yes, back in the year?

No, I think Dean went through the couple of items. He'll just recap it for you quickly.

Mike, not at all. The $0.05 growth, as I stated earlier, I'll rattle through quickly here, $0.02 of that came from core-related to early renewals, primarily a large lease in Cambridge for 130,000 square feet, $0.01 from value creation projects from lease-up of additional space that we plan to deliver this year at 499 Illinois, $0.01 from acquisitions, and then $0.01 from various items, included in that were updated assumptions for our bond offering in 2014.

Tom Catherwood, Cowen and Company.

Dean, we looked at this quarter, pretty strong internal growth, obviously. From a GAAP standpoint you're up 3.8% and your leasing spreads were strong, as well. As we think about it, though, given the guidance raise and the strong performance, we were somewhat surprised that you didn't raise the same-store guide for the full year. And we're wondering as we think through the rest of the year, is growth going to moderate somewhat internally or is there something else driving, leaving the guide where it is?

No, I think we're doing very well relative to our guidance on same-store, both the traditional GAAP view, as well as the cash view. I think our cash stats as an example of 4%, 3% for the quarter, if you just compare it to the midpoint, the midpoint of 4% to 6% for our cash basis NOI growth still puts us tracking for 5% growth.

So I think that you're going to see, collectively, as we proceed through the year same-store performance move closer to the midpoint, and I think there's room to be on the upper end relative to those midpoints, both on GAAP and cash.

And then Peter, appreciate the outlook on some other recent sales. It looks like cap rates are coming down on some transactions. But when we look at you, you're trading at roughly a 6.4% implied cap rate. And there seems to be some sort of a split between how public markets are viewing these assets and what they're going for in private transactions. Wonder what your sense of what's driving that split and if you still see cap rates compressing through the rest of this year.

Well, I guess, Tom, what I could tell you is that any time that we enter into a transaction in the core markets we're just seeing more and more people involved. And that's just driving the pricing further and further. And then after something trades I get an e-mail or a call from somebody looking to find out, why did it trade so low? And we talk it through and it turns out to be a good arms-length transaction and a good comp and we talk about it here on the earnings call.

I think this is the third quarter in a row I've gone through some pretty good comps that would give people an idea of what things should trade for, yet it doesn't seem to translate when you look at our implied cap rates. So I can't answer why there's a gap. I don't quite understand it. But I will -- I certainly think that we are going to continue to see more and more investment in the sector and pricing will continue to be strong.

And then building off of that, obviously a lot of interest in the sector, not only assets but in the kind of business itself. We've seen the entrance of senior housing, obviously with the Vertex deal into the now life science real estate sector, with Kilroy's purchase in Seattle, they're entering the sector as well. And obviously, given the growth that you guys are seeing, the value creation potential you're seeing, it's obvious that you would see more competition. But do you see some potential for that competition to eat into some of your main areas, or some way affect your business strategy?

Well, I think you have to distinguish between somebody owning a building or two or three or whatever, even a big building like the Vertex Building at Seaport Center, versus somebody who has fully integrated teams on the ground who have of operated for 15 to 20 years and who have a tenant base second to none. So I don't think we get much worried about competition.

As Peter said, we think it is absolutely fine that cap rates are being driven lower because that gives us a chance to create value rather, I think, as Peter likes to say, rather than buy somebody else's value, and that just hasn't impacted us. We have great opportunities for growth. We can literally double the size of the Company on a square footage basis on the land we own. We hope to monetize a lot of that in the near term as Dean said and on-board EBITDA.

But it hasn't stopped our growth in the core urban innovation centers. So, I think, just an acquisition or a purchase doesn't make a life science real estate company that really can span multiple markets.

Gabe Hilmoe, UBS.

Just on the redevelopment property at 225 Second, I'm just trying to get a sense of what the opportunity is there. Is that a conversion play from office to lab, and I guess what type of user ultimately takes that space?

It's an existing tenant that has outgrown their space and asked us to find a specific solution for them, and so, yes, it's a retrofit.

And then on the move-out coming in 4Q, I think it's in Rockville at Research Court, is that an asset that -- that's something that could get put into the for sale bucket or is the plan to redevelop that as well?

We actually already are in discussions with a potential tenant to take that building. So we're advancing that. It's more than likely going to be a retrofit into a lab building from, currently, a specialized use.

Going back to 500 Townsend, any interest or opportunity to bring in a capital partner or will that be all Alexandria at 100%?

Yes, it will be Alexandria, 100%.

And at this time there is one name remaining in the roster.

(Operator Instructions)

Emmanuel Korchman, Citi.

It's Michael Bilerman with Manny. Good afternoon. Dean, this 130,000-square foot large renewal, when did that become effective?

Effective in the first quarter. It was an original -- it was a lease with an original lease end date in 2016. So we had an opportunity to do an early renewal that started in the first quarter.

