Earnings Call Transcript - ARE Q1 2010

Rhonda Chiger, Investor Relations

Welcome everyone to the Alexandria Real Estate Equities Incorporated first quarter 2010 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Rhonda Chiger. Please go ahead, ma'am.

Joel Marcus, President, Chairman and CEO

Thank you, Rhonda, and welcome everybody to the first quarter 2010 Alexandria Real Estate call. With me today are Dean Shigenaga, Peter Moglia, Peter Nelson, and Krupal Raval. Let's start off as I always do, with some macro comments. We are very pleased to report another quarter, our 51st of solid, stable, and consistent financial and operating performance and, as at the end of last year, the fittest performance of all REITS, of all equity REITS on a total return basis in IPL. Although, as most of you know, the capital markets have shown remarkable resiliency since the first quarter of 2009, actually a mere 12 months ago, it's hard to imagine when the markets were still on free fall, the underlying health of the real estate markets is finally stabilizing but still challenging in some locations. Our job over the last year has been to focus, really focus strongly on management's focus on prudent risk management and maintaining solid stable performance, an emphasis on strong business practices, and a laser focus on our clients and their business, maintaining our innovative and sound business strategy which we pioneered, continuing the innovation of our unique product offerings to the broadened life science industry and continuing to focus on revenue and profit growth. This quarter witnessed the PPACA reform in healthcare signed into law by President Obama on March 23, entitled the Patient Protection and Affordable Care Act, kind of a simplistic notion for something that’s incredibly complicated. I think it's important to remember, as I have said many times, our biopharmaceutical products are really the only part of the healthcare expenditure pie that can truly, ultimately contain in lower cost and that should serve us well in the years ahead. If you look at the biopharmaceutical industry, global drug sales are expected to hit $1 trillion over the next five years. Our burgeoning markets in the developing world will help make up losses to generic competition elsewhere. A good news that growth is continuing to be robust notwithstanding the passing through the peak years of loss of exclusivity on many of the blockbuster drugs. Reflection on how much the global pharma market has moved away from the dependence on global blockbusters and obviously the five or six major developed markets. We see a 5% to 8% compounded annual growth rate over the next five years, increasing the overall market size to $300 billion in these markets and the real focus is more productivity and innovation as business models change and these entities get off their main campuses and move to the touchpoints of innovation. The pharma industry under the law that I just indicated will have about a $105 billion estimated cost of contribution to that regulatory scheme, including $38 billion in Medicaid discounts over 10 years, about $28 billion in industry's fees over 10 years, about $32 billion over 10 years in the so-called doughnut hole coverage, and about $7 billion on follow-on biologics. I think it's fair to say that this healthcare reform gave the biotech industry much of what it wanted. The big win was the 12 years of data exclusivity protection, which became law as part of the provision to establish a regulatory pathway for follow-on biologics products and many of the newer products, whether they be proteins, monoclonals or so forth are really the products of the future. Also, we are very pleased that strong government funding continues with a 3.1% increase as of October of this year in the already strong $31 billion NIH budget, and of the top 10 recipients, kind of an amazing statistic, of the NIH funding in 2009, nine were ARE tenants which garnered almost $2.5 billion. Also, when you combine big pharma and biotech R&D, it hit an all-time high as of the end of 2009 at $65.3 billion of R&D funding. So we move forward into 2010 with solid and positive metrics and inertia. Moving to the operations and financial results of the quarter, we are pleased to report $9 FFO per diluted share with solid and stable metrics throughout our operations plus a very strong leasing quarter. Just going to mention the balance sheet briefly; Dean will detail the updated multi-year capital plan in a few minutes. The continuation of our debt payoff and pay down strategy, we only have one secured debt maturity coming up this year on October 1st of about $13.5 million. Our balance sheet is in very good shape, and we are pleased with the strength and flexibility of the metrics, and our capital plan has been well highlighted. On occupancy, let me get into detail there. We reached a fairly stable level of occupancy at about 94% with the historical average noted on page 22 of the supplemental of about 95.2%. Start-off with the weakest market, which was San Diego, and certainly the other companies that operate in that market were doing better than most of those, but you see across the board whether it would be our niche or office, etc. It continues to be a lagging market. We had a loss of about 180 basis points over this past quarter, although we expect to pick up some occupancy through the balance of the year as we see some emerging demand. I think we're pleased that our assets are located in the best sub-market of UTC in Torrey Pines, and recently we think that one of the competitive big