Alexandria Real Estate Equities Inc (ARE) 2015 Q3 法說會逐字稿

Welcome to the Alexandria Real Estate Equities Inc third-quarter 2015 earnings conference call. My name is Lauren and I'll be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded. I will now turn the call over to Paula Schwartz. Please go ahead.

Thank you, and good afternoon, everyone. 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 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. And now I'd like to turn the call over to Joel Marcus. Please go ahead, Joel.

Thank you, and welcome, everybody to the third-quarter call. Today with me are Dean Shigenaga, Chief Financial Officer; Steve Richardson, Chief Operating Officer; Dan Ryan, Executive Vice President; and Tom Andrews, Executive Vice President. Firstly I'd like to start by congratulating the entire Alexandria team on a truly excellent third-quarter, operating and financial results really in all respects.

Let me turn to the core to start the conversation. We had a very solid third quarter, 96.2% occupancy. We leased over a million square feet. And as you know, with the 4 million square feet year to date is for 2015 the highest in the Company's history with average lease term this quarter of about 8.7 years, very good. I think that really goes to the heart of that the team has successfully executed and taken advantage of this great high demand environment.

Also 8.8% cash leasing spreads, 4.8% cash same-store property NOI growth, coupled with strong annual escalations in virtually every lease and triple net lease structure in virtually every lease, also has really driven our high margins. So we're very proud of the core.

Really proof positive our client tenant user base wants to be on Alexandria campuses and in Alexandria-owned and managed Class A buildings because we are the brand. And we take the time and make it our business and solemn commitment to understand our tenants' businesses, their space needs, growth, as well as their challenges. Most of the facilities we deal with are really mission critical facilities of our user base.

Moving to demand, to give you a sense of what we see at the operating ground level. It's certainly true there's a very supply-constrained base availability in Alexandria's urban campus markets, particularly Cambridge and the City of San Francisco. This tightness of availability has certainly impacted behavior of some tenants in the market.

Demand for Alexandria's urban campus and Class A buildings is the strongest in the Company's 21-year history. We're really blessed to be in the absolute best locations with the best assets at the intersection of the two most important successful industries, life science and technology.

Increasing macro volatility, things like China, et cetera, have clearly had an impact on decision-making by some tenants in the market. We believe that Alexandria's best-in-class campuses and facilities, though, will continue to maintain high occupancy and strong rental rates during such volatility.

The window is open for biotech but has become more selective regarding quality and valuation and undoubtedly will have some impact on certain tenants in the market. Public sector big tech at the forefront of mobile and cloud have had a banner year in 2015. Some, and certainly not all, of the private tech companies with $1 billion valuations and above that are private may have some challenges with sustaining recent peaks in private market valuations which may have some impact, again, on decisions by some of those tenants in the market.

Moving to tenant strength and selection, something that's really very important here at Alexandria. I think it's great to note that 53% of our annual base rent is from investment-grade tenants, one of the highest in the REIT industry. And our duration of our top 20 tenants comprising almost half of our ABR is 8.6 years. So we have strong solid durable and secure cash flows.

Our very high-quality science and tech team coupled with our world-class advisors provide us first-in-class research on our tenant industries and also our tenant underwriting. Maybe two examples in point with leases signed this quarter, let's go to Pinterest first.

We signed 150,000 square foot lease for 100% of our 505 Brannan Street campus project in one of the absolute best locations in SoMa in the City of San Francisco for a first phase of development. We had multiple users looking at this spectacular location but we chose Pinterest because of our longer-term relationship with the management team.

Initial discussions started in Spring of 2014 when Pinterest had raised $750 million with evaluation of $5 billion. Since then Pinterest has raised an additional $1.3 billion on a valuation of $11 billion, so we try to be highly discriminating in our tenant selection.

One of our key advisors is deeply connected to Pinterest, which also helped as well. We understand and like their user base and growth prospects. We feel that the B2B business will be even more potent than their historical B2C.

On the multiple revenue stream aspect, we like the ad revenues, the approach they're using to viable pins, and partnerships with brands that can give them multiple revenue streams. We also like the management team and the investors are first class including Andreessen Horowitz, Bessemer Trust, Fidelity, Goldman and Wellington.

The financial metrics are also important. We looked at cash on hand and the ability of them to survive in the downturn. We also looked at their cash burn and the ability to cut it in case they need to, and also critically important to all these companies, a reasonable and methodical pathway to profitability.

Moving on to Bluebird Bio. We signed a lease for 253,000 square feet at our 60 Binney Street property with Bluebird Bio. Overall demand in the Cambridge market at the time of selection of Bluebird for the 60 Binney project was significant. There was a mix of demand, both credit and non-credit as well as life science and technology.

