Alexandria Real Estate Equities Inc (ARE) 2014 Q3 法說會逐字稿

Welcome to the Alexandria Real Estate Equities Inc. third quarter 2014 earnings conference call. My name is Matt, and I will be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded.

I would now like to turn the call over to Rhonda Chiger. Ms. Chiger, you may begin.

Thank you, and good afternoon.

This conference call contains forward-looking statements within the meaning of several securities laws. Actual results may differ materially from those projections and forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements as contained in the Company"s Form 10-K annual report and other periodic reports filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Thanks, Rhonda, and welcome, everybody to the third quarter call.

With me today are Dean, Steve, Peter, Tom and Dan, so we have got a full house here. We are pleased to report the third quarter FFO of $1.21 a share, and an increase in our narrowed guidance of $4.79 to $4.81 FFO, up over 14% from third quarter of 2013, I think characterized by strong demand, as well as strength in our core operations. And I think the key to the success this year has clearly been our platform, which is our Class A facilities located in our collaborative science and technology campuses in the best urban innovation clusters. We have certainly benefited significantly from that.

I think, if you think about Alexandria' at this point in time, maybe ten kind of key strengths come to mind. First, of all very strong core operations across all key metrics as set forth on page 1 of the press release, and accelerating FFO growth into 2015. Two, we have got 2.3 million square feet in current value creation, development and redevelopment projects, 85% leased or in negotiations, page 29 of the supp. I think this is a great testament to the teams in each of our markets, plus an additional approximately 1.8 million square feet in near-term value creation development projects, virtually all of which are under active negotiations, again page 29 of the supp.

I think also what is important to note is the average initial cash stabilized yield generated from about 6.4% to 8.3% in value creation, substantially exceed our implied cap rate base cost of capital, resulting in strong profit margins over the coming several years. You can take a look at pages 30 and 34 for those updates. ARE clearly owns the best science and tech campuses in our urban innovation clusters of any REIT or private investor today. A very well run asset base at the asset management level, five, a very few challenged assets six, I think a deep long tenured and highly talented team, which are members of the fully integrated teams in all of the key innovation clusters.

As Dean has pointed out before, seven, a high level of liquidity almost $2 billion. Eight is a strong balance sheet able to support strong value creation pipeline for the future. Nine, a low dividend pay out ratio and increasing dividend sharing growth in cash flows with our shareholders. And I think, ten, continued sales of non-income producing assets, as well as non-core assets while maintaining accelerating growth into 2015.

Just a few macro comments, there certainly is a strong trend toward the urbanization of the innovation economy and workforce, and again, we have been fortunate to take significant advantage of that. I think also in our tenant base we see the strong confluence of structural factors, with also positive cyclical factors which don't necessarily line up in time. But we are seeing that now really in the best of times for our tenant base. On the operations internal growth side of things, we continue to beat our occupancy and rental rate increase estimates, and leasing in the key regions helped drive internal growth this quarter at about 871,000 square feet. Greater Boston contributed 35% and San Francisco 32%.

On external growth, Steve will comment on the acquisition of the two Mission Bay parcels in connection with the Uber joint venture, development of 422,000 square feet in the heart of Mission Bay, a superbly executed transaction to continue to drive our growth in San Francisco. ARE's goal is to maintain strategic optionality regarding its growth strategy.

This is really kind of our mantra. And as such, due to the extraordinarily strong build-to-suit leasing demand for our Binny Street development parcels, and a corresponding reduction in the lease-up risk, we have updated our strategy, which we announced in the fourth quarter of 2013 which was to sell a minority JV interest in the Binny land parcels, and we will now seek to keep on balance sheet assuming near-term leasing on all. So again, that's just an update on the strategic optionality approach. If we aren't successful in leasing, we would move forward with the joint venture.

Clearly, a key to this move on the assumption side of things is our desire to capture the extraordinary economics and the extraordinary demand for these three buildings versus an ability to move out our leverage targets somewhat. But Dean will deal with how we plan to address that through free cash flow, the growth in EBITDA, land sales, some asset recycling, et cetera. And we are very comfortable, I think with our current plan regarding our overall leverage.

Dean will talk about the balance sheet. And I would conclude by saying on December 3, at Investor Day, we will layout the 2015 business plan, which will confirm accelerating FFO growth into 2015, as well as what we expect to be a strong increase in our NAV into 2015.

