Earnings Call Transcript - ARE Q4 2010

Rhonda Chiger, Founder, Co-President

Thank you and good afternoon. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding our 2010 earnings per share diluted attributable to Alexandria Real Estate Equity’s common stockholders; 2010 FFO per share diluted attributable to Alexandria Real Estate Equity’s common stockholders; the business plan of certain tenants; and the expected impact of the retirement or conversion of our unsecured convertible notes. Our actual results may differ materially from those projected in such forward-looking statements. Factors that might cause such a difference include, without limitation, a failure to obtain capital, debt construction financing and/or equity or refinanced debt maturities; increased interest rates and operating costs; adverse economic or real estate developments in our markets; a failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing development or failure to successfully operate or lease acquired properties; decreased rental rates or increased vacancy rates; or failure to renew or replace expiring leases; defaults on or a non-renewal of leases by tenants; general and local economic conditions; and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission. All forward-looking statements are made as of the date of this call, and we assume no obligation to update this information. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements and risks to our business in general, please refer to our SEC filings. Now, I would like to turn the call over to Joel Marcus. Please go ahead.

Joel Marcus, Chairman, CEO and President

Thank you, Rhonda, and thank you everyone for joining our fourth quarter and year-end 2010 earnings call. We will keep the management presentation somewhat brief to allow more time for questions and answers. Alexandria has been developed and expanded with a strong focus on the best locations for the life science industry, specifically targeting intellectual and entrepreneurial hubs. Having a prime location, top-notch facilities, committed investments, sustainable operations, and understanding tenant needs are all essential for our success, which has been our winning strategy. Notably, Ian Read, Pfizer’s new CEO, recently stated that they are enhancing biomedical innovation by aligning their research and development network with major science and technology hubs. We plan to increase our presence in Cambridge, Massachusetts, to work alongside other hubs like San Francisco, New York, La Jolla, and Cambridge in the UK. I’m excited to mention that Pfizer established their new therapeutic innovation group in Mission Bay, San Francisco and we have a science center in New York. Now, briefly reviewing our cluster markets for the quarter, let’s start with the West Coast. In Seattle, we are focusing on Lake Union, regarded as the top life science submarket, where we’ve maintained occupancy at 97.5% due to strong demand, allowing us to lease 86,000 square feet this past quarter. In the San Francisco Bay Area, we’re performing well with balanced markets, and despite some movement in South San Francisco, we signed 158,000 square feet of leases in the fourth quarter. For 2011, we anticipate positive leasing transactions particularly at East Jamie Court, and we are monitoring the demand at Mission Bay. In San Diego, overcoming the challenges faced in 2010 was crucial as we aimed to build a strong regional team and acquire top assets. We integrated Veralliance and acquired the Biogen Idec campus and the campus point project. We expect to see positive growth in the leasing market next year, tracking over 1 million square feet of potential demand. The fourth quarter in San Diego was noteworthy with almost 600,000 square feet leased, including a significant portion attributed to Illumina. Shortly, I’ll have Peter Moglia, our Chief Investment Officer, discuss the Illumina deal under confidentiality constraints. The genetic analysis market has significantly grown, doubling in value over the past five years. Moving quickly to the East Coast, the Southeast market has been slow, with only 10,000 square feet leased in the fourth quarter, and rental rates remain under pressure. However, suburban DC had a good occupancy increase with 66,000 square feet signed. In the NY-NJ-PA markets, one of our major accomplishments was the Alexandria Center for Life Science in New York City, which is now 96% leased. We are also tracking significant demand for the West Tower build-to-suit project. In the Greater Boston area, although we lost some occupancy, we have promising prospects for 2011, expecting to address 500,000 square feet of lease rollovers. Vertex is in discussions to lease at Fan Pier, which could bring valuable assets, although they currently have a significant amount of space in Cambridge that they may exit. Finally, it’s crucial to remember that high-quality, stabilized assets in prime locations maintain their value, while those in secondary markets are still struggling. Now I’ll turn it over to Peter for highlights on the Illumina deal.

Peter Moglia, Chief Investment Officer

Thank you, Joel. We understand you’re very interested in more details of the significant transaction, but as Joel alluded to, please understand we’re bound by strict confidentiality and are limited to what we can disclose. We hope that the following will give you enough color to better understand the positive impact of the transaction and its impact on our models. The cash yield excluding the additional FAR is 0% in the first year, then ratchets up to 7% upon full delivery of the build-to-suit. The average cash yield over the lease term is approximately 10.7%. The gap yield excluding the additional FAR is approximately 10.5% initially, then moves to just under 11% upon full delivery of the build-to-suit. The effective rent is higher than the three most recent Class A lab office comps in the market. Illumina’s lease will commence no later than November and we’re obligated to deliver the build-to-suit in two phases no later than 2013 and 2014, with an opportunity to deliver ahead of the schedule. The tenant has the right to expand further into three more buildings with square footage totaling approximately 297,000 square feet. It is anticipated that the tenant investment in the build-to-suit buildings will be substantial. We expect Biogen to move out before the end of their 15-month term and pay full rent and operating expenses through August. This will provide us the opportunity to deliver portions of the project to Illumina before their November start date with limited downtime. Thank you very much, and with that I’ll pass it over to Dean Shigenaga, our Chief Financial Officer, to discuss financial results.

