Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q1 2012
Operator, Operator
Good day ladies and gentlemen, and welcome to the First Quarter 2011 Alexandria Real Estate Equities Incorporated Earnings Conference Call. My name is Karris, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded for replay purposes. And now I would like to hand the call over to your host for today, Ms. Rhonda Chiger. Please proceed, ma’am.
Rhonda Chiger, IR
Thank you. 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. And now, I would like to turn the call over to Mr. Joel Marcus. Please go ahead.
Joel Marcus, Chairman, President and CEO
Thanks, Rhonda, and welcome everybody to our 60th quarterly conference call as an NYSE listed company and the 15th anniversary this month of our IPO in May of '97. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, and Krupal Raval. It struck me driving into work today as I was listening to sports radio that yesterday has gone, and it’s all about today and tomorrow. So we're going to focus with that theme — focus on today and tomorrow. So 1Q was actually a pretty solid quarter, and we have much work to do through the rest of 2012, and that’s really our laser focus. I'm going to start off with balance sheet and capital allocation thoughts. We did have, I think, a very productive first quarter when it comes to the balance sheet as you saw from both the press release and supplemental. The consummation of our debut bond offering, the perpetual preferred, and the line of credit, which we just closed, was very significant. We have much more to do through the balance of 2012 focused on suburban asset sales and as well as other non-core asset sales for our capital recycling program. Dean is going to refer to that. Obviously we're focused on land sales and we'll be reporting some in the quarters to come and potentially in other potential JV relationships we are exploring. As you know, or should know, asset sales on a lease-based world are more complex and time-consuming than simple generic offers, and that’s important to keep in mind. So as we think about some of our markets and this recycling program, obviously Seattle, San Francisco, Merlin, and Massachusetts are areas that we're focused on. As many of you know from our press release, we did complete a very high-quality joint venture in the key Longwood Medical submarket, a market we consider one of the best locations in all that submarket due to the highest concentration and density of research hospitals and teaching platforms. We consider our main location truly a triple-A location, which we always focus on, and once we open the Longwood Center, we will have the best-in-class building there by far. We’re looking and will report next quarter a strong yield and no net future capital outlay, which we are pleased about. We completed a partial sale of the land at a gain and matched funded the future capital with both the construction loan and our JV capital. We did make one small acquisition in one of the best locations in all of Research Triangle Park with a solid yield. It wasn’t something we were necessarily looking to do, but it was a very opportunistic situation, and we took the opportunity to create that kind of platform for other things we’re doing down there. One key new build-to-suit that Steve will discuss a little more about in South San Francisco helps move another key parcel from our land bank in that market, which has been a challenging submarket, into the development process for cash flow at a solid yield. It’s one of the best locations in South San Francisco, and we’re proud that we secured a best-in-class tenant. We continued to be very focused on attracting high-quality tenants to key land parcels for NOI creation or liquefied land holdings, and our target is to lower non-income producing land as a percentage of GAV to about 15%. Regarding operations for the first quarter, it’s important to remember, as many other teams have reported, the macro market still remains challenging and the political climate clearly in disarray. Following our fourth quarter, which was the highest-volume leasing quarter in the history of the company and the highest leasing year in the history of the company in 2011, we're very pleased to report solid leasing demand in the first quarter, with 63 leases signed for 912,000 square feet, balanced by region: 19% from San Diego, 24% from San Francisco, 15% from RTP, 13% from Maryland, and 27% from Boston. This confirms solid life science demand for our best-in-class properties and submarket adjacency locations. However, there are lower quality lab spaces overhanging some submarkets which are keeping somewhat of a lid on rents, and some landlords are making some hard-to-understand deals. But when you have the best locations and best quality assets, we feel good about the outcomes that we will have. On the development side, we’ve got six projects in development. Steve will talk to you somewhat in depth about 499 Illinois. Our projects like 225 Binney with Biogen Idec, our Onyx deal in South San Francisco, Illumina in San Diego, another small build-to-suit in UTC with a 100% occupied tenant and our small Canadian development with GlaxoSmithKline are all 100% leased. We know our challenge at 499 Illinois, and as I say, Steve will highlight that in some detail. On the redevelopment leasing, we’ve made very good progress on four principal urban redevelopments — 400 Tech Square is almost 40% leased, and we have a few prospects we’re in good dialogue with. We expect to have positive results in the coming quarters. Johns Hopkins is in move-in mode, so that's coming to completion. At Campus Pointe, we have 17,000 or 18,000 square feet on lease under a hard option to Celgene. Finally, at our 1551 Eastlake, the former Gates Foundation, we’re almost half leased, and we expect to have good progress over the next quarters. Steve will update on East Jamie for you, and it’s important to remember that a substantial portion of active development and redevelopment are actually leased, contributing to much of the projected NOI ramp-up for the fourth quarter. We feel we go into the rest of the year with good momentum. I’m going to ask Steve to comment on detailed leasing activity.
