Alexandria Real Estate Equities Inc (ARE) 2013 Q4 法說會逐字稿

Welcome to the Alexandria Real Estate Equities, Inc. fourth quarter 2013 earnings conference call. My name is Vickie and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. And at this time I'd like to turn the call over to Rhonda Chiger. Please go ahead.

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of 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. With me are Dean, Steve, Peter, Marc and Andres. And wish everybody a very happy New Year.

On the fourth quarter and year end, I think the quote at the beginning of the press release summed up, I think, the year 2013, where it really demonstrated the return in strength of the core operations, completion of significant value-add Class A development projects in our AAA locations in our urban, science and technology cluster markets, and really the completion of many significant and important improvements in our long-term capital structure.

I think what 2013 also showed us, based on fourth-quarter and year leasing, is that the strong demand in these key cluster markets really has returned in a rather robust way. And we're very pleased about that.

Our fully integrated smart teams in each of the regions obviously have a lot to do with the delivery of these results. And, as Dean will talk more about, the balance sheet is in very good shape to support solid and stable growth, with continuous onboarding of our EBITDA from the value-add pipeline.

A few macro comments for 2013. Many of you know it was really a banner year for biotech and pharma after a long drought. 46 US biotech companies priced IPOs, the most in 13 years. And about $3.5 billion was raised of new money and venture funds, which had a few years of tough sledding.

And, importantly to us, pharma has continued in an inexorable fashion toward their external innovation hub model into our [core] cluster markets. And we benefited pretty greatly by that.

And, interestingly enough, small companies invented most of the big drugs that received approval in 2013. And I'm also pleased to report that 59% of all drug approvals by the FDA in 2013 were actually Alexandria tenants. So, that's a great testament to our underwriting.

Also, the emergence of several huge, I think, new classes of drugs and drug targets, including the Immuno-oncology area, the non-alcoholic liver disease area which has caught fever lately, and then, importantly, RNA therapeutics.

If we go on to operations and internal growth, the demand for our product in our core cluster markets, and really ARE as the premier landlord, hit an all-time high. We're pleased to report, and Dean will talk about, the solid same-store results. And we expect the same to continue in 2014.

Occupancy continues to be strong and we believe will continue to increase in 2014. And I think Steve will talk about leasing fourth quarter and 2013, an all-time high with solid spreads on those leases.

Pleased to report, which is interesting, that Maryland actually had the highest leasing volume of all the regions in the fourth quarter, with 391,000 square feet, or 29% of all leases signed, a big change from the last few years. And San Francisco had the highest leasing volume for 2013 overall, almost 1 million square feet at about 27%. So that's all really good news.

External growth, we delivered the final redevelopment to Genomatica in San Diego. And also about 189,000 square feet out of our West Tower at the Alexandria Center for Life Science, our flagship campus in New York City, to tenants, including Roche and NYU.

We're working on new leases with a public biotech company and a private biotech company. We hope to report here in the not-too-distant future. And one set back we had was one set of negotiations with an existing tenant for expansion of about 30,000 square feet was deferred.

Moving on to 75/125 Binney, ARIAD has confirmed they will proceed under the lease. They may or may not choose to sublease all or part of the smaller building. But it's pretty clear, based on their own statements, that the 26 Landsdowne property is functionally obsolete for their needs.

In Longwood, we've seen slower leasing than anticipated due to institutional concerns regarding NIH funding, which we hope will be restored over the coming year. And this really impacts -- the top tier not so much but certainly any institutions other than the top tier, I think, have to worry a lot. But since Longwood Medical is really the five great hospitals, they aren't impacted nearly as much. But, still, they're concerned about the trend there.

So, we've got a new marketing push we're instigating this month, just a week from now. And we're also seeing demand from the institutions potentially to buy condo pieces out of their capital budgets as opposed to leasing through the operating budget. So we'll see where that goes.

Area strategic optionality for growth, we've got, as you know, multiple platforms which have enabled us to be opportunistic in Cambridge and San Diego regarding acquisitions over the last 90 days. And we're pleased about that.

On the balance sheet, as many of you know, at Lehman we carry 2.5 million square feet of land at Mission Bay. That's now been fully built or monetized. And about 2 million square feet in Cambridge, and about half of that is underway.

We achieved our investment grade rating and our target zone of leverage thereafter. And we're pleased that we'll continue to onboard a lot of EBITDA from those projects. And we're glad we carried those through the financial crisis but it certainly wasn't easy.

