Alexandria Real Estate Equities, Inc.
Q4 2012 Earnings Call Transcript

Published: 8 Feb 2013

[Operator:]

Hello, and welcome to the Alexandria Real Estate Equities, Inc. Fourth Quarter and Full Year 2012 Earning Conference Call. My name is Myesha and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Rhonda Chiger. Please go ahead.

[Rhonda Chiger:]

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

[Joel Marcus:]

Thanks, Rhonda, and welcome, everybody, to the Fourth Quarter and Year End Earnings Call, and Happy New Year to everybody. Sorry for the late notice, we were going to release next week, but I’ve got to fly to Basel to meet with Roche’s CEO and so we needed to kind of accelerate our earnings release, so apologize for the inconvenience. ARE’s solid progress in both the fourth quarter and in 2012, I think positions us well for 2013. It reminds me of Lou Holtz’s quote, of football fame

[Steve Richardson:]

Thank you, Joel. I’ll go ahead and focus my comments on two key areas, the first being the Q4 and 2012 leasing results, and then we’ll look forward a little bit at the status of the 2013 roles for each region. So the company delivered strong operating results during 2012, leasing a total of 3,281,000 square feet in 187 leases and finished with a solid Q4 2012, leasing a total of 678,000 square feet in 47 leases. I’ll provide more color on this consistent performance in each region, but will note that these statistics really highlight the company’s ability to engage its client/tenants in a way that is unique and differentiated in the real estate industry. We’re bringing to bear our entire operating platform, including our proprietary life sciences underwriting teams, to fully engage with these clients, not only on an operational level to provide class A service for mission critical facilities and enhance amenities to support an intrinsically collaborative culture, but also on a business development level to partner and leverage a best-in-class network of industry leaders. So, as we look at Cambridge, we leased a total of 924,000 square feet during 2012, including 92,000 square feet of that executed during Q4. We had a nice occupancy increase this past year of 70 basis points from 93.9% to 94.6% and rents for Class-A product have solid support in the mid-to-high $50 triple net range and significantly higher for new build-to-suit product. The last quarter featured a 47,000 square foot lease renewal with Novartis in Tech Square. No downtime, no tenant improvements, with a nice 3% increase. The balance of the suites leased last quarter range from 2,500 to 9,200 feet and so we’re encouraged with the early stage segment, as well as an important complement to the second cohort of homegrown companies that Joel mentioned, that are commercializing critical lifesaving products, continuing with the announcement in early 2013 of the long-term lease of 244,000 square feet to ARIAD. The overall Cambridge market is healthy. As the vacancy rate decreased a full 670 basis points from 17% to 10.3% during this past year, as a result of the highest absorption rate since 2000. It is also important to note the expansion of really some of the key pillars of the life science industry, with significant construction activity underway. Biogen is building half a million square feet, Novartis another 570,000 square feet, The Broad Institute’s 250,000 square feet, Pfizer’s 231,000 square feet, and Mass General’s Reagan Institute 75,000 square feet are a clear indicator of the dynamic market in and around Alexandria’s core Kendall Square and Binney Street Holdings. Moving down Maryland. Given our significant attention to this cluster with the regional team during 2012, we’re very pleased to see the market stabilize and believe the hard work is paying off with pretty significant performance during that year. We leased 547,000 square feet throughout the year and including 171,000 square feet during Q4. We did experience a bottoming out of our occupancy rate of 89.4% at the end of the third quarter and we’ve seen an improvement of 150 basis points to 90.9% at the end of the fourth quarter. The key leases completed during Q4 include an important mission-critical facility for a local government agency, Montgomery County, leasing 73,000 square feet for nine years at a slight increase on a cash basis, no downtime, and a modest refresh improvement allowance averaging $15 per square foot. This cluster’s trending at a vacancy rate of 7% and if we experience reasonable demand again during 2013, we believe we can continue to incrementally improve our occupancy and rental metrics. Also, it’s important to note the details of the 70,000 foot lease in this market that negatively impacted our cash results overall this quarter. This facility is ultimately a core holding and we now have a long-term lease through the end of 2021, and although it did have a cash rent roll down, it only required a very modest investment of $5 per square foot in tenant improvements. So all things considered a worthwhile trade-off as this helps stabilize the portfolio going forward. Moving over to San Diego, the regional team leased a total of 354,933 square feet during 2012, including the lease of a little more than 76,000 square feet during Q4. When you step back and realize the operating asset base has grown significantly year-over-year from a little over 2 million square feet to 2.7 million square feet, this represents a remarkable 34% increase, nearly all of which is represented by new class A facilities with creditworthy tenants. Occupancy is a solid 95.1% in this past quarter. We were pleased to partner with Genomatica, one of the rising stars in the industrial biotechnology industry on long-term lease of 10 years for 68,000 square feet during Q4. The majority of the tenant prospect activity continues to be in the Torrey Pines and UTC submarkets, as the flight to quality continues in this strong market. The overall market vacancy has increased slightly by 80 basis points, from 9.3% to 10.1% compared with the prior year, largely as a result of one project that has been placed on the market by a non-life science developer. So it remains to be seen if it will represent significant competition. Moving north to the Bay Area, we leased a total of 592,000 square feet during 2012 and 78,000 square feet of this total during Q4. Occupancy increased 110 basis points, from 96.7% to 96% – 97.8% during the year. The Q4 leases were highlighted by a broad set of renewals in each of the three key submarkets. The Stanford cluster remains very healthy with a vacancy rate of sub 5% and lease rates in the $30 to $36 triple net range. Alexandria also congratulates one of its key Stanford cluster anchor tenants, Map Pharmaceuticals and its recent acquisition by Allergan, a $32 billion New York Stock Exchange traded company. Map will continue operating in our facility in the Stanford cluster and Allergan presence will surely bolster the overall strength of the cluster as well. The South San Francisco cluster is a tale of two cities, ultimately. The overall vacancy rate is certainly high at 11.9%, but as you drill down and segment the market, the vacancy rate for the moderate to small-size suites is just 2.4% and this is exactly where we focused our efforts and have been successful. Lease rates in the South San Francisco for these suites range from the low to mid-$30s triple net. The Mission Bay cluster has no laboratory suite vacancy and has ongoing activity from the three market areas we anticipated over time