Space needs and timing vary considerably for each requirement. IBM Watson was in the market and we were fortunate to capture them as a sub-tenant on a 10-year lease at the 75-125 Binney Street. That location and space matched their timing well as 60 and 100 Binney developments would have been delivered too late for their requirement.

Similarly, Alexandria was also able to fill the requirement for Bristol Myers at 100 Binney, since we had opportunistically begun the project. We also had secured Sanofi Genzyme as our anchor at 50 Binney.

Bluebird Bio was ultimately was selected based on a number of factors including timing, space needs, relationship. And we have a high degree of respect for Nick Leschly, the CEO, whose father was also CEO of SmithKline Beecham. The quality of the Company, the profile, of the quality of their technology and their prospects, their space needs matched well with the 60 Binney project, which will lead to significant construction cost savings and given the ability to build both 50 and 60 Binney simultaneously.

Alexandria's also had an important and strategic relationship both with the Company and also its early investors and Board members. We also see the overall mix within the ecosystem to be an important consideration for long-term value.

Similar to Biogen, Bluebird is a few years away from potential regulatory, as Biogen was a number of years ago from potential regulatory approval of its first product. It would then commence commercial sales soon thereafter and continue to build out the product offering and grow the Company. Both the stage and growth potential of the Company are critical to the overall ecosystem and fundamentally why large pharma companies keep moving into Kendall Square today.

At the end of the day we had three publicly-traded biotech companies looking at these Binney projects and we ultimately chose Bluebird for 60 Binney. Bluebird has almost $1 billion in cash and marketable securities as of the end of the second quarter. Its current market cap exceeds $3 billion.

I won't get into the drugs, but it is clearly the leader in the gene therapy area. We believe that their clinical and pre-clinical programs, as well as their partnership, will lead to a very successful Company over the years. The current demand is still solid in Cambridge and new requirements are both early and later stage as well.

Remember, too, we founded Alexandria 21 years ago on the basis that we could successfully underwrite a complex industry, life science industry, because no one else up to that time had really been able to successfully do it on a national platform. And 21 years later I'd say we're doing a great job of it.

On our highly pre-leased development and redevelopment this provides very strong protection for future cash flows. Dean will highlight, the 1.5 million square feet at 89% leased to be delivered by the fourth quarter of 2016, page 35 of the supplement. And on page 36 of the supplement, the 1.8 million square feet of development and redevelopment to be delivered in 2017 and 2018.

We're building to budget with very solid yields and good margins to reasonable exit cap rates, as you can see. We're also very careful about any new starts and will look at each and every one of them very carefully.

Steve will answer any questions on the new disposition announced, the sale of the partial interest at 1500 Owens. So together with 225 Binney announced last quarter, we secured a very high-quality and sophisticated buyer and long-term partner.

Excellent price discovery, I think for net asset value and now two of our top sub-markets, San Francisco and Cambridge, and strong price per square foot. I think this demonstrates Alexandria's ability to create value through careful and prudent asset recycling and high-value and high-rental rate development.

On final comments, couple things. I'd say the recent Congressional budget deal, there will be about $1 billion to $2 billion additional for NIH per year in funding which is a good thing, and increasing the FDA budget which is also good.

There's been a lot of noise around pharma. I think it's fair to say today the five majors, J&J, Roche, Novartis, Pfizer and Merck, all have met or exceeded their expectations and have broad-based new product pipelines which are very sustainable. They've got multiple multi-billion dollar products in the pipeline as well and I think the noise around pricing is clearly misguided.

Specialty pharma, all of Valiant and Turing where there's little R&D and very aggressive approach to the market built on M&A and other kinds of different approaches, I think is where the scrutiny should lie. Biotech continues to innovate, solving dreaded diseases and that's really front and center.

So let me finish before I turn it over to Dean, by a couple of comments about biotech in general. 734 IPOs have been launched over the past 36 years, raising about $35 billion. That investment, more or less, has roughly yielded $850 billion of current value for the sector. The window is clearly open but more selective on quality and valuation, as I said.

And I think something that's important, the sentiment, not fundamentals, have turned negative as the noise factor is high in a political environment. Sentiment, not fundamentals. Science and medical advances and innovation are accelerating. Cures will clearly save large amounts of money in the future. And there is only one sector that can really address that and that's the biopharma sector.

Bottom line is the biotech and pharma sector, biotech in particular, is well-financed. Regulators are supportive, innovation is present and valuations are lower, leading to an optimistic outlook. I'll turn it over to Dean.

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. I've got three important topics to cover today: First, growth in NOI and net asset value through highly-leased value creation projects. Second, prudent management of our balance sheet and our funding strategy. And third, key capital matters for the fourth quarter, including important comments on our self-registration filing this morning.

