Alexandria Real Estate Equities Inc (ARE) 2013 Q3 法說會逐字稿

Welcome to the Alexandria Real Estate Equities, Inc., third quarter 2013 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to 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 10-K Annual Report and other periodic reports filed with the Securities and Exchange Commission. Now, I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Thanks, Rhonda, and welcome, everybody, to Alexandria's third quarter '13 conference call. With me today are Dean, Peter, Steve, Mark, and Andres. We'll continue we hope a somewhat shortened format to leave adequate time for Q&A.

I think management's quick take of the quarter is that we're very pleased with an all-around solid third quarter by our entire Alexandria team. Let me comment a little bit about the biopharmaceutical industry. As you know, one of the nation's most dynamic innovation and business ecosystems is built upon a robust foundation of companies, academia, and clinical that perform and support advanced biomedical and technological R&D, and really act as a funnel and distribution engine for getting life-saving and quality-of-life improving therapeutics to the marketplace. The sector provides significant R&D north of about $65 billion, yielding new treatments and potential cures and things that actually may prevent the onset of disease, and ultimately reduce the socioeconomic cost and burden of society as a whole. Accomplishing the mission of bringing these treatments to patients, the sector really sustained a large scale supply chain ecosystem, both in R&D and support, production, distribution, et cetera. The value chain continues to evolve, shaped by technological advances that open up opportunities for really new goods and services, including the areas in molecular diagnostics and medical informatics. We've talked about that before.

This sector supports, directly and indirectly, about $3.4 million US jobs and generates about almost $90 billion of take-home income. It has compensation twice the private sector average in the US which is pretty amazing. The industry accounts for almost $800 billion in economic output, almost 3% of total US output. The economic impact comprises about $375 billion in direct business and over $400 billion in indirect, and also about $40 billion in government taxes. It's a pretty sizeable industry and one that has incredibly important impact, given the advent of Obamacare and we may talk about that in future calls.

Moving to operations and internal growth, our number one tenant, we're pleased, Novartis, has continued its global expansion by taking a full building in Research Triangle Park and Steve will have more to say on the leasing side. I'm pleased to say that the first time in the 16-year history of ARE as a public Company, now over half our ABR is generated from investment grade tenants. That's a significant milestone. We had a very strong leasing quarter with 830,000 square feet and solid cash and GAAP increases. We've only got about 297,000 square feet of [rolls] left in the fourth quarter, very manageable. We continued solid same property performance that Dean will comment on, as we continue to enjoy increases in both rental rates and occupancy across most of our cluster submarkets. Margins are holding steady and solid about 70%. We're comfortable reiterating our internal growth guidance as Dean will highlight in a couple of minutes.

Moving to external growth, solid set of deliveries, out of re-development in the third quarter including San Francisco, Massachusetts, Maryland, and Seattle are averaging about 83% occupied. This leaves our Genomatica project in San Diego as the only domestic active redevelopment but we are teeing up some for value creation addition into the pipeline. I think the big news for the quarter on the delivery side was our first Binney Street quarter flagship facility delivered to Biogen Idec, 305,000 square feet on-time and on-budget with very solid yields. As Dean will highlight our non-income producing assets as percentage of GAV dropped below 20%, as we had predicted.

A couple of quick updates on development projects, Steve will talk about the 499 Illinois and the 269 East Grand. On our New York project the Alexandria Center for Life Science, we're 48% leased to date with two credit tenants. We're negotiating final agreements for about 20% more with a variety of users for approximately 84,000 square feet. We believe these are highly probable to close in the fourth quarter, bringing our total expected leasing to about 68% by the end of December when we deliver row space, again at very solid yields for New York City. On our Longwood joint venture, we're negotiating additional space requirements, approximating about additional 19% or 79,000 square feet which would bring occupancy to about 68%. We're seeing a nice resurgence in the integrated clinical sector over there.

Moving to 75/125 Binney, a lot of attention has been given to that. To remind people, the lease does not give Ariad any termination right or downsizing rights. Ariad has stated that they intend to occupy the premises but we're comfortable that we can satisfactorily address all eventualities and will be aggressive in managing this matter. Over the next two to three months, Ariad will modify their space plan and program needs to reflect the revised business and financial strategy, which they intend to announce on November 6. They're also updating their New England Journal of Medicine details about the trial on November 7. If Ariad does sublease portions of their premises, the project can easily accommodate multi-tenant lab or office configurations. Base building construction is full speed ahead. Steel will be topped off next week and base building is scheduled to be weather-tight in April. The design of the tenant improvements is paused pending completion of Ariad's revised program. TI construction has not commenced at this time. We continue to project that the base building completion and rent commencement will be achieved in the first quarter of '15. Steve will have more to say about demand in Cambridge.

