Alexandria Real Estate Equities Inc (ARE) 2014 Q4 法說會逐字稿

Welcome to the Alexandria Real Estate Equities, Inc. fourth-quarter and year-end 2014 earnings conference call. My name is Jennifer and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. It will now 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. And now I would like to turn the (technical difficulty) please go ahead.

Thanks, Rhonda, and welcome, everybody, to our fourth-quarter and year-end 2014 call. With me today are Dean, Peter, Steve, and Dan. And I want to start out with a couple of macro comments.

And first of all, really very proud of what our amazing Alexandria team collectively accomplished in 2014, our 20th anniversary year. We are really blessed to have a great business with an outstanding opportunity set and a business which passionately and positively impacts the quality of human health each and every day. We had an exceptional year with strong core growth and significant growth from completion of highly preleased value creation projects.

Important to our success this year was Alexandria's Class A facilities and our collaborative science and tech campuses in really the hot urban innovation clusters characterized by rising rents giving us pricing power, rising occupancy, and constrained supply in our core urban cluster markets.

2014 also saw the US FDA hit an 18-year high with drug approvals, 41 novel medicines versus 27 the year before, and we are very proud that 56% of those 41 companies were ARE client tenants. And there were a number of very significant breakthrough treatments for a variety of cancers and rare diseases.

Dean will comment on guidance in a few minutes, but the midpoint of the guidance as we go forward for 2015, as you know, is [$5.20], which is an 8.3% growth, and when combined with our dividend we are predicting a double-digit return for this year.

Internal growth, operations and leasing really are characterized by very strong year-end occupancy at 97% for North American operating properties. We had very solid same-store -- or same-property NOI growth and the fourth quarter witnessed solid leasing particularly from North Carolina and San Diego.

Let me just comment on two markets for the moment. One is the Cambridge Boston market. The mark-to-market analysis that we have done internally indicates this is a continuing durable market, our so-called greater Boston cluster. And we are expecting growth of about 17.5% on a cash basis and 21.8% a non-GAAP basis.

Occupancy is up 200 basis points to 98.8% compared to 4Q 2013. Lease rates are in the $60 plus range triple net for existing product and prospects seeking new large blocks of space at our Alexandria Center at Kendall Square are anticipating rents in the low $70s triple net on a GAAP basis.

In the San Francisco cluster, occupancy is up by about 120 basis points from the same period a year ago to 98.9% in the operating asset base. And worth noting that we resolved the remaining vacancy last week, so we are now fully 100% leased.

Lease rates for new product are in the mid to high $50 triple net as the proposition office allocation continues to constrain supply of new product in the Bay Area. The mark-to-market refresh indicates further growth to about 11.7% cash and somewhere between 17% and 18% a non-GAAP basis.

And as I will mention in a moment, we are advancing the entitlements and lease negotiations at 510 Townsend and anticipate completion in the near term as well as finalizing the design this month for what will prove to be an absolute world-class and iconic tech facility for Uber at Mission Bay, adjacent to the amazing league-leading Warriors arena. And we will disclose yields on those in the 1Q supplement once our construction costs and so forth are finalized.

Moving to external growth briefly, again, we had good leasing progress on our value-add development projects both at Longwood and the Alexandria Center for Life Science in New York City. And I want to comment a little bit on the near-term value creation development pipeline, page 31 of the supplement.

At Campus Point, Dan has been very successful. He expects to have the lease for about 75% of the project, the new building finalized hopefully this month, entitlements following shortly thereafter, and then construction starting probably by the second quarter.

At 50 Binney, we look to finalize the lease for the full 50 Binney project in the first quarter here and hopefully to finalize a lease in the second quarter for 60 Binney. And that construction is fully underway and in our plan.

When it comes to 100 Binney, we are trading paper with at least five substantial space users. Construction will depend upon significant pre-leasing, but we expect that to happen in the relative near term.

Coming back to 510 Townsend Street for a moment, we expect the lease to be finalized this month, entitlements to follow in March and probably kick off with construction by the end of the second quarter.

And as many of you noted we did make a number of acquisitions over the past quarter, including the remaining 10% interest in the Alexandria Tech Square Center, which we purchased from MIT, the remaining 10% interest, half paid this year and half paid next year. And as we indicated in the supplement and in the press release, we see very significant upside in the lease rolls and that project is really kind of probably the single best located project in all of Cambridge.

