May 9, 2008
Alexandria Real Estate Equities, Inc. (NYSE:ARE) Q1 2008 Earnings Call Transcript May 9, 2008 2:00 pm ET
Executives
Rhonda Chiger – Investor Relations Joel Marcus – Chief Executive Officer Dean Shigenaga – Chief Financial Officer Jim Richardson – President
Analysts
Michael Bilerman – Citigroup Irwin Guzman – Citigroup Anthony Paolone – J.P. Morgan Philip Martin – Cantor Fitzgerald Dave Aubuchon – Robert W.
Baird
Operator
Welcome to the Alexandria Real Estate Equities first quarter 2008 conference call. (Operator instructions) At this time for opening remarks and introductions, I would like to turn the call over to Rhonda Chiger.
Rhonda Chiger
This conference call contains forward-looking statements, including earnings guidance within the meaning of the Federal securities law. 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. And now I would like to turn the call over to Joel Marcus.
Please go ahead.
Joel Marcus
Joining me here today are Jim Richardson, Dean Shigenaga and Pete Nelson. I want to start off the call with some brief macro comments.
As all of you know the liquidity crisis and debt crunch which certainly came to the forefront during the first quarter actually has benefited the pharma sector. Those companies with cash hoards have bound better strategic buying opportunities now when they don’t have to compete with players who are debt financed.
As an example our number one tenant Novartis is making a complex acquisition of Alcon a Swiss company actually owned by Nestle for about $37 billion in total consideration. That company produces everything from contact lenses to surgical equipment to pharmaceuticals.
Our number two tenant, GlaxoSmithKline announced the acquisition of another one of our key tenants in the Cambridge market, Sirtris Pharmaceutical, a very cutting edge anti-aging company for more than $700 million. And so while striving to cut SG&A more and more the multi-nationals are increasingly interested in making investments in the area of biologics.
Pfizer announced a new R&D center for cancer biologics and I think this bodes very well for the biotech sector and really our great both tenant base and asset base. On the biotech side, generally the first quarter of 08 was positive.
Our top ten tenant Genentech got approval for Avastin for advanced breast cancer in addition to the already approved colon and non-small cell lung cancer indications. And then finally yesterday California awarded $271 million in grants to build 12 new stem cell centers in the state.
The universities and research institutes that are receiving the money have said they would spend an additional $560 million on laboratory construction, the resulting total of about $831 million, with that nearly 800,000 square feet of research space to house some 2,200 scientists so that’s all pretty good news in what is otherwise a pretty tumultuous capital markets environment. Moving on to earnings guidance and dividend policy, the first quarter was really a classic ARE quarter, all financial and operating metrics were really humming during one of the most tumultuous quarters in the country’s history and ARE has been a great safe haven for all investor styles.
This was our forty-third straight quarter of truly remarkable performance on top of being the number two performing equity REIT out of all publicly traded equity REITs from our IPO in May of 97 through 12/31/07 with a compounded annual growth rate of 22% on a total return of 711%. As you know from the press release, the first quarter after non-cash impairments and preferred stock redemption charges, the supplemental adjustment, we’re up 7% at $1.48 diluted share and Dean will talk more about that and we reiterate guidance after the supplemental adjustment of about $6.07 per diluted share and again Dean will comment on that and also the non-cash impairment charges.
On the dividend policy, the Board will consider increases in the dividend during this year at a rate likely to be somewhat less than the growth in FFO as been past policy. And ARE’s reported continuing very low payout ratio at about 53.2% which positions us well for this, for future dividend increases.
On the operating and financial performance side, again the forty-third straight quarter of positive same store growth with both rental rate and occupancy increases, 3.6% on a GAAP basis and 7% on a cash basis. Jim is going to comment in depth on the leasing side but all I’d say is that it was an absolutely stellar leasing quarter, again during a tough macro quarter, 570,000 square feet with GAAP rental rate increases exceeding 14% on renewed and re-leased space, really a very, very strong quarter.
Occupancy ticked up very strongly at about 100 basis points in virtually all the sub-markets and the assets sold were fully occupied and didn’t really have much to do with that, it was really based on strong leasing. We delivered on time and on budget about 103,000 square feet out of the redevelopment pipeline at very solid yields.
Let me turn for the moment to the development pipeline in the supplemental. The 158,000 square foot Mission Bay kickoff, our second building, has a 50,000 square foot institutional anchor and Jim will comment on very significant additional demand for space at Mission Bay.
In South San Francisco the 162,000 square foot two building campus on the water, we’re working on several transactions and will have more to report next quarter. And the 135,000 square foot building under construction, 65,000 square foot leased with the balances optioned.
In South China we do have the 50,000 out of the 280 committed to our joint venture partner and we’re working on assembling our leasing team as we speak. On East River, the first to deliver 300,000 square foot East Tower which is to be delivered in the first half of, space will come on board first half of 2010.
