Alexandria Real Estate Equities Inc (ARE) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Alexandria Real Estate Equities Incorporated second-quarter 2013 earnings conference call. My name is Rufus, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the conference over to Ms. Rhonda Chiger. Ms. Chiger, you may begin.

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of the 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 10K, 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 2013 conference call. With me are Dean Shigenaga, Peter Moglia, Steve Richardson, Mark Benda, and Andres Gavinet. We'll continue our shortened format today so there will be more times for Q&A and, obviously, give you guys more efficiency of the listeners time, pretty heavy day on earnings calls.

As we think about the second quarter, I guess management's take is it seemed a little bit like the good old days. One of those really ideal quarters pre-Lehman when ARE was hitting on all cylinders, and we hope we are back to doing that and those were the days when we were among the top performers on a total return basis from IPO to Lehman, so we would like to return to that at some point here.

US Life Science R&D spending is up this year to $82.7 billion. Pharma performing well in the capital markets, they are obviously profitable with about $181 billion as of late on the balance sheet. The open innovation external research and key cluster markets continues to be the driver for pharma innovation and ARE has signed over 16 significant leases with Big Pharma over the last several years.

The IPO window for biotech is actually open big time for the first time truly in a decade with a big upswing in drug approvals as well. For 2013, there's 13 either new chemical entities or biologics that have been approved by the FDA through July 25, and an astounding 9 out of 13, or 69%, were ARE client tenants, so we're very proud of that record.

The NASDAQ biotech index is up about 27% for the first half and some of our clients have really had astounding performance, Biogen Idec up 52% in 12 months, Celgene 99% in 12 months, Gilead 117% in 12 months, Onyx 70% in 12 months, Illumina 91% in 12 months. We really haven't seen that kind of performance in many years.

Scientists have been laboring for years to develop treatments that harness the bodies immune system to destroy cancer, so-called cancer immunotherapy. Bristol Myers, Roche, and Merck have experimental treatments in their pipelines which could become the biggest new drug class in history, which is a very good thing. Also a class of cancer stem cell companies are also holding great promise. When we move from macro to internal growth, I think we'll continue to see positive movement in occupancy in most of the markets, probably Maryland still showing some uncertainty, but we're making steady progress.

RTP is likely to recover nicely and positive moves in Seattle, particularly in light of this quarter where it was a dip primarily due to the delivery of one of our East Lake properties. Solid quarter on leasing, 768,000 square feet in both cash and GAAP were up nicely, lead by the San Francisco cluster market and the 499 Illinois lease with Illumina that Steve can comment more on during Q&A. Moving to external growth, it was a solid leasing with deliveries of about 22,000 of redevelopment, almost 250,000 square feet of development, and about 167,000 square feet of previously vacant space. Over the next one to two quarters, I think we'll see some positive leasing momentum continuing at 499 Illinois. We hope we'll be leasing another one to three floors at the Alexandria Center for Life Science in New York. And then, let me move to our Alexandria Center at Kendall Square, our Binney Street corridor property. I want to focus particularly on 50 Benny, which has probably the best water views of any of the sites there.

We're working on a substantial redesign as well as a work going on to drive down costs to build, and we're targeting now a very strong digital health and technology set of tenants in the market, kind of a unique opportunity in time, and potentially with a kick-off potentially in the first quarter of '14. We're tracking nice tenant demand in Lake Union in Seattle and Campus Point in San Diego for future developments. On the acquisition side, we get asked a lot about our philosophy on acquisitions. We're always on the market and we're tracking every possible lab or lab conversion deal that comes to market and we hope we're very discerning on that regard. There is quite a bit of product on the market today and we're looking carefully. The top priority would be value add and, obviously, good submarkets where we have ability to match tenants in hand with the acquisition and create value. If we acquire stabilized assets they must be at solid yields, not low yields, in secondary submarkets.

On the balance sheet, which Dean will have more to say about in a moment, clearly we're continued to realize land sales of our non-income producing assets like the Mission Bay West, which has been announced this quarter. In India, we're working hard on new investment with respect to our platform, and in China we're working hard on the potential contribution of assets into a broad healthcare services platform.

When we move to the dividend, I think you'll continue to see the Board increase the dividend and continue to share, I should say, increases in cash flow with investors, particularly as we bring on some major projects during the latter third or fourth quarter here this year. So, let me turn it over to Peter Moglia for a few comments on internal growth and leasing.