[Dean Shigenaga:]

Okay. Thanks, Steve. We reported FFO of $1.16 per share diluted as adjusted for the fourth quarter. Our FFO per share results are in line with our range for guidance provided on Investor Day in December of 2011. Moving on to our core operating metrics, we had significant success with the execution of the significant growth NOI from development and redevelopment deliveries. Fourth quarter, NOI from continuing operations of $107.5 million was up 6.6% over the third quarter and up 10.1% over the fourth quarter of 2011. In 2012, we completed approximately $1.1 million rentable square feet of value-added development and redevelopment projects, aggregating almost $700 million at an average GAAP yield around 8%. Approximately 60% of this was completed and delivered at the very beginning of the fourth quarter of 2012. Same-property performance for the fourth quarter, it really was the third consecutive quarter of an upward trend in cash same-property performance. The fourth quarter of 2012 cash same-property NOI growth of 6.3%, up over the solid third quarter 2012 cash same-property NOI growth of 4.3%. We projected the strength of our cash same-property performance continues into 2013. Our projection for 2013 cash same-property performance is up from 4% to 7% over 2012. 2012 cash same-property performance of being up 3.5%, was driven primarily by the following items

[Joel Marcus:]

Okay, operator, we – we’ll take questions now, please.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from Jamie Feldman with Bank of America. Please go ahead with your question.

[Jamie Feldman:]

Great. Thank you. So, I know you guys spent a good deal of time talking about yields and comparing yields to office on the call. I guess, where – what investors might be trying to get their head around is the portion of your total investment that goes to the lab space build-out. How to underwrite that or how you guys think about underwriting that and the return on that versus kind of your core and shell office building? Maybe if you give us a sense of how you guys – when you look at acquisitions or even development, how you think about the relative investment and those two pieces of your cost structure.

[Joel Marcus:]

Well, if the question – Jamie, is the question presume that somehow the above-standard improvement from office somehow is not valuable for the long-term? Could you expand upon your question? Because, obviously, the return is the overall return of the project, it’s not segmented core and shell versus improvements. But if we have a build-to-suit, generally, they tend to be 10-year, 15, 20-year leases. These are yields that – and the yields that – I think it’s important to note these are initial stabilized deals, so these don’t include all the increases over time, which I think investors and analysts often overlook as well, but these are yields on the full package.

[Peter Moglia:]

Yeah, I guess one way I could answer it, Jamie – it’s Peter Moglia – is that when we do look at pricing build-to-suits, we do have a lower expectation for return on the core and shell and the TIs that are infrastructure 40-year type of duration. And then we price the TIs that we think may not recycle as well or for as long at a higher rate to blend into a total that we believe is above what exit cap rates would be at the time.