On the balance sheet side, land sales, we've revised down about $75 million to $100 million from our original estimate at the beginning of 2013, but we hope to capture much of this in 2014. On the dividend, the Board's policy is to continue to share increasing cash flows with investors as we still have a low dividend pay-out ratio of about 65%. Let me move to Peter Moglia, a couple highlights on the transactional side.

Sure, thanks, Joel. There were two notable trades from other investors in the third quarter I'd like to highlight. The Heights at Del Mar, a 219,000-square foot office lab building, or two building campus, which is located in the Del Mar Heights submarket of San Diego was sold by Prudential for $126.35 million. The property, anchored by Neurocrine Biosciences, also included an 89,000-square foot development pad. We estimate the cap rate to be 6.3% and the price per square foot of the improvements to be about $547. Although we were admirers of this real estate and intimately knowledgeable of the project, as it was a Veralliance redevelopment, we chose not to pursue this investment based on the pricing and the nature of the tenants.

Also, 320 Charles Street in Cambridge traded for $52 million or $523 per square foot. The property's currently occupied by the Broad Institute but will become vacant when Broad move to their new 250,000 square foot building at Cambridge Center in the middle of next year. We declined to pursue this opportunity based on the pricing expectations for this 1940s vintage building. So with that, I'll pass it over to Steve.

Thank you, Peter, and I'll start with a quick overview and then touch on specific leasing items and finish up with a couple of key trends of interest. Overall, the Alexandria's life science cluster markets are very healthy. As we've been discussing, the biotech index has hit all-time highs. Liquidity is very strong with 42 IPOs to date, raising nearly $3 billion, as well as large and small M&A activity, all driven by genuine clinical results. Alexandria's fully integrated regional teams leased a total of 829, 533 square feet in 57 leases during this past quarter at our outstanding assets, driving occupancy gains of our North American operating portfolio to 95%, up 40 bips from last quarter. Also noteworthy is the occupancy rate of 94.5% when including the Company's redevelopment set of facilities, a clear indication of our ability to attract and retain the highest quality client tenants.

Cash and GAAP quarterly leasing spreads increased by 4.1% and 16.5%, respectively, with the major drivers not only including activity in Cambridge, Torrey Pines in New York, but also the Greater DC market and South San Francisco. Finally, as Joel touched on, the re-development and development pipeline continues to make steady progress with 228,000 plus square feet leased this quarter, and specifically increasing the leased and negotiating percentages to 68% at our New York facility, up from 56% last quarter, and now 82% at 499 Illinois up from 73% last quarter. To touch on the market specifically, demand in Cambridge in the inner suburbs was very strong with 11 different life science tenants leasing space in the 5,000 to 15,000 square foot range in the mid- to high-50s, triple net. We're tracking approximately 1.6 million square feet of demand in this market, split roughly in half between life science and tech users, so obviously a very dynamic and robust market. The Greater DC market appears to have hit its trough and is rebounding, as we leased 203,000 square feet, highlighted by a 42,000-square foot lease to an important institute at 3% cash increase in the $32 triple net range. The market outlook has been further improved by our recently announced extension of an existing lease, and a new long term lease totaling 135,000 square feet in the aggregate with the NIH at 9800 Medical Center Drive.

Also, the Mission Bay market has tightened significantly as UCSF leased 30,000 square feet on the sixth floor at 499 Illinois, while a high-quality public biotech company recently signed a lease for the entire fifth floor, comprising 43,680 square feet at the start of the fourth quarter. We have only 8,000 square feet on the first floor and 28,000 square feet on the second floor at 499, and are in active discussions for all of the remaining states with a number of tenants. Also, the South San Francisco submarket in the Bay Area continues to improve, as we're nearly fully leased in this submarket after executing a lease for approximately 19,000 square feet with one of our second cohort companies in the mid-30s, triple net range. Rounding out the clusters, RTP highlights include the 40,00-square foot lease with Novartis that Joel had mentioned, San Diego with a 25,000-square foot lease with a very promising public life science company, in the mid-30s, triple net, and the Seattle market consummated a lease with a 17,000-square foot tech tenant, given the triple A location at 1551 East Lake in the South Lake Union tech and life science corridor.