We expect to sign our first lease [shore leaf] for about a floor and a half with a European bio-pharma firm and we have currently working on LOIs and RFPs in excess of 400,000 square feet. We’re at the term sheet stage with our joint venture partner and so good things are happening.
And then in Seattle the 115,000 square foot building fully committed. On the disposition side, we sold six properties as you know from the release, $70 million with a very sizable $20 million gain and as I think we alluded to last quarter, we exited the East Bay of San Francisco, a market that we sought to get out of for some time.
We finally found the right opportunity and so with a nice sale, fully occupied buildings but we have a somewhat near term lease renewals coming up over the next couple of years, it seemed like a good time to exit. And finally on the balance sheet and capital plan and Dean will detail this more in a moment, we continue to have a strong and flexible balance sheet, a hallmark of this company with very significant dry powder to meet the growth and capital plan, certainly for this year and next year.
Essentially, virtually all 2008 maturities have been handled and we continue with our high and strong margins. So Dean, take it away.
Dean Shigenaga
Our results for the first quarter of 2008 reflect the strength or our unique roadmap for growth and our continued ability to execute and deliver consistent and predictable results period after period. The first quarter of 2008 represents our forty-third consecutive quarter in growth in FFO per share diluted, our forty-third consecutive quarter of positive same property growth on a GAAP basis and a solid start toward our eleventh full calendar year with positive leasing activity.
For the first quarter of 2008, FFO per share diluted was $1.48, up 7% over the first quarter of 07 after the supplemental adjustments for non-cash impairment and preferred stock redemption charges. Let me quickly cover a few important items starting with our guidance for 08, non-cash impairment charges, our balance sheet and our 2008 capital plan and then I’ll cover some key items on our solid fundamental operating results.
Guidance for 2008 after supplemental adjustments for non-cash impairment charges related to assets held for sale and certain investments and is reflective of the ongoing strength of our core operations as shown in the operating results for the quarter. We continue to generate consistent and predictable operating results which is a key component to our updated guidance for 2008.
From our solid leasing activity year after year, the positive same property performance quarter after quarter to our solid quadruple net lease structure, to our unique ability to underwrite the life science industry and client tenants. These key attributes have proven to be an important component to our strong and consistent operating performance and will provide a solid base for our growth through 2008 and into 2009 and 2010.
Our updated guidance assumes no acquisitions and assumes the sale of at least two additional assets which are currently held for sale. Other opportunistic sales may occur over the next 12 months but no additional properties qualify as held for sale as of quarter end.
Our updated guidance based on various assumptions include the key points I just summarized is FFO per share diluted of $6.07 after supplemental adjustments for non-cash impairment charges and earnings per share diluted of $3.00. Our guidance for FFO per share after supplemental adjustments really represents a solid increase of 7% over 2007.
Next turning to non-cash impairment charges, during March of 2008 we recognized non-cash impairment charges related to two vacant assets held for sale as of quarter end. One asset located south of Boston is an older industrial building in a sub-market with no life science tenants.
This property was acquired about ten years ago and is the only property we own in this particular sub-market. The other asset is a vacant office building located in the scientific research zone in San Diego.
We believe the capital markets have placed some pricing pressure on vacant office properties in the non-office location is reflected in our sales price at below our book basis and in the sales of other office properties we track from time to time. In comparison, there have been very limited sales of life science facilities to show any meaningful trend in values for life science properties.
Pursuant to FAS 144, our impairment charge of approximately $4.6 million reflects our anticipated sales price less costs of sale which is primarily commissions and legal fees. As of today we expect to complete the sale of these two assets in the coming quarters and we have no other assets identified as held for sale at the moment.
I should point out that we will consider opportunistic sales on the back half of the year if a sale of one or more properties makes sense for the company. We strongly believe that the charges related to the two assets currently held for sale are not any indication of valuation for our well performing life science properties.
The significant gains on our sales of properties we have recognized over the past year and in the first quarter of 2008 highlight the strength of the value of our life science real estate. Also in the first quarter of 2008, we recognized non-cash impairment charges primarily related to certain publicly traded non-tenant investments.
Consistent with every quarter, our investment committee which includes our audit committee chairman performs a diligent review of our investments for impairments. The accounting rules for our investments in publicly traded securities requires us to consider trading prices during the most recent six month period in our quarterly investment review process.
I should point out that the publicly traded companies that were written down this quarter continue with their life science focus business plans. More importantly our historical performance with our other investments speaks for themselves as our investments have performed very well over the years.
I should also point out that in the near future we do not anticipate any impairment charges related to investments or real estate. Again we have sold several assets over the past couple of years at a significant gain and our investment in life science companies have performed very well over the years.
Now turning to the balance sheet and capital matters, as of yearend we had approximately $1.1 billion outstanding under our $1.9 billion unsecured term and revolving facility. Debt to total market cap was approximately 44% and our un-hedged variable rate debt was approximately 21% of total debt.
