Earnings Call Transcript - ARE Q1 2014

Rhonda Chiger, Investor Relations

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s Form 10-K, Annual Report and other periodic reports filed with the Securities and Exchange Commission. And now, I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Joel Marcus, Chairman, CEO and Founder

Thanks, Rhonda, and welcome everybody to the first quarter ‘14 conference call. With me today are Dean Shigenaga, Peter Moglia, Steve Richardson, Marc Binda, Andres Gavinet and Amanda Cashin. My take on the first quarter really echoes our theme that was presented in Investor Day December ‘13 on our return to stable growth with increasing FFO per share growth and NAV per share growth. Really, a very clean quarter, strong core, solid operating metrics and very positive external growth. As many of you have read, Michael Porter of Harvard has written about urban clusters. It’s useful to reflect that ARE has really chosen to focus the bulk of its efforts and precious capital in the leading urban innovation clusters, focusing on quality buildings, locations, and tenants in each of those submarkets. This ultimately reaps higher value, stronger and more durable rental streams in up and down cycles, deeper and more creditworthy tenant base, tenant rollovers more protective again on releasing stronger rental rates, more pricing power, lower cap rates and lesser CapEx. We also noted in our press release that we celebrated our 20th anniversary as a company and are proud of our exceptional track record starting from a mere $19 million back in 1994 to a total market cap of $39 billion today. We’ve been able to generate a return of about 579% from IPO through the end of the first quarter. On macro comments on the FDA, there have been actually 12 FDA new drug approvals through April 24 of this year and 50% were ARE plant tenants, which we’re very proud of. As part of the 2012 Drug Act, the new breakthrough designation was introduced, and there have been 48 breakthrough designations through May 05, ‘14. Alexandria client tenants have 56% of those breakthrough designations. As you may know, those are promising drug candidates with remarkable clinical activity in development. The Affordable Care Act, which has been much in the news, is forecast to add $25 million new insured lives by 2023, which indicates strong demand for innovative medical products. Large pharma now has 56% of its Phase 3 pipeline from external sources, up from 38% a decade ago. Thus, it’s fair to say the integration with biotech in urban clusters continues unabated. Regarding pharma M&A, based on past history, those driving biotech are often acquired, while research units continue as independent competitive units. This was the formula Roche used with Genentech many years ago. If we move to operations and internal growth, Greater Boston and San Francisco primarily contributed to the strong cash and GAAP rental rate increases, and Steve will explain the details further. First quarter leasing amounted to 563,000 square feet, with Greater Boston accounting for 42%, San Francisco 19%, and Maryland 14%. We feel very confident about the increasing GAAP leasing spread based on Dean’s adjusted guidance in that regard, and occupancy across the regions continues to trend at best all time highs. Moving to external growth quickly, acquisition activity has been significant, with year-to-date approaches hitting $150 million driven primarily by sector demand from our growing and expanding tenants. We are actually running out of space for some of our tenants, necessitating additional acquisition opportunities, which is good for them and beneficial for us. This is partly a consequence of accelerated FDA approvals and a cash-plus biotech sector. Steve will also detail the strong tenant demand we’re seeing in both Greater Boston and San Francisco. On the development front, we’ve seen good steady leasing up ahead of our pro forma in New York City, now approaching 70% at 75/125 Binney. We are on target and have frequent dialogues with Ariad, making solid progress on our Class A facility. As you know, Ariad has a contractual lease commitment for 99% of the project with contractual rent payments. The target rent commencement date is contractual and remains on March 22, 2015. In Longwood, we expect to have another fourth floor leased by around the end of this quarter, with activity picking up. On our 50/60 Binney corridor, we will shortly commence marketing with one of the buildings of 250,000 square feet given significant market demand. In San Diego, strong demand continues with Spectrum 1 40% pre-leased and 40% in negotiation. We're nearing signing the LOI with Alumina on their 150,000 square foot build-to-suit; similarly, at Campus Point, for a 120,000 square feet build-to-suit out of 140 we’ll build. We're also in build-to-suit negotiations with Spectrum 2 in San Diego. Dean will further discuss the balance sheet but can confirm our land sales are projected to be $145 to $245 million, and we feel comfortable with that number. Our forward active pipeline is around $35 million and another $95 million plus may be on the horizon. We’ll keep you posted as our negotiations progress. Lastly, on the dividend, the company intends to continue policy to share increasing cash flows with shareholders, maintaining a low payout ratio of about 60%. So, Peter?