quality spaces that was open for lease where a landlord decided to make what we thought was kind of a foolish decision to capture an early stage tenant, about 40,000 square foot tenant in this big quality building at about $50 triple net in Torrey Pines, something that I think we would never do and just kind of was an indication of maybe desperation in that market, but I think we see most of the normal leases being at a much higher rate, and we see a continuing solidification; I think we probably hit bottom there. Moving to San Francisco, we did one of the two key life science cluster markets. We did a 40 basis point pick up in leasing to 95.8%, so very, very healthy. All of our assets are clustered in the Mission Bay, South San Francisco, and Palo Alto locations which really are the premier locations. Current vacancy rates are a little above 10%, we expected it to be more in the 7% to 8% by year-end. With the East Bay still hugely struggling in a much less desirable geographic location and far higher vacancies, we see that market struggling. We exited that market in early '08 right before the collapse of their sterns with a great sale of our few assets in that market. We also added, as noted in the press release, the top-tier life science company post quarter-end to our all-star client listed Mission Bay, again just reconfirming that those companies that are big and global make fairly conscientious decisions of where they want to focus their leading-edge R&D, and we are very pleased among our number of locations they chose Mission Bay. In Seattle, we lost 100 basis points. That's really not due to a weakness in the market; it really was due to Gilead moving from some smaller spaces where they were located in a building of ours to its new flagship location. We delivered that space on East Lake Union in build-to-suit during the first quarter. We still see our current occupancy being 98.1%, still very, very good. The good news is our very high-quality assets are primarily clustered in the West, East, and South Lake Union sub-market locations which have remained very strong. We still see some of the poor quality locations around Elliot Bay where we exited a lab building leased to a company which was going to have a role over the next year to an ultimate user at a gain. We thought that was a good move, and we still see continuing weakness in the suburbs, but in the heart of our market in Seattle we see good solid performance. The Southeast, not much to say other than a slight 20 basis point decrease, as the Southeast continues as a quieter and weaker market, we are working hard, again, as I said last quarter to keep steady occupancy and protect rental rates. A minor market for us in New Jersey in suburban Philadelphia; you see there is a significant decline in occupancy. Remember occupancy is not weighted, so it tends to skew the numbers. A few assets we have acquired over time with no real clustering and a building going vacant caused that, and as we have said we have a plan to exit New Jersey over time. We sold half our assets there and probably the others over the coming couple of years. In suburban DC this was a very strong comeback and really the big winner for the quarter and had a pickup of about 110 basis points based on high-quality locations, very well located and outstanding physical structures and the best-in-class operations really won us a number of deals, and this was really bolstered on the back of stimulus funding and strengthening of the NIH budget. There is some continued softness in some of the submarkets and I will address that in a few minutes regarding some asset acquisition, and Massachusetts, again one of the top two cluster markets we had a nice 60 basis point pickup to 94.9%. We have minimal vacancy with our best-in-class assets and locations while others sit with empty shell space. The user Massachusetts market has continued to show, I think, really strong fundamentals. The availability rate in Cambridge is down, other than some vacant shelf space, to very low single digits. We see good activity in the middle market range of about 20,000 square feet to 35,000 square feet in the suburbs; at least about 128 suburbs pretty much minimal availability. The region continues to attract large pharma and big biotech. Merck of Germany acquired Millipore, a very solid acquisition, and Merck announced that their chemical units will be headquartered around 128 and expecting headcount growth in the future. Celgene invested $138 million in a company called Agios, and I think you will continue to see positive examples. The Pfizer-Wyeth merger resulted in no net job loss in the region and AstraZeneca has reported adding headcount to their Waltham R&D center while downsizing Delaware. All good signs and really go to the heart of R&D clustering. Same property results, we are pleased to report up on a GAAP basis 0.4 and on a cash basis 0.8. Dean will highlight this. This continues our unbroken quarter-to-quarter results, probably a record among those lead REITs. Moving on to leasing, we had a very, very strong leasing quarter with 564,000 square feet leased with rental rate increases on a GAAP basis. For renewed and re-lease base up 1.8, cash 0.7. So, this is a very good sign, and included in that is 137,000 square feet from both development and redevelopment. Overall average about six years with minimal TIs and leasing commissions. Our 2010 rollovers are down to about 685,000 square feet or about 5.8%. As you see from our expanded leasing, our rollover schedule about 36% to date are leased, 19%, I should say, as of