Alexandria’s client tenant has signed a 10-year lease at 499 Illinois Street for approximately 97,700 rentable square feet (RSF), or 45%, of the 219,600 RSF facility, consistent with the Company’s current “initial yield” projections. The client tenant will open a state-of-the-art RD center in Mission Bay focused on the development of next generation products and services, as well as a customer demonstration and training center.

Alexandria’s Mission Bay life science cluster is renowned for its significant talent base – a dense concentration of Nobel Prize winners, scientists, doctoral students, entrepreneurs, venture capitalists, and technologists from first-class client tenants including the University of California, San Francisco (UCSF), California Institute for Quantitative Biosciences (QB3), Bayer AG, Celgene Corporation, Fibrogen, Inc., Nektar Therapeutics, Inc., and blue chip venture capital firms such as Novo Ventures, OrbiMed Advisors, Third Rock Ventures, venBio, and Versant Ventures.

At the heart of Mission Bay, UCSF is leading the Precision Medicine revolution, which aims to integrate genomic, clinical and environmental data into routine clinical practice and improve patient diagnosis and treatments. In recent weeks, Mission Bay has garnered international acclaim with the announcement that two major drug developers – Roche and Bayer AG – have initiated strategic partnerships with QB3. In addition to Roche and Bayer AG, Novartis AG and Pfizer Inc. have also joined the QB3 program. With innovative collaborations pioneered by QB3 as well as UCSF’s intensifying intellectual and capital investment in translational medicine, Mission Bay has become the epicenter of life science innovation, collaboration and translation in the San Francisco Bay Area. The current market demand is very strong for 499 Illinois Street particularly, and Mission Bay more broadly, from multiple market segments including life science, translational clinical uses and the rapidly expanding technology sector.

“We are honored to welcome this exceptional client tenant to the Mission Bay life science ecosystem and 499 Illinois Street for the creation of an iconic RD center,” said Stephen A. Richardson, Chief Operating Officer and Regional Market Director of Alexandria’s San Francisco Bay Area Cluster. “This Company is a world-class organization, and we look forward to integrating its team into the highly innovative and collaborative Mission Bay life science community.”

The client tenant’s Mission Bay RD center will feature unique and creative amenity spaces, including a high-quality cafe, an activated bay front plaza with distinct recreational areas, and a cutting-edge fitness center. This iconic campus environment, ideally situated within the highly innovative and urban Mission Bay life science ecosystem, will provide the Company with a unique advantage in recruitment and retention, as well as driving productivity for this world-class organization.

About Alexandria Real Estate Equities, Inc.    
Alexandria Real Estate Equities, Inc. (NYSE: ARE), a self-administered and self-managed real estate investment trust (REIT), is the leading and largest investment-grade REIT focused principally on owning, operating, redeveloping, developing, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry. Founded in 1994, Alexandria was the first REIT to identify and pursue a primary focus on the laboratory niche and has since had the first-mover advantage in every core life science cluster location including Greater Boston, the San Francisco Bay Area, San Diego, New York City, Seattle, Suburban Washington, D.C., and Research Triangle Park. Alexandria’s high-credit client tenants span the life science industry, including renowned academic medical research centers, multinational pharmaceutical companies, public and private biotechnology entities, U.S. government research agencies, medical device companies, industrial biotechnology companies, venture capitalists, and life science product and service companies. Forty-six percent of Alexandria’s total annualized base rent is generated from investment-grade client tenants. As the recognized real estate partner of the life science industry, Alexandria has a superior track record in driving client tenant productivity, collaboration, and innovation through its CBD locations adjacent to leading academic medical research centers, best-in-class laboratory/office space, unparalleled life science real estate expertise and services, and longstanding and expansive network in the life science community, which we believe result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For more information, please visit www.are.com.

This press release 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 our Annual Report on Form 10-K and our other periodic reports filed with the Securities and Exchange Commission.

SOURCE Alexandria Real Estate Equities, Inc.

Article source: http://www.fiercebiotech.com/press-releases/alexandrias-499-illinois-street-mission-bay-san-francisco-signs-anchor-9770-0

“Onyx represents a significant new second generation of biotechnology companies that are commercializing breakthrough, high-impact products that will save lives, manage disease, and reduce the economic burden of disease on society,” said Joel S. Marcus, Chairman, Chief Executive Officer and Founder of Alexandria. “We are honored that Onyx and its world-class team have chosen a long-term partnership with Alexandria, and we look forward to their continued growth and success in the years to come.”

The ground-up development of this facility is consistent with Alexandria’s strategy to transform non-income-producing land into income-producing assets with significant pre-leasing from high-quality client tenants. As an investment-grade REIT, Alexandria also intends to fund this development on a leverage-neutral basis. Alexandria expects to deliver the 269 East Grand Avenue in the fourth quarter of 2014 and is currently negotiating a secured construction loan to provide funding for this project.

Alexandria is the dominant life science owner and operator in the San Francisco Bay Area cluster with approximately 2.9 million rentable square feet (including development and redevelopment assets) in the Mission Bay, South San Francisco, and Peninsula submarkets. In Alexandria’s South San Francisco submarket, from the first quarter of 2008 through the third quarter of 2012, Alexandria captured approximately 844,000 rentable square feet of new leases –approximately 724,000 rentable square feet more than the next highest laboratory landlord. Alexandria currently serves approximately 25 client tenants in the South San Francisco submarket including Roche, Onyx Pharmaceuticals, Inc., Theravance, Inc., Crescendo Bioscience, Inc., Exelixis, Inc., Global Blood Therapeutics, Inc., and Stem CentRx, Inc.

About Alexandria Real Estate Equities, Inc.