So, our outlook for same property performance for full year 2013 remains solid at up 5% to 7% on a cash basis, and up 1% to 3% on a GAAP basis. Cash same property performance at 8.3% for the first half of 2013 was driven primarily by the rent commencement for Illumina in San Diego in October of 2012, and the lease up of some temporary vacancy in Cambridge at 790 Memorial and 300 Technology Square that had been vacant in the first half of '12.

Same property expenses were up 6.2% for the first half of 2013, primarily due to an increase in property tax rates in Greater Boston, higher snow removal expenses, and higher repairs and maintenance expenses. 94% of our leases are triple net and, therefore, the increases in these operating expenses are recoverable from our tenants.

Rental rates on leasing activity have improved this year. Key drivers this quarter include better than anticipated rental rates, primarily in Cambridge on releasing of space at 300 Tech Square and 215 First Street. Value-added development projects that will deliver in the second half of '13 include the fully leased 225 Binny project that will deliver on October 1, and the West Tower at Alexandria Center which is currently 44% leased that will deliver in mid- to late-December.

Value-add redevelopment projects with targeted deliveries in the third quarter include three of the five projects in redevelopment. 100% of the 285 Beer Hill Road project in Greater Boston, 25,000 square feet of the 36,000 square feet of CIP at 343 Oyster Point in the Bay Area, and entire 9800 Medical Center Drive project in Maryland. I'll add that we also expect to deliver 79% of 4757 Nexus in the fourth quarter. For more on that, I'll turn it over to Dean.

Thanks, Peter. Real briefly here, guys. Quickly to the balance sheet. Our debt-to-adjusted EBITDA was about 6.6 times and our fixed charge coverage ratio was about 2.7 times for quarter end. And we're projecting improvement in leverage to 6.5 times by the end of the year and our fixed charge coverage ratio will be at about 3 times by year end. Our unhedged variable rate debt is down nicely to approximately 11% of total debt. We've got a tremendous amount of liquidity today with $1.5 billion available on our line and $300 million in cash. Our outstanding debt under our three bank facilities were reduced by over $700 million, or approximately 37% since January 1.

Briefly some updates on our three bank facilities. In July, we completed an amendment to our 2016 unsecured term loan to reduce the interest rate to LIBOR plus 120 basis points. Our goal is to retire the $600 million term loan over the next one to three years, so we kept the maturity around mid-2016. At the end of August, we expect to close an amendment to our $1.5 billion line of credit and our $600 million 2017 unsecured term loan. The amendments focus primarily on extending the maturities from 2017 to January of 2019. Reducing the interest rate for outstanding borrowings and minor adjustments in our favor to a few financial covenants, aggregate commitments will not change. Pricing of the line of credit will be reduced to LIBOR plus 110 basis points plus an annual facility fee of 20 basis points, and our 2017 term loan will drop to LIBOR plus 120 basis points.

Our guidance for the full year includes an estimated loss of $0.02 per share that we expect to recognize in the third quarter, related to the write off of a portion of unamortized loan fees related to these amendments. We also expect to close the secured construction loan over the next couple weeks for 75125 Benny Street with commitments of approximately 65% of the total cost at completion. The anticipated interest rate on the loan will be LIBOR plus 135 basis points.

Lastly, on guidance, we updated our guidance from earnings per share diluted to a range from $1.53 to $1.63. We reaffirmed our guidance for FFO per share as adjusted for 2013 to a range from $4.35 to $4.45. Our guidance for FFO per share as adjusted, as a reminder, excludes $0.03 of losses on early extinguishment of debt due to the write-off of unamortized loan fees, $0.01 was recognized in the second quarter and, again, $0.02 are estimated for the third quarter. And as a reminder, our detailed guidance assumptions for the year are included on page 3 of our earnings release. With that, I'll turn it back over to Joel.

So, that's it for prepared remarks. We did it in less than 15 minutes, so let's go to the operator for Q&A, please.

Thank you, sir.

(Operator Instructions)

For our first question we go to Emmanuel Korchman with Citi.

Good afternoon, guys. You guys sort of breezed through it but could you give more details on what exactly you said on China? It sounded like some kind of contribution into a services platform? And also the continued buildout in India and how we should think about size and scope and timing of that?

Well, let me say this about each one of those. With respect to China, we're working on a pending transaction, so I don't want to say anything more, but we are looking at contributing our assets to a broader healthcare services platform, which we think has enormous value. We don't plan to put any significant more capital into that, but this gives us a chance to add our assets to a larger pool and potentially earn some significant fees for helping manage some of that effort.

In India, we're involved in raising additional investment funds. We don't, again, plan to put any significant or really any significant funds into India. It would be primarily through third parties, so there's nothing changing according to our business plan. We've just moved it ahead quite a bit as we've announced in the past, so that's about all I could say about it for the moment.