the end of the quarter I believe, 19% redeveloped and to redevelopment a shell building in San Diego, where we got to really build out infrastructure and an industrial building in Seattle for 2010, 12% negotiating we are anticipating and 33% marketing. The 2011 lease rollover is about 1.7 million, 9% leased to-date, 25% in the redevelopment. Primarily that is there are really locations, but the big one is at almost 200,000 square foot, a 400 Tech Square, one of the buildings that is on our campus, very similar to 200 Tech Square, which we’ve had such success with. So we hope to move into redevelopment next year and move that from an old tired office to a state-of-the-art lab conversion. At 200 Tech Square as you know, our anchors are Glaxo, Pfizer, and Novartis. We have achieved a yield on investment of about 10% and a yield on incremental dollars of about 17%. So we are very pleased with those results, 33% negotiating or anticipating and about 33% marketing, so I think we are in good shape going into through this year and into 2012. We delivered several buildings into redevelopment, one really a very strong one in Maryland at 50,000 square feet. So let me move to development; it's kind of a lot to report there. We delivered 109,000 square feet to Gilead in Seattle with about a 9% yield. In April, we signed a 49,000 square foot lease to a top-tier big pharma company at Mission Bay North. The key focus for management over the coming quarters and next quarter in particular will be the favorable resolution of the 162,000 square feet two-building complex at East Jamie Court at 58,000 square feet remaining in the ex-Selexis building. Certainly our highest priority, virtually all the remaining space at the Alexandria Center for Life Science New York City is under negotiation and we hope to fully stabilize that building in the second half of 2010, two years ahead of our internal model presented to our Board in June of '06, so we are very pleased about that. We continue to move forward with the process of the first university initiative with the credit tenant pre-leased build-to-suit, and we will keep you posted in coming quarters. We continue to work on signing our first credit tenant lease in our international markets. We placed one important undeveloped parcel, fully entitled likely to go office and to discontinue operations, and you can fully expect a number of key land parcel dispositions over the coming quarters. We have been approached by a number of users for possible build-to-suits, which we are likely to pursue as well. Moving to acquisitions and then I will just finish up after that and turn it over to Dean for his comments. We are seeing kind of a pickup in the acquisition market, now we're appearing after about a year and a half, or two-year dormancy due to the structural decline of the credit markets and stock markets, etc., which we are all having lived through. Happy that those things have at least gone for the moment. One of the hallmarks over the years with Alexandria is really a very disciplined, best-in-class real estate and life science underwriting capability, experience and expertise with the key focus on the maximization of a favorable return on invested capital. To give you a color on a couple of acquisitions we have seen this past quarter; a 157,000 square foot building converted from a FedEx facility. Actually, we did that conversion a number of years ago in a secondary Maryland submarket where we had the right of first refusal. It was a kind of unusually low cap rate above market rounds beginning into 2011. The anchor tenant which turned out to be, on diligence, a very weak tenant, over three months behind in rent, left 20 people with 30,000 square feet, with the balance of the space sub-leased to an office tenant. We passed, and it was sold to another REIT. I guess the lessons there, bad credit above market lease is maybe not likely to survive, and institutional quality pricing kind of moved us off of that opportunity. The second set of opportunities, two-building complex, 82,000 square feet adjacent to one of our main campuses in the secondary Maryland submarket. The ownership came to us as a preferred and likely buyer, although was marketed with a very weak public life science tenant in one of the buildings; we rejected that outright because of our life science underwriting and, subsequent to our rejection about a week or two later, the company announced the failure of its principal product in the market, so I guess it was a good call. The other tenant in the other building was primarily an office who is one of our major tenants and indicated that they would be moving out. I guess the lesson that is passing there is bad credit, too high a price for 75% vacancy next year on a challenged submarket. The third opportunity we looked at and passed on where we had first look based on a long history of relationships with the main owner of a private nonprofit was a campus in a very good submarket in Maryland, 122,000 square foot modern main building was required to be rented at an unusually low rate for about a mid-single-digit yield with some multiple smaller outdated buildings on site, and some additional land but in Maryland. It's hard to justify a value that the land that may not be developed for many, many years. So passing there, the lesson is inadequate return on invested capital. Moving on to our client tenant base, we have tried to continue to expand that, continuously stay very, very strong, well diversified and no undue concentration. So, let me turn it over to Dean for his detailed comments.