Stephen Richardson, COO
Hello, this is Steve Richardson, and I’ll go ahead and comment on the significant key trends, primarily focused on the Greater Boston and San Francisco Bay Area cluster markets. From a broad pattern perspective, we’re really seeing the life science sector in these markets experiencing demand from a critically important segment of the industry’s ecosystem—an emerging second cohort of companies that are driving towards commercialization and significant product revenue. Large biopharma enterprises historically that provided a foundation of excellence for the industry—like Genentech, Amgen, and Biogen—are now being followed by companies that have been working diligently in product research and development with the promise of delivering novel therapies. Commercialization from these companies is an exciting and compelling evolution in the industry as the roster of biotechnology companies joining the ranks of the aforementioned giants with significant product revenue is growing. With that backdrop, focusing on Cambridge’s Kendall Square district, we really see the lab market demand today dominated by companies in the second cohort, with organic growth from homegrown enterprises spurred by commercialization. This demand ranges between 1 million and 1.5 million square feet today. The companies are seeking to consolidate in high-quality headquarters facilities that will provide a platform as commercial entities moving forward. The lease rates today in Kendall Square range from the mid-50s, triple net, to low 70s, triple net for existing space and build-to-suite opportunities, respectively, and have a market vacancy rate of approximately 15%. Alexandria’s asset base in Kendall Square is performing very well with a 4.4% vacancy rate. As Joel mentioned, we’re in the midst of good activity in the 400 Tech Square redevelopment project, although we are experiencing competition from chronic vacancy in other projects in the market. Turning to San Francisco, in particular the South San Francisco cluster, we’ve consistently indicated our caution regarding this important cluster as we’ve exercised discipline and restraint regarding capital allocation for acquisition opportunities over the past few years and focused exclusively on our existing asset base in build-to-suit opportunities. With that, we’re pleased that this discipline and focus has been rewarded as we are announcing the execution of a long-term lease with Onyx Pharmaceuticals for 171,000 square feet at 259 East Grand Avenue. This is Onyx’s second facility on Alexandria’s fully integrated East Grand Campus and brings their footprint up to approximately 300,000 square feet. Onyx truly represents one of the best examples of the second cohort of companies mentioned before, enjoying significant product revenues today and promising additional products in their pipeline. We are delighted to grow our partnership with the company. The overall South San Francisco lab market is incrementally improving with a vacancy rate of approximately 9.4%. Lease rates remain in the low to mid-30s triple net for existing space, and our asset base in this submarket is performing well with a vacancy rate of 3.2%. We continue to engage in negotiations with both an existing tenant and a new tenant at our East Jamie Court development for a total of approximately 40,000 square feet in its 163,000 square foot facility. We’ll be targeting Q2 to Q3 to consummate these transactions. Moving north to Mission Bay, it remains a tight market with our portfolio’s vacancy at just 1% when excluding a couple of retail suites. The 499 Illinois project represents the only block of space available for life science use, as the China Basin building has been fully absorbed with tech users. Given the high-quality waterfront location, we’re exercising patience as we continue dialogue with institutional life science users. We’ve been here before in Mission Bay and have brought 1700 Owens, 1500 Owens, and 455 Mission Bay Boulevard South to the market in a similar state, ultimately securing excellent anchored tenants. Salesforce.com is in a pause mode as they evaluate their options during the next six months, as we mentioned before, but UCSF continues to make significant and meaningful investments in Mission Bay with the grand opening of their 2,237,000 square foot Neuroscience Center on their campus and rapid progress on the $1.6 billion medical center hospital complex. Regarding the 2012 rollovers, we’re making steady progress in that realm as well. At the end of Q4 2011, we reported 694,000 square feet of remaining leases to be resolved and are pleased to have reduced that figure to 352,000 square feet. We signed 36 leases in the rollover category totaling 275,000 square feet during Q1 at lease rates that provided a cash basis increase of 1.1% and a GAAP basis increase of 7.6% when excluding one lease in the secondary Sorrento Valley submarket of San Diego. The remaining 167,000 square feet of space that rolled this quarter is concentrated about 50% in Cambridge with very high quality assets, so we expect to define 33% in Maryland, which may present some challenges, and just 13% in San Francisco where we should also define. The forecast for the balance of the year from a lease rate perspective is consistent with guidance from the end of 2011, with cash basis relatively flat and a GAAP basis increase of up to 5%. Thank you, and I’ll turn it over to Dean.