Dean Shigenaga, CFO

Thanks, Peter. Let me jump right in here. We reported FFO per share diluted of $4.40, which excludes the gain on land sales and before losses on early extinguishment of debt. This is really on target with FFO per share expectations that we had from the beginning of the year. We also reported EPS diluted of $2.19. Quarterly common dividends increased to $0.45 from $0.35, up 29%, and really reflects our ability to share increases in cash flows with our shareholders. We reported the highest quarter and year of leasing at 1.1 million square feet and 2.7 million square feet respectively. This really is our 12th consecutive year of positive rental rate increases. Leasing included a 350,000 square foot lease with Illumina and the 130,000 square foot lease at the Alexandria Center for Life Science in New York City. Same property NOI growth was 1.3%, with 2% on a GAAP and cash basis, representing our 50th consecutive quarter of positive same-property NOI growth. Operating margins were 72%, representing one of the highest operating margins in the REIT sector. Keep in mind over the past several years, margins have declined primarily due to the impact of ground-leased assets. Ground lease grants are actually reported through operating expenses. Occupancy was solid at 94.3% for our operating properties, 88.9% including spaces undergoing redevelopment. During the quarter, we delivered a significant amount of new space to the operating asset base either through ground-up development or recently acquired assets. Both had a significant impact on straight-line rent adjustments, either from normal straight-line rent related to long-term leases acquired with operating assets or two, free rent and normal straight-line rent on long-term leases delivered from our development projects. The good news is that we recently delivered significant spaces under long-term leases from both recently acquired assets and recently completed development projects. Additionally, contractual cash rents are scheduled, if not already in place. Straight-line rent adjustments from these assets will burn off over the coming quarters as a result cash flows are projected to increase by 15%. Additionally, as we delivered space to Illumina over the coming quarters, we expect an increase in straight-line rent for four quarters. Lastly, FAS 141 mark-to-market lease revenue should drop to $1 million after the second quarter of 2011. Turning to acquisitions in the fourth quarter, we acquired five properties aggregating over 860,000 rentable square feet for $282 million. Stabilized cash yields range from 10% to 8%, GAAP yields range from 11% to 9%. Acquisition activity focused on value-added opportunities through releasing of space, immediate redevelopment and near-term development opportunities, for example, to fully lease ground-up development with Illumina. Turning to our balance sheet, we completed the extension of our revolving line of credit extending a maturity to January of 2015. The revolving line increased by $350 million to $1.5 billion, bringing our total facility to $2.25 billion. Pricing on the revolver is now 2.4% over one-month LIBOR. Our $750 million unsecured term loan maturity remained unchanged at October of 2012, and pricing on the term loan remained unchanged at 1% over one-month LIBOR. We anticipate refinancing our term loan in late 2011 or early 2012. We probably all continue to acknowledge the debt market continue to show significant capacity for borrowers that includes funding from banks and life companies. We’re starting to see an opening in the CMBS market as well as ongoing activity in the bond market, all of which at fairly attractive pricing. We expect to close the full year on $250 million bank loan this quarter, and we will provide more details on this in our next earnings call. During December and January, we retired $83 million and $43 million respectively of our $375 million convertible notes. As of today, we have $250 million outstanding, which we plan to retire by the first quarter of ‘12. We also expect to go through the formal rating process later this year. Turning to credit metrics, our net debt to EBITDA was 6.9 times, reflecting the debt reduction from proceeds from our sales of land in Mission Bay. EBITDA growth and debt repayment are anticipated to continue through 2011, and net debt to EBITDA is also anticipated to improve through the year. Financial covenants under our credit facility were adjusted slightly to market and can be found on page 34 of our supplemented package. Leverage was 36%; the covenant is 60%. The unsecured leverage was 39%, and the covenants are 60%. Our fixed charge coverage ratio on a trailing 12 months was 2 times; the covenant is 1.5 times, and I should point out the current quarter annualized fixed charge coverage ratio is 2.4 times, really reflecting significant improvement. Our unsecured debt yield was 14%, the covenant is 11%. Turning to sources and uses for 2011, our net cash flows is expected to be $100 million; asset recycling and land sales are expected to be about $150 million; and unsecured bank loan, which I just mentioned, of $250 million; other debt equity and J.V. capital in the range of $300 million bringing total sources to about $800 million. We anticipate development, redevelopment and construction spending in the $340 million range; acquisitions of approximately $200 million; secured debt repayments of approximately $115 million; and retirement of $375 million notes in the $100 million range bringing total uses for the year to $755 million. Additionally, as you point out, availability under our credit facility as of year-end was $750 million; we had cash on hand approaching $100 million; and I think, as I mentioned earlier, we anticipate refinancing our term loan in late 2011 and early 2012, and the retirement of our $375 million notes by early 2012. And lastly, moving to guidance, we updated our range of guidance for 2011 FFO per share diluted to be provided at $4.58 to $4.68, up $0.02 before losses on early extinguishment of debt that we recognized in January of 2011. And EPS diluted of $1.97 to $2.07. Our guidance is based on various underlying assumptions and reflects our outlook for 2011. Some of these assumptions included the following: cash and property NOI growth in the 2 to 4% range, GAAP rental rate steps in the 5% range on lease renewals and releasing space for the year with some variances and results quarter-to-quarter. Straight-line rents for the year in the low $30 million range, G&A expense is flat to modestly up over 2010, and capitalization ventures to decrease 20% from 2010, and lastly, our guidance assumes selected sales of land and non-core assets continue over the next few years, including one land parcel that’s currently under contract today.