Peter Moglia, Chief Investment Officer

Thanks, Joel. I'd like to highlight two notable life science trades that demonstrate life science real estate in core markets is achieving cap rates comparable to those of Class A office products. First, I want to discuss the pending sale of the Vertex headquarters research building in the Seaport Fan Pier submarket of Boston. This is the largest life science real estate transaction since HCP’s purchase in 2007, with a purchase price of $1.125 billion or $1,022 per square foot. Vertex occupies the entirety of the 1.08 million square feet of lab and office space, which also includes 50,000 square feet of retail space and 740 parking spaces. Based on publicly available information and our own estimates, we believe the cap rate for this trade was in the low sixes, likely around 6.2 after leasing up the retail space. Had the property been in Cambridge, we think the cap rate would have been much lower. We know there was at least one other bidder at that price point, but Senior Housing Properties Trust was the buyer. We had early insight into this transaction through our relationship with the developer and broker involved. Although the real estate is Class A and Vertex is a reliable tenant, we are uncertain if Fan Pier will compete with Cambridge for life science tenants in the long run due to its lack of the ecosystem that Kendall Square provides. This transaction further indicates that life science real estate has become appealing to a broader range of investors. This is S&H's first investment in life science real estate, and we know several other bidders included pension fund advisors and sovereign wealth funds. This trade shows that lower cap rates are influencing our price per square foot statistics, as reflected in Kilroy’s acquisition of 401 Terry in Seattle for $106.1 million or $755 per square foot. 401 Terry, a laboratory office building in South Lake Union, attracted significant national interest with over 30 initial bidders. The cap rate for this transaction was 6.0%. Considering the tenant's non-credit rating, we believe the cap rate could have been lower. This trade also indicates the growing interest in life science real estate. Additionally, I want to mention that 221 Main Street, a 379,000 square foot office building in San Francisco's South Financial District near Mission Bay, sold at a 4.0% cap rate in April with a price per square foot of $725. Many in brokerage considered that cap rate high for a large institutional quality building. As Mission Bay develops, it will become more integrated into SoMa and the financial district, especially with the new Warrior Event Center adjacent to our 401-499 Illinois property, enhancing Mission Bay as a vibrant live, work, play environment. Even applying a discount to our Mission Bay assets with long-term leases to credit tenants, a cap rate in the high 4s to low 5s is justifiable. I would also like to note that SO Green is selling 673 First Avenue in New York at a 4.7% cap rate. This is relevant to our New York City assets due to its proximity to the Alexandria Center for Life Science, its quality in medical tenancy, and that it is a leasehold interest. Given our assets are long-term leased to credit tenants and lack competitive products, we have argued for a rate lower than this. With that, I’ll pass it over to Steve.