Jumping right in, growth in net operating income and net asset value through disciplined allocation of capital into highly-leased development and redevelopment projects really have highlighted nicely in our supplemental. And Joel referenced page 35 and 36; I encourage you to take a look at those two pages.

But for the fourth quarter of 2016, we're expecting to deliver about 1.5 million square feet by then. It's fairly back-end weighted. This is highly leased at about 89%. And we're going to deliver about $75 million to $80 million of annual incremental NOI upon stabilization of the square footage.

Additionally, on page 36 of our supplemental we've highlighted another 1.8 million square feet, again highly leased at 71% that is going to contribute another $105 million to $110 million of annual incremental NOI upon stabilization. These are projects scheduled for completion really in 2017 and 2018. All of this square footage, about 3.3 million square feet, is targeted with average cash yields just north of 7%.

In comparison, we recently announced the partial sale of two Class A properties with one located in Mission Bay and the other located in Cambridge at an average cap rate of 4.6%. Really highlighting the tremendous value we have generated through the ground-up development of these two properties. This also highlights the value creation in process on approximately 3.3 million highly-leased rentable square feet, again to be placed in service in 2016, 2017 and 2018.

Moving on to the prudent management of our balance sheet and our funding strategy. As we've highlighted, our balance sheet is solid with really well-laddered debt maturities and really limited maturities through 2018. Our debt maturities for 2016 were reduced subsequent to quarter end with the REIT payment of $76 million in October, leaving less than $235 million maturing in 2016.

Our balance sheet liquidity as of September 30 is over $1.2 billion on a pro forma basis to reflect the $350 million in commitments available under the construction loan for 50 and 60 Binney Street that we closed in October. Liquidity by the end of the year is expected to be approximately $1.8 billion, as we complete an unsecured bond offering very soon and several important sales of real estate.

We remain on track to meet our net debt to adjusted EBITDA goal of 6.9 times by year end. As you know, we focus on decisions that drive long-term versus short-term performance, including our leverage goals. We continue to execute on improvements in our credit metrics, including net debt-to-adjusted EBITDA in order to further enhance our balance sheet with flexibility.

In order to provide transparency in various metrics, our disclosures include short-term trends with quarter-annualized metrics and longer-term trends with trailing 12-month metrics. The longer-term metrics eliminate quarter-to-quarter volatility that may appear in the quarterly metrics. We believe our approach provides the investment community better visibility in the trends and various metrics that we disclose.

Moving on to our funding strategy. You may have noticed in recent years we have generated over $500 million to fund growth through development. The two drivers of this included roughly $125 million per year of cash flows from operating activities after dividends and approximately $400 million primarily from long-term fixed rate debt from the unsecured bond market through growth in EBITDA.

Growth in EBITDA allows us to fund a significant amount of construction without increasing leverage. We expect to continue to fund approximately $0.5 billion of construction in 2016 and 2017 from these two sources of capital.

Demand for high-quality core real estate remains strong and has allowed us to sell on average of approximately $200 million per year over the past five years. We expect demand for high-quality real estate to continue into 2016. And accordingly, we anticipate real estate sales to remain an important component of our capital plan for 2016.

Over the past five years, I think you've noted that our capital strategy execution has been proven to be very prudent on the management of common equity, including our projection for 2015. The proceeds of the issuance of common stock has represented really only approximately 20% to 25% of our total sources of capital. As a reminder, there's been no significant common equity issuance in the past two years.

Our capital plan on average for the last five years has utilized significantly less common equity than expected for leverage at 6.9 times, primarily due to the benefit of retained operating cash flows, significant EBITDA growth, and sales of real estate. In summary, we will continue funding our growth with the most cost-efficient long-term capital. Most importantly, we will execute these objectives while we also focus on generating growth and FFO per share and net asset value.

Turning to our capital plan for the remainder of 2015. Most importantly, sales of real estate we have about $600 million in proceeds forecasted for the fourth quarter with approximately $300 million, or 50%, of this under contract to close in the fourth quarter. The other $300 million, or 50%, is moving along quickly and is focused on the sale of a partial interest in a core property while we also continue to pursue the sale, or sales, of other core-like properties. As a policy, we do not comment or speculate on potential sales beyond the current disclosures.

Next, on our shelf registration statement. You may have noticed our shelf registration was filed this morning. This filing is required, is effective upon filing and simply eliminates one additional filing in order for the Company to issue unsecured bonds.

The investment grade bond market has shown improvement in recent weeks, as you probably are well aware of, and we do expect to issue bonds very soon. We remain focused on tenure of tenures, since it fits well into our debt maturities.

Additionally as mentioned last quarter, our ATM expired in early June and we do expect to file the new program. Just to be clear, we do not expect to use the ATM program this year, as we are on track to complete our projected real estate sales for 2015. Lastly, we completed one of the two construction loans anticipated this year and we are focused now on closing the second construction loan in the coming months.