Dean Shigenaga, SVP, CFO and Treasurer

Thank you, Joel. The first quarter of 2010 was a quarter that could be described as a quarter flushed with capital for REITs. Recent access to a variety of sources of capital is proven by the announcement of various debt and equity deals. Banks and insurance companies continue to compete aggressively for financing of high-quality real estate owned by quality REIT sponsors with limited or no new quality transactions for lenders to finance. Terms for secured loans have tightened significantly in favor of borrowers. It’s an odd time period with REITs having access to significant amounts of capital with very limited high-quality opportunities to deploy capital through acquisitions. Alexandria is in a unique position with highly desirable land for build-to-suit projects. Let me move on to our solid operating results and then circle back momentarily to our balance sheet sources and uses of capital in our 2010 guidance. The key elements to our business model, including but not limited to our favorable lease structure, you need life science underwriting team, highly experienced real estate team, and laboratory facilities focused on locations adjacent to key research institutions and key life science submarkets, continues to provide stable and consistent operating results. 88% of our leases are triple net leases, with an additional 8% providing for the recovery of the majority of operating expenses. 94% of our leases provide for annual rent escalations, and approximately 92% of our leases provide for recovery of major capital expenditures. Our average occupancy percentage at December 31 of each year from 1998 through 2009 and March 31, 2010, was over 95%. We are through the first of four quarters and on our way to our 12-year positive increases in rental rates on new and renewal leases for previous lease base. In our 47th consecutive quarter of positive same property results, additionally operating margins remain relatively steady at approximately 73%, G&A expenses averaged about $9 million per quarter in 2009, are up this quarter and reflects the usual items that cause expenses to be higher in the first quarter when compared to the fourth quarter. Including the various payroll-related expenses that max out during the year and result in limited or no expense in the fourth quarter and the usual audit-related expenses that are incurred in the first quarter of each year. We are still projecting total G&A expenses for 2010 to decline in comparison to 2009. Before moving to our value-added project, let me clarify our rental rates on vacant, redeveloped, and developed space leased. We reported an average rate of $27 and $29 for cash and GAAP, respectively. Our reported rental rates are impacted by leasing rates for lower quality, previously vacant space during the quarter. If we exclude leasing activity for previously vacant space, our rental rates for redeveloped and developed space averaged about $31 and $34 on a cash and GAAP basis, respectively. Next, turning to our value-added projects, let me briefly comment on our cap interest for the quarter. We advanced pre-construction activities to an appropriate stage related to supporting the future ground-up development of approximately 290,000 rentable square feet in Mission Bay and ceased capitalization at quarter end related to pre-construction cost including interest, property taxes, and insurance. We also delivered our ground-up development aggregating 115,000 rentable square feet at Seattle to Gilead Sciences Inc. At the beginning of the first quarter, we added two new redevelopment projects aggregating to 129,000 square feet; one asset is located in Torrey Pines, and the other asset is located in Eastern Massachusetts. We also were required to capitalize interest related to our future development site in Toronto as a result of construction activities completed during the quarter. Additionally, we had several other smaller construction projects that required capitalization of interest during the quarter. Capitalization of interest should be flat, slightly down next quarter, with a decline in capitalization of interest occurring in the third and fourth quarter as we deliver significant spaces from our redevelopment and development programs. Our value-added projects include unique adjacency locations in Cambridge, along with the medical area in Boston, Mission Bay, South Francisco, and New York City. A significant portion is under active development, active redevelopment, or undergoing preconstruction and entitlement work. Many of these assets are strategically located adjacent to key life sciences entities in each of the top life science submarket cluster destinations. Ultimately, these assets will be redeveloped or developed, leased to high-quality