So let me turn it over to Peter Moglia for some comments.

Sure, thanks, Joel.

So we had one notable life science trade to report in the third quarter, which occurred in the Route 128 corridor of the Greater Boston region where GIF Partners, a private equity investor based in San Francisco purchased 850 Winter Street from Marcus Partners for a 6.3% cap rate. The price per square foot for the suburban asset was $404. The other notable trade involving Boston was BXP's sale of a 45% interest in two Boston and one New York City office buildings to Norge for what ISI calculated to be a 3.8% cap rate. This trade was noted by Green Street when they increased their NAV to $91.75 per share on October 1.

The Bay Area continued to be extremely hot in the third quarter with 989 Market, 650 California, 50 Beal and 60 Spear Street trading separately at a weighted average cap rate of 4.08%, and a healthy $621 per square foot. In Seattle, 500 Yale Avenue and South Lake Union traded at 5.71% cap rate. The property is anchored by tech start-up space provider Rework. The buyer was Trinity Capital lead by former Speaker executive, Richard Lieder.

A number of Seattle office assets hit the market this quarter, and pricing guidance has been in the low to mid 5%s as owners like Vulcan, Shorenstein, and Brookfield look to capitalize on a diverse pool of buyers in the market, including foreign funds, German and Hong Kong-based, domestic funds such as Investco, private equity investor GI Partners, and a number of other public and private REITs. A number of these investors were bidders on Life Science asset 401 Terry, purchased by Kilroy in March which had a weak tenant credit anchor.

The trend of cap rate compression has continued through the third quarter due in part to low interest rates, a lack of alternative investments, and deep pool of investors, including foreign funds. It appears that the investment market is only getting tighter, as an analysis of comps from our core markets shows the weighted average cap rate dropped 5.58% in 2013, to 4.8% through the third quarter of 2014, driven largely by 100 basis point plus tightening in the San Francisco Bay Area.

As a follow-up to questions we have received about who is bidding on life science real estate assets, we can give you some names of those who have been actively bidding on them in the Greater Boston market. They include the related companies, Deutsche Bank Asset and Wealth Management, which was formerly REIF, Korean Fund, Moray Asset Management, JPMorgan, Private Investor, The Rockefeller Group, Swiss Fund, AFIAA, Clarion Partners, Private REIT KBS, Prudential and Principal.

To wrap up my comments, I want to acknowledge that with the end of QE, there is a lot of conversation about if, when and by how much interest rates will rise, and the effect they will have on cap rates. Analysis of data from the first quarter of 1989 through the first quarter of 2013 by Robert Charles Lesser & Company determined that the average spread between cap rates and the 10-year treasury yield is between 250 basis points and 300 basis points.

According to Real Capital Analytics, the current spread for office product is between 400 basis points and 450 basis points. So we believe there is room for cap rates to absorb increases in interest rates, and remain at current levels. In addition, rising interest rates should reflect an improving economy and real estate fundamentals, which should dampen a rise in cap rates, driven by a rise in interest rates.

With that, I will pass it over to Steve.

Good afternoon, everyone.

I would like to take a step back today as we head into the final months of the year, and frame the drivers for what has been an exceptional year for ARE's performance in the unique urban and science and technology clusters in which we operate: one, the deep and broad-based demand in the critical science and technology sectors; two, the significant supply constraints in ARE's highly desirable urban innovation clusters, and three, the rental rate strength and pricing power in those submarkets. These drivers have contributed to strong core performance again this quarter and year-to-date, as we reported cash and GAAP increases of 6.2% with 14.1% year-to-date, and 5.6% and 18.6%, respectively this past quarter for renewals and releasing of space, as well as historically high occupancy levels of 97.3% for North American operating properties.

Very powerful global economic forces are intensifying demand for ARE's Class A product in its urban innovation clusters, as they possess unique and mission-critical attributes that simply cannot be replicated in other locations. Against the significant wave of demand is a set of political and geographic factors that are constraining supply. The ability to aggregate and deliver new product in urban settings is a very complicated and politically-charged endeavor, as well as the imperative for high quality design, technically-capable and creative collaborative work environments. These two powerful forces, significant demand and constrained supply have created pricing power in the market.

