Alexandria Real Estate Equities’ CEO Discusses Q2 2012 Results – Earnings …

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jamie Feldman, Bank of America.

Jamie Feldman – Bank of America

Great. Thank you. Can you guys dig a little deeper on what’s going on in Cambridge, I know when we spend some time out there, it seem like you had several development irons in the fire, I’m just trying to get the latest thoughts on what’s going on and is there something that’s changing in terms of sentiment and people’s specificity of signing leases?

Joel Marcus

No. I think, I would just say on the builder suite side, I’d say stay tuned. I don’t what to pre-announce anything, but we’ve talked about significant demand there and our Alexandria Centre at Kendall Square, one on the Binney Street quarter I think has been the target of quite a bit of interest of a range of this kind of second generation biotech companies that are experiencing significant commercialization today. So I think that is unchanged and I think you will see some of that manifests itself and unfold pretty soon.

I think when you get back to the Tech Square area and overall just demand, then I think as Steve said, we’re seeing pretty strong demand. My guess is, we’ll be out of space at 400 Tech Square by the end of the year. We’re already assuming we sign leases for these two latest LOIs that have been signed, that gets us pretty close to where we what to be. So we’re seeing kind of continuing solid demand in that market, I don’t know if Steve has given other comments or thoughts.

Steve Richardson

Yeah, I mean, using 400 Tech Square specifically we talked about the stacking diagram, I mean once you start factoring the option in that rig and has their – and we’ll just have 10,000 feet or so left on the top floor assuming Ragon did move forward with that. So, it continues to be a very, very healthy market.

Joel Marcus

Yeah. And Ragon just for those of you, who don’t know it’s a nonprofit institute of Massachusetts General Hospital and the other two LOIs that we signed, one is a very large credit tenant and then the other one is a kind of an emerging company, but I’d say the demand is coming heavily overall from, the big demand is coming heavily from the second generation of companies that are experiencing kind of the commercial stage. So it stays strong. I’m a little less focused on the tech sector there. I don’t Peter, Steve if you guys have any comments. I think it’s still pretty strong, but I haven’t seen many anything specific that I could comment on.

Dean Shigenaga

I haven’t seen anything announced recently, but obviously Google and Microsoft have grown, I think Microsoft actually took more space at Cambridge Center that was the last deal that was announced.

Joel Marcus

So, I don’t know that’s helpful color Jamie?

Jamie Feldman – Bank of America

Yeah, definitely. And then, switching gears Joel, congratulation I guess and Board of Directors for the NIH, the foundation with NIH.

Joel Marcus

Thank you very much. I appreciate that there was a high honor.

Jamie Feldman – Bank of America

Good.

Joel Marcus

I’ll do. I’ve been considered.

Jamie Feldman – Bank of America

So can you talk a little bit more about what that means in terms of what you’ll be doing and your time commitments and how we should think about that related to ARE?

Joel Marcus

Yeah. I wouldn’t say that you know it’s a quarterly board meeting in Washington, but I would say I’m kind of a 24/7 guy, so it won’t have any impact what so ever. Other than it gives me a chance to interface directly with the – and we have at our recent conference with Francis Collins and a number of the people who were on the Hill requesting NIH funding. So, in a sense it gives us a direct pipeline to that discussion negotiation between the NIH and the government and Congress as far as continued funding for critical stage, basic research here in the U.S. So, I think it will be a big plus. But, yeah, it doesn’t impact me David.

Jamie Feldman – Bank of America

Okay. All right. Thank you.

Joel Marcus

Yup. Thank you.

Operator

Your next question comes from the line of Steve Sakwa, ISI Group. Please go ahead.

Steve Sakwa – ISI Group

Thanks. Good afternoon. Joe, I just want to know if you could talk a little bit about New York. I know there was a story about the New York Genome Center. And the fact that they had signed a 170,000 foot lease, down more in the – I guess, it’s a little further south. And I’m just curios that that type of tenant was something you could have looked out to kick-off the West project. The timing didn’t fit or if there was just something about your project in that tenant that maybe didn’t allow that deal to happen?