life science entities, and will generate significant revenue and cash flows. Over the last five years, on average we have leased approximately 500,000 square feet of space related to our active redevelopment and development projects. During the first quarter, we leased about 137,000 square feet of space related to our redevelopment and development projects. This 137,000 square feet is unrelated to the 115,000 square foot building that was delivered to Gilead during the quarter and leased many quarters ago. This run rate on an annualized basis is approximately 550,000 square feet and puts us on track with our historical average of about 500,000 square feet of redevelopment and development leasing per year. By the end of 2010, we anticipate about 80% of our 865,000 square feet under development being leased with a portion of this being committed. The delivery of these leased projects will generate significant revenue and cash flows and will result in a corresponding decline of required capitalization of interest. Additionally, our land parcels will provide significant opportunities for monetization and reinvestment of capital into our business and will provide important capital to repay outstanding debt. As of March 31, we have one parcel classified as held for sale and we anticipate the sale of other parcels over the next few years. However, as of quarter-end, no other parcels qualify as held for sale. Moving on to our balance sheet; consistent with my comments last quarter, the lending environment continues to show considerable strength. Secured debt lenders continue to bid aggressively for high-quality assets with high-quality sponsorship. Loan-to-values are more common around the 70% range with rates in the 6% and sub-6% range. Banks and insurance companies are aggressively chasing the best deals, and signs of bank warehousing debt for securitization continue. These are obviously all positive signs for the real estate industry. Later in the back half of 2010, we will begin formal discussions and negotiations with our lenders for the amendment of our credit facility. The environment for credit facility amendments remains solid. Banks continue to step up for new relationships providing commitments of up to $200 million. Existing relationship lenders continue to increase the commitments, and obviously certain banks are not renewing their commitments. We continue to keep in close contact with our lenders, and based on our recent discussions, we have a high level of confidence that we will successfully amend our credit facility later this year. Our tenant receivable balance of $2.7 million is down over $1 million since December 31 and represents one of the lowest receivable balances over the past several years. We added additional credit-related information onto our supplemental package for our top 20 tenants, further highlighting the strength and diversification of our tenant base. During the quarter, we adopted Accounting Standards Codification 810, formerly known as Statement No. 167, amendments to FIN 46(R). This literature was adopted effective January 1 and requires that companies including Alexandria reconsider their consolidation conclusions. We have one development joint venture that currently owns a development parcel in a AAA, replaceable and unique location in the Longwood Medical Area of Boston in which both parties of the venture share major decisions. As a result, pursuant to this literature, we deconsolidated this venture and have reported our interest as an investment in an unconsolidated real estate entity under the equity method of accounting. Please refer to the definition section of our supplemental package in our Form 10-Q filed for additional information. Moving on to sources and uses, we are very comfortable with our balance sheet position today. Additionally, our balance sheet capacity along with conservative and reasonable assumptions for sources of capital highlights the flexibility we have to cover our uses of capital through 2014. Sources of capital included the following: $609 million of availability under our credit facility, $107 million of cash on hand, $80 million of annual free cash flows, $75 million to $100 million of new loans or refinancing each year. We are currently engaged in very early discussions for the refinancing of one loan with the contraction maturity in 2011 and the current outstanding balance of approximately $76 million. Sources also include $50 million plus per year of asset sales. $50 million per year is a reasonable assumption; it’s likely that sales of non-income producing assets end at north of $50 million per year in both 2011 and 2012. It’s important to keep in mind that this list of sources of capital is not exhaustive and other sources of capital may be