Steve Richardson, COO and Regional Market Director

Thank you, Peter, and good afternoon everyone. I’d like to highlight two key points we made to Marc that underline the theme of stable growth referenced earlier, going well in our Gateway cities where we've allocated significant capital in Class A urban science and technology campuses. First, we’ll discuss the outstanding performance of our core due in great part to our fully integrated regional teams. Secondly, the ability of our teams to seize additional growth opportunities in the best locations, such as the recent acquisition at 500 Townsend Street in San Francisco's SoMa district. The first quarter performance has been solid, with reported cash and GAAP increases of 10.4% and 18.2%, respectively, this past quarter for renewals in re-leasing space. The business imperative for our investment-grade tenants to commit space is clearly evidenced by a stellar occupancy rate of 96.6% for North American operating properties, up 240 basis points from Q1 2013, with just 292,000 square feet of rollovers remaining to be resolved in 2014, only 1.9% of our operating asset base. Tenants with 2015 rollovers are pursuing early renewals to secure high-quality space in these key clusters. In Alexandria's key innovation clusters, we see strong and broad business patterns, as outlined by Joel, manifesting in these healthy real estate indicators. In Cambridge, we are tracking demand of more than 2 million square feet from both life science and tech users, expecting our mark-to-market rollovers for the year to be around 9% on a GAAP basis, as the rollovers concentrate in Cambridge, with rental increases of high 50s to low 60s triple net for existing products. As mentioned earlier, The Binney Street marketing and prospect discussions are ongoing, with rent expectations in the low 70s triple net for ground up projects. Direct vacancy rates remain healthy at 10.2%, contributing to the market's sense of urgency. The San Francisco Bay area is experiencing exceptional demand too, reaching an all-time high of 99.8% occupancy across our operating and development portfolio. We are currently tracking approximately 1 million square feet of life science demand and another 6.5 million square feet of tech demand, driven by two substantial leases with Salesforce occupying 700,000 square feet and LinkedIn taking another 400,000 square feet, driving lease rates for new projects into the mid-50s triple net. Our anticipated mark-to-market for Bay Area 2014 rollovers is in the high teens, with lease rates in Mission Bay hitting the high 40s, mid-30s in South San Francisco, and low to mid-40s in the Stanford cluster. The market is tightening, with vacancy rates dropping to 100 basis points in Mission Bay and SoMa to a tenth of a percent of 6.4% respectively. In South San Francisco, the vacancy rate also reduced by 40 basis points to 6.4%. Moreover, San Diego is in a strong demand cycle, with 800,000 square feet of requirements and rents on Torrey Pines surpassing the $40 triple net mark, a near 10% increase from last year. The UTC submarket has a direct vacancy rate of 6.4%, while Torrey Pines' vacancy rate of 10% is projected to enter the single digits next quarter. We also expect mark-to-market modest rollover to contribute to core growth in Seattle, Maryland, and RTP, providing gains from 5.9% to flat to 20% respectively for 2014, with tight vacancy rates in those markets. Second, the 500 Townsend acquisition in SoMa that plans to develop nearly 300,000 square feet of Class A space exemplifies the regional teams' ability to capture compelling growth opportunities. The historically robust demand cycle in SoMa absorbed 4.5 million square feet over the past three years, continuing with another 1.1 million square feet from the recent leases noted. 500 Townsend, backed by a stellar development team with decades of experience, is on track to create an iconic facility that enhances the historic and architecturally significant SoMa district. With that, I’ll turn it over to Dean.

