Alexandria Real Estate Equities Inc (ARE) 2015 Q2 法說會逐字稿

Welcome to the Alexandria Real Estate Equities second-quarter 2015 earnings conference call. My name is Vickie and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to Paula Schwartz. Please go ahead.

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the Company's periodic reports filed with the Securities and Exchange Commission.

With that, I will turn it over to Joel Marcus. Please go ahead, Joel.

Thank you very much. With me today are Dean Shigenaga, CFO; Steve Richardson, Chief Operating Officer; Peter Moglia, Chief Investment Officer; Tom Andrews, Executive Vice President; and Dan Ryan, Executive Vice President. So, welcome to our second-quarter call.

I think the second quarter has really two key storylines for our best-in-class office REIT. The first one is price discovery for ARE and its assets and I believe deserving of cap rate compression and multiple expansion. And secondly would be the share historic leasing volume in the second quarter, testament really to the locations, quality of assets, and really the leasing teams.

Dean will go through the balance sheet and guidance in detail, but we did increase guidance to $5.24, so when you take our projected FFO for the year, plus the dividend, we are looking at a low double-digit total return.

On the science and technology front, the industries themselves remain at the forefront of growth and leadership in our innovation economy seeking to attract the best talent in really the best urban submarkets where now, as you can see from the supplement, ARE now derives 75% of our annual base rent from Class A assets in AAA locations, and we are very proud of this really crowning achievement, and coupling that with investment-grade client tenants of about 53% of our ABR, we feel that we have really accomplished something pretty special.

The demand for our urban campuses have really never been stronger.

On the FDA front, again increases in the FDA approvals, as I have said before, have been driven by better understanding of the disease biology and very much improved regulatory process. Year to date for 2015, there have been 20 approvals and ARE client tenants have garnered 60% of those. Again, we are very proud of that.

I think one big note on the policy side is the House of Representatives passed the 21st Century Cures Act on July 10. It is now moving to the Senate for discussion more likely in September. A couple of key provisions. Very much need for increased funding to the NIH and the FDA, which if this bill passes will be very welcome; improved investment in certain areas of critical science. The bill aims at removing barriers to increased research collaboration. It has certain guidance incorporation -- incorporating patient perspective into the drug development process. It also has guidance to ensure that patients can be treated based on their unique characteristics of their disease, so-called personalized precision medicine.

There is a section on modernizing clinical trials, which will be very important; greater use of patient-generated registries and biomarkers; the development of certain new medical apps; and potential orphan drug exclusivity for rare diseases.

On the technology side, machine learning and Big Data have contributed greatly to the intersection of tech and life science. We see continued strong growth in the sharing economy and we are also pleased to mention that our new client tenant, Stripe, our tenant at 510 Townsend, raised a new round of financing valuing the company at approximately $5 billion, led by Visa, American Express, and Sequoia, and they also announced a new partnership with Visa.

Moving on to the sale of the 70% interest in our 225 Binney, we are very pleased with a highly respectable cash cap rate. We believe that this was very attractive to a group of high-quality institutional investors. It also monetized a core asset and really evidenced significant value creation. We hope it is meaningful on a NAV data point and it certainly, importantly, raises significant equity type capital to help fund our development pipeline.

The yield is reflective of what long-term investors are willing to accept, and we won't speculate about the upside in 13 years, but we believe it is significant. The building, as many of you know, is 305,000 square feet in the heart of Kendall Square, developed by our greater Boston team in the Alexandria Center at Kendall Square, Binney's corridor development and really the strongest life science submarket in the country, a LEED Gold building, 100% triple net leased to Biogen through September 30, 2028, with two five-year renewal options at 95% of fair market rent.

There was a significant pool of interested buyers, and likely we will continue to look at monetizing select assets, and Dean will talk to you about sources and uses in a bit.

We are very pleased that a sophisticated investor like TIA paid a low cap rate, reflecting the high value they placed on the real estate and the residual value, notwithstanding there is no chance to increase rents for the next 13 years. I think that recognized the value in Cambridge are more a function of extreme supply constraints, high barriers to entry, and a limited availability for space for the universe of life science, pharma, biotech, and technology firms that really want to be and need to be in Kendall Square versus simply a snapshot of current rents.

I think our partner recognized there is minimal re-leasing risk in a submarket with low single-digit vacancy rates and a demand that is currently substantially in excess of inventory.

Ironically, there is obviously significant upside if Biogen were to vacate early and rents were to go to market. I am sure they took comfort in the dramatic leasing velocity in the Binney Street corridor and our transactions with Sanofi-Genzyme, Bristol-Myers Squibb, and the long-term value of the Binney Street assets and greater Kendall Square project that we have done.

I also think that capital values in Kendall Square clearly continue to increase. I think our partner's confidence in the long-term value of 225 Binney validates our laser focus on developing and owning irreplaceable mission-critical assets in the top innovation clusters. The end users who are attracted to these markets are really highly discriminating in their location decisions. As you know, their need to hire and retain top talent who want to work in these dynamic submarkets, their need to collaborate on product development and scientific research drives their real estate decisions.