A couple of key trends to really highlight here are the emerging company expansion and formation is in full swing in Cambridge, San Francisco, and San Diego. A recent Barron's article detailing the success of Third Rock Ventures portfolio companies, as well as a recent liquidity event for venture firms, venBio and Novo, of an acquisition of a San Diego biotech company are all contributing to the creation of another platform for demand coming from the life science sector during the next one, two, and three years. Also notable to consider, the imperative for these life science companies to remain committed to and expand their mission critical facilities was clearly evident as noted in the leases consummated in the DC and RTP area. It's both a strategic and operational necessity, and this positively impacts our franchise. Finally, with the Seattle market's ability to capture demand from the tech sector, this is continuing a trend that was started earlier in the year in the San Francisco Bay Area, and positively highlights the desirability of our triple A locations in these key brain trust locations clusters, and supports rental growth along with our dominant life science client tenant base. With that, I'll hand it over to Steve. Thanks, Steve. Same property performance for the year 2013 is solidly on track for our target of up 5% to 7% on a cash basis, and up 1% to 3% on a GAAP basis. Cash same property performance of 6.5% for year-to-date '13 was driven primarily by contractual annual increases in rent, lease up of temporary vacancy in the first half of '12, and specifically in Cambridge at 790 Memorial and 300 Technology Square, and rent commencement for Illumina in San Diego in October of 2012. We completed 461,000 rentable square feet of development and re-development projects. These are detailed on page 26 of our supplemental package, including disclosure of NOI contribution for the second quarter, third quarter, and fourth quarter for your models. On average, our initial stabilized yields on a cash and GAAP basis are 20 basis points and 10 basis points, respectively, and our average cash yields are up 10 basis points over our prior disclosures. Debt-to-adjusted EBITDA was 6.8 times. Fixed charge coverage ratio was about 2.8 times, and by year-end, we are projecting improvement in leverage to approximately 6.5 times and our fixed charge coverage ratio of about 3 times.

Net income producing assets dropped to 19% of gross real estate, down from 23% at the beginning of the year. Outstanding debt under our bank facilities were reduced by over $800 million or approximately 42% since the beginning of the year. In addition to the $55 million of land under contract for sale that's targeted to close in December of '13, we also have $30 million of additional land sales under negotiation that are targeted to close in 2014. The largest sale is approximately $20 million to a residential developer in Seattle. As Joel had mentioned, we expect to continue to identify additional land parcels for sale in 2014.

Our unhedged variable rate debt was 10% as of September 30, and we anticipate executing additional interest rate swaps or caps in the fourth quarter to mitigate a portion of our future unhedged borrowings. We updated our EPS guidance on a diluted basis to a range of $1.54 to $1.58. We also narrowed our range of guidance for FFO per share as adjusted for 2013 to a range from $4.38 to $4.42 with no change in the mid-point of our guidance. Detailed guidance assumptions for 2013 are included on page 4 of our earnings release.

Our guidance this year includes our FFO per share target of $1.16 for the fourth quarter of '13, representing a $0.10 per share growth over the third quarter of '13 driven, primarily by the following. The third quarter '13 development and re-development deliveries, net of the impact of capped interest is highlighted on page 26, and that shows the NOI ramp quarter-to-quarter on an FFO basis that's driving about $0.05 of the growth going from the third quarter to the fourth quarter. We also have some fourth quarter deliveries that are scheduled late mid-December on the West Tower spaces and 4757 Nexus. That's going to drive about $0.01 of FFO per share. The acquisition's about $0.01. We had some early leased extensions at 455 Mission Bay Boulevard South driving about half a cent, some other items of about $0.01. Then lastly, the repayment of about $100 million of our term loan in the quarter with outstanding cash or cash we had on the balance sheet, percentage rent at Tech Square in the fourth quarter primarily from parking, and the lease up and delivery of space ahead of plan at 951 Gateway drove about a penny and a half. That's about a $0.10 aggregate growth as we go into the fourth quarter. With that, I'll turn it over to Joel.

Operator, we're ready for questions if we could, please.

(Operator Instructions)

Gabe Hilmoe, UBS.

Hi, thank you. Joel, just on 75/125 Benny and the potential increase to the cost basis in relation to Ariad's expansion against the TIs, just so I understand, none of the proposed costs or TIs associated with that expansion that would bring up the basis in the projects have been spent, or plan to be spent at this time. Is that correct?

That's correct, Gabe. It's Dean here. We're still working on the core and sell and none of the interior improvements have started yet.

Okay. Following up on that, is there anything within the base design that is specific or unique to Ariad using the space? At this point in time, why even consider a design change with an increased cost, if the ultimate tenant is somewhat of an unknown?

Yes, the answer is no.

Thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Great, thanks. Just sticking with Ariad and 75/125 Binney, can you just talk a little bit more about what happened with Ariad, and how we should think about that similar risk in the rest of your portfolio, or lack of risk?

I think if you think about what we just said, or what I said in the opening remarks, 50% of our annual base rent is from investment grade tenants. I'm not sure how many REITs out there have that kind of credit in their portfolio, especially in our world in the biotech and pharma industry, but just broadly even across the office, the office guys, et cetera, over tech guys. I think it's pretty extraordinary. I don't see any big credit risk at all certainly. If you take what Steve said, this has been over the past year and a half, the best of times in the biotech and pharma industry. There are some exceptions by companies, but industry-wise this has been the best time since really the heyday of the internet when biotech also reached a peak back in 1999, 2000, and 2001.

