Alexandria Real Estate Equities, Inc. (ARE)

Q2 2010 Earnings Call

July 29, 2010 3:00 pm ET

Executives

Rhonda Chiger - IR

Joel Marcus - Chairman, CEO and President

Dean Shigenaga - CFO

Analysts

Anthony Paolone - JPMorgan

Suzanne Kim - Credit Suisse

Quentin Velleley - Citi

Sheila McGrath - KBW

Will Marks - JMP Securities

John Stewart - Green Street Advisors

Presentation

Operator

Good day and welcome everyone to the Alexandria Real Estate Equities Incorporated second quarter 2010 results conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Rhonda Chiger.

Rhonda Chiger

Thank you everyone. This conference call contains 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 of 1934 as amended. Such forward-looking statements include without limitation statements regarding our 2010 earnings per share diluted attributable to ARE's common stockholders, 2010 FFO per share diluted attributable to ARE's common stockholders, the business plans of certain tenants and the expected impact of the retirement or 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 development, 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.

Now, I would like to turn the call over to Mr. Joel Marcus.

Joel Marcus

Thank you, Rhonda. Welcome to the second quarter 2010 conference call. Let me start off with some macro comments quickly. Those of you who read Alan Abelson's column each Saturday in Barron's will remember about a week or two ago, he indicated that despite the periodic winning street, we're still in the grip of the secular bear market that has years to run.

So in light of this cautious business climate, it's nice to know that contrary to significant negative budgetary spending at the fed and the state level, this is not translated into a measurable dip in R&D investment by the broad and diverse life science sector. Despite the deep recession, pharma and bio have spent last year's $65.3 billion in R&D compared to $1.5 billion from 2008.

Our number two client tenant, Roche, ranked number one with over $9 billion of R&D spending. Our number 10 client tenant, Pfizer, was number two at $7.85 billion. Our number one tenant, Novartis, was number three with $7.47 billion. So we're very pleased about that. We also have not had a space go vacant due to pharma M&A, and we're very thankful for that, given our adjacency locations.

Among a number of critical challenges coming up is the growing clinical trial complexity, challenging drug development and obviously the need to contain rising cost. And we think there is a big opportunity where ARE will focus its platform on this significant emerging area.

Another interesting opportunity that has come to us relates to something called the Cures Acceleration Network. It's a newly formed translational research program at the NIH, designed to bridge discovery from the lab to clinical testing. $500 million have been set aside for approximately 20 drug development programs and another 20 projects using compound that companies have abandoned, and we expect to benefit directly from that program.

In looking at ARE with the best adjacency locations to the critical innovation centers, the best-in-class assets and the best-in-class asset services, we've attracted big pharma to our asset base at an ever growing pace and as they pare back their silo research locations on big, remote and isolated campuses. The July 6 Financial Times focused on the key issue of critical success factors for clusters. And I'd recommend that for your reading.

In the toughest quarter in the financial history of the country back in first quarter of '09, many of you'll recall, we announced signing leases that are first-in-class 200 Tech Square project adjacent to the MIT campus with Glaxo, Pfizer and Novartis.

So in addition to recently attracting biotech oncology jewel, Onyx Pharmaceuticals, to South San Francisco, a number of you may have seen from the East Bay, which is continuing to be depleted of its life science presence, we helped also bring Bayer AG Pharma's U.S. Innovation Center to the Mission Bay, also from the East bay.

And there's an interesting quote recently that was reported in the San Francisco papers by Terry Hermiston who is the site head, and he said, "The driving force for locating our U.S. Innovation Center in Mission Bay is the proximity to scientists from academia and young biotechs and the opportunity this holds to jointly turn great ideas into the next-generation treatments for our patients. It is important to acknowledge the importance of partnerships and collaborations in the new economy in this location."

So it's a great credit to our management team and superior regional teams. Our quarter-to-quarter strategy is to do everything humanly possible to aggressively defend against an erosion of fundamentals and a prudent offense to glory in a sensible, reasonable and quality manner which will uniquely distinguish ARE and set us apart from all others.

And we view the differentiating guiding principles through this difficult time is first of all to act for a long-term benefit; two, to do careful underwriting; three, to demonstrate patience and persistent good judgment; four, to emphasize return on invested capital; five, to attract and retain high-quality client tenants and employees; and next, to keep focused on positive internal growth, which is critical. So being the landlord of choice to the life science industry at this point is an ideal place to be.

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