Earnings Call Transcript - ARE Q1 2011

Rhonda Chiger, Investor Relations

Good afternoon and welcome. This conference call contains forward-looking statements within the meaning of federal Securities Laws. The company’s 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 annual report on Form 10-K and its other periodic reports filed with the Securities and Exchange Commission. And now, I’d like to turn the call over to Joel Marcus. Please go ahead.

Joel Marcus, Chairman, President and CEO

Thanks Rhonda, and welcome everybody. Thanks for joining us for the first quarter call. We are going to try to be efficient and I will be as brief as possible. I’ll turn it over to Steve Richardson who will highlight some of the important updates on the type of fiscal market and then I will finalize comments from our standpoint before we open it up for Q&A. On the status of the business today, I think we are making good progress in virtually all of our key Life Science adjacency markets despite a sluggish recovery. The quarter was a pretty decent solid quarter again given the macro environment which is still challenged. We clearly have the best-in-class in most well-located lab space, and it gives comfort for each quarter in and out of leasing, re-leasing, etc. When you look at NIH government funding which has been driving a lot of attention lately, certainly the government funding level. 2010 was $31.2 billion and 2011 is $30.9 billion; there is a small federal budget cut, but we feel that the federal government is supportive in keeping the levels above $30 billion which should provide us adequate funds on a go-forward basis over the next year or two. In 2010, our clients garnered 12.7% of the annual NIH budget—up several percentage points from the year before—and the biopharma budgets for 2011 should stay north in the aggregate of $60 billion which is good news. On the leasing front, we had a solid 550,000 plus square feet leased through the first quarter, and I think we are on our run rate for the second quarter to be equally solid. We have 28 leases as you know—with newer renewal space and a modest uptick on a bit of shorter-term leases but don’t take that as any particular trend. Massachusetts strength was offset a bit by some of the challenges in Sorrento Mesa in San Diego and a little bit in our North Carolina market. 16 leases were redevelopment or development space and again Boston and San Francisco are two leading markets and were solid in that regard. Steve will cover this more in depth in a few minutes. Our 2011 lease rolls about 1.6 million square feet coming up should be manageable. We have only San Francisco and Boston, Cambridge with over 100,000 square feet to re-lease, which we see as very achievable. We’re still looking at GAAP rental rates on a yearly basis up somewhere between zero to 5%. On redevelopment space, we’re making good progress on one of our Torrey Pines properties. We’ll be able to report to you over the coming quarters. I think also in the University Town Center at our campus point asset, we’re making very good progress and will be reporting to you there. We have good progress in the Boston, Cambridge area with each of the assets we have for redevelopment. The Rockville redevelopment will be able to report good progress as well. Overall, I think you’ll see the leasing and negotiating numbers continue to rise over the coming quarters. Moving on to acquisitions, and again Steve will detail more about the Mission Bay acquisition. But as we stated at the Pacific Group Conference in Florida in mid-March, we will continue to be opportunistic in our search to find AAA locations and AAA facilities where we can add and create value coupled with our conservative and rigorous underwriting standards. I think if you look at the Mission Bay acquisition, our view is that this was a move to secure AAA location and AAA buildings on their own merit. They're really the best waterside site in Mission Bay immediately adjacent to the UCSF R&D campus and right across the street from the $1 billion three-hospital complex now under construction. We, at one point, had looked at potentially acquiring this, but with so much land through the Catellus acquisitions, we decided not to go forward; however, we’re pleased to have this opportunity. It’s pretty clear we’ve got the best knowledge about that submarket of any commercial real estate entity, and we have clearly the most capable and conservative underwriting. It was a solid buy—although not a steal; in fact, very few deals in AAA real estate today. We do see a unique ability to solidly increase cash flows, and I think appreciation will come over time especially given the ability to tenant one of the buildings. It’s clear in Mission Bay we have real pricing power and it is, as Steve will tell you, almost a fully occupied submarket.