Dean Shigenaga, CFO
Thanks, Steve, and good afternoon everyone. Our results for the quarter reflect a $0.01 increase in our interest expense net for one month related to our debut 4.6% unsecured bond offering, and approximately half of that $0.01 increase in preferred stock dividends related to the overlap of our 6.45% Series E preferred stock with our 8.375% Series E preferred stock. Additionally, our results included a loss on early extinguishment of debt of approximately $623,000 or $0.01 per share related to the write-off of unamortized loan fees from the early retirement of our 2012 term loan. Our results also included a D-42 preferred stock redemption charge of approximately $6 million or $0.10 per share upon calling for the redemption of the 8.375% preferred stock. NAV read FFO including these items aggregating $0.11 was approximately $0.97 per diluted share, and FFO per share as adjusted was reported at $1.08. Earnings per diluted share were $0.41 before the loss on early extinguishment of debt and the preferred stock redemption charge. Turning to core operating metrics, the first quarter of 2012 NOI was expected at $101.6 million, consistent with Q4 2011 NOI of $101.8 million. Last quarter, we highlighted the occupancy declines in South San Francisco, Greater Boston, and the Suburban Washington D.C. markets. The San Francisco Bay overall occupancy declined from 96.7% to 93.9%, primarily due to a 54,000 rentable square foot move out at Oyster Point. We expect occupancy to increase in the second quarter from leases scheduled for delivery at 951 Gateway and other properties. Additionally, occupancy is projected to continue increasing in the second half of 2012. Greater Boston occupancy declined from 93.9% to 91.7%, primarily due to move outs at 300 Technology Square and 790 Memorial Drive. We expect occupancy to increase to the 93% to 94% range in the second quarter from executed leases and expected deliveries at 790 Memorial Drive, 99 Erie Street, and 6-8 Preston Court. Lastly, in Suburban Washington D.C., as you recall from our last conference call, we have one large user of approximately 95,000 rentable square feet at Virginia Manor that is planning to move out in May at the end of their lease term. These spaces are both part lab and part traditional office, and we expect the space to require some time to re-lease. Another user of 105,000 rentable square feet at 1413 Research Boulevard, which was evaluated to remain in occupancy, recently confirmed that they will be vacating the space in May 2012. We assumed a 50% chance of renewal previously, so this change was partially included in our guidance. This tenant has been in the building since the ‘90s, and the older brick building is currently planned for future development or redevelopment. Looking forward, NOI is expected to increase in the second and third quarters, and our estimate for NOI for the fourth quarter remains in the range of $111 million to $113 million. Our same property growth in NOI was approximately 1.7% on a cash basis and a decrease of 0.7% on a GAAP basis. The cash performance was primarily driven by contractual rent steps, rent commencement on a development project at 249 East Grand starting on April 1, 2011, and rent commencement on space in the East Tower at the Manhattan project in New York. Same property performance also reflects the impact of anticipated rollovers in Cambridge at 300 Technology Square and 790 Memorial Drive in the first quarter, resulting in a reduction in both rent and recoveries. We expect an increase in occupancy in Cambridge related to deliveries in the second quarter from executed leases. Same property operating expenses increased 1.3%, reflecting an increase in property tax expenses offset by a reduction in steam and snow removal expenses due to a mild winter in the first quarter of 2012. Briefly on our leasing stats, rental rate changes from new or renewal of previously leased spaces increased 3.3% on a GAAP basis and decreased 2.8% on a cash basis. We had one lease for about 18,000 rentable square feet driving the statistics down for re-leasing that space to a new tenant in the Sorrento Valley market. This particular submarket, by the way, is the lowest rental rate submarket in the San Diego lab market region for Alexandria. If you excluded this one lease, rental rates would have been up 1.1% on a cash basis and up 7.6% on a GAAP basis. Our G&A run rate has moved ahead of schedule with the hiring of additional personnel and continued build out of our fully integrated regional operations. Since December 2011, we have added 6% to our number of employees; additionally, Joel’s employment contract was amended in April and now includes total stock return performance and other key changes to retain Joel for performance that will closely align with the interest of the shareholders. G&A expenses are expected to remain consistent for the full year of 2012 at 7% to 8% of total revenues. Moving next to our balance sheet, as clearly highlighted in our press release and supplemental, we had a very strong quarter of balance sheet management milestones. The 4.6% unsecured notes resulted in higher interest expense on a net basis in the first quarter by $0.01 related to being outstanding for about one month in the quarter and is expected to result in additional interest expense in the second quarter by an additional $0.02. The 6.45% Series E perpetual preferred issuance did overlap with the outstanding series E until the redemption on April 13th, resulting in an increase in preferred dividends in the first quarter of around half the amount of $0.01. The second quarter will not realize a benefit from this refinancing due to the overlap of the two securities for a couple of weeks in April. In the third and fourth quarter, this refinancing will reduce preferred stock dividends by approximately $0.01 per share respectively. The new pricing under the amendment is 1.2% plus an annual facility fee of 0.25%. This amendment will reduce interest expense net by approximately $0.01 per quarter. In summary, in the first quarter of 2013, we have successfully tapped a variety of sources of capital, and we expect to close another small but important construction loan for approximately $50 to $55 million. This loan is currently under negotiation for a recently announced development in South San Francisco at 259 East Grand Avenue. We will also actively pursue asset sales to meet or exceed our targeted dispositions for 2012. We are currently 42% through our targeted dispositions for the year. We remain committed