And then also we did acquire another project from MIT, their 640 Memorial Drive. Dean may make a comment or two. We did have a 5.9% initial cap rate moving to 6.4% at 1116 when the rental phase-in is completed. This purchase in the mid-Cambridge market really ties to our 780 and 790 Memorial Drive. clustered development that had been very highly leased and very successful.

So now we are starting to build a cluster in the mid-Cambridge market. It is subject to a ground lease with MIT and MIT, for their decision to use their capital for future development, decided to put this market out for sale. We have a very unique relationship with MIT and also the two tenants that inhabit 640 Memorial Drive.

I won't get into any deals on the balance sheet. We will try to make this presentation somewhat shorter than normal. And I will ask Dean to kind of comment on a number of subjects and then we will open it up for Q&A quickly here.

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. I've got four important topics I want to cover today. First, obviously our strong performance in 2014 and continued focus on growth in FFO per share and growth in net asset value.

Second, I want to touch on our quality cash flows and disciplined allocation of capital into high-value urban innovation cluster submarkets.

Third, I will touch on an update on our significant progress on our capital plan for 2015 and key considerations for net asset value.

And lastly, I will close out with some comments on guidance.

Jumping right in, the fourth quarter was a very strong quarter of performance with FFO per share of $1.23 and really the wrap up of an outstanding year with total shareholder return up 44.7%. Our FFO per share for the full year was $4.80, up 9.1% over 2013. Our strong performance in 2014 is projected to continue into 2015, with our midpoint of FFO per share of $5.20, up 8.3% over 2014.

Our strong cash NOI growth from value creation deliveries throughout 2014 is driving significant growth in NOI and cash flows in 2015, with further increases from significant value creation deliveries in 2015.

We continue to focus on growth in FFO per share and net asset value in 2015 and beyond. One of the key drivers of growth in FFO per share and net asset value in 2014 was the significant quarter-over-quarter growth in net operating income and cash flows. And we expect this growth to continue into 2015 that will drive continued growth in net asset value.

The quality of our ABR has improved significantly in recent years, supporting high-quality and strong cash flows. The three key areas driving quality ABR and cash flows include: first 56% of our ABR is derived from investment grade rated client tenants. And again, this represents an industry-leading statistic.

Second, 83% of our ABR is generated from high-value urban centers of innovation including greater Boston, primarily the sub markets of Cambridge and the Longwood Medical Center; the San Francisco Bay area, primarily Mission Bay and Soma; Palo Alto and the Stanford Research Park; New York City, San Diego, again, primarily Tory Pines and UTC; and in Seattle primarily in Lake Union. 83% of our ABR in these high-value centers of innovation reflect a significant focus of our capital allocation over many years in our urban innovation cluster submarkets.

And third, we remain disciplined in our allocation of capital going forward. 85% of our capital allocation in 2015 is projected to be in the same high-value urban centers of innovation that drive 83% of our ABR today. Additionally, over one half of our capital allocation for 2015 is projected to be invested in two of the top destinations for science and technology innovation in the Cambridge and Mission Bay/Soma submarkets.

Let me briefly clarify our initial cash yield for our purchase of our ground lease hold interest at 640 Memorial, located in mid-Cambridge. Our release disclosed in initial cash yield of 6.4%. For clarification, one of the two leases we acquired with the property has about one year remaining before rent concession burns off. So our cash yield, as Joel had mentioned, on day one is approximately 5.9% to 6%, which increases to about 6.4% in about 12 months.

Moving next to the great progress on our dispositions in our capital plan for 2015. We had $235 million in dispositions identified to date, of which about $113 million was completed in the fourth quarter and January of 2015. We have an additional $122 million of properties held for sale and these proceeds from these sales will be invested immediately into substantially leased Class A value creation development projects.

Our midpoint of our 2015 guidance for asset sales is approximately $390 million with $178 million completed or identified in held for sale. The remaining of our midpoint of our guidance is about $212 million, which represents our sale proceeds.

At a very high level a portion of the $212 million in proceeds from remaining asset sales really will provide a benefit or a reduction of leverage since a portion of the proceeds also reduces our debt to offset a reduction in EBITDA. The exact mix of land versus operating asset sales will be determined in the next couple of quarters.

While we are covering capital, let me briefly touch on approximate pricing for unsecured bonds. At a very high level, we believe pricing for 10-year unsecured bonds in the last month would have been roughly about 180 basis points over 10-year treasuries or approximately 3.6%.

In 2015 we have the flexibility to execute a 10-year bond deal with a maturity in 2025, providing us the opportunity to both extend our weighted average remaining term of outstanding debt and continue to ladder maturities.

