Feb 11, 2010
Executives
Paula Schwartz – SVP Joel Marcus – President, Chairman and CEO Dean Shigenaga – SVP, CFO and Treasurer
Analysts
John Stewart – Green Street Anthony Paolone – JP Morgan Jamie Feldman – Bank of America Michael Bilerman – Citigroup Will Marks – JMP Securities
Operator
Good day, everyone and welcome to the Alexandria Real Estate Equities fourth quarter and year-end 2009 conference call. Today's call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the call over to Paula Schwartz. Please go ahead.
Paula Schwartz
Thank you and good afternoon. This conference call includes forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 as amended and Section 21-E of the Securities Exchange Act 1934 as amended.
Such forward-looking statements include without limitation statements regarding our 2010 earnings per share diluted attributable to Alexandria Real Estate Equity, Inc. common stockholders, 2010 FFO per share diluted attributed to ARE's common stockholders, the business plans of certain tenants and the expected impact of the conversion of our unsecured convertible notes.
Our actual results may differ materially from those projected in such forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital, debt construction financing and/or equity or refinance debt maturities, increased interest rates and operating costs, adverse economic or real estate developments in our markets, our failure to successfully complete and lease our existing space held for redevelopment and new properties acquired for that purpose and any properties undergoing develop, our failure to successfully operate or lease acquired properties, decreased rental rates or increased vacancy rates or failure to renew or replace expiring leases, defaults on or non-renewal of leases by tenants, general and local economic conditions and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission.
Forward-looking statements are made as of the date of this call and we assume no obligation to update this information. For more discussion related to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements and risks to our business model in general, please refer to our SEC filing including most recent Annual Report on Form 10K and any subsequent quarterly reports on Form 10Q.
Now, I would like to turn the call over to Joel Marcus. Go ahead, Joel.
Joel Marcus
Okay. Thank you very much.
Welcome everybody to the fourth quarter and year end 2009 call. With me today are Dean Shigenaga, Peter Moglia, Peter Nelson and Krupal Raval.
As I always do, I want to start out with some macro comments for both 2009 and then looking forward in to 2010. The fourth quarter was a solid blocking and tackling quarter as the final quarter of obviously a uniquely historic year where the financial and credit systems were really on the precipitous of collapse and as the Fed Chairman has said just over the last day or two, the recovery is likely to be painfully slow.
Success under extraordinary stress is really all about the best people and successful execution and that I think was our report card for 2009 and really a great credit to the women and men of Alexandria. A couple of critical highlights for the fourth quarter and 2009 as a whole.
I think the theme is really consistency, 11 years straight of positive year-to-year lease rolls. Pretty – we maybe unique in most of the REIT universe, 46 consecutive quarters of positive same property growth, 11 years of high occupancy approximating about 95%, historically steady high margins, reductions significantly the principle balances of secured notes this year, Dean will talk about extended of about 267 million extension or maturities and refinancing of other secured notes payable about 159 million and then we repurchased about 75 million par value of 37 converts.
Let me talk about the industry and some crucial data points and trends. Pharma is going through, as you all know, a necessary phase to become more globally competitive.
This is actually a good thing. Reselling of pipelines through M&A is one of the critical strategies and obviously the Pfizer-Wyeth acquisition is a good example.
Pfizer is one company probably hit hardest by layoffs and shutdowns and obviously patent cliffs, but their actions have been fully given the absorption in such a large entity as Wyeth. Clearly increasing external collaborations with biotech companies is a wave of the future.
If you just compare the 2009 partnering activity versus 2008, about 20 billion in 2008 and 37 million in 2009 give you a sense of the dramatic increase. The slimming down and many of you seen a lot of the recent announcements of antiquated and nonproductive silo oriented and home campus R&Ds.
This is really being, I wouldn't say done away with, but substantially reorganized and Andrew Witty of Glaxo has really led that charge with his drug performance unit business model. Also another critical strategy is the expansion of the international footprints in to a lot of the expanding economies, particularly the brick economies and Novartis is as good example as any of that.
And then finally, another critical strategy has been the stronger push by many into a broader healthcare products platform and diversification and again, Novartis' acquisition of Alcon Eye Care is a great example. Just a couple of quotes from some of the CEO's of big Pharma, Jim Cornelius of Bristol-Myers said that the strength of our balance sheet and cash position enables us to execute our strategy including our ongoing business development activity and BMS is focusing on supplementing its internal R&D portfolio with strategic partnerships and acquisitions and Bristol-Meyers is a partner of ours up in the Massachusetts area.
Another interesting quote by Andrew Witty who I think has emerged as really one of the trend setters at GSK. Recent changes in the financial markets have led us now to expect that investment opportunities are more likely to arise that will support our strategic priorities and very important that we retain sufficient flexibility to take advantage of these opportunities and Novartis is obviously one of our top tenants.
Chris Viehbacher, who I have come to know, the new CEO of Sanofi-aventis who came from Glaxo said we will need to make some acquisitions in phase one and two in order to reinforce our portfolio and announced recently they are likely to spend $15 billion on broadening their healthcare products platform and portfolio. And then, finally, a guy who has become a pretty good friend of Mr.
Moglia's here in our East River Science project, John Lechleiter, a quote from him recently. "I got hungry again about three weeks after the ImClone deal got closed."
So don't count big Pharma out. It's going through a transition phase to make it bigger stronger and competitive.
That's all good. If you look at 2009 margins for the biotech and Pharma industries, biotech margins were 27%, Pharma was 17%.