Joel Marcus

Yeah. Let me give you a may be a more macro view. I think that we see as I mentioned, the second wave of biotech commercialization successes coming to New York as well. We also see maybe even more importantly in New York, is really become an important destination for new research or development units of big pharma. And the Wall Street Journal documented that last year with Pfizer we’ve seen it certainly in Lilly and Pfizer. It’s clearly true that there are a number of pharmas looking to place a unit into the New York area. We think that’s one of the most attractive targets that we would look at obviously internal demand from our existing clients.

Yeah, the New York Genome Center, I’d say for two reasons, was not of great interest to us although I think it’s great for New York. I think number one timing was a little too early for us and then secondly I think our own underwriting of that kind of an entity would basically say that we would be more comfortable seeing them move into a more robust funding environment than they are today. If you compare that to the – they kind of want to be a broad institute.

They’re not there at, but maybe someday they’ll work up to that. They don’t have any anchored donors. At the moment, they’ve just gotten donations from a number of the institutions. But you compare it what Steve mentioned in 400 Tech Square with Ragon. Ragon is fully funded institute of the Massachusetts General Hospital. That’s kind of tenant we feel pretty comfortable about underwriting. So, for New York we just – for timing and for underwriting purposes we just weren’t there.

Steve Sakwa – ISI Group

Okay. And then secondly on page 33, I want to just thank you for providing a lot more detail on the kind of the China and India development projects that you’ve got going, but it obviously kind of bags the question and you did allude to this that you’ve got your two projects in China, but not really going forward. But I guess the cost seem excessively high for at least the project under development. I’m curious if you could provide us the information for the operating property, I guess the roughly 300,000 that’s open. Is that cost much different than $82 million that is expected to be spent on the other 300,000 foot building?

Joel Marcus

Yeah. They’re fundamentally – I’ll let Dean comment on the specifics, but they’re fundamentally different projects. As I said, we started South China really with a U.S. company actually the requirement came out of the company that we’re close to in the Mission Bay area, teamed with the European company and we then acquired this site – this land, it’s a 50-year land use in South China kind of near Macau.

It’s a region we wouldn’t have normally gone to, but we decided we’d use that our first ability to have our own team, because we don’t joint ventures there, see if we could really build a product, and then once the joint venture fell apart and we kind of we’re faced with, we’ve got to finish this development, because in China when you sign a deal if you’re a foreign company and you just don’t go forward, you’re not likely to do anything else in China. So, we wanted to kind of preserve reputation, and we’re developing it. It’s an area that really is a manufacturing and flex market, it’d be kind of like an industrial area in the U.S. So, the costs there are considerably lower than we would expect if we built a lab product, but Dean can give you some highlights.

Dean Shigenaga

Yeah, just to give you some rough sense, Steve, I think if you think of what’s in service, you probably have a roughly a 50-50 allocation between China and India just on the in-service assets.

Joel Marcus

But on that specific asset on cost on the Southern China.

Steve Sakwa – ISI Group

Yeah, I guess…

Joel Marcus

Steve, you cut off. Do we have more color on the cost?

Operator

Your line is open, Steve.

Steve Sakwa – ISI Group

Hello, can you hear me?

Joel Marcus

Yeah, let us work on that and we’ll try to give you a little more color on the costs in Southern China, but we would see them to be considerably lower than building a lab building.

Dean Shigenaga

Yeah. I agree. We’re probably about $70 a foot there in South China.

Steve Sakwa – ISI Group

Okay. And then, Joel, can you just comment – it does look like your leasing activity in India seems to be much stronger. I think your lease – three building are 100% leased, one building is about two-thirds lease, but maybe just talk a little bit about the demand drivers that you’re seeing in India. It did sound like you are much more optimistic about that market and it sounds like you might bring in a joint venture partner to fund that, how far along are you on that?

Joel Marcus

Yeah. So let me maybe just say one or two other things about China and then I’ll speak to India. I think when it comes to China, we’ve realized the basic challenge in China is less the demand in China, it is more the incentive system and Steve and I had both spent considerable time in China, I was just there last week. You bring a client over and literally that client once they go shopping in China can end up with a dozen, two dozen different offers from any number of economic development zones, cities, provinces and it creates a challenge of sticking of tenants.