Joel Marcus, Chairman, CEO and President

Operator, if you could open it up for Q&A. Thank you.

Operator, Operator

(Operator Instructions) And we’ll take our first question from Sheila McGrath with KBW.

Sheila McGrath, Analyst, KBW

Yes, good afternoon. I did want to ask a few other questions on this San Diego acquisition. Hopefully you’ll be able to answer them. Just in terms of the 0% return in the first year and the 7% and then 10.5%, is that you mean in 2011 and ‘12 and ‘13? Is that how we should look at it?

Dean Shigenaga, CFO

Yeah, I think Sheila, this is Dean here. Excuse me for a little vagueness on the answer, but the free rent period in the first year will be based on a start date of November. But I also said to caution as we’re trying to work to limit the time of when they get into their space. The exact timing we don’t have a good handle on, but we’ll be able to report over the next couple of quarters.

Sheila McGrath, Analyst, KBW

Okay, and then if you just could give us some insight, did you have Illumina in mind as a tenant when you bought the acquisition?

Joel Marcus, Chairman, CEO and President

The answer was we had four likely candidates and they were certainly on the list.

Sheila McGrath, Analyst, KBW

Okay, and then if when you purchased this asset, if you compare it to your returns thus far on East River, is this going to end up being a bigger kind of IRR contributor than even East River?

Dean Shigenaga, CFO

Well, they are different because this is an existing asset, and the Alexandria Center for Life Science in New York is obviously a development. But they’re really kind of different; I would assume this would be a higher yield if you looked at it on a basic yield basis.

Sheila McGrath, Analyst, KBW

Okay, and Joel, could you give us some insight on the pricing and leverage metrics that you’re seeing from the life companies right now in the CMBS market on secured debt?

Dean Shigenaga, CFO

I can’t, Sheila, broadly speaking, and I say that cautiously because you know from my comments earlier that we’re actually not in the market on the CMBS side of the life side today, and so I don’t have a term sheet to give you an accurate number. But I would say life companies remain aggressive; the CMBS deals in my opinion probably fall one step behind it on pricing. On the life side and banks, I would say for shorter-tenure deals, they are probably extremely aggressive today, and our pricing is probably tighter. But on a shorter tenure basis, I’d say your 7 to 10-year paper from either the CMBS or the life market would probably put you somewhere plus or minus 5%. The bank side for Alexandria, shorter tenured paper I’d probably say something approaching 200 over LIBOR.

Sheila McGrath, Analyst, KBW

Okay. Thank you.

Joel Marcus, Chairman, CEO and President

Thanks, Sheila.

Jay Habermann, Analyst, Goldman Sachs

Hi, good afternoon. Here with Connor as well, Joel just focusing on the JV capital, I guess can you give us some sense of the timing for some of the JVs and likely cost of that capital, maybe some of that yield you’re looking for in terms of sales and I guess the types of capital that you’re talking to you at this point?

Joel Marcus, Chairman, CEO and President

When you say JVs, are you referring to projects or just specific or generalization?

Jay Habermann, Analyst, Goldman Sachs

Well, project specifically and I guess in general as well, the types of capital versus you’re talking to.

Joel Marcus, Chairman, CEO and President

Yeah, I mean we had reported back, Jay, I don’t know, a couple of years ago, when we started the New York project and I think it was right before the crash actually we had a term sheet negotiated for the East Tower with a JV partner. I’m trying to remember; it’s been too long ago. But I believe it was more or less a 50-50 deal, and we view that capital would be helpful. We were actually looking. I think at that point at maybe building the east and west tower together, but obviously the downturn changed that. So I think as I recall it was probably both towers. Now that I think back about that. But I think when it comes to a large scale project, also that wasn’t really available at that time for us, and certainly later it was not on that size of spec construction project. Today, I think the JV sources of capital, in fact, I met with one very, very prominent JV person in New York not too long ago and discussed The Binney Street Project. If we kick off a large-scale project, as opposed to a single home JV capital, something we clearly would look at as an important source of capital. I don’t know if that helps answer the breadth of your questions, but that’s kind of what we’ve done to date.

Jay Habermann, Analyst, Goldman Sachs

Okay. No, that’s helpful. And then in terms of returns on development, can you focus on Cambridge a little bit and perhaps compare returns that you’re talking about for those projects versus what you’re seeing on redevelopment?

Joel Marcus, Chairman, CEO and President

Yeah, I mean our redevelopment, the biggest one we’ve done was really a pretty huge success. I think we achieved, when we did a case study a number of quarters ago, maybe about, I don’t know, four, five, six quarters ago on our 200 Tech Square building where I believe our returns on incremental capital we put in approached about 16% to 17%. We signed anchor releases in that building when we bought it; 200 Tech Square was going to be an updated and redone office building. We ended up being able to convert it to lab. Rents went significantly up, our anchors there were Pfizer, Novartis and Glaxo, and I think that is one of our most successful projects, a big scale. And I think today, we’re going to be embarking this year on redevelopment of 400 Tech Square. We don’t have pricing yet; we don’t know whether it would go for new office or new converted labs because there is actually very significant demand for both in Cambridge today. It’s very, very hot; companies or entities. So, we would hope to achieve obviously double-digit returns on our incremental capital into that project. When it comes to development on the Binney Street corridor, I think we would target something in the range of a high single-digit probably likely, given underground parking and other amenities that we’ve had to provide to the city. I would say if we could reach anywhere between 8.5% and 10% on an unleveraged basis, that would be pretty strong.