Unlike financial and professional service firms, for example, who view real estate more as a commodity, well, life science and tech companies view their real estate location decisions as integral to their operations. That makes them somewhat more rent insensitive, although they are clearly very focused and very diligent and willing to pay to be in AAA buildings and top locations with superb owner operators. And we're in the enviable position of owning that real estate that will experience this exceptional and sustained capital appreciation and rent growth.

Moving on to internal growth, we hit an all-time high for any quarter at over 1 million -- 1.9 million square feet of leased, really historic and a great achievement for the Company. 29% came from our greater Boston, primarily Cambridge, operations, 26% from San Diego, and 22% from the San Francisco Bay region. Occupancy was down slightly, due to two rolls Dean will talk about. Again, same -- solid same-property NOI growth for the quarter and strong margins.

On the external growth side, we had an opportunity, Dan and his team, to acquire 10290 Campus Point Drive, immediately adjacent to our current Campus Point project, which added 304,000 square feet at $105 million, about $356 per square foot. Qualcomm is in for a short time, then it has been entirely re-leased to Eli Lilly and will undergo some redevelopment, and Dean can take you through the machinations, but essentially Lilly ends up netting -- leasing about 72,000 more square feet from us.

Notable leasing achievements in the supp for the quarter, 300,000 square feet at 510 Townsend to Stripe, as we just mentioned; our 208,000-square-foot lease to Bristol-Myers Squibb at 100 Binney; and 90,000 square feet to Juno at 400 Dexter. We expect to announce in the not-too-distant future the completion of a lease to a full building user at 60 Binney, and we continue to be well leased -- well preleased in a highly visible pipeline that now has visibility into 2016, 2017, and then 2018.

As we mentioned in the supp, the capital allocation for this year, 45% to Cambridge, 22% to San Diego, 13% to Mission Bay, [sum of] 4% to New York, and 16% to others. Dean will comment on the balance sheet, but we expect to be at 6.9 times net debt to EBITDA at year-end, and on the dividend side, with continuing low payout ratio and growing cash flows we expect the Board to continue dividend increases, sharing our increasing cash flows with investors.

So with that said, let me turn it over to Dean.

All right, thanks, Joel. Dean Shigenaga here. Good afternoon, everybody.

I have got three important topics, but we really wanted to take a brief moment to express our appreciation for our team for recognition as the 2015 recipient of the NAREIT Gold Investor Communication and Reporting Excellence Award. It truly is an honor for the Company to receive this award and our team will continue to focus on transparency, quality, and efficiency of reporting and communication to the investment community.

Three topics today; first, I want to cover the continued strong performance from our Class A buildings in AAA locations. Second, I will provide an update on our solid balance sheet, access to diverse sources of capital, and brief comments on key items for the second half of 2015. And third, briefly, on our disciplined allocation of capital and management of our value creation pipeline.

So kicking it off with our continued strong performance, our strategic focus on unique collaborative campuses and urban innovation cluster submarkets continue to drive very strong operating and financial results. We reported FFO per share of $1.31, up 10.1% over the second quarter of 2014. Demand for our Class A assets in AAA locations also continues to drive strong leasing activity.

We updated our guidance and increased the midpoint of our range of FFO per share from $5.22 to $5.24. FFO per share growth for 2015 is now greater than 9%, representing our second consecutive year of very strong growth above 9%.

We remain on track to reach our occupancy guidance range of 96.9% to 97.4% by year-end. However, as disclosed over the past couple of quarters, the two lease expirations in the second quarter drove a temporary decline in occupancy. One lease was for 128,000 rentable square feet at 19 Presidential, located in the suburbs of Boston, and that lease expired at a rate of about $25. And another lease, for about 82,000 rentable square feet at 2525 State Highway 54 in Research Triangle Park, expired at a rate of about $20. Both of these were single-tenant buildings and we are marketing each building for multi-tenancy at rental rates equal to or above the expiring rates.

We remain well positioned with a high quality -- with high-quality buildings and tenancy. Cash same-property NOI growth has averaged about 5% over the last 10 years and the midpoint of our guidance is above this average, at 6%. This performance is driven primarily from our favorable lease structure, with 94% of our leases containing annual rent escalations. Additionally, strong demand for our Class A buildings in AAA locations has driven high leasing volume and pricing power in our key urban cluster submarkets and, for the second consecutive quarter, has been the primary driver of the increases in our strong FFO per share guidance for 2015.

Next, turning to an update on our solid balance sheet, access to capital, and some brief comments for the second half of the year. First, our balance sheet is very solid with well-laddered debt maturities and really limited maturities through 2018. Additionally, our balance-sheet liquidity is very strong at approximately $1.1 billion.

Turning to sources of capital for 2015, our guidance has decreased about $90 million at the midpoint to $1.05 billion and really consists of the following -- 12% or $125 million from net cash provided by operating activities after dividends, 15% or roughly $155 million from a net incremental increase in debt, and 73% or $770 million from asset sales and other sources of capital, which I will touch on in a moment.

Included in our net incremental debt for the year is the issuance of $350 million of unsecured notes. Offsetting this increase in debt is a reduction in debt from the projected proceeds from asset dispositions, which results in a modest net increase in incremental debt for 2015.

I should take a moment to highlight the recent volatility in the debt capital markets. In the month of July, over $100 billion of unsecured bonds were issued, driven primarily by M&A activity, and it seems like the M&A activity will likely to continue and drive new issuance volume in the near term. All-in pricing, including new issue concessions, is higher today versus 90 to maybe 120 days ago.