Next I just want to touch on some very important NAV considerations. For your reference on page 4 of our supplemental you will find a brief outline of key considerations for NAV models on our Company from our recent dispositions and assets held for sale.

The key point here is that various important items included in our fourth-quarter results will drive a meaningful overall increase in net asset value due to the following: continued significant growth in cash NOI in the fourth quarter of $4.6 million or $18.3 million on an annualized basis. This is on top of the cash NOI growth for the third quarter of about $5.8 million or $23.4 million on an annualized basis.

We expect significant growth in cash NOI quarter to quarter to continue, which has been and will be a key driver of growth in NAV going forward. We have increased our developable square footage by approximately 416,000 square feet, 88% of which represents increases for near-term develop projects located in University Town Center, including about 214,000 square feet at 5200 Illumina Way and about 153,000 square feet at 10300 Campus Point. And we continue to work on finalizing these entitlements.

Page 4 of our supplement package highlighted other key NAV considerations including the sale of real estate located in Toronto. The key highlights of this transaction are that we had an operating property classified in rental properties generating operating losses due to operating expenses of about $1.4 million per year related to ground rent expense.

As such, we believe most NAV models had no value or a negative value attributed to this investment. We completed this sale in January of 2015, so as you update your model for the fourth-quarter NOI, remember to make an additional adjustment to increase NOI in order to eliminate the annual operating expense of $1.4 million.

Additionally, since most NAV models likely attributed no value to negative value for this asset, remember to add the proceeds from the closing of the sale of $54 million as a positive adjustment to NAV.

Also because of the factors I just described, we believe the impairment of $16.6 million for this asset had no impact on most NAV models. I should also point out that the impairment is primarily related to foreign currency exchange rates, taxes, and other closing costs for that property.

The next item to consider for NAV is the impairment related to the sale of nine land parcels with seven old industrial buildings located in South San Francisco. The buyer of these assets operates, redevelops, and develops industrial buildings. These parcels were previously classified as land held for future development. The impairment charge was about $24.7 million and will slightly offset increases in NAV I just described. Further details on this sale are also included on page 4 of our sentimental package.

Briefly on 500 Forbes, this is a high-quality core-like asset located in South San Francisco that we acquired in 2007. However, we did recognize an impairment related to the write off of non-cash items including net book value related to an acquired below market lease and improvements we received from a prior tenant.

We expect to complete the sale of this property at a market cap rate reflective of a high-quality asset with quality improvements and an investment-grade rated tenant.

Since most NAV models valued this property based upon cash NOI and a market cap rate, which is consistent with our expected sale, we believe this non-cash impairment of $9.6 million has no impact on most NAV models on our Company.

It is important to also note that the proceeds from these sales will be immediately invested into highly leased value creation development projects at very attractive cash yields relative to current market capitalization rates.

Additionally, these sales and immediate investment into value creation products is well aligned with our overall strategy to continue to grow FFO per share and net asset value.

In closing on this topic, the key here is that we believe there are several drivers in our fourth-quarter results that will result in a significant increase in net asset value, including significant growth in cash NOI, additional [SAR] that we are adding two key near-term ground-up development projects, and a net positive impact from completed and pending sales, including any impact from impairment charges.

Briefly I want to comment on our 7% Series D preferred stock. You may have noticed during the quarter we purchased about 513,000 shares or roughly 5.1% of our outstanding 7% series D preferred stock for an aggregate price of about $14.4 million or $27.98 per share. This results in a preferred stock redemption charge of about $2 million or about $0.03 per share. Our guidance assumes that we do not repurchase any additional shares of our outstanding 7% series D preferred stock in 2015.

Lastly on guidance, the detailed assumptions underlying our guidance for 2015 are included on page 5 of our supplement package. We are extremely pleased with the solid execution by our team in 2014 with the delivery of strong growth in cash NOI, FFO per share up 9.1% over 2013, and significant growth in net asset value. We remain focused on continuing this growth into 2015 with FFO per share forecast up at 8.3% over 2014.

A key driver to our growth in net asset value has been and will continue to be the significant growth in cash NOI quarter to quarter. We believe we have the right assets and the right locations and the best roster of client tenants and we remain focused on continuing to build our best-in-class franchise. With that I will turn it back to Joel.

Thank you. Operator, let's open it up for Q&A please.

(Operator Instructions). Smedes Rose, Citi.