So our view is, I don’t think we’ll be doing much more in China, but if we were ever to do it, it would have to be done on a pre-lease build-to-suit because otherwise, it’s just a very hard goal, but we need to work out of the two projects we’re on. We hope to complete them and ultimately, we would probably exit those projects.

In India, we think because you can actually own land, there is no government interference, there is, no real incentives. It is much more of a normal environment although India still is – it is an emerging world country. There is huge demand from really what we would consider to be life science, kind of the health science, industrial, uses of laboratories. We think it’s a big opportunity in a number of clusters throughout the country. We like the South, but the North and the Northwest are particularly good. Delhi is an interesting location.

We’ve tried to establish kind of critical mass. We’ve got our own team on the ground. We’ve put into construction and development a number of projects where we had – we tried to do a little bit like we did pre-crash, where we would try to meet existing demand with a product that we’re actually constructing. I think going forward, we would really go-forward only a either 100% built-to-suite or a substantial prelease for future developments. But we think the demand is really substantial. It’s a county of as you well know of – well over a billion people, healthcare is – and health science is an important part of what they are doing. They’re still, there is a bit of battle over patent protection, but fundamentally most of the big pharmas and a lot of the industrial companies who used laboratories for their RD aren’t looking at India’s Novel discovery platform. They are using it as a base to penetrate that huge market and one where they can do process work. So, it’s a pretty fuddle market. It produces, I think the most engineers of any country on earth.

There is an emerging big middle class, the size of greater than the U.S. So we think that the demographics and the pieces are in place for good productive work. We think the yields are pretty good and we think the locations when you can cluster in a knowledge canter make a lot of sense. But we do think given kind of where we are in the capital side of things where the U.S. is in macro wise, it would be to our best interest much like we did with Longwood to team up with a financial partner, there not – we don’t need an operating partner. But a financial partner that we could split the upside, but also split the capital cost and I think we’re proceeding without that effort. So, I’d be happy to answer anything more specific than that.

Steve Sakwa – ISI Group

Is that something you think you could get done this year or is that a 2013 event?

Joel Marcus

I think that’s probably first, my experience in India, I don’t know I’ve been there may be 40 times, is it kind of depends, if it was a U.S. firm that operates there, it could go fast; if it is a firm in Asia, somewhat slower. So I would say six to nine months would be kind of an estimate. It could be that our effort with Clarion and Longwood went pretty fast. But, again India is different. So I would say probably early part of 2013 first half.

Steve Sakwa – ISI Group

Okay. Thanks.

Joel Marcus

Yup. Thanks, Steve.

Operator

Your next question comes from the line of John Stewart, Green Street Advisors.

John Stewart – Green Street Advisors

Thank you. A couple of questions for Steve, actually. Steve, first of all, just curios, what is the Veterans Administration doing with lab space in Mission Bay. And then if you could give us an update on sales force and then last but not least, you and Joel both sort of alluded to 499 Illinois and I guess just given the perceived strength of that market, would have expected to see more leasing there. So could you give us kind of – I guess the quarter is what do you thing has held you back there, has it been – or tech users gone shy on Mission Bay or is there you need to put more capital in the building, what’s going on there?

Steve Richardson

I think it was the regional managers held this Bay.

Joel Marcus

That’s always a contributing factor. Yes. On the VA they had an existing research facility. It’s really their leading research facility in the entire country for veterans as they have various maladies and they relocated from location in the Presidio based in San Francisco that was very antiquated. So, we’ve been talking with them literally for a number of years. I think we first chatted with them five years ago, just shortly after we purchased the property there in Mission Bay. And so, they were very keen to locate kind of a must have type of location and we are able to pull together a lease with the government actually in record time. It went very, very quickly, because they’ve really wanted to see the opportunity there.

On the sales force land there is really nothing new to report. They had said that it would be two or three quarters while they were in pause mode looking at their existing head count needs, trying to find existing facilities to accommodate that and then revisit whether or not they would move forward with actually building out a campus. It’s really not clear at this point. I don’t know that we’re overly optimistic or pessimistic. It’s just under further consideration by their team.