[Jamie Feldman:]

So, the parts of the piece that doesn’t recycle as long – how do you think about the duration? Or how long those last? Or do you assume that those only last as long as the lease?

[Peter Moglia:]

Well, I would say that we would – we amortize that, the majority of that into the term of the lease. So, if it’s a 10-year lease, we’re getting that back in 10 years.

[Steve Richardson:]

Right, and Jamie, I think it’s constructive. I mean, a couple anecdotes we mentioned Novartis renewing the lease there in Tech Square. There were no TI dollars; the one down in Maryland were $5 a foot. We had a large one in South San Francisco a year or so ago, it had been leased for 10 years. We had a 10-year renewal and I think we had a $15 to $20 a foot tenant improvement allowance there. So – in the overall cost per square foot of these facilities, it’s fairly nominal.

[Jamie Feldman:]

And then can you just give us a sense of where market rents are across your major markets? And whether you’re seeing any material growth at this point?

[Steve Richardson:]

Yeah, I think in the Cambridge market, we’ve got very solid support as we talked about in the mid-$50s, triple net for existing product. So, I think we’re doing well there.

[Joel Marcus:]

Non-build to suit.

[Steve Richardson:]

Right, non-build to suit, absolutely, that’s existing product and, again, as we talked about build-to-suit’s significantly higher. So there is certainly is a step function as these companies – we’ve talked about this a lot and we’ve seen improve out now, with Onyx, with ARIAD, as they’re looking to aggregate around a campus to build a company for the next 10 or 15 years, they’re really driven to this build-to-suit type of product and they’re absolutely willing to pay for that step-up in rent from the existing product that’s out there. Moving across the markets, we think Torrey-Pines has certainly stabilized in that mid-$30s, triple net range, South San Francisco, again, segmenting the large blocks of space from the small space, similarly low to mid-$30s, triple net.

[Peter Moglia:]

Yeah, I could just comment on Seattle. Seattle has remained a very high-rental environment, even though the activity hasn’t been strong as it was maybe two or three years ago, but their rents are between $45 and $52 for the Class-A space. Maryland has – it experienced a drop over the last couple of years, but we’re encouraged by the fact that we’re now quoting things in the mid-to-high $20s and getting a lot of traction with that. And then in Research Triangle Park things for the first class space is also similar to Maryland in the $25 to $30 range. And then in New York, which obviously Joel commented on, is very high-cost environment, we’re able to translate that to very high rents. And without giving too much away, I would say that we are in the mid-to-high-$70s to low $80s for our projections for the West Tower.

[Jamie Feldman:]

Okay. And then, finally, just any thoughts on sequestration and what do you think it might be in to your leasing? Any expected slowdown?

[Joel Marcus:]

Yeah, I think – I mean, my own personal view is that it’s likely to happen, it may not last for a prolonged period of time. We know just through my work at the NIH and others that there’s no one on either side of the aisle, as well as the Executive branch that wants the NIH budget cut, so we think a deal will be made post-sequestration as part of another budget package. I think the only area that we see it impacting is really the institutional side, because the institutions are the ones that get direct grants from the NIH. The pharma and bio side, zero impact to those guys, by and large. But I think a project like Longwood or projects where you’d be looking primarily at an institutional base, a 501(c)(3) through university or research, those are the ones that would be on pause until that sequestration is resolved. But my guess is, it will be resolved by June 30, if not sooner, in a positive fashion.

[Jamie Feldman:]

So, when you think about your expiration schedule, is there anything there that might be slow to renew based on...

[Joel Marcus:]

We have one roll of about 60,000 with a GSA lease in one of our markets, and we expect to renew that, and – because it’s mission critical – we’ve been told that. And as far as bigger leases, I think we’ve said before, the only lease we have that really is heavily dependent on NIH is a lease in – rolling in 2016 with the Scripps Research Institute, which is the largest non-profit in the U.S., but there’s no near-term lease exposure to that, that’s 2016. Other than that we have nothing coming up in 2013.

[Jamie Feldman:]

Okay. Thank you.

[Joel Marcus:]

Yeah. Thanks, Jamie.

[Operator:]

Our next question is from Quentin Velleley with Citi. Please go ahead with your question.

[Quentin Velleley:]

Hey, there. Just in terms of the income producing assets that you’ve sold recently, where your GAAP yields are sort of above 15% and I assume the cash yields are actually higher than that as well, I guess my question is how many of these properties are there in the portfolio that are in the suburban (inaudible) markets? Lab space might not be viable long-term and the rent’s very high, can you just give us sort of a sense of how many more of these assets there are?