Jay Habermann, Analyst, Goldman Sachs

Okay. And just lastly in terms of uses of capital, can you talk about the potential? You mentioned dividend increase versus conserving capital obviously to fund the external growth and potential land acquisitions as well as maybe even debt pay-down?

Joel Marcus, Chairman, CEO and President

Yeah, we have obviously back over the last couple of years since the dividend cut that many REITs were implementing. In fact, I remember being in San Diego in November ‘08 when I think we did our first day 13 one-on-one meetings. In 12 of those meetings, people begged us to cut the dividend; it was kind of a surreal situation as you probably recall. But I think as we go forward, we would like to see, we just did make a significant, the board did a significant increase in the dividend. I think you’ll see that going forward in a measured way so that we’re sharing the upside in cash flows with our shareholders, but at the same time retaining as much as we can because it’s the cheapest source of capital. I don’t know, Dean, if you want to add anything to that.

Dean Shigenaga, CFO

No, I think Joel summarized it very nicely at the end there. We’ve been able to share the increase in net cash flows to our business while retaining some as the primary objective going forward.

Jay Habermann, Analyst, Goldman Sachs

Okay. Thank you.

Dean Shigenaga, CFO

Thanks.

Jamie Feldman, Analyst, Bank of America

Thank you. Can you talk a little bit about the significance of Pfizer's Center for Therapeutic Innovation coming to your center? I mean, it looks like from the press release they put out that there are other organizations that will be housed within it, so I’m trying to figure out, is that kind of competitive to your space or is this just a toehold and maybe they can expand from here? But I’m just trying to get a sense of the significance of that lease in specific.

Joel Marcus, Chairman, CEO and President

Yeah, the Center for Therapeutic Innovations is really a brainchild that’s emerged over the last couple of years since Pfizer has gone through a pretty gut-wrenching reorganization, starting with Jeff Kindler and now with the new CEO. Clearly they want to exit more and more of their siloed campus locations, which aren’t really adjacent to the innovative and entrepreneurial locations, and part of that was the establishment of kind of a standalone entity called the Therapeutic Innovation Center. Their goal is to create, at least initially—and it may grow over time, obviously depending upon product opportunities—somewhere between 40 and 60 scientists in a very high-intensity, high-quality lab, and they are not doing Pfizer research. They are not developing either small molecules or biologics. What they’re aimed at doing, their sole goal is to access innovative technologies and opportunities from the significant academic and institutional centers that are adjacent to these locations. So they have already embarked upon setting it up at Mission Bay; obviously, I think they’ve signed the deal that was announced, maybe by Jeff Kindler before he left as CEO, with UCSF, and my guess is they probably will find others there. So they’re not leasing space or doing anything, but it’s solely external collaboration. The same thing in New York when they move, I think in the next couple of months. That group will be aimed at, and they’ve signed, as you saw, the press release that Pfizer put out, they’ve signed some 7, 8, 9, I can’t remember how many collaborative agreements with major New York City institutions, and again it’s aimed at collaborating with those institutions not doing internal Pfizer research. They’re looking at other sites, as Ian had mentioned in his quote I gave, to really access worldwide innovation. So this is where big pharma is really headed in, less focused on places like we’re out in Connecticut, etc.

Jamie Feldman, Analyst, Bank of America

And then, what’s the appetite for growth for that? I mean, could they be, is that anything large enough to do like an anchorage tenant second building?

Joel Marcus, Chairman, CEO and President

I don’t know that this will be because these are obviously projects that take time, but they’re early-stage projects. Thus, the 250 to 300,000 square feet of demand, real demand that we have right now, and we’re working pretty hard on it. In New York, for example, one is a biotech company; the other is a major institution in that particular disease area. Those are the two big ones. There is a bunch of small ones. So, we’re not accounting Pfizer in that. But I would expect over time, if Pfizer is successful and accessing innovative technologies that could move from R to D, that they would expand in New York City.

Jamie Feldman, Analyst, Bank of America

Okay. And then could you just walk us through your 2011 remaining expiring leases, kind of the big ones that have some vacancy risk?

Joel Marcus, Chairman, CEO and President

Yeah, I try to do that a bit in my kind of geographical review, but let me just go to that page; bear with me one moment here. So, it’s page 40 of the supplements, and I’ll just run down each of the markets. So in San Diego, we’ve got a total of 550,000 square feet expiring, and as you can see, the bulk of that is already leased, so we don’t see much risk there. The Bay Area, we got about 269,000. Most of it still is remaining, and so we see that as a modest challenge, but we think we can work certainly up to that challenge in the greater Boston area about 484,000 square feet, almost 200,000 of which is the 400 Tech Square, which we have a high degree of interest in, probably single building users, and about 120,000 that’s remaining that isn’t resolved. So, we think that is inordinately manageable. New York, New Jersey suburban about 38,000, which is pretty small. Southeast is pretty small. DC, we’ve got one big one we’re working on, and the balance is pretty small. Seattle is pretty small. The Gates Foundation building, which is coming back to us, is an office building we’re converting it for lab. We’ve already signed a major lease there, and we see that is resolving. So, we don’t see inordinate challenges in the releasing risk for 2011.