Stephen Richardson, EVP, Regional Market Director, San Francisco

Hi, this is Steve Richardson, Executive Vice President Regional Market Director for the San Francisco region. The recent recoveries really continued and intensified with significant absorption of space from technology companies such as Motorola, Dell Computer, Zynga, Hewlett-Packard, Google, Facebook, and Salesforce.com, and imminent demand from another cohort of technology companies. The Life Science sector has remained steady and healthy with incremental demand, keeping vacancy rates in the West Bay, which stretches from San Francisco to Palo Alto, in the 9% to 10% range. The Life Science vacancy rate would actually have been driven lower, but for the reason of 11th hour termination and negotiations for a large block of sublease space in the South San Francisco market. The healthiest of the Life Science submarkets continues to be Mission Bay, featuring a current vacancy rate of just 1% or so. Alexandria’s vision of Mission Bay as a world-class cluster attracting strong credit tenants with international significance continues with enthusiasm. We are pleased to formally announce the purchase of 409 and 499 Illinois Street, the world-class newly developed 453,000 square foot laboratory facility constructed on a spectacular 3.8-acre waterfront site in Mission Bay for approximately $293 million. The two-building project is designed in a six-story configuration situated over a secured two-level parking structure. The 409 Illinois facility containing 241,000 square feet is 97% leased on a long-term basis to one of the Bay area’s most promising life science companies, FibroGen, which is focused on several large product opportunities. It is a well-capitalized company with a diversified product pipeline and blue-chip pharmaceutical partnership. The 499 Illinois facility contains 211,000 square feet. It is currently vacant and requires further development to bring it to market and stabilization. We expect to engage a broad range of life science, medical office, clinical practice, and research and technology companies currently in the market and based upon our view of market conditions and certain assumptions, we expect to achieve a GAAP stabilized yield for the overall project in the range of 7.2% to 7.6% and initial cash yields in the range of 6.5% to 7%. These yields are based upon the current rental rates we have achieved in Mission Bay and do not account for potentially higher lease rates that may arise from a cluster of factors. One site is clearly a unique waterfront offering in a market that is now at a 1% vacancy rate for life science products where Alexandria has real pricing power. It is adjacent to both UCSF’s research and hospital multibillion-dollar campuses, and we expect these demand drivers to enhance our rental rates and yields for the facility in the near and long term but we’ve taken a conservative view on our underwriting and future leasing. The price per square foot is also competitive with recent transactions featuring existing and old lab facilities and, exactly, land in the South San Francisco market. Also, it’s important to know that this facility includes 590 parking spaces and provides an apples-to-apples comparison with Alexandria’s Mission Bay facilities; in the South San Francisco lab market approximately $65 should be deducted from the price per square foot metric driving a price per square foot of $581 for the facility. This infrastructure provides a return on investment with real urban CBD parking rates unlike South San Francisco’s market, which does not provide for paid parking for expensive parking structures. This is clearly the right asset at the right time for long-term appreciation and high-quality increases in cash flows. We have solidified our dominant market position in Mission Bay. The Salesforce.com land sale was an important event since it enhanced Mission Bay’s international reputation as a diversified world-class intellectual and innovation center featuring both life science and technology enterprises, as well as advancing Alexandria’s pursuit of an investment-grade rating by monetizing a significant non-income producing asset. The Illinois acquisition serves a similar dual purpose, in that it boosts the company’s near-monopoly Mission Bay footprint to more than 975,000 square feet of existing space, plus the ability to provide another 290,000 square feet or so for build-to-suit users, while at the same time bringing beneficial cash flow to the company and enhancing the metrics for investment-grade ratings. We continue to make steady progress on the East Jamie Court facility in South San Francisco, with two of the six floors fully leased. We are taking a measured approach to the South San Francisco submarket with a key focus on tenant retention such as our recent renewal of Theravance at our 901 and 951 Gateway project for a 10-year lease; securing high-quality growth companies such as Onyx in our 249 East Grant Campus and incremental progress on East Jamie Court with a number of promising companies including Stem CentRx, but we’ve chosen not to invest significant capital in additional ground development projects without significant pre-leasing. On a final note, we’re also advancing our 2011 roll-over efforts and are either in negotiations or serious discussions with approximately 70% of our remaining 120,000 square foot roll-over for this year. A majority of these tenants in these suites anticipate extending their lease in one of the spaces as in the process of staying back over the new tenant. With that I’ll go ahead and hand it over to Dean.