That's very respectable. Then the 2010 forecast by Big Pharma and some medical device companies, just as an example, Pfizer 31%, margins, Merck 31%, Abbott 22%, Amgen 36%, Medtronic 26%.
So these guys are in good shape. FDA drug approvals were up one over 2008 in 2009, 26 versus 25.
As many of you know, the second half of the big stimulus bill, the 10 billion for the two years during 2010 will be obviously put to use this year. Last year, I think we reported to you our tenants garnered about 4.6 billion about 8.8% of that.
And I will comment later on direct leasing in Maryland as a consequence of that increase. The president has recommended an increase in the NIH budget as of 2010 of 3.2% to $32.1 billion.
The Gates Foundation recently announced their commitment to fund $10 billion over ten years for major vaccine developments and I think it's interesting not too many people know this. The U.S.
is actually doing a good job of retaining brain power, 92% and 81% respectively of all Chinese and Indian science and engineering Ph.D.' s in 2002 before were still in the U.S.
five years or more later, pretty good comment. So key expected trends for 2010, increasing Pharma need to extricate themselves from this kind of main campus and silo R&D which has been unproductive and that's all the headlines you are reading about cuts.
They are moving to the critical adjacency touch points of innovation and those are the locations where area is dominant in all of our life science markets and why we have the premier franchise. As an example, we signed Pfizer, Novartis and Glaxo during 2009 to our Flagship Tech Square property and we will announce another major big Pharma which is not now a client, they're likely to sign a lease soon and will be making that announce.
Increased expansion of large biotech and key life science markets, Celgene's major expansion at Mission Bay and those on the precipice of product approval. We are in the early stages of discussions with a very significant expansion with one major such company which would also be a new client to the portfolio.
With university endowments down 2008 to 2009, Harvard is down 29.8%, Stanford 26.7%, clearly the strategic relationships with these kinds of institutions will accelerate increased leasing of space and we are likely to make an announcement over the coming quarters of the first project in this regard as we have alluded to before. Moving to actual operations and financial results.
We did come in during the fourth quarter at $1.09 diluted FFO share as expected and for the year at 5.52 which included some extraordinary revenues earlier in the year. On the balance sheet, we ended in comfortable shape.
Dean is going to talk about this in great depth so I will not mention too many things but we covered the key elements of loan reduction and loan extension and we will continue that process in to 2010, our principal maturities this year are only about $36 million together with amortization. Let me move to occupancy because that's kind of and Dean will discuss a little the view for the coming year, but it has trended down since the beginning of the financial collapse and that's no surprise to anybody.
We are less immune than others but we are certainly not immune and there is light at the end of the tunnel. The decline has been to about 94.1% this quarter but still highly respectable.
We are working hard to protect and mitigate both occupancy and rental rates. If we take it market by market, San Diego has been down one of the tougher markets 300 basis points since the end of last year, 100 basis points just this quarter.
Leasing is picking up a bit as we reported last quarter but the market still lacks substantial positive momentum. I think we feel lucky that we are protected by a large concentration of our assets in the two best sub markets, Torrey Pines and University Towne Center where we continued to dominate those markets.
In the San Francisco Bay area, down 300 basis points since the end of last year, 80 basis points down this year primarily attributable to the softness in demand in south San Francisco, but ramps have stabilized and vacancy should stabilize as I think Steve Richardson reported last quarter, up 10% on the west side of San Francisco Bay. Mission Bay, South San Francisco and Palo Alto again we are the flagship franchise, but far superior to the disaster that's really been happening on the east bay where fundamentals have totally eroded.
We have completed and delivered our last redevelopment asset in the San Francisco Bay area as well this year in this quarter. In Massachusetts we have seen a 240 basis point decline since last year, about 40 basis points this quarter.
We are viewed as the landlord of choice in Cambridge which we are very proud of. You can ask just anybody, any of the companies or institutions and they will point to us as the market leader by far.
The market has stayed pretty healthy. Our vacancy rate is single digits compared to other buildings that are hampered by high cost basis and inefficient floor plates.
And we continue to see good activity. In the Southeast, there has been a notch up of about 110 basis points but down since the end of last year, general market softness in Research Triangle Park as this is a secondary market and rents and occupancies trended down but, again, we are working hard to keep steady occupancy and protect rental rates as best we can.
I think the surprise is the Suburban DC, Maryland market down this quarter but up over 400 basis points since last year. We dominate this market by far with the best assets, operations and tenants and made a strong comeback primarily due to 200,000 square feet, three leases due to the stimulus bill.
And I guess what more can I say about Seattle. We have no vacancy there.
Once again, the premier assets in the best location with the best operations and tenant quality and it stayed fully – virtually fully leased. Moving to same property, Dean is going to discuss our view of the future on that, but we are up again for an unprecedented string of quarters of 46-some odd quarters, cash up 13 and GAAP 11 [ph] in the most difficult quarters in years and for the year cash up 47 and GAAP up 28 [ph].
So we think the best in class team has performed very well. Moving on the leasing, we did 40 leases, executed 40 leases for 489,000 square feet with a rental rate increase of about 1.5% on the renewed and released space in this quarter.
We did experience our first ever quarterly decline in cash rental rates down 8% attributable primarily to two significant leases, one in a kind of an industrial building in South San Francisco where we negotiated a lease and felt it was important. We attracted one of the premier Cleantech companies in the nation and that company will ultimately expand probably greatly and become a large energy company.
So I think we felt that short-term pain is worth long-term gain. And in Maryland, we did have a step-down on a – significant step-down on a lease and Dean can highlight that for you a little later.