Alexandria's client tenants have therefore been keen to renew early to ensure stability of operations, and more importantly to seek trusted and long-term partnerships as they seek to establish unique and high quality urban campuses. The long-term lease and joint venture between ARE and Uber has created a now paradigm, and clearly illustrates the desire ability of the ARE collaborative urban campus platform for its science and technology partners. Broadly, we have essentially resolved the rollovers for 2014 with less than 0.5% outstanding, and just 794,150 square feet remaining to resolve, or just 4.29% of our operating asset base for 2015.

Drilling down on ARE's core urban markets, the statistics reveal a very robust set of activity. In Cambridge, Boston we have seen demand intensify during the past quarter in the life science market with 2.5 million square feet of demand, and another 2 million square feet of tech demand. Most notable is the high quality demand from seven different potential client tenants seeking large blocks greater than 100,000 square feet.

We have refreshed our mark-to-market analysis, and across the entire operating ARE asset base we see solid cash increases at 9% and 13.2% on a GAAP basis, and pretty amazing metrics for Cambridge Boston, growth of 18.2% on a cash basis and 22.4% on a GAAP basis. Occupancy is up by 230 bps to 98.6% compared to the same time frame last year, and lease rates are again being pushed to the high $50s and near $60 triple net for existing product, and prospect seeking new large blocks of space at ACTS are anticipating rents in the low $70s triple net.

Vacancy rates overall continue to tighten, and on a regional basis are just 5.7% on a direct basis, with 7.8% of total availability. Moving west, the San Francisco to Stanford clusters are also experiencing an intensified demand cycle from science and technology companies. Occupancy is up by 290 bps from the same period a year ago to 99% in the operating asset base.

We are tracking nearly 900,000 square feet of life science demand, and 9.3 million square feet of tech office demand with market highlights of several pre-leased large projects with tenants such as Google, EMC, Machine Zone, and again most notably, ARE's groundbreaking long-term lease and joint venture for 422,000 square feet with Uber in the heart of Alexandria's Center for Science and Technology at Mission Bay.

Lease rates for new product are now in mid to high $50s triple net, as the Prop M office allocation continues to constrain supply of new products in San Francisco. The mark-to-market refresh indicates an impressive 8.6% cash and 14.4% GAAP growth trajectory, and the market continues to tighten as vacancy rates dropped 100 basis points in the lab sector to 6.2%, and a steep drop of 430 basis points to 4.1% in the SoMa Tech district.

Moving to south, we see that San Diego's market is, again, a similarly positive story. Demand in the market is up 300% to 2.4 million square feet compared with last year. Core performance is very solid with an occupancy increase of 340 bps to 96.1%, and the operating and redevelopment asset base and market vacancy has dropped 140 bips to 9.6%.

The existing tenant base growth trajectory is very strong in our key large campuses. CampusPoint and Alumina's headquarters have more than 600,000 square feet under negotiation, a clear testament to ARE's underwriting team's unique capabilities and expertise. And I will pass along a shout out for their stand-out contribution.

Finally, the long entitlement and approval process in San Diego continues to constrain supply in Alexandria's core clusters, which in turn will continue to support rental growth, which is reaching all-time highs in the mid to upper $40s triple net. Finally moving Nnrth, Seattle has seen explosive growth in the tech sector during the past quarter with leasing in excess of a million square feet. Vacancy rates remain below 5% for lab and tech space, with upward pressure on rental rates for new ground up lab product in the high $40s to low $50s triple net. With that, I will hand it off to Dean.

Thanks, Steve. Dean Shigenaga, here. Good afternoon. I have got three important topics I want to cover.

First I will provide an update on our capital strategy and our ability to continue with the delivery of strong growth in FFO per share and net asset value. Second, I will an provide an update on the positive impact of accelerating demand. And third, I will provide a summary of key guidance items for 2014, a few important thoughts for 2015, and our confidence in our ability to deliver solid growth in cash flows, net asset value and FFO per share from our Class A buildings, and a land parcels located in urban innovation clusters.

First on our capital strategy, our key capital matters for 2014 are substantially complete. In July, we completed our $700 million unsecured bond offering with a weighted average interest rate of 3.5% and a term of 9.6 years. We updated our targeted sales for 2014 to a mid point of $120 million, down $75 million from our prior guidance, and we have about $83 million of dispositions under contract, and expect to identify additional sales in 2015. I will come back to this topic in a minute.