I think if you look at Ariad, biotech is a tough business in general of producing, inventing, and going through the development stage, and then ultimately producing medicines for the commercial application. I would say if you look at almost any number of the top tier biotechs, virtually all of them have been on the brink at one time or another. I think Tom Andrews reminded me the other day that Ariad's situation with safety post-marketing reminded us of Biogen in the mid-2000s with Tysabri, when they were approved from '04, pulled from the market in '05, put back on the market in '06, and had sales approaching $1 billion dollars in 2012. My own view on Ariad is that the jury is still out. The story is still to be written. I think if you look at the deep science behind it, it's pretty clear that this product is an impressive scientific feat because it is not only able to hit the CML and the so-called gate keeper mutations, but it could be effective in a range of other potentially even more important cancers including things like GI cancer, thyroid cancer, lung cancer, which actually have a much larger potential. I think the drop of 75% to 80% in their stock that's happened on a number of occasions to a number of the big guys today, I think it'll be determined over the coming weeks, months, and over a period of time over the next year or two, to see what the ultimate story is. But we're ready for eventualities.

Can you also talk about your uncovered expirations? You give a lot of color on what you know will renew next year. But can you just talk about some of the largest leases that may move out, or you just haven't settled yet?

Are we talking about 2014?

Yes, 2014.

Yes, fortunately, Jamie, 2014 only has a handful of leases. I think there's two leases that are north of 60,000 square feet. They're in the range of 60,000 to 70,000 square feet. One space currently has a sub-tenancy in it that will likely extend in that property. The other space we clearly expect a renewal on it, so again the two largest rolls for '14 are in the 60,000 square feet range.

The total rolling, about a million square feet is 7.4% of the portfolio, is actually well below the average we've had. We feel pretty good about that.

Then finally, what do you think your mark-to-market is on 2014 roll?

I think we'll talk more specifically on our Investor Day in December. But very broad strokes, Jamie, I'd say directionally, it's relatively in line with our overall performance on leasing, or at least our goals for leasing this year.

You mean leasing spread similar?

Yes, the mark-to-market, yes on our leasing.

Okay, thank you.

Anthony Paolone, JP Morgan.

Thank you. Can you just step back and give us a little bit of context around Ariad in terms of the space? They're supposed to come out of how much of it, where it is, and also what this may or may not do to just your plans for further projects in Cambridge over the short run?

Yes, that's a good question. I don't know the exact amount of square footage they're coming out of space in Forest City. It's about what, 120,000?

It's about 120,000 in total and two spaces and I believe their lease is currently go out to roughly 2019 on this space.

Right. I think they're at 26 Lands Down which is in the Forest City University Park area. Those buildings, at least their main building, which has been their headquarters building for a long time, is a pretty older-like building. I don't know that it's functionally fit for the company, assuming the company continues make progress and recover from this hit, so clearly that's a factor. I think the properties are well over 20 years old. When you talk about where they're coming from, that's where they're coming from, and obviously the expansion was going on one metric. Given the safety issues, even though it's cancer and then the change in direction on the clinical trial obviously, they've announced they are going to do an earnings call on November 6 when they'll give an update.

I think the larger question is, in both buildings that we have we feel very good about the ability. We have those today, let's say Ariad didn't exist, and we have those buildings available for lease in Cambridge, both as two single-tenant buildings or two multi-tenant buildings. We feel very good about excellent location and they're very functional. The floor plates are really ideal for lab office. I think the only impact that we see as we move along on the Binney Street project is clearly we want to see this resolved before we announce any further start which we were thinking about doing in 2014 of 50 Binney. We will clearly wait to see how Ariad gets resolved before we do anything there. I think that's the practical outcome. Steve talked about we're tracking about 600,000 to 800,000 square feet of demand in the Cambridge area. Some isn't even not known to brokers, where we know from CEOs of companies who are looking but haven't engaged brokers. We know of a shadow pipeline that's even larger than that.

How would net rents have to stack up if you went multi-tenant with those buildings, in order to get to the same economics that are penciled in for Ariad now?

Well, new construction multi-tenant probably is in the low- to mid-60s. That's just where they are today. Ariad's rent is north of that. There would be a difference but I'm presuming Ariad's not folding up its tent and going away. Very few companies do that. Beyond this drug the company does have a pipeline. I believe, and I think others believe, that this drug has some greater use than the CML use, and if they're successful in treating other types of cancers this could be a Tysabri story again. Again, we'll have to see.

Okay, thanks. On acquisitions and dispositions on the land sales, what was the reason for just less of those occurring? Did that tie in at all to the acquisition pipeline? Did those come down? Did one drive the other, or are they for separate reasons?