2009 is a whole 142 leases for almost 1.9 million square feet, a staggering positive achievement in a staggeringly tough year. Rental rates for the year up on a GAAP basis 35 [ph] and on a cash basis a little bit above neutral at about 0.1% on renewed and release space.
And I dare say we are probably one of the few REITs to stay positive for so many years on rental rates and certainly this year and we have, I think, a positive view of next year. And we will get that a little bit later.
As you will notice, very, very low TIs and leasing commissions compared with many others in our space. If you look at 2010 rollovers, there's a million square feet coming up next year, about 8.7% of the portfolio, of total base rent I should say, about 24, 31 in base rent.
Almost 50% at this point are essentially resolved or likely to be resolved so we feel good I about our position, 28% are leased or committed up from 23% last quarter and 21%, we're negotiating and fully anticipating down from about 27%. We have two assets for about 13% of the space we're putting redevelopment, one Shell Building in San Diego that will come back to us later in the year, that we're going to need to build out and one industrial building coming back to us in Seattle in the third quarter which we are likely going to want to have space of that lease.
38% marketing too early, up 1% from 37 in the third quarter when we reported. Dean will tell you we are likely to again give guidance somewhere in the 0 to 5% up range on a GAAP basis for 2010 rollovers but he can highlight that more detailed.
2011 rollovers, 1.7 million square feet, about 15% of the portfolio total square footage, about 44% already are leased, committed, negotiated or anticipating, so we feel very, very good about that position. About 8% will go in to redevelopment.
There's actually one building in Tech Square which is an existing office building, so we very much look forward to putting that in to redevelopment and having the success both on occupancy and on return on invested capital that we have had at Tech Square on building 200 and about 48% down from 55% marketing and too early to call. So we feel very good about we are we are.
On redevelop in the fourth quarter, we delivered two properties for a total of 78,000 square feet, 50% plus leased and in 2009 as a whole 233,000 square feet delivered 72% leased. Let me move to development which has been a key focus and certainly one of the more important things.
I think it's important to remember that we have the premier franchise and development where we take an investment where our basis has been very favorable, put it in to development and entitlement, actually construct and then turn it in to cash flowing assets. And it's impossible to look at cash flow net of capitalized interest when development is moving in to NOI production.
If you look at the development schedule on page 33, one building which we delivered during the year to Pfizer, 102,000 square feet, 15 year leased Pfizer at rents in the mid $3 range yielding, 10% cash-on-cash returns. The first building is 1500 Owens.
It's pretty much fully committed to UCSF and Celgene. A second building that we started, we delivered the first building, Shell Building to Pfizer where they put in up to $5 million and Nektar, their subtenant is putting in up to $20 million.
We feel very good and we have another significant lease for negotiating. We will have news next quarter.
Probably a disappointment is East Jamie Court, the 162,000 square feet where we had it almost at the point of inking a deal but we think that either that deal may come back or we are looking at other opportunities, but we are putting the two buildings on the water, really great location, adjacent to the Roche campus redesigning so that we can multi-tenant both buildings. On the Exelixis building, they did not exercise their option to take additional space that we are now marketing and we are in discussions with a very, very good entity potentially take the balance of that space and we will keep you posted on that.
Probably the highlight of the development, well, let me get to one other in Seattle we did deliver this quarter as was indicated the building minus some retail which we are pretty much finishing up to Gilead Sciences and that, I think, is great tool for Seattle to have them up there in a first class building on Lake Union. And then to East River Science Park now, the Alexandria Center for Life Science at New York City, I think we have nothing but good things to say.
Let me give you a floor by floor blow of what's going on there. Floor one, we have inked a deal with a premiere food service provider and great and well known chef, so you will see that develop over the coming months and when we are ready, we will make a formal announcement.
Floor two, our conference center we're in late stage lease negotiations and expect to have that signed in the very near future. Floor three, is committed – fully committed to a very exciting translational research entity on the cutting edge of bench to bedside research.
Floor four, is our science hotel fully committed one lease signed to a European entity and the balance to a European biotech company that hopefully I think will be signed today and those will, one is a signed lease, the other is a signed LOI under lease negotiations but fully believe that will be done in the very near future. Floor five, half the floor is taken by a cancer translational research entity which has a rock star head that will head that up and then the balance of the space we are dealing with several takers and we hope to have that basically committed.
It's really our choice among door a, b, or c. Floor six is core services and we have signed a number of – or Lilly assigned for part of that and others will sign for the balance of that.
Floor eight and nine have been fully committed to the translational research entity I talked about before. Floors 10, 11, 12 and 14 committed to Lilly ImClone.
Floor 15 will be some small offices for us and offices for other entities that we will announce in the future which have blockbuster names. And then the top floor is a LOI, I think being signed as we speak and lease to be done for a European biotech holding company, so.
I think the good news is that's done and we can put all the angst and all the kind of Monday morning quarterbacking that was done from the street behind us and I think it just shows that we were able to secure a tremendous first class location with very little cost – the city being really our partner on this and putting together a first class science park in the city, really second to known where it never had been done before. If you go to page 27 of our supplement, you will see the updated 20 large client tenants.
I think the good news is it's been as strong as it's ever been. Pfizer is now added to that.
There are no undue concentrations and we feel just really, I think very pleased about where we are. In closing, let me add a couple of comments in addition to announcing over the coming months, our first university credit tenant pre-lease development program deal.