utilized to successfully execute our capital plan in addition to making adjustments to our capital plan from time-to-time as appropriate. In summary, this list of sources highlights the flexibility we have in meeting our uses of capital through 2014. Turning to our uses of capital, our estimate for construction for the remainder of 2010 is in the high $100 million range. This projection includes our estimate to complete approximately $69 per square foot and $139 per square foot for our redevelopment and development projects, respectively, plus a few other smaller projects. Uses also include repayment of secured debt maturities, net of $284 million of refinancing related to our two largest secured debt maturities. Uses also include the successful renewal of our credit facility at three quarters or greater of its current $1.9 billion capacity. We also have our repayment of our $3.7 million convertible debt, so through 2014 our uses of capital are meaningfully less than our sources of capital. Moving next to credit metrics; our net debt to adjusted gross assets was stable at about 45%. Net debt to adjusted EBITDA was approximately 8.1, and we see this improvement in the coming quarters and years. Unencumbered NOI represents a large portion of our operations at about 55% of total NOI. The book value of our unencumbered assets as a percentage of gross assets was approximately 71%. The weighted average interest rate as of March 31 for our outstanding debt was approximately 4.74%. This is the rate as of quarter-end which is a specific point in time. This rate is clearly different from our weighted average interest rate for capitalization of interest, which is based on the average interest cost during the three months in the quarter, not a specific point in time, and is subject to the changes in our outstanding balances of debt from month to month. Facility covenants are very specific to each company and dependent on these specific terms and definitions of each facility agreement, as such covenant calculations and compliance will vary from company to company. We believe our credit metrics related to our facility covenants are solid for a business. Leverage was about 43%, the facility limits about 65%. Our secured debt percentage remains below 15%; our limit is 55% under our facility. Fixed charges are solid for our business at about two times, and the facility limit is about 1.4 times. Our capital plan over the next several years is manageable under conservative and reasonable assumptions. Over the next several years, our goal will be to balance key debt and balance sheet metrics with capital from debt and equity broadly defined. To be clear, equity capital will include reinvestment of free cash flows, selective sales of the income and non-income producing assets, opportunistic JV capital, and common equity. JV capital will be primarily focused on key opportunities to work closely with institutional users with strong capital positions on the development of our strategic land parcels. We also expect improved credit metrics over the coming quarters and into the next few years, as I mentioned earlier, we anticipate the monetization of various land parcels going forward. Moving lastly to our guidance; our guidance for 2010 for FFO per share diluted was $4.43, up $0.01 since we provided guidance in early February, and 2010 earnings per share diluted was $1.80. Our guidance is based on various underlying assumptions and reflects a slight increase in our outlook for 2010. Some of these assumptions include the following: our occupancy is forecasted to be flat to slightly up by year-end; same property results are projected to be flat to 2% in that range on both the GAAP and the cash basis. Straight-line rents are forecasted to increase in the third and fourth quarter as we deliver long-term leases from our development projects. Margins are projected to stay in the 73% range; other income is projected to be approximately in the $1 million to $2 million range per quarter. G&A expenses are projected to be in the low $30 million range, and by the end of this year, we anticipate about 80% of our 865,000 square feet undergoing development in a position of being leased, with some space being committed. These projects will generate significant revenue, FFO, and cash flows. Capitalization of interest for 2010 is expected to be in the low $60 million range, which will be lower than 2009 and will reflect the delivery of significant square footage out of our redevelopment and development programs. Our projection for cap interest also assumes a decline quarter-to-quarter, primarily in the back of 2010. Lastly, our guidance assumes selective sales of land and non-core assets that continue through 2010 and beyond. With that, I will turn it back to Joel.