Probably most importantly, ARE now has the full range of capital choices available, and will utilize the most capital efficient and effective tools in our arsenal as we grow our earnings going forward in 2014 and beyond. And then likely in 2014 we'll see land sales and land sales of joint venture that will likely involve multiple markets to take advantage of, really, an unusual current strong existing tenant demand coupled with the demand that's known in the market more broadly.

And then, finally, a comment on the dividend. The Board will continue its policy to share increasing cash flows with investors as we maintain a low dividend payout ratio, I think about 60% at the year end.

So I'm going to ask Peter Moglia to comment on some of the capital markets matters.

Sure, thanks, Joel. There were two notable trades from other investors in the third quarter, and I'm going to take you through them.

One Kendall Square, a 670,000-square-foot nine-building office lab campus located in Kendall Square, East Cambridge, was sold by Rockwood Capital to DivcoWest for $395 million, or $590 per square foot. The property is anchored by Merrimack Pharmaceuticals, which occupies approximately 18% of the property. But there's very little in the way of credit tenancies there. The majority of the tenancy is really early-stage life science and tech companies who enjoy the retail amenities offered by the property.

We estimate the cap rate to be about 5.75%. And understand that the property had close to 10 bidders in the final round, including real estate investment funds, all domestic money; institutional money with operating partners; and REITs.

Alexandria looked at this property a number of times. And though we are very pleased with the location, we dropped out early when the price became out of balance with the credit profile and the duration of the tenancy. We also believe there's a lot of CapEx needed to update the building's infrastructure so the price was just a little heavy for us.

245 First Street, which is also known as Riverview, and located in East Cambridge, was sold by Equity Office Properties to Jamestown, which is a core and core-plus investor, for $192.6 million, or $647 per square foot. That property includes the Cambridge Life Science Center, which is a low-rise lab building which is connected to an office tower that includes nine levels of above-ground parking by a three-story atrium.

The main tenant there is the Forsyth Institute, which is a non-profit research organization. And we estimate the cap rate on that sale to be approximately 5.9%. And understand that there were three final bidders, including a pension fund advisor, a public REIT, and Jamestown, the ultimate buyer. So, although this is a great location, actually very close to our 215 First Street property, we declined to pursue the opportunity because we felt the pricing expectations did not match the B quality profile of the buildings.

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

Thank you, Peter. The solid core operating performance during 2013 in our key brain trust cluster locations is continuing as we work our way through the first quarter of 2014. The trajectory of the mark-to-market metric, evidenced by the GAAP increase of 18.2% this past quarter, is very encouraging, as it highlights the increasing value and strength of the Company's core Class A assets in these AAA locations.

We've seen a clearer sense of urgency to secure and lock down space returning to the market as we're approaching high occupancy rates in each of our key clusters. This is translating directly to enhanced activity in our 2014 and 2015 roles. We have just 491,000 square feet remaining to resolve in 2014.

We're only 3.3% of our operating asset base. Nearly half of that is concentrated in Boston and San Francisco, two of the hottest markets.

We're also getting out in front of our 2015 rollovers and engaging in discussions with key clients. And we'll move on to the details and activity in these clusters.

We've seen the lease rates in Cambridge increasing approximately 10% year over year, and now range in the mid to high $50s for existing product, with build-to-suit projects pricing at $70 triple net. We're tracking approximately 640,000 square feet of known life science demand, with more behind it, and another 1.6 million square feet of demand from tech users. The mark-to-market for rollovers this year, excluding one legacy lease, is 7.5% and 14.6% on a cash and GAAP basis in Cambridge.

Moving over to San Francisco, the rents in Mission Bay have increased approximately 15% during the past year and are now in the mid $40s triple net. We've also seen the South San Francisco sub market experience lease rate increases in this range during 2013. And on a mark-to-market basis still remain 20% below historic levels.

The mark-to-market for rollovers we anticipate resolving this year in the Bay Area will be slightly positive cash, and a very healthy 10% on a GAAP basis. Demand remains very robust with 1 million square feet of life science and 7 million square feet of tech tenant requirements in a broader San Francisco to Silicon Valley marketplace.

San Diego's activity is highlighted by a decrease in the direct vacancy on the Torrey Pines Bluff of 144 basis points from 10.1% to 8.66% at a time when we have significant activity on our Class A Spectrum project located on Science Park Road.

Rents have increased 7% from last year to the upper $30s triple net in the sub market. And we are currently tracking 1.2 million square feet of high-quality demand across the three key clusters in San Diego.