Our pro forma debt to total market cap is approximately 41% based upon recent trading prices of our common stock this week around $105.00 per share. Consistent with our ongoing policy to mitigate our risk to variable interest rates we will continue to evaluate opportunities to execute additional interest rate swap agreements.
Moving next to our capital plan, we have been and continue to be very good and disciplined stewards for our precious capital. During the quarter we completed the offering of our series D convertible preferred stock and raised important capital for our value add development and redevelopment programs.
Our net proceeds from this offering were approximately $242 million including the exercise of the overallotment option. Our decision to raise this important capital was made at a time when the capital markets had shown many weeks of deterioration post Bear Stearns.
It was a tough decision to make during that environment but we clearly believe that it would be more prudent to raise the capital in order to maintain our long term strategy of having a strong and flexible balance sheet. This strategy is fairly consistent with our early and timely decision to increase the capacity under our credit facilities over a couple of key amendments in 2006 and 2007.
Our $1.9 billion unsecured credit facility contains unique features that provide borrowing capacity for our non-income producing assets like our land, our imbedded development pipeline and our active ground up development projects. The advance rate on development projects under our facility is very similar to the advance rate on traditional construction financing.
A significant current capital need is our East River Science Park project in New York City and our cash usage projections are conservative since these projections assume we fund 100% of the requirement for East River Science Park. As Joel had highlighted, our intent is to bring in a minority partner and project financing for East River which will reduce our capital needs for this project to approximately 20% of the total capital requirement.
During the quarter we complete the refinancing of the $76 million loan with an existing lender, extending the maturity date to December of 2011. The interest rate on this loan is approximately 4.3% and this financing represented the last important debt maturity that we have for 2008.
We are also focused on our 2009 debt maturities and plan to refinance these loans ahead of their contractual maturities. We continue to have refinancing opportunities that will generate proceeds of up to $200 million in excess of existing loan balances.
Our run rate on construction activities for the first quarter was approximately $80-$90 million and our run rate going forward through 2008 is approximately $100 million per quarter. Again our capital plan going forward will continue to include a variety of sources of capital, including opportunistic property sales as appropriate, joint venture opportunities, project financings and secured debt.
Next turning to same property results, same property results have continued to be very positive quarter after quarter for forty-three consecutive quarters and were 3.6% on a GAAP basis, 7% on a cash basis with the increase in same property results driven by both increases in rental rates and occupancy. Same property occupancy was solid at about 95.3% at quarter end, up from about 94.3% at the end of the first quarter of 07.
Our policy has been to exclude 100% of properties under partial or full redevelopment from our same property stats as we believe this methodology is appropriate in order to prevent significant increases in same property results as a result of redevelopment activities. Our leases contain key provisions that contribute to our strong and consistent operating results quarter after quarter.
As of quarter end, approximately 89% of our leases were triple net leases and an additional 8% of our leases require our tenants to pay the majority of operating expenses. Guidance for growth in same property performance for 2008 remains in the 3-4% range on a GAAP basis and we expect increases in same property rental rates to be the primary drivers of same property performance while we also expect same property growth through an increase in occupancy.
Next let me move to a few key operating stats. Occupancy for our operating assets realized solid gains this quarter to 94.8%, up from 93.8% as of yearend.
Our occupancy level and operating stats remain slightly impacted by significant vacant office space related to property we acquired in Cambridge in the fourth quarter that has both an operating and future development component. We continue to forecast an opportunity to grow internally through an increase in overall occupancy through 2008.
As mentioned on prior calls, certain assets contain spaces for future redevelopment and currently contain vacancy. These spaces have a negative impact on our occupancy statistics, operating margins and operating results but clearly provide for future growth through our value added redevelopment program.
With that said, margins continue to remain very solid at approximately 73.5%. Again, margins were impacted by spaces with imbedded future redevelopment and development opportunities and the recently acquired office building in Cambridge with significant vacancy.
This building was acquired with the purchase of a key development parcel in Cambridge. Operating margins have been in the 74-75% range over the current and prior quarter excluding these future value add opportunities in the office building.
On a perspective basis, we are projecting margins to be in the 74-77% range. Straight line rents for the quarter were approximately $3 million and going forward we’re projecting $3-$4 million per quarter.
Capitalization of interest for the quarter was approximately $17.2 million and reflects our ongoing efforts with our important value add development and redevelopment projects including our strategic efforts to move along our reconstruction activities for our imbedded future developable square footage. With that I’ll turn it over to Jim.
Jim Richardson
So let me take you through some quick broad market commentary before I get into specific leasing performance. In that context, the general conditions that I described during the year end call have continued to prevail over the first four months of 2008.
And those are vacancy rates remaining low while threats to supply shock remain very nominal. Tenant demand is diverse and fairly robust across a wide array of all size and industry segments with the academic, institutional and governmental client base continuing to be most active.