Dean Shigenaga, CFO, SVP and Treasurer

Thanks Steve. Welcome everybody. As we reported our earnings for the quarter, FFO per share diluted was $1.15 excluding the $2.5 million loss on early extinguishment of debt, and earnings per share was reported at $0.44. Moving to the balance sheet real quickly, and as a quick reminder, an overview of our recent amendment to our facility, we extended the maturity ultimately until January of 2015. The line of credit increased by $350 million to $1.5 billion, bringing the total facility to $2.25 billion. Pricing on the line of credit was 2.4 or one month LIBOR and the $750 million term loan maturity remains unchanged at October of 2012, with pricing on that $750 million term loan remaining at 1% over one month LIBOR. In addition, in the quarter we closed a new $250 million unsecured term loan with pricing at 2% over one month LIBOR. The covenants are identical to our unsecured line of credit and the initial maturity is 2014 with an option to extend the maturity to 2015. As you probably are aware, the bank lending environment continues to strengthen for solid sponsors like Alexandria. Lender interest remains very strong and pricing continues to improve. Our guidance, which I’ll get to in a moment, assumes a small portion of our $750 million term loan is refinanced this year, with the remainder being refinanced no later than 2012. During the quarter, we’ve retired $96 million of our $37 convertible notes, which leads us to about $206 million outstanding as of March 31. Briefly let me summarize our balance sheet capital structure and liquidity objectives over the next several years. Our objective includes reducing leverage as a percentage of total gross assets and improving the ratio of debt to EBITDA. Maintaining diverse sources of capital, reducing outstanding convertible debt, managing the amount of debt maturing in any single year, refinancing outstanding variable rate debt to fixed-rate debt, maintaining adequate liquidity from net cash providing by operating activities, cash and cash equivalents, and availability under our line of credit. Maintaining available borrowing capacity under our unsecured line of credit in excess of 50% of our total commitments of $1.5 billion except temporarily as necessary to finance acquisitions. Fund dividends from operating cash flows, and most importantly, retain net positive cash flows after payments of dividends for reinvestment into acquisition and/or redevelopment and development projects. Moving briefly to credit metrics, our net debt to EBITDA is seven times as of March 31, and it continues to have an outlook of improvement through the year. Our financial covenants under our credit facility are as follows: leverage was 37%; the covenant is 60%. The unsecured leverage is 40%, the covenant again is 60%. The fixed charge coverage ratio was 2.2 times on a trailing 12; the covenant is 1.5 times. Our current quarter annualized fixed charge coverage ratio is 2.5 times, showing a significant improvement. Our unsecured debt yield was 13.5% and the covenant is 11%. Briefly let me turn to sources of cash for the remainder of 2011. As I mentioned in our prior call, our net cash flows are anticipated to be approaching about $100 million for the year, which leaves us about $75 million for the remainder of 2011. We have cash on hand of approximately $110 million, anticipating asset sales and land sales in the $75 million to $150 million range. We also anticipate an unsecured bank loan in the $400 million and other capital of about $300 million consisting of unsecured debt, secured debt, perpetual preferred, or common stock. That brings our total sources to about $1 billion, and keep in mind we have approximately $841 million available under our line of credit as of March 31. Turning to uses of capital for the remainder of the year, acquisitions in total are projected to be about $395 million. This includes $293 million for the transaction we completed in Mission Bay, leaving us about $100 million of incremental acquisitions forecasted. Our construction spending breaks down to a total of $277 million, as follows: redevelopment, which is stated to be about $116 million; development about $77 million; projects in India and China about $43 million; pre-construction activities about $22 million; and CapEx and other TI projects of about $19 million. Common dividends for the remainder of the year, assuming no changes in the existing share count, are projected at about $75 million for the next three quarters; repayment of debt in the range of about $98 million; and repayment of the $750 million term loan, as I mentioned earlier, in the $100 million range; retirement of the remainder of our 3.7 notes at about $206 million bringing total usage just slightly above $1.1 billion. Lastly, let me comment on guidance for 2011, as we reported FFO per share diluted in the range of $4.52 to $4.57 and EPS of $2.03 to $2.08. Our guidance is based on various underlying assumptions and reflects our outlook for 2011. Some of these assumptions include the following: $0.05 loss on early extinguishment of debt, this includes $0.03 since our guidance in early February; the increase in acquisition expenses partly in Q2 from the transaction in Mission Bay and the remainder being spread over the second half of the year; increase in interest expense related to the acceleration of refinancing originally anticipated in later quarters including refinancing of a small portion of our $750 million term loan in 2011 versus 2012; then, of course, the acceleration of other financing from 2012 into 2011. Cash same property NOI growth in the range of 2% to 4%, GAAP rental rate steps on lease renewals and re-leasing of space in the up to 5% range with some variances quarter-to-quarter. Straight-line rents are expected to be in the low $30 million range with amounts back-end weighted in the year. FAS 141, revenue will drop below $1 million coming the third quarter. G&A expenses are expected to be up modestly over 2010. Lastly, our guidance also includes the items that were previously highlighted in sources and the uses of capital. With that let me turn it over to Joel.