Moving on briefly to guidance and some closing comments. The detailed assumptions underlying our updated guidance for 2015 are included on Page 3 and 4 of our supplemental package. We are in a great position today with a real estate strategy focused on unique campuses and AAA urban innovation cluster locations. We have one of the best teams in the REIT industry and a top brand that collectively drives demand from high-quality and innovative companies.

Internal growth is solid and is expected to remain solid in 2016. We generate high-quality cash flows with 53% of our ABR from investment-grade tenants. Our cash flows are stayable with 96% triple net leases. Our cash flows increase contractually with 95% of our leases containing annual rent escalations averaging up almost 3%.

Demand remains solid for our high-quality buildings and AAA locations, in very supply-constrained innovation sub-markets and is expected to continue to drive very solid cash and GAAP rental rate increases on leasing activity over the next year. We continue to focus on disciplined allocation of capital into our visible and highly-leased multi-year value creation pipeline.

We will continue to execute on prudent management of our balance sheet and funding of our growth with the most cost-efficient long-term capital. Most importantly, we will execute these objectives while we also focus on generating growth in FFO per share, net asset value and common stock dividends.

We believe we have the right assets and the right locations that will inspire productivity, efficiency, creativity and success for our highly innovative client tenants. Our team remains focused on continuing to build the best-in-class franchise. Thank you and I'll turn it back to Joel.

Operator, we're ready to go to Q&A, please.

(Operator Instructions)

Our first question comes from Manny Korchman with Citi.

Hi, guys, good afternoon.

Hi there.

Just thinking about marketable security sales as a potential source of equity, how are the changes in the biotech stock markets change the way you think about selling or holding on to your marketable securities there?

Yes, I don't think they've had that much influence. As you know from this past quarter, we did have a number of sales and will continue that over the coming quarters. We still have significant built in gains so we're comfortable and I think the quality of the holdings that we have is high. We feel very good about the position we're in and we try not to be just pure market-timers.

Joel, you guys disclosed the amount of those gains. What was the underlying balance that you sold to get to those gain numbers?

Bear with us one second.

I don't have the proceeds right in front of me, Manny. I think that's what you're getting to right?

Yes, the actual sale amounts exactly.

I don't have the actual proceeds. I think the investment dispositions this quarter probably netted out a slight positive in overall investing activity, meaning dispositions net of reinvestment. So maybe it was a small net cash receipt at the end of the day for the quarter.

Can we think about it in terms of multiples? So was the gain 2 times? Was it a 2 times gain? Was it flat to what you held? Can you give us some idea of just magnitude?

Well, to put it into perspective, Manny, what we are looking at is on the $104 million or $105 million of unrealized gains we have as the quarter end, I think we only have about a $30 million investment.

My other question was so there's been some recent news on Biogen cutting its workforce. Has that impacted yours? Or do you think it will impact (technical difficulty) your in?

Yes, I'll ask Tom to speak about it.

Yes, it was reported that Biogen might cut about 800 heads in Cambridge and Eastern Massachusetts. Recall they lease or own about a million square feet in Kendall Square. And they lease about 350,000 square feet in Weston on Route 128, which is 50% subleased to another company. But we see no evidence that's relatively small layoff, in terms of the total headcount and space occupancy, is going to impact Kendall Square at all.

That may impact their future need for space here in the short to medium term. But certainly they're not abandoning space that they have. We own their headquarters building together with TIAA, so that we're in great shape with that building.

Thanks, guys.

Our next question comes from Jamie Feldman with Bank of America Merrill Lynch.

Thank you. So you had commented that when you chose Bluebird there were several biotech companies that you opted for Bluebird over. Can you talk about across your major markets, how many types of conversations like that you're having? Like when you have a space the multiples of tenants that are interested that space?

Oh, I think it's very common. Both Steve and Tom can give you color on that, but I think in virtually every case these days, there are multiple users for the same space. Obviously timing, rental rate, quality of tenant, and a whole lot of things factor into that.

Jamie, hi, it's Steve. We do. We have more demand than we have supply certainly in the market. We're tracking 22 different tenants in excess of 100,000 square feet in San Francisco alone. And then at another 6 million square feet of demand in the Greater Stanford area. So we are being very selective and we do have a number of options that we choose from when we're selecting these tenants.

Yes, and it's Tom. As Joel mentioned, we do have multiple parties pursuing the space that we ended up selecting Bluebird for. We have multiple parties looking at the remaining space at 100 Binney where we're working to do some additional leasing on the remaining 180,000 or so square feet which delivers in late calendar 2017. It's not uncommon at all for us to have multiple prospects and we are managing carefully to try to optimize our tenancy there.