to lowering our general well-required capital to balance our incremental construction spending over time. Some of this capital will come from land and operating asset sales, and we may consider implementing a modest ATM program. Our debt EBITDA will also benefit from the significant amount of NOI and EBITDA contribution beginning in the third quarter of 2012 and ramping up into the fourth quarter from the delivery of our substantially leased redevelopment and development projects. Our goal is to improve debt to EBITDA to below 6.5 times over time. Turning to page seven of our press release, I’d like to read through some key assumptions underlying our guidance. Same property NOI performance targets for cash and GAAP have not changed from previous guidance. On a cash basis, we’re expecting an increase of 3% to 5%, and on a GAAP basis, up 0% to 2%. Our expectations on rental rate steps have not changed as well, and we expect renewals and re-leasing of space to be up to 5% on a GAAP basis and slightly negative to slightly positive on a cash basis. Straight-line rents have not changed in our projections, with an expected average of about $6.5 million per quarter for FAS 141 and $800,000 per quarter, which has not changed either. G&A expenses are expected to increase meaningfully to 12% to 14% over 2011. Cap interest has been adjusted downward slightly to a range of $55.5 to $61.5 million, depending on the timing of construction activities, and the decline is reflective of lower interest rates on our line of credit. Similarly, our interest expense net has also declined in our forecast to $73 million to $79 million. Moving to page eight of our press release, we continue to make progress on our targeted NOI growth for the fourth quarter. It’s important to note that this NOI growth is contractual pursuant to executed leases. We updated key assumptions for the fourth quarter and reconfirmed the expected range of NOI at $111 million to $113 million. We slightly updated G&A to $11 million to $12 million and also updated interest expense to $20 million to $23 million, reflecting preferred dividends due to our preferred stock refinancing now down to $6.5 million. We reconfirmed core FFO at $71 million to $73 million, and core FFO per share of $1.15 to $1.17. Our guidance for 2012 was updated to reflect $0.14 of charges, with $0.03 of that related to the write-off of a portion of loan fees related to the modification of our line of credit and $0.10 for the D-42 preferred stock redemption charge. We previously provided guidance for $0.01 related to the write-off of unamortized loan fees from the early retirement of our 2012 term loan. With that, I’ll turn it back to Joel.
Joel Marcus, Chairman, President and CEO
Okay. Operator, if you would open it up for Q&A.
Operator, Operator
And your first question comes from Ross Nussbaum with UBS. Please proceed.
Ross Nussbaum, Analyst, UBS
Hi, good afternoon everyone. A couple of questions from me. First, I understand the language regarding the increase to the budget for G&A expense this year. What I'm trying to understand is why wasn’t any of that known or contemplated when the guidance was given just a few months ago?
Dean Shigenaga, CFO
Well, that’s actually pretty easy, that’s because the effort to—well actually maybe the easiest thing to do is refer you to our proxy. We spent a good deal of time outlining the process that we undertook to look at the ISS issues. That took the study of two independent comp groups plus the board, plus the comp committee, and myself, on the Joel side. And then on the expansion side, we’re always exploring opportunities in the market, and we’re somewhat busier than we thought in a number of markets with our activities. Those are things that just evolve over time, as you know, Ross.
Ross Nussbaum, Analyst, UBS
Okay. Fair enough. In your very extensive supplemental, I think it’s page 20, that’s the same question I asked last quarter—are the yields on the suburban redevelopment still targeted in the mid to high-single digits?
Joel Marcus, Chairman, President and CEO
Yeah, I think they vary by individual projects. Some at the upper range are actually north of 10, and some at the lower range or like in the mid-single digits.
Ross Nussbaum, Analyst, UBS
Is there any reason for the second quarter in a row that those numbers got left out from supplemental?
Joel Marcus, Chairman, President and CEO
I don’t know that they’re left out but they’re not all that material to the other projects that are much bigger.
Ross Nussbaum, Analyst, UBS
$234 million, so leave that one. Same — similar questions on India and China, looks like it was about $7 million spent in the first quarter, $38 million budgeted for the remainder of the year it looks like. Can you give us a sense of exactly what kind of activity is going on there and I notice the square footage also looks like it changed a little bit?
Joel Marcus, Chairman, President and CEO
Well, as you know, we have two projects we’re working on in China: a small one in the south and a larger one. But by and large they’re not super material projects in China, and we’ve continued to enhance the buildings and work on leasing in those markets. We’ll report over time on our successes there, although China we said publicly is a tough market for many reasons. In India, our footprint is larger. We think it’s a significant future market, but as we’ve said both at Investor Day where you attended and certainly on the fourth quarter call, we cut our capital allocations to India this year by about 50%. We’re primarily working with credit tenants who are at the top of our credit tenant roster to fulfill their needs over there, so we’re pleased about that as well.
Dean Shigenaga, CFO
And Ross, it’s Dean here, to close out your last question on that change in the square footage in Asia under construction, had to do with the completion of some preconstruction activity on a land parcel, so it dropped off capitalization and is sitting at idle land today.
Ross Nussbaum, Analyst, UBS
Okay. So just to be clear on the $152 million that’s budgeted to be spent, $114 million has already been spent. Is there actually anything physically there or is that all moving dirt and predevelopment work?
Dean Shigenaga, CFO
No, there are actual operations, buildings, etc.
Ross Nussbaum, Analyst, UBS
And but nothing is leased at this point?
Dean Shigenaga, CFO
Nothing leased at this point, no, considerably leased actually.
Joel Marcus, Chairman, President and CEO
And the stuff that’s under construction has some pre-leasing on it.