Rents are either stable or increasing in every one of the core markets that we’re in. Sales transaction activity is very limited given the aforementioned state of the capital markets.
However we haven’t really seen any evidence of any real significant value erosion in the core markets that we’re in. We are encouraged by the consistent demand we’ve seen from emerging stage companies in most of our markets and as we have mentioned many times in the past, this is critical for the growth and health of the commercial component of the life sciences business over the long term.
And then finally we have not observed an extension of transaction timelines due to the capital market disruption from a leasing perspective, however as is probably fairly obvious, the larger the transaction, the longer it takes to negotiate and conclude it, particularly given the complex nature of our facilities. Turning to leasing performance, as both Dean and Joel have mentioned, the first quarter was a very strong start to the year for us with 570,000 square feet of new leases which represents one of the strongest quarters we’ve ever had.
14.1% GAAP rental rate increases on new and renewal leases also reinforces these positive trends in our core markets. The activity was heavily distributed to the East Coast by about a 3:1 ratio.
And our core regions of Massachusetts, Maryland and the Bay Area accounted for the majority of the leasing activity. About two-thirds of our leasing was represented by new or renewal leases with the balance in previously vacant ore redeveloped space.
And I think importantly, much of the activity was comprised of small and medium sized leases with lease terms ranging from three to five years which resulted in an average lease term of just over four years. As both these guys have mentioned, occupancy for the quarter was up by 100 basis points led by strong gains in the Bay Area, Massachusetts and the Southeast.
Building on a very strong first quarter performance we’ve also made really good progress on resolving the balance of the 2008 rollovers, contrasted with the 846,000 square feet of rollover that we have scheduled for 2008 at yearend, that number has now been reduced to something just north of 500,000 square feet. And importantly approximately 25% of this remaining balance has been leased, while an additional 50% is in active negotiations in anticipating successful resolution.
On the heels of our 14% plus positive rent growth in the first quarter, we’re very comfortable with our prior 5-10% guidance range for calendar year 2008 and we hope to push the top end of that range. I want to comment on how we see 2009 unfolding from a leasing projection perspective.
We have about 850,000 square feet of the current operating portfolio rolling over in 2009 and as such we are very focused on ensuring advance resolution to the greatest extent possible and prudent. And toward that end we made very good progress already.
About 10% of that space has been resolved and re-leased, about 40% of the space we’re in current negotiation and anticipating as well a successful conclusion. Two-thirds of the unresolved rollover in 2009 actually occurs in the second half of the year.
And I want to point out that the region that has the most significant exposure which is the Maryland region, representing about 30% of the total has had great progress to date. About 20% of that Maryland specific rollover has been resolved with another 50% in active negotiation and anticipated to be successfully renewed or re-leased.
And we anticipate lease rate increases at rollover to fall within our typical 5-10% range for 2009. Let me talk specifically about Mission Bay.
As noted on our prior call, 1700 Owens is stabilized at 95% leased and or committed. The steel has been erected now at 1500 Owens and as Joel mentioned we have a lease executed for about 40% of that building with a premier institutional user.
And we have had really strong active interest on the remainder of the building. As I noted, the steel has just been erected.
Moving on to other parts of Mission Bay, we have an executed LOI from a very prominent user for more than 100,000 square feet in our Mission Bay North Campus and we are in late stage negotiations with another user for most or all of the tower building on our Mission Bay East Campus. The prospects are coming from a variety of geographic locations with complimentary but varied space use requirements from all segments of the life sciences sector as well as the newly emerging technology realm.
And toward that end we have continued our proactive and innovative marketing program to the broad tech community and have serious interest from several large users interested in the unique features and characteristics of the Mission Bay project. Turning to development, Joel also indicated and we mentioned on our call last quarter that we have commenced construction on a new 115,000 square foot project in Seattle in the East Lake sub-market.
We have a fully executed LOI and are negotiating a lease with a single tenant for the entire building. And the leasing on our new project in South San Francisco has been a bit slower than we anticipated due to some specific sub-market factors unique to South San Francisco which is primarily that the current demand is relatively light as total supply results in only an 8% vacancy rate, it really is a demand driven issue.
That said, we have had very good activity in the small and mid-sized user segment and anticipate some success as we communicated in a subsequent quarter. So overall we remain very bullish relative to the ultimate prospects for this building which is really a unique water front oriented Class A project adjacent to Genentech’s campus in South City.
On the disposition front, as has been noted, so far in 2008 we’ve concluded the sale of six properties for a total consideration of approximately $70 million. And I do want to remind everyone that what our objective is here in these transactions which is to reduce leasing exposure, capture some imbedded gains, and enhance balance sheet flexibility and or to match fund franchise enhancing opportunities.
We are currently in escrow on two additional properties as Dean mentioned that should close within the next few quarters. So let me just quickly close, from a real estate operations and development perspective, the first quarter was another very solid quarter for the company with progress on multiple fronts.