We will likely announce our first foreign tenant build to suit and a possible sale or ground lease of the significant land parcel. Dean will cover guidance and related assumptions and I think, kind of finally I would say for 2010 investors likely to choose the safety and reliability of companies like Alexandria, where you've got clearly you are more immune than other situations to the vagaries of the real estate pressures and economics, the best strategy and management team, a company that dominates the best sub markets, controls the best assets and locations in those sub markets, not overpaying for assets and I think, most importantly, a company that on its balance sheet can create solid future growth in addition to existing core growth, few can do that today.
So, let me turn it over to Dean. Sorry for the length, but given this is not just a quarterly call but a year end call, we wanted to be a little more detailed.
Dean Shigenaga
Thank you, Joel. It's clear that in 2009 the real estate industry along with almost every industry experienced an unprecedented financial, economic and banking environment.
Fortunately, the core of our operations delivered solid operating statistics similar to those accomplished each and every year since our IPO. The real estate industry has shown tremendous capacity to attract important capital since the depth of the crisis.
Alexandria has also executed on various important capitals and deleveraging initiatives in 2008 and 2009. Over the next few minutes I will provide an overview of certain key financial and operating metrics and provide an overview of our guidance for 2010.
Our supplemental package provided a new summary of historical occupancy percentages, rental rate increases on annual leasing activity and quarterly same-store performance. Our average occupancy percentage at 12/31 from 1998 through 2009 was over 95%.
Our average occupancy percentage was over 89% for the same time period, assuming we include all vacant space undergoing a change in use through redevelopment. We completed our 11th year of positive increases in rental rates on leasing activity and our 46th consecutive quarter of positive same property results.
Additionally, operating margins remain relatively steady at approximately 74%. Our operations have been steady through the various environments including the past one to two years, highlighting the strength of our asset base to deliver solid operating statistics during very tough cycles.
Let me briefly comment on capped interested for the fourth quarter. The aggregate amount of capitalization was up this quarter due to increase in our weighted average interest rate and due to timing of delivery of a couple of spaces from redevelopment.
These spaces were delivered, ultimately occupied and are now generating revenue. As for the interest rate, it is impacted by the mix of our outstanding debt and the reduction related to variable rate debt due to the recent closing of our $120 million secured loan and the equity offering that we completed in September ultimately resulting in a higher effective interest rate required under GAAP.
Our value-add projects include unique adjacency location in Cambridge along with medical area Boston, Mission Bay, South San Francisco and New York City. A significant portion is under active development, active redevelopment, or undergoing preconstruction entitlement work.
Many of these assets are strategically located adjacent to key life science entities and each of the top life science sub market cluster destinations. Ultimately, these assets will be redeveloped or developed, leased to high quality life science entities and will generate significant revenue and cash flows.
Over the last five years on average we have leased approximately 500,000 rentable square feet of space, related to our active redevelopment and development projects. By the end of 2010, we anticipate the delivery meaning leased and occupied of at least 80% of the approximate 1 million rentable square feet under active development.
The delivery of these projects will generate significant revenue and cash flows and will result in a corresponding decline of required capitalization of interest. We started 2009 with various important initiatives to address the unprecedented crisis.
In 2009 we reduced our outstanding secured debt by approximately $267 million and extended debt maturities or refinanced secured notes aggregating $159 million. Later in the second half of 2010, we will begin formal discussions and negotiations with lenders for the amendment of our credit facility.
The environment for our credit facility amendments has improved significantly since the last year. Banks continue to step up for new relationships providing commitments of up to and sometimes in excess of $200 million.
Existing relationship lenders continue to increase their commitments and obviously certain banks are not renewing their commitments. We continue to keep in close contact with our lenders and based on our recent discussion, we have a high level of confidence that we will successfully amend our credit facility later this year.
While I'm covering the facility market, let me also provide an update on the secured debt market. We will continue to see improvement in the secure debt market with interest rates moving towards the 6% and loan-to-value ratios moving to 70 plus percent.
Large banks are targeting new loans that will hold on their balance sheet for securitization in the near future. The size of these loans are likely to be smaller than previously, but opening up another stream of debt capital will be positive for the industry.
Let me briefly point out that our outstanding tenant receivable balance as of year-end was 3.9 million, contains no uncollectible amounts and the balance represents one of the lowest receivable balances we have had over the a past several years. Moving next to sources and uses of capital.
Our balance sheet capacity and forecasted sources and uses of capital assuming reasonable assumptions will allow us to manage our balance sheet capacity beyond 2014. Our capital plan includes the following sources of capital.
674 million of availability under our credit facility, 95 million of cash on hand, 80 million of annual free cash flows, 35 million of non-strategic assets under contract letter of intent or negotiation for sale at gains. We anticipate successfully sourcing additional new secured loans or refinancings each year in the $75 million to $100 million range and asset sales in the $50 million range.
We are at various stages on refinancings for two loans, which have contractual maturities in 2010 and 2011 and I expect the interest rate on both of these loans to be in the mid, the low to mid 6% range. Through 2014, these sources of capital approximate $1.6 billion.
It's important to keep in mind this list is not exhaustive and other sources of capital may be utilized to meet our capital plan in addition to making appropriate adjustments to our capital plan from time to time as necessary. Next on uses of capital, our construction spending for 2010 is anticipated to be in the mid to high $200 million range.
We anticipate 50 million of net secured debt repayments, this is net of 373 million of refinancings or extensions, the successful renewal of our credit facility again at two-thirds, three-quarters or greater of its current $1.9 billion capacity and as noted earlier the market environment indicates that our assumption here is conservative. Repayment of our 3.7% convertible debt that is due in 2012.