Okay. And so those three tenants, I assume that's who you're talking to for some of the other space?

Yes, one of them, yes. They are all three public. One is an existing tenant -- well two were existing tenants and one is not. But yes, the answer is yes.

Okay. Then can you talk about -- I think in the supplemental there's still no total cost projection for 400 Dexter or 100 Binney. Can you talk about what the final costs on those and why it's not in here?

Jamie, what we try to do is as soon as we announce a new development to give as much information that's available at the time new projects commence. Occasionally 400 Dexter, as an example, is going through a few different iterations. But we do have a general sense of where we're going to fall out but until we feel comfortable that the disclosures will be final, we prefer to wait until some of the moving pieces are resolved. I can tell you that generally speaking -- give me one second -- generally speaking, I think, in Cambridge you're probably looking roughly high-level $900 a foot all-in at completion on 50 and 60 Binney as an example, as a baseline. There's some different attributes at 100 Binney.

As we round out our budget we'll disclose both the cost at completion and the returns. But I would say that you should keep in mind that returns are going to be very similar, directionally, with 50 and 60 Binney. Again, I gave you overall returns for all of these projects that are delivering in 2016, 2017 and 2018 and it's just north of 7%. So I hope that gives you some comfort that we're building solid projects and we'll provide these disclosures in the near term.

So you said $900 per square foot in Cambridge. What about in Seattle?

Let me not comment specifically, because it may not be applicable to that project right now. Suffice to say, Jamie, that our overall average yields on a cash basis are just north of 7%.

I'm saying cost per foot.

I know. Well, if we were prepared to disclose that, Jamie, we would have put it in the sup. So let us refine the budget and when we're prepared to provide that disclosure, we will. But it falls right down the fairway from a yield perspective.

Got it, all right. Then thinking about next year. Do you think your same-store NOI will be higher or lower than what we've seen in 2015 based on what you have coming up?

Well Jamie I think the way we would like the community to think about same-property performance, I think over a long term of cash same-property performance has probably averaged about 5%. I think the way you build up to that number is -- keep in mind you've got triple rent leases which drive stable cash flows, but you've got annual escalations that are approaching 3% embedded in our leases. So your cash NOI will grow close to 3%. Your marketing to market, roughly and I'm going to use simple math for the next step. Roughly 10% of the portfolio will be in mark-to-market and we're marking that close to 10% right now. So you get 1% dropping down to NOI on top of the 3% of annual escalations.

And then you've got the opportunity to early renew and if you have leasing activity, the leasing activity's easily 2 times the expirations. So we are getting ahead and capturing some rental rate growth, call it somewhere between 1% to 3% dropping to NOI. 3% would be just a home run year, but if you pick up 1% to 2% now you've built up a 5% to 6% base cash same-property NOI performance. I don't want to get into guidance for 2016 which we'll do in December. But I think overall, core performance is going to be very solid for 2016.

Okay, thanks, that's helpful.

Our next question comes from Sheila McGrath with Evercore.

Yes, good afternoon. Joel, I was wondering if you could help us understand for newer companies like Bluebird or Pinterest or Stripe, do you underwrite such that the development yields would be a little bit higher? Or higher rent for these newer tenants? Or do you charge the same as a strong pharma, credit pharma, tenant?

Yes, I think that depends on the -- and I'll ask Tom and Steve to comment -- I think it depends a lot on the particular building, the particular rental rate in the situation, their particular program. Because every tenant and every lease is actually different. It isn't vanilla like there's three vanilla choices and they are all pretty similar. They are actually somewhat different in each respect. But I'll ask these guys to give you an on-the-ground comment.

Sheila, it's Tom. I think as Joel said, each of these transactions is different, so it's really hard. You really can't compare them as if they are vanilla deals. There's always a nuance to them.

Sometimes, for example, even a more credit-worthy company we may be able to get them to pay more because of the particular situation that they're in with respect to that particular deal. I wouldn't say that there's any -- that you could consistently assume that we get more money from a tenant who might be less credit-worthy than another tenant that might have been a candidate for the space. It really comes down to specifics of the negotiation and the transaction.

And certainly security deposit is different but, Steve, you could --

Yes, just to add to that, Sheila, it is a very dynamic environment. The tenants are moving very quickly to lockdown space. So I think what's really important when you step back is really the tenant underwriting and how we go about valuing the companies and looking at their long-term tenancy and partnership in the building with them. So that's where we really focus our attention.

Okay, great, that's helpful. Joel, also you have a well-leased development pipeline for 2016, 2017, 2018. Should we assume that you're remaining patient on other land development opportunities because you have enough on the plate right now? Or are you in the market looking for additional development opportunities?