We had strong continued leasing performance, we’ve made a key success on leasing and commitments within the development pipeline, we’ve made solid progress on the disposition front and we’ve made continued progress in the expansion of our international platform relative to both opportunities and operations. We are certainly sensitive to the uncertain economic times that lie ahead, but we are cautiously optimistic about the near term future given the progress that we’ve made to date and described in our opening comments here, specifically on the leasing side, including strong visibility and the resolution of our 2009 rollovers.
We continue to believe that the unparalleled locations of our development assets and the consistent substantial entitlement progress that we’re making, allowing for sequential delivery as the market demand dictates really make us a unique player in this niche and then finally our deep knowledge and engagement in each of the markets that we’re in, allowing the company to capitalize on the best opportunities with absolutely the best people. And with that I’ll turn it back over to Joel.
Joel Marcus
Okay operator we’d like to open it up for Q&A now.
Operator
(Operator instructions) Your first question comes from Michael Bilerman – Citigroup.
Michael Bilerman – Citigroup
Irwin Guzman is on the phone with me as well. Dean you touched a little bit on the securities side and talking a little bit about the gains you experienced.
And currently at least on the public side, on a $5.6 million investment you’re sitting on, a total basis of $28 million, so almost five times your basis, can you talk a little bit about the spread of how many investments that goes over? And then also talk about the private side of it where you’ve got $56 million invested, how many investments that goes over and sort of what you think the imbedded mark to market is today, just to give a little bit more color on these activities.
Dean Shigenaga
I think broadly speaking, we probably have, very rough numbers, maybe 100 investments or so in private and publicly traded companies. All of our investments, keep in mind, in the public companies by and large from what I can recall, originated from an investment in a private entity that has gone public and we still hold the securities.
So that’s kind of the mix. As far as imbedded value on the private side, I think if you can look at the historical performance, the imbedded value in public securities we hold, I think that’s a pretty decent indication of some really imbedded value on the private side which the accounting rules require us to account for on historical cost basis.
So I think there’s reasonable upside imbedded there.
Michael Bilerman – Citigroup
And when you look at, so you generated $22 million of gains in terms of liquidation over the last three years, what sort of return has there been on your sort of initial capital?
Dean Shigenaga
It’s kind of hard to tell because each investment varies.
Michael Bilerman – Citigroup
Is this a 2 X type business for you or a 3 X?
Dean Shigenaga
I think if you look at an IRR based valuation you would get probably into the high teens or low 20’s.
Irwin Guzman – Citigroup
You outlined in some detail the level of leasing you’ve accomplished in ground up developments but can you talk about the redevelopment inventory, specifically the inventory that you’re going to be delivering by the end of the year, it looks like a little over $100 million of investment, can you talk about the lease strength in those assets and the level of activity that you have for the reaming space that’s not leased?
Joel Marcus
There is a small redevelopment going on in kind of North of San Diego. There are a couple of activities, nothing to report there of significance.
So I would say that’s kind of quiet. I may want to have Jim run down the San Diego ones because those are ones that are actually pretty active here.
Jim Richardson
Yes, we have a couple of assets that have turned over, over the last year or so that we’re redeveloping and that have, in the San Diego markets specifically, and I would say just on a quick look, about half of that space we’re in negotiation or have leased. So we’re making very good progress down in San Diego.
And just looking through the balance, we have some pretty good activity in Massachusetts as well we’re we’ve got I think four assets that are in redevelopment there and it looks like just again kind of off the top, it looks like probably 30-40% of that space we’re in pretty active negotiation on. So it’s spread across the portfolio.
If you look at maybe two large opportunities, one would be the tech square opportunity, we have some very good leasing ongoing at the LOI stage or beyond. So you’ll be hearing more about that, so I think that market, there’s some good things happening.
And then in the Gaithersburg or Shady Grove market, I think some very good activity on that. So I think you’ll see that as these come forward with completion of the construction and fit out and delivery, that there’ll be some pretty good things happening.
I think we had a pretty strong occupancy quarter on redevelopments delivered this quarter.
Irwin Guzman – Citigroup
On the international front you’ve spoken in the past about bringing in a JV partner to help fund the developments in China and India, is that something you’re still looking at doing and what type of a partnership are you looking for in terms of percentage ownership from the third party and in terms of your share of capital investment versus the partner’s share.
Joel Marcus
I think it’s too early for us to really make that call. I think over time we clearly think that those are markets that contain half the world’s population and so they deserve a lot of effort, although they’re a little bit, they’re still in the early and vital stages.
So I don’t think, I mean I have an idea of how we want to structure and fund it but I don’t think we have really spent I would say any great amount of brain power doing that because we really need to assemble our pipeline in a fairly dramatic way before we then take the next step on the funding plant.
Irwin Guzman – Citigroup
Would that partner, would the purpose of that partner be just sort of capital or would it also be local expertise?
Joel Marcus
No actually we’re going to have the local expertise, we have operating teams on the ground everywhere where we are. So it would be likely a capital source only.