No, I think just in this business, and in any business of selling land, it is extraordinarily like pulling teeth. We've had a number sales through the year. I think we've done pretty well. We've got a number teed up and others that we're looking to move forward. It's just one of timing and diligence and also where you have to re-purpose the use. It just takes time. Buyers aren't willing necessarily, especially if you've got a residential situation, to take the property without contingencies. We just have to be patient, and I'm sure we'll be able to do a good job of hitting some important targets as we get through the fourth quarter and well into 2014.

And on the acquisition side?

Hi, Tony, this is Peter. There were just two good opportunities, one in RTP that was a credit tenant, a tenant that we have a great relationship with, and want to build an even better one. It's a long term lease, and the pricing was very good.

They were actually very instrumental in getting us involved in this property which is sometimes unusual when it comes from a tenant.

Right, so we really like that one. Then the Barnes Canyon one in San Diego, with something that Dan Ryan had looked at a decade ago near the San Diego Tech Center. It's a very vibrant area. There are a lot of tenants in and around there because of the amenities and the access to the highway. He really came in and said we could get this for a very reasonable price, and I've got plans to redevelop it. I think we could hit a home run. So far, that seems to be playing out. We have two tenants in that project right now. One of them will be expiring by the end of the year, but we're already talking to a tenant to back fill that space at a nice incremental yield. Both projects were very good opportunities, and we wanted to capitalize on them, so we did.

If you look at it, there is a large volume of projects in the market today. We've said on other calls we think strategic optionality is the best way to think about it. We look at everything. We should be aware of everything. It's been a pretty active market this year. Peter also highlighted two deals we looked at but didn't pursue. That ultimately closed.

Thank you.

Jeff Theiler, Green Street Advisors.

Just quickly to follow-up on that acquisition line of questioning, it wasn't necessarily that there weren't opportunities out there? Was it just the pricing was out of whack? Or are there things that are still in negotiations that might end up closing early next year? I'm just trying to figure out the reduction in guidance and that kind of thing.

I think it's a combination of a number of things. Sometimes there may be acquisitions. Peter could tell you we're tracking well over a billion dollars, in quite a number of markets. We turned down a deal in San Francisco that was almost $250 million. We're looking at a bunch of things but I think again what our view is at the beginning of the year obviously is tempered by what plays out during the year. Some things were put on the market, pulled off the market. I think again we're just looking. Our key driver is obviously to deploy capital to the highest accretive use, and Peter, you could comment further if you want.

Yes, just to comment on the reason that we haven't met the original guidance on acquisitions, it does not have anything to do with the amount of opportunities available. It has really been our selectivity on where we wanted to place the capital. What we do next year, we'll see at this point in time. I'm sure we'll give better guidance at our Investor Day. There are plenty of things available and not just in one or two markets, but really broadly across all of our clusters.

Did you give any updates on your progress in China and contributing your assets to the healthcare platform?

I would say we have no updates since last quarter. We're still working on that. Steve, you could talk about the one lease we're about to sign in South China.

In South China, we have a lease out for signature that will be finalizing shortly here that will lease the balance of the project there. One particular facility will be fully stabilized. Again, that should be done very shortly here with a credit.

Our game plan is to attach these two sets of assets to a bigger platform in China because we see that as a better way to manage that market from our standpoint since our capital allocation over there is obviously not significant at this point.

Right, okay. Thank you very much.

Sheila McGrath, Evercore.

Joel, I was wondering if you could talk a little bit more about 29th Street coming online in fourth quarter. That's just part of the building. Is there going to be any impact in fourth quarter? Also just on the shadow pipeline of leasing at that property, how do you think demand is shaping up?

Yes, Dean can give you a little bit more details on the on-boarding of income, but we will deliver to Roche in December. We also have planned, as you know, a lease with a credit tenant for 120,000 additional feet. As I highlighted in my commentary, we've got a number of tenants, both credit and non-credit, that we're actually not just at a letter of intent stage. We're actually at a more robust lease negotiation stage for an additional approaching 84,000 square feet. It could be three or four users. That would bring us up, and I think there's a high probability of virtually all of that happening, so that would bring us up to about 68% almost 70% by year-end which I think would be pretty amazingly dramatic. We feel very good. There's a good demand in the marketplace. We have interest from Europe, from Japan, obviously domestically, so we see it, as we said, and we told the City of New York, we view this as a destination. Dean, I don't know if you want to comment?

Sheila, the answer to your question as far as contribution, it's roughly call it 700,000 of NOI coming in. It's fairly small because it's being delivered, call it, mid-December. When you roll it into the first quarter, you'll get a nice [Pareto] adjustment.

Yes, so if we're at 68% or almost 70%, we aren't including there, we're hoping Roche expands in the project. None of the 84,000 square feet under lease negotiation right now includes a Roche expansion, but we just had Franz Humer in the building and he basically told a packed audience, including the deputy mayor and quite a number of other dignitaries, that he was certain that Roche would want to expand its footprints. We hope that is a 2014 event as well.

