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By Jason Ren | 11-10-2011 01:00 PM

Alexandria CEO: New Lab Space Entrants No Threat to Moat

Well-located properties, high-quality facilities, and high levels of specialized knowledge will help Alexandria fend off new players to the lab-space real estate market, says CEO Joel Marcus.

Jason Ren: Hello, I am Jason Ren, a REIT analyst with Morningstar. Joining me today is Philip Martin, a REIT strategist with Morningstar, and chairman and CEO of Alexandria Real Estate Equities, Joel Marcus. Wonderful to have you.

Joel Marcus: Wonderful to be here. Thank you.

Ren: Alexandria is developing lab space in Asia for its partners. In a recent investors conference call, you remarked that the "research" research and development is in the United States, but some of the "process" research and development is moving out to Asia. One of my questions is how do you see research R&D eventually moving toward Asia, and how much of this is a threat or an opportunity to your operations?

Marcus: Thanks, Jason. So, a couple of preliminaries. First of all, on Asian operations, we have a small operation in China. We're still proving our model there. We do have a more expanded operation. We actually operate directly through partners in both India and China. So we have a pretty good-sized team on the ground in India. We are focused on primarily build-to-suit developments for European and North American companies involved in the broad life-sciences industry over there, primarily in Bangalore and Hyderabad, India.

When it comes to what I said on the call regarding U.S. or North American and European countries, first and foremost, they are focused on building big presences in India, in particular, to take advantage of that market. So you've got sales and marketing, you've got development. You have some, as I call it, process R&D and also clinical trial and data management work.

I think when you distinguish between novel, innovative research versus more traditional process-oriented research, I think it seems pretty clear that a novel inventive research will stay primarily in the U.S. and Europe. One reason is because of patent protections. The second reason is because of the main universities generating and institutes generating that kind of research, and the great minds really across the globe are still coming to the U.S. in rather large numbers.

So we see it concentrated here, and I think that will propel and help our business years into the future. But I think the opportunities lie in the big markets in India and other places where our clients want to take advantage.

Ren: Closer to home, we have been lately seeing health-care REITs such as Health Care REIT and HCP move into the lab space arena, and also lab space s sometimes thought of as a specialized office. So I just wanted to get view on the health-care REITs and maybe perhaps even other office REITs kind of moving in on your niche and how you might want to think about defending your economic moat and how your land holdings might play into that?

Marcus: I think that's a great question. So when we saw Slough sell its U.S. life-sciences portfolio back in 2007, and I believe HCP paid a pretty top-of-the-market price, about $2.9 billion, we valued that portfolio at about $2 billion. We looked at it, but ultimately we felt that it was concentrated really in two markets, one is South San Francisco and second was San Diego outside. A little bit in Torrey Pines, Calif., but in number of locations we were already pretty concentrated and had pretty dominant positions in those markets. So we decided early on, and I think after the first round, not to pursue it both on valuation and in location.

But I think HCP for them made a smart move. I think it was certainly they hit the market at a top price, but I think ultimately that may be good for them. It allowed them to diversify into another segment. It really doesn’t affect us in the sense that we already have positions in those markets. I think South San Francisco has turned out not to be such a great submarket. We've really redeployed our focus into Mission Bay, Calif., where we have exclusive control over all commercial land, and that’s a 1% vacancy market. So we have chosen to refocus our efforts there. Then in San Diego, there is quite a bit of competition across the board.

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