Dean Shigenaga, EVP, CFO and Treasurer

Thanks Steve, Dean Shigenaga here. Good afternoon, everybody. I’ve got three important topics to cover. First, I want to provide an update on our balance sheet, which has positioned us to support stable per share earnings growth. Second, I will provide key updates on important strategic capital-related events for 2014. Lastly, I'll summarize key drivers of our $0.05 growth and guidance for 2014 FFO per share as well as our confidence in achieving solid growth and cash flows, net asset value, and earnings per share in 2014 and beyond. Starting with the balance sheet, we continue to focus on maintaining a strong and flexible balance sheet that allows us to execute on our business strategy. We have almost $9 billion in gross assets, a 32% increase since we received our initial investment-grade rating in 2011. We have over $1.3 billion in liquidity. Only $20 million and $61 million of debt is maturing in the remainder of 2014 and 2015 respectively. We anticipate continued improvement in the net debt to adjusted EBITDA ratio, driven by growth in EBITDA and projected land sales. Our fixed charge coverage ratio continues to improve as we benefit from the migration of high-quality tenants into Class A collaborative science and technology campuses in urban innovation clusters. Our fixed charge coverage ratio has improved significantly to 3.3 times, up approximately 50% since our initial credit rating assessment. Our unhedged variable rate debt of 26% currently supports an opportunistic bond offering in 2014 without having to terminate swap contracts. By year-end, we expect unhedged variable rate debt to be around 11%. Regarding our capital update for 2014, with our bond offering, we remain focused on maintaining a strong and flexible balance sheet. Specifically, our bond offering targets extending our maturity profile by refinancing outstanding debt. We have increased our targeted size of the bond offering by $150 million to a midpoint of $550 million and anticipate executing this offering in the near-term. The proceeds will be utilized to reduce our 2016 term loan by $100 million and the remaining proceeds will reduce outstanding borrowings under our line of credit. We plan to execute our strategy by further reducing our 2016 term loan and issuing long-term bonds for growth capital while driving steady growth in FFO per share quarter-to-quarter. Our guidance for land sales in 2014 will emphasize generating capital from non-income-producing assets for investment into high-value development projects. We expect land sales to total $145 million to $245 million, with a midpoint of $195 million, and we will provide more details over the next quarter. On guidance, I want to address two important topics: leasing activity expectations for the remainder of the year and key drivers for the solid $0.05 increase in our FFO per share guidance for 2014. In the first quarter, we reported strong rental rate growth on lease renewals and re-leasing of 18.2% and 10.4% on a cash basis. With 53% of renewal activity occurring in Cambridge, Massachusetts, we expect rental rates to increase over 18% and 12% on a cash basis. We remain on track to achieve solid rental rate growth and are optimistic about hitting the upper end of guidance. We are pleased to announce a solid $0.05 increase in the midpoint of our FFO per share guidance for 2014 to a range of $4.70 to $4.80, representing an 8% growth over 2013. The increase reflects our execution of business strategy leading to solid earnings growth. Key drivers comprise a $0.02 increase from core operations driven by solid early renewals, including a 130 square foot lease in Cambridge; a $0.01 increase from value creation projects, including the lease up of an additional 25,000 square feet at 499 Illinois, now 98% leased; a $0.01 increase from acquisitions; and a $0.01 increase from various other items, including updated assumptions for our 2014 bond offering. The delivery of certain pre-leased value creation projects is expected mainly in mid to late Q3. Our expectation for FFO per share through 2014 aligns with our growth goals of a penny increase per share each quarter. In closing, we are pleased to be in a solid position with our balance sheet, ongoing solid core operations, and demand from high-quality science and technology companies driving stable growth in FFO per share and net asset value in 2014 and beyond. With that, I’ll turn it back to Joel Marcus.

Joel Marcus, Chairman, CEO and Founder

So operator, if we could open it up for Q&A please.

Operator, Operator

Yes. Thank you. (Operator Instructions). And we will take our first question from Emmanuel Korchman with Citi. Please go ahead.

Emmanuel Korchman, Analyst, Citi

Hey guys, thanks for taking questions. Dean, I will start with you. Looking at your sub, I see a comment about the marketable securities balance underlying gains going up significantly, but it didn’t look like the biotech index kind of went up the same amount. Could you talk about what might be happening there? Is there a single need that’s really outperforming or something else?

Dean Shigenaga, EVP, CFO and Treasurer

In follow-on to our comment Manny, last quarter we briefly touched on the upside and value of our investments being easily worth two times cost, most of those investments remain healthy. A couple of securities drove primarily large increases during the quarter and that’s reflected through equity. Just for everyone’s note, this measure does not impact our P&L or income statement, but I think from time to time, you'll see substantial growth in value reflected in our investment holdings on the balance sheet, primarily as private securities transition into public securities during liquidity events.

Emmanuel Korchman, Analyst, Citi

Thanks guys for the explanation. Your exposure in India went up this quarter; previously, you had spoken about reducing your exposure. Can you clarify?

Joel Marcus, Chairman, CEO and Founder

That's all FX.

Emmanuel Korchman, Analyst, Citi

But it looks like your number of assets went up unless I’m mistaken.

Joel Marcus, Chairman, CEO and Founder

We brought one asset from redevelopment into operating that was fully vacant.

Emmanuel Korchman, Analyst, Citi

Got it. And then my final question, you’ve increased your debt issuance guidance within the notes, but you haven't increased any sales guidance. Given the environment, Peter spoke about assets trading at pretty low cap rates. Have you considered selling more stabilized properties and rolling those into other lands or nominal properties rather than selling to the bond markets?

Joel Marcus, Chairman, CEO and Founder

As you know, we did that in a couple of submarkets during late 2012 and early 2013. That program is done, and we're currently more focused on the land sale opportunities we have to use together, obviously with bonds to invest in both redevelopment and development projects.

Emmanuel Korchman, Analyst, Citi

Thanks, Joel.