Sheila, let me just add I think as you keep in mind this project was commenced about 12 months ago, so we're fortunate to be able to actually deliver space as quickly as we can later this year. We're going to continue to work on the fit up and lease up with the remainder of the space, so I think I've taken some questions over time where the capitalization would cease in '14. I don't expect it to on the project because we have quite a bit of construction to continue through the lease up.

Okay. Steve Richardson, I think in the prepared remarks mentioned another platform of demand. I'm not sure if I really understood that. Could you just go into a little bit more detail on that?

Sheila, just to add or clarify that, we've just seen a real resurgence in the emerging companies, both at the formation stage and expansion stage. As I referenced the Cambridge market, there had 11 different leases all between 5,000 and 15,000 square feet. We've just seen historically that those will mature. A number of them will advance, so we've seen quite a bit of growth. The same thing is happening in the South San Francisco market. Historically, we've talked about the large overhang there from the Amgen blocks of space, but when you segment the market for smaller blocks of space, say 10,000 to 50,000 square feet, you've only got 2.9% vacancy. Again, it's fueled by venture capital firms that have a lot of liquidity through M&A activity, through IPOs. You're really setting the stage for another cycle of demand as we did a number of years ago.

Okay, and last question on 499 Illinois, you've made a lot of progress there. Could you give us a little bit more detail on how you think leasing shapes up the next couple of quarters there?

Specifically, we've got the 8,000 left on the first floor, 28,000 square feet on the second floor. We have roughly a million square foot portfolio in Mission Bay, so this represents the last remaining space. We are in active discussions with people for all of that space, and I would expect it would probably be two or three tenants. If we aren't completed by the end of the year, it would be very shortly after, with maybe just one small piece remaining. Our hope would be we'd have that completed close to year-end.

Okay, thank you.

Emmanuel Korchman, Citigroup.

Hi, guys. Just thinking about Ariad for one more second, or the Binney project, have you been in any discussions with them maybe before the November 6 plans release to get some comfort on the timing of when they might come to you, and perhaps take back some of that space now while you do see other demand in the market?

We've had some ongoing discussions but I think it's fair to say that November 6 is an important date because they'll publicly unveil their reorganization plan to address the issues that have been thrust upon them. Any substantive progress has got to wait for that public unveiling. Yes, we've had ongoing discussion, but I'm not at the moment able to tell you anything more.

Thanks for that, Joel. One other one for me. We all know that biotech can at times can be a volatile space. We've seen Ariad news. We saw Tysabri a few years ago. Has any of that changed the way you approach deals? Have Amanda and her team changed the way they underwrite deals? Or is there anything else that you as a landlord to the biotech space, can you change anything that you're doing, or have been doing to get more comfort or security?

That's a super great question. As soon as we found out about this, we asked ourselves that exact same question. One thing that's pretty shocking that happens rarely, Tysabri's maybe a good example, obviously Ariad's drug is one of the latest examples, but it's pretty unusual when you have a product that's been allowed on the market by the FDA, and cancer's different than some of the chronic diseases, because cancers generally terminal, by and large in many cases, how a safety profile arose the way it arose. I think that was pretty surprising and pretty unusual. I don't really want to comment more beyond that, but I would say, that was pretty unusual. I think there will be a lot discussed in the New England Journal commentary on November 7 about dosing. That's obviously a critical issue. But let me just say this. This was pretty unusual. What you normally find is a company that's working on development. Then the product just doesn't work. In other words the clinical trial was a bust and everybody goes home. The company goes on either with another pipeline product, or if they are one-trick pony, then that's it. That's few and far between. Most have multiple pipelines. I think the safety profile issue coming up the way it does, I think it's unknown at the moment at least to those of us who have seen just the base data how many people had cardio problems going into the trial who had pre-existing issues. I think that's an issue that has to be explored. There's a whole range of things. I think the answer is you really have a couple of choices. We didn't go forward with Ariad until the product was approved. That gave us a high level of confidence. Obviously, one doesn't anticipate very often a safety issue coming back. Yes, we'll be very thoughtful and careful about how we think about development projects, even the companies that have a single product on the market as we go forward.

In the past, I think that wasn't of greater concern but obviously this shows that it needs to be. Even if it's once in every few years, it's still a big question. I do believe the nature of this product, Ariad's a good shot if they can respond to the FDA properly. If they're able to use this in a broader set of indications, this could be an interesting product, assuming it's not CML limited. But anyway, the answer in short is yes, we are clearly looking carefully.

Maybe a quick one for either Dean or Peter, on your acquisition commentary in the lower guidance there, is it fair to assume that those projects have fallen out since you raised equity and gave the higher guidance? Better said, is the pipeline of acquisitions now just smaller as valuations have gone up?