Moving back east to Maryland, we've seen a steady increase from its trough. Joel had noted a key lease execution there. And we anticipate mark-to-market rents with a healthy 10% increase for rollovers this year. And the regional team is tracking another 0.25 million square feet of demand, with an emphasis on high-quality space.

Moving back to the Northwest, the Seattle market is experiencing pent-up demand as we are tracking and engaged with tenants seeking a total set of requirements of about 280,000 feet. We're extremely well positioned with our development opportunities in the heart of South Lake Union, which many know is also experiencing a boom in demand from the tech sector.

Finally, wrapping up in the Southeast, the RTP market has tightened considerably over the past year, with 190 bps decrease in vacancy, to 10.6%. And we're tracking about 90,000 square feet of demand in the market. And do anticipate very healthy mark-to-market GAAP rents approaching 20% increases.

With that I'll turn it over to Dean.

Thanks, Steve. Jumping right in, the same-property performance for 2013 was very solid, up $17.4 million, or 5.4% on a cash basis, and up $6 million or 1.8% on a GAAP basis. Cash same-property performance for 2013 was driven primarily by our favorable lease structure. Again 95% contained annual contractual steps in rent, and 94% of our leases are triple net.

Other drivers included lease up of temporary vacancy in the first half of 2012 in Cambridge at 790 Memorial and 300 Technology Square. And rent commencement for Illumina in San Diego in October of 2012.

Briefly on value creation projects that were completed in the fourth quarter, we hit a major milestone with the completion in December, and the delivery of the first portion of our second Class A lab building in New York City. This delivery is about 12 months and two weeks after the delivery of the crane to the site in early December of 2012.

Major construction activities and capitalization of interest is forecasted to continue through the remainder of the project. Overall, yields are on track with our disclosures. In fact, I think you'll find that we'll be well ahead, meaningfully ahead, when we're done with this project. But let us work through the remainder of the lease up there.

We also completed the redevelopment of 4757 Nexus Center. 79% of the project was delivered at the end of October and the remainder of the project will be delivered over the next 18 to 24 months.

I've got a few comments on the balance sheet. First, the timing of closing the purchase of 150 Second Street in Cambridge resulted in debt to EBITDA of 6.6 times at year end. On a pro forma basis, assuming a full period of EBITDA from the acquisition, leverage was right on target at 6.5 times.

Timing of transactions, spending, and EBITDA growth will result in some increases and decreases in leverage quarter to quarter. Our overall goals for debt to adjusted EBITDA, and our fixed charge coverage ratio, have not changed. These metrics will continue to range within reason quarter to quarter and year to year. And our growth in cash flows and EBITDA will allow us to maintain solid credit metrics.

We increased our land sales target and our guidance at the midpoint by about $125 million related to the projected sale of a partial interest in certain near-term development land parcels. We also eliminated our prior guidance of $250 million of issuances of common equity through our ATM program in 2014.

The timing of the sale of an interest in certain land parcels is conservative and earlier than our previous common equity assumptions. And therefore these changes resulted in no impact to our overall guidance in FFO per share. The remaining $125 million in sources of capital was an increase in debt.

On January 31, we repaid $209 million of our 5.6% secured loan related to our 1.2 million square foot campus at Alexandria Technology Square in Cambridge. Our fourth-quarter annualized NOI was approximately $67 million, really double the NOI that was in place at acquisition.

That really brings our cash yields on this project to 8.5% today based on our gross real estate investment to date. Our total unencumbered NOI as a result of repaying this debt will increase to 85%. Outstanding debt under our bank facilities was reduced by over $600 million, or approximately 32%, since December 31, 2012.

I'd like to touch briefly on our strategy for bank debt outstanding on our credit facilities. As of 12-31 we had about $1.3 billion outstanding under the three facilities, down meaningfully from this time last year. $950 million or 73% of our outstanding debt under the facilities is subject to interest rate swap contracts with various swaps maturing through early 2017.

We strategically maintain unhedged variable rate debt to provide flexibility to opportunistically refinance our debt. Our interest rate swap agreements are considered from time to time, and further mitigate interest rate risk both in notional and in effect each month, as well as extending swap contracts beyond 2017.

We plan to repay outstanding borrowings each year under our $500 million unsecured term loan until the loan is repaid in full by its maturity in July of 2016. Repayment of this loan over the next few years will reduce our credit facilities by 16% to approximately 26% of total debt.