And, Joel, I don't know if you can talk about this or not, but in China you'd still maintain some type of equity position or you would sell it completely?

We would maintain some kind of an equity position but potentially that would be a liquid security.

Okay. And then just looking at the back half acquisition pipeline, it looks like from your disclosure you have $64 million of projected, completed, or in process acquisitions. Was wondering what stage that's in right now and what those might be and just what the remaining asset acquisitions might look like?

Yes, so we have something in the range of $64 million-plus in process today. We expect to close those this quarter and then behind that, we have probably another $150 million of asset acquisitions that are in relatively near-term pipeline, but not in a formal process yet, so that is kind of where we are at the moment.

I'm not sure I want to say anything else about where, how, when, whatever but if you listen to my comments about the attributes that we're looking for, we'll stay true to how we're thinking about those.

So, just so I get this correct, those are unlikely to be value-add opportunities and more likely to be portfolio quality acquisitions?

Yes, no I didn't say that. I said we really are looking at two kinds of acquisitions, and I think you'll see whatever we end up acquiring this year will be one of either value-add, or if it happens to be stabilized, it will have a good yield, a strong yield, and it won't be in secondary or tertiary markets. We're not looking for those kinds of acquisitions. So, that's the parameters under which we are thinking about things because we're seeing a fair amount being brought to market these days as I've shared over the past quarter or so.

Great, that's it for me, thank you.

Yes, thank you.

And for our next question we go to Gabe Hilmoe with UBS.

Hello, guys. Just following up on just some pricing around the acquisitions and the yields. When we're looking at conversion redevelopment type plays versus core, how should we be thinking about going in cap rates for that type of stuff?

Hello, this is Peter Moglia. I think that the way that things are underwriting for the redevelopment properties that we're looking at now, they are obviously going to range depending on the market. Something in a core market like Cambridge may price differently than something in a market in San Diego, but in general, we're looking at redevelopment stuff that's between 7% and 8% right now.

And just on core? I mean for best of the best in Cambridge?

We aren't really looking at anything new and we're obviously developing the Binney Street projects to very high yields. And we continue, we have plenty in our pipeline for that market. But I would say that that is still a very vibrant market for investment and if we decided to switch from development to acquisition there, I think we would find cap rates to be very low, so we're very comfortable with what we have now in our development. We are, as Joel said, we are going to look for stabilized opportunities but we don't want to go too crazy with cap rates and we're looking at things that are priced fairly.

And ideally, they would be in the high sixes or well above that. I don't think you'll see us buy anything in the six range or below or even mid sixes unless it was something unusual, but we don't have anything in our pipeline today that is targeted there.

Okay, and then on the 50 Binney development, Joel, I think you mentioned potentially starting that January of next year, did I hear that correctly?

First quarter.

What kind of pre-leasing do you need to have to go live with that?

I think stay tuned because we're working hard on a number of requirements that seem to be unusual in the market and I don't want to commit at the moment. We ended up, we've done 100% pre-leasing like the Biogen Idec at 225, and in New York we did 15%, now that's stepped up to much larger than that.

So, I think it depends, but we see an unusual interesting opportunity in the market. Very little competitive product, which is very important, and a surge in requirements in the digital health and tech area. As you know, on the lab side we're still looking at 100 Binney for one or more lab tenants, but we are also mindful that there's a lot of lab space, not necessarily competitive, maybe second, third, or fourth generation space that's coming back in 2014 from Vertex's move to Fan Pier, so we're mindful of that.

But we see a unique opportunity in the market for a period of time where we may be the only game in town, and there's some pretty good sized requirements there at pretty good yields, so let me just leave it at that.

Okay, and I guess just one more for you, Joel. Just on the land sale in Mission Bay, was wondering if you could give a little bit more color on the decision to do that? Because you've spoken in the past about expectations are pretty sizeable, institutional demand coming down to that part of the market after the hospital is done, so just looking for a little bit more color on the decision?

Yes, I'm going to ask Steve to comment. Obviously, it's a pending transaction, so he may just give you some broad brushes, but I think it's fair to say that we have to think cleverly and adeptly, and flexibly. Our balance sheets now probably the best its ever been, but we're mindful that we still have a bit more non-income producing property than we want and our targets are to bring that down even more over time.

We're looking at our ratings upgrade, hopefully, over the coming year from S&P, and so we want to be mindful of that and here was a very solid opportunity that came along. There was ownership desire and ownership that was desired by the acquirer, and so we thought long and hard about it, but felt we have enough flexibility in the Mission Bay area over time that we felt it was not, didn't hurt us strategically to do that, but Steve can give you some further color.