Well, I think the step that we're looking at has stayed pretty large throughout the entire year. I think, as Peter said, it's the selectivity that's been unusual. I think if something doesn't really line up, we generally pass on it. But also there is a cycle of bringing things through the acquisition pipeline, and not ours, but sellers and it takes a whole lot of time. Peter, I don't know if you can comment.

Yes, there certainly could have been a couple of things that had they just gone another way, we could have easily filled it. The negotiation cycle takes awhile, and because our product is actually a very en vogue product, there's more and more investors that really like it, you get into some competitive situations. You feel like go ahead, let this other guy pay that price for it. We'll get the next one. I think it's just as simple as that. There's been plenty of opportunities. It's just that we're very selective, and I think that you guys will probably appreciate that.

Yes, I think one property that Peter will comment on next quarter, it hasn't closed, and it's in process. I won't say where or what it is, but it's a property in Cambridge. It's a property we were interested in, but we heard the whisper number. It's a good size property. I can't remember the exact amount, but pretty good size combination of office and lab. When we heard the whisper number, we just pulled away and said that doesn't really make sense. We didn't even bid on it, but there was a pretty fierce bidding war among a number of institutional investors and a whole lot of pension funds we heard. That was one that when it started, when it came up on our pipeline, we said wow, given the location to us, we really liked it, liked the combination. Then when it got to the point of what brokers were putting out on the market as the whisper number, we just said it wasn't of interest to us. That's a good example.

Thanks for that guys.

(Operator Instructions)

George Auerbach, ISI Group.

Dean or Joel, as you look into 2014 on the development spend number, if 50 Binney is out of the running and I'd think that the third building in New York would be out just because of the lease up efforts on the second tower, how do you see development spend trending next year?

What you just said is correct, we wouldn't see starting the third tower in New York a little too early. We've got some leasing to do. Clearly, until Ariad is resolved to our satisfaction, we wouldn't kickoff another project on Binney. We'll update and we'll give you a very granular detail on the spend number for '14 when we do our Investor Day. I don't think I want to preempt that at this point.

Maybe just to follow-up on that one of Tony's questions about the land sales, I think you mentioned they slipped into next year. Should we expect a similar amount of land sales in 2014?

What we do have under negotiation is what I commented on which is the $30 million. We've also broadly commented, George, that we are looking at different parcels. I think we'll provide more color over Investor Day and possibly the next couple quarters on exactly what we might monetize next year.

But it should we would hope it would be well north of that.

Great. Thank you.

Dave Rodgers, Robert W. Baird.

Good afternoon. Maybe, Joel or Steve, for one of you, you guys have done a great job leasing up space. You've gone from 2.5 million square feet of availability on our numbers, down to closer to a million square feet. Currently, one of the questions I would have for you is do you see more of a restricted ability to lease space, just due to availability next year, that we should be expecting as we think about 2014 leasing guidance? Can you perhaps talk about any kind of stubborn vacancies in that number, where you're seeing a little bit better traction?

Dave, I think again, looking at the 2014 rolls, we've got probably a good 30% under negotiations there, only about 600,000 square feet remaining. Half of that is in a mix of Boston and the Bay Area, so I think we'll have plenty of quality leasing opportunities there. We've talked about near term development and re-development opportunities, whether they might emerge from acquisitions that Peter's talked about, or that we've highlighted in the supplemental as well. I think we have plenty of near term growth opportunities, both in the operating portfolio and the development and re-development portfolio as well.

Just given where leasing spreads are, given where the vacancy in the portfolio is, and the demand profile you're seeing, the question before I guess was would you see accelerating more development starts? Taking it more broadly and say do you have a limit or a target as a percentage of enterprise value that you'd like to see development get up to, given your comments, Joel, about how strong the market is today relative to where it's been over the last 5 or 10 years?

I think we look at it on a submarket by submarket basis. If you look at the supplement pretty closely, you can see us pushing forward a couple of parcels in Seattle. We have very robust demand up there. We have very little product to meet that demand, similar in San Diego. I think that's also true so I think you'll see those two markets will be pushing ahead both development and re-developments, New York no, obviously Cambridge no, until 75/125 is resolved. We've done a good job of leasing space up in Maryland. We're getting tighter there, even in North Carolina.

I was at a meeting the other day. There was an interesting immediate requirement for a fairly large amount of space we can't deal with, but we're hoping to capture the long term opportunity through a development there. Yes, it's a little bit of a good conundrum or quandary where we have demand and we don't necessarily have absolutely immediately available space of the size that they're looking for. I guess that's a good thing. Remember, too, I think this sector, and the sector obviously goes through its own mutations, but is less dependent upon the general economic environment and much more dependent upon it's really event driven. That's what we have to be focused on.