Alexandria Real Estate Equities, Inc. (NYSE:ARE), a self-administered and self-managed real estate investment trust (REIT), is the largest and leading investment-grade REIT focused principally on owning, operating, redeveloping, developing, and acquiring high-quality, sustainable real estate for the broad and diverse life science industry. Founded in 1994, Alexandria was the first REIT to identify and pursue a primary focus on the laboratory niche and has since had the first-mover advantage in every core life science cluster location including Greater Boston, the San Francisco Bay Area, San Diego, New York City, Seattle, Suburban Washington, D.C., and Research Triangle Park. Alexandria’s high-credit client tenants span the life science industry, including renowned academic medical research centers, multinational pharmaceutical companies, public and private biotechnology entities, U.S. government research agencies, medical device companies, industrial biotechnology companies, venture capitalists, and life science product and service companies. Forty-seven percent of Alexandria’s total annualized base rent is from investment-grade client tenants. As the recognized real estate partner of the life science industry, Alexandria has a superior track record in driving client tenant productivity, collaboration, and innovation through its CBD locations adjacent to leading academic medical research centers, best-in-class laboratory/office space, unparalleled life science real estate expertise and services, and longstanding and expansive network in the life science community, which we believe result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For more information, please visit www.are.com.

This press release 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 our Annual Report on Form 10-K and our other periodic reports filed with the Securities and Exchange Commission.

SOURCE Alexandria Real Estate Equities, Inc.

Article source: http://www.dailymarkets.com/stock/2013/03/04/alexandria-real-estate-equities-inc-announces-long-term-lease-with-leading-global-commercial-stage-oncology-company-onyx-pharmaceuticals-inc-for-new-build-to-suit-facility-in-south-san-francisco/

David Becker, principal, Bay area office of BNBuilder.

Blanca Torres
Reporter- San Francisco Business Times

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HQ: Redwood Shores

Company: BNBuilders, based in Seattle, opened a Bay Area office in 2003 focusing on bioscience and lab buildings. The local office employs about 150 people with $140 million in revenue in 2012 and an estimated $175 million for 2013. Recent projects include a 162,000-square-foot headquarters for Onyx Pharmaceuticals in South San Francisco, the build-out of Twitter’s offices at 1355 Market in San Francisco and a lab building for Valero in Benicia. Its client roster features Alexandria Real Estate Equities Inc., Shorenstein Properties, Kilroy Realty, Wareham Development and Hudson Pacific.

Background: Becker came to the Bay Area to …

Blanca Torres covers East Bay real estate for the San Francisco Business Times.

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Article source: http://www.bizjournals.com/sanfrancisco/print-edition/2013/01/11/david-becker-principal-of-bay-area.html

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

Operator

Absolutely (Operator Instructions) and our first question will come from Jonathan Habermann of Goldman Sachs.

Jonatnhan Habermann – Goldman Sachs

Hi, good morning, everyone. I guess the question here on dispositions, Dean you’d mentioned possibly raising above the $112 million in guidance but can you give us sense of the magnitude that you’re anticipating, perhaps, beyond that original forecast?

Joel Marcus

Yeah, let me – Hi, Jay, it’s Joel. Let me comment on that it would be our goal to see that maybe approaching to $200 million to $250 million if we’re successful. But clearly we can’t assume that.

Jonatnhan Habermann – Goldman Sachs

Okay. And just switching to 499 Illinois, can you give us some sense of the tenant looking at the space? What they’re timing would be for actually taking use of that space?

Steve Richardson

Yeah, this is Steve. We’re on track. We’re in a full marketing campaign mode. As I noted, we’ve had tours. There is live genuine activity in the market. We do need to complete the warm-up process. So I think we’re talking about a mid-2012 occupancy target.

Jonatnhan Habermann – Goldman Sachs

Okay. And just final question, can you just give us any update I guess on New York City in phase two?

Steve Richardson

Yeah, we continue to view New York as a really strong market. We had one opportunity this week that had a time issue that was pretty sizeable and pretty exciting that we did have to let pass and not take on but it was quite interesting. We do have two requirements that are external that are both institutional and one internal for substantial expansion for New York when we decide to kick off the West Tower which is 400,000 square feet. So that’s really – what will determine that is really the capital that will fund it and we clearly would want to move those opportunities to signed leases and have over 50%. At the moment, none of that is in our current 2012 plan.

Jonatnhan Habermann – Goldman Sachs

Okay. And just to clarify in the dispositions, I guess what portion of that would be assets versus possibly liquidating from land?

Steve Richardson

The majority of that would be assets.

Jonatnhan Habermann – Goldman Sachs

Thank you.

Operator

And our next question will come from Anthony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

Hi, thanks. Good afternoon. First question is on Illumina and they’ve preannounced and had a tough time. Just curious if you could give a sense if there’s any outs of them and either their main lease or with the building you are building for them the expansion part of that site?

Joel Marcus

No. And in fact we’ve had discussions with them as late as yesterday. Some things we can’t share with you because they aren’t public. They did file an 8-K today on their small layoff. We know where that’s coming from but it is not affecting their operation that we’re involved with. I’ll ask Amanda to comment on Illumina because I think there is a certainly misunderstanding about – broadly about kind of what’s going on there.

Amanda Cashin

Sure. So as you mentioned, Illumina had announced their earnings and had announced sort of a pre-guidance to their earnings and move on to some reductions that they’ve seen from some of their academic customer spending and a lot of that they’re attributing to sort of the uncertainties that the academic researchers are seeing from federal funding from research grants. So that has slowed customer spending down. And also – that has also impacted from the roll off from the stimulus fund that had a peak in 2010. So they’re kind of seeing reduction of revenues, a 1% decrease in third quarter 2011 from third quarter 2010.

But remember this is a profitable company that has a $3.7 billion market cap and continues to be committed to growth and innovation and investing in research and development. So I think we feel so pretty comfortable that while their stock price may have dipped it may have been in responses perhaps in over valuation in the market due to the really, really high expectations both have, as they really are a topnotch DNA sequencing company that has a lot of conduct to really impact the market in the long term for genome sequencing.

Joel Marcus

Yeah, and I think Tony as far as the phase that they are taking, they have reiterated the time schedule and the space and we don’t see any changes in that whatsoever.