Given the recent volatility in the debt capital markets, we prefer not to speculate on pricing for our future transaction, but suffice it to say that guidance can absorb the range of interest rates reflected of recent volatility. More importantly, we have significant liquidity on balance sheet and have flexibility to be patient on the timing of the issuance of our unsecured notes.

We're also working on two secured construction loans, one of which will fund the construction in 2015 for 50 and 60 Binney Street in Cambridge. The other construction loan will provide funding beginning in 2016 for the construction of our unconsolidated JV development for Uber at 1455 and 1515 Third Street in Mission Bay. Both loans are expected to close this year.

We will significantly increase our balance-sheet liquidity to over $1.7 billion by year-end and we will disclose the key terms of each loan in the future.

Asset sales are an important component of our sources of capital and we will continue to focus on growth in FFO per share and net asset value while we fund our highly leased value creation projects, while also improving our net debt to adjusted EBITDA to less than 7 times by year-end.

Our midpoint of guidance for dispositions and other sources of capital is $770 million and consists of the following. About $550 million or 71% has been identified and is working through various stages. This includes $94 million completed to date, $190 million under contract related to the sale of a 70% interest at 225 Binney Street at roughly a 4.5% cash cap rate, and about $266 million working through the process. The remainder is about $220 million.

As a policy, we do not speculate on potential sales that have not been identified, but will continue to focus on sales of both operating properties and land. More importantly, we will continue to provide disclosure of specific sales when they are identified and classified as held for sale. Additionally, as mentioned last quarter, our ATM expired in early June and we expect to file a new program.

Turning to our allocation of capital and management of our value creation pipeline, our investment strategy focuses on the allocation of capital into Class A buildings in AAA locations that really should translate into higher long-term value for our shareholders. 84% of our capital for 2015 will be allocated primarily to four higher-value cluster submarkets, including Cambridge, Mission Bay/SoMa, Manhattan, and Torrey Pines/University Town Center.

We have been very disciplined with our value creation activities. We have a modest-sized pipeline undergoing construction today. Our value creation pipeline has declined to about 12%, with about one-half of our pipeline under active construction and the other one-half representing near-term and future projects.

We tend to focus on minimizing our leasing risk. Over the past five years, we have commenced about 4.1 million rentable square feet of ground-up development projects, with about one-half of that representing 100% preleased single tenancy projects and the other one-half representing multi-tenancy projects that, on average, were 36% preleased. Our value creation projects under active construction today, aggregating about 2 million rentable square feet, was 71% leased and 17% under negotiation.

I think the other key attribute of our discipline is we really are on budget. Of the 4.1 million rentable square feet that commenced over the last five years, these projects have been completed -- well, the projects completed to date are about 1.9 million of that rentable and have, on average, been completed under budget, with initial cash yields slightly above our estimates at the commencement of these projects.

Lastly, on guidance and a closing comment here, the detailed assumptions underlying our updated guidance for 2015 are included on page 3 and 4 of our supplemental package. We are really in a unique position with strong demand for our Class A assets in urban innovation cluster submarkets. Internal growth remains very strong. We have a visible and highly leased multi-year value creation pipeline. We continue to focus our strategy of generating cash -- growth in cash flows from operating activities, FFO per share, and net asset value.

We are also focused on increasing our common stock dividends, while retaining significant cash flows for investment into highly leased value creation projects. We believe we have the right assets, 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 very much. So that's our formal comments. Operator, do you want to open it up for Q&A, please?

(Operator Instructions). Smedes Rose, Citi.

Busy quarter for you guys. I wanted to ask a little more about the San Diego purchase for $105 million. What do you expect to spend to upgrade the facility for Eli Lilly's move and how do you think about the stabilized returns there?

And then, just so -- I just want to make sure. You were far along in the entitlement process for construction at the adjacent building. Will that be put on hold now?

Yes, so let me -- I'm going to ask Dan to comment, but we haven't projected full -- fully construction cost, so Dan is just going to give you rough estimates. Same thing with yields. When we develop our full budget, we will put them into the supplement, but we hope it to be north of 7 broadly, but Dan can comment on the deal.

Yes, hi, this is Dan Ryan. Yes, so we expect it will be north of a 7 in terms of cash and cap on that opportunity. You're mostly right about the -- so there are two components to Lilly. One is we had their existing space in 10300 Campus Point Drive, plus we had executed an essentially build-to-suit building for them, which would have been adjacent to that 10300 building.

So we terminated the build-to-suit in favor of this new acquisition, and we're reworking -- basically reworking the site plan now to consolidate the entitlement into a new building, which will be on the 10290 site.

And estimated construction of about -- I guess we're estimating, what, maybe 300 plus or minus?

Yes, exactly.

Yes, so, Smedes, about 300 plus or minus (technical difficulty) to put on the redevelopment.

Okay, great. And then, I just wanted to ask you on 25 Binney, obviously a very attractive cap rate and you mentioned a number of potential buyers there. I was just wondering, could you talk about a little more of the range of buyers? Were they mostly institutional like TIA or were they family office as well or foreign sovereign funds or anything on that?