[Joel Marcus:]

Well, first of all, let me may be correct your view. When you sell an asset – and Peter’s the one that’s handled that and can give you chapter in verse – it’s really a mischaracterization and a misnomer to characterize this as being sold at some GAAP yields. Those were ramps that were produced in the past and in the Columbia – 1124 Columbia we had already removed one of the key anchors and move them down to South Lake Union. Another tenant, we didn’t choose to underwrite, moved to another landlord. And then another tenant chose to elect an early termination. So, if you talk about a GAAP yield on that project of 15% or 17%, it makes no sense. It’s really on a per square foot basis and it really is on a – on the buyer looking out what you can pay for repurposing that. So that’s how you have to look at it. And Peter will talk more about – we don’t have too many of those in the portfolio on a value basis, but it is pretty different. Same thing on West Watkins; we had almost 60,000 square feet that’s rolling this year. We have another building that the tenant is likely to exit, which is the main anchor there in a couple of years. So, again, you can’t look at it as we’re investing in it on a yield or you are selling on a yield basis. But, Peter.

[Peter Moglia:]

Yeah, thanks, Joel, I guess, Quentin to give you an example of that 1124 Columbia building may show as a – I don’t know – 15% GAAP yield or something like that right now. But after these tenants exit, I think that would go down to a 3% and you’d be holding an asset in a market that is just not in favor with lab tenants anymore and its highest and best use is really medical office. So I think there was a really good marriage between us and the buyer where we were able to cash out of an asset. They did really well for us for a long period of time, but no longer was needed. We could take that cash and put it into higher earning investments.

[Joel Marcus:]

Yeah, let me just say this about that asset. We bought that in 1996 with zero down, the yield on the original sale leaseback to the Fred Hutch was something in the range of 10% to 11% and that asset has cash flowed and had been very, very accretive to this portfolio. And now we’re at a position where that market, as Peter said, has gone totally MOB and hospital. So, again, look at it for what it is, not for maybe some theoretical cash flow. But do you want to talk about other exposures?

[Peter Moglia:]

Yeah, and a little more color on the 1201 Clopper asset, as Joel alluded to, we have a tenant in a couple of years that has told us that they’re – they’ve told us that they’re moving out. They have their own campus already in another other part of the I-270 corridor there and their plan was to move. So, that building is quite big. I think it’s somewhere in the neighborhood of about 140,000 square feet and it’s also a mix of office, warehouse, and lab. And we took a look at that strategically and said

[Joel Marcus:]

Yeah, but as a percentage of GAV, it’s pretty minor.

[Quentin Velleley:]

Okay. But for the non-income producing assets – sorry, for the income-producing assets that you’re looking at selling this year, should we expect to see similar yields to what you’ve done? Or a little bit lower?

[Joel Marcus:]

Well, again....

[Peter Moglia:]

Yeah, I mean, I guess it depends on what yield you’re looking at. I mean, we haven’t announced – we have disclosed held-for-sale in Worcester, a portfolio we have there.

[Dean Shigenaga:]

Yeah, there’s only – the two assets we sold in 2013, one was actually the asset that was held-for-sale as of year-end. One of the assets did not meet the qualifications for held-for-sale as of year-end, so it was actually not in the discontinued operations numbers. The asset that Peter’s referring to, there is a third asset that’s in the Q to be sold in the first quarter. That asset’s also a component of the fourth quarter discontinued operation information. So whether it’s the revenue or the NOI that you see in the supplemental package you kind of could get a sense for the income estimates off of that project.

[Quentin Velleley:]

Okay. And then just in terms of the proposed joint venture on Binney Street, if I’m reading it correctly, it looks like you’re selling it and, effectively, where your partner would get an 8% development yield. Obviously, they’re going to take some leasing risk with that, given you’re not fully leased, but is there some – can you maybe just talk about the fees? I’m not sure if there is some kind of promote or something in there?

[Peter Moglia:]

Yeah. Quentin, this is Peter Moglia. We’re still in early discussions with a number of parties. I – it’s just not smart for us to disclose any specific details with those negotiations at this time.

[Quentin Velleley:]

Okay. Thank you.

[Joel Marcus:]

Yep. Thank you very much.

[Operator:]

Next question is from Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath:]

Yes, Joel, I was wondering on the joint venture is that something we can extrapolate the pricing there to land value in Cambridge? Was it negotiated based on a certain land value?