Dean Shigenaga, CFO

And then Jamie, just to add some color there: in the marketing, actually, in the tail column, most of the leases are below 20,000 square feet in size. I think there is only one lease that is north of that, and it’s in the 50,000 square foot range. So, it is spread across a number of smaller spaces with no large lumpy exposure.

Joel Marcus, Chairman, CEO and President

Yeah, and in San Diego, if Dean will make sure my recollection is correct, I think he pointed out the $34-$36 annual base rent expiring in San Diego, a big part of that is the Biogen Idec lease, and if you back that out, that number drops to about $25 or something, so that’s important to remember too.

Jamie Feldman, Analyst, Bank of America

Okay. And then finally, actually, Dean, so if you look at the increase in FAS 141 and straight line rent in the quarter, can you give us a sense of how, the timing and those actually burning off and turning into real cash?

Dean Shigenaga, CFO

Sure, 141. I think I commented on that by the, after the second quarter of '11, 141 will drop down to about $1 million a quarter. And straight line rents will run a little high for a while for two reasons: one, a lot of deliveries on the developments and large leases that have been executed. As those burn off space by space to cash flows that will tail off. However, as I mentioned in my prepared comments, you also have the Illumina lease coming in, timing to be determined over the next few quarters, but no later than November of this year which will contribute meaningfully to straight line rent adjustments that are going to be fairly significant for a number of quarters.

Jamie Feldman, Analyst, Bank of America

It sounds like that’s at least flat, if not increasing by year-end, straight line?

Dean Shigenaga, CFO

No, I don’t think it’ll increase relative to the current quarter straight line rents, a number of roughly $9 million. I think I was forecasting somewhere to be in the low $30 million range on straight line rents for 2011; that kind of frames the range that we would expect.

Joe Marcus, Chairman, CEO and President

You’re welcome.

Operator, Operator

And our next question will come from Will Marks with JMP Securities.

William Marks, Analyst, JMP Securities

Hello Joe, Dean and everyone. Just a question on a very, very broad question on acquisitions and development, and who you’re seeing in terms of competition. I don’t expect you to name names, but are there some new players that are building this type of space at all? And are the number of acquirers, has the number of acquirers increased in terms of your competing with when you look for a deal?

Joel Marcus, Chairman, CEO and President

Well, virtually everything we did this year was up market. So in that sense, we didn’t have any competition to speak up. But I think deals we saw and we passed on, there was one deal in Sorrento Valley in San Diego, another deal in the Bay Area of South San Francisco. There have been a number of deals we’ve seen that we passed on. So I don’t know necessarily the number of bidders and kind of what their makeup is. But I think it’s fair to say, I did quote a couple of quarters ago, there was a deal that we really liked and went after but lost to a pension fund back in June in the Massachusetts region, which we thought was kind of emblematic of what you’re talking about. It was a—I don’t remember how big it was, but it was about a 60, 70,000 square foot B building, B location but triple-A credit tenant and lease through 2028. And there were quite a number of bidders because people view that as almost like a borrow on. So I think, it depends on the nature of what the acquisition is.

William Marks, Analyst, JMP Securities

And then, what about development, is there?

Joel Marcus, Chairman, CEO and President

Well, in developments, we own our sites, we obviously...

William Marks, Analyst, JMP Securities

Well, I just mean others. Are you seeing any kind of increasing activity?

Joel Marcus, Chairman, CEO and President

The only group that I have seen recently in any of our markets actively developing is Boston Properties on a site in Cambridge that we believe they’re going forward with, and I believe that will be a lab building. But other than that, I would say we haven’t seen any development in the markets at the moment.

William Marks, Analyst, JMP Securities

Okay.

Joel Marcus, Chairman, CEO and President

And most people don’t really have—most people, frankly, don’t have great land sites. You can have land sites, but if they’re not really AAA land sites your competition for really high-quality tenants isn’t very good.

William Marks, Analyst, JMP Securities

Okay. Thank you.

Joel Marcus, Chairman, CEO and President

Yeah, thank you.

Michael Bilerman, Analyst, Citi

Hi, this is Mark with Michael Bilerman. Looking at China and India, I’m hoping you can provide a rough timeline of how long you expected to fully build out the current projects there? I think there are just 7 million square feet, also shed some light on the plan behind the added 2.4 million square feet of potential building in India and just the overall long-term pieces on the regions? Thanks.