Ross Nussbaum, Analyst, UBS
Okay. It might be helpful.
Joel Marcus, Chairman, President and CEO
Our model for India is not to do spec development by and large. Our model in China was to see if we could build there. We know we can do a great job. But as I’ve said many times, our challenge in China is when we bring one of our pharma tenants over there, they end up with 30 bids from local economic development groups and economic zone cities, which creates a real distraction. We’ve figured out how to overcome that, but we’re not sure we want to commit more capital to the Chinese market, certainly in the short-term.
Ross Nussbaum, Analyst, UBS
Thank you.
Joel Marcus, Chairman, President and CEO
Yeah, thank you.
Anthony Paolone, Analyst, JPMorgan
Thanks. Are you seeing any lift in lab rents in the Bay Area given just how much rents have moved for conventional office from all the Tech demands?
Stephen Richardson, COO
Yeah, hi Tony, it’s Steve. In Mission Bay again we’ve got the only lab facility there. We pro forma the project at rents that we’ve completed at 1500 Owens and at 455 Mission Bay. I think we’ll certainly do that or better. In South San Francisco, we are seeing some incremental improvements. I would say it’s modest at this point though; there are still a couple of sublease opportunities that need to be burned off. But I think we’re finally turning the corner over the next— it will be a few quarters; it’s not going to happen in the next couple of weeks. But we will see some uplift in rental rates there towards the end of the year and the beginning of next year.
Joel Marcus, Chairman, President and CEO
Yeah, I think Tony, what really—and Steve and I were talking about this earlier—what really has fundamentally changed the Bay Area at least the mid and inflow, which would be the South San Francisco market, is really the acquisition by Roche of Genentech. The full acquisition has fundamentally changed everything, as Roche being a big pharma operates very differently from Novartis, which is another Swiss company. I think until things settle down with that, at least in the South San Francisco sub-Mission Bay aside, you won’t see dramatic increases there. Palo Alto remains very strong; there is virtually no space available down there, and the mid-peninsula is not a huge lab market other than the cluster in San Francisco; East Bay is the same.
Anthony Paolone, Analyst, JPMorgan
Is there— in Mission Bay with your Illinois Street assets, would you consider leasing those to Tech, and is there demand for Tech other than just lab space at this point there?
Joel Marcus, Chairman, President and CEO
Yeah, well, we’ve commented before and I’ll let Steve expand. We clearly looked at and had a lot of interest from Tech users. It’s not our primary focus, but if someone is willing to pay us a significant amount of money and it makes sense in that opportunistic situation, we would consider it, much like we did for Google’s First Campus. But Steve can give you a sense of how Tech is viewed at.
Stephen Richardson, COO
Yeah, we have had serious discussions with a couple of Tech groups, Tony, and the way we’re warming up the building, we’re able to accommodate that use without over-investing in the building. So I think we’re providing flexibility from that perspective, and to the extent a floor or two out of the six-story building ends up becoming a Tech use and then further downstream becomes a life science use, we’ve seen that happen occasionally in the portfolio. But it’s not our top priority at all.
Anthony Paolone, Analyst, JPMorgan
Okay. And then Steve, did I catch this right in Cambridge? You said it was 1 million to 1.5 million square feet of demand; did I hear that?
Stephen Richardson, COO
Yes, that is accurate.
Joel Marcus, Chairman, President and CEO
And that’s lab Tony; that’s not including tech.
Anthony Paolone, Analyst, JPMorgan
And what’s the availability across the whole market?
Stephen Richardson, COO
I think you’d have a mix of existing facilities and build-to-suit opportunities. There is a 15% vacancy rate, but as far as large blocks of space that provide flexible expansion opportunities, you really don’t have too many of those at all.
Anthony Paolone, Analyst, JPMorgan
Yeah, I guess it seems like a lot of demand. Do these folks have options or is it going to be a requirement that stuff will have to get built?
Joel Marcus, Chairman, President and CEO
Yeah, more likely a build-to-suit is correct for the bigger requirements.
Anthony Paolone, Analyst, JPMorgan
Okay. And then just last question, Joe. You mentioned exploring potentially some other joint venture relationships. Just curious whether that was for perhaps development or existing assets, or just any color there?
Joel Marcus, Chairman, President and CEO
Yeah, I think primarily development; we’ve thought about it for existing assets, but that’s almost like creating a preferred equity structure. I’m not sure that’s what we want. We’ve spent time thinking about that, but I think on the development side, if we’re fortunate in land some significant developments that are out there, we might look at it, much like we did with the Longwood project at a creative structure.
Quentin Velleley, Analyst, Citi
Hi, thank you. Just in terms of the build-to-suit at 259 East Grand, the speculation at Bayer supposedly bringing talks of a takeover of Onyx. If that were to eventuate, what might that mean for that project and other spaces that you have with Onyx?