Moving to leverage, debt to adjusted EBITDA was 7.2 times as of the third quarter, and forecasted to be 7.1 times by the end of the year based on significant growth in EBITDA, and targeted dispositions of $83 million both of which offset our estimated construction spend for the fourth quarter. Also significant growth in EBITDA continues into 2015, and we will keep leverage within a reasonable range as we deliver highly leased projects and commence new development projects. Lastly, we expect leverage to improve towards the target range of approximately 6.5 times, as pre-lease developments deliver significant growth in revenue, NOI and EBITDA.

Briefly and importantly on our capital strategy, our capital plan focuses on self-funding all or almost all of our growth in 2015, and is aligned with our strategy to grow FFO per share and net asset value. Additionally, we are very comfortable with our capital plan and credit metrics going forward, and will provide an update in detail on our Investor Day on December 3. First, we will plan to invest cash flows from operating activities after dividends currently greater than $110 million per year into high value development projects.

Second, we expect to issue long-term debt to fund Class A highly pre-leased development projects on a leverage neutral basis through significant growth in EBITDA. Combined with operating cash flows after dividends, these two items in 2015 should allow us to allocate $500 million to $600 million of capital to high value development projects. Third, we expect to supplement our sources of capital by identifying real estate to dispose of for the next one to five quarters, including operating properties both non-core and core like, in addition to land parcels. We are in a great position to continue to deliver solid growth in FFO per share and net asset value from 2014 to 2015, including the impact of dispositions and the related reinvestment of proceeds.

Moving next to the positive impact of accelerating demand on our asset base. As Steve pointed out, tenants clearly looking to tie down early renewals in anticipation of increasing rental rates in a very supply constrained environment. Occupancy reached 97.3% as of 9/30, and now, exceeds our upper end of our guidance. We expect to end the year with very strong occupancy at the top end of our range of guidance of 96.9% to 97.3%.

Same-property NOI growth has strengthened throughout the year. Year-to-date same-property NOI growth was solid at 4.5% and 5.2% on a cash basis. Our guidance for same-property NOI growth for full year of 2014 remains strong, at a range from 3.5% to 5% and from 4% to 6% on a cash basis.

Rental rate growth on lease renewals and releasing of space has been very strong year-to-date, up 14.1% and 6.2% on a cash basis. Our guidance for rental rate growth for 2014 remains very solid at a range from 11% to 14%, and from 4% to 6% on a cash basis.

While we are on core performance, let me briefly comment on operating expenses. Operating expenses for the third quarter increased approximately $9.7 million, or up 20% compared to the third quarter of 2013. One-half of the increase was driven by increases in variable expenses, due to the increase in occupancy in our same properties. Occupancy was 96.9% and 93.6% as of 9/30/14 and 2013 respectively, within the same-property pool.

The remainder of the increase was driven by the completion and delivery of highly pre-leased development and redevelopment projects. Operating margins remained very solid at 69% for the third quarter, due to our triple net lease structure with 95% of our leases providing for the recovery of operating expenses.

Lastly on guidance, the completion of highly pre-leased development projects will drive a reduction in non-income producing assets to 13% of gross real estate by the end of the first quarter. There are no significant changes in prior arrangements of guidance for straight line rent, G&A expenses, capitalization of interest and interest expense net.

Now that we only have one quarter remaining for 2014, we have provided guidance for these items specifically for the fourth quarter. Capitalization of interest for 2014 is targeted at $46.7 million for the year. Based upon a mid point of our guidance, this represents a significant reduction of about one-third from our capitalization of interest for the year of 2012, driven primarily from the completion of highly pre-leased development and redevelopment projects over the last couple of years. The decline in capitalization of interest is expected to continue into 2015, again due to the completion of additional highly pre-leased development projects, really from September 30 through March 31 of 2015.

High quality science and technology entities continue to drive strong demand for our Class A assets in triple A urban innovation clusters, and drove improvement in our outlook for 2014. We updated our guidance for FFO per share diluted to a range of $4.79 to $4.81 or a mid point of $4.80. This represents a solid increase over 2013 of 9.1%. Our guidance for earnings per share diluted is a range from $1.65 to $1.67.