Yes, just to add to that, the ownership dimension was really an imperative, so we ended up heading down that path. And it will be a mix of the land and existing improvements, as well, including parking spaces.

All right. Thanks, guys.

Thank you.

Our next question we go to Jeff Theiler with Green Street Advisors.

Good afternoon. I was just wondering if you could give a quick update on the cap rate environment in light of the rise in interest rates lately? Do you expect to see cap rates trend up? Do you expect certain markets to be more affected? Any additional color you could provide on that would be helpful?

Okay, are we helping you with your next addition? (laughter) Peter will talk to you about that?

Yes, we've been discussing it. Obviously, we've got to pay attention to a rise in interest rates and how that's going to affect our Business. But I've been in the business for over 20 years and doing acquisitions for much of that, and I think what if the rates remain up 100 basis points and we stabilize here, I think there's plenty of room in the risk premium that cap rates have over treasuries to absorb it.

So, I wouldn't think we're going to see much, if any, movement. I think if they continue to rise and it's a rise in real interest rates, I mean a rise in real yields that's driving it, then cap rates will ultimately have to adjust. And, however, I would say there's going to be at least a 6- to 12-month delay before that happens because sellers are the last to understand that they need to lower their price.

I'd say that if the rise is due to inflation, and maybe the effect would be muted a little bit because it's a possibility that more funds will flow into real estate looking to hedge, but that's basically how we feel right now. I don't think we're going to see much, if any, movement.

Okay, and any markets, if you do see movement, any markets in particular that you would be more worried about than others?

The markets that have the weakest demand for product, obviously, are going to be the most sensitive to it. We're not really in acquisition mode in any of those markets.

Okay. Fair enough, thank you.

We go next to Jamie Feldman with Bank of America Merrill Lynch.

Great, thank you. I just want to focus on internal growth for a little bit. So, you guys have had a pretty solid year for leasing spreads and same-store growth. Can you talk about the sustainability of both of those metrics as we roll into the back half of the year and even into 2014?

Well, I think, Jamie, it's Dean here, on same property, you can tell from our first half results being, at least on a cash basis very solid at 8.3%, and our guidance has remained for the full year at 5% to 7%, which is very solid results anticipated for the full year. It also implies that the first half, as Peter had commented on, had a few drivers.

Lease up of some space in Cambridge that was vacant in the first half of '12 that boosted the first half of '13 cash performance. So, I think you'll see slightly smaller same property cash results on the back half of '13, but still falling right in the core of our target at 5% to 7%.

I think if you roll these numbers forward to '14, you'll see statistics that should be big picture roughly in line with our current target for 2013. So, I'd say somewhere in that north of 5% range on cash, and GAAP same property results in that similar range up to 3%, but we'll give you a better update as we get out into our investor day presentation in December.

When you think about leasing, the leasing stats are very strong at 6.5% on a cash basis, 12.7% on a GAAP basis. Those fall relatively in line with our guidance for the full year. Cash leasing status at 3% to 5% for the full year slightly down there but the GAAP numbers will be right down the fairway for the back half of the year.

So, I guess focusing on rents, what are you guys thinking now, and what are you seeing in terms of just market rent growth?

Well I think when you look at, you almost got to go market by market. We've been successful, as you can tell from our commentary for the last two calls, in Cambridge and releasing our spaces. San Diego we've done well and Seattle we've done well. I think Maryland has been clear that rents have remained challenging, and I don't see any dramatic growth coming out of that market.

So, I think our opportunity set remains in our core markets from Cambridge, San Diego, Mission Bay, and up in Seattle.

Just to add to that, Jamie, I mean when you look at vacancy rates and trends, the direct vacancy in East Cambridge has dipped down pretty significantly, 300 bps from 9.9% to 6.9%. I mean Joel mentioned that the Vertex space becoming available, but that's always a little bit different when you're dealing with subleases.

The Boston office market has improved as well with the tech sector. Torrey Pines, the availability dipped 40 bps as well from 10.3% to 9.9%. And San Francisco market burning off some of the availability at 499 Illinois. South San Francisco, San Mateo County, we're about a 9.5% vacancy, so the overall market stats are trending in the right direction, as well.

Do you have a sense of where market rents are for your products year-over-year? Maybe on a net effective basis what kind of growth you've seen?

I think they are reflected here in the stats that we've been talking about, with the cash and the GAAP increases.

Okay.