Joel Marcus, Chairman, President and CEO
I’ll let Steve comment again on the ground, but from a pharmaceutical and biotech perspective, we would expect, given Onyx’s platform and operation, that they would leave that fully intact and operate out of South San Francisco. It wouldn’t change Bayer’s research presence in Mission Bay separate and apart from that. For us, it would be credit enhancement and frankly might be interesting because they could use that to further expand in the South San Francisco area as well, so that could be very beneficial, but Steve can further comment.
Stephen Richardson, COO
Yeah, I think that’s exactly right. We have a long-term lease commitment from Onyx. They worked very hard on the design to build out a fully integrated operation. The trend in the clusters over the past couple of years has been for pharma to keep operations intact and grow the operation. I’d be hopeful that pattern continues here.
Michael Bilerman, Analyst, Citi
Joel, it’s Michael Bilerman speaking. Just quick follow-up; you mentioned having income from India and China, but looking on page 38 of the supplemental, there are no international assets listed here other than Canada. I guess the question is, when you look at page 42 and the $767 million growth spent on the development pipeline, of which $114 million spent in India and China, is there any income coming off of that today? That’s been recognized in NOI?
Joel Marcus, Chairman, President and CEO
Regarding the projects in Asia that are under construction, there is no income associated with them. There is a small amount of completed space in India that’s probably generating about $1 million annually.
Michael Bilerman, Analyst, Citi
Is my impression correct then that everything in CIP, the $767 million you spent, is earning essentially nothing right now?
Joel Marcus, Chairman, President and CEO
That’s true, Michael. The basis in CIP is not earning any revenue; it’s all under construction.
Michael Bilerman, Analyst, Citi
So the income in India you’re referring to is separate from the money spent in CIP?
Joel Marcus, Chairman, President and CEO
Yes, that’s correct Michael. It’s a small piece of real estate that’s operating as rental properties today.
Michael Bilerman, Analyst, Citi
And you’re still earning some income from the existing buildings, correct?
Joel Marcus, Chairman, President and CEO
A little bit, and it shows up in our AFFO reconciliation and it’s about just shy of $500,000 for the quarter.
Michael Bilerman, Analyst, Citi
Okay. Thank you.
Joel Marcus, Chairman, President and CEO
Yeah, thank you.
Michael Bilerman, Analyst, Citi
And I just jumped on late, Joel. I caught you at the end of a sentence where you said something about not understanding other landlords' deals and I didn’t know what that was in reference to.
Joel Marcus, Chairman, President and CEO
I think in some markets you find some landlords with chronic vacancy willing to make deals that don’t make necessarily market sense. This happened at San Diego up on Torrey Pines, where a landlord leased a building that had chronic issues for $1.50, two years ago, where the lowest price ever leased for similar quality properties was at least $1 higher than that. We see some of that around, and until that chronic vacancy is absorbed, it prevents rents from really increasing. We see a little bit of that in South San Francisco, a little bit in Cambridge, and a few markets in Seattle, so that’s out there.
Michael Bilerman, Analyst, Citi
And on 499 Illinois, I understand you’re being conservative in pushing out the initial occupancy by six months. Have your return expectations changed at all or your capital needs for that project?
Dean Shigenaga, CFO
Michael, it’s Dean here; no, the capital investment has not changed and our return expectations have not either.
Michael Bilerman, Analyst, Citi
Okay, thank you.
Joel Marcus, Chairman, President and CEO
Yeah, thanks, Michael.
Conor Fennerty, Analyst, Goldman Sachs
Thanks, good afternoon. Joel, just you mentioned redevelopment conversations you guys are having. How much of that potentially could come in 2012, and how much have you included in your guidance if any?
Joel Marcus, Chairman, President and CEO
In terms of guidance, there are no incremental redevelopments beyond what’s on our schedule that could come into guidance.
Conor Fennerty, Analyst, Goldman Sachs
No, I meant what you referenced—conversations with potential tenants for redevelopment assets.
Joel Marcus, Chairman, President and CEO
I mean, the only one that has some incremental NOI potential for delivery is really the 400 Tech Square project in Cambridge, where we’ve got a few discussions with prospects that could deliver in the fourth quarter. But that’s not a meaningful component of our NOI ramp-up; it probably represents about 300,000 of potential NOI from that project in Q4 of ’12.
Conor Fennerty, Analyst, Goldman Sachs
Okay. And then just looking at the $934 million left of land on the balance sheet. I realize a bulk of that’s the West Tower in Kendall Square. What else is included in there?
Joel Marcus, Chairman, President and CEO
Okay, so the $934 million of book value is really two buckets: $550 million of land undergoing preconstruction activities and $387 million of land held for future development, which is not under capitalization. That detail shows up on the last page of our supplemental. It provides the breakout of land undergoing preconstruction activities, which is part of our CIP category, including our development site in Cambridge, totaling 1.6 million square feet, 250,000 square feet in San Diego, and the second tower in New York City as the third component. Land for future development is spread across multiple markets, a little bit in Boston, a little in Mission Bay, about 1 million square feet in San Francisco, 1 million in Suburban Washington D.C., and 1 million in Seattle—other markets about 1 million and internationally about 6 million square feet of potential development product.