Joel Marcus, Chairman, CEO and Founder

Yes. Thank you.

Jamie Feldman, Analyst, Bank of America Merrill Lynch

Great, thank you. I know you guys touched on your JV prospects in a few different ways; you mentioned potentially contributing land. Can you clarify how we should view the JV going forward? When might we see activity, and how?

Joel Marcus, Chairman, CEO and Founder

A quarter or two ago, we hoped to have a joint venture in place where we would be a majority partner, potentially by late second or early third quarter focused on the 50 and 60 Binney properties or potentially on 100 Binney. There's substantial opportunity driving that project, around $750 million, making it ideal for a JV opportunity, allowing us to earn fees and promote, etc. So, that hasn't changed from previous discussions.

Jamie Feldman, Analyst, Bank of America Merrill Lynch

Okay. Reading the press release, if I read it correctly, you talked about potentially taking on an Executive Chairman role in several years. Can you elaborate on what that means and whether it entails maintaining the CEO position?

Joel Marcus, Chairman, CEO and Founder

The simplest way to think about it is that under the new contract, I’ll continue as CEO of the company through December 31, 2016. Beyond that, the contract may change; I don’t know. But I’m focused on this quarter.

Jamie Feldman, Analyst, Bank of America Merrill Lynch

If you were to become Executive Chairman, would you remain as CEO? Those are distinct roles; you can’t keep both?

Joel Marcus, Chairman, CEO and Founder

Yes, they are two distinct roles.

Jamie Feldman, Analyst, Bank of America Merrill Lynch

Finally, as you discuss rent rates, you mentioned tech rents and life science rents. Are you considering focusing more on tech than life science at this point, and how do you view that decision?

Joel Marcus, Chairman, CEO and Founder

We haven’t changed our focus from critical urban science and technology clusters. If you visit our facilities, like Mission Bay, you’ll see our commitment to Alexandria Science and Technology campuses. We primarily concentrate on the life science industry, but as Steve noted, integrating information technology and engineering with life science is underway, especially in the digital healthcare age. Therefore, we'll stick to our strategy of focusing on Class A buildings and urban innovation clusters.

Jamie Feldman, Analyst, Bank of America Merrill Lynch

Thinking about rent growth, are you seeing it rise faster for modern tech space than life science?

Peter Moglia, Chief Investment Officer

Yes, the rate of increase tends to be a bit more substantial in the technology sector compared to life sciences. However, we have observed healthy rental rate increases in Mission Bay, Cambridge, Seattle, and San Diego, so all markets are performing well.

Joel Marcus, Chairman, CEO and Founder

Yes, thanks Jamie.

Sheila McGrath, Analyst, Evercore

Good afternoon. Joel, could you elaborate on the land acquisition in SoMa? How long do you think it will take to entitle the pricing? You mentioned that recent acquisitions were tenant-driven; are you already discussing this site with potential tenants?

Joel Marcus, Chairman, CEO and Founder

Yes, I’ll let Steve comment on that and then I’ll provide additional insights on the acquisitions.

Steve Richardson, COO and Regional Market Director

On 500 Townsend, we’ve submitted to the city as of last Friday. The development team’s experience allows us to execute quickly, with the entitlement process expected to take 12 to 18 months. Regarding pricing, there were two other bidders at that price point, and it's consistent with the pricing for high-profile parcels. Our internal and external teams are engaged in discussions with potential tenants, even leading up to the acquisition closure.

Joel Marcus, Chairman, CEO and Founder

As noted, both San Diego and Greater Boston acquisitions were primarily driven by specific tenant needs based on FDA approvals and the cash-rich biotech sector. Companies are well-capitalized and expand, which explains the acquisition activity.

Sheila McGrath, Analyst, Evercore

Dean, if you were in the bond market today, where do you think you'd execute roughly for 10-year debt?

Dean Shigenaga, EVP, CFO and Treasurer

I’d estimate somewhere in the low 4% range on a 10-year issue.

Sheila McGrath, Analyst, Evercore

Any comments on other income? It was somewhat higher than we had predicted for the quarter. Any impact from the weather during that quarter?