And again, through 2014 our uses of capital are meaningfully less than our sources of capital. Briefly moving to our credit metrics, our net debt to adjusted EBITDA was approximately 7.7, debt to gross assets approximately 45%.
We continue to retain a significant pool of unencumbered NOI representing 55% of total NOI. Our weighted average interest rate for outstanding debt was approximately 4.95%.
Our facility covenants remain very specific to every company including Alexandria and are dependent on the specific terms and definition of each facility agreement. As such, covenant calculations and actual compliance will vary company-by-company.
Additionally, as expected, we have operated in compliance with debt covenants. We believe that our credit metrics related to our facility covenants are solid for our business, leverage is 41%, facility limit is 65%, our secured debt percentage remains below 15%, facility limit is 55% and fixed charges are solid for our business at two times and the facility limit is 1.4.
Our capital plan over the next several years as outlined earlier is manageable under conservative and reasonable assumptions. Over the next several years, our goal will be to balance key debt and balance sheet metrics with capital from debt and equity broadly defined.
To be clear again, equity capital will include recycling free cash flows, selective sales of income and non-income producing assets, opportunistic JV Capital and common equity. JV Capital will be primarily focused on key opportunities to work closely with institutional users with strong capital positions on development of our strategic land parcels.
Lastly, turning to guidance. Our guidance for 2010 FFO per share diluted was $4.42.
2010 earnings per share guidance was $1.84. Our guidance is based on various underlying assumptions, some of the assumptions are as follows, occupancy is forecasted to be flat or slightly up by the end of the year, same property results are projected to be in the 2% range.
Rents steps on 2010 leasing are anticipated to be from 0% or up to 5%. Straight line rents are forecasted to be in the $4 million range per quarter, up slightly over 2009 primarily due to long-term leases related to our active development projects coming on line.
As you may have already noted, this is appearing in our straight line rent adjustments as shown in the fourth quarter being up. But the fourth quarter also included a large adjustment related to one lease with a higher contractual rental payment, in other words prepaid rent last quarter that caused the fourth quarter straight line rent amount to increase.
So, straight line going forward will drop from the fourth quarter level. Margins are projected to stay in the 73% to 74% range.
Other income is projected to be approximately 1.5 million to 2 million per quarter. G&A is expected to be lower than what it was in 2009 at approximately 31 million.
By the end of this year, we anticipate at least 80% of that 980 million – excuse me, 980,000 square feet undergoing development will be generating significant revenue and FFO. Capitalization of interest for 2010 will be lower than what it was in 2009 and will reflect a delivery of significant square footage from redevelopment and development.
Our projection for capped interest for 2010 is in the $60 million range down from approximately 72 million for 2009 and will decline quarter to quarter in 2010 primarily in the second half of the year. Lastly, our guidance assumes selective asset sales of non-core assets continuing through 2010.
Now I will turn it back over to Joel.
Joel Marcus
Thank you, Dean. Operator, if we could go to Q&A, please?
Operator
Absolutely. (Operator instructions) Our next question will come from the sight of John Stewart from Green Street.
Your line is now open.
John Stewart – Green Street
Thank you. Joel, can you touch on East Jamie Court and specifically I think, you referenced redesigning that for multi-tenant how much would you expect to spend to build that out?
Joel Marcus
Well. We are not – I think I said redesigning it, I didn't say building it out.
John Stewart – Green Street
Sorry. How much would you spend on the redesign?
Joel Marcus
It's not significant dollars.
John Stewart – Green Street
Okay. And how about –?
Joel Marcus
These are not millions, these are in low hundreds of thousands of dollars my guess would be.
John Stewart – Green Street
Got it. Okay.
And the stabilized yield.
Joel Marcus
On?
John Stewart – Green Street
On that project.
Joel Marcus
I couldn't tell you we don't know what the rental rate will be.
John Stewart – Green Street
Okay. Can you speak to the UCSF campus?
I have read that there may be potentially some funding shortfall, can you speak to that?
Joel Marcus
I'm not aware of anything that is in process now that would be subject to the shortfall. The hospital is one where people were wondering about but the hospital has been fully funded to my knowledge based on what was represented to me by the folks at UCSF.
I think it's been, I don't have Steve Richardson here but it has been fully bond approved and I believe, I can't remember what the budget is, it is well over $1 billion, 1.5 million square feet children's, women's and cancer hospital and its sight work is going on as we speak. I don't think the California budget situation is going to negatively certainly not impact the hospital development and to my knowledge, existing construction on the R&D campus that's underway certainly isn't going to be impaired and by the way what has happened there to some extent is they often times came up large donors with bond financing so it's not strictly state funded.
John Stewart – Green Street
Right. Okay.
That's helpful. Could you just broad brush touch on absorption in San Francisco?
Joel Marcus
When you say absorption meaning when I talked before about trends and what we have seen, are you talking about future or?
John Stewart – Green Street
We've heard that there is pent up demand that you expect to see big leases hit in the relatively near term, is that jive with what you are saying?
Joel Marcus
Well. I think we have a number of requirements that we are certainly dealing with that are more than just trivial and so I think the answer is that's a good sign, the West Bay has been as you know, more protected but still has suffered in the downturn.
But we expect to see I think some occupancy pickups during 2010 for our asset base in the South San Francisco market for sure.
John Stewart – Green Street
Okay and then just lastly real quick, if you could touch on China particularly given the Google announcement and then Rio Tinto as well, just kind of your thoughts on that market.
Joel Marcus
Yeah. I think that market is – it's a unbelievably great market to me in the sense of opportunities but it is in a realistic sense a challenging market because the U.S.
government and China have a number of critical issues between them or . Yeah, that goes from obviously trade currency valuation, information freedom and so forth.