Additionally, as our capital structure grows over the next several years, bank debt will also become a smaller portion of our capital structure. More importantly, we will continue to focus on improvement in our capital structure while we also focus on optionality to drive stable and solid growth in bottom line per share earnings and growth in asset value.

Lastly, for guidance, we updated EPS diluted to a range of $1.75 to $1.95. And we reaffirmed our guidance for FFO per share as adjusted for 2014 at a range from $4.60 to $4.80.

With that I'll turn it back to Joel.

Operator, we would like to go to Q&A at this point, please.

(Operator Instructions)

Emmanuel Korchman with Citi.

Joel, maybe if we can focus on your life science investment platform for a second.

You've got $140 million of investments on balance sheet. I believe the majority of that is in private companies rather than public ones. And they don't get mark-to-market on the balance sheet.

So if we're going to think of the total value of investments that Alexandria has made over time, where would that be versus that $140 million on the balance sheet?

Yes, that's a good question. Thanks very much. Maybe just one step back would be useful to say why we do what we do, and that is we think really a couple reasons.

One is it gives us a strategic window into, really, breakthrough science and product opportunities that ultimately, in many cases, lead to tenancies. Number two, it gives us an unparalleled knowledge of industry trends, and how we should be thinking about things. Three, it hones our skill base in underwriting tenants and, obviously very importantly, our financial returns.

I think right now that amount is about 1.7%, 1.8% of total assets. I think we've got a solid ROI over the past number of years.

I would say that given where the biotech sector has gone over the past year or two, we would clearly be well above market on marking to market those private investments.

We participated in some of the most important companies. And we know that those companies have huge upside and huge market opportunities. So we feel very good about where we're positioned.

So I think the two impairments that we recognized shouldn't be at all looked at as an indicator of where that value is today. The two impairments -- one related to a company that actually started a number of years ago and that has been winding down over a period of time. And the other was a clean-tech asset.

If you watched 60 Minutes and Vinod Khosla a couple weeks ago, that market has really not done as well.

So the core therapeutic life science investments have really done well. And we're very comfortable with where we are on that. So I hope that gives you some color.

If we're thinking about ascribing a more fair value in our NAVs, how should we think about it -- 2 times that $140 million? 3 times? Just if we want a more fully-baked number.

I'm going to ask the accountant in our midst here.

Yes, I would say that the large majority of that investment portfolio is held at cost. And you probably realize that over the years, we've been able to end up with significant liquidity events that have realized gains.

And I think in the backdrop of where life science and biotech companies are valued today, you're probably comfortably at a 2X on cost. And this is all historical -- real early, early entry point investments on these underlying life science companies.

I think on average you're there. And, like we said, we took two charges that aren't reflective of the overall valuation.

Thanks, Dean. And then one other question for you maybe.

What drove the decision to increase the land sales in the JV agreements rather than do the ATM as we had discussed in December?

Yes, I think part of it was, now that we have gotten to a point where the balance sheet and onboarding of EBITDA will help our future, will really fuel and gives us a platform to grow now more consistently, and certainly a bit like we had pre-Lehman, it seemed to us, after a lot of internal discussions and discussions with those outside, that if we do not increase our share count this year through offerings, it will, I think, be a good demonstration that the Company can grow nicely without relying on common equity. And I think that was a little bit of the core of how we thought about it.

I think you guys commented directly on the last call and asked that question. And I think we have clearly given some very deep thought to that.

And I think, irrespective of whether our stock was at $60 or $61 or $70, we feel that by working with a joint venture partner who can provide us immediate capital and a flexible structure to help us monetize and ultimately onboard cash from development parcels where we have the ability to tenant some of those properties today, to defer them to later on doesn't make sense.

That was the other thing that really drove us -- is the extraordinary demand in the market, some of which is known and some of which isn't. I think those things came to a confluence that made us move in this different direction.

Perfect, thanks very much.

Jamie Feldman with Bank of America.

Great, thank you.

Sticking with the JV question, can you just talk a little bit more about your progress and timing and size, and what we should be thinking? And what you're seeing on pricing, as well?

Let me comment on maybe the targets. We have three buildings left to build in the Binney Street project -- 50, 60 and 100 Binney -- totaling almost 1 million square feet. We know there is significant demand in the market.

We also have some significant demand from tenants of ours. We would like to move that forward, so that would certainly be high on our priority.

But, as you know, we just delivered the Biogen Idec transaction at 225 Binney. And we're well underway at 75/125 for ARIAD. So having a partner who would provide a significant amount of capital for the other Binney projects is very desirable.