Yes, well, we talked to quite a number of people and I would say there was a large group of very interested buyers, including a number of sovereign wealth funds, but because of certain investment restrictions for sovereign funds -- as you know, if they were to hold over a majority of an interest creates tax issues for those entities, we finally ended up focusing on domestic high-quality institutions that could own greater than 49%. So, it was a great mix and it was mostly high-quality institutions and foreign sovereign funds.

Great. Okay, thank you.

Sheila McGrath, Evercore.

On the San Diego acquisition, I was just wondering if you could help us understand how that will flow through. Will it be an acquisition, $105 million, with the Qualcomm lease and then start capitalizing? Or how will that hit the P&L, I guess, Dean?

Sheila, Dean Shigenaga here. You are correct, Sheila. There is a short leaseback for about 90 days and then the project, I think effective October, will enter our redevelopment program and will commence the process of converting that to its office lab use, so there is a very short leaseback period.

Okay. Great. And then on 505 Brannan Street, in the supplemental you talk about it was pretty significant up-zoning, and I'm just wondering how long that will take and your confidence level with achieving that zoning, up-zoning.

Sheila, hi, it's Steve Richardson. Sure, as you saw, Phase 1 is fully entitled, that first 135,000 square feet, and then the Phase 2 will be part of the adoption of the central SoMa plan.

So, we have a number of thoughts about strategies to lock that down, but ultimately I think it will be a couple of years out before we do lock down the Prop M allocation for that property as well.

So you will go forward, Steve, with just Phase 1 initially?

Yes, yes, we will.

Okay, and do you think that will be tech or life science?

It could be either and we have strong demand from both sectors.

Okay, thank you.

Jamie Feldman, Bank of America Merrill Lynch.

I guess starting out on 225 Binney, are you going to receive a management fee on that 70%? And if so, what is the percentage rate?

Jamie, it is Peter Moglia. Yes, we are going to receive standard property management fees, but we have been asked by our partner not to disclose that percentage, so I'm sorry. I can't give that to you.

Okay. And then, I see you guys had about an $80 million change in investments on the balance sheet that didn't flow through earnings. Can you talk about what's in there?

Not company specific, but you are correct. Our unrealized gains are up to about -- almost $140 million. It is a handful of companies that we were initially invested in when they were private and they are now publicly traded companies with a significant mark to market.

I think somebody asked the question maybe a year or a year and a half ago about what the mark to market potential and I conservatively mentioned it was 2X. And so, I think you get some sense for the upside in that investment pool.

And I think from a P&L perspective, we have been realizing some gains, but they have been fairly modest time to time and that just gives us a steady flow of other income. I think what we might consider over time is selectively monetizing some of that portfolio and reinvesting that capital into our business.

And is any of that in your guidance in terms of source of capital or income or anything?

Only from the standpoint of the normal run rate, Jamie. We typically have $1 million to $2 million of investment gains a quarter, typically more like $1 million, so that run rate is in there, but anything large we would try to carve out and identify for you. So the answer is no. There is nothing lumpy included in our guidance.

Okay. And then, I guess, bigger picture, we have seen a lot of health insurer consolidation over the last month or so. Can you guys talk about what impact you think that may have on the broader healthcare space and your business potentially?

Well, I think that chapter is yet to be written. I guess you could draw some analogies to the airline industry, that it is going to be bumpy and you can't always get seats when you want.

So I think that now with the Affordable Care Act having been reconfirmed in a number of specific areas by the Supreme Court, I think what will shake out is you will have three or four -- it looks like three, but you will have others -- dominant providers, and they will be important in influencing how they insure under the law and under the ACA and obviously important in negotiating with the industry. But that's yet to play out.

What impact do you think it might have on just capital flows to pharmaceuticals? Is there talk of cutbacks?

I don't think so. I think it certainly is as strong as we have ever seen it.

If you just look at the M&A activity almost every day, although a lot of that is in the generic space, certainly you look at the venture side and what's big in the venture side is not only venture, but institutional crossover investors putting large, large sums of capital into companies that are private and that ultimately go public, and you see that both in life science and tech, and then obviously the IPO market, I think, remains pretty strong.

Remember something else that I think is going to be a huge benefit to this industry, and nobody has really talked about it, is there is a bill working its way through Congress and I have a high, high degree of feeling that it is going to pass, and that is a one-time tax -- Obama is in favor of it -- on companies that have large foreign cash overseas. A lot is in the tech sector. Pharma itself has over $200 billion of cash, a significant amount of that is overseas.

So if there is a one-time tax of something that they are projecting between 14% and 16% that will fund infrastructure in the US, that is going to mean that there could be $100 billion, plus, money flowing back to the US for reinvestment. I think that's going to be a huge boon to this industry.

Okay, and then just my final question. Good execution on 225 Binney. Are there more assets you want to put in the market for sale?

I think you'll see us look at another core asset. There are certainly -- we have been contacted by quite a few people. I wouldn't say there is a line at our door, but there is quite a few people looking, and so we are looking at a couple of core assets. And then, clearly, we have a number of non-core assets and land parcels that we are working on. So, the answer is yes.

Okay, all right, thank you.

Kevin Tyler, Green Street Advisors.