Joel Marcus, Chairman, President and CEO

Thanks everybody. Operator, if you could open it up for Q&A please.

Anthony Paolone, Analyst, JP Morgan

Thank you and good afternoon. My first question is on the Illinois acquisitions. How much more do you have to spend between just finishing up the second empty building and just any CapEx or tenant improvements that you need to do to get it built up?

Stephen Richardson, EVP, Regional Market Director, San Francisco

Hi Tony, it’s Steve Richardson. We expect between the infrastructure and the improvements there for that building alone somewhere in the realm of I would say $100, $125 plus a square foot.

Anthony Paolone, Analyst, JP Morgan

Okay. And then how do you look at hurdle rates on starting new acquisitions or starting new developments, and redevelopments, and also looking at acquisitions? It seems like you’re willing to take down your returns a little bit to do this and understand the strategic nature of it, but just how do you think about that across other parts of the portfolio now since your portfolio has increasingly strong locations?

Joel Marcus, Chairman, President and CEO

I think it’s pretty rare to have acquisition opportunities in what I would consider to be the three critical markets or submarkets: Mission Bay, Cambridge, and New York City; obviously, in other markets, you’ve seen some of the activity in San Diego, etc. So I think in Mission Bay this was the only non-Alexandria held commercial real estate. We have coveted that site for a long period of time. I think only by moving out of some of the landholdings—which were dragging in a sense, both from a balance sheet and a cash flow standpoint—once we were able to successfully exit, I think our view of an opportunity to buy AAA location, AAA buildings at not a bargain basement price, but at a pretty full price gave us an opportunity where we see pretty good pricing power. We underwrote it in a pretty conservative fashion; it was something we wanted to do with the immediate cash flow. There is a great opportunity to increase further beyond our pro forma based on future rental rate increases, and so I think the choice between doing that versus kicking off another building where we did not have a current build-to-suit candidate that was ready to go made good firm. In Cambridge again, very few properties are trading, while there is no opportunistic acquisition opportunity that we can see in the immediate timeframe. So, securing a build-to-suit there would be something we would consider, and again all—it isn’t simply as I said purely IRR or yield driven.

Peter Moglia, Vice President, Real Estate and Finance

Yeah, Tony, it’s Peter Moglia. Joel hit the nail on the head there. I mean, we looked at what the stabilized yield would be and believe it’s going to be at least 100 basis points over what the going-in cap rate would be as we had bought it stabilized. So, we felt really comfortable with the pricing given that spread. And then obviously we always look at the unlevered IRR and ensure that it’s going to cover our projected long-term cost of capital, and in this case it surely did. To address your hurdle rate question, that would be my answer.

Anthony Paolone, Analyst, JP Morgan

All right. Then just the one follow-up to that is, I mean, it sounds like then a quality asset like that on just a stabilized basis would probably have yield somewhere in the fives perhaps?

Peter Moglia, Vice President, Real Estate and Finance

I would say that it’s possible, stabilize today that that could trade below six, but I would look at it as a six, six even.

Anthony Paolone, Analyst, JP Morgan

Did that kind of pricing—I mean what does it do to your thinking in terms of joint ventures? You’ve gone down that path a little bit in the past and, I guess, maybe update us on that.

Peter Moglia, Vice President, Real Estate and Finance

Well, we saw one asset last June that I think I alluded to in meetings or in conference calls where there was a B location, triple-A credit in suburban Boston that went for a 64 cap rate to an institutional buyer. In Mission Bay, it isn’t a lot better than that waterfront view next to the campuses we described. It would be hard to imagine that it wouldn’t attract pretty aggressive cap rate buyers. On a joint venture basis, I think we have to kind of see how—our view is that probably the most probable joint venture opportunity for us is really on the Binney Street, the Alexandria Center for Life Science Kendall Square, because the magnitude of the build-out there is large. We do have one deal that we signed a letter of intent for and we are looking to finalize a lease over the coming 30 days or so, and we’ll share more with you next time. But I think that’s probably an opportunity that we would think a joint venture wouldn’t work for us.

Anthony Paolone, Analyst, JP Morgan

Okay. Thank you.

Peter Moglia, Vice President, Real Estate and Finance

Yep. Thanks, Tony.