Operator
Your next question comes from Anthony Paolone – J.P. Morgan.
Anthony Paolone – J.P. Morgan
Can we go through some of your developments, particularly in Mission Bay, some of those you gave square footage and others you just said, for instance, like someone looking at an entire building, can you just maybe go through square footage specifically, like I think Jim you mentioned a building I think in East Campus that you’re talking with somebody about?
Joel Marcus
Those would be in imbedded in the pre-construction but not under active development, so just so everybody knows, but go ahead.
Jim Richardson
So on those specifically, Tony, we have a couple buildings on the North Campus parcel that each of them is 105,000 square feet, that’s the intended developed size. And so we had a signed letter of intent for one of those buildings.
And then the other one that I mentioned, we have another building that’s on the West Campus that’s a tower building which is approximately 240,000 square feet as currently designed and we’ve got a user for a majority of that that we’re in late stage negotiations with on an LOI. So As Joel said, neither of those are in the active development pipeline.
They are substantially through the permitting process and enough so that we can be negotiating very specifically with tenants.
Anthony Paolone – J.P. Morgan
And then on East River Science Park, how many square feet is a floor and a half?
Jim Richardson
It would be somewhere between 30,000-40,000.
Anthony Paolone – J.P. Morgan
And then as we think about the 115,000 square feet in Seattle that you’re negotiating on and some of these Mission Bay assets where you’ve got letters of intent and even East River Science Park, can you put some probability or just assess the risk of that moving from a letter of intent to an actual lease and kind of what needs to happen?
Joel Marcus
Well I think if you go back on the active developments, the 158,000 square foot building at Mission Bay, I think Jim confirmed we have a 50,000 square foot acre institutional tenant with a signed lease. South San Francisco, the building, 135,000 we have a signed lease for 65,000 plus that tenant has an option or right to take down the balance this year.
South China, our joint venture partner has committed to 50,000 square feet there and in East River as we said, we have about 30,000-40,000 that will be signed shortly. And the balance, I would say it’s hard to say, but those are kind of 50/50 on the remaining 400,000 square feet of demand.
And the Seattle is a signed LOI and in lease negotiations, so I would put that probability at extremely high.
Anthony Paolone – J.P. Morgan
In terms of just general operations, can you talk about whether or not there’s been any real change in the behavior of tenants or prospective tenants in leasing in terms of either pushback on rents or concessions or time to make decisions etc.
Joel Marcus
I don’t think so, in fact I think I commented at the outset that there really hasn’t been an extension in transaction times associated with this capital markets challenge that everybody is dealing with. I really believe that as we’ve said many times that our industry marches to the beat of a different drummer and we have, we’re really encouraged at the diversity of the activity, both from a size perspective, from a market perspective and then from the various industry segments.
It’s really been encouraging. So and rents have not gone in the wrong direction in every single market, they’re either stable or they have been increasing.
Now I will say that I do believe that we have very uniquely located asset locations and so this may not translate into secondary quality locations. But at least in our portfolio, it’s been pretty much the same as it has been.
Anthony Paolone – J.P. Morgan
With respect to the investment portfolio, can you just go through the strategic rationale and benefit of engaging in that business, given what seems like quite a few relatively small investments and kind of going through the brain damage to make each one of those and what you derive from that?
Joel Marcus
Yeah we started this effort, I personally started it with our former Chairman Jerry Sudarsky back in 1996, so it’s been now 12 years. And we’ve established I think an unparalleled knowledge base and really proprietary capability to analyze and understand and even target.
If you look at kind of what we call the horizontal space, which are really all the critical technologies emerging and then you look at the vertical space below those which are the particular disease targets or particular areas of focus within say a cancer area, that has given us the ability to avoid tenant defaults, has given us the ability to target desirable tenants like Sirtris which was just announced being bought by GlaxoSmithKline, we have a great relationship with the management team and the founders out of MIT and because of our sector knowledge and expertise to a large extent that tenant came to us because of that. So the financial success that we’ve had is really secondary to the strategic desirability of doing what we do and I would say of all the things we do in the company, the proprietary real estate research we really do coupled with the sector research and capability is really not only second to none but indispensable to our success.
Operator
Your next question comes from Philip Martin – Cantor Fitzgerald.
Philip Martin – Cantor Fitzgerald
Joel you’ve talked a bit about this at the outset of the call but if you could just go through it a little bit more, in more detail if possible, but the business models and the growth strategies of your tenant base. It sounds like they remain as healthy if not a bit healthier and on target and I just thought if you could address that a little bit more, given the economic downturn and just trying to gauge the strength of this tenant base and again to Jim’s comment about marching to a different drummer.
Joel Marcus
As you know we have a multi-faceted tenant base that’s made up of big pharma and we’ve mentioned two of the big tenants which are Novartis and Glaxo. Clearly we focus on the institutional side which Jim mentioned is a very fast growing area.