Anthony Paolone – JPMorgan

Okay and the $3.3 million I guess I calculated that as in terms of the fourth quarter GAAP NOI on that project. Is that the full amount with the exception of the 4 million that would then come in from the additional property you’re building there?

Joel Marcus

Yeah, that’s correct.

Anthony Paolone – JPMorgan

Okay and if I – I just looked at that just to understand the bridge from where Biogen was there and where Illumina is there now. You said the roll down sequentially I think is $1.7 million, so it suggest that I guess Biogen was running at about $5 million a quarter in NOI about $20 million a year. Is that right in terms of GAAP?

Joel Marcus

Yeah from a GAAP perspective, you’re right. Roughly speaking if you add 1.7 million on top, roughly I think the GAAP rate was around $36. Effectively what happened was when we originally purchased the property it was subject to a 15 month leaseback. As you are well aware 45 days later we executed the lease with Illumina for the campus and they had the desire to be in the project much sooner. So we went back to Biogen and try to figure out how to get space back sooner so we can meet and accelerate the delivery Illumina’s benefit.

We were able to achieve that not all at once but over time and so the 15-month shrunk. From a pure accounting perspective, it required the re-estimate of the amortization period of the 141 revenue under a shortened timeframe, which resulted in $1.7 million of higher GAAP rent income in the third quarter. That really worked through the process as we were trying to figure out exactly what that estimated delivery date would have been for Illumina to take the space. And as we took the space back from Biogen, we were able to figure out the exact timeframe which really is the reason for not a whole lot of clarity until it happened.

Anthony Paolone – JPMorgan

And so I guess, I’m just trying tie in – maybe another way to look at this if my numbers here are close, in hindsight, does the Biogen yield on a GAAP basis work out to have been something like 15% plus. And now, with Illumina in there, you’re trying get to your 10% that you’ve kind of guided to for a while in the space, is that kind of like…

Joel Marcus

Yeah. But…

Anthony Paolone – JPMorgan

…different?

Joel Marcus

Yeah. Something’s – Tony, I didn’t do the math but something a little unusual from a yield perspective on a GAAP basis during Biogen’s occupancy, it was not originally targeted that way because we thought we had a 15-month deal. But you’re right, the acceleration or shortening of their lease term resulted in an increase in GAAP rent resulting later after Biogen ruled out and Illumina took occupancy in a normalized run rate going forward, and I think I provided that number at $38 and some change in the supplemental.

Anthony Paolone – JPMorgan

Okay. And then a question for Steve on the Illinois Street property, you talked about a couple of institutional life science tenants that we’re looking at it. Just curious as to what their alternatives would be like what other types of things would they be looking at when they consider that space?

Joel Marcus

Yeah. Again, I did use the word preliminary, Tony, so I do want to say that again. But right now, they have no other alternatives. I mean 1700 Owens is essentially fully leased. 1500 Owens now is fully leased with UCSF expanding for the fourth time. 455 is now fully leased or committed. So as far as high quality life science space for laboratory users, there really is no other alternative down there in Mission Bay.

Anthony Paolone – JPMorgan

But would tenants or prospective tenants like that consider other markets or what would be sort of their mind set or is it matter of maybe we’ll go into new space, maybe we won’t do anything at all? I mean, it sounds like they don’t have an option?

Joel Marcus

No. These particular types of users really don’t have an option. Going down to South San Francisco isn’t particularly viable, so I think it’s just a matter of time.

Anthony Paolone – JPMorgan

Okay. And then just a couple of questions on the development side between I guess now and the end of next year about $83 million of funds to China and India, curious as to A, how many projects does that encompass; B, is that all of the spending, is that just part of half to get certain projects done; and then I guess, C, what are the returns like on something like that?

Dean Shigenaga

Yeah. Actually, it’s – just to clarify, you’re right, Tony, in total, 83 over five quarters. It’s about $20 million in the fourth quarter and 62 projected for next year. And we are anticipating delivery of some space soon, so you do see some dollars maybe at a little higher rate than what we have incurred on average for 2011. So you’ll see that soon and that’ll probably come out on both markets soon, both India and China.

Joel Marcus

Yeah. I’ll ask Steve to comment broadly on China and then I will on India, just generally about kind of where we are in today.

Steve Richardson

Yeah. We’re making good progress there. I just returned on Friday from both of our projects there in China. We’re having serious discussions with a significant anchor tenant for the South China project that we’re feeling optimistic about and then have continued detailed conversations with a couple of key users for the North China project. More to come on those but these are substantive discussions with real users with requirements.

Joel Marcus

Now in the North China project, we’re working to try to finish that and there will be additional investment in the build out. What’s emerged is a possible institutional/governmental entity that could take a floor more in North China together with potentially a North American client. And then in South as Steve said we are on the (inaudible) of having a major anchor tenant there that’s a credit western pharma kind of company. Probably the bulk of those funds will flow into India primarily in two submarkets.

One submarket with one major tenant which is one of our top tenants who is doing. Or in the process of delivering a project to them right now and there would be several follow on will actually paces.

And so that’s been the bulk of our focus in India and we continue to invest and try to have a number of key land parcels and kind of to build that suite approach. As we said I think on previous calls, our benchmark for on and after tax basis is to try to be about 500 basis points above what we could get on the development here in the U.S. and we think we will be able to achieve that. China is hard to say at this point. I think it can be – we’re still in that target area.

Anthony Paolone – JPMorgan

Okay. And last question just on Toronto, can you give us the economics there and what’s your, I guess, basis on that right now and just when that income comes in?

Joel Marcus

Sure, Johnny. I think this is filed out in this supplemental as well as last and it was almost in a transition right over our second quarter earnings. So, we were able to provide limited information at that time. But basically MaRS a nonprofit entity in Toronto that did Phase I and affiliate of MaRS where we moved in forward with Phase II and Phase II development in Toronto that we had originally anticipated doing.