Michael Bilerman, Analyst, Citi

Yeah, good afternoon.

Peter Moglia, Vice President, Real Estate and Finance

Hey, Mike.

Michael Bilerman, Analyst, Citi

Hi. Just staying on the Illinois acquisition, when you bought Biogen Idec at the Investor Day, your first two bullet points were best asset in the four major submarkets than a high discount to replacement costs, and really value-add going and then using the skill-set. I recognize your view of triple-A asset, triple-A location, but it would appear as though just based on the costs that you’ve put into your other Mission Bay buildings and what you just sold the land for Salesforce.com, that this could be pretty much I would say more circular around replacement costs: maybe it would take above, maybe it would take below, but probably not far off; so I’m just wondering how you can compare and contrast that?

Stephen Richardson, EVP, Regional Market Director, San Francisco

Yeah, Michael. Hi, it’s Steve. I think there are a couple of components to this. One is, again when you look at the price per square foot, and it is important to look at the parking structure as an integrated part of the building. When you break that out as a revenue-generating entity itself, you do end up with a replacement costs figure that I think you’re probably right is somewhere in that range of plus or minus what we’ve been in, and that includes tenant invested capital as well. As far as the value-adding potential here, I mean we have a 1% vacancy rate in Mission Bay. The building will appeal not only to our core target of life science drug discovery lab companies but also to important clinical people that we’ve actually toured through the facility as recently as last week, medical office building users, technology users, so you have a diversity of demand there that we think will allow us to add value and bring in a great new cohort of tenants. We were conservative in the underwriting; the lease rates we’ve targeted are ones that we have achieved with a number of tenants looking back over a number of years. So I’m hopeful, we did not underwrite in a way that we do in fact have rental rates and yields better enhanced above and beyond what we’ve already accomplished.

Peter Moglia, Vice President, Real Estate and Finance

And hey Michael, it’s Peter Moglia. I think you’re referring to the comments I made at Investor Day. I’d say in this case we are going to be using our skill set and our connections. We do have leasing to accomplish our goals and we are going to be making a spread over what we would buy a stabilized asset for. So I think in that way the profile does fit. But I’d also like to mention that this is a bit different than the biogeneric deal because this is a very scarce asset. If you look at a map of Mission Bay today and plot it where Salesforce is going in the hospital and all the other uses, there is very little land left and nothing in this particular area for a number of years. So you have to really consider that when you’re looking at the overall pricing and the overall strategy of this. It’s going to be very little available on Mission Bay for a number of years, except for what we have and what we can build.

Michael Bilerman, Analyst, Citi

How much of parking income is coming off the asset today?

Peter Moglia, Vice President, Real Estate and Finance

There are a total of 590 spaces; I think roughly half of those are leased. I don’t have that figure off the top of my head, but we can get back to you with that.

Michael Bilerman, Analyst, Citi

You’re allocating based on your $65 about $30 million to parking?

Peter Moglia, Vice President, Real Estate and Finance

Yes. Yeah, I mean we have built parking structures in Mission Bay to support our existing facilities. So we have a good sense of both the parking space rental revenue and the parking space cost.

Michael Bilerman, Analyst, Citi

And is this a revenue source that you’re looking to increase, or do you think in place to justify the 7% return?

Peter Moglia, Vice President, Real Estate and Finance

It’s looking at it in the latter percent that it justifies that return. Being adjacent to a hospital over time, we have an opportunity with daily parking to help enhance that. All I think is a reasonable expectation. Again, we didn’t factor that into our underwriting.

Stephen Richardson, EVP, Regional Market Director, San Francisco

Yeah, I’ll keep in mind Michael too; I think as Peter said we’ve underwritten this on yesterday’s rental rates, leases already signed—not looking at anything in the future. So, I think we feel good about the conservatism we built into the numbers.

Michael Bilerman, Analyst, Citi

And just thinking about it from the seller's perspective, I sure understand that it is not a stupid real estate guy and I’m pretty sure. Clearly, if there is more value to be had by leasing up the space and then selling off any constraints to anybody, you’d think that that would be a strategy they would pursue. So I’m just trying to reconcile, comment a little bit?

Peter Moglia, Vice President, Real Estate and Finance

Yeah, well I think a couple of things. Steve can give you a little more color; they were trying to monetize assets in this particular fund for their reasons. There were a number of bidders at the table; I think at least one or two of them probably would have beaten up on pricing. But I think the certainty of our diligence knowledge and market knowledge there convinced them that we were the best buyer here. I think you have to remember that this is a market they don’t really deal with, or they have very few life science assets. So it’s not really in their sweet spot, but Steve you could comment on that.