And, Jamie, to be fair, we don't have the net effective numbers right in front of us. I can't give you an exact answer to your question.

And then turning to your comments on digital tech and health, can you just help frame how large that opportunity is, and it sounds like in Cambridge, but is that something we'll see spread across other markets?

Well it's a big opportunity right now and we've signed one lease and we're looking at some others in the San Francisco Bay Area. I think the Bay Area is really where the home of this is resident, but we see Cambridge, Boston, and the San Francisco Bay Area as really the major areas.

Digital health is kind of an interesting area because it's a very broad intersection of essentially the IT platform type companies and healthcare. And it's one of those situations where there are going to be, and there already are, many opportunities for the convergence to take advantage of lowering healthcare costs. This isn't so much in the pharma and drug area. It really to a large extent is in many of the other areas which are really big areas, and so it will happen in pharma and drugs to some extent, but the big opportunities are in electronic monitoring, a number of the service components.

It's quite a big area, if you want to read something that is pretty stellar about this, read Eric Topol's book. He's really the guru in this area, he's a professor, tenured professor, down at UCSD and he's really predicted this to be the fastest growing area of the new economy over the next decade and I personally believe it.

And then, what kind of -- how is the building requirement different for digital health versus your typical life sciences?

Well it would be much more of a techy building, but they meet our qualifications because most of those locations want to be in Mission Bay, for example, they want to be in Palo Alto, they want to be in Cambridge, they want to be in Boston, they want in really the CBD areas that we've focused our Class A, our AAA locations and Class A product for, so we see it as a natural extension of what we're doing. We're not dramatically changing our focus, but it's clear that a lot of demand we're seeing in these markets is aimed in that direction.

And so, you're saying it's more like traditional office space? I know it's tech, but --

I don't think it's traditional office. It's really new generation high-tech, and we're building out a space for probably the premier incubator backed by Kleiner Perkins in San Francisco called Rock Health. And it's very cool, very techy, very cool space and it's taken about a 2000 square feet in our 455 Mission Bay facility that was actually going to go retail, interestingly enough. So we see it as a natural complement to what we're doing.

Is there another component or no?

Typically not.

I'll add that, Jamie, the infrastructure you're going to see in that type of use is you're going to need a lot of air to keep the computers cool. You're going to need a lot of power, a lot more power than you would supply an office building with so, as Joel said, it's not traditional office, it is an infrastructure play. It just doesn't have the wet component to it.

Yes, and it's not data centers either.

Okay, all right. Great, thank you.

The key is we want to be in the best AAA CBD locations where we have our Anchor business and with Class A assets, and if we can do that and meet some of this demand, that's going to be great and meet our yield hurdles.

So, the yield is comparable to your traditional life science?

Well, I think it's case-by-case. We don't have enough experience there, but certainly the cost of construction is less and so one would hope you could meet pretty good yields.

Okay, thank you.

We're pretty comfortable in the yields we're targeting in Cambridge.

(Operator Instructions)

We go next to Matthew Spencer with Robert W. Baird.

Hello, guys, it's Dave Rodgers. Wanted to follow up on 499 Illinois and maybe tie in this digital management question. Is that what you're looking at for space out there? Is that going be continue to be more traditional lab? And can you give us some of the color on the back filling work you're doing for that vacancy?

Yes, hello, Dave. Right now we're looking at a mix of technology, digital health, and more traditional lab users as well as translational uses. So, I think we're benefiting again from that location and a number of different demand drivers there. We do have 30,000 square feet for a lease that's out for signature. That's more on the traditional lab or translational lab type of lab side, but we are talking with technology and digital health side, as well.

And a question for Dean or for Steve if you have it. How many assets do you expect to come out of the core of the operating portfolio maybe during the second half of the year and move into redevelopment? Either number of assets or particularly square footage of assets coming out in the second half?

Well, if you go to the supplement, I think it's page 17. I think clearly this year, we don't have anything targeted for redevelopment and we have one or maybe two combined assets next year that are a little bit older, office-like properties in the suburban DC market.

That if they, in fact, roll that we would likely try to enhance those and go for some laboratory use, but other than that we don't have anything unless we buy something that we would be converting, like the Barnes Canyon.

Okay, thank you and then a question for Peter on the disposition side. Sounds like acquisitions remain competitive, but are heating up in terms of the number of offerings out there. Is that bleeding over to the dispositions you would like to do and make you think a little bit broader about the disposition pipeline of assets that you think about putting out there?

Yes, well I think we've indicated we don't have any plans for any significant dispositions, but we are continually looking at the asset base for non-income producing assets, much like Steve mentioned, the Mission Bay West sale. You may see some more of that.