And then finally with Illinois, it absolutely has been that disappointing there. And you see somebody like the VA who have to be in Mission Bay, wants to be in Mission Bay. So, they moved quickly. We just haven’t seen additional demand in the window of time we’ve had since we acquired the asset from a high profile, high credit tenant and the tech companies really have wanted to stay very, very close to their peers. I think there’s a little bit of frankly a lemming mentality, where they get concerned about recruiting people, if we’re next door to Twitter and Zynga and their brethrens and they just have more comfort. Mission Bay hasn’t really been identified as a clear tech destination. I think if we were to secure an anchored tenant with a floor or two, I think that would change literally overnight but we’re just not there yet.

John Stewart – Green Street Advisors

You might just talk about when the hospital gets delivered, because that’s clearly a game changer.

Joel Marcus

Yeah, that couldn’t be a bigger part of Mission Bay with a couple billion dollars of investment going on right now and we do see the full substances impact of a 1.1 million square foot facility there. Just like we saw when a number of the research buildings were being built out that drove a lot of the clinical demand that has now resulted in 100,000 square feet of leasing by UCSF at 1500 Owens. We do expect additional demand and it doesn’t necessary have to be UCSF at all, but other entities that really make an imperative for them to the nearby if not adjacent to the hospital to look at 499 as a very logical location. That still is a ways off from ultimately being up in operational. But I think the fact that the Curtain Wall has completed and it looks much more like a finished product will have a meaningful impact on how people perceive this area over the next couple of quarters.

John Stewart – Green Street Advisors

Have you had any contact with sales force or have they just gone Ray a silent?

Joel Marcus

No we’re in very close contacts with them, consistent contact. We’re obviously neighbors and they just haven’t changed their view on their plans for the future.

John Stewart – Green Street Advisors

Okay. And then, Joel just on the asset sales, a couple questions, one; what is the mix for the $57 million that sort of targeted to get the – hit the full-year guidance. What’s the mix, the breakout between income producing and land sales?

Dean Shigenaga

I’m looking at that right now. So, we just closed of the $56 million remaining we closed $20 million today to Pennsylvania since there were operating maybe a $15 million or so would be land, they’re last $21 million is still to be determined. I don’t think there is any significant land in there. So I’d say, it’s more operating in that bucket.

John Stewart – Green Street Advisors

Okay.

Dean Shigenaga

I think that’s correct.

John Stewart – Green Street Advisors

Okay. And then, it may not be entirely fair to draw inferences from the discontinued operations on page 18, but if you do look at you had the one income producing asset and just if you did take the disclosure it looks like you’re talking a double-digit cap rate on the – the route 495 asset is that kind what we’re looking at for a suburban lab not cluster asset?

Joel Marcus

Yeah. I think you’re taking the implied information from the PL and balance sheet disclosures on page 18 of the supplemental.

John Stewart – Green Street Advisors

Yup.

Joel Marcus

And I think what you have to keep in mind is the 196,000 square feet is more of a land type…

John Stewart – Green Street Advisors

Right. So we would have expected the NOI will be entirely attributable to the income producing asset.

Dean Shigenaga

On $8 million, I don’t recall the cap rate. There is income related to the land partials, they are operating, but just not at office or lab rents. There is income being generated, I don’t have the breakdown, John, I can give you some better color offline.

Joel Marcus

They are happy to follow up offline. One last…

Dean Shigenaga

I won’t read too much into the $8 million sale as a benchmark for yields on dispositions or even cost per square foot.

Joel Marcus

Yeah because it’s kind of one-off assets it’s not even clustered. It’s not part of the Wister asset group.

John Stewart – Green Street Advisors

Sure and it’s obviously a small deal, but we just don’t see a lot of comp, so that’s why I’m interested. And lastly for you Dean, if I may and I apologize if I missed this, your disclosure, obviously continues to improve and thank you for that. But do you breakout anywhere the NOI that runs through the PL from properties that are still in the development pipeline?