Anthony Paolone, Analyst, JPMorgan

Thank you. My first question is on the leasing spreads in the quarter; the cash spreads were up, I think it was 8.7%, and GAAP was up 0.8%. It would seem like that spread should be wider, given typically you have contractual lease bumps in the lease. I am just wondering if there is something in the quarter that caused that to be so tight.

Dean Shigenaga, SVP, CFO and Treasurer

Yes, I don’t think there is anything unusual. I think you can run a model on the statistics and find that you can probably achieve something in the 2.55% to 3% on steps and end up with that leasing statistic.

Anthony Paolone, Analyst, JPMorgan

Okay. So there was no change in the typical bumps that you get in new leases.

Dean Shigenaga, SVP, CFO and Treasurer

No, nothing unusual on average for that square footage that was completed in the period.

Anthony Paolone, Analyst, JPMorgan

Okay. On the balance sheet sequentially, I don’t know if you had mentioned this, but the land held for development went up by $40 million. Does that come out somewhere else or what was that?

Joel Marcus, President, Chairman and CEO

You said land held for development?

Anthony Paolone, Analyst, JPMorgan

Yes.

Joel Marcus, President, Chairman and CEO

Yes, we had in my comments earlier, Tony, we had moved a few portions of our Mission Bay West parcel, 290,000 square feet that have completed reconstruction activities that basically we have advanced the reconstruction work. In fact, we also have piles on the ground on one of the sites, which allows us to shrink the time to deliver once we are engaged in a tenant negotiation for those new projects. Basically, the majority of that increase in land held for future development is related to that, but I should also comment that it's also skewed to the upside. It makes the basis look a little bit high because there is a fairly significant change in the balance in the current quarter related to our foreign currency translation for our project in foreign markets, basically. It's substantially in Canada. That foreign currency translation entry is booked every quarter when we report and flushes through equity, not through the P&L, but it results in this quarter an uptick in our land held for future development.

Anthony Paolone, Analyst, JPMorgan

Okay. You were running through this and I think missed it; you’d mentioned some of the items that you see its capitalizing in the quarter. What were those I guess this was one of them?

Dean Shigenaga, SVP, CFO and Treasurer

During the quarter, we obviously had delivered the building for Gilead and we had, well actually that was we completed also what we brought into redevelopment projects into our active development. We completed one development project for about 50-some odd thousand square feet. We delivered the Gilead building, which I mentioned, and then we also had some critical construction activities ongoing with our project in Toronto during the period.

Anthony Paolone, Analyst, JPMorgan

Okay. Then those Toronto stuff stopped, is that it?

Dean Shigenaga, SVP, CFO and Treasurer

Yes, correct. I believe as at quarter-end we had completed those activities.

Anthony Paolone, Analyst, JPMorgan

Okay. Then just a little bit bigger picture, can you give us an update on the deals you think were working on with universities and something like that that you talked about in the last couple of quarters?

Joel Marcus, President, Chairman and CEO

Yeah, we have a number of ongoing initiatives, Tony, that I described; I would say primarily on land of institutions where they would put up the land and we would partner with them to create a facility that is needed, and they would be leasing the space. The most advanced one is one that I have referred to before, which I hope will be in a position at some point to announce. When you are dealing with institutional clients, it sometimes is a long process, given approvals and just diligence issues that go through a variety of different committees, but the first one we are looking at is a gateway building to a very large campus, three stories, probably about 90,000 square foot building used for various state-of-the-art life science and technology uses.

Anthony Paolone, Analyst, JPMorgan

Is there anything else? Any update in terms of Scotland or India you could provide?

Joel Marcus, President, Chairman and CEO

In Asia, we continue to move ahead our projects; particularly we have a small project in South China which we hope to finish at the end of this year, and ultimately tenant not for life science, but ultimately probably technology and manufacturing projects. It was our first project, and we kind of got our feet wet, and but not one we would want to stay in that location; it was really driven by a partner of ours, who ultimately decided to not take part of the building for just their own business reasons in China. Then we have a two-building complex in North China about 300,000 square feet that we are working on. Hopefully, we will finish the shelves during the last quarter or two of this year, and we are working on a laming of tenant; we are in discussions with the tenant to fill at least hopefully part of one of the buildings. It’s a US tenant we are bringing to China, and actively marketing the balance, so stay tuned; we hope to have some good news there. In Scotland, we are working on the possible sale of several of the land parcels that we have rights to at some gains, and again those are just working their way through; those are complicated for a variety of reasons, but the buyer is there, the seller is willing us, and we just need to work through a number of hurdles. So, hopefully we will have that done maybe through the balance of the year. Then just stay tuned on that because there will be some updates on that over the coming quarter or two.

Michael Bilerman, Analyst, Citi

Dean, just on the capitalization, relative to the fourth quarter, it sounds like things have certainly came out the redevelopment, the development, as well as the Mission Bay moving from pre-construction to just land which you are not capitalizing anymore. What was the average balance that you are capitalizing interest on sequentially? Did the rate change? It looks like 5.2% in the first quarter.