And I mentioned in my comments the rather dramatic amount of dollars flowing out of you know really huge budget deficit time in California out of the [CIRN] program that looks to build quite a number of facilities and employ quite a number of people. So in addition to big pharma which for right now accounts for probably about 20% plus of our rental base, the institutional side is approaching about 15% and that’s a very fast growing area.
Traditional office is a bit of a sliver. Private biotech companies, but unique ones, Sirtris was one of those just a year ago, is about 12% and those are where we have this unique and special way to underwrite.
Another big sector which is between 15-20% of net effective rents is essentially product and service companies. These are Quest Diagnostics, Lab Corp, very strong companies that sell into our out of this industry, so a very diversified tenant base.
And then public biotechs account for a little less than 30% of the company’s revenues, heavily made up of many of the big cap companies including in our top ten, Genentech, [Amalon] and others. So we have sought to try to craft this asset base and the tenant base in a very diversified I think very healthy and really among the best players and I think that’s really served us well and made this ten years of really outstanding performance.
It doesn’t happen automatically, it really is done through tough pick and shovel work and I think the diversity and the way we have lined up our tenant base and kept it at the highest levels is really a great credit to how we performed.
Philip Martin – Cantor Fitzgerald
Even from the demand standpoint, have you seen any let up in demand for potential new projects or new space needs, expanding space needs? Does that continue to be pretty robust across your tenant base and even in terms of new tenants?
Joel Marcus
Yes, I think the answer is yes, I think Jim spoke to the fact that if you look at the biotech sector and the number of small to medium leases and again if you pick the right horse, two companies that have performed extraordinarily well that started in very small space, Alnylam Pharmaceutical which started in 2,000 with two people in Cambridge is now a multi-billion dollar equity market cap and I think Roche just announced, I think it was Roche, that they’re stepping up their investment there. Also Sirtris was again started in a pretty small space.
So that segment of the market, I think again, if you pick the very high quality companies, that tends to have good constant demand and with the relationships, that has certainly benefited us on the leasing and occupancy side. I think big pharma is a little different, they are much more strategic about what they do.
So you have to have the relationship and you have to be in the right place for them to work with you, otherwise sometimes they just do it off their own balance sheet. I think one of the fastest growing sectors is clearly the institutional sector as we’ve alluded to.
And obviously growth in the public biotech sector, selectively has been very important for us as well. So I think again with the right selectivity, each of the sectors have their own unique growth and future opportunities and locations sometimes matter in the different regions, but clearly the best locations as Jim said is what really matters and a landlord who has deep understanding of the platform, the physical platform and also the scientific side of it is pretty indispensable to them.
Philip Martin – Cantor Fitzgerald
And then on the leasing side, I mean it’s certainly a very good leasing quarter here. The space that was leased, a breakdown was given, but would you characterize this as pretty typical space within your portfolio or was there some anomaly that led to such a good leasing quarter?
And what do you expect going forward, I know you said 5-10% range for leases over the next 12-18 months but I’m just trying to get a sense of what specifically drove this good leasing quarter?
Jim Richardson
I think without going lease by lease it would be hard to give you an absolute conclusion, I think some of it is timing, certainly, but it was spread over, well I mentioned three primary geographies or locations, but it’s split over a lot of buildings and a lot of space resulting in that average lease size that was just slightly more than 10,000 square feet. So I don’t think there was anything unique and special about the rollover and in how we resolved it in the first quarter.
I think as I mentioned it looks very good for the balance of the 2008 rollover and I think I would probably interpret that more as just broadly good quality space and locations and then this fairly consistent diverse demand that both Joel and I have talked about as opposed to a unique set of assets that happen to be rolling at the right time.
Philip Martin – Cantor Fitzgerald
And is it fair to assume that there’s some real pricing power in this portfolio?
Joel Marcus
I think with respect to unique locations, that’s absolutely true. I mean some of the assets in Cambridge for example, certainly Mission Bay.
I think people make decisions and obviously there are a variety of opportunities that if you want to be in the best locations then there is clearly some pricing power in the best locations. And frankly lesser quality tenants go to secondary and tertiary locations which is fine.
But I’d rather be in the AAA locations.
Jim Richardson
I would also say that one of the things that we’ve mentioned many times on calls is we have fully integrated operations, particularly in these three markets that we talked about. So we’re very close with these tenants.
I mean we’re working on transactions now that might be three or four years out, trying to strategize with the company to renew them, expand them etc. So if we were trying to navigate this thing from 3,000 miles away, it’d just be a whole different ballgame.
So we’re on the ground in the spaces with those tenants everyday and so I think pricing power gets built into that and just our overall success.
Operator
Your next question comes from Dave Abuochon – Robert W. Baird.
Dave Aubuchon – Robert W. Baird
Can you detail a little bit more the assets that you sold in the East Bay, at first glance and crunching the numbers it looks like it’s a fairly low price per square foot, $170.00, and I know you said they were fully occupied assets but were the near term lease rollovers one of the reasons for what I would think is a discounted price for those assets?