And you can actually find their press release on their own website so this information is available, but basically we executed a ground lease within affiliate to allow them to move forward. MaRS has announced commitments with two institutional anchor tenants along with attractive financing from infrastructure in Ontario. So from Alexandria’s perspective we have no financial obligations related to the construction or the financing of the project and we expect ground rents to commence with the completion of construction of the building.

Anthony Paolone – JPMorgan

And what’s your all-in basis for that land and what’s the ground rent, or what’s the return on that?

Joel Marcus

Yeah, we have helped you – give you a brief description on what we actually had invested into the project. The original structure was the ground lease from MaRS. We then invested into design and soft cost as well as a lot of hard construction to go below grade for a parking garage. The foundation in structure to support the building, and we kept it off right at street level. MaRS will finish the project from that point.

So we had roughly somewhere in the $80 million range invested in the project. And, the way this work is – do we had a basically a 99 year at least, we get it back roughly in 49 years. And rentals begin upon completion of the building and step over time.

Ultimately we get a modest return on this ground rent. I wouldn’t say it was the most attractive ground lease structure, but we do get a nice single digit return on our investment. But again it won’t happen for a few years, probably 2013 or later.

Steve Richardson

And we don’t have future payments on the original ground lease, which is…

Joel Marcus

Yeah, everything is being passed through. So now, we’re no longer responsible for operating cost or the ground.

Anthony Paolone – JPMorgan

I see. Thank you.

Joel Marcus

Yeah. Thank you.

Operator

(Operator Instructions) And our next question will come from Michael Bilerman of Citi.

Michael Jason Bilerman – Citi

Good. Thank you. Good afternoon. Dean, thank you for the details regarding the redevelopment and development NOI. If we can just go into detail just in terms of the ins and outs of how that – the cost associated with that amount. And I think you broke out just between the development and redevelopment was about $34 million out of the call it $45 million of NOI and then I guess there were some that had been recently completed. But can you walk through – you really compared this 4Q to 4Q. What sort of percentage of that NOI comes online in the fourth quarter? And then first, second, third and fourth, it sounded like some of it was coming earlier than the fourth quarter of next year.

Dean Shigenaga

Yeah, Michael, I don’t have that schedule in front of me but let me try to – if we turn to page 46 and 47, I’ll try to give everybody some – a better depth to the question you asked. John Hopkins is 100% leased and it’s a second quarter ‘12 delivery date. Campus Point is a little bit of split between 4Q, 1Q over the next one or two quarters with the other half being fourth quarter of ‘12. Nancy Ridge was just the next asset on the schedule, is at least first half ‘12 on the lease component. 400 Technology Square is late in the year for ‘12, 215 is small and we passed on that. Basically that one will be delivered shortly. Quadrangle’s first half of ‘12, 9800 Medical Center is a fourth quarter of ‘12.

As you move off to the development schedule, 5200 Research Place is a fourth quarter delivery. Illinois with a fourth quarter assumption for the lease up and East Jamie, I believe I gave 25 and 25 in 3Q and 4Q. So it’s really back end of the fourth quarter weighted.

Michael Jason Bilerman – Citi

And then as you total this, so it was $34 million and then you had 7 Triangle and recent development stuff was another $4 million, so $38 million in total and then the balance was same-store and acquisition, what does that NOI upon full stabilization grow to? Because I think you had also talked that let’s say for Torrey Pines, you’re only assuming it’s 20% leased, it was only $1.2 million. Obviously the full NOI contribution is going to – if you lease it up, it’s going to start hitting later years. But I’m just trying to understand the magnitude of this NOI.

Dean Shigenaga

Yeah, that’s a real relevant question, Tony, let me see if I’ve got a schedule that goes out beyond that and it’s not perfect because I’ve got a development schedule that looks at all development.

Michael Jason Bilerman – Citi

I guess I’m going to ask it in a different way, you talked about that these projects comprise high 400 millions of cost. What is the yield or the ultimate stabilized yield is it just the 38 million that you’re talking about today and it relates to the same high $400 million which is about an 8% yield?

Dean Shigenaga

Yeah it is right in that 8% range and I would say if I had to guess just looking on the delivery they provided you somewhere approaching 20% has yet fully to come in and that number could be bigger. I mean we could just run these estimates mid-quarter assumptions on the information I provided. I just don’t have that breakdown with me.

Michael Jason Bilerman – Citi

And then how much when you’re talking about $500 million or high $400 million of cost investment when you look on page 43 of your supplemental you have $604 million that you’ve spent on development and redevelopment. Is that not that the high $400 million you’re talking about is that all captured in this $600 million? Or has some of it already been transferred to operation or vice versa? Is money to be spent over the next 12 months that eventually will contribute to NOI to next year? Just trying to put all the pieces together.

Dean Shigenaga

Yeah, you framed it well Michael, it’s the latter. So the $300 million on page 43 $300 million of active redevelopment basis – development basis of $190 million the basis I’m referring to sits in there. It also includes spend-to-complete.

Michael Jason Bilerman – Citi

And so how much spend-to-complete to generate that $45 million – or sorry $38 million of NOI is still left present?

Dean Shigenaga

Yeah, unfortunately Michael I don’t have that breakdown with me. But we can chat about it later.

Michael Jason Bilerman – Citi

And that spend is included and effectively in this capital budget that’s on page 45…

Dean Shigenaga

That is correct.

Michael Jason Bilerman – Citi

You have $416 million part of that is part of this high $400 million delivery that you’re talking about?

Dean Shigenaga

That is correct.

Michael Jason Bilerman – Citi

Is there a dilution in terms of the timing of when something gets delivered versus when it contributes NOI that could also be affecting your numbers next year effectively the project as delivered in the first quarter, you stopped capitalizing interest but the NOI is not being recognized until the fourth quarter, is that also playing a part in this sort of earnings value or dilution that’s happening?

Dean Shigenaga

All right. That is true on a few of the assets but I think where it’s probably more relevant. I mean even if you think that could be less, three, four, five years, Michael, we’ve seized capitalization on a variety of projects and brought them back into operating load where all the carry costs go to the PL.