We would hope that we would be able to lower our total non-income producing assets. But I think there may be here and there a small income producing asset or so. There's a handful but nothing of any significance, but I think the place you ought to focus would be further sales of land assets.

Great, thank you.

Yes, thank you.

We go next to Steve Sakwa with ISI Group.

Thanks, good afternoon, Joel.

Hello there.

I was wondering if you could just touch on a little bit more about the New York demand? It sounds like you've got another use that might take one to two floors. I'm just curious, the pace of leasing now that you've got the major anchor tenant in? What are you seeing? What are happening with rents?

And then second question, if you could just comment on the TI and Leasing Commission's figure this quarter. And I know that jumped quite a bit and I'm just wondering if that's tied directly into the leasing that you might have done in New York?

Yes, so when you look at the floor plan, Roche's taking the top two floors, the floors are all about 30,000-plus square feet apiece. Our second anchor, Investment Grade tenant, is taking floors two, three, four, and five. The lobby will be, we're actually moving our office. We've actually leased our office in, which has great views and so forth, at a great rate and we'll be moving when the building opens to the ground floor of the new building together with the fitness center and so forth.

But we have in process and we're still at the exchanging LOI stage with one pharma tenant to take potentially one to two floors, and this would be lab space. I'm pretty optimistic. It's hard to know exactly the timing, but third or fourth Quarter, I'd give it a plus 50%. We're also working with a joint venture of a biotech and a Big Pharma for potentially a full floor, so that might take 12 and 14 and 9 in those two separate transactions.

And then we have a biotech tenant that is actually in public offering mode right now that looks to take potentially the better part of maybe half a floor more. And then we have our accelerator effort which we hope to get off the ground this quarter, in fact, to take the other half of the floor.

So I'd say in the short-term, we probably got three or four floors working, I kind of round down just to be conservative, so maybe one to three is what I said in my commentary. Those are all lab users. Rents have held very strong.

We're in the well within our targets in the upper $70s approaching $80 triple net. And as you know, the lease we signed, Leasing Commissions in New York are just always higher than many other places, and our TIs are a little bit more then because of the nature of the tenant. But I think our yields are holding, in fact our yields might even have some room for growth and certainly the average stabilized yield which we disclosed this quarter in New York is above 7. So, we feel pretty good about if we were to turn around and sell a first class building in New York with credit tenants that are 10, 15, 20 years, my guess is we could do better than a 7 cap rate on that by a long shot.

So, I feel pretty good about the economics there and the demand is, it's a market that there is not normal demand because it's not a Cambridge or Boston established, so we've created the demand. And I think with the product type and the cluster ecosystem we've developed, I think we've done a really nice job of doing that, and so I feel very, very good about the prospects in New York. If you remember the East Tower, when we built that it was 100% spec pre-Lehman. We delivered it in the mid, well in the Fall of '10. We had a three year lease up and we actually finished leasing it up in 12 months, so I'm not saying we can do that exactly, but we're on track maybe to come close to that.

Okay. And then I know you guys have been working very actively to whittle down the land bank and the development pipeline, but as you start to get some of these other projects completed, whether it be Binney or New York and, obviously, making progress in San Francisco, how do you think about backfilling the development pipeline over the next two to four years?

That's a really good question. I think, though, if you look at the supplement which Dean and the team have really masterfully developed, there's -- we have quite a bit. There's no shortage of opportunities. San Diego we've got quite a bit, we've got some in Seattle, we've got some in the San Francisco Bay, Maryland probably isn't going to happen. We've got another option parcel in New York, and we've still got over 1 million square feet in Binney.

So, I think for the next two to four years we're probably in good shape, but if we have an unusual requirement we wouldn't hesitate to try to go out and buy land to match. I don't think we need to do that. I hope we don't have to, but our goal is to get that rating up with S&P and, ultimately, both ratings up over the more medium term.

So, we're mindful of not carrying that land, but if we have an opportunity at hand and we could snag a land parcel, that would be a better way to go rather than keep it on balance sheet for an indeterminate time. We've certainly been beaten up over the last many years for that strategy, which worked so successfully pre-Lehman, but we've obviously adjusted that strategy.

Okay, thanks.

Thanks, Steve.

We go next to Michael Carroll with RBC Capital Markets.

Yes, thank you. When did you guys first notice the pick up in the acquisition opportunities that you're tracking in the market today?