Thank you. I wanted to ask you in your Technology Square purchase, was there any decision around buying the 10% now versus at some other point? Was there some sort of trigger that you needed to buy that now? And if you could give maybe a little more color around the 100,000 square feet that you could potentially add there as well? And then just more broadly, are there additional opportunities with MIT where you would be kind of the natural buyer I guess?

This is Joel. With respect to the timing, it really is driven not by us but MIT's management company's decision to sell certain assets so that they can invest them in development projects both on and off campus. So that really drove the decision for timing on Tech Square and 640 Memorial Drive.

When it comes to other opportunities, certainly those would be very interesting to us, given Cambridge is one of our most important markets. When it comes to the 100,000 square feet, we are working on the design and entitlement of that. And so, I'm not sure I could say much more than that. Tom is unavailable today but I will make a note. We will comment in our next conference call and give you some updated details on that.

Okay, and then if I could just ask one more about the land bank that you have talked about potentially selling pieces from and you mentioned Forbes Boulevard in South San Francisco. But is there more or much for from kind of the 2006-2007 sort of vintage if you will that you would look to bring to market this year?

Not particularly. We did use a set of parcels there for the development of the Onyx campus, which when Onyx got acquired by Amgen they succeeded to those assets. We do have another set of parcels for development, but I think that's something we will continue to look at as time goes on. So, it's possible, but nothing certain at the moment.

Thank you.

Jamie Feldman, Bank of America-Merrill Lynch.

Great, thank you. So if you look at your acquisition guidance and what you've already done year-to-date, or scheduled to do year to date, you've kind of hit that number. So what does the acquisition pipeline look like from here?

I don't think we have anything that is in the near-term, but we look at everything that comes to market that we feel is in the sweet spot of either the nature of the facility and certainly the nature of the location. But I don't think we have anything in the near-term that we are looking at.

So there's really (multiple speakers).

As I just said to Smedes, the timing of the Tech Square acquisition or really the sale by MIT and the decision to market 640 Memorial Drive were really driven by their own capital needs and own decision-making timing. It had nothing to do with ours, I can assure you.

Okay, and then you had commented you could start to build a cluster in the mid-Cambridge market. Can you talk a little bit about what might be different about that segment of Cambridge, whether it is tenant or it's building type or if that becomes a real investment for the future for you guys, what's different about it?

Well, I think if you look at a map, it's directly west of East Cambridge. It encompasses, kind of circles, it kind of touches MIT and circles around toward Harvard Square. There are a number of owners and developers in there. MIT certainly has an important toe hold.

Some years ago we actually owned a property next to 640 called 620 Memorial that was ultimately leased to Pfizer and then I think we sold it to them and I think they turned around and sold it just a year or two ago.

But back about 10, 12 years ago we built 790 and 780 Memorial Drive. Tom really managed to that development right near the Polaroid building and so that has been a real important anchor for us in that mid-Cambridge market. So we like that market and when this opportunity came up, we decided to move on it.

Okay, and then I guess a similar question in San Francisco as Mission Bay is filling up. What is kind of the next cluster you could create there? As you go farther south or you just try to keep penetrating the CBD?

Well, I think you'll see naturally it move out. You can't move east from Mission Bay because you will be in the bay, but you can move south, you can move west and you can move north. So I think those will be the natural extension at Mission Bay.

Okay and then finally, on the land sales in the quarter. Any impairments? If we look at your current land bank, just what level of impairment do you think you would still see if you did sell some of that remaining land or is it finally now more of a mark-to-market?

Yes, well it's always difficult to speculate what land will trade at, Jamie, but I think if you turn to page 37 of our supplemental, I will bifurcate the landholdings in the two buckets. We have 2.3 million square feet in near term and that is products that you know is heavily under negotiation so I will skip over that.

That's all going to yield very nicely, very attractive returns. The future bucket, you have about 2.9 million square feet and if you go through that, the larger components -- well the largest component, $1.7 million spread across multiple markets is $32 a foot. I'm not really concerned in any meaningful way with that. It's $56 million.

Everything else, I mean you've got Technology Square, you've got some residential in Cambridge on Grand Avenue, which is adjacent to the fourth site at the Onyx Amgen campus plus some other land on grand Avenue, so great locations.

We can make money on those deals. If we sold we would be close to that depending on the buyer. If you compared it to the trade we just did, we traded out of South San Francisco to an industrial buyer at about $80 a foot, so maybe a slight haircut. These are pretty small dollars, Jamie. So I think all in we're in really good shape.

Okay, great. Thank you.

Sheila McGrath, Evercore ISI.