Yes, I think in my prepared comments, Sheila, I mentioned that any new developments we would be looking at pretty carefully. We've got the 1.5 million square feet that Dean mentioned on Page 35 and the 1.8 million on Page 36. That's a pretty robust pipeline for 2016, 2017 and 2018.

I think there are opportunities that will come to us, whether they come through current campuses for example, in San Diego or other locations. And certainly in New York we're in discussions on the new building. But we're not -- I wouldn't say anything -- we're not looking at kicking off anything imminently at all. Anything we do, do, we would be mindful of the macro-market environment and then obviously, the demand in the market and then just our overall cash usage for that particular year. So it's kind of a complex equation there that we look at.

Okay, great thanks. One last quick one on construction costs. Any worry that construction costs or labor moving higher? Labor costs?

Certainly New York is a big worry. I think today we're very fortunate when we kicked off the West Tower back at the end of 2012 and early 2013, we hit a really great price point in the New York market. Today I don't think that would be true, so that's certainly an important factor. Again, Dan and Tom and Steve can comment on pricing. Up until now I think rental rate increases have out-stripped construction price increases, but it's something to pay attention to.

Yes, hi, Sheila, this is Dan. Yes, we're seeing some pressure on some construction materials, particularly glazing, that is being offset by savings in structural steel due to the Chinese drop off in usage. So on balance, we're cautious, we're trying to really primarily focus on some of these long lead items to be able to lock that in today. But we don't think that it's a super material impact. I don't know how you guys feel in your markets?

Yes, this is Tom. I'd say that we've got major projects under way for where we've done a vast majority of the buy-out in prior months. I think we are certainly very comfortable.

As Joel was saying, the rental rate increases that we experienced in the market certainly out-strip the construction price increases that we were seeing when we were buying out these jobs. But we do watch it very carefully, curtain wall, as Dan mentioned is a tough trade right now. There's so many projects going vertical in the Eastern cities with curtain wall, so it's tough. But we've got that well managed on our projects in Cambridge.

Hi, Sheila it's Steve. Finally, I think we're seeing pricing pressure from subcontractors. I think they are very busy in the Bay Area in particular with both the residential and life science and technology construction under the way. What we do, though, for each of these projects, especially as we get into 2017 and 2018 deliveries, is have a very clear annual escalation in construction pricing. So that is well baked into the pro formas and the anticipated yield. We don't think we'll be surprised beyond that we've already got already baked in.

Okay, great, thank you.

Our next question comes from Rich Anderson with Mizuho Securities.

Thank you. Dean, you mentioned about some of the long-term average and same-store. I know you don't want to get into 2016 guidance, but do you think that the 8% to 10% re-leasing spread that you've been getting this -- or you're guiding to this year is a sustainable number for the next couple of years? Or do you see that trailing down based on where the re-leasing is going to be happening in future years?

I think, Rich, what's important to keep in mind on leasing performance, at least going out for the next 12 months, is that we are dealing with some of the best buildings in the best locations in very, very supply-constrained markets. So we're in a good environment where the best, most innovative companies are looking to be in the best facilities in the best markets. I would think that leasing activity is going to remain very robust going out for the next 12 months. I would not be surprised to find guidance falling fairly close to our expectations for 2015.

The reason I ask is I'm looking at 2016 expirations and you have Research Triangle, Canada, Maryland whereas this year it was San Francisco, if I'm reading this right. So just wondering if the geographical footprint will play a role.

Well it's a little bit of that, but you also have to keep in mind that the leasing activity in a given year also benefits from renewals that you can't identify from the supplemental, which is I believe page 24 which shows our expirations by category. That's also an important driver, so getting ahead of some expirations that are beyond 2016 will also contribute. I would say, big picture, the market drivers are fairly obvious that the two top markets are big drivers of leasing activity. But I think the top five all contribute very nicely to 2016.

Fair enough. You mentioned and I understood the road map to funding development. And you got it covered, so to speak, to $500 million. But are there any situations that you see where the funding of development would meaningfully exceed $500 million in any of the next couple of years?

Well that's kind of been true this year and it's been true last year and possibly the year before. So I think it's safe to say that it will. And we do have a fairly robust pipeline, so yes, Rich, it will exceed that.

Okay. I'm looking at the guidance and it's in the $500 million, $600 million range for development spending this year?

Yes, and it's important to keep in mind the strategy that we've used over the last, call it, five years. And our approach going forward is very consistent with that. We want to minimize the consumption of common equity to the extent possible and focus on asset sales in an environment when private-market valuations are attractive capital.

Okay, thanks. Do you guys -- if you had a choice between the two and you had to make a choice, would it be FFO growth or NAV growth as a guiding strategy?