Briefly, let me provide a few key thoughts for 2015. We will not comment further on 2015 beyond these brief comments, since we plan to cover 2015 in detail during our Investor Day on December 3 in New York City. We expect to continue to execute on our strategy to deliver solid growth in FFO per share and net asset value, including the impact of reinvesting capital from the sale of operating assets, both non-core and core-like and also certain land parcels. Core performance is accelerating, and we expect cash rental rate growth on renewal and releasing of space to be significantly stronger than 2014, and cash same-property NOI growth should be very solid and in the general range of growth as 2014.

We are occasionally asked about the mark-to-market for rental rates on current in-place leases. We believe the mark-to-market for cash rental rates for in-place leases are on average north of 10%. More importantly, we were expecting growth in cash rental rates to be very solid in 2015 for lease renewals and releasing of space. Construction spending for 2015 is fairly fluid at the moment with various build-to-suit negotiations in process, and we expect to finalize our construction budget for 2015 over the next few weeks.

As you know 2014 is turning out to be a very strong year with FFO per share forecasted to be up 9.1% over 2013, and we anticipate 2015 FFO per share growth over 2014 to be very solid, as well. We look forward to providing our detailed outlook for 2015 at our Investor Day on December 3 in New York City.

With that, I will turn it back to Joel.

If we could go to Q&A, Operator?

Certainly.

(Operator Instructions)

We will take a question from Emmanuel Korchman with Citigroup.

Hello, thanks for taking the questions. Dean or Joel, does common equity play a part in your capital strategy at all?

Well, as we said earlier, it certainly doesn't for this year. And based on I think our comments to date, and we will certainly give you a full detailed business plan update on December 3. Our goal would be to try to eliminate or minimize any common equity for next year based on the factors we have talk about, land sales and recycling of assets together with clearly cash flow and growth in EBITDA. So we hope to kind of do what we did this year if possible.

You spoke earlier about strategic optionality, you had 50, 60, 100 planned to be in a JV, now it's wholly-owned unless its -- unless leasing isn't where you expect it to be and then it will be back into JV. How does sort of, -- how does a partner think about that given the unsurity of leasing and what they would be coming into? Also if you do it at 100% now is there potential for that to become a JV in the future?

Yes, it's a good question. When we announced the intent to go down the JV path last year fourth quarter we had no tenants in hand for 50, 60 or 100. We thought it would be prudent to make a sale of less than a half interest in that set of parcels. It certainly would help us in a variety of ways, and we didn't know how long the leasing would take on that. And we did one on ones with more than, I think, 15 high quality joint venture partners. I don't think there was a single one of which, which said we're not interested. We ended up boiling it down to a handful and then ultimately one and reached a term sheet, or at least a general term sheet in June.

But during the summer months when the kind of tsunami of demand reared its head in both life science and tech in Cambridge, it was pretty clear to us that if we could, again the trade off being, if we could take advantage of this very unusual and extraordinary demand in the market, versus the desire to joint venture, we would do that. But we clearly want to maintain flexibility, and if the lead joint venture partner, were we to go back to them any time, decided not to; we know there is a handful of other high quality partners who would covet being our partner with this land. This has got to be ground zero land in the best, certainly life science market in one of the best sub Markets in the entire country, if not world. And so, we are not too worried about that. I'm sorry, if I didn't -- what other part of that question didn't I cover?

If it would potentially become a JV in the future once -- ?

I think if it turned out we're not able to sign substantially all of the demand that we're getting at the moment, we certainly would look to go back to a joint venture. And as I said, I think there are numerous partners that would be willing to go forward with them.

Thank you.

This is Peter. I just would -- I wanted to add one comment. I think that if we weren't successful in 100% leasing in these projects like we expect to do, then a joint venture partners hurdle rates will make more sense for the risk profile that we would be bringing back to them. I mean right now, with the type of returns that they are looking for, and we're providing very little risk, there is not a big match. So, I think we would be returning an opportunity that is more apropos to a JV.

Got it, thanks. I will requeue.

At this time, we will move to Sheila McGrath with Evercore.

Yes, Joel I was wondering if you could talk about how far along in the process are these leases, and are they all life science or tech at 50, 60 and 100 Binney?