We talked a little bit about China as an example today. One of the projects will likely seize capitalization shortly which will absorb the carry costs to the PL and part of the building will be leased as well, so not all of it will fall to the bottom. And so, there are small assets like that that will contribute a little bit to hit to FFO as the operating costs drop to the bottom line.

Michael Jason Bilerman – Citi

And maybe moving to the balance sheet for a moment, I think you referenced in a couple of comments stress testing the model, trying to put very I guess very conservative assumptions from a financing standpoint into the guidance range that you’ve put out and I think you talked about $200 million of other capital whether they be preferred as sales or ATM which I assume as carrying probably 7% to 8% cost in their model (inaudible) throughout the year and that’s going to pay down the line, is that what’s embedded in the numbers currently?

Dean Shigenaga

That is correct, Michael.

Michael Jason Bilerman – Citi

And then in terms of unsecured debt issuance, I want to make sure I heard you correctly. Did you say you moved that to the end of next year or end of this year?

Dean Shigenaga

We pushed it out from 2011 on our debut bond offering, Michael, to the back half of ‘12.

Michael Jason Bilerman – Citi

So shouldn’t that be massively accretive relative to where people’s mind set and if you go back to the last quarter when you talked about the bond issuance and there’s two pieces happening, right? You issued the bonds at a higher rate, you’re weighted average cost, that goes up so when you capitalized that, you effectively have higher capital interest from a GAAP perspective even though it’s cash dilutive. But that was a $0.13 drag on an FFO basis. Are you effectively saying now even though estimates have come down and that sort of what came down over the last quarter’s call was estimates were high given the fact that the unsecured bonds issuance wasn’t in there that effectively we should now go back up for that $0.13?

Dean Shigenaga

It is – pushing back the bond assumption is a positive or accretive adjustment to FFO. The impact if you were to move this up to one-one of the year, if I recall correctly, it’s not quite $0.13, Michael. May we go to the math offline but I believe it’s closer to something like – and I, oh, I guess what I should be saying the difference between your analysis at $0.13 and I think our underlying assumption is that the latest – there’s another assumptions that goes with a bond offering in our model. And that is the retirement of our 2012 term loans. So those two go hand-in-hand. The net impact of those two assumptions moving. I think net out a few pennies a quarter, maybe $0.03, $0.035.

Michael Jason Bilerman – Citi

Okay. So I guess the term loan that you’re going against your term loan that LIBOR 150 over for five years. That one is effectively going to pay down your line, so that’s a neutral event for your guidance, right?

Dean Shigenaga

Relatively, yeah.

Michael Jason Bilerman – Citi

Because it’s effectively the same rate?

Dean Shigenaga

The line is a little more expensive, but ultimately, Michael, one of two things will occur with the $500 million new term loan. Initially, we’ll retire the line balance outstanding and reduce it. That pricing is about 2.3% over one month (inaudible), so there is a benefit there. Ultimately it will either take out 250 term loan or bonds will take out the 250 term loan. But short-term you’ll get roughly 80 basis point benefit.

Michael Jason Bilerman – Citi

Okay. I have this last question before I leave the floor. The 120 that you’re talking about for fourth quarter of next year, that still going to – I mean if you end up issuing the bonds to that point, that 120 is going to come down, right? I mean that’s still going to have dilution from refinancing and doing your debut bond offering.

Dean Shigenaga

I’m sorry if I wasn’t clear. Guidance includes the bond secured bond offering assumption.

Michael Jason Bilerman – Citi

For the full fourth quarter of 2012?

Dean Shigenaga

Correct.

Michael Jason Bilerman – Citi

So when you look at the street right now, which is at $1.21 for the fourth quarter, the lower guidance effectively in your guys’ eyes is more a reflection of the development and redevelopments not contributing until later in the year versus earlier in the year in which case the run rate into 2013 should state relatively the same and you should feel relatively comfortable where the street is at for 2013.

Dean Shigenaga

Yeah, by and large. And I think just broadly speaking, the different mix of capital until we get to the fourth quarter.

Michael Jason Bilerman – Citi

Okay. And for the supplemental, I think one of the things that would help going forward to bridge this gap is on page 46 and 47 is they actually have the (inaudible) invested today, your gross potential investment targeted yield. In that way, and also a little bit more clarity on as to when in the year those projects are coming online so that going forward, there won’t be this disconnect between what the street is thinking and what you guys are thinking in terms of development and redevelopment given that it’s such a substantial part of your business and I’ll get off soapbox.

Dean Shigenaga

Yup. No, we agree. We agree. I think it would be incredibly helpful.

Operator

And our next question will come from Philip Martin of Morningstar.

Philip Martin – Morningstar

Good afternoon.

Dean Shigenaga

Hey there.

Philip Martin – Morningstar

I think my model is done. But thanks, that was a very good insight actually on the model and a lot of information you provided in your opening remarks, Dean, was helpful. Joe, would you characterize your larger high quality tenant base as compared to what’s called the less established tenants to be less concerned with a potential of 7.9% NIH budget cut? And then your opinion kind of potential reduction in the budget drive increased MA or do you feel venture capital would still that potential shortfall or void?

Joel Marcus

Yeah. That’s a good question, then maybe I just pulled out the top 20 in some of the – at the risk of elongating this call a little bit. Let me just run through. I think the answer is we don’t have real exposure in a real meaningful sense. I mean Novartis is one, Lilly is two, Roche is three, FibroGen just moved to four. They are very well financed private company with a potential huge blockbuster drug that is a new motive administration. Illumina is number five. Amanda’s talked about that. The government is six. And those are long term non-cancellable leases other than one lease which comes to an end next year.