Stephen Richardson, EVP, Regional Market Director, San Francisco

Yeah, no I think that’s right. They are a very well-respected organization. I think they have a keen sense of timing. We’ve stated that this was not a bargain basement price. It was a reasonably full price for where the property is and its stage of development in leasing. I think they’ve just chose to act upon that timing for both macro market reasons and also their fund. I think they are out there raising another fund right now, and it probably helps them to have a sale completed in a prior front end point to that to investors.

Michael Bilerman, Analyst, Citi

Okay, thank you for the comment.

Joel Marcus, Chairman, President and CEO

Thanks everybody. Operator, if you could open it up for Q&A please.

Ross Nussbaum, Analyst, UBS

Hi everyone. Good afternoon.

Joel Marcus, Chairman, President and CEO

Hi Ross.

Ross Nussbaum, Analyst, UBS

A couple of questions; maybe we will move past the Mission Bay. If I am reading your supplemental correctly it looks like you spent or planned on spending $43 million in China and India this year, which is not an insignificant amount of money. Can you talk about where you are now on those expansion plans?

Joel Marcus, Chairman, President and CEO

Sure, those dollars actually go across a number of projects, and so individually there is no one project consuming all that capital. If you look at India and China, we’ve got a million square feet, so it’s a modest investment in that particular market at the moment, and as we advance our efforts in that particular region, we’ll continue to provide more color.

Stephen Richardson, EVP, Regional Market Director, San Francisco

Yeah, in India we at the moment don’t want to certainly get into great detail, but we are doing a build-to-suit that has been increased in size by one of our top tenants coming from the U.S. among others. That’s one of the keen focal points of this, and we will probably over the coming quarters. At the moment, they do not want us to say anything about this particular expansion, but we’ll hopefully be able to share that with you in coming quarters.

Ross Nussbaum, Analyst, UBS

Okay. On the leasing in the first quarter on the—I guess the 28 leases, the second, three lease term, shorter than I would have expected. Can you add some color perhaps on why these lease terms were no longer there?

Joel Marcus, Chairman, President and CEO

Yes, as I said, don’t read even growth in rental rate mark-to-markets don’t necessarily as the inset look at a single quarter as necessarily a trend for the future. I think they are very individualistic, and I would say I would take nothing in particular away from or through this anything to them in particular. Yes, one quarter statistics kind of skewed, and I would always look back on the prior rolling quarters; when you get to the first quarter, it’s really tough. But it’s the only period presented. However, if you look back you can see the recent trends back in 2010; the average lease term on renewed and re-leased space was 8.1 years, while the average lease term on redevelopment for vacant space was closer to 10 years. So that was the recent trend—not in just one quarter; these three-year terms will easily average out as we get through the quarters.

Ross Nussbaum, Analyst, UBS

Okay. That’s helpful. Last question, Joe, at your Investor Day, I guess last December, I thought you were pretty emphatic that one of your key priorities for this year was moving forward towards an investment-grade rating.

Stephen Richardson, EVP, Regional Market Director, San Francisco

Yes.

Ross Nussbaum, Analyst, UBS

And walking a fine line between advancing that goal and not doing any more speculative development. So I guess how do you put the Mission Bay acquisition in that context where you’re not taking the development risk but you are taking the leasing risk? How do you think about that relative to the timing of getting a rating? Where are you in that process?

Joel Marcus, Chairman, President and CEO

I think that’s a great question, and it does present a fine line of balancing a number of competing issues. I think we felt good that we were able—I mean had we not had two-year severe downturn, I think our view of selling that kind of land at Mission Bay may have been different. The world would be different, I think. But it’s like Vegas; you play the hand you’re dealt, and so we played the hand we’re dealt and exited quite a number of the parcels, had a pretty good gain, certainly a pretty good price per FAR foot, and moved from a non-income producing asset. The deal we just bought again, we don’t choose the timing of when buyers come to or sellers come to market; they come to market for a variety of reasons as Steve said (raising another fund or whatever). It’s fair to say that from a ratings perspective, and that was not the main motivation for the purchase, it’s great real estate, it’s immediately cash flowing; it’s a pretty decent return with some good upside. Even though we have got some leasing risk, we have got a 1% vacant market with about four different sectors that would be looking at that building with a lot of interest. So we feel pretty comfortable in taking that risk. We said both at the Investor Day and otherwise, we’re not interested in and would not do speculative developments. Any other mission-based types that would be developed on the west side would be only on a substantially leased, pre-leased, or build-to-suit basis. New York, we’re going to tap that market starting in June, and in Cambridge we do have our first building; assuming we execute the lease, it would be a build-to-suit. Again, we want to try to balance all these things and carefully balance the volume at which we’re doing things. We do things, I think, in a step-wise fashion prudently and as carefully as we can about everything. It’s all obviously a whole set of balancing efforts.