Yes. Well, since we have Tom here, I will let him comment but suffice it to say, we have a letter of intent that we are working on and coming very close to agreement on which would then move to a lease pretty quickly on 50. We are trying to key up the parameters of the economics on 60, and we are deep into LOI negotiations on 100. But Tom, do you want to maybe characterize it even more globally than that?

Yes, that's accurate, Joel. I think we have some companies, some of this demand is pure growth from existing Cambridge based, tenants including a couple of life science companies. There is one which is a consolidation of an existing Cambridge tenant that leases in multiple locations in the city, and wants to be under one roof. There's another one that's demand from an out of market life science company. So we have a number of ongoing discussions and we're quite confident that we will be able to lock down one or more of these very soon for some, or perhaps all of the space that is available, which totals over 950,000 square feet.

Yes, at the moment all of these are life science companies, but there is significant demand from tech. And there's one large tech RFP that is out there that we will clearly respond to as well. We are looking at multiple back up offers as well. So, it's not just one shot on goal here, so we feel pretty comfortable with that.

And if we look at the potential costs, is it accurate to look at the cost per square foot of 75-125 Binny to estimate or is that higher?

Well, I think in some cases here we are looking at tenants who are more office than lab use. Within some of these buildings, you will recall when we did 225 Binny, we had a life science tenant that took an office use in that building, so the cost ended up being lower in total. I would say, the range could be up to as much as the 75-125 Binny. That's kind of a higher cost project for the amount of lab space in that tenant requirement. And it could range down somewhat from that, but it wouldn't be too far off the total that's reported for 75-125.

Okay, last question. On funding, Joel you mentioned asset sales. These projects won't be coming online until 2016 and 2017. Are the asset sales going to be mostly concentrated in 15 or stretched out over a longer period?

So Sheila, it's Dean Shigenaga here. We're working through a number of assets that will identify here over the coming months, so it's a bit fluid on the dispositions. But our bogey, at least for solving for our capital needs for 2015, will be to execute a number of transactions that fit the capital plan and our business, really will allow us to reinvest the capital into these really high value development projects.

But I would say we would likely continue with this broad strategy, i.e. invest cash flows that we retain from operations, use EBITDA growth to debt fund without impacting leverage. And then continue to identify assets selectively for recycling and reinvestment into the business. And like we mapped out, there's not a whole lot of land left, but we will do some land. There will be non-core assets, and we'll identify some that are more core like which should represent some high value opportunities to monetize and reinvest.

Yes, I think Sheila with that different than happened in the past, I think you can still expect that we would have an increase in FFO per share during this time period. So that is something we are keeping firmly in mind as well.

Okay, thank you.

Yes, thank you.

We will take a question from Jim Sullivan with Cowen & Co.

Good afternoon, guys.

Hi, Jim.

A question for you in terms of just how strong this market is in Cambridge. It does seem to be a level of demand growth which is exceptional. And I think in the prepared comments you talked about a low $70s as the rent per foot triple net for high quality build-to-suit. And I wonder if you could just remind us back in the first half of the year, I think we were talking about low $60s to the mid $60s is that right, is that how much the movement has been?

Hi, yes, this is Tom Andrews. The movement is on that order. I would say, that we have certainly seen in proposals that other landlords have been sending out to tenants, and in our own proposals we've seen significant movement from earlier in the year on the magnitude of $10 a square foot or more.

Can you give us a handle on what might have happened on construction costs over the same period?

We project construction cost increases currently in the range of 6% annualized.

6%, okay. And then finally for me, can you give us an update on what's happening with the Volpe site? I know this is some time off, but there was this, I guess, RFI. Maybe I don't know if there is another date certain for the next step in the process. But if you could just give us an update, if there is another step, number one. And number two, what Alexandria's posture is here in terms of partner or not, and the scale and size of that project?

Sure. So there was an RFI which was due in early October. We know there was significant number of respondents to that RFI. We are told that the Federal GSA is working on an RFP. We have had some folks tell us they think it might be out as early as some time in Q1 of next year. We would imagine that there would be a multi-month response time frame for that.

And that many development companies and operators would likely pursue that property, which under proposed zoning in Cambridge accommodates -- if my recollection is correct, over 2.5 million square feet of commercial space, and over a 1.5 million square feet of proposed residential zoning. So Alexandria certainly is following this closely. We made a response to the RFI. We expect that once we see the RFP, that we will work carefully to evaluate how we should pursue this, what will be a very interesting opportunity.