Similarly in Seattle, where we know there's immediate demand, those would be the other locations we're interested in. We've had to date, I think, about eight meetings with very high-quality you might call blue chip investors. We're working on CDAs and terms of deals.

Beyond that, I don't think I want to speculate about the nature of those discussions or the terms that are being talked about. But I would say, it's fair to say we joint ventured the Longwood project back about a year or two ago. Peter led that effort with a high-quality investor in Clarion that took 50% of that transaction.

So, I think we have a knowledge and a skill base to bring on a very high-quality investor that has a DNA thinking about how we think. And so that's where we're headed here.

Okay. And then back to your private investment portfolio, what would be the timing where you would start to harvest some of the value?

We do continuously. We've seen a lot of -- you might think about this, and this goes back to the question Manny asked. Dean's a conservative guy by nature, so I won't overrule his facts number.

But if you think about, we have quite a few private investments, some of which have gone public or are in the process of going public. So, that gives us a nice opportunity once they do to mark those to market. And then, also, obviously to think about are there times where we would exit.

Most IPOs, you're generally locked up 180 days. But I think we've had very good results, and we're very comfortable with where we are.

Jamie, the only thing I'd add is if you look back the last couple years, we probably averaged somewhere between gross gain somewhere of $10 million to $15 million -- and sometimes larger than that. So, it's been a pretty consistent opportunity to realize gains over time.

Yes. And those were tougher years because the market wasn't nearly as buoyant as it has been over the last year or so.

Okay. So, do you include any of that in your guidance?

There's always a base run rate of recurring gains from the investment portfolio quarter to quarter. So, yes.

And occasionally, Jamie, we hit some home runs like we did in 2012 when we backed that out. It was a large --.

Yes, we had an $8 million-plus gain from Boston Biomedical. But I would say, again, we try to be careful and conservative on our guidance. So let's see what the rest of the year rolls out to be.

Okay. And then just final question, sticking with the guidance.

Dean, can you talk a little bit about the sensitivity? I know you kept the range constant from your Investor Day. What would give you some upside here or some downside?

I would say, first off, it's only been a couple months. So, although things have improved, I would say, generally speaking, from the demand point standpoint, space has remained healthy.

I think it's just too early to think about changing our outlook for the year. And as we go through the year, we'll revisit. But everything is pretty much on track with our views that we shared with you on Investor Day.

Okay, thank you.

Dave Rodgers with Robert W. Baird.

Maybe talking about the New York asset a little bit more, I think both in the Investor Day and maybe last quarter, you talked about a better run rate there. I think you mentioned, Joel, in your comments maybe a setback with an existing tenant looking to expand. But maybe talk about the backlog and demand there, both domestic and internationally, and what you're seeing for that asset.

Yes, it's interesting. You have to remember, when we delivered the West Tower, Peter negotiated the lease with Eli Lilly; but they were our anchor. But, essentially, there is no market there to speak of.

We actually have had to create the market, which we feel very good about. We took a risk; the city took a risk on us; and I think it paid big dividends for both.

So, you can't look at market dynamics because they simply don't exist. Every single lease and every single tenancy we actually have to force and really work on. You can't just hang out a for lease sign and expect people to show up or market demand to go there.

So, it's not easy lifting. And I know, I remember very clearly when we delivered the East tower and we signed Lilly, there was some discontent among the Street that said -- how come you haven't leased it up? Well, we had a three-year lease up and we did it in one, so we're pretty pleased.

This time we have got a two-year lease up, and hopefully we can do it. A year from now we'll be hopefully done.

But, as I said, we are in lease negotiations with one private biotech company. We expect to move their -- another public company that we expect to move their non-existing tenants.

We've got some internal demand from existing tenants. We've obviously been talking to Roche and others about expansion.

We do have a backlog of a couple of companies. We've got one big pharma that had a great year. It is not now currently in New York as far as research.

But it's really too early to tell. I'm not sure I can give you any more color.

I don't know -- Peter?

I can just piggyback onto the pharma discussion.

Our life science team in the New York office is probably averaging a day with a pharma company almost every month. And so there's quite a few.

I don't know, Joel, if you want to comment on that.

I wouldn't say anything more than that.

I actually have some meetings in Japan coming up in two weeks. We have some real interest from some Japanese pharma companies who haven't done research.

Some exist; a client of ours, Eisai, is in our Cambridge asset base. And we're talking to a couple of others about potential New York research presences. But, again, it's still too early to tell, Dave.