Hi, guys. Biogen, the tenant at 225, they have been in the news. The stock is selling off 20%, plus, as drug sales slow down. Can you comment a bit on the broader state of the market, the biotech market, and then some of the readthrough when such a large company loses that much of its market value overnight?

Yes, remember, too, that company has increased its valuation dramatically. I actually did an interview of George Scangos about a year ago at a -- I think it was an event in San Francisco, and I remember asking him what the market cap of Biogen Idec was, the name previously when he started, and it was $14 billion. And I asked him what his worry was and he said he thought the market cap was going to go down in negotiating his contract.

So you saw it go to north of $100 billion and it did have a selloff.

Let me speak to Biogen itself. I think the management team is a great team. George is a highly seasoned professional. Obviously, they lowered estimates for their multiple sclerosis franchise and that was not welcoming to the Street, and obviously significantly cut value, and this was by analysts and others, the value attributed to their pipeline.

One of the really big potential values in that pipeline was their Alzheimer's drug, and obviously the drug missed hitting a significant response on two key measurements, and it also demonstrated, I guess, some evidence of brain swelling among some limited number of patients. But one believes that they still have a good chance of having good Phase III results. It's difficult, expensive, and risky, but that's where they're headed.

Anybody who can crack Alzheimer's really will be the beneficiary of just an unending number of patients, unfortunately.

I think you have to look at a lot of the tech and a lot of the biotech companies, and obviously they're priced based on their revenues and on their pipeline of products or opportunities, and I think when somebody has to bring a little more reality to guidance than they had, I think you see a pretty large selloff. But I think some of that is bounceback and I think the company over time will recover much of that valuation, so it still is a very, very well-valued company, so we aren't worried.

But I think in any industry that has -- I mean, look what happened to Google on the plus side. Their CFO came in and announced some really disciplined approach to cost cutting and the stock just popped dramatically, so that's the marketplace.

Okay, I appreciate that. In terms of -- Dean, this one might be for you, in terms of the acquisition guidance for the year, I think you brought it down $50 million this quarter versus last quarter. Just wondering what might have driven that move. Was it a capital allocation decision or was there something else driving it?

There is some details on page 3 of our supplemental package for reference, but, in short, we had one transaction included in our guidance last quarter. It was about a $135 million transaction, and really at the seller's request, timing has been moved back to the first quarter of 2016. So that transaction is still there, just not part of 2015 anymore. Offsetting that reduction of $135 million was the purchase of the Campus Point building.

Okay, great. Thanks, guys.

Mike Carroll, RBC Capital Markets.

Can you guys describe what is your plan for 10300 Campus Point when Eli Lilly decides to vacate -- well, when they vacate to go to 10290?

I will ask Dan to comment.

Hi, this is Dan again. Yes, we feel really good about the prospects of backfilling that. It is barely -- it is a very highly built-out lab office space that Lilly was in. They spent a significant amount of their own capital that we will be the net beneficiaries for.

We are currently in paperwork with four-plus tenants already. This is going to be some of our best space in the portfolio. So we generally expect a significant 15%, plus or minus, increase in current rent at the re-lease. We feel as though the downtime will be very short, given where we are with current discussions, and a fairly modest amount of capital to get there.

Yes, and I should clarify. That lease is about 125,000 square feet and the contractual expiration is in the fourth quarter of 2016.

Okay, and then how are your discussions, I guess, progressing with the city on the North Tower land site option? Are those just a formality and that site is going to be yours?

Well, I don't know that anything is ever a formality, but we do have a legal option that lasts for 17 years, so I feel good about that, but we are in deep discussions. We had several meetings with the city this week. We have a discussion going on on increasing the FAR and how that might work, and so that's where we are, but we expect a resolution to that and some decision this year, maybe within the next quarter or so. So, that's moving along pretty intensively.

Great, thank you.

Ross Nussbaum, UBS.

Can we talk a little bit more about page 4 in your supplemental? I just want a little more clarity on the asset sales that you are targeting through the end of the year. I guess the first question is, where are you process-wise with 500 Forbes in the South San Fran? I know that was listed last quarter in the supp as well. Is that -- where are you in terms of getting that thing across the finish line?

So let me comment briefly, and then Steve can add some comments. Everything in the category of pending and targeted, the only transaction that is under contract today is 225 Binney, which you are well aware of. Everything else is not at that stage yet, but moving through various areas. I don't know if Steve wants to comment any further.

Yes, hi, Ross, it's Steve Richardson. Yes, we've fully engaged the marketing team now. We have got packages out. We have been touring prospective buyers through the property, so we're in the early innings of the overall marketing process. We will keep you updated as time moves along.

And as somebody asked before, Ross, about would we -- with our success at 225 Binney, would we look at another core asset sale, and the answer is yes. We're in active -- we are active on another core asset, potentially, so stay tuned on that.

And is that the 240,000 square feet with $8.2 million of NOI that you have identified as other? What exactly is that?

Yes, we are not prepared to provide more color on what we have, but let me just say that we have a number of assets that we have targeted that could allow us to achieve our targeted dispositions, so we have flexibility in what we execute there and we have a number of projects or operating assets we are looking at.

Okay, and how does that other category differ from what you then laid out as projected remainder/asset sales, that additional $195 million to $245 million? Is that stuff that is not on the market yet? I'm trying to understand the nuance there.