So we are not blindsided by the challenge in that market. I guess I would use the Chinese proverb to say that a journey of a thousand miles begins with the first step.
We just put our first step in to south China and our first step in to north China, so we don't view this as an immediate situation that we hope to have some large amount of space in a very short period of time. Our partner is the government and we see this as a very, very careful step by step process.
I just was in China, very aware of the tensions that also spill out in to the real world of commercial enterprise.
John Stewart – Green Street
Great. Thanks a lot.
Joel Marcus
Thank you.
Operator
And it looks like our next question will come from the site of Anthony Paolone of JP Morgan. Your line is now open.
Anthony Paolone – JP Morgan
Thanks. Good afternoon.
The first question is on capital spending for 2010, I think you mentioned mid to high 200 million and I think if I look at your cost to complete development and redevelopment it comes out to about 200, so just wondering where the rest is, where that comes from.
Dean Shigenaga
Well. We always have other protects that are occurring from time to time, some of it could, is attributed to additional redevelopments.
Joel hinted also and we have for the last quarter or so anticipated another project related to a university that we are working with and that's included in our estimates of spending, so our spending includes a forecast for incremental projects.
Anthony Paolone – JP Morgan
Okay. Then second question really then would relate to that.
Can you just give us a little bit more color on the university deal and also you mentioned maybe a foreign tenant. I just want to understand I guess I'm not clear as to what those things mean like a foreign tenant outside of the U.S.
or just a foreign tenant on one of your U.S. land parcels?
And on the university side, I guess I'm still a little unclear as to who is party to what in that situation?
Joel Marcus
Yes. I'll try to help you as much as I can, given existing agreements.
On the foreign side, one of our locations overseas in Asia, we are working actually with two, one existing client and one non-client for significant space on a build to suit basis from our shell and what we view that as, as a – I think like I said to John as a first step in validating that we can build first class high quality space in a market that's never seen it before with the kinds of challenges you have and also attract both current tenants and non-tenants to that market because the market is obviously one that has huge future potential. So hopefully that's helpful.
On the university side I think what I emphasized is we view this also as a first step we view partnering with a number of universities across the country and maybe throughout the world is an important part of the future growth of this Company and certainly the industry and given endowment challenges that they've had, even more reason to think about using their land for something other than just traditional academic buildings or just traditional kind of the way they did business before. So partnering up can be awfully enticing to both parties.
We will; we are not prepared to announce anything but we are well along in an effort. We got design done, we got agreements that are moving through process and we are moving through an approval process where we would announce a signature building on a major university campus that would be credit tenant leased in a majority to that university but with an exciting set of tenants in the building, so all I can say at this point is stay tuned but that's kind of the first step of this program.
Anthony Paolone – JP Morgan
So doesn't sound though like you would be doing something, say on campus where you would start it without some sort of pre-leasing?
Joel Marcus
No. No, no, that's not anything, I think in this credit and financial environment we would never do that without a majority being pre-leased on a long-term basis.
Anthony Paolone – JP Morgan
Okay. And then just a last question, if my notes are right I think historically you talked about rent spreads looking like I thought it was in the 5% to 10% range, you talked about 0 to 5 for 2010.
I'm just wondering if there has been any change in the market there.
Joel Marcus
I think if you take out the two leases we talked about, one was the San Francisco lease of an industrial building that had an existing high rental rate with, actually it was a big company that we moved to a Cleantech company and we took a step down on that and you exclude a lease we re-did in Maryland where the tenant had signed at a high point in the market, if you take those out and then you kind of project forward I think both Dean and I said we feel relatively comfortable in the 0% to 5% range going forward for this year.
Dean Shigenaga
No. I agree with that.
Anthony Paolone – JP Morgan
Okay. Thanks.
Joel Marcus
Yeah.
Operator
And we’ll move next to the site of Jamie Feldman from Bank of America. Your line is now open.
Jamie Feldman – Bank of America
Thank you. Good afternoon.
Dean I want to make sure I heard you right. The same store outlook, for next year plus 2%?
Dean Shigenaga
Yes. That's correct.
Jamie Feldman – Bank of America
Is that a cash basis or GAAP?
Dean Shigenaga
I'm trying to think. I think they are both relatively in that range.
So both on a GAAP and cash basis to be in that range.
Jamie Feldman – Bank of America
Okay. So you're basically saying occupancy is flat to up and leasing spreads are slightly positive, then you have annual bumps to get there?
Dean Shigenaga
Correct.
Joel Marcus
That's a good way to characterize it.
Jamie Feldman – Bank of America
Okay. So you mentioned the East River Science Park, building 100% leased.
What does this mean for the second building? Should we start thinking about that soon?
Joel Marcus
I wouldn't say it's all leased but it's relatively fully committed. I think by the end of the year that building will be virtually all stabilized and I think you will see the significant benefit of those leases and the high quality nature and the long-term nature of those leases flow in to NOI certainly big time in 2011.
I think we would love to try to think about the West Tower but I think again, we still are in an environment that is awfully, awfully tough and I think too many people forget that it is, we got very high structural unemployment out there that doesn't seem to be abating, treasury is obviously signaling maybe a move to move on interest rates later in the year. There is certainly no, to my knowledge, no great ability to get construction financing today given the credit markets.
So I think it's going to take some time but we have sufficient demand today that we could make, I don't know what the percentage would be but that building if we build it today would not be empty. But I think stay tuned because I don't think that's going to be imminent but I think we will reevaluate that as we go forward but it certainly is a high class problem.