[Joel Marcus:]

Well, again, we haven’t – we haven’t had a handshake or concluded any joint venture. We’re actually aggressively pursuing the construction financing first, because that provides valuable piece of the puzzle. So I think it wouldn’t be useful for us to comment on any of the broad terms we’ve had broad discussions with. We just haven’t been that – we aren’t that far along. We’re really focused on – we’ve had discussions with a number of partners and structures and things like that, but we’re really waiting to get the construction financing in place ASAP.

[Sheila McGrath:]

Okay and then....

[Joel Marcus:]

So, bear with us for a quarter or so.

[Sheila McGrath:]

Sure. And then, on East Jamie Court and East Grand Avenue, the yields moved higher. I was just wondering if you could walkthrough what was – what were the drivers of the revisions there?

[Peter Moglia:]

Yeah, I think, Sheila, on East Grand, ultimately the team on the ground did a great job of buying out the project, and that combined with Onyx really wanting to occupy as soon as they possibly could, so we accelerated they’re delivery; so that helped. And then at East Jamie Court, we were just more successful than we had been projecting. Again, we talked about that smaller segment having a lower vacancy rate in the market, so we were fortunate to capture a few tenants and really beat what were conservative projections.

[Sheila McGrath:]

Okay. And then, Joel, you did mention in your remarks earlier that there were some assets coming for sale. I’m just wondering if you – if there’s something of interest to you? Or how you’re viewing acquisition opportunities at this point?

[Joel Marcus:]

Yeah, we’ve modeled none, but there are in one market or another, assets we know that are being positioned for sale. We’re certainly looking at a few, as we speak. We don’t have any huge motivation one way or another, but, obviously, if something was superbly fascinating to us and one where we thought we could create value and deliver a product that fit into that submarket in a smart way, we would potentially pursue it. But I would say we’re looking more than we’re aggressively pursuing.

[Sheila McGrath:]

Okay. And then just on New York Tower LOIs, do you – are they like – do you consider them highly probable? Or the ones that get you to 54%?

[Joel Marcus:]

Yeah. About half are from existing tenants and I would say those are highly probable. So out of the seven floors, let’s say more than half – four floors or more are from existing tenants. So we think those are highly probable and the others are new tenants, but we have strong relationships. And I think it’s hard to always characterize and you say something and the Street assumes you have it. So I would say 50%-50%, but my personal view is it’s higher than that.

[Sheila McGrath:]

Okay. Thank you.

[Joel Marcus:]

Yeah. Thanks, Sheila.

[Operator:]

Next question is from George Auerbach with ISI Group. Please go ahead with your question.

[George Auerbach:]

Great. Thank you. Joel or Dean, have you guys touched yet on the seller financing of the assets sales, the $39 million.

[Dean Shigenaga:]

Have we touched on it?

[Joel Marcus:]

We just briefly mentioned it. Peter, can talk to you about it; he negotiated it.

[Peter Moglia:]

I think $29 million of that was associated with the 1124 Columbia sale. Remember, that the – well, maybe – you may not know but the buyer is repositioning that. So, in order to maximize the value, they were looking for a loan that could bridge them through the entitlement process in the beginning of construction. So that’s a short duration loan; I think it’s a couple years where they’ll be paying us, I think they have an option to extend it for one year after that. And then there was another $9 million loan associated with the $40-something million West Watkins/Clopper deal, which was part of the negotiation to maximize our proceeds.

[George Auerbach:]

I guess can you just touch on the rate on those loans? And then I guess just kind of stepping back, what is the FFO contribution of those loans? Just trying to figure – I know guidance ticked up by $0.04 – just wondering what impact the seller financing had on FFO this year?

[Dean Shigenaga:]

Actually, the seller financing had no impact. What really drove the change in our guidance was driven twofold

[George Auerbach:]

Okay. And, I guess, Dean, can you maybe talk about same-store NOI growth in the fourth quarter in 2012. It seems like the New York lease kind of, especially in the fourth quarter had a disproportionate impact? Do you have those numbers excluding New York?

[Dean Shigenaga:]

I don’t. That was actually same-store performance for the entire year. I don’t have that breakdown, George, but I can come back to you.

[George Auerbach:]

Okay. Thank you.

[Operator:]

Next question is from Dave Rodgers with Robert Baird. Please go ahead with your question.