Joel Marcus, Chairman, CEO and President

Sure, great question, Mark. So taking China first, we have a—our first really test development there was a building in South China for a variety of reasons we chose that location. We also had our early partner that decided to exit. And that really got our feet wet in doing our own, having our own team and our own ability to build in China high-quality buildings, and we do have good activity on that building of 280,000 square feet if not a lab building. We ultimately want to lease it and sell it because we have no desire to be there. In the North, we have a land use REIT that we can build. It’s a little bit like Mission Bay near a rate—one of the top five technology centers in all of China. We have our first two buildings under development, about 300,000 feet, 150 each. They are today, the only first-class lab facilities for lease in China. We just had a team there. We’re putting together our whole marketing plan; that construction is going well. We hope to have space available, actually, some prebuilt space for moving late in the year. Our big challenge in that project, in addition to executing it—which we’ve done, I think, very successfully so far—is really getting incentive packages from both the local and national government to be granted to us to give to tenants as opposed to having tenants have to shop around the 30 locations in China comparing benefits. We’ve now secured that as of—I think I may have mentioned in our Investor Day; I can’t remember—but we have finally secured that on our last call, and now we can actually go out and put forth an incentive package that is highly competitive. That was a critical step, so I think you’ll see activity through the balance of this year. We’re also working on another possible center in the heart of Beijing. We view China as you have to do it very carefully, very slowly and not get ahead of yourself, so we want to make sure we get fully leased on our 300,000 square foot building as rapidly as possible before we go to break ground on our next center in the heart of Beijing which will have a little bit of a different scope collaborating with the major universities. It’s a bit of a different business model, but I think our goal is the journey of a thousand miles is the first step, I guess, as was said in China and so we want to travel that road very, very carefully but clearly over the next decade or two, China is going to be huge and we think we’re well positioned to take advantage of that. In India, our view is a little bit different, the market is different, the infrastructure challenges are very different. But we view India as an easier—nothing is easy in Asia—but an easier market operating because it’s obviously free market. It’s not government control, and so we have a plan there to develop a series of clusters again in lab and related kinds of businesses much like the Illumina business and Life Technologies and others. We think we have a great chance to kind of dominate that market. We did announce—or we didn’t, but there was an announcement in one of the newswires of an acquisition we made from an Indian company of a project in Hyderabad. So we think over the long term, India—the benefit of India versus China in one sense is it’s lower cost, the access to great people and intellectual capital is pretty amazing because there is a very young, highly educated population, and we think it makes sense to have footholds in the two most important, actually the two countries that have half the world’s population.

Michael Bilerman, Analyst, Citi

No, it’s very helpful. Just finally, 426,000 square feet under development in India , is that going to be readily available some or just some of the space in China by year end or is that?

Joel Marcus, Chairman, CEO and President

We think so, correct; and a significant part of which we already have committed tenants in India, existing tenants.

Michael Bilerman, Analyst, Citi

Okay. Great, thank you very much.

Joe Marcus, Chairman, CEO and President

You’re welcome.

Anthony Paolone, Analyst, JP Morgan

Thanks, good afternoon. Dean, I think you mentioned $340 million of development spending this year. Can you give us a sense of how much of that is for projects that are underway right now versus starting new stuff, for instance like the Binney Street build to suit?

Dean Shigenaga, CFO

Sure, you probably picked up from the pages of our redevelopment projects and development projects that we’re estimating $110 million and $70 million respectively of construction spending for those projects. You probably also noted in the real estate section for projects in China and India that we’re forecasting construction spend in roughly the $60 million range. We also have a couple future redevelopments where we’re likely—they are not in redevelopment today—but we anticipate spending some money later this year, which is probably in the range of $26 million. The rest includes spending both in our development site in Denny to accelerate our opportunity to go vertical as well as an estimate for unknown projects, which we know are quite possible to occur.

Anthony Paolone, Analyst, JP Morgan

Okay, just to make sure I got that so when in your prepared comments the $340 million was that just development or was that just development and redevelopment spending?

Dean Shigenaga, CFO

That was all construction spending.

Joel Marcus, Chairman, CEO and President

Worldwide.

Anthony Paolone, Analyst, JP Morgan

Okay, and then just to make sure I got your answer right, there was $70 million, I think in the supplemental on the ground up, $60 million in Asia, and then I think you mentioned $26 was it in the redevelopment?

Joel Marcus, Chairman, CEO and President

110 on redevelopment, 70 on development, roughly $60 million in Asia, 26 on new redevelopments that are not in the redevelopment pipeline today, roughly $16 million on pre-construction substantially all related to Binney and the remainder is unidentified. It’s a projection of spending that we think is likely to occur but not specific to any project.

Dean Shigenaga, CFO

Which could be over $50 million, so should put it to about $340.

Anthony Paolone, Analyst, JP Morgan

Yeah, got it. Thank you. The other question I have is your New York center now, you talked a lot about the bigger tenants as being key anchors for the West Tower, but then it seems like over the quarters there were a lot of smaller tenants that had demand. Can you give us a sense as to where those types of tenants ended up going and kind of what that looks like if you do start a second tower?

Dean Shigenaga, CFO

When you say smaller tenants who may have had interest in the East Tower, you mean?

Anthony Paolone, Analyst, JP Morgan

Correct. I know you had mentioned some smaller ones, but not likely anchor size for the West Tower?