Jamie Feldman – Bank of America
Okay and thank you.
Joel Marcus
Yeah. Thanks.
Jamie.
Operator
And now looks like our next question will come from Michael Bilerman of Citigroup. Your line is now open.
Michael Bilerman – Citigroup
Hi. Thank you.
Dean, just on the capitalized interest, you look at the rate that using to capitalize went from 516 to 542 up 26 basis points, page 12 of your sup but your average rate on your debt only went up 10 basis points from 4 85 to 495 that's on page 19. What is driving the difference between the weighted average rate change in the quarter and the rate that you are using in capitalization?
Dean Shigenaga
That's a really good question, Michael. The real impact is almost, I think the easiest way to help present this on the call is think of higher rate either fixed rate, secured debt or swapped out facility debt as one bucket assume 50% of the debt is in that bucket for the sake of just this analysis and assume the other half of the debt is sitting in a variable LIBOR based bucket, which we all know LIBOR is extremely cheap right now.
And if that bucket was 50-50 as far as the amount of debt in each category, you would get a simple average of the effective interest rate. But as we completed two transactions, one the equity offering in the third quarter and then the secured debt in the fourth quarter, the proceeds of which went to pay down our credit facility balance, which first goes to payoff unhedged available rate debt, which effectively and proportion to the buckets of 50-50 that I was describing to you earlier.
You would have less debt weighted to roughly 1.5% LIBOR based debt versus an average of almost 6% other debt. So when you change the mix, you effectively weighed up the interest rate used for capitalization.
Michael Bilerman – Citigroup
You are not using average debt balance in some way you are using a different bucket for the capitalization rate versus the average debt rate?
Dean Shigenaga
Well, the…
Michael Bilerman – Citigroup
Directionally, I would have thought if one would go up the other would should go up proportionately unless you are using different.
Dean Shigenaga
Yeah. It's – I've never looked at it that way, Michael, but they are two separate calculations.
Michael Bilerman – Citigroup
Okay. In terms of G&A I think you mentioned G&A for 2010 was 31 million, which is about 7.75 million a quarter.
You averaged about 9 million in '09 and $31 million number would take you back to '06, late '06 levels. What is happening in 2010?
Dean Shigenaga
A little bit is being driven by I think a lower amount of aggregate stock compensation anticipated running through G&A in 2010 versus 2009 and keep in mind we had significant amount of compensation running through '09 at a fairly high stock price. That's – from a pure accounting perspective that runs through, based on the value of the award at the date of grant which, for the most part we know that most of it was in the $100 range and the more recent grants through since late '08 have been done at much lower stock price.
Michael Bilerman – Citigroup
So that $5 million is the difference is all stock comp? There is nothing else capitalization or anything else going on?
Dean Shigenaga
No. It's not being driven by a change in capitalization.
The capitalization really hasn't moved much as you look at the amount of development and redevelopment of construction activities we broadly have. Whether it's '07, '08 or '09 it's pretty significant.
So nothing is changing there. And I guess to some degree although we didn't have – we didn't have any reason to cut staff because of the crisis.
I think we did have some performance reductions that have had occurred in late '08 and little bit of '09 that helps out a little bit. But I think the majority of the change is really driven by stock comp.
Michael Bilerman – Citigroup
So you would expect the 14 million of stock comp adjustment, that's page 16 in your AFFO, that 14 million would go down to 9 million for 2010?
Dean Shigenaga
Yeah. Probably close to that would be my guess, yes.
Michael Bilerman – Citigroup
You talked a little bit about development and obviously to coming on line later in the year. Do you have a sense of – you give us a capitalized interest reduction heading into 2010.
But how much development NOI is effectively going to start hitting the numbers in 2010? And then what would that be on annualized basis by the time we get to the end of the year?
Dean Shigenaga
Yeah. And keep in mind guys, although I think I tried to give you some perspective of what we anticipate completing in deliveries at 80% of our development pipeline, a lot is back end weighted.
As an example, I think we also footnoted in our supplemental that the Gilead building in Seattle was delivering in early February but if you think about it, New York, which is the bulk of the square footage and cash flows that will be all back end delivered. But the good news is given the pace of activity that we got on the project.
We feel very comfortable getting the majority of that delivered this year.
Michael Bilerman – Citigroup
And what's the – in terms of East River, when does that actually start to come in?
Dean Shigenaga
I think we will start to see some of that start in the third quarter.
Joel Marcus
Yeah.
Dean Shigenaga
And the majority of it will be late third quarter and starting the fourth quarter.
Michael Bilerman – Citigroup
Okay. Joel, you mentioned little bit about the 2011 lease role obviously being a big percentage of your total leases and you talked about Cambridge and one of the buildings and office building in Tech Square, take out and redevelop.
I guess it's about 140,000 square feet, the remains about I think 600,000 square feet in eastern mass, I don't know how much of that is in the suburbs verse news Cambridge, that's rolling in 2011. Can you give any color that's one of the biggest markets where the roll is concentrated?
Joel Marcus
Yeah. Let me just take a look at the schedule for a moment.
Yeah, the techs core building is the largest – can you run that down, they will run that down and maybe I can come back to that in a moment.
Michael Bilerman – Citigroup
Okay. I was up in Toronto recently and passed by the development that you have underway there or at least the construction site is fully up.
How much capital are you spending there I know it's not listed as active development project, but it look I mean your signage was everywhere and looked like an active protect. Can you give us an update on what's happening?