[Dave Rodgers:]

Joel, during your comments and Steve’s as well, I think you both talked about negotiations, leasing backlog, RFPs, RFQs that you’re seeing out in the market. Have you – I didn’t hear you present the information – but have you aggregated that total of kind of what the backlog is that you’re looking at today? If not, can you? And I guess maybe to componentize that a little bit, how much of that is related to existing assets that you think you’d have a shot at filling? Versus how much of that would be related to redevelopment or ground-up development where you’d have to spend money on?

[Joel Marcus:]

That’s a – maybe try to restate your question in a more compartmentalized fashion, so we can try to, take it in bite size pieces, that’s a pretty broad question.

[Dave Rodgers:]

What’s the total leasing backlog that you’re looking at today?

[Joel Marcus:]

I’m not sure what you mean by leasing backlog, but let’s put it this way, we’re seeing stronger leasing in – strangely enough – in some of the suburban markets than we’ve imagined or seen over the past year or two, which has been I’d say significantly more than we assumed. I think we’ve got pretty conservative assumptions on some of our existing space when those things would be speculatively filled. And we’re seeing the – a more rapid conversion of requirements in the leases than we planned in our internal model. But I don’t know that – we track by market and submarket, not overall. We don’t really roll it up because it doesn’t mean anything rolled up because rents in North Carolina could be $15 a foot and rents in Boston could be $65, so it’s a little hard to say, but if you want to be market specific, we could be responsive.

[Dave Rodgers:]

Excuse me, maybe not now, but, again, the thought was just kind of getting to – it seems like a lot of your activity has been in the last couple of quarters development related, are you continuing to see that? You kind of commented on that during the commentary...

[Joel Marcus:]

Well, I think it’s – yeah, I think it’s broader – much broader than development related...

[Dave Rodgers:]

(Inaudible).

[Joel Marcus:]

Yeah, I think it’s much broader than development related. I mean, I can think of spaces that we’ve had – we have kind of what we call chronic leasing or chronic vacancy spaces that we’ve just seen stay vacant for periods of time. We have one space that’s been vacant for quite a while in the Greater Boston market, that’s now just been – just been leased, I think this quarter to an institutional tenant that we haven’t had activity for three or four years on it. It’s not part of Cambridge, but we’re starting to see that happen in quite a number of locations with spaces that have been hard to lease and we’re getting really good – good results. So that’s been surprising to us.

[Dave Rodgers:]

And then a second question I guess related to the joint venture you talked about with ARIAD and I realize it’s not done, you’re still negotiating it. Maybe just step back and say why did you elect to go – or why are you electing to at least pursue that type of a funding for that asset versus maybe what you might do with the Biogen development that you have ongoing as well?

[Joel Marcus:]

Well, our preference would be do it all ourselves, but we’re mindful of – and we haven’t made final determinations – but we’re certainly moving down a road here. But our goal to meet our debt to adjusted EBITDA target of 6.5x this year. So that’s part of the overall plan and that’s been driving our thinking now.

[Dave Rodgers:]

Thank you.

[Peter Moglia:]

Yeah, I – this is Peter. I’d just comment, too, I mean, versus the Biogen Idec campus. I mean, this is a development that still had some leasing risk associated with it, so it just makes a little bit more sense to do a JV structure where you have some more risk involved than the Biogen Idec deal.

[Dean Shigenaga:]

Hey, Dave, before you jump into your next question, let me just get back to George’s question about fourth quarter same-property performance on a cash basis as reported was 6.3%. If we were to back out the benefit from cash rent improvements at New York City, cash same-property performance for the fourth quarter would have been 3.7%. So, it’s roughly a couple million dollar cash improvement in New York for the fourth quarter.

[Joel Marcus:]

Dave, did we – were we responsive to your questions?

[Dave Rodgers:]

Yeah, I’m all set. Thanks, guys.

[Joel Marcus:]

Okay. Thank you very much.

[Operator:]

Next question is from Jeff Theiler with Green Street Advisors. Please go ahead.

[Jeff Theiler:]

Good afternoon. Just a quick one regarding 499 Illinois, it sounded from your commentary that – at least it sounded like interest has really turned a corner. You’re getting a lot more inquiries. Is that, in your opinion, just a function of we’re getting closer to UCSF opening? Or is there something else going on there that’s driving traffic?

[Steve Richardson:]

I think it’s really a combination of things. I think the overall market dynamics as we’ve outlined in the second-half of 2012 have really pointed in our direction. There’s a lessening existing supply of space in SoMa for tech companies. With Meraki and Cisco coming down to Mission Bay, I think that’s clearly validated Mission Bay as a technology sector location. So, that’s certainly been positive. And then, ultimately, we had a bit of a bit of a pause in the life science activity during 2012 and historically it’s been relatively consistent. So I think we’re just seeing that consistent demand re-emerge and it’s really from both sectors

[Jeff Theiler:]

Yeah. And so would you expect just in regards to UCSF, would you expect that peak demand coming concurrently with the completion and the opening? Or is there a time lag that happens after that? Or do you get demand coming ahead of it? Where would you kind of put the peak?