Ross Nussbaum, Analyst, UBS

And where are you exactly with the agency that you’re pointing?

Joel Marcus, Chairman, President and CEO

We’re not formally before them, but we believe that, as Dean has mentioned a number of times, we would hope to be formally in that process in the latter half of 2011.

Sheila McGrath, Analyst, KBW

Yes, good afternoon. Joel, you mentioned that Manhattan triple net rents are approaching $80. I was wondering if you could run through—as you sometimes do—the lab rental rates for your major markets across the country.

Joel Marcus, Chairman, President and CEO

Let me just talk about maybe the three major markets; San Francisco—Pete can give you a little bit of what the current rental rates are in the two markets we’re dealing with.

Peter Moglia, Vice President, Real Estate and Finance

Good Sheila. Mission Bay has remained steady in the low to mid-40s and from the South San Francisco to the Stanford market we’ve seen some recovery from a pretty distressed point to probably in the mid-30s, and see that tightening up incrementally.

Stephen Richardson, EVP, Regional Market Director, San Francisco

I think in New York, as we said, we feel our lease rates are approaching, as we indicated, $80. We know that there is an incubator up at Columbia that’s got rates pretty similar to that. There is no other product in New York City. We see the office market coming back pretty nicely and noticed that there are a number of developers even looking at developing office space. So that all bodes well for I think future increases, and in Cambridge, I think Peter can comment, but I think we’re answered in the mid-50s to high-50s triple net.

Peter Moglia, Vice President, Real Estate and Finance

That’s right, but we actually started what may have been a $70 comp today on a recently signed lease in the news. I would tell you the San Diego has really been pushing rents; $250 was really the asking rent for most of the Class A space for the past 12 months, but we have really evolved to do the $3 range over the last couple of months. We think we are going to continue to push that. North Carolina is still fairly dormant; the rental rates have really settled in the low 20s range. Maryland is probably in the mid-20s to low 30s for newer product. Am I missing anything else? That’s about it.

Sheila McGrath, Analyst, KBW

Okay. And then second part of the question was with rents now approaching $80 in New York, how does that pencil out for your return on the second building versus the first?

Peter Moglia, Vice President, Real Estate and Finance

Yeah, I think it really is—pencils up pretty nicely because if you look at the second building, we would see somewhere—again, you never know what the infrastructure improvement will be for a given tenant—whether it will be more of a shell deal or more of a split of the build-out or whatever, but I think it’s fair to say that we would probably have overall cost in the somewhere in the $650 range because we don’t have to put in the amenities we put into the East Tower, and I think we would have more intense lab than we have in the East Tower. We would be in an even slightly better position with respect to returns than the East Tower, assuming rents that we’ve signed, not future rents. So we feel reasonably comfortable with that scenario.

Sheila McGrath, Analyst, KBW

Okay. And last question, just wondered if you could give us an idea of the level of activity or interest at either New York or Cambridge versus six months ago. Are you having more dialogues and conversations that would lead you to believe that you might have an earlier start on either a build-to-suit in Cambridge or the second building in New York?

Peter Moglia, Vice President, Real Estate and Finance

Yeah, well I think as we were saying just a couple of minutes ago, we have signed a letter of intent for approximately 300,000 feet in Cambridge. We’ll see if we can turn that into a signed lease; we have, I think, a high level of confidence. But until it’s done, it’s not done. I think that kind of moves us significant step ahead on the Cambridge development side; there is still—together with the Bay area, one of the two top markets in the country. I think New York is not far behind. So I think there is good activity in Cambridge from a number of factors, both the life science and tax factor. We’re talking about a life science user here for the building and in New York we’ve not really engaged in many discussions, but we know where we left off kind of the end of last year and we kind of have a lift. There were two significant institutional users that would require something in a range of north of 200,000 square feet. We’re going to revisit those specifically come the June kind of kick-off, and assuming those haven’t changed and they couldn’t have gone anywhere else in the city because of the reason; I think we would expect there would be good activity.