Joel Marcus, Chairman, CEO and President

Yeah. Well, there are hosts of smaller tenants that looked at the East Tower, and some of those were up at the Columbia incubator, some of them were in the suburbs—Connecticut, New Jersey, etc. If you’re comparing prices and then having versus those, it’s obviously easier to kind of stay in those locations. I think the West Tower will be the anchors are probably the two that I mentioned—if and when we decide to go forward with. That one is a large well-known independent translational entity focused on a particularly disease area much like the Neuroscience Institute we have in the West Tower, but it’s a standalone, it doesn’t have an affiliation per se aimed at commercializing products. And then secondly, there’s a pretty fast-growing biotech company that has its eyes on a lot of space north of 100,000 square feet, and this would be the logical location. So those are the two most important current anchors that we would see. There could be some smaller tenants; I can’t tell you today exactly, but we certainly have a list of ones that have looked and expressed some interest, but we haven’t—I mean we don’t really account those as logical or credible to kick off a project of that size, although we do clearly own curtain wall and steel today.

Anthony Paolone, Analyst, JP Morgan

Okay, got you. And then just last question to clarify: I think you had mentioned earlier an 8.5% to 10% type return on the Binney Street project.

Joel Marcus, Chairman, CEO and President

And that cash unlevered.

Anthony Paolone, Analyst, JP Morgan

And is that going in or is that an IRR?

Joel Marcus, Chairman, CEO and President

Yeah, because that’s initial.

Operator, Operator

(Operator Instructions) And we’ll take our final question from Jim Sullivan with Cowen and Company.

James Sullivan, Analyst, Cowen and Company

Hi, I have two questions. First of all, in terms of same-store NOI number reported, the expenses were up 4.2% in the quarter, and I’m just curious what the major driver of that was and whether we should expect that to continue. And also, Dean, if you could address what kind of expense growth is baked into the 2% to 4% forecast for ‘11.

Dean Shigenaga, CFO

All right, Jim; it’s Dean here. This, the same-store performance in fact the entire portfolio—we should keep in mind that with the majority of our leases being triple net, there is very little leakage to the bottom-line from fluctuations in operating expenses year-to-year or even quarter-to-quarter, whether it’s a hot summer period, cold winter, or just fluctuations in utility rates. So the good news is as you look at other property types, you do need to be concerned about fluctuations within operating expenses, but for Alexandria, the fluctuations are passed through whether OpEx runs high or low; the tenants will bear either the expense or the benefit from lower operating costs. In this case, expenses were running a little bit, I think primarily from utility related costs. So I don’t expect it to be sustainable. I think year-to-year, quarter-to-quarter, we see most of our OpEx variations at the utility level, occasionally a little bit on the insurance level and occasionally some at the property tax level.

James Sullivan, Analyst, Cowen and Company

Okay, second question, this is really for Joel. I was intrigued when you talked about the Illumina transaction. You had talked about, I think a response to a question from Sheila that there were four potential candidates for that space, and I am curious whether the other three potential candidates have found alternative locations and number one. Number two, whether their requirements represent net additional absorption or trading places or both?

Joel Marcus, Chairman, CEO and President

Yeah, so what I can tell you is that several of those we are certainly engaged in finding other suitable facilities for it. So stay tuned, and I will comment about net positive absorption—yes, some of it would be absolutely net positive absorption. And I think Illumina is a good example. There are a number of entities that seek growth. They have existing facilities but they’re just not able to grow to the extent they need to grow to satisfy the platform and the business opportunity, and so we hope to be there to provide that opportunity for them. And that’s why we’ve been pretty bullish on our prospects in San Diego.

James Sullivan, Analyst, Cowen and Company

Thanks.

Joel Marcus, Chairman, CEO and President

Yeah, thank you.

John Stewart, Analyst, Green Street Advisors

Thank you. Joel, this is a couple of follow-up questions on the Illumina deal. First of all, I’m curious what role if any Dan Ryan played in bringing that across the finish line?

Joel Marcus, Chairman, CEO and President

None whatsoever. Just kidding, Dan and his team and Peter really were the critical elements in that and I think when you’ve got first-in-class team and you’ve got a first-class site, nothing is ever easy but it really made it much more possible to execute such a complicated and such a large size transaction really in record time.

John Stewart, Analyst, Green Street Advisors

I guess, was that sort of a deal that Dan brought with him or was that an Alexandria entity level, all pistons coming together to get the deal done?

Joel Marcus, Chairman, CEO and President

Well, I think it’s probably the latter in the sense that the sales of the Biogen Idec transaction really emerged before the time that we finalized arrangements with Dan. But I think it’s fair to say that it’s really a combination of all of those factors, and again, what you need is great leadership, and Pete brought that to the table.

John Stewart, Analyst, Green Street Advisors

Thanks. And I’m sorry if I missed this when Pete was going over it, but I caught it said, I think November 1 start date for lease, but what exactly is the free rent period?

Joel Marcus, Chairman, CEO and President

You’ve got a significant period on the front end with no cash rents in the first 12 months of the lease.

John Stewart, Analyst, Green Street Advisors

Got it. And then it phases in year two?

Joel Marcus, Chairman, CEO and President

Yeah, and then the cash rents actually will accelerate over time.

John Stewart, Analyst, Green Street Advisors

Got it. Okay. If I could maybe Joel get you to comment, and first of all, thank you for the continued improvements in disclosure and looking at the leasing economics; pretty impressive particularly over time. I guess the one thing that is sort of missing from the disclosure is pre-rent. So I could, if I could just get you to comment on the prevalence of free rent in terms of leasing on a general basis?