Yes, good afternoon. The GAAP cap rate on 500 Forbes looks to be about 5%. I'm just wondering if the cash cap rate is going to be close to that. And could you describe the level of interest from buyers for that asset?

The GAAP cap rate is shown on our disposition page on the supplemental, probably at about a 5.1, Sheila, as you stated. I think the cash number trails that just a tad, maybe somewhere in the 30 to 40 bps behind that.

Okay, and were there a lot of potential buyers interested in the asset?

Let us not comment about the transaction itself other than to say that you have a very high quality asset that I think will be very attractive and we feel you can get a sense for our approximate price point that we expect to complete on the transaction. So I think it is an attractive trade for us.

Okay, and then on 50, 60, and 100 Binney, the supplemental says 2016 and 2017, if they are completed 2016 it would be very, very late in the year and not contributing. Or how should we think about timing in 2016 for those projects?

I think it's hard to speculate on timing too specifically because there's a lot of negotiations ongoing and it ultimately will depend on the terms of the lease. But I think it's safe to say that if it contributes into tray 16 at all its fourth quarter. That is probably the earliest, but the exact timing for each of those buildings will depend very specifically on the lease negotiations, so we can provide better color as we execute transactions.

Okay, last question. On the investment page you did have some unrealized gains. Was there an IPO or two? And should we assume that there will be some sales from that bucket in 2015?

Yes, we had -- actually over the past two years I think we've had 14 IPOs. So yes, there will be I'm sure sales over coming quarters and years.

Okay, thank you.

Michael Carroll, RBC Capital Markets.

Thanks. Joel, can you discuss the demand you are seeing at the Illumina campus in the UTC. With a doubling of the size of the project that's underdevelopment, has the timing changed on the potential projects that are in the near-term value creation pipeline?

Yes. Dan is here, so I am going to let him comment.

Yes, good morning.

So when you ask about the demands, in terms of Illumina's growth, it has been extremely robust. The delivery of this next filming basically taps out there existing entitlements, so we are in front of the city now to title for about another 350,000 square feet of additional space and we have -- they have asked us to go ahead and progress on that additional square footage that we think we can get.

So do you expect --? Could that break ground in the next few years also? Is there enough demand for that?

I think that's a fair assumption.

Okay, great. I guess my last question, can you talk a little bit about your asset sales in general? How much of the portfolio going forward do you want to sell? Is it that you just want to raise capital through asset sales or is there other assets that you want to dispose of?

I think for the moment you have our guidance on what we would like to accomplish for 2015, so we've got a range call it the midpoint of $390 million. Again $178 million has been held for sale, so either it's been completed or pending and that leaves us with $212 million to complete for the rest of the year.

And again, that number is a mix when we think about what remains. A little bit of land and some operating assets and again we will bring more color in the next couple quarters. And I think when you go forward it's hard to speculate what we will look towards in 2016.

But I think we will look at our options as we manage through our capital plan what we have this year. A lot of -- how much will be debt-funded and then is there an opportunity to recycle assets for reinvestment? And I think those would be are two priorities.

Okay, great. Thanks.

Rich Anderson, Mizuho Securities.

Thank you. Good afternoon. What is your tenant retention percentage generally and how has it trended over the recent past?

I think we did a study about a year ago and we looked back probably seven years if I recall. And the retention rate has been pretty consistent as you roll that forward.

It's been averaging about 85% over that time frame and the only qualifier I would give, as you know, we acquired a couple assets recently that were redevelopment targets right out of the gate. It was leased. We acquired a lease in place that had generally maybe 12 months of remaining term.

And we will exclude something like that because that's intentional targeted lease rolls that were planned for redevelopments. But it's a very solid retention rate. You could tell from our occupancy stats and our leasing performance that it's all very consistent, so very strong retention.

Okay, and then looking at the leasing schedule, average lease term of 4.3 years for this quarter, it's kind of moved around that number over the past few quarters. What is your kind of desire, to make that a longer or shorter number, considering the strength of the markets?

Yes, it depends, Rich, so much on the nature of the lease, the nature of the location in multitenant buildings with companies that grow rapidly and need flexibility on space three, five, seven years are kind of where the sweet spot is. And then you get into the development.

You see this quarter it was about 10 -- over 10 years. So you see in the larger blocks of space 10, 15, 20. That's really how it is broken down for years and years and we don't expect to change that.

Okay, and then thinking of NAV, if you're developing to 7% to 8% stabilized return, what do you think -- if you were to turn around to sell those assets upon stabilization, what do you think the market would purchase those assets for?