Okay, thanks. And maybe a follow-up, two parts to it that should tie together. First, any major tenant rollover this year that we should be thinking about?

And second to that would be, any plans to take any existing operating assets, either with an expiration or without, and put them into redevelopment this year or as the year progresses?

I think on the redevelopment side, I think there's one listed.

Yes, Dave, we have on page 17 -- this project is footnote 2 on page 17. It's Barnes Canyon Road. We acquired that in the third quarter of 2013. It's 67,000 square feet.

It did roll in January. And it will undergo conversion into high-tech office space through redevelopment. And it is 100% pre-leased.

All the remaining space that we have expiring for 2014 aggregates about 491,000 square feet. This excludes anything that's leased or under negotiation that's highly anticipated to resolve favorably.

That remaining bucket is only -- I think the largest leases are somewhere in the high 40,000-square-foot range. And there are only a couple -- two or three of them at that range. So nothing significant rolling in 2014.

Yes, I would just add to that, Dean. I had touched on that during our comments, in a mark-to-market basis, we're looking very favorable on those rolls.

It is pretty well distributed across the portfolio, again with a concentration in Boston and San Francisco where we're seeing healthy demand. So, nothing out of the ordinary there.

Yes. I'd say one thing that's different. There was an e-mail I traded with one region this morning. We're starting to see, interestingly enough, which we haven't seen in maybe a decade, tenants coming to us and saying -- Our lease rolls in 2015 or 2016 or 2017, and we would like to try to tie down space today. We haven't really seen that for a long time.

It's actually been the opposite way -- our going to various tenants whose leases are coming up -- not this year, but over the next year or two -- to try to -- I don't know that it's a blend and extend. Maybe a couple years ago it was more blend and extend. Today it's just renewal.

But we're starting to see that reverse inquiry now. We just had one very large tenant ask us to consider renewing right away. And that is a nice thing to see, so that's a good sign in the marketplace.

Great, thank you.

Jeff Theiler with Green Street Advisors.

Hello, good afternoon.

It sounds like your best guess right now is that ARIAD comes in and subleases a portion of that space at Binney Street. Assuming that does happen, how does that impact the timing of the remainder of those Binney Street projects?

Yes, I won't speak for ARIAD. They're going to have to make that decision. But we know, we've had face to face discussions, and they've indicated they are going forward.

I would say that when it comes to timing, our timing is, right now, delivery in the first quarter of 2015, so none of that's changed.

But the remaining buildings after that, is that pushed back years?

No. Actually, I think if you listened to my commentary that I just gave on 50, 60 and 100, because there is such extraordinary demand in the market today, our view is, by bringing on a joint venture partner, we can actually accelerate the construction of those projects, one or more of those projects.

So, in my view, those are going to be more advanced than we would be otherwise.

Great. And, then, can you talk a little bit more about the Cray Court acquisition -- what you saw in that, what the plan is for that building over the longer term, how long the Scripps Research Institute lease is, et cetera?

Sure, Jeff. This is Peter Moglia.

Scripps leases that building for, I believe, another six years. And so that was one of the drivers for the acquisition.

But another main driver is that there's very little that you can obtain in Torrey Pines. And we've really done a great job creating a lot of value there with our Nautilus project and some of the other developments we've done. Rental rates have really gone up.

So, getting more product there was a priority for us. And this is a very mission-critical facility for Scripps. It was a design built for them. And it has a very efficient design for NIH type of reimbursements.

It would be very hard for them to replicate if they were to go elsewhere. So we really think they're going to stick there for a long period of time. And it's also very close to their campus.

Great, that's helpful. Thanks very much.

Sheila McGrath with Evercore.

Yes, good afternoon.

Joel, we've heard a lot about the positive rent growth in Cambridge and San Francisco. I'm just wondering if there's any way you can give us an estimation of how Alexandria's portfolios in-place rents in those markets compare to current market, not just what's rolling this year.

I think, Sheila, it's probably consistent with what we've talked about with the rollover. It's mark (technical difficulty). So you're probably in that 10% to 15% range in both of those markets on a GAAP basis.

Okay. And then, Dean or Steve, on the GAAP increases, they were so large on new leasing.

Was that the six steps and the rents were larger, or were the lease terms? What's driving that unusually large increase?

I'd say it was primarily -- well, all the leases we're extending on the terms. But I would say that you had a couple larger leases within the year, at the 10- to 15-year lease terms, that were extended that really drove GAAP rent increases in 2013. If you back them out, you're probably still in that 13% range on growth.