In terms of -- you have a partner I believe with this -- working with you on this?

We have spoken with multiple partners. We have not selected a partner.

Okay, great. Thanks.

Thanks.

At this time we'll move to Graham [Sineck] with (inaudible).

Hello, I just wondering if you can approximate the returns on joint ventures versus just going a company-owned route? What order of spread are we talking about?

Well, yes, this is Peter. I mean, from a yield on cost standpoint, that is not -- it wouldn't dilute what we're going to achieve. It is just going to -- the amount of investment we have would be obviously diluted by the amount of partner capital we bring in. We would be in a position to earn a promote, so it's possible that we could actually leverage that partners investment, and increase our own return. But what it does do, is it gives upside to the future because we take that capital.

Take that capital (technical difficulties) employing possibly higher yielding assets in the future?

I'm sorry, you cut out. Could you ask that again?

Yes, I mean employ capital, implicitly being that you can deploy the capital at higher rates in the future that you anticipate at higher lease rates, or because there are other properties that you see with higher potential returns?

Well the reason that we might employ other people's capital is an alternative to raising equity through common stock sales. So it's just the opportunity cost for doing that is upside in our own development.

Have you figured what the blended cost of capital is for ARE currently versus those alternatives?

We have, but we aren't prepared to share that.

All right. The land sale inventory, how do we -- ?

I think we need to move on to another questioner.

All right.

Thank you.

Next question will be from Ross Nussbaum.

Hey guys, good afternoon.

Hey there.

A couple different questions. Joel, is there anything you can say at this point about the press reports that you're acquiring 640 Memorial Drive in Cambridge?

Yes, I can tell you that similar to the press report that we were joint venturing with somebody for an apartment building in Boulder, Colorado; you can't always believe everything you read. But I think it's fair to say that we don't comment on speculation. And when we're prepared to announce, if it happened to be an acquisition or whatever it is. We'll announce it when the time is appropriate. So I would have nothing more to say.

Okay. Second question is back to Binny Street. How would you characterize your discussions with the tenants you are having today, versus where you were three and six months ago? Because I know when we've spoken all year, you have been, I would say, similarly extraordinarily bullish on the leasing prospects there. So are you finally at the point where you are pretty darn confident this is getting over the finish line asap?

Yes, let me say this, and then I will ask Tom to comment. When we go back to Q4 of 2013 when we announced kind of on our strategic optionality strategy, if you will, that we were assuming we were going to joint venture and we put into play a pretty intense process to accomplish that, I would say the level of demand and forward movement of that demand in Cambridge probably didn't come to a head until this summer. And so, maybe that's the really operative time that I'll let Tom kind of characterize it.

Yes, look. I think that we have a number of transactions that we would characterize as in the pipeline. And a handful of them are getting to be very real in terms of the trading of proposals, the frequency of discussions with brokers and principals, and these feel very much like they are moving toward completion. Of course, the answer -- the truth is that they are not complete, until they are complete. And we don't have anything signed yet, but with very positive negotiations ongoing. And they feel, and in a couple instances specifically, they feel like they're moving to completions quite soon.

I would say that in all three circumstances the lead party in all three of these cases we've had prior relationships with. So these are not parties that we have not had a prior relationship with. In other words, we don't know each other, so that's also I think a very helpful factor.

Okay. And then finally for me, I'm wondering a little bit why you would wait, if you will, for proceeds from potential asset sales to come in X quarters or X months down the road; rather than just hang up the phone from this earnings call, and pull the trigger and issue equity at the [eight handle] on the stock price? Given that we're in an uncertain and increasingly volatile world, why take the risk that you'd be able to transact on asset sales a couple months from now, than just take the equity and get the balance sheet down toward those goals?

Well, that's certainly a relevant question, and certainly one part of an argument that I think one could conceive of. I think in reality though, Ross, I think we have enough confidence in the demand going forward here for awhile. I think Peter articulated, we also feel that we're in a pretty decent environment on the recycling of both land and some assets that I think we can look forward to. I don't know how long that will last, but I feel good about at least as we look out a few quarters.