Well, of course it depends on what market you are in (multiple speakers).

Let's say Cambridge. Let's go high.

Well, I think you are probably in potentially sub 5 cap rate.

Okay, and what do you think a range would be if that's the floor or do you think it could be six of us at the top or depending on where you are in the country?

Well again, it depends on the nature of the building. If you have an older multitenant building, that would be higher than 5, but if you have a new Class A facility with a long-term lease and a credit tenant, you're not going to be above that.

Got you. And then last question. You took Asia out of the occupancy statistics. I know you have a dedicated sheet for Asia on page 47. But I'm curious, is there anything symbolic about why you did that? Is there any change of strategy in Asia or -- if you can comment on that please?

No, no change. There's really -- Asia is such a small portion of our business. And, as you know, we are really focused on our domestic growth opportunities here. So we continue to focus on the lease up of our properties there, but we have some work ahead. But again, it's a small piece of the business.

It is small, but do you think the long-term strategy is to not be there at some point in 5, 10 years or something like that?

Yeah, I'd say it's hard to speculate. I think we yield nicely in India on the operating assets and you can tell from our disclosures China has been a little tougher on the returns. But it's hard to speculate going forward.

But I think it's clear we are not trying to put any significant new capital into those markets. Clearly investors and management and the board, etc., want us to focus on our core urban clusters here in the United States.

Okay, great. Thank you very much.

Michael Knott, Green Street Advisors.

It's actually Kevin Tyler here. You commented earlier on mid-Cambridge and then you just gave some color as it relates to cap rates in Cambridge overall. But the lease yield reported -- the cash lease yield was about 5.9%, as you said on 640 Memorial.

I guess I was just curious, based on the activity in that market, what is an appropriate spread between mid-Cambridge and Kendall Square let's say? And if this was 5.9% and, Joel, you say 5.4% high-quality in Cambridge, how do you kind of explain that differential?

Unfortunately Tom is not here, so we will make a note and ask that question during our next call, but let me give you my own view on that. There could be -- again, so much depends on the nature of the facility itself, new versus somewhat dated. Is it multitenant/single tenant? They term the lease, credit and then exactly where it is.

So 640 -- I think it's encumbered by a ground lease, so that's one thing. It is mid-Cambridge. It is a redeveloped, fairly new facility, but has two tenants, long-term leases. So if that was in the heart of Kendall Square, my guess is maybe 50 basis points, it may drop to a 5.5.

Okay, thanks.

There's no upside to those rents as well. They are long-term leases. There's no near-term ability to try to mark to market, so it's more of a stabilized asset.

It could be -- it could even be -- maybe better said, between 50 and 100 basis points between mid-Cambridge and Cambridge.

Okay, thanks. On the development side, you guys continue to talk about bringing development down as a percent of gross investments. I think the number you're quoting is 13% in the first quarter. But is there any broader read through on that number kind of through do a shift in strategy -- acquisitions versus the development going forward? And then how much of the reduction can you ascribe to portfolio grow or just recent deliveries?

Yeah, so maybe I will talk to strategy and let Dean talk to the arithmetical calculation. And on strategy, no change in strategy. We view ourselves really as best at creating value through development and redevelopment. We do take the opportunity on occasion to look at acquisitions. 640 was unusual for us.

Tech square was right up our sweet spot because we have coveted -- we've approached MIT for years actually in trying to buy that interest, but they haven't been ready because they didn't have a use of proceeds. And then they kind of decided they were ready.

So it kind of just depends. But I think it's fair to say that we believe we can create better value by creating value, not buying somebody else's value.

Let me add some color. I would say that the land bank dropping down to 13% -- or I should say non income producing assets as a percentage of gross real estate declines to 13%. And that is really through -- substantially through deliveries offset a little bit by an increase in construction spend.

If you want to put that into perspective, though, that's still roughly $1.3 billion, $1.4 billion of non-income producing assets, with 50% of that being active projects, which as you know is highly leased. And about another 25% of that number sits in near term, which is in Cambridge; 50, 60, and 100 Binney.

So I think we've got a good size of a future pipeline, but I think to put that number into further perspective, back in 2007 it was still about $1.3 billion. The Company was much smaller. So as we grow in size, that percentage will naturally become a smaller piece of our business while still providing us great opportunities to grow prospectively with build-to-suit opportunities.

I think our focus will be just being very careful and prudent on how much land we carry at any given point in time, so we can minimize the carry and deliver a product to the market as quickly as we can.