Dean Shigenaga

We do. It’s on page – it’s in the AFFO reconciliation, which shows up on page 12 and it’s actually burning down fairly significantly. Most of the revenue – always find at your – it was 72 – so it’s $478 million in Q1, $72 million in Q2, so it’s really burnt down. We used to be running if you go back to June of – the second quarter of 2011, we’re about $1 million a quarter. What’s happened is most of that income was being generated out of the Cambridge and Binney Street development site and as we move closer to vertical construction, we slowly vacated tenancy in the buildings and since then have taken down most of the buildings out there. So if you’ve been out to Cambridge lately, you’d see most of the sites leveled now.

John Stewart – Green Street Advisors

Okay. Thank you.

Joel Marcus

Thanks, John.

Operator

Your next question comes from the line of Michael Bilerman, Citi.

Unidentified Analyst

Hi. It’s (inaudible) with Michael. Thanks again for the China and India development disclosure. Would you be able to give us some kind of sense for what the stabilized development yield expectations would be for China and for India. My sense is that China would be pretty low, somewhere in the low single-digits, but India will be, I guess probably going to be above 10% or an 11%, would that be kind of right?

Joel Marcus

Yeah. I think in China, the South China being kind of a flex manufacturing, our guess is that’s going to be lower single-digits, again because of both our being our first effort in a market that we would not have chosen had it not being for this kind of, original kind of group that asked us to go there. In Northern China, I’m sure we can tell you anything, yet. We don’t know enough ultimately because the rents could vary, if we were able to land and we’re working actually with one specific tenant right now that’s a tenant of ours in the U.S. If we’re able to land a bigger incentive package, the rent would correspondingly be higher. So I’m not sure we can give you any guidance there, yet. I’d say, stay tuned, but again I don’t view China as really a core international operation given what we’ve said to you.

In India, however I think the level of credit of the tenants by in large is very high. Most of our tenants and over time will try to break that out more specifically or fairly large international players, they aren’t a lot of startups or who we stage companies by in large there. They’re some of service companies. So, it looks a lot like China in that sense. And I would say yields probably will range from low double digits to mid to high double digits, it’s kind of range based on a variety of factors. And so, I think that’s kind of where we see things and if we’re able to achieve in a great market here in the U.S. maybe an eight yield – those yields probably I think are going to be somewhere between 300 and 700 basis points above that just on average, but you’ll see those develop over time. And I think that’s pretty fair.

Unidentified Analyst

So, just a question is like that I’m going to speaking. As you think about sort of the balance sheet and in terms of raising equity, you did launch the ATM in the quarter looks like you’ve had a pretty hard at least in the couple weeks that was opened in June with about 40 million raised. And, I think being said, expect the next 210 over the next four quarters I assume that subject market conditions and if you have the opportunity to you – you may accelerate that. And you sort of line that up relative to disposition volumes of 112 which you’ve held pretty formal year. Part of that dispositions is always going right back into development with the one land sale and in Longwood. So, I sort of treat that a little bit separately, why not be more aggressive in terms of the asset base in terms of the asset base, in terms of selling, a substantial more of the assets rather than continuing to raise equity or even try to do a large joint venture on some of your assets or even clusters to raise that capital more efficiently than through the marketplace?

Joel Marcus

Yeah, I think that’s a fundamental question that we think about and discuss almost on a constant basis and I would say to you the Longwood process was and that Longwood venture and the yields are actually pretty good and they’re likely to be higher rather than lower over time. In the one sense, it’s a great opportunity to bring in a money partner to off lay capital costs. On the other hand, you can’t get better real estate and you’ve got by enlarge credit tenants and really good yields. I mean if you could build to an 8.5 cash yield in Longwood and if you exited that market, my guess that’s got to be a low-six or a mid-five probably, I don’t know Peter can talk about that. That’s a hard thing to necessarily just give up. So, we have to think very carefully about do we really want the joint venture partners for Kendall Square as an example, and that’s an issue that’s not easy to digest.

When it comes to sales of assets, we’ve really looked through each of the regions. We’ve worked hard to tee up a variety of sales. You’ve got an environment today where obviously capital is cheaper and available, but in many cases, we’re not interested in selling core – our cluster assets. We’re interested in selling really some of the suburban and you really have to do that in a measured fashion. It would be hard just to put in an entire submarket for sale in this particular environment or not in 2005, 2006, 2007 we’re really in a market that is still is a little different. So we’re working hard to take it step by step, but it’s hard to jump to large volumes. We all have to be mindful that where we have critical tenant relationships as we do in a number of these cases just to simply offload an asset, we have to be mindful of that.