So, it's still a very strong year but a little bit inflated by two large transactions.

Okay. And then last question, just on looking at Building 2 and the remaining lease up, I think you disclosed in the supplemental through 2015.

Could you just talk about anymore insight into timing through 2014 and into 2015 when you expect that building to stabilize?

Which one are we talking about?

Building 2. I think you said in the supplemental -- in New York.

In the West tower?

Exactly.

Okay. So, we are currently, to give you some perspective, we have about 11% that's leased that has not been delivered yet. Which leaves us maybe 43% of the project on the second tower to resolve. And, as Joel had mentioned, we have some transactions that we're working through.

I think from a timing perspective, our goal would be to resolve most of the remaining lease up over the next, call it, four quarters. And we'll have a better sense as we make our way through the year.

We're sitting here in Q1, so I'm talking about into early 2015 we should have pretty good color on resolving the rest of the space. I'm not talking about necessarily delivery but, hopefully, moving the remaining space through negotiation and lease over that time frame.

But keep in mind our internal model, as we said in the East Tower, Sheila, was a three-year lease up. Right now we have a two-year lease up.

And we just delivered first space at the end of December. So we hope to beat that.

Sheila, let me also add, we're conservative in our modeling, as well. So I think there's upside from our own model to the extent we get ahead of our delivery time frame.

And so, given that the faster lease up on Tower 2 or West Tower, could you give us an update on how you're thinking about the option parcel?

Wow, that's a good question. There's a new sheriff in town, I guess, who likes affordable housing; so I don't know.

We actually approached the City pre year-end under the Bloomberg Administration thinking maybe there was something we could do to accelerate things. But they didn't really want to put anything into play, so we've gone back to the game book or the playbook that says we've got to finish the West Tower before we then approach them on the option parcel.

It's just hard to know. Honestly speaking, if the City wanted to do something, they could clearly designate that as residential if they wanted to. Although I'm not sure how affordable water views would be from that location.

But we're hoping that the long-term interests of the City are aligned with ours that said they really want to continue to build the commercial life science sector. And so we hope that will happen.

But I would expect, now that Mayor Bloomberg is out, I don't think there will be any early discussions with them given, where we are on the West Tower.

Got it, thank you.

(Operator Instructions)

Michael Carroll with RBC Capital Markets.

Thanks. How should we think about your near-term development opportunities? How many projects could we expect to actually break ground in 2014 and 2015?

It sounds like you're seeing some good activity, obviously, in Cambridge; and we know there's strong activity in Seattle. Is there any other markets that you can see some near-term opportunities?

Yes, that's a good question. And I think Dean and his team tried to put some, really, color to those opportunities.

So those of you who have got the supplement, if you look at page 30, that's the Kendall Square/Binney Street corridor assets. We talked about those.

The next page is the Spectrum project in Torrey Pines Peter referred to. We're working on that.

If you go by that project you'll see steel moving along. We think there are a number of tenants, both existing and non-existing tenants, that would want space. So that clearly is moving forward.

I think the Illumina campus, we certainly have discussions going on with Illumina. They are continuing to grow, so I think you'll see progress there in the very near term.

Same thing on Campus Point Drive. We have demand from one or two of our current tenants. And we're underway with expanding and confirming entitlements there. So that would seem to be more of a near-term.

The next one is the 9950 Medical Center Drive in Rockville. For the first time, we've seen that market really change; and we're getting relatively full in that market. I don't think we would ever kickoff anything without a mostly leased situation.

I can't imagine actually having building in Maryland again. But we are at a point, interestingly enough, where there seems to be both institutional and pharma demand; and so we'll see what happens. I'm not sure how near term that may be, but we're moving forward with our design and confirmation of entitlements.

And then Seattle, page 35, I think these are probably next behind Cambridge. There's great demand from tenants in the market, including Amazon. We would like to have a partner to help us finance that.

And then the final one is 6 Davis Drive. There was an announcement yesterday by the Research Triangle Foundation that basically indicated they have just bought a large parcel right across from our parcel or our sets of parcels, including the Hamner Headquarters campus right across the side from I-40 that's going to be an iconic headquarters of the Research Triangle Park. And it looks like they are going to pour a lot of money into that.

We've seen some substantial demand from existing tenants. We've got two build-to-suits we're looking at right now. Don't know how soon they may be, but they could go sooner rather than later.

So, I think you'll see a pipeline that will start over the next set of quarters or into next year that will develop a nice pipeline of opportunities for us to harvest in the 2016-2017 time frame. So a lot is actually going on.