Bristol-Myers, Glaxo, MIT. Even if the NIH budget is cut, MIT will still dominated with very high quality opportunities. NYU-Neuroscience Research Institute. It’s been fully endowed by a huge hedge – a billionaire of hedge fund, so there’s no exposure. Alnylam’s a public biotech company. Gilead, Amylin all – and I think really are not NIH based. Pfizer 14, Theravance 15. 16 would be the one that Scripps Research, they garner a lot of NIH money.

Remember, I said it’s (inaudible) grants though it’s something happened in fiscal 2013, what they have today would be fine through a number of years but then new grant starting in ‘13 and beyond might impact them so they potentially downstream. Quest Diagnostics, 17 now. Forrester is 18. They’re moving out, so they’re out of there. Infinity is a public biotech company not subject and The Regents of the University California. I would say these are – the bulk of these are like clinical and non-NIH grant type uses that we have. I’d say out of the top 20, probably the only one that would have real exposure would be beyond Illumina that you’ve seen. Although Illumina’s competitors have far less exposure life cryogen and my guess is that Illumina will work itself in to that position where it has I think today amounted 25% NIH exposure or something.

Dean Shigenaga

It’s about a third of the revenue.

Joel Marcus

Okay. My guess is they’re going to work that down so they’re going to have a lot less like the others do, but I would say scripts would be the only one.

Philip Martin – Morningstar

Do you find that the budget cuts and the potential budget cuts I should say are delaying any lease decisions on the parts of your existing tenant base new potential tenants, et cetera or are they really or are they not?

Joel Marcus

Yeah, in our world in each of the kind of critical submarkets we’re in, they’re not that we can sell. I think the one area that could be would be long with medical center which the multiple Harvard hospitals there garner a large amount of NIH budget. So that could be one area, but in the rest of our markets that we know of, we have very few tenants that really garner huge amounts that are dependent on leasing facilities as it relates to NIH budget cuts. And remember, the 2012 budget should be at least – if it’s down, it’s only going to be down $190 million.

Philip Martin – Morningstar

That much.

Joel Marcus

Yeah. And so the 2013 in my guess is even if this automatic budget cut happens because these guys can agree by November 22nd, my guess is that government – I mean Obama has been on this soap box and a lot of people have, they’re going to probably find a way to restore that because of the need for leadership in this area for the country. So, if not a controversial issue, it just happens to get caught up in this budget debacle.

Philip Martin – Morningstar

Yes. And that’s what I’m confronted with when we talk to investors is that…

Joel Marcus

Yeah.

Philip Martin – Morningstar

It’s more confusion than anything when you understand the real fundamentals. There’s probably a better story than what’s being perceived out there.

The last question I have, with respect to leasing trends, does the Alexandria portfolios – does the larger and higher quality tenant-based limit rental rate growth a bit for the company over the next call it 12 to 24 months. I mean, obviously, the potential offset is a higher quality tenant which is certainly important in this environment – very important in this environment where there’s global and economic uncertainty but is it somewhat limiting your rental rate growth because the percentage or proportion of smaller tenants isn’t there? I just want to get some insight into that.

Joel Marcus

I think actually it kind of works the opposite way to the extent that a tenant has a pricing power they’re more likely to be stringent on rental rate increases. Give you an example, both ourselves and Boston Properties are building state-of-the-art facilities for Biogen Idec in Cambridge. They’re really tough. They had two companies, not so much competing but they were doing similar projects and so they have some pricing power. They could go – they could have stayed where they are or done some other things.

So they kind of work both parties against each other in a sense and so where you’ve got the bigger safe and the bigger pricing power sometimes you have a tougher time negotiating more upside on the annual steps but I think where you’ve got a multi-tenant building and you’ve got floor users or smaller space is actually much easier to achieve that three or three plus.

I don’t know. Steve, you can comment what’s in your market.

Steve Richardson

Yeah. I think the tenants really. And we alluded to this with the institutional tenants in Mission Bay, I mean, they need to be next to UCSF, they need to be next to MIT, they want to be on the Torrey Pines bluff, they want to be in the South Lake Union. So to the extent, you’ve got relatively healthier tight markets even though there’s a large credit tenant that we try to exert their credit worthiness for lower lease rates, their desire to be there versus the market that they had sub-leased space under lease rates.

They’re going to choose the location versus the economic. So I think that really provides a nice floor and as Joel said, maybe we don’t actually have higher annual steps but we end up with longer lease rates as well so you’ve got the security of a long-term lease rate, then the obvious gap benefit of that annual increase.

Philip Martin – Morningstar

Okay. So that’s really a half to – I mean it’s a great location and a half too situation for these tenants large and/or small so okay, I appreciated. Thank you very much.

Steve Richardson

Yes.

Operator

And our next question will come from John Stewart of Green Street Advisors.

John Stewart – Green Street Advisors

Thanks. I’ll try to be quick. Joel, I hope you could give us a bit of perspective on Steve’s new role. It sounds like maybe you’re doing a bit more travel to China than previously. But otherwise, I wanted to get some perspective on what his responsibilities are going to be going forward and he’s going to be back filling what he had been doing in San Francisco. And then, lastly, if you could just give us some comment in terms of how we should think about this in the context of longer term succession planning.

Joel Marcus

Yes. So he didn’t get the recruiting letter yet. Yes, Steve initially – while we continue to manage the bay area and over time, we will look to have a new market leader there so that’s something we have to work on during the coming quarters. And much as Jim’s role was and Jim and Steve are not related for reference.

Really, the first initial focus is really detailed effort in each of our regions because we spent a lot of time in each of the regions. We’re a very hands-on management team. I think that’s why we’ve been able to I think execute on developments, re-development leasing things like that and keep a very stable workforce.

So I think that’s and that’s a big part of what Jim did and I think you’ll see initially that’s where Steve’s effort will be. I think it’s pretty clear Steve’s been with the company more than a decade. The board is very comfortable with him, obviously. I am too and so we view Steve as a very important person on a go forward basis.