We also, obviously, have taken the decision to seek an equity capital partner in India, like that something that is easy to reflect on because it’s a new market, it’s one that as I think great promise, there is a lot to do there and so it makes good sense. So we’re trying to, I think, attack it in a pretty dogged, methodical, analytical fashion, but it’s not so easy just to simply accident entire market, submarket. And many of the markets we’re in, we really don’t want to exit. So it’s really those suburban assets and there is only one or two locations and you just can’t wholesale sell them all. I don’t know Peter, you could comment as you spend a lot of time on this effort.

Peter Moglia

One thing you don’t what to do is dilute the market. You don’t want to go out with a bunch of assets that are all on the same place. I mean it’s going to cause someone to want to take a big discount to take those assets, and so that’s not really the strategy we want to do. But one of the things that we are looking to do are take certain operating assets that could be high cap rate assets because the reason they are is because the credit isn’t very good and we want to take that capital and recycle it into something like Binney Street where we could get a much lower cap rate for that asset. So, overall I think we’re going to get our NAV much higher by selling some suburban assets and putting them into urban.

Joel Marcus

I don’t know if that’s a helpful perspective, but…

Michael Bilerman – Citi

No. No. It is…

Joel Marcus

That’s how we’re approaching as we’re thinking about it.

Michael Bilerman – Citi

And then, in terms of the aftermarket equity program, you did $40 million in the three weeks of – last weeks of June from when you launched it at price of $70.64, with the stock higher today? Is there not a desire to do that quicker than over the next four quarters, just from the standpoint of where leverage is today and understanding that you’re sort of want to get back into mid-6s, obviously rising that 200 would equate to almost half a turn?

Joel Marcus

Yeah. Yeah. I’m going ask Dean to come in, but I would say we just had face-to-face meetings with the rating agencies and I think to keep in mind to, it isn’t quite like a balance sheet point in time, it really is a process in an operating mode, modality, and level and so, we do believe we could operate very comfortably at a – within a boundary of around 6.5 times. But it’s also a process to get there, not just an automatic goal and suddenly we’re there. So I think that’s how we’re thinking about it, but Dean will comment specifically.

Dean Shigenaga

Yeah. I agree with Joel’s comment. There is not a goal or a pressure in our view to jump to the 6.5 times, we’re going to get through there through the delivery of our EBITDA and NOI ramp up, which occurs in the fourth quarter and obviously thereafter because we have a lot of product behind it that’s leased and scheduled for delivery. The ATM program, we tapped a little bit of capital in June, we – it wasn’t clear – we’ve been off the program in July, and we’ll will look for opportunities over the coming four quarters to execute a little more equity over time.

Joel Marcus

Yeah. But, I think Michael it is true though that if we do move forward with additional construction spending, we would ramp-up the pace of that program. There’s no doubt about that.

Michael Bilerman – Citi

And just lastly on 499, you haven’t change your sort of yield expectations or your cost expectations, but it definitely sounds like things are going slower than you had hoped when you purchased the asset. So, I’m surprised that nothing has changed from a yield or cost and if you think that things are going to take a little bit longer, I would assume you capitalize interest longer, maybe you have to provide a little bit more incentive to land at anchor tenant. I don’t know where rents are today relative to what you originally under road I think it was look like $350 net a month. So, maybe just talk a little bit about what’s happening there.

Dean Shigenaga

Yeah. I don’t think you have an eroding rental rate market and I don’t think concessions are the issue. Obviously carry will always be important, but Steve you could comment on general economics?

Steve Richardson

Michael, we originally underwrote this conservatively looking at lease rate that we’ve already achieved at the three facilities they are operating Mission Bay and really what’s change it has taken longer and ultimately we’ve pushed out just by two quarters the delivery of that. So, that in and of itself hasn’t had an impact given other considerations with the lease rate, but the original underwriting, I think was fairly conservative.