Dean Shigenaga, EVP, CFO and Treasurer

Nothing unusual in other income for the first quarter. You should anticipate a run rate of around $3 million a quarter, or $12 million of other income annually. Regarding the weather, which has been a significant topic, we experienced similar exposures like others. However, with our triple-net lease portfolio, the tenants bear those costs, leaving us with limited P&L exposure due to weather conditions.

Sheila McGrath, Analyst, Evercore

Okay, great. Thank you.

Steve Sakwa, Analyst, ISI Group

Thanks, good afternoon. I’d like to revisit the joint venture. In the supplemental, you mentioned guidance staged, specifically regarding land sales tied to the strategic venture, roughly $150 to $250 million. Are all sales primarily tied up in the Binney project? Are there other assets currently on the market?

Joel Marcus, Chairman, CEO and Founder

No, they are not all Binney. We have about $35 million unrelated to Binney in our forward pipeline.

Dean Shigenaga, EVP, CFO and Treasurer

In reference to Binney, on page 31 of the supplemental document, our book value for 50, 60, and 100 Binney is roughly $286 million. We aim to maintain a majority position while selling a stake in the land for development, which is expected to be above book value during the process. While Binney is significant, we have additional transactions in the $60 million to $65 million range that remain under discussion.

Joel Marcus, Chairman, CEO and Founder

We hope to accomplish those transactions during 2014.

Steve Sakwa, Analyst, ISI Group

Regarding the bond deals, was there anything that prompted again a delay? At Analyst Day, you mentioned conservative guidance and effective execution at the beginning of the year. It seems like this offering may happen in Q2 but has been pushed back for six months; is there a specific reason?

Joel Marcus, Chairman, CEO and Founder

While you mentioned our earlier projections, we never definitively stated a specific timeframe; rather, we modeled it conservatively. We've continually sought opportunities in secured debt markets, as we now have significant unencumbered NOI, over 80%. We believe there may be an opportune window for what we want to accomplish.

Steve Sakwa, Analyst, ISI Group

Lastly, Dean, regarding land sale gains, would those be related to Binney, or separate?

Dean Shigenaga, EVP, CFO and Treasurer

We haven’t provided specific guidance on land sale gains, and any gains would be excluded from our core FFO numbers. However, we do anticipate the assets currently under negotiation will be sold at a modest or small gain.

Kevin Tyler, Analyst, Green Street Advisors

Hi, it's Kevin Tyler here with Jeff. I had a question about an article discussing a potential Alexandria partnership with Rice University's BioScience Research Collaborative. You have succeeded with such deals as the NYU project at the Alexandria Center for Life Science. Are you considering a larger footprint in Houston?

Joel Marcus, Chairman, CEO and Founder

We’re not focusing on university-related transactions, as our experience has shown us that those budgets tend to be muted. We prefer to focus on science and technology urban clusters integrated with multiple centers, fostering clinical trial opportunities. Should we pursue other locations, it will align with our strategic plan, rather than a one-off deal.

Kevin Tyler, Analyst, Green Street Advisors

Thanks very much. I believe our other questions have been answered.

Michael Carroll, Analyst, RBC Capital Markets

Thanks. Can you provide an update on the Ariad situation? I know they’ve had some positive announcements. Has there been any update on their sub-lease space at 75, 125?

Joel Marcus, Chairman, CEO and Founder

I indicated earlier that we are frequently in dialogue and meet with Ariad since they are tenants in our project at 75, 125. I don’t have any news on their sub-leasing activities, but as of yet, they’re interested in sub-leasing parts of the building and have been in touch with various parties.

Michael Carroll, Analyst, RBC Capital Markets

The increase at the bottom end of your guidance was largely due to the delay in the bond offering model, correct?

Joel Marcus, Chairman, CEO and Founder

No, the growth was attributed to a few factors. Dean outlined the components earlier, including $0.02 coming from core related to early renewals, primarily a large lease in Cambridge for 130,000 square feet.

Michael Carroll, Analyst, RBC Capital Markets

That’s great, thanks.

Tom Catherwood, Analyst, Cowen and Company

Thank you. Dean, an impressive quarter with internal growth. Given the recent guidance raise and strong performance, we were somewhat surprised no adjustments were made to same-store guidance for the full year. As you think ahead, will growth moderate internally, or is there something causing you to leave the guide unchanged?