[Steve Richardson:]

I think it’ll be starting this year and it’ll continue through the time period that the medical center opens. There’s a clear effort to consolidate in and around Mission Bay. The Chancellor’s building is now broken ground, so that is clearly the power center for UCSF, right there at the corner of 16th Street and 3rd Street.

[Jeff Theiler:]

Okay. Great. Thanks very much.

[Joel Marcus:]

Thank you.

[Operator:]

And we have a follow up from Quentin Velleley with Citi. Please go ahead with your follow up.

[Michael Bilerman:]

Hey, good afternoon. It’s Michael Bilerman speaking. I just wanted to come back to sort of the asset sales that are planned in July. We completely understand and appreciate that under-leased and underutilized assets and assets that go through changes in dynamics, can’t really look at them on a cap rate basis. But I think the other side of it is that income is being lost from the company, right? You take the two sales that happened the beginning of the year, the $84 million, you are losing $15 million of GAAP NOI; that’s coming out of the P&L.

[Dean Shigenaga:]

Yeah. But some of it was coming out anyway because of either lease rolling out or termination of leases. So a chunk of it I don’t have it in front of me, but...

[Michael Bilerman:]

No, no, no, right. We know whether it’s going to come out or not, but I think you have to appreciate from an investor and analyst perspective that we have to understand that on your NOI stream how much of that would be at risk from potential assets that, if someone was capping your NOI and capping this NOI at a cap rate, okay – so they would be putting a cap rate on that $15 million – they would have come out with a much different value than what ultimately you sold on the assets. So maybe I can ask it in a different way. If we look at the sales of income-producing assets that are scheduled for the rest of the year, which is about just under $100 million, what is the current NOI stream for those assets? I.e., how much NOI needs to come out once we sell those assets for $100 million?

[Dean Shigenaga:]

Give us one second.

[Joel Marcus:]

Yeah.

[Dean Shigenaga:]

So I’m going to see how much; I’m looking for the breakdown.

[Joel Marcus:]

Well, about more than half of that, Michael, I think Dean had in his remarks about $50 million or $60 million are targeted for three assets in San Diego, all of which go dark and are in our lease rolls today. So that’s going away no matter what, but we can try to...

[Michael Bilerman:]

But I assume that’s not in your same store guidance that we need to figure out some way to take that out from an NOI stream to be able to get to the numbers. So, arguably, I understand that selling these assets, they serve a different purpose and they’re great to do and it’s cleaning up the portfolio and all the other benefits that we think are good, but at the same time we have to make sure that we’re stripping out the right amount of NOI for the sales.

[Joel Marcus:]

Yep.

[Dean Shigenaga:]

Yeah, so, Michael, I’m sorry, I just got the schedules, as you can imagine $377 million projected, I wanted to be sure I looked carefully at the breakdown to answer your question.

[Joel Marcus:]

But only the income-producing...

[Dean Shigenaga:]

Yeah, so on the income-producing, the only other sale that’s been identified is the one we referenced on the call. So – so, we completed $84 million, there is roughly something in the $40 million range that’s closing here shortly in the quarter. And outside of that I think there’s another $18 million to meet our bogey. So, it’s a small number. That asset has not been identified, so I can’t give you a yield today, in the sense. So, it’s small and I don’t expect -all this information’s included in our guidance, included in same store. I don’t have that particular yield assumption in front of me at the moment, but on $18 million it’s not a big assumption.

[Michael Bilerman:]

Right. Well, and I guess maybe the other way to look at it is there a way to sort of parcel out, if you were to sort of look at the NOI stream today, sort of calling it on an annualized basis, the $430 million, what percentage of that income do you view within this bucket of – is it $10 million, is it $20 million, where we should be really treating that on a price per pound basis, rather than a cap rate basis? Understanding that $15 million, right, was – that represented almost 3.5% of NOI, but a much, much lower percentage of NAV.

[Dean Shigenaga:]

Yeah, and I hate to ask you to do this, Michael, I missed the first part of your question.