Joel Marcus
I actually can't. I will tell you the following because we are under discussion with Mars there, but there is an active lender that is interested in financing the transaction and it looks like there may be very large requirement that we might be able to get but we are working with Mars to try to address that again given the where we are in the credit markets and that's an active negotiation as we speak.
But we certainly put tens of millions of dollars in building the underground parking and foundation before the project was suspended due to the financial collapse. So I would say stay tuned, that discussion is going on literally as we speak today.
Let me see if I can give you a couple of highlights on the – yes, Tech Square the building 400, which is occupied by an office tenants right now is about 145,000 square feet, MIT comes up and they are almost 100,000 square feet. So that's a good majority of that and we have every reason to believe based on discussions with MIT they are going to renew.
And then there is one other that comes up kind of midyear that's about 100,000. So there are really three big leases with – it's a suburban location with a pretty large credit tenants and I think we have every indication that they are likely to renew on that.
So and also we are expecting based on what we can see in that market in 2011 potentially to have double-digit rent increases which is amazing to say today.
Michael Bilerman – Citigroup
And then just go to quick ones, in terms of disk ops how much is held for sale on the balance sheet today?
Dean Shigenaga
Hang on, guys. I think most of that was in our 10Q footnotes but let me pull the schedule here, it's about low $30 million – yes.
Michael Bilerman – Citigroup
Still run, still held for sale?
Dean Shigenaga
Yeah. And we sold one small asset in the fourth quarter.
Michael Bilerman – Citigroup
Okay. And then you talked a lot about the leasing spreads in the quarter being influenced by the San Francisco building and the Maryland building.
Obviously, cash rents being down 8 was a great mark. What would the rent spreads have been without those two leases?
Joel Marcus
I think it would have been about breakeven.
Michael Bilerman – Citigroup
Right. And what's the size of those two leases?
Joel Marcus
Well that’s…
Michael Bilerman – Citigroup
I think one was San Francisco is maybe what about –
Dean Shigenaga
Out of the 374.
Michael Bilerman – Citigroup
One was San Francisco maybe about, so large, it's a large – together I think they are probably north of 100,000 would be a guess.
Michael Bilerman – Citigroup
Great. Thank you for the time.
Joel Marcus
Yeah. Thanks, Mike.
Operator
(Operator instructions) Our next question will come from Will Marks of JMP Securities. Your line is now open.
Will Marks – JMP Securities
Thank you. Hello, Dean and Joel.
Joel Marcus
Good.
Will Marks – JMP Securities
A quick question on the lease roll over, on 26, page 26 you have in 2010 annualized base rent 2431. Where was that at the beginning of, where was 2009 at the beginning of the year?
Dean Shigenaga
I don't have that.
Joel Marcus
I don't either.
Dean Shigenaga
But I can tell you the challenge with that analysis it's dependant on the mix of leases that you have rolling in the schedule.
Will Marks – JMP Securities
It does look like 2010 is low certainly compared to future years.
Dean Shigenaga
Yeah. I think that's a fair statement, yeah.
Will Marks – JMP Securities
Can you offer any color on if you are doing anything in terms of free grant or other concessions these days?
Joel Marcus
Yeah. I think it's very dependent obviously market.
To give you example research triangle park if the process of renewing a lease right now and the tenant is throwing out market statistics. But those are not first class lab space, they tend to be kind of third or fourth generation or they tend to be other space but somebody would have to invest a lot of dollars.
But we are looking in some of the softer locations at trying to encourage people through a bit of free rent and I'm talking about a month or two or three at the most on a five or seven year lease to make sure they feel like they are getting some benefit and obviously looking overall at the net effective rent on that transaction. But I would say buy in large it hasn't been hugely significant, but it's at the very least end market dependent.
Will Marks – JMP Securities
That makes sense. Okay.
I though…
Joel Marcus
For example, in Massachusetts in other locations in Mission Bay it just hasn't been really part of the equation in an important sense.
Operator
And looks like our last question will be a follow-up from the site of Michael Bilerman of Citigroup. Your line is now open.
Michael Bilerman – Citigroup
I said I had one more, sorry.
Joel Marcus
It’s okay.
Michael Bilerman – Citigroup
The straight line rents I think, Dean, you said something about in the fourth quarter one lease that drove that 7 million.
Unidentified Analyst
I said I have a one more question.
Joel Marcus
Hello. We can hear whoever is talking there on the site.
Michael Bilerman – Citigroup
Yeah.
Joel Marcus
So Michael, the straight line rent was up primarily for two reasons. One, we have been delivering some leases, long-term leases under our redevelopment and development projects lately that's contributed to it.
But we also had a fairly meaningful one-time prepaid rent that was contractually due under lease that was received in the third quarter – excuse, the fourth quarter GAAP number. So I think we reported about 7 million of straight line rents, it's a drop back down more in line with about a 4 million run rate per quarter in 2010.
Michael Bilerman – Citigroup
Has anything happened to the GAAP rents in that case?
Dean Shigenaga
No. No.
No. Those are under a lease, GAAP straight line rent so there is no impact to GAAP rents.
Michael Bilerman – Citigroup
Okay. Thank you.
Joel Marcus
Yeah. Michael also, or maybe this is Will that asked, if there is any free rent that we offer and we are pretty careful in most locations hopefully not to do much of it, we always just extend the term.
Michael Bilerman – Citigroup
Right.
Joel Marcus
Operator, any other questions?
Operator
We have no further questions at this time.
Joel Marcus
Okay. So thanks, everybody very much and we look forward to talking to you for the first quarter in May.
Operator
And this does conclude today's teleconference. Thank you for your participation.
You may disconnect at any time.