And just doing the math, $0.02 is $1.4 million. So that's $11 a foot greater than what you would have -- or what it's currently paying today in terms of a markup?

There was a very healthy markup on this space on a cash basis, and because it's got a good term on it, you also get a GAAP benefit increase as well with the annual steps. So yes, Michael, very solid step on rents.

It's a big building and it's a AAA location in the heart of Cambridge.

Hopefully it doesn't surprise you because BXP had massive steps in their Boston holdings, as well, this quarter, so --

No, no, no, I didn't -- I thought it was relative to a renewal that was scheduled to expire, not something that was 2016 that you brought forward. Because I was just thinking about the delta from what was already in guidanceb but this is effectively a new lease that you brought forward or a renewal that you brought forward, who were able to capture a significant amount of markup. And I was just trying to make sure that I understood the dynamics of what was in guidance versus now. And now I understand it.

And the reason that happened, actually, is this is a tenant that's had some pretty great success recently and they're nervous about the opportunities to expand in Cambridge or even maintain themselves, and so they emerged and came to us to try to put this deal together. So that's the market dynamic there, Michael, that as you know from the tour you took in January.

Is there other opportunities like that where you can bring -- and I know you're always aggressively leasing space, but is there other roll that you can pull forward from future years that can help growth in the near term?

The answer is yes.

And do you have a number? Is there a certain size that you're working with right now in terms of transactions and leasing? I know the leasing volume, at least in the quarter, was a little bit lighter than what the history has been.

Just because we have -- this is one of the smallest yearly rollovers, I think, in the history of the Company. The answer is yes, but I don't think we want to re-revise guidance here on this call, so just stay tuned.

As you think about sources and uses this year, you've made the decision to fund the extra $100 million of your effective use of capital through acquisitions and development spend, all with debt. And so, I'm just curious, in your mind, you worked so hard to get the balance sheet in the position, at what point do we start thinking leverage neutral?

Because as it stands right now and you think about sources and uses in the guidance, the extra $100 million is completely debt funded, right? So what point do we trigger --

I think that's not an accurate portrayal. So maybe Dean, you want to comment on that.

I would say in my comments, what I would like everybody to remember is that we have tremendous EBITDA growth occurring in 2014 and continuing into 2015. And if you recall my prepared comments touching on the fact that trailing 12-month net debt to adjusted EBITDA will continue over time to migrate lower, at a lower leverage point over time, and this is going to be driven primarily by EBITDA growth, but in this year we do have some projected land sales which we feel very comfortable with and that will help as well.

But the EBITDA growth continues beyond 2014 and that's a primary driver of balancing it, and on a trailing 12 basis you're going to see continued improvement in debt to EBITDA. So if you did have a spike on a current quarter annualize -- but that has more do with funding and relative timing.

Right, and I understand that. But all that is the great EBITDA growth that you're pushing in, selling the land and not increasing assets, all of that was known. What I'm just trying to think about is this quarter, you've added $100 million to your uses of capital. You're funding that $100 million, irrespective of the EBITDA growth, irrespective of the land sales, all of which was fully discussed at the Investor Day.

You're funding the extra $100 million of capital spend with debt, and all I was trying to think about is, knowing the future uses of capital that will be on the come, you think about the San Francisco land you just bought, you'll have a development, at what point in your mind does it trigger the need for either to sell more assets, given how robust the market is -- Peter's talked a lot about that on the call -- or the need to raise common equity, which I know you've talked about not wanting to do. So that's what I'm just trying to balance out a little bit.

I think you'll see, Michael, and it's a really good question and we think about this every day, obviously, because our target debt to EBITDA, as we said, we want to migrate not only from broadly the 6.5x range, but hopefully over the coming years, lower. We clearly will see, we hope, a larger amount of land sales this year than even the guidance has provided. And we clearly would look at low-yielding assets as a possibility for asset sales.

And so we have said we aren't going to raise common equity this year. So I think that we expect the land sales to make up the majority of what we need to make sure we're in the target debt to EBITDA ranges.

So, I guess, an incremental potential new use, you would view it as the need to actually raise the asset sale guidance. And if next quarter we come around and you have another $15 million of opportunity, at that point we would actually see an increase.

Yes, and I don't want to -- I want to be really careful because this is a public call, but I think you will see over the coming quarter the $50 million that we spent on the Townsend acquisition will be fully covered, as an example, by a sale of an asset that we haven't and -- we haven't commented about. We're still negotiating, but we believe we've got a good probability of success. So I think, in a sense, it's a little bit of match funding.

And there are no other questions so at this time I'd like to turn the call back to Joel Marcus for any additional or closing remarks.

Thank you very much. We managed to keep it within the hour, and appreciate it and look forward to talking to you on the second quarter call. Thanks, everybody.

And thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation and have a great day.