Michael Bilerman – Citi

Okay. Thank you.

Joel Marcus

Thanks.

Operator

Your next question comes from the line of Philip Martin, Morningstar.

Philip Martin – Morningstar

Yes, good afternoon.

Joel Marcus

Hi, Philip.

Philip Martin – Morningstar

Just wanted a bit of a macro question Joel, could you provide us with a sense of how the uncertainly in Europe may be effecting tenant needs and growth strategies and what that may mean for Alexandria in terms of more or fewer opportunities or may be a shift towards strategies to the emerging markets. Again, just thinking a little more macro level.

Joel Marcus

Yeah. I mean I can give you one recent example. Well, I think if you look at the big players in Europe, there is not a lot of expansion going on in Europe for pharma. There is some biotech, but a lot of that is really sales and marketing not core research. Novartis has obviously moved worldwide headquarters from Basel to Cambridge, Roche has obviously paid a lot of money and acquired Genentec as their oncology platform and really their engine of product pipeline and beyond that based in the U.S. You recently had Sanofi, I think Chris Viehbacher about a week or two ago announced that he was shutting down sites in Southern France. These are core research facilities. Remember there is a French company I think in Toulouse and forgot where the other location was, but both on the South of France. And so what that tells you is, he said, that they have been historically may be over the last two decades, pretty unproductive as far as new molecules whether it be chemical entities or biologics into the Sanofi system.

And so for a French company in a fairly – with a new leader who is pretty socialistic to be willing and he is obviously Canadian, but being willing to step up and close sites down in France, that’s a pretty big deal and he’s obviously made clear statements as well as the quote I use from, he is head of research, Zerhouni that they view often as the main place they’d like to grow their core research. It seems to me European pharma is moving across the pond to the U.S. into the hubs and not really focused on much expansion in Europe. So, that’s the reason we’ve not focused on Europe because we don’t see it as a real growth opportunity. And, I think those three examples give you a little bit of taste of what’s going on over there.

Philip Martin – Morningstar

And, I know in some past discussions, I’ve had with you. If I came away with the sense that there was some pent-up expansion demands even within your own tenant base and you’re being a little more cautious given the world we live in today et cetera, I’m trying to balance all of that out. What types of pent-up demand expansion organic growth exists in this portfolio of Alexandria’s. Today, are you having to say no in some cases or you’re pushing it out further bit?

Joel Marcus

Well, yeah. Go ahead, I’m sorry.

Philip Martin – Morningstar

No. No. Are you pushing it out further a bit?

Joel Marcus

Well, I think, we still maintain, we’re pretty careful on underwriting. I answered one question about New York and how we looked at demand there. We want to wait for real strong credit anchored tenant. We don’t want to compromise with just an entity that may need a bunch of space, but then we don’t view as highly creditworthy. In the Boston market, Cambridge market in particular there’s a number of fairly sizable transactions that are requirements. I think, we’ve done a good job of sorting through those and making sense of what those are and what those mean.

So, I think it’s pretty clear that there is some good opportunities and we’re maybe best positioned out of all the players in Cambridge to take advantage of that, and MIT has got a lot on their plate, Forest City has got a lot on their plate, they’re kind of the big Boston properties business as well and we’ve got some opportunities. So, I think we will be energized. So I think New York City obviously, the Cambridge opportunity and clearly if something moves in Mission Bay, we could take advantage of that. So, I think those are primary pent-up demand opportunities that we’re looking at today.

Philip Martin – Morningstar

Okay. Okay, thanks for the insight.

Joel Marcus

Yeah.

Operator

Your next question comes from the line of Michael Carroll, RBC Capital Markets.

Michael Carroll – RBC Capital Markets

Hey, guys. Can you give us some color on the upcoming France Park redevelopment project? How extensive will that activity be?

Joel Marcus

The new acquisition?

Michael Carroll – RBC Capital Markets

Exactly, yeah.