Makes sense, thanks. That's all I had.

(Operator Instructions). Dave Rodgers, Baird.

Joel, one question for you with regard to the backlog of demand and interest in your four key hub markets. Are you seeing or what is the breakdown maybe between tech office or traditional office and kind of lab demand? I guess the gist of the question is, one, are lab tenants in any particular market being priced out by higher rents? Two, are there any particular markets where the lab demand has really ebbed as the tech office demand has been flowing?

I would say maybe just taking you around the country real quickly, I think Seattle, tech demand and lab demand have been fairly steady there. I think again it's very site-specific. In San Francisco, clearly tech demand I think as Steve has indicated, if you took a benchmark today is probably 10x of what lab demand is.

But yet certain markets remain pretty key hotbeds of laboratory properties, South San Francisco, Mission Bay, even though Uber is coming in. But I think some of the other markets have gravitated or stayed much more tech. San Diego, I don't know. Dan, you could speak to that.

I think that we find that the life science demand is more significant than the tech demand.

And then moving to the other side of the country, I think in Research Triangle Park, really the add demand in tech has really dominated there. Maryland is pretty much kind of lab. We haven't seen a big tech influence there. New York, we are pretty much focused on life science there. We haven't really gravitated to tech for our center.

But obviously, Silicon Alley and what is going on in New York City, certainly some of the other REITs have been very strong tech demand. But we think that's -- we are creating a life science market there, so it's a little different for us.

Then Cambridge, clearly lab or office, lab/office or office by lab companies is still a mainstay, but there is increasing demand by big tech users. So we are seeing both of it. So a little bit of different story in each of the markets. I don't think any significant lab tenant is getting priced out of the market because if you look at the health of the biotech industry and the pharma industry, it's the best it's ever been for those two industries.

So they've got more than $200 billion on balance sheet. So if they want a site, they will go after it. And if they are competing against a big tech tenant, they can certainly go head-to-head.

I'm assuming that the Uber building is not a lab-ready building. Are there any other new construction projects of the major variety that you're looking at or that you've started that are not going to be kind of lab-ready at some point in the future?

Well, let's say if not lab-ready it's be lab-capable, would maybe be a better way to say it. Clearly Townsend, we are likely to sign a lease here in the very near term with a brand-name tech tenant. And then Binney, it's kind of a combination of who is bidding on that between life science and tech, so we will see what shakes out there.

But generally if we build a building, and I think Tom and Steve had gone through this in a prior call, we try to, if it's in the sweet spot of the Cambridge or a Mission Bay, we would make it lab capable and it's just a few bucks a foot to do that.

Of your top 20 tenants, I think AstraZeneca is the only one that comes up in the next two years or before the end of 2016 with a major maturity I think of 350,000 square feet. Are you having any discussions with them or can you talk at all about that tenant and their desire to be in that space?

Well, I think there's a few leases there. Some of it comes up early. The reason why it's got 1.7 remaining years is some of this comes up in early 2015. Half of that space that does come up in early 2015 I think has been resolved and has at least been leased. We're still working on the remainder of that and that's probably about a third of that ABR that I am referring to of that $9.3 million. I don't have the details, Dave, on the other stuff with me.

But I think it's fair to say, under the new leadership of Pascal Soriot, they obviously thwarted the Pfizer takeover. They have made a big presence, continued significant presence through their MedImmune acquisition in the Maryland market. They have a big presence in the Boston market, so they are not retrenching in any of the locations that we've seen.

Dave, I think the other two leases go out to 2018 and 2019. So it's really weighted by a near-term roll.

That's helpful. All right. Thanks, Dean. Thanks, Joel.

Jim Sullivan, The Cowen Group.

Thank you. Good afternoon. Joel, I wonder if you could give us kind of a top-down summary of your view of East Cambridge and mid-Cambridge. What I'm referring to is that obviously the Volpe site I gather is still under discussion, negotiation I guess with the GSA. And we keep hearing about not just yourself but your peers and MIT looking to increase density where they can on sites that they control.

And then of course I guess there's a local community pressure to increase the amount of residential space anytime any increased density is provided. As you think about the value creation opportunities in East Cambridge, as well I guess those value creation opportunities in the adjacent market of mid-Cambridge, maybe you can kind of summarize for us how much square feet -- additional square feet might be entitled in the next couple of years in East Cambridge. And kind of relate that to the demand that you foresee continuing or emerging over the next two years.