Conor Fennerty, Analyst, Goldman Sachs
Okay. And then just lastly, on the balance sheet, any of the secured debt that comes due in ’13 and ’14 pre-payable?
Dean Shigenaga, CFO
Generally, '13 and '14 debt maturities on the secured side only have the standard prepayment window of roughly 90 days. I do not expect any early retirement of any of the secured debt.
Conor Fennerty, Analyst, Goldman Sachs
Okay.
Joel Marcus, Chairman, President and CEO
Thank you.
George Auerbach, Analyst, ISI Group
Great, thanks guys. Dean, you mentioned in your comments about the ATM program. Can you quantify how large you could see that program being, and I guess, would you be using potential equity to fund the 2012 development or redevelopment spend?
Dean Shigenaga, CFO
Yeah, I think most companies typically see their ATM programs roughly—not that every company does the same—but generally around 10% of their equity market cap, limiting the size of the program. For a company like Alexandria, you probably see no reason for it to be outside the $250 million to $350 million range in size. It’s not intended to replace a traditional follow-on offering, but in smaller needs for equity capital, you can raise in a much more cost-effective manner.
George Auerbach, Analyst, ISI Group
And on the timing of that use, would you see yourself using that over the next 12 months to fund development?
Dean Shigenaga, CFO
Yeah, I’d say over the next 12 months. It’s fair to say that without any significant news on the asset disposition front, we would likely use an ATM to raise some equity capital.
George Auerbach, Analyst, ISI Group
Right. And lastly, in terms of the disposition program, I know you sold the Longwood property and maybe another property on the market were under contract. Can you quantify above the $64 million mainly shown here is additional dispositions planned for this year—what’s on the market, how interested are those assets? And in terms of pace of sales, how do you see the rest of the year playing out?
Dean Shigenaga, CFO
Beyond the few that are under contract, which gets us to 42% of the way, for the $65 million you’re referring to as the remaining amount of the $112 million, I’d say we have some early discussions on a couple of assets that could close over the next 2 to 3 months that might aggregate a little north of $100 million. I’m cautious about banking on that number as those discussions are still early and there are no contracts in place. We continue to evaluate assets for potential disposition. I think our product type is a little different from the traditional assets that go to market, so it sometimes takes a bit more time to execute.
Joel Marcus, Chairman, President and CEO
But I think two points, George: One would be, you’ll definitely see more activity on the sale side both at the asset level, and we would have to be careful what we say here for disclosure purposes for both land and even some buildings, both non-core and suburban. On the ATM, I would say the way to think about that is we will, over time, probably put an ATM in place. We probably will think of it as a very modest program. Our goal is to try to keep guidance where it is for the year while maintaining our credit metrics where they should be. We’re focused on minimizing dilution very closely.
Phillip Martin, Analyst, Morningstar
Thank you, and good afternoon.
Joel Marcus, Chairman, President and CEO
Hi.
Phillip Martin, Analyst, Morningstar
I wanted to follow up with Steve on the second cohort. These tenants are now playing a larger role in your future leasing plans. What kind of differences, challenges, and benefits does the second cohort mean for you in terms of square footage demands, costs, lease terms, etc.?
Joel Marcus, Chairman, President and CEO
Let me take a first crack, and then I’ll ask Steve to comment, Phillip. I think Steve really put his finger on one of the principal future growth engines of this industry. You’ve got pharmas kind of reinventing itself, and we’ve seen a big movement out of unacquainted and isolated facilities into hubs, which has been well documented. We’ve seen a lot of product and service companies, like Illumina, marketing new generation products. The institutional side has also grown to some extent, but in the biotech industry, if you look at it separate from pharma, the second cohort of companies that Steve referred to really constitutes the generation of companies that have been around for 10, 15, 20 years—heavily based in the Cambridge-Boston area and in the San Francisco Bay area, with some in other markets. They are creating many Amgen-like companies, smaller, more nimble, fully integrated companies that have done research and are now moving from R&D to commercialization. They’ll have strike forces of sales operations with more targeted products, and ultimately, they might be picked up one by one by big pharma. These companies will need to maintain fully integrated operations in more likely the Cluster markets, and Onyx is a good example. There are several that have significant requirements coming to market in the Boston-Cambridge area, which gives you a sense of who these companies are. Steve, you can talk further about what you see in the Bay Area.
Stephen Richardson, COO
I was actually meeting with the CEO of one of these companies yesterday, and he was very enthusiastic about having four products in the clinic, $500 million in cash in the bank, and the ability to really build out to the next phase. It’s a combination of the large blocks of space they’ll be requiring and the credit foundation that they have now, and the potential for some very significant meaningful growth in this industry. So that’s what we’re excited about in our core clusters, with availability we have of different build-to-suit opportunities in particular to offer to these types of companies.
Phillip Martin, Analyst, Morningstar
Are the square footage demands pretty similar to what Alexandria’s portfolio has experienced historically? Are they a bit smaller? Can your existing portfolio handle most of this demand, or are we going to see a ramp-up in development and redevelopment potentially over the next 12 to 18 months to meet this demand?