They've been that way for awhile. We focused, we have never been out of the acquisition market, but remember our major focus was getting our balance sheet to an investment grade level that would enable us to upgrade our BBB minus rating with S&P. We are BBB flat with Moody's. That's been the focus, so we have not wanted to put additional pressure on the balance sheet over the last couple of years.

We've done some. Last year we bought a great site in San Diego that we're likely to start development on here in the coming couple of quarters. It looks like we may have some tenants there at the Spectrum project, so we're in the market. We see everything. We look at everything, we think about things, we looked at a big project in Cambridge that we have some real interest in, but it waned and ultimately never got sold, so I'd say we're always in the market.

Again, are there more single type assets out there? Are there portfolio deals? What's the typical type of opportunity?

It varies. I would say larger portfolios, no, but an asset or two or three or a larger asset those are out there and sometimes we go hunting. We don't just wait for things to come to market.

We actually look at opportunities that we would like to be involved with and see if there's some way to create a win-win opportunity, so it isn't like we just wait for something to come across the fax machine or e-mail. That isn't how this business is done.

Okay. And then are there stabilized lab assets, or should we expect more of these redevelopment type office assets like the one you completed this quarter?

Yes, I think you'll see, somebody else asked that question. I think you'll see a combination, but I don't think you'll see us buy high priced, low cap rate assets in tertiary markets. That's not a business model that we would subscribe to.

Okay, thanks.

Yes, thank you.

And with a follow-up question, we return to Emmanuel Korchman with Citi.

Yes, it's Michael Bilerman speaking. I may have missed this, but just on 1600 Owens what's your all-in basis with the allocated parking and improvements for that land?

I think one thing that we would say, Michael, is because it's a pending transaction, allow us to complete the transaction, then we'll fully disclose that. I think at this point it would be better not to make any comment on that, but we will have a gain on the transaction.

Is there a range of gain? Are we talking about 10%? Just trying to understand how much of the non-income producing bucket, because you've probably see an important part of your strategy of whittling that down and creating capital for future growth?

Yes, Michael, to give you some idea, it's inside of 10% of the transaction.

Okay. And, Joel, just a question for you. In terms of the shareholder vote and to say on pay, which arguably was probably disappointing to yourself and to the Board of only getting 9% of shareholders to support say on pay in compensation.

I guess what have you gone back, what is the comp committee gone back and sort of evaluated based on what shareholders have said and voted effectively? I recognize it's not binding, but it clearly was a message, and so I'm just curious how you, as well as the comp committee, have reacted?

Well, I think that you have to put it into perspective. When I renegotiated my contract in 2012 with the Company, it took many, many months to figure out a formula going from what was the old and established and accepted contract, which had the bells and whistles that the folks at ISS and others, ultimately, didn't like, and many CEOs were in that position. And we worked long and hard.

We probably spent about six to nine months on it because it's a black box, ultimately, because it's a little different than going to the IRS where you can get an advanced ruling and say if we do this transaction, can we get approval? With ISS and other folks that overview that kind of stuff, you actually don't have, you can't get that ahead of time, and they are also looking at every company as the same.

This Company is a science-driven Company. It's a development Company, it's got a senior management team of 12 to 15 people who have been with the Company for more then a decade. This is a complicated Business. It's not let's go out and buy suburban office and just kind of do that as a play. So, it's a complicated set and I'm probably one of the only people that have technical experience both on the life science side from decades and also on the real estate side.

So, we ultimately ended up with a contract that actually got approved by, recommended for approval by ISS last year. They said you made enough changes, and you worked well, and they gave it a stamp of approval. And, again, we couldn't know that ahead of time, which was always tough because you work hard and it's always give and take on both sides.

So, this year what really made the difference I think, there was a signing bonus that was vested over, I forgot the ratio but let's say it's 50/50, it may have been 40/60, but parsed over a number of years, none of which vested in 2013. And then a separate part that was based on total performance, again, none of which vested in 2013. But the value of that signing bonus was a $5 million, but all of which was downstream over many years. Not a huge number if you compare it to other CEOs out there, I'm sure. And ISS, absolutely because of the way they stack and the way they measure, it's not whether it's realized, it's whether it just comes to fruition by a reporting matter.

So, that was the thing that kind of tipped the scales and tripped it and so, obviously, the Company, myself, independently the comp committee and their Advisors, are looking at how do we fix that in a way that's fair and reasonable for everybody. So, we're working through that and that's going to take a good deal of time.

Again, the challenge is one can't go back to ISS and get some blessing. You have to do your best and then hope that they bless it. But I also am mindful that I don't want both as a CEO, a member of the Board, the Founder of this Company, I don't think that we ought to have some agency that has a lot of conflicts that's being investigated by Congress to actually order us or tell us what to do when we compensate, whether it's me or Senior Executives.