Our leverage, let's face it, we are operating in a better leverage level than we ever have before, and better than a number of other companies that are really in great shape, and have strong stock prices. And we just had meetings with the rating agencies in July, so we feel comfortable with where we've come over the last couple years. We've made dramatic improvements on virtually every single credit metric one could look at. And I think we feel good about where we are, and I think we would like to protect our growth in earnings by minimizing the equity issuances, and looking at those assets that we could sell. So, I think that's our current game plan at the moment, but I mean the situation you postulate is certainly one that reasonable people could look at. But I think, we're going to try to repeat what we did this year in 2014. And try to do it in a way that I think that makes the most sense all around, and minimizes dilution. But again, if there was a big change in the equity markets, then we'll deal with that.

Thank you.

Thank you.

(Operator Instructions)

We will take a question from Jamie Feldman with Banc of America.

Thank you. Can you guys talk about what was in other income in the quarter? It looked like it was a little bit higher than usual.

Jamie, Dean Shigenaga here. Other income was $2.3 million. Actually, I would call it a tad light from our run rate, rather than higher. It was just higher from the second quarter. Second quarter was down to less than $500,000, so that was an unusually low quarter due to a very small amount of investment gains in the quarter. So, I would suggest for modeling purposes, you should expect about a $3 million run rate per quarter.

Which has been historically pretty much where it's been at.

Okay. And then can you talk about your -- any of the largest 2015 expirations, and any that may not be covered, or you think might be moving out at this point?

Yes, the two big ones that I'll let Steve deal with that. But the two that strike me, we have one full building user in a suburb in Route 128 that is moving out. And that is a building that we're looking to release or potentially market. And then another one that rolls a full building user, a government user, in North Carolina, and we've already got good releasing prospects on that. Those are the two stand-out full building users, but as Steve said, we've got unresolved paired down to 0.75 million square feet in 2015, which we think is really, at this point in time, pretty great.

That's right. Jamie just kind of to add to that, yes, that's just about 4% of the asset base. And when you take out those two pieces, that takes out about another third. Got a block of space in tech squares, so we think that will be an opportunity rather than a concern. That's in the 60,000 square foot range. And then potentially in the UTC market in San Diego as well. So no other real large blocks, other than the two that Joel cited, and spread out pretty uniformly with smaller pieces.

Okay, and then I guess for the 2015 expiration schedule, do you have a sense of where you think those rents are versus market?

Well, that's kind of a mix, but if you want to go back Jamie, it's Dean here again. If you want to go back to my prepared comments, I didn't give specific guidance for 2015, but I did comment that cash rents on lease renewals and releasing of space should be meaningfully stronger than our performance in 2014. We'll layout the plan on Investor Day in more detail.

Okay. So it is just higher at this point. And then I guess, just finally on San Diego, we've seen market condition getting stronger there generally across many sectors. What do you guys seeing in terms of your portfolio, and maybe opportunities to do more non-life science leasing? How should we think about your business plan there going forward, given conditions seem to be tightening?

Yes, hello, Jamie. This is Dan Ryan. Yes, so we are in an unusual situation in San Diego that we basically are out of inventory, like most of the other regions, and we're now actively employing what land bank we have. As Steve mentioned earlier, we are in discussions of -- with excess of 600,000 feet of new build in our region. So it's a vigorous market right now. A lot of what we're responding to is internal portfolio growth.

The question about whether we're kind of crossing over into seeing is some tech demand, we do have a couple things. We did our Barns Canyon project which we leased to a tech user. They've come back after having moved in for three weeks, and asked if they can lease the next building over, which is about 45,000 square feet. So we're working through that. So we're seeing, probably not as vigorous as Steve's market, but probably 80/20-ish kind of life science and tech demand.

And do you have a preference versus one versus the other in terms of your return?

Yes, I think we're generally agnostic about -- it's a matter of where you are on the risk level with some of life science tenancy versus tech tenancy. But generally agnostic about it, just really trying to target the best return and overall risk adjusted capital investment.

All right. That's helpful, thank you.

That does conclude the question and answer session. I'll turn things back over to Joel Marcus for closing remarks.

Thank you, everybody. We did it well under an hour and that is great. So we'll see many of you at NAREIT, and look forward to Investor Day and our year-end call. Thank you, again.

Again that does conclude today's conference call. Thank you for your participation.