But I think what distinguishes Alexandria from most other companies, maybe there’s a few at the very large end that have pretty large management teams. But I think in the mid-cap and certainly for others, I think we have a senior management team, maybe a 12 to 15 people virtually all of whom who’ve been with the company more than a decade which is pretty unusual who operate very – operate in a – both in an independent but in a real effective reporting fashion and I think that’s very unusual to have that depth and quality of management. And there’s any number of people who could step up and take on much more heavy lifting and so, we’re very fortunate and blessed I think with that.

John Stewart – Green Street Advisors

Okay, that’s very helpful. Thank you. And one last one, just coming back to the dispositions and not at all focused on 2012 guidance. But just a little bit of color please. I presume that what you’re talking about, aside from maybe a couple of assets in the Boston Suburbs, I would presume we’re talking about North Carolina and Suburban New Jersey or Philadelphia. And so if you could comment just qualitatively in terms of what might be non-core and proudly speaking in terms of cap rates you might execute out. Thank you.

Joel Marcus

I think that’s a question that is something that I think we’re not prepared to make public at this point. I think it would imprudent to do so. So the best I would say is stay tuned and we clearly have a sizeable effort going on to look at the ability to monetize Suburban assets and move that capital into our urban CBD.

I mean, we have this groundbreaking (inaudible) in Cambridge we have 1.7 million square feet there. I think more Sacramento on the call today, and Boston Property has mentioned that maybe of all the markets, CBU Cambridge is maybe the top. We do too. So it’s (inaudible) us to use our capital, which is both precious and top these days to get in the sense of the general markets to move them into those kinds of irreplaceable locations. So I think you’ll see us to do that, but let me not comment on that for a whole variety of reasons.

John Stewart – Green Street Advisors

Fair enough, how about just the cap rate, the cap rates?

Joel Marcus

Well, I think you also – yeah, I don’t think you can assume anything. I think we’re looking at a variety of structures. And so let me beg of by saying stay tuned and hopefully for the next quarter or so we’ll be able to elucidate that in a more detailed fashion.

John Stewart – Green Street Advisors

Okay, thank you.

Joel Marcus

Yes.

Steve Richardson

Thanks, John.

Operator

And our next question will come from Dave Rodgers of RBC Capital Markets.

Dave Rodgers – RBC Capital Markets

Yeah, Dean, real quick on the financials that you talked about for next year. Did you give a development start number that’s embedded in your guidance for ‘12 and or a capitalized interest number for 2012 relative to ‘11?

Dean Shigenaga

Not on the developments starts side, but we do have a – let me think. In Cambridge, we have Biogen Building that was going to be breaking ground here shortly, so that development will be added into ground up developments. And then I mentioned in NOI growth there is two potential developments one of which is executed and they aggregate somewhere around 140,000 square feet in total but two separate projects with credit for the spread of tenants behind it. As it relates to cap interest, I provided guidance in the $54 million to $60 million range for ‘12.

Dave Rodgers – RBC Capital Markets

Okay, thank you. And I guess, Joel, just on the asset sales again, sorry to kind of belabor the point. But I guess just to get a better sense, how would you rank order your preference for selling assets or other capital initiative next year? Obviously, cost is one issue but also moving the portfolio is another. So, I mean, does that rank at the top of that list and how would you view that?

Joel Marcus

In the sense of ranking against what else?

Dave Rodgers – RBC Capital Markets

I guess you got preferred as an option, common equity…

Joel Marcus

Yeah…

Dave Rodgers – RBC Capital Markets

…deleveraging initiative?

Joel Marcus

Yeah, fair enough. I’d say it ranks at the top.

Dave Rodgers – RBC Capital Markets

Okay. Thank you.

John Stewart – Green Street Advisors

Yes, thank you.

Operator

And our last question will come from Ross Nussbaum of UBS.

Gabe (ph) – UBS

Hi, guys, it’s Gabe (ph), I’m only here with Ross. Just a real quick one, sorry if I missed this. But did you guys give a yield on the Biogen development, that kindle?

Joel Marcus

We did not, but I think you can assume that I think on a caller two ago we basically said we’re in the mid to high-seven and that’s kind of where it is. So if we were to turn around and build that building and sell it, we think although that wouldn’t necessarily be our favorite kind of development yield, we think we could achieve a six or sub-six on that asset, so there is a decent spread there.

Gabe (ph) – UBS

All right. Thank you.

Joel Marcus

But don’t interpret that as our standard development yield, I think, on new construction generally.

Ross Nussbaum – UBS

Hey, Joel, it’s Ross, I might have missed this earlier but with respect to the Alexandria Center, realistically, are we talking about that being still years away or is there a possibility that a big fish could come in 2012 and we can see an announcement there sooner rather than later.

Joel Marcus

Oh, you mean in New York?

Ross Nussbaum – UBS

No, I’m talking, sorry, in Trenton Square on the big redevelopment project…

Joel Marcus

Oh, I’m sorry, okay the big one, well as maybe has been said, I think on the Boston Property’s call there is at least one and maybe big tech users that are looking for sizeable space there is a big pharma user that’s looking for sizeable space. There are number of big players so the answer would be, we certainly don’t have that in our 2012 go-forward game plan but something had emerge that would be sizeable as opposed to people looking for a floor or two. And this is maybe one of the only places they could go that would make sense so I would say we’re working on those things but we have nothing that’s definitive at this point.

Ross Nussbaum – UBS

Do you have all your required zoning approval at this point?

Joel Marcus

Yeah. I mean, we have – virtually we’re working on the final two building design. We’re working infrastructure so we can move very quickly.

Ross Nussbaum – UBS

Okay. So instead you are working with the (inaudible) at this point?

Joel Marcus

Yeah, everything has been – we’re way beyond that.

Unidentified Analyst

Okay. Thanks.

Joel Marcus

Yes.

Operator

And at this time I would turn the conference back over to our speakers for any additional or closing comments.

Joel Marcus

Okay. Well, sorry we ran a little over today or a lot over today. Thanks for the very, very good questions and we appreciate your time and attention. Thanks again.

Operator

That does conclude today’s teleconference. Thank you all for your participation.