Joel Marcus, Chairman, President and CEO
I think many of the companies—and I can think of a half a dozen right now—Cambridge-based and San Francisco-based, are looking to have small fully integrated campuses running from 250,000 square feet to potentially 1 million square feet. It’s challenging to piecemeal these together, and the new generation of leaders want to be as close to each other as possible, meaning different functions of the company. Many will likely be forced to go into development.
Phillip Martin, Analyst, Morningstar
So is it fair to say that at least in the Cambridge market, we could see development ramping up over the next 12 to 18 months potentially?
Joel Marcus, Chairman, President and CEO
I think there’s no doubt that, as Steve described, the market deals on the market that range from 1 million to 1.5 million square feet, development will be one of the primary vehicles, yes, absolutely.
John Stewart, Analyst, Green Street Advisors
Thank you. How many square feet are the three assets that are under contract for sale?
Joel Marcus, Chairman, President and CEO
Dean?
Dean Shigenaga, CFO
It’s about 100,000 square feet.
John Stewart, Analyst, Green Street Advisors
Now that they are under contract, can you let us know which markets those are in?
Joel Marcus, Chairman, President and CEO
I believe two are up in Seattle and one is in Pennsylvania.
John Stewart, Analyst, Green Street Advisors
Okay.
Joel Marcus, Chairman, President and CEO
More to come, as I describe. There are at least four markets we’re looking at—actively engaged in this process to identify assets for sale; I mentioned Seattle, San Francisco, Maryland, and Massachusetts.
John Stewart, Analyst, Green Street Advisors
Okay.
Joel Marcus, Chairman, President and CEO
Seattle, San Francisco, Maryland, and Massachusetts.
Dean Shigenaga, CFO
To keep up with the supplemental disclosure demands at the street in which we've expanded our accounting group measurably.
John Stewart, Analyst, Green Street Advisors
It’s definitely appreciated.
Dean Shigenaga, CFO
Yeah, no, thank you.
John Stewart, Analyst, Green Street Advisors
A couple of housekeeping ones for Dean if I may. Just regarding the language in the press release, was the preferred redemption charge from original issuance costs, or did you pay above par to retire that?
Dean Shigenaga, CFO
Well, it was the original issuance cost. We redeemed it at par, John.
John Stewart, Analyst, Green Street Advisors
Okay. And can you clear up for us what the current status is? What’s going to happen with the milestone payments at Mission Bay with the Salesforce campus in pause mode?
Dean Shigenaga, CFO
Nothing changes from our view. In the transactions when we sold those parcels, the company recognized the liability for an estimate of potential payments. If those estimates pan out to be true, those payments will be made over the next several years. As far as we understand with Salesforce, nothing at the moment has changed our view on the timing of those potential payments, and quite honestly, it’ll be a few years before we really know what happens.
John Stewart, Analyst, Green Street Advisors
Right, which from memory was on the order of $30 million, right?
Dean Shigenaga, CFO
No, it was closer to $14 million, John.
John Stewart, Analyst, Green Street Advisors
Okay, sorry if I got that wrong. Okay, and then one last one for Joel if I may. A lot has changed in terms of the capital structure and balance sheet in the last 90 days. It’s been a while since I’ve heard an update on the long-term strategy in India. Can you give us an update based on where you are today, which is a much different situation than where you were a year or two ago?
Joel Marcus, Chairman, President and CEO
Yeah, that’s a good question. I think Michael was asking about that as well. My desire and our desire as a company, but I personally have had a vision for Asia as a pretty big market over time. Post-Lehman and the financial crisis, we’ve had to rethink the pace and the scale at which we could build out in India, in particular. We’ve done that, and even more recently when we looked at it—I mean, 2010 was a strong year until the U.S. got downgraded in late July and early August when we were about to go to the bond market. We remember those dates well. We’ve refocused our capital allocation substantially, cutting our spend in India by about 50%. We think India is a big market with a lot of opportunities in the life sciences there—industrial biotech is big as well. Companies like DuPont and others use similar platforms. The goal was to achieve critical mass to take an entity public on the Singapore Exchange that would be publicly traded and self-finance that operation in which Alexandria would have a stake and hopefully a liquidity event and value. That pace, however, has stretched out due to shifts in market dynamics, as you've also observed with other firms. So we’re managing our capital deployment at a more measured pace.
John Stewart, Analyst, Green Street Advisors
Yeah, and that's exactly what I was getting at. The Singapore listing would still be the long-term game plan, but the timeline has changed.
Joel Marcus, Chairman, President and CEO
Absolutely. We thought we could probably do it by 2014; now it’s a couple of years later but that is our goal because we think that’s the most effective and efficient way of scaling our efforts while also establishing a good liquidity path for our investment. We hope to engage in a tour there over the next 12 to 24 months. I think you’ll be impressed by the quality of what we’ve done and our team. However, the pace at which we can do this and our capital allocation strategies need to be much more cautious.
John Stewart, Analyst, Green Street Advisors
Well, I look forward to the property tour.
Joel Marcus, Chairman, President and CEO
Okay, excellent.
John Stewart, Analyst, Green Street Advisors
Thank you.
Operator, Operator
And ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.