We haven't seen this much activity across all the markets in a long, long time.

Okay, great. And then my last question is, Joel, you indicated that the ARIAD space, or at least its old space, is functionally obsolete now.

Those are not my words. I think those are ARIAD's words.

Okay. Can you give us color? Is that obsolete to most life science tenants or is it obsolete for ARIAD?

And now, it's not your space, obviously, so can you talk more generally about the Cambridge market of how much space in the market could be obsolete or near obsolete?

Yes, I've been into 26 Landsdowne many times. I'm not sure that I currently have the knowledge of how the systems are functioning.

ARIAD's been historically a pretty heavy chemistry user. So that's an issue.

And I think obsolete for their transition from a small company to a commercial stage company. So it may -- there could be functionality in the chemistry side, and there could be functionality just for the nature of the stage of growth of the company. I'm not the best one to ask about that.

I think if you look at overall space in the market, I think you have to look at, really, I would say space in Cambridge, the only space you could look at that could be functionally obsolete is some of the Vertex space that we heard is going to be going to office. But I think Tom Andrews could probably give us better details on a property by property.

But, remember, our experience up in Seattle, we sold the old Fred Hutch Cancer Research Center. We bought it as a converted hospital many years ago. Those systems actually lasted since the 1970s.

So these buildings are built -- if they're done right, they have long-term, re-leasable, reusable, and if they're maintained well, functional -- functionality for many decades.

Okay, great, thanks.

Steve Sakwa with ISI Group.

Thanks, good afternoon.

Joel or for maybe Peter, I just wanted to circle up on some of the asset sales and pricing. I wanted to come back to the Kendall Square deal and the other transaction that was mentioned. And then maybe even touch on the Skanska deal.

But as you look at cap rates, price per foot, and you talk to the institutional capital partners, what do you think the unlevered IRRs are that the institutional partners want? And what do you think the unlevered IRRs were for the two deals that you passed on?

Good question, Steve. I have talked to a number of institutional investors, and I've read a number of surveys about what people are underwriting to. And I'd say generally for core, people have dipped below 7%, probably 6% to 7% on an unlevered basis. For core product, add 100 basis points-plus for value add.

So, I would guess that -- I know that the One Kendall Square sold for a price that was probably a good 20% higher than we originally thought it might go for. I ran some numbers on that, and I would guess that that IRR is probably sub 6%; but I'm not sure.

Obviously, I might have a more conservative view of rents than the buyer. So, we'll see; but that was obviously a very healthy trade.

The 245 First Street, that is a very good location, as I mentioned; but it's a hybrid building. It's kind of funky.

If you went there you would look at it and it seems like a big brother and a little brother attached holding hands by an atrium. It's just a weird-looking building.

And the parking goes nine stories above ground. If you look at it, you go -- wow, great location, but I wouldn't want to take an investor on a tour and show him this.

That thing traded at a sub 6% cap, which is good news for the market. But I do know that there was some sub; a few of the leases in that rent roll were below market. So I'm sure that the buyer there is probably going to get at least a 7% IRR.

Did I answer your question, Steve, or is there something else I need to touch on?

You did for those two. I was just curious, as you guys looked at the Skanska building that you recently purchased, if you could just remind me on the price, the cap rate, and maybe what do you think the IRR is on that purchase?

I don't comment on IRRs that we are achieving. We do give a lot of disclosure on the yield. But I believe the purchase price was $94.5 million. Give me a second here to find that.

Yes, $94.5 million. It was $767 a foot. That is a fairly healthy price per pound. But considering some of the New York type of trades that you see that exceed $1,000 a foot, and the high rents that you see for lateral space in Cambridge, I think it's an appropriate price per pound.

Stabilized yield will be 7.3%. And that will be achieved sometime in August of 2015 when the free rent from the existing tenants burns off.

You may not know, but Foundation, one of the tenants, was pulled from One Kendall Square. And they got a pretty big free rent package in order to come over there. And so that needs to burn off. We also have another 18,000 square feet of leasing to do.

So, we anticipate we'll get that all resolved by August of 2015, and we'll be cash flowing at a 7.3% at that point.

Okay, thanks for the clarity.

There are no other questions so I'd like to turn the conference back to Joel Marcus for any additional or closing remarks.

Thank you, operator. Thank you everybody for taking time.

We did it under an hour and that's good news. And we'll look forward to talking to you on the first-quarter call. Thanks again.

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