Sheila McGrath, Analyst, KBW

Okay. Thank you.

John Stewart, Analyst, Green Street Advisors

Thank you. Joel, can you give us a sense on 499 Illinois? Is this sort of a Biogen Idec situation where you’ve got a tenant in your back pocket?

Stephen Richardson, EVP, Regional Market Director, San Francisco

John, hi, it’s Steve Richardson. My colleagues in San Diego did a spectacular job there. There is always that hope, but this may take a little while. We do have discussions there—early discussions; there is tenant demand in the market, but we’ll have to stay tuned in the next couple of quarters. We are not trading paper with anybody right now, I can tell you that.

John Stewart, Analyst, Green Street Advisors

So, what are you underwriting in terms of the lease-up period?

Stephen Richardson, EVP, Regional Market Director, San Francisco

We’ve got a two-year lease-up period.

Joel Marcus, Chairman, President and CEO

That’s fairly consistent with our underwriting on the campus down in San Diego that we purchased from Biogen; it was a lengthy lease-up period.

Peter Moglia, Vice President, Real Estate and Finance

Yeah, this is Peter. We did assume a full 13 months before we actually have revenue coming in from the second building.

John Stewart, Analyst, Green Street Advisors

Okay. For one of three tenants?

Peter Moglia, Vice President, Real Estate and Finance

Yeah.

John Stewart, Analyst, Green Street Advisors

And what is the in-place rent per square foot at 409 Illinois?

Peter Moglia, Vice President, Real Estate and Finance

It was roughly high 40s.

John Stewart, Analyst, Green Street Advisors

Okay. And Joel, you made a comment that was intriguing about several different sectors that would be in line to take this—or are you—what is your intent to keep 499 as lab, or are you looking at alternative uses?

Joel Marcus, Chairman, President and CEO

Well, that’s what we hope to have may be something up our sleeve. Our main goal is to bring a lab tenant in, and we’ve actually looked at it as a single building user or multi-tenant users. We are looking at it both ways. I think it’s pretty clear as Steve had a showing last Friday, I believe; there is some institutional pent-up demand that may kind of overpower anything else. If we can push prices in a certain direction, it might be a combination very much like we did at 1500 on a combination of traditional lab office and even the clinical component. If that gets mandated, there could be a nice opportunity to drive rents in a way that we wouldn’t have imagined on either traditional office, medical office, or traditional lab, so that’s kind of our secret hope here.

John Stewart, Analyst, Green Street Advisors

Okay, and then my last question is when you take this acquisition and think about the build-to-suit and Cambridge, how are you going to pay for all this particularly when you are considering going to the agencies later on this year?

Peter Moglia, Vice President, Real Estate and Finance

Yeah, I mean I think it’s fair to say that other than in the depth of the downturn when we, like many companies, raised funds in a number of ways. We certainly did a number of offerings, and we did one convert—probably would never did that again—but that was not match funded; they were really funded on the basis of keeping the balance sheet in good shape, keeping a lot of liquidity, and not knowing whether the banking system was going to be there or not. Historically, other than those pretty tough two years, we’ve always considered to really match fund those at a point when we felt we wanted that kind of pay down the line. We’ve got a lot of capacity on the line, but obviously, our goal over time would be to match fund. Our goal has been, before the crash and certainly after, to minimize any dilution on that, and so that we would continue that same kind of philosophy.

John Stewart, Analyst, Green Street Advisors

But I would think that to get an investment-grade rating you need to bring leverage down a bit?

Peter Moglia, Vice President, Real Estate and Finance

Well, I think our numbers are in pretty good shape. I think we’d like to see our debt-to-EBITDA numbers as Dean said; they continue to trail down into the sixes in a very positive fashion. Part of that will come from bringing on additional EBITDA, but yeah, I mean our goal is clearly to continue to eliminate secured debt, and obviously refinance the $750 million term loan and half the bond market. Those are all kind of a combination of play.

John Stewart, Analyst, Green Street Advisors

Okay. Thank you.

Peter Moglia, Vice President, Real Estate and Finance

Okay, many thanks.

Joel Marcus, Chairman, President and CEO

Thanks everybody. We appreciate—we’re trying to be time efficient here and we look forward to talking to you on the second quarter call. Many thanks again.

Operator, Operator

And that does conclude our conference for today. We thank you for your participation.