I would say first NAV, but we can't ignore the investors that do focus on FFO. I think they're, bottom line, both important but we're not wed to one or the other in particular. We're looking for long-term decisions for the long term that will drive both of those metrics but more importantly hopefully total return performance.

Okay and then last question, maybe for Joel. Do you have any comment about the BioMed deal?

I think it's a very good positive for them. The truth be known, analysts like you guys followed both of us. But in most of the sub-markets that we're in, we actually virtually don't compete with them outside of some assets in Cambridge.

Seattle very little competition. In San Francisco, very little competition. San Diego, even though they're based there, hasn't been a lot of competition. And New York, not the same thing. So as a macro Company, yes but on a sub-market basis. But I think it's a positive for them.

And do you think it could result in some activity coming your way vis-a-vis Blackstone? Or is it too early to say?

You mean assets that we might be interested?

Yes.

Yes, I could say publicly we have no interest in any of their assets.

(Laughter). Thank you very much.

You're welcome.

Our next question comes from Jim Sullivan with Cowen Group.

Okay, thanks, good afternoon. A similar question to one Rich asked, but maybe asked a little bit differently. Joel, if we have entered a period of significantly weaker capital formation are there any geographic markets in which Alexandria has a presence which are likely to be more affected than others?

Yes, that's a tough question to answer because, number one, we're, as you know, very highly leased both in our operating portfolio and in the development and redevelopment side. Each market's different.

Seattle tends to be tech and institutional; San Francisco tends to be biotech, pharma and tech; San Diego tends to be more biotech and pharma. Maryland has been a broad base of different types of companies, a lot of service companies and things. Research Triangle is turning out to be ag-tech mecca. New York, we just landed Nestle, their skin care group and Lilly up for another building, but it seems broad-based in the life science area. And Cambridge is heavily biotech, pharma and tech.

So each market really has its own dynamics, but at the moment we haven't seen any dramatic change in any specific market that I could give you. I tried to characterize what we're seeing on the ground. There are some tenants that, because of lack of availability, are sometimes giving up expansion or just looking maybe at different locations. But at the moment I'm not sure I could give you anything specific.

And it would sound like, and I don't mean to put words in your mouth, but what's happened over the last 90 days does not appear to really have had an impact in terms of your disposition strategy.

No not at all. But I do think that people are paying attention to the capital markets. Obviously, pharma doesn't need to because they don't finance through the capital markets. Big tech also doesn't so much finance through the big capital markets.

But obviously the private guys on the private side in tech and obviously the biotech market are focused on the capital markets. So people are paying attention to the shift that's happened over the past couple months. There's no question about just boardroom talk.

Okay and then final one for me. Alexandria has been a selective investor in private funding rounds for various companies at early stages, and you've been through a few cycles. Can you characterize the slowdown in activity over the last 90 days? Has it stopped or slowed materially? If you have a guesstimate on where it's going to go in the next 12 months.

Okay, so that's an interesting question. And the answer is it has not slowed down appreciably at all. We tend to like big idea companies, big platforms, multiple shots on goal with products, great management teams, great syndicates. I would say we have not seen any slow-down in the pace of new opportunities that have been presented to us at all, believe it or not. What is slowing down is the exit of the pipeline, not ours, but the biotech pipeline.

Having gotten through the really high-quality companies, there are some companies that haven't been able to get out. But there's also a new crop of pretty high-quality companies that I think you'll probably see file, either have done silent filings or will be filing ahead of JPMorgan Healthcare. So I think you'll see a pick-up in that. But we've not seen a slow-down on the private investment on the biotech side at all.

Okay that's great, thank you.

Thanks.

Our next question comes from Kevin Tyler with Green Street Advisors.

Yes, hi. High level one for you, Joel, tying back to your opening comments. You talked about a sentiment shift and not really a fundamental shift towards the biotech sector. But how does the fundamental shift, if there is one, affect the MITs, NYUs, Data Farmers, the more academic government-based tenants that are in your stable?

Well, I think the budget deal that appears worked out between the Republicans and the Democrats, and it looks like the both Houses will be on board and ultimately the President is on board, I believe. I think will be a net positive for the institutional side of things a bit, providing incrementally about $1 billion to $2 billion more annually to the NIH.

I think Tom can comment on the ground. But I think one thing that surprised us and I think we've said on our past calls, is the slow-down in institutional activity like in Longwood. Whereas Cambridge has been on fire and a lot of Cambridge tenants won't go to Longwood. It's kind of surprised us there hasn't been more activity.

Yes, just to echo what Joel said. We expected more growth and more demand out of the Harvard-affiliated Longwood institutions. We're at about 63% leased, I think, on that asset. We've got some groups kicking around but not really moving very swiftly on the remaining 150,000 feet or so that we have to lease there.