They can suggest things, they can set best practices, but I don't think they ought to control the world, so I think we have to take a balanced approach at that and I think the Board, the comp committee, myself, and the Company as a whole are trying to do that. We've operated in good faith. We've always done the right thing, we've certainly never done anything that didn't make good sense, and I think you'll see that outcome in the 2014 proxy, so that's how we view it.

I guess ISS and Glass Lewises, not everyone has to vote with them. You still had 52 million shares that were voted against the plan. They don't necessarily have to vote upon those recommendations, and I sort of, you had more so from a shareholders perspective, right? Because the shareholder can make their own independent determinations.

For sure, but they carry a lot of weight. I think the other thing that obviously has tripped the Company, it didn't trip them in approving last year the nature of the contract, but this year our total return performance over the one, three, and five years has not been what it was pre-Lehman.

And one of the reasons is if you look at, we ended up the end of 2008 at one of the highest stock prices of any REIT. And then if you take that as a base going forward on a comparison of one, three, and five years, if you start at $60 a share and a lot of guys are selling at single digits, the performance over the next couple of years are going to be naturally devastated by that high stock price. And so, we just haven't performed up to par and, obviously, we've been in a multi-year balance sheet transition, so those things have obviously hurt us and hurt us in the eyes of shareholders, as well.

Just a question on the acquisition. So, of the 200 to 300 that is in guidance, what contribution to earnings do you have in there for the back half of the year?

Michael, it's Dean here. It's relatively small. It's $0.02 to $0.03, in that range. And keep in mind it's probably more impactful in the fourth quarter because what we're doing is taking cash sitting idle on our balance sheet today and putting that to use, so --

Right and I guess it does depend as value-add? You aren't going to earn a return on those value-add deals? Could that just be land or that is more redevelopment in terms of spend?

Well, the one way to think of it, Michael, is it really depends on the transaction itself. But the Barnes Canyon transaction, as an example, and that one is really small but it's real and you could look at it, our disclosures indicate that we'll carry a 7% return short-term while we're able to do our planning and design for the redevelopment.

And with any luck, there's limited down time to transition from a value-add 7% yield to a redevelopment return, which will be slightly higher.

Just lastly, Joel, the acquisitions, some have worked out in the past, some haven't. You obviously have a great significant amount of redevelopment, new development, good internal growth going. I guess when you sit back, do you say you know what, I'm just going to forget about these acquisitions.

I'll keep my leverage, my leverage will be lower. I'll have enough money to fund the development, I won't have to rely on an ATM, and really allow the stock to gain some momentum rather than trying to replenish or going out and doing other value-add or even higher cap rate core assets. Have you rethought, maybe, of saying you know what, forget about it? Let's just move forward on what we already have on our plate which is quite substantial?

Well, I think that, again, you have to look at everything combined. It's not binary. I think when we look at the acquisition we made last year in the Barnes Canyon, if we have we see a particularly good location that we like, we have targeted tenants that we're pretty interested in.

And in both cases we do. We feel like it makes sense. We've got pretty high occupancy in a lot of our key markets, so I think Peter said we're not necessarily looking for big Cambridge acquisitions because we've got a lot on our plate. But I think San Diego is a very interesting place.

New York City represents an interesting opportunity to the extent it makes sense in a market or two, so I don't think you're going to see us change dramatically from what we've been doing. We've been in the acquisition market, as I say every quarter, all the time, and we try to be pretty discreet. So, I don't think we're trying to be, we're not trying to ramp that up in any unusual way.

We may or may not meet those targets, but I think we'll be able to hopefully meet guidance as best we can and I think we've got all the wherewithal to do that. But I don't think we're changing our strategy and I think we're committed to lower leverage. Our balance sheet is in great shape.

But we want to grow and where we see the opportunity for to match tenants with product, and if we don't own it, we can't necessarily just go out and build everything. And as you see from the schedule we don't have anything targeted for redevelopment this year and only one or two assets that we currently own potentially for next year, maybe there's another add-on.

So, I don't think you'll see anything dramatic that we're doing that would change what we've done in the past.

Okay, thank you.

And with that, ladies and gentlemen, we will end our Q&A session. Therefore, Mr. Marcus, I'll turn the conference back over to you for any closing remarks.

Okay, well we did it in less than an hour, we thank you very much, great questions and we look forward to talking to you next quarter. Thanks again, everybody.

And ladies and gentlemen, this will conclude today's conference. Thank you for your participation.