Jim Richardson
I wouldn’t say it was a discounted price. I think I might even have talked about this on the last call, I think on the stabilized cash flow it was like a low sevens cap rate.
The buildings were substantially populated by a good quality user but there was near term lease rollover exposure and we just felt like it was a market that was thin enough that we didn’t want to try to sort through that exposure. I think that the cash flow itself and I have to go back and look, I don’t have it in front of me, might have been such that the rents were low enough that even at that cap rate it drives the lower per square foot cost.
Joel Marcus
Right and these are East Bay and the Alameda region, these are somewhat older buildings, these are not Class A buildings, they’re probably Class B buildings. And they are dated buildings as well.
Dave Aubuchon – Robert W. Baird
Obviously there has been a tremendous amount of disruption in the credit markets over the last three or four months and you were marking these assets I assume right in the middle of that. Was pricing in line with your expectations?
Jim Richardson
It was, actually it was and we’ve been looking at doing this for a little bit but we had several interest parties, they liked the cash flow, they actually like the, every buyer seems to have some interest and there were a number of buyers that liked the East Bay that liked Alameda specifically, think it’s a good long term growth area. So we did, I think in light of the credit market situation, I think we did pretty well there.
Joel Marcus
Yes it was a high quality local developer with a pension funder, so they didn’t rely on outside debt.
Dave Aubuchon – Robert W. Baird
I believe Jim I think you said that there was a tech company interested in one of the Mission Bay buildings, any particular reason or reasons why they would select Mission Bay versus South San Francisco maybe?
Jim Richardson
I think there’s a lot of reasons but I don’t know that the trade off would necessarily be South San Francisco, that’s much more of a life science driven market. But it would be down through the peninsula into the Silicon Valley and as I think I’ve noted on prior calls, there’s been a lot of migration of some of the tech sector into San Francisco because of the labor base, the 24/7 quality of life, Mission Bay in particular has so many different transportation routes into that area at relatively low hassle rates.
And you can get a campus environment and an essentially waterfront view and you’ve got all of that intellectual capital that’s relevant there with UCSF etc. So there’s just a lot of amenities resident at Mission Bay and being in San Francisco that you can’t get down in the Silicon Valley necessarily.
That’s what has been the draw I would say primarily it’s the labor base.
Joel Marcus
Absolutely and I just want to FYI on the tech side, if you look at an interesting statistic this week, I’m not a video game player but Grand Theft Auto which is the number on video game ever sold a $0.5 billion in sales in the first six days. There are companies in the broad and diverse tech sector that have a lot of cash.
Dave Aubuchon – Robert W. Baird
I believe you said this was in the Mission Bay East, the 240,000 square foot building?
Jim Richardson
I’m sorry, Mission Bay West, if I said East I meant West.
Operator
Your final question comes from Anthony Paolone – J.P. Morgan.
Anthony Paolone – J.P. Morgan
On the redevelopment that was put back into service in the first quarter, can you give just a sense as to how much all in cost and roughly what the yield was on that just to give us an update on how those are going?
Dean Shigenaga
Yes I think the incremental spending was probably in the $80-$100 range on average. And it was substantial stabilized upon a delivery into operations.
Anthony Paolone – J.P. Morgan
But I’m just trying to get a sense, do you calculate after you put that $80-$100 a foot into the properties, what your all in basis is into those assets and when you bring it back in what the yield is on that basis?
Dean Shigenaga
Correct we do look at our leasing activity across all aspects on an all in cost basis and so the anticipated yields that we target on redevelopments being in the double digits is what we expect to and have historically been able to perform at.
Joel Marcus
And so I think what actually happened on these five properties, San Diego, San Francisco, the Northwest, there was a small thing in Florida which is not very relevant and then in Maryland I think you could say fairly that the yield on the incremental dollars was within our range and I think given some of the basis that we have in some of these assets, the overall net over the term of the lease would be consistent with the target range given to you.
Anthony Paolone – J.P. Morgan
On the future development pipeline, I noticed from last quarter in Seattle your future development pipeline I think went from 595,000 square foot to 843,000, was that just an increase in density because I didn’t see you buy anymore land it seems.
Dean Shigenaga
You’re correct there weren’t any land acquisitions during the quarter but what we do from time to time is carefully review our imbedded opportunities and in certain circumstances we’re not comfortable with projecting the opportunity as we evaluate ultimately what we’ll do with a particular project. So this was as a result of a very thorough review that went over probably about six months and we drew some conclusions that we’re comfortable with the future development opportunities in Seattle and classifying it as such.
Operator
I guess I’ll now turn the conference back over to you for any addition or closing remarks.
Joel Marcus
Luckily we’ve done it in less than an hour so I want to thank everybody for joining and we’ll talk to you come second quarter. Thanks again.