Joel Marcus, Chairman, CEO and President

Yeah. I don’t know that you can ever make a generalization. I think you really have to deal with the market reality. And so today, if we were to lease or do a deal in Binney Street, which we’re working on some things, or on our conversion at Tech Square, you really have to be responsive to a marketplace. And so the marketplace really dictates what roughly is marketing at any given point in time, and it changes pretty rapidly. I don’t know that I can be more specific. There is no—it is always very market-dependent and very time-dependent at any given point in time.

John Stewart, Analyst, Green Street Advisors

And I guess...

Dean Shigenaga, CFO

Sorry, John. One thing I’d add is that when you’re dealing with some large lease transactions for 15 or 20-year terms, you’ll have a component of free rent if that’s market at the time, and it’s not an unusual environment that we’ve seen in the last year on our leasing front with any free rent that we’ve dealt with this year.

John Stewart, Analyst, Green Street Advisors

Sure, fair enough. Okay, and then lastly Joel, without speaking necessarily to these specific acquisitions in the fourth quarter, but we obviously just don’t get as many data points in the lab sector in terms of values. Could you speak particularly when you consider the trend more broadly in terms of real estate values and interest rates? Can you speak to cap rates for your product?

Joel Marcus, Chairman, CEO and President

Well, I think what I mentioned earlier in one of the questions, the project that came to market, widely marketed in Massachusetts in June went for I believe a 6.4% cap rate that’s without any frills, B building, B location, AAA credit, and a very long-term lease. We certainly have thought to buy product that’s under replacement cost; that isn’t always the case with a lot of buyers out there. People are paying sometimes extraordinary prices, which seem a little wacky sometimes to us. But I think again it’s very dependent upon, is there a value-added component? Is it an off-market transaction? Is it widely marketed? I mean, the widely marketed transactions frankly are going to be very aggressive in pricing. And I don’t think that’s necessarily an indication of either higher or low cap rates; I think it is what it is at a point in time. And I would say, some of the cap rates I think you guys have assigned out there probably seem on the high side.

John Stewart, Analyst, Green Street Advisors

And you haven’t seen a shift necessarily in the last 90 days?

Joel Marcus, Chairman, CEO and President

No, I’d say it’s been going on since we all emerged from the two-year debacle, and that’s probably started in the spring. So, I don’t think there has been a noticeable shift. I mean you could look at one transaction or another and say does that make a data point back. I don’t think so. But I think if you’ve got a first-class location, you’ve got a first-class facility and you have term and credit, that isn’t even a lab product anymore. That becomes almost a desirable acquisition for anybody like the one I described pension fund—the one I’d said, they just viewed it as a bond. So I think that’s prevalent, not only in this product I said broadly out there today. But if there are poor locations, poor quality, and you’ve got some value out, then I think the world kind of changes on that. I mean if you look at our markets—Lake Union, Mission Bay, the good places at San Diego, you look at Cambridge, you look at Gaithersburg, Rockville in Maryland, and New York City, I mean the cap rates there, if we were to sell flagship assets with term and top quality tenants, those things would be at very aggressive cap rates today.

John Stewart, Analyst, Green Street Advisors

Okay, thank you.

Joel Marcus, Chairman, CEO and President

Thank you.

Suzanne Kim, Analyst, Credit Suisse

Thank you so much. I do appreciate the disclosures this quarter. The first question is to just to clarify on the dividend rates. I’m just wondering what sort of metrics that we should sort of look at to focus on. I know you said you’re going to increase it with net cash flow, but I’m wondering if you’re looking at a payout ratio or targeting a payout ratio. And then secondly, with regards to your pre-construction pipeline, I know that big chunk of it is Binney and the other chunk is the tower in New York City. I’m wondering what the first two priorities are, what you kind of see as most feasible in near term as coming online?

Joel Marcus, Chairman, CEO and President

Yes, so let me maybe answer the second question, and I’ll let Dean address the first. Between New York and Binney, I think we see a piece of Binney probably going sooner than New York, although frankly, if we wanted to start New York today we could, but we’re mindful of a whole lot of things we’re working on and some of the goals that we set for ourselves that we don’t want to push things too rapidly; it doesn’t make sense. But I do see early start to maybe one of the Binney buildings if we can secure an important anchor tenant. I think that’s how I would line it up. Dean, you want to comment on the dividend?

Dean Shigenaga, CFO

Yeah, Suzanne, it’s Dean here. As far as the dividend strategy, the increase as well as future increases, I think we committed in both situations that our strategy is to share increases in net cash flows with our shareholders while also allowing us to retain increases in net cash flows to recycle or reinvest into our business. I guess I should additionally point out that we don’t forecast any shortfalls in our dividend deductions to meet a 100% or zero taxable income I should say going out over the next few years. So, really it comes down to our desire to share increasing net cash flows with our shareholders.

Suzanne Kim, Analyst, Credit Suisse

Great. Thank you so much.

Joel Marcus, Chairman, CEO and President

And our payout ratio is historically book pre and post-crash has been, I think among the lowest in the industry, so we have, I think a good basis going forward. But as I mentioned earlier, we certainly want to retain as much free cash flow as possible as well to reinvest in the business.

Suzanne Kim, Analyst, Credit Suisse

Thank you.

Rhonda Chiger, Founder, Co-President

Well, thank you everybody very much, and we’ll talk to you in May on our first quarter call.

Operator, Operator

And that concludes today’s conference. We thank you for your participation. You may now disconnect.