Yes, that is stuff that is not quite as advanced as what totals up to roughly the midpoint of $550 million, which includes the pending and targeted. So we have a little bit of work here to quickly resolve over the next few months and we expect to be in a position to give you better color on this entire targeted disposition figure for 2015.

And one asset in that other, for example, is a important project that we have gone to the tenant who has expressed great interest in potentially acquiring it, so we have a discussion there, but we also are working on a sale package. So these are all not just imagining that we are going to sell something, but these are actually pretty active in trying to move them to an active sale position.

Got it, okay. And then, my last question is really around the last footnote on that page. You guys have made a pretty hefty profit being biotech investors over the past few years. What is preventing you from -- just from a risk standpoint, given the massive run-up in biotech stocks in the last four or five years, why not take a pretty hefty profit and sell down a lot of those positions, rather than -- I don't want to use the word gamble, but gamble those on biotech continuing to run up?

Yes, I am going to let Dean answer that. He did address it in a previous question, to some extent, but I think to some extent we have taken some. There are a number of companies there that have achieved pretty nice valuations, but you have to remember, too, these are -- a number of them are development-stage companies, and to the extent they turn out to be future Amgens, Biogens, Celgenes, and so forth, the upside is even far greater than one can imagine with the realization of that pipeline, but we get your question, so Dean can answer it.

Yes, it is a balance there at the end of the day. Part of our focus over the next four quarters will be looking to monetize components of that so we can reinvest the capital. So we are looking at that. A couple of them recently had their initial public offerings, so there is a bit of a lockup period as well to consider.

But we do see that as a source for our development pipeline as we need it.

Thank you.

Dave Rodgers, Baird.

Yes, Joel or Dean, maybe just a broader question on the development pipeline. I think Dean mentioned that the value creation pipeline has come down as the size of the Company overall. But how do you envision that going forward as you move into 2016? Are there sufficient projects and spend that you will be able to keep that pipeline at a fairly large level or do you see it coming down before you can get entitlements and everything ready for another round?

Well, I think (multiple speakers) -- yes, go ahead.

I was going to say there is two things to consider. Our active projects under construction today are highly leased and are going to be delivered over the next number of quarters. Page 2 of our press release highlighted, as well as page 30 or so in our supplemental, 32, highlights the rough timeline of near-term projects, but the stuff that we are going to commence in the second half of 2015 that sits in the near-term pipeline today, 1.1 million square feet is 80% leased and 20% under negotiation, so we do have very good visibility into really high-quality developments that will generate EBITDA and cash flows going out into basically 2016, 2017, and 2018, in that time frame.

So you got good visibility from a sizing perspective. The overall value creation pipeline might grow in dollar value temporarily, but it will settle back down as we deliver a number of projects, call it, over the next six quarters.

Okay, and then I guess with regard to maybe more acquisition and redevelopment assets to get product to market a little bit faster, should we expect as you move late into this year or maybe even early into next year that you start looking at a greater number of acquisitions to bring that product online faster or are you pretty happy just going ground-up development in those discussions that you are having?

Well, I don't think we have to. I think you get great value. If you just look at the pipeline, as Dean articulated, and you can look at the page 22 spreadsheet, it is pretty robust. There aren't too many people out there that have control on their balance sheet of future value creation and future cash flowing assets out 2016, 2017, 2018, and then over time maybe beyond.

And we only look at the acquisition market really opportunistically. We underwrite everything, but look at it pretty carefully, and a lot of times you don't even see things coming up. Like the Qualcomm deal, if you were to look at that a year ago or six months ago, you don't even know some of these things happen.

So we are not so focused on acquisitions. I don't think we need to do that as a way to grow the Company -- as a mainstay. But we clearly look at it as a way to build our franchise where it makes sense and where we have great infill sites or projects.

And I guess, lastly, obviously a lot of asset sales in the pipeline and that's a primary source of funding for new development. Equity is still off the table and not something that you are considering for this year into early next year?

Well, as I think we have said before, it is our lowest priority as far as funding, and so we think that free cash flow, obviously, debt that we can generate by bringing on additional cash flow, and then obviously asset sales, land sales are our primary focus.

Okay, great. Thanks.

Rich Anderson, Mizuho Securities.

Is it correct that the original discussion with 225 Binney was 80%, not 70%, of the value of the asset?

Yes, I don't know that we had -- we talked to a pretty broad range of people running from 49% to 100%, depending upon what people were thinking, and then we came upon what we felt was appropriate for our continuing interest and the partner's long-term interest, so that's how we felt about it.

Okay, so there's (multiple speakers)

It is Dean here. I would only add one other comment. I think our guidance last quarter gave a range from 70% to 90%.

Okay.

As we were narrowing down the terms of the deal.

No, that's what I remember, thank you. And as far as TIA's perspective, what is in it for them, in your mind, besides obviously a very valuable asset? Until 2028, there is nothing is going to happen to their 4.5% return, so is that purely just they're just a believer in Cambridge for the long term? Is that where their mind is, do you think?

Well, I think in my introductory comments I spent actually quite a bit of time going through how I think they look at it and institutional investors look at it. I won't go repeat that at the moment, but I think the investors we have talked to, and there are quite a few, certainly well more than a dozen, had a very, very positive and strong view of that market and wanted to have a strong foothold in a AAA location in a Class A building with a great tenant. I think that's where institutional money is, certainly a part of it, is focused today.