Dean Shigenaga, EVP, CFO and Treasurer

We’re performing well on guidance for same-store growth across both GAAP and cash views. On a cash basis, our 43 for the quarter compares to the midpoint of 46 for cash NOI growth, keeping us on track for 5%. As such, we anticipate same-store performance to proceed towards the midpoint, with potential to settle on the upper end as we advance through the year.

Tom Catherwood, Analyst, Cowen and Company

Based on recent sales, cap rates seem to be diminishing. Comparing to your implied cap rate of 6.4%, there appears to be a divide between public perception and private transactions. Can you offer insight into what's creating that gap? Will you see more cap rate compression through 2014?

Peter Moglia, Chief Investment Officer

Every time we enter into a transaction, we notice an increasing number of participants driving pricing. Following a successful trade, many seek to understand why it did so well, which we discuss here during the earnings calls. This repeated observation has shown us that cap rates are being driven lower by demand. I cannot explain the gap, but I believe investment in this sector will persist, and pricing will remain strong.

Tom Catherwood, Analyst, Cowen and Company

With the increased interest in this sector and its value creation potential, will additional competition affect your core strategies?

Joel Marcus, Chairman, CEO and Founder

You need to differentiate among those owning a few buildings compared to those with integrated teams that have operated successfully for decades. We're not overly concerned about competition. The fact that cap rates are decreasing means we can create value instead of buying someone else's. We still have excellent growth opportunities, and the potential exists to double the size of the company based on our land holdings.

Gabe Hilmoe, Analyst, UBS

Thanks. I wanted to ask about the redevelopment at 225 Second. Can you characterize the opportunity there? Is it a conversion from office to something else, and what kind of use may it have?

Joel Marcus, Chairman, CEO and Founder

This space houses an existing tenant that has outgrown their needs and asked us for a specific solution. So yes, it’s a retrofit.

Gabe Hilmoe, Analyst, UBS

Will it likely go into the sales bucket, or is it planned for redevelopment?

Joel Marcus, Chairman, CEO and Founder

We’re already engaged in discussions with potential tenants to take on that building, and we intend to advance that project into a more viable use space.

Gabe Hilmoe, Analyst, UBS

Last question from me on 500 Townsend: is there potential for a capital partner, or will Alexandria hold 100%?

Joel Marcus, Chairman, CEO and Founder

That will be Alexandria 100%.

Michael Bilerman, Analyst, Citi

Yes, it's Michael Bilerman with Manny. Good afternoon.

Joel Marcus, Chairman, CEO and Founder

Hi there.

Michael Bilerman, Analyst, Citi

Dean, about that 130,000 square foot large renewal, when did it become effective?

Dean Shigenaga, EVP, CFO and Treasurer

The first week of this quarter.

Michael Bilerman, Analyst, Citi

That’s a nice mark-up. So that’s $1.4 million. Is that approximately $11 per foot higher than anticipated versus what is currently being paid today?

Dean Shigenaga, EVP, CFO and Treasurer

There was a very healthy mark-up on this space based on cash basis, and it will increase our GAAP benefit since it comes with annual escalation.

Joel Marcus, Chairman, CEO and Founder

Yes, Michael, it’s certainly a large building in a premier location in Cambridge.

Michael Bilerman, Analyst, Citi

Are there other opportunities like this where you can pull leases forward? I know you're constantly chasing down leasing activity, but are there other rollovers that could be accelerated?

Joel Marcus, Chairman, CEO and Founder

The answer is yes.

Michael Bilerman, Analyst, Citi

Would you have a number on that? I mean, is there a quantity of size you're currently working with?

Joel Marcus, Chairman, CEO and Founder

We’ll be cautious about revising guidance on this call, but stay tuned.

Michael Bilerman, Analyst, Citi

Thanks for the insights.

Joel Marcus, Chairman, CEO and Founder

Thank you for your insightful questions. So, operator, it’s been a full hour, and I appreciate everyone joining us. Looking ahead, I’m eager to connect with you again during our second quarter call. Thanks everyone.

Operator, Operator

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