Dean Shigenaga, SVP, CFO and Treasurer

Michael, if you turn to page 16 of our supplemental, the top half of the page shows a weighted average interest rate used for capitalization. It is an average rate for the three-month period and the period was 5.2% versus the average for the three months ended or the fourth quarter period was 5.42%. So the interest rate itself dropped about 20 basis points. The average basis substantially appears in the CIT schedule…

Michael Bilerman, Analyst, Citi

It's in the…

Dean Shigenaga, SVP, CFO and Treasurer

It was $1.4 billion last quarter.

Michael Bilerman, Analyst, Citi

Then the $1.5 billion this quarter, so I thought it would have come down, not up by $100 million.

Dean Shigenaga, SVP, CFO and Treasurer

CIT was 1.3 as of quarter-end. It did go down.

Michael Bilerman, Analyst, Citi

I guess during the quarter the balance of your capitalizing on was 1.5, just to get the $19.5 million of capitalized interest.

Dean Shigenaga, SVP, CFO and Treasurer

That is right, Michael. I think the primary driver, although, is driven by few things. We did add about 130,000 square feet of two new redevelopment projects, almost, I think, right at the beginning of the quarter, which added probably to the basis that you may not have originally estimated. We also had, as I mentioned, some important construction activities related to our project in Toronto that were advanced during the quarter, which you may not have anticipated as well. So those are probably the primary drivers relative to your model.

Michael Bilerman, Analyst, Citi

Your last expected cap interest for the year to be $60 million; you are now expecting it to be above 60s. Is that 65 or 62?

Dean Shigenaga, SVP, CFO and Treasurer

One of the challenges, Michael, is that the forecast for cap interest is highly dependent on a variety of factors; which is the exact timing of delivery or completion of construction projects combined with the interest rate assumptions. And because it’s a forward-looking estimate, it's subject to some variability. On average, my outlook for cap interest really hasn’t changed a whole lot. I think last quarter I said it was in the $60 million range. I think I just give guidance in the low $60 million range. So, I am still in that general area. I think we’ll end up sub 65, but I am saying that very cautiously because there are a lot of variables that impact that number every day. Sure. The asset that’s held for sale as of quarter-end is a small parcel. The book basis is about $3 million. There is no gain included in our FFO guidance related to that parcel or any other parcels. The magnitude of land sales going forward will be highly dependent on our negotiations and our appetite for specific parcels, but I can share with you that they do range in size from this very small parcel up to a transaction size that would be very significantly north of the $100 million range.

Michael Bilerman, Analyst, Citi

In that southeast of Mission Bay, where are you in terms of marketing the space from the Tech IT perspective on the campus?

Joel Marcus, President, Chairman and CEO

Yeah, we have a number of users who are looking at the east parcels which aggregate about a million square feet, and those discussions and negotiations continue, and we think there will ultimately be a favorable resolution of that. And then, as we said last quarter, we also are well into discussions on the South parcels, about 500 square feet to go medical office again, parcels that we probably would not hold long-term. Then the hospital, I think there are now about had a one-point some billion dollars they are, I think just about a $100 million or so short of their total goal. So, there is no doubt if you go by the site, there is a huge amount of work going on there. So that is going forward without doubt and there is no medical office or administrative space, office space available on that over a million square feet campus. So we think that that’s going to be a very nice opportunity for somebody with, you know, medical office focus.

Michael Bilerman, Analyst, Citi

One last one, on the same-store expenses, is there anything…?

Dean Shigenaga, SVP, CFO and Treasurer

Yes, they were down to 4% year over year, which was certainly a larger decline than I would have thought.

Michael Bilerman, Analyst, Citi

Is there anything happening there?

Joel Marcus, President, Chairman and CEO

No, not really, Michael; the majority, and keep in mind the majority of the decline in OpEx in the same-store pool actually results in a corresponding decline in the recoveries. That's why in the same-store page you see a decline in revenues, yet positive growth in NOI. The growth in NOI is coming off the top line and growth in rental income.

Will Marks, Analyst, JMP Securities

Actually, all the extensive discussion has cleared out any issues I had. So, thanks.

Joel Marcus, President, Chairman and CEO

We will thank you. I think we have made within sight of an hour, which makes that efficient. We thank you for your time and participation, and look forward to talking to you in late July with second quarter results.

Operator, Operator

That concludes today’s presentation. Thank you for your participation.