Article source: http://seekingalpha.com/article/302577-alexandria-real-estate-equities-ceo-discusses-q3-2011-results-earnings-call-transcript

Nowhere in the country has the tightening of lab space supply been more evident than in the supply-constrained San Francisco Bay Area — especially in South San Francisco and the San Francisco CBD, where leading life science owners and developers such as Alexandria Real Estate Equities Inc. (NYSE: ARE) and HCP Inc. (NYSE: HCP) are competing with technology and Internet companies for some of the last available land parcels.

In recent months, tech companies have scooped up land in the Bay Area that effectively eliminates millions of square feet previously earmarked for lab and biotech buildings in one of the nation’s tightest land markets. In response, Alexandria and HCP have acted recently to lock up available properties and fill the demand at increasingly healthy return profiles on new development, including assets within the Mission Bay redevelopment in San Francisco’s CBD, one of the most desirable biotech addresses in the country.

However, observers say they don’t expect another speculative boom like the one during the mid-2000s upcycle that fueled construction of millions of square feet of life science space in clusters like the Bay Area, Boston/Cambridge, San Diego, Raleigh and Durham, NC; New York, Seattle and suburban Maryland. Even in the tightest markets like Boston and San Francisco, companies are still mainly interested in less risky build-to-suit or solid pre-leased projects.

“Building true, specialized life science space on spec is a challenge given both the above-average cost per square foot and the unique needs of each user,” noted Chris Macke, senior real estate strategist for CoStar.

Just seven months ago, ARE sold most of its undeveloped Mission Bay land to cloud computing company Salesforce.com for construction of a global headquarters — a loss of up to 2 million square feet of potential new lab space development. In April, ARE jumped back into the Mission Bay market, acquiring a newly developed two-building property at 409-499 Illinois St. developed by Shorenstein Properties and SKS Investments.

Alexandria paid $293 million for the two towers totaling 453,000 square feet located across the street from the $1 billion University of California, San Francisco (UCSF) research and development campus and medical center.

The first 240,000-square-foot tower is 97% leased to a biotechnology company through November 2023, while the second tower has 212,000 square feet of rentable space in shell condition, which the company plans to build out. The acquisition gives ARE the capacity to develop nearly 300,000 square feet of additional new supply in Mission Bay, where it now has a footprint of more than 975,000 square feet of existing space at a vacancy rate that has dwindled to just 1%.

The peninsula has recently experienced a sharp increase in absorption, driving direct vacancy rates in South San Francisco to less than 5% and total vacancy to near-single digits when including subleased space, said Paul Gallagher, HCP chief investment officer, during the company’s first-quarter earnings call earlier this month. The ramp up of tenant demand from tech, life science and medical device companies has driven up rental rates by as much as 25% this year.

“This activity reiterates the importance of understanding which industries are driving the various markets and even submarkets across the country,” Macke said. “South San Francisco and the San Francisco CBD are benefitting from the confluence of tech companies and life science companies, as they have both chosen those submarkets as the place to be in the San Francisco MSA.”

ARE essentially traded development risk for leasing risk when it sold the Mission Bay land to Salesforce.com and acquired the new buildings from Shorenstein last month. But the decision whether to acquire or develop buildings is more than just a simple matter of comparing yields or initial rates of return, noted Joel Marcus, Alexandria chairman, president and CEO.

With a major presence in San Francisco, New York City and Boston/Cambridge, three of the nation’s strongest life science markets, the company is positioned to capitalize on pent-up demand as one of the few companies with the ability and resources to develop both build to suit and preleased projects.

In additional to the 300,000 square feet of remaining development capacity in Mission Bay, ARE has about 800,000 square feet left to build in New York at the Alexandria Center for Life Science, where it hopes to begin pre-marketing a 400,000-square-foot tower next month. The company also expects to announce the first build to suit at its Kendall Square project in Cambridge, where it has 1.7 million square feet in its development pipeline.

Leasing isn’t as brisk at its San Diego and North Carolina properties, but on May 18, Alexandria announced plans to build a 50,000-square-foot agricultural research center with 18,000 square feet of research greenhouse space near Research Triangle Park in North Carolina. The multi-tenant project will be called Alexandria Ag-Tech Center.

About 20% of HCP’s wholly owned properties are in the life science sector. Its portfolio also includes senior housing, medical office, post-acute/skilled nursing and hospitals assets.

In its life science portfolio, HCP has only about 750,000 square feet of vacancy across six buildings, with significant interest in about half of those buildings, HCP Chairman and CEO James Flaherty said.

Large tech companies such as HP, Motorola, Google and others have been expanding within Silicon Valley in recent quarters. Firms are now pushing from Mountain View and Sunnyvale northward into San Francisco, sometimes into land and space previously earmarked for life science development.

With lab vacancy now at about 5% in the San Francisco area, development may become an attractive option, with existing buildings for sale likely to be priced in the mid to high $600-per-square-foot range, HCP’s Flaherty said. And the company has jumped right in, announcing the purchase April 15 of the largest undeveloped site in the city, a 20-acre parcel called The Cove at the former U.S. Steel site in South San Francisco.

HCP acquired the land, next to the REIT’s 900,000-square-foot Oyster Point campus anchored by Amgen, from Genentech Inc. for $65 million and began development of The Cove at Oyster Point late last month. The project will deliver up to 800,000 square feet of new lab and office space at an estimated 8.5% return on cost, said Gallagher, the HCP CIO.

Flaherty emphasized that the bullish outlook on development is based on the heated South San Francisco area market, rather than a full-on development play across the company’s life science portfolio.

HCP, holding an already significant market share with its Amgen and Genentech campuses, will “move very quickly on [The Cove] to prepare for what we expect will be an attractive supply-demand dynamic in South San Francisco,” Flahery said.

Article source: http://www.costar.com/News/Article/LAND-GRAB-Developers-Ease-Back-Into-Life-Science-Market-As-Supply-Tightens/128906