I apologize. I missed the beginning of your call, so (multiple speakers)

It is Peter Moglia. I just wanted to add one other very important factor that drove TIA to do this transaction, which was they wanted to do something with Alexandria. They work with the best operators in the best locations, and they identified us as that and that was a very important aspect to this transaction for them.

So we are very proud of that, and we think that their brand and their acumen in examining our real estate and us is a great testament to our quality.

I guess the question I was having was, is this going to be a recurring relationship going forward with them?

Very well could be.

Okay. Regarding the investments in companies, and Dean, you spoke about, is there any situation where you are both an investor and a landlord?

There are. I would say of the investments, probably 80% are non-tenant investments and probably 20% or so are. Is that a fair number?

That's correct. In that range.

Is there any kind of restrictions about selling or buying stock if you are also -- have business as a landlord/tenant? I don't know if there would be.

Not regulatory, but I can tell you internally we ensure that we look at these transactions separately. In other words, the lease is a separate transaction, and if we decide to invest, we handle that separately from that decision to lease space.

Okay, and then last question. Joel, I think you referenced 20 FDA approvals so far in 2015. I got that much detail at the beginning of the call. But is it true also that not many in the way of blockbusters in terms of profitability of those drugs? Is that -- would you say that's a fair statement relative to previous years? And maybe just some color around the profitability as opposed to just the straight-on approvals of the drugs.

No, I don't think that's true. I think you are also seeing a new class of cholesterol-lowering drugs, which are likely to be new era blockbusters. Clearly, some of the cancer drugs will be. I think it remains to be seen if any of the CNS drugs get approval and become -- they likely would become, but that's something that remains to be seen.

But, no, I think that the drugs that are being approved today -- you have to remember, too, we're also in an era of, as I said, precision medicine, so a lot of drugs that are being approved are for various targeted rare and orphan disease patient populations, patients that haven't been able -- haven't been responsive to mainline therapy. So you see some of that.

So don't assume they are not profitable, but you can assume that they are more niche drugs, and that's a matter of just better biology and better science and better regulatory science, as I was saying earlier.

You do have some pretty big blockbusters, like the hep C cure in Sovaldi and others. So this is -- the new generation of drugs, I think, is a very great set of promising opportunities. So, we view it as pretty highly positive.

Okay, great. Thanks for the color.

Jim Sullivan, Cowen Group.

Joel, I am curious. With the benchmark pricing here at 225 Binney and continuing discussions on some other assets in some other markets, I wonder if you could give us a handle, if you will, on how we should think about cap rates in Cambridge versus cap rates for the rest of the portfolio, and particularly I'm thinking about New York City and San Francisco -- San Francisco, generally, and to what extent we should expect differential cap rates, higher, lower, in either of those markets?

And then, also, if you could touch on to what extent the ratio of general office space to lab space might impact the cap rates?

Yes, so maybe take it one by one. So I think, and Tom is here and can comment on Cambridge cap rates beyond 225, but I think it's fair to say that we see a continuing cap rate compression in that market. I think it is true.

We may end up selling one or more assets in the San Francisco Bay Area that I think will bring, I think, good cap rate data to the table as well, and so I think you're going to see, again, some cap rate compression in that market certainly vis-a-vis our assets.

New York City, we don't plan to sell the New York Center, but I think Peter reported back a quarter or two ago, I think SL Green sold an asset or bought an asset, I can't remember, not too far from our site and it was on a long-term ground lease. I think at a --

That was a [4.7] cap rate. Actually, we talked about that at investor day. It seems like New York is probably the only major market that from first quarter to second quarter had a small uptick in their cap rate, according to [Corpaks], but all our other markets actually either stayed stable or even dropped.

One thing that I really noted to Joel before this call when I was doing some research is that the suburban Maryland market actually had a 22 basis-point decrease in cap rate, so found that to be very encouraging, considering we do have holdings there. But overall, I think cap rates, Jim, are going to remain stable. The 10-year has gone up about 25 basis points from the last quarter.

There is still about a -- close to a 400 basis-point slack between the historical cap rate and the margin it usually has with a 10 year, so if it goes up -- if interest rates go up even more, I don't think it's really going to affect cap rates until maybe it starts go up by 100 basis points or so. I think we are going to have a long run of continued stabilization, maybe even some more compression as the sovereign funds continue to pour money into these markets that we are in.

And as Joel alluded to, we had quite a number of investors looking at 225 Binney. I think we will have quite a number of investors looking at the next project we have.

So overall I think, to answer your question, I think the Cambridge cap rate that you saw was very healthy. I would expect that assets of that quality will continue to trade at that level and I think we are probably looking at at least another 12 months of stable cap rates, and then we will see how external factors affect that.

Yes, I would say also, Jim, in thinking about our asset base, as I mentioned actually in the second page of the supplement before the press release, we have sought to try to highlight what we think are the important best-in-class office REIT attributes that we have and then highlighting 75% of our ABR now comes from these Class A assets in AAA locations with the 53% of ABR from investment-grade tenants.