[Michael Bilerman:]

Like I say, if your annualized NOI stream is $430 million, how much of that NOI stream is tied up in assets where you see this risk is there? Is it effectively done? I mean, the two assets you sold, again, produced $15 million of GAAP NOI, that’s 3.5% of the NOI stream, where the value would’ve been very different if you put a cap rate on it versus valuing it on a price per pound basis?

[Dean Shigenaga:]

Yeah, I don’t – Michael, you’re talking about our overall asset base, and if I think through, we don’t have anything specifically identified that falls into this category that we’re looking to monetize at the moment. We have one asset in the Worcester market, out in suburbs of Boston that we’ve identified and those are in our disclosures. I think that was disclosed in the fourth quarter as a component of one of the targeted sales in December.

[Michael Bilerman:]

Okay. All right...

[Dean Shigenaga:]

So beyond that...

[Joel Marcus:]

So, maybe to put book ends around that, we think that in the broad – if we looked at all the assets that we would want to dispose of today – that we could dispose of today, that we haven’t identified, but that we kind of have an idea about, that number would be somewhere in the $5 million to $7 million range of NOI...

[Michael Bilerman:]

Great. And then just coming back to New York for the construction cost of $1,100 a foot for the second Tower...

[Joel Marcus:]

Yep. Yep.

[Michael Bilerman:]

Can you break that out of how much was – and understanding that I know we went through the Great Recession, you have to carry the land – well, not the land because there’s the ground lease. But you have to carry I guess the materials for a little while longer, how much of that represented – how much of the $1,100 is capitalized costs? And maybe you can break out the components because it does seem like a high number, especially, the fact that there’s no land basis?

[Joel Marcus:]

Well, we can maybe do that off line. I don’t – we’d have to look at it. Clearly, you’ve got the superstructure, the infrastructure, which is expensive, you’ve got all the steel and curtain wall that we bought back in I think 2007 when we kicked off that building. You’ve got, obviously, the carry issue described. We’ve got, obviously, a budget for finishes, et cetera. But I think it’s wise not to get too obsessively and compulsively focused on the costs, but look at the number on the rent that Peter gave. If you’re getting $70 or $80 triple net, 10-year, 15, 20-year leases with 3% escalations and you’re getting a yield we think will be ultimately north of 6.5% in a triple A, class-A asset in New York, I don’t know of any deal we could do in New York City today, by way of acquisition or development, that could equal those yields, Michael. So, I think put that into perspective. We’ll try offline to get you somewhat of a segmented breakdown on costs; we don’t have it with us...

[Michael Bilerman:]

Right. I’m also just trying to reconcile a little bit. I mean, you’ve been in this project for a long time, I would think that the yields that most people and that you’ve talked about on the prior calls – we can dig up the transcripts – I’m not trying to say that 6.5%, close to 7% is not good today, it is, but the yields that have been talked about previously about this project, especially about the second phase of the project, which was supposed to benefit from a lot of the infrastructure costs being layered to the first tower, were much higher. And so, I’m just trying to understand what changed? Because the rental market’s certainly come back and the rents are there. So, it has to have been on the cost side and I’m just trying to understand what part of the cost? Was it the capitalization piece? Because you obviously are capitalizing a lot on other projects, so I’m trying to think about whether we need to be mindful of that. And just what sort of change in the dynamics from when you first sort of thought about this project and it was going to be a high single-digit yield to where it’s ending up today?

[Joel Marcus:]

Well, I think when we started this project in 2005, 2006 and 2007, our view of the market pre-Lehman was quite different. And, obviously, we had never built in New York. And I don’t think we ever gave – you could go check the transcripts – I don’t remember giving specific yields because we had no rental rates at that time. But I know over the last couple of quarters, I think I personally said, both in meetings and publicly, I’ve said we think it’s probably in the mid-6%s. That’s a number I’ve been using publicly for quite a number of quarters. And, I think the numbers as they finally come out through our finance group are pretty consistent with that. So – but if you go back five or more years and our hopes on the project, I’m sure hopes were in 2006 and 2007 in the mid to high-single digits, but those were only hopes, certainly, no details behind that. So, I think that’s how we thought about it over post-Lehman.

[Michael Bilerman:]

Okay, great. Thank you.

[Joel Marcus:]

Yep, thank you.

[Operator:]

We have no further questions at this time. I’d like to turn it back to Joel Marcus for closing remarks.

[Joel Marcus:]

Again, thank you very much for your time and we’ll look forward to talking to you on the first quarter call and, again, Happy New Year to you all.

[Operator:]

Thank you, ladies and gentlemen, this concludes today’s conference. Thank you all for participating. You may now disconnect.