Steve Richardson

Yeah. Probably, too early to say, we have one existing tenant that is looking at some or all of that, but nothing to announce at the moment. It clearly is a critical piece. It sits across from our one of our prime campuses in Torrey Pines and next to one of the major institutions there. So it’s probably almost as good as you can get as far as location. So, we’re looking at doing a combination of redevelopment on part, and potentially ground up development on the other part, but I’d say stay tuned, but it’s a really I think it’s a high quality credit opportunity in a AAA location.

Michael Carroll – RBC Capital Markets

Do you know how much capital you’d have to spend on that redevelopment?

Steve Richardson

I don’t know. Dean, do we have any estimate at the moment?

Dean Shigenaga

No, the estimates are still being built, Mike.

Michael Carroll – RBC Capital Markets

Okay.

Dean Shigenaga

Yeah. Too early.

Michael Carroll – RBC Capital Markets

All right. And then according to your guidance, you have about $377 million left to spend on your development and redevelopment projects, but you would have about $225 million left to spent on your in-process developments. What’s the rest of the capital coming from?

Joel Marcus

Yeah. There is actually a pretty good breakdown Mike on page 32 of the supplemental that shows the breakdown for the last half of 2012 at $377 million. For those of who that don’t have it for reference, let me just read off of some numbers, $95 million for developments on the backup this year, $131 million for redevelopments and these are North America numbers, about $43 million for preconstruction, generic infrastructure and building improvements in North America of about $55 million; future construction projects in North America of about $30 million and redevelopment and development projects in Asia of about $23 million, and that totals to $377 million.

Michael Carroll – RBC Capital Markets

All right. Thanks.

Operator

And you final question will come from the line of John Stewart, Green Street Advisors.

John Stewart – Green Street Advisors

Thanks for sticking around. Just two quick ones. Joel, just wondering if you have an assessment of what potential overlap or exposure you may have from Bristol-Myers Squibb’s acquisition of Amlyin, would that (inaudible) that space is potential for rationalization?

Joel Marcus

Yeah. We have our exposure to Amlyin over the next, I think their lease goes out another three or four years as I recall, I think about it’s about 75,000 square feet in San Diego. We see that rolling. We don’t the Bristol-Myers taking that space and in fact Amlyin has been, Steve or Peter you could try on that. I think it’s been on the sublease market for a while. So it’s been kind of noncore. I don’t see Bristol using San Diego as a major expansion hub, but I think they’ll keep certainly certain parts of the operation. It’s much more of a development and commercialization effort than it is really an RD hub for them.

Dean Shigenaga

Yeah. Amlyin and it’s been shirking for quite a while in the market, they’ve got a lot of space for sublease. So I think once their RD phase was over where – then they – were concentrating mostly on development and commercialization. They just stopped using a lot of space, so I wouldn’t expect BMS to take any of it.

John Stewart – Green Street Advisors

Okay.

Steve Richardson

Yup. So we have it targeted, I don’t know if it’s in 16 – 15, 16, whatever the date is, I don’t have it right in front of me, but we’ve assumed actually even before the acquisition that would roll and not be renewed and I think that’s pry too of a bunch of their other space down there, would be my guess.

John Stewart – Green Street Advisors

That’s helpful. And then, Dean, I know you gave a run rate for straight line rent for – on a quarterly basis, but just wondering if you’ve got the fourth quarter number, just given the ramp up of NOI coming online, what’s the cash contribution or rather what’s the straight line rent adjustment for fourth quarter?

Dean Shigenaga

It’s probably – I don’t have the two quarters on the back half of this year, but they’re averaging about $6.5 million. I’d say, I think my expectation is a little bit more straight line rent in 3Q, a little bit less in 4Q.

John Stewart – Green Street Advisors

Okay. Thank you.

Joel Marcus

Yeah.

Operator

This concludes the question-and-answer portion for today. I would now like to turn the call back to Mr. Joel Marcus for closing remarks.

Joel Marcus

Yeah. Thank you, everybody. Sorry, we ran a little bit over here and we’ll look forward to talking to you on the third quarter call. Thanks again.

Operator

Thank you once again. Ladies and gentlemen, this concludes today’s conference. You may now disconnect and have a great day.

Article source: http://seekingalpha.com/article/767481-alexandria-real-estate-equities-ceo-discusses-q2-2012-results-earnings-call-transcript

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