Yes, that's a question -- again, I would probably punt on that to Tom and we will try to address that in the next call. But let me just say this, there is right now about 2.3 million square feet of demand from at least seven major potential tenants seeking blocks greater than 100,000 square feet just in the East Cambridge area.

And so, if you just look at what's out there just at this moment in time, the numbers are pretty significant. MIT has a big development that they are working on. I suspect that some of the capital that we have provided them will go into that. It is a pretty large site that they will be able to entitle and build on.

I think probably over the next maybe 18 to 24 months the -- Volpe site is a large site that a couple million square feet including both commercial and residential. Obviously probably every developer between Boston and New York is looking at that.

There is the Northpoint site, which is -- at the moment has not been in favor -- a couple million square feet up there both on commercial and residential. We understand that that actually is in play right now. It was owned by a private equity shop here out of Los Angeles and they are looking to market it. We have heard that there's a lot of foreign interest in that particular site.

And then others are looking to add density, as you know, Boston properties, etc. So there's a pretty big movement to expand entitlements and keep abilities and availabilities in that market. But there is a somewhat tougher Cambridge Council now looking at all kinds of issues including both residential and obviously traffic demands and just demand on city services. So I think those are the kinds of things that will be balanced and be meted out over time.

So I think there is I think great opportunity, but there's also time frames. We happen to have hit a very sweet spot, actually you'd always like to think you're really smart, but luck helps a lot with our 50, 60 and 100 Binney. We hit a time when there's virtually nothing else that competes with us on a Class A ground-up construction basis in that market in a time when rents are at -- approaching all-time highs.

So I think we feel very fortunate about that, but we are always on the lookout to make sure that our three- and five-year plans are cognizant of the growth in those markets. And we think both East Cambridge and mid-Cambridge make sense.

You have to number too there's Alston, which is a gigantic future development which Harvard manages over on the other side of the campus across the river. And that could provide a huge amount of space and growth for the next generation of companies, but that's probably a 5- to 10-year out project. So a lot going in in that market.

Can you also just remind us when these sites might include as part of an increased density entitlement the development of residential, what your philosophy is and how you're going to handle that if you do get entitled to do residential? Are you going to be breaking it apart then?

Well, we already have. We've been required to build certain residential on the Binney Street corridor. I think it's, what, 270 Third?

Yes, 270 Third is the first project. It's probably about 90 some odd units and it's probably an investment in the $45 million range for that project.

Yes, so that's part of the give and take that we had with Cambridge a number of years ago when we entitled and up-zoned our Binney Street sites. And so, that's just part of doing business.

In New York a lot of developers are facing the same issue, how to address the housing issue that obviously is front and center with the mayor. So I think a lot of -- and I think San Francisco over time, workforce housing is going to be a very important issue for a lot of companies and a lot of cities.

And in terms of doing that, your approach would be to do it on your own balance sheet, not bring in a partner?

We talked to a partner but in our case in Cambridge it was small enough that it made sense. What our long-term hold on it, we don't really know. We are not really a residential holder for I think long-term, but we haven't made any short-term decisions. But I think part of being a commercial developer today in urban innovation cluster centers is the reality that residential is going to be front and center in some cases.

Okay, then finally from me, you have mentioned in the past digital health is a segment of life sciences where you thought we were in the early stages of maybe some material demand growth. And I'm just, curious there was a lot of capital formation in that sector last year. And I wonder if you could just remind us whether you anticipate digital health as a demand segment to be concentrated in any of your existing submarkets.

Yes, so far we see it more importantly in the city of San Francisco, a number of companies who are really brand names in that area have grown up. They occupy at the moment kind of tech office space. I think the challenge with digital health, and I do think it will be an important segment as time goes on, is you have kind of a juxtaposition.

You have the baby boom generation needing more healthcare services but less capable when it comes to social media and electronic kind of digital, if you will, tools to implement that health. And then you have on the other end the millennial generation, highly sophisticated in the digital world but not caring a whole lot about health because when you are 15 or 20 or 25 your health -- there are exceptions to that -- generally is in good shape.

So this industry is still in the formative stages. There's a lot of venture capital going into it. But it will probably take three to five years to begin to kind of shakeout and mature. But it is here to stay and this intersection between healthcare and the digital world will clearly make an important cost impact difference over time for sure.

Okay, great. Thank you.

It appears that we have no further questions at this time. I will now turn the program back over to Mr. Marcus for some closing remarks.

Okay, well thank you very much. We did it in less than an hour and we'll look forward to talking to you on the first-quarter call. Thanks again, everybody.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.