On chronic vacancies, you mentioned, we have any spaces. We did have a few spaces in the suburbs in Massachusetts, over the past year or two or three years that we viewed as chronic. We had trouble getting traction. We had one tenant we'd do something with. Then it flaked out on us. We have been very successful, Tom and the team, of leasing virtually all of the chronic vacancy. I don't know, Peter or Steve, if you know of anything out there that today we would say is just tough space. There are some buildings that may have like a basement level space of 5,000 to 10,000. That just happens. That isn't ideal, but short of that a minor rounding error thing, I don't think we have much.

We used to do a lot. We used to focus on that pretty much, but a lot of it was in the 495 corridor out in the outer suburbs of Mass. We did resolve those.

We haven't really had much else since then.

I think our dispositions that we made late last year and early this year helped, not only did they give us some capital to recycle, they helped resolve some of the submarket issues we just weren't in love with. I think that turned out to be a good thing for us.

Great, thanks. Then just final question, touching on those dispositions or potential future dispositions, I know you've got the portfolio largely where you'd like it. Given the pricing you talked about in the market today, have you re-contemplated either some joint venture sales where you'd maintained some management or ownership, or more out right sales to continue to improve the balance sheet?

I think on the income producing side, there might be minor things in like a Pennsylvania asset, or this asset or that asset, but nothing that would be of almost any substance. We don't have anything that we're targeting right now specifically. If somebody came by and gave us an offer, we might consider it in a secondary or tertiary submarket, but we don't have anything planned I think on our game plan for 2014. Dean, is that a fair statement?

Yes, that's true. There might be a couple very small things, very small in the fourth quarter.

Okay, great. Thank you.

There are some analysts and investors who have told us to sell the New York asset, or something like that to establish a benchmark. But we're smarter than that. It doesn't make any sense.

Yes, don't do that. Great, thanks.

Michael Carroll, RBC Capital Markets.

Thanks. On page 29 in your supplement, how should we think about the near term development projects? When could these actually be started? And is there a way we should think about that?

Absolutely. As I just mentioned, Mike, 50 and 100 and the residential on Binney, obviously we're moving forward with a bunch of infrastructure and things like that, that we have to do. As far as moving ground up, we certainly aren't going to do that until Ariad is resolved. I think you'll see us move Science Park pretty quickly. I think Illumina will move at some point here, Campus Point as well. New York will hold off. Then both Seattles will move, so I think of the ones I've mentioned, and I mentioned just a moment ago, San Diego and Seattle, I think you'll see move pretty rapidly in 2014. We're trying to make sure we have the entitlements perfected and any up-zoning for increased FAR to get maximum advantage. Then in Seattle, we have literally tenants in hand who we know need space. That would probably go very fast. San Diego, we know also Illumina has certain demands down there. LIlly, UCSD have demand on the space. In the Science Park, I think Dan circled a tenant or two. On Investor Day, we'll give you a more detailed roll-out, but I think you'll see those move ahead aggressively in pre-development, and hopefully as fast as possible in development where it makes sense, where we've got a targeted tenant. We clearly won't do just random spec development, but we'll make sure we've got tenants soft-circled or hard-circled.

Okay. Is 50 Binney Street still earmarked for a tech tenant, and you want to delay that project to be conservative with what happened to 75/125?

Yes, the answer is we're trying to get approval to divide that building into two buildings. We think one would be easy for tech because we've been approached on that by tech opportunities and the other potentially, so it would be two 200,000 some odd square feet buildings. We're going through the design work and the approval work right now. Yes, we still would like to go maybe one tech and one lab there, but we wouldn't start anything at all, even if it was tech just until we resolve 75/125 to our satisfaction.

Okay. Is there any update on the India transaction? Have you received any significant interest from those assets?

Yes, as I said we're looking for an investment partner to go forward with this platform. We think it's a great platform. It's lead by our number one tenant, Novartis. We think it offers a great opportunity. We're well into discussions, and we hope that we can bring in a partner to really help us move that platform forward.

Okay, thanks.

We have time for one final question. Emmanuel Korchman, Citigroup.

Real Capital Analytics seems to have picked up an acquisition credited to you guys of a Walgreen's in Anaheim. Was that real?

Yes, we did it. That's our new headquarters. No, we don't know anything about it unless Peter's out doing random things. He's gone rogue.

Actually, that was Steve. Wasn't it part of a --

It was part of an OP unit transaction that we had consummated several years ago in South San Francisco with a partnership there. It was part of the recapitalization in the OP unit. Yes, we did acquire that Walgreen's for this partner.

Thank you for that.

But we don't own it.

Our partner owns it just to be clear.

Perfect, thanks.

That was all the questions we had for today. I'd like to turn the conference back over to our speakers for any additional or closing comments.

We want to thank you very much. We'll talk to you on year-end and fourth quarter in February. Thanks again, everybody.

With that, everyone, that does include today's conference call. We'd like to thank you again for your participation.