So I got to believe that as people look at NAV and look at cap rates with respect to our asset base, they will take note and I think adjust them appropriately down. I think on the office lab side, not sure I can comment. Tom can maybe give you some color in Cambridge on cap rates office versus lab.

Yes, I think there -- there has not been a lot of, I guess, comparable price discovery in Cambridge, and I think that maybe the closest one is the ACP trade of the for-city interest at University Park, but that had a lot of leases of varying durations, buildings that were certainly older. I think average age is 19 years old or something like that and not quite the Class A newer assets that are prevalent in Kendall Square.

It was also a minority noncontrolling interest as well, so that certainly could have discounted the price.

Right. I think (multiple speakers)

Okay, then finally for me, can you give us an update in terms of the demand for space in Cambridge and what impact that is having on market rents, and maybe if you relate that to your Cambridge portfolio, your 100% owned portfolio, how you feel about where those rents are versus the market?

Yes, Jim, so we're observing obviously the very tight market conditions that occur -- that are in Cambridge right now. We have active lease negotiations underway and proposals going out for the balance of our space at -- .

Let me clarify. We have proposals going out for the balance of our space at 100 Binney. As you know, we committed about half that building to -- at least about half that building to Bristol-Myers Squibb.

We are seeing a significant upward movement in [wards], including ourselves, pretty aggressively increasing rent quotes to prospective tenants, due to the scarcity of available space in the market and the number and quantity of prospective tenants there in the market.

And Jim, this is Peter Moglia. One other thing I wanted to ground out is, as Tom mentioned, rents have been continuing to increase in Boston. Rents are continuing to increase in San Francisco. They're continuing to increase in San Diego. We are even seeing it in Seattle as well for life science space and that's just going to continue to put pressure on cap rates, so I guess it rounds out the original question.

Yes, so on Cambridge, just to get back to one number, I think you could see something between 12% and 15% mark to market there this year.

Great. Okay, thank you.

Smedes Rose, Citi.

Sorry about that. It is Michael Bilerman. Dean, I just wanted to come back to the investment side. Can you at least detail out the largest, not by name on who it is, but by dollars the largest public holding that you have of that $173 million? What does the single largest position amount to? And then on the private side, the about $190 million or so, what would be the concentration and the largest investment there?

Yes, there is probably -- we don't have that information instantly handy, but I would say there is probably about a half a dozen companies that make up the majority of that -- of a good portion of that mark to market, Michael.

For the $140 million of mark to market, that's about six companies, you're saying?

Yes, about a half a dozen that make up a good majority of that.

And how widespread is the $190 million? Is that 30 investments or 10 investments?

It's pretty widespread.

So it's a lot.

Yes.

And then, the increasing in terms of it -- it looks like, I guess, some companies went public in the first quarter where effectively your available-for-sale cost balance had moved up from $22 million to $34 million, which stayed flat in the second quarter. So the big move in unrealized gains sequentially was just from the companies that had gone public in the first quarter seeing their stocks move up 50%, 60%?

Yes, the big increase had a lot to do with IPOs in the current quarter.

But your cost basis stayed at $34 million, so I would have thought you would have seen more transfer out of the private bucket into the public, if they had gone public in the second quarter?

You know, Michael, our cost basis on these investments are really, really small on the (multiple speakers)

(multiple speakers).

Yes, on the public securities. As an (multiple speakers) -- yes, we probably had -- I think page 4, footnote 5 gives you a sense. I think of the $172 million or $173 million, $140 million of it, roughly, was unrealized gains in the public securities.

Right. Last quarter, that was $83 million, and so I was just trying to figure out if you moved up sequentially $55 million, how much of that was stock just going up from the first quarter versus companies that went public as the cost basis of the investment stayed flat.

The majority of it relates to two investments that went public during the second quarter. That drove the majority of the increase in the unrealized gains.

And then as we think about this disposition of $195 million to $245 million, the projected asset sales, how (technical difficulty) securities effectively versus part assets versus land, because all of them have different sort of embedded cost to Alexandria?

Yes, we are not prepared to get into that specific number right now, Michael. It is a component that you'll see us reinvest over, call it, the next four quarters or so.

Just to give you an example, in July alone I think we monetized a little bit of our balance, but it is relatively small in scale of the unrealized gain. So we are focused on it and you'll see us get to it over time.

But most of this stuff is in progress already, the $200 million to $245 million of other -- remainder of asset sales?

No, we commented earlier, Michael, that the stuff that is more advanced is included in the category right above that. I am turning to the page right now.

So the category that says pending and targeted asset sales. 225 Binney is under [PNS], as you know. The rest of the transactions in that balance in the disclosure is at various stages, not at the PNS level yet, but actively moving through the transaction process. And we have a number that sold for -- it is [220] at the midpoint that we are working on at much earlier stages. But we feel pretty comfortable with what we have to execute here.

Again, there is good interest in our core assets, along with Joel had mentioned we have a tenant interested in a specific asset, so we have -- we have got good activity going on right now.

Great. Thank you.

It appears there are no further questions at this time, so I turn the call back over to Joel Marcus for any additional or closing remarks.

I just want to thank everybody for joining our second-quarter call and we will talk to you on the third quarter. Thanks, again, very much for your time.

That does conclude today's conference. We thank you for your participation.