We're hopeful that this potential budget deal that Congress is talking about could result in some additional NIH funding and instigate some additional activity. The other area where funding comes to these institutions commonly is through philanthropy. And there are some potential demand drivers from some foundation groups that are looking to invest over there. But we haven't seen any real estate activity out of that yet.

Okay, thanks. And then your guidance, Dean, suggested you're not really planning much more in the way of acquisitions for the current year. I was wondering if that's based more on a change in cost of capital? A vote more on development at the current time? Or perhaps just more color or insight into the state of deal pricing currently in the market.

Let me just comment. I think if you go back to our total acquisitions for the year, at the beginning of the year we probably couldn't have told you that this was the array of acquisitions we would be pursuing. The MIT acquisitions, as we mentioned, came up really quite by circumstance.

The deal that Dan executed with Qualcomm and retenanting that building with Lilly, again, came to market kind of serendipitously. It presented a great opportunity to expand our campus. But months before that, we didn't have any idea of planning for it. So I think our primary external growth platform has been focused on development. So we haven't really been focused on some benchmark for acquisitions. I think that's probably true of, without getting into guidance for 2016, I think that's probably true of 2016 as well.

Okay, that's helpful color. The last one I had, can you give us any insight into the inquiry that you may have received from other institutions interested your properties? Hence eventually your sales or dispositions. But has it increased at all since the BioMed news has surfaced?

Well, I'm not sure we get -- we did a pretty methodical set of meetings back about a year and a half ago when originally looking potentially for a JV partner on some developments which morphed into a different kind of an approach. I would say I personally did like 15 or 16 101s. I think virtually every single group we met with, all brand names, expressed high levels of interest for the quality of the location, quality of asset, quality of management and quality of tenancy.

I think even today, we still do have a number of people that do approach us about getting involved in, whether it's an asset sale or potentially partnering on development. So that's kind of ongoing. I don't know that the Blackstone deal either increased or somehow hastened it. I think its been pretty consistent over the last two years since we've been moving in that direction.

Okay, thank you.

Our next question comes from Dave Rodgers with Baird.

Good afternoon. Maybe for Tom or Steve, wanted to follow-up on an earlier question. Particularly regarding any pushback you're seeing in Cambridge or San Francisco on rent levels. I'm thinking particularly from biotech or pharma companies that are just getting priced out from some of the more tech office, heavy, dense users of space. Are you seeing that in the market? Or is there just that many more tenants on the tech side taking space than there are on the lab side today?

Yes, hi, Dave, it's Steve. No, not necessarily. We are actually seeing the converse. The tenants really want to be in these locations. It's an essential must-have business imperative for the life science tenants in Mission Bay to be surrounding UCSF, for the technology tenants, be in this Mission Bay SoMa cluster. So to the extent rents have risen to the price level they are at they are sustainable, they're acceptable. And we've seen just the opposite, that the tenants are really prioritizing location over some potential price sensitivity right now at this level.

Yes David, in Cambridge, as you know, much more of the demand that we've seen there has been on the life science side. But its been both lab and office space, much more of the recent growth both lab and office space. There certainly are some younger companies who are getting queasy at the rental rates and are looking elsewhere. But as I said, we've got multiple parties looking at the remaining space that we have.

We have multiple parties looking at that 60 Binney when we transacted the Bluebird deal. We have multiple parties looking at 100 Binney. So we're not seeing a great -- we're not seeing people withdraw from the location because of pricing.

Yes, it's also in those locations, it's a fundamental question of recruitment and retention, too, that really underlies that and that's almost like a cost of doing business as opposed to just a rent number.

Fair enough, thank you. And maybe with regard to Joel, or if Dan is on the phone too, the redevelopment pipeline I think is about 525,000 square feet, plus or minus. Looks like some of that is going to go from lab to more tech office. Can you talk about the returns on that? And then the second part of that is do you see more assets moving into the redevelopment bucket over the next year or so?

So I'll have Dean comment for the moment.

So I guess the redevelopment -- the bulk of the -- the biggest project you have disclosed are there, the other two aren't quite as large. But you have $240 million roughly of completion on Campus Point which is probably the largest project there.

That's going from an office to a lab.

And so all of these are in pretty good shape. We're working on lease-up of 11 Hurley and 9625. Just a bit -- I'm sorry, 11 Hurley is under negotiation, 9625 we're working on. It's just premature to talk about the status of those negotiations, but we do have ongoing negotiations. Again, I think your overall returns are going to follow on average here, 7%-plus on the initial cash yields.

As far as the future pipeline, we do have a little bit that's disclosed in the supplemental and the expiration schedules that's potential, but it's pretty small. I don't see anything in the portfolio today that represents a redevelopment over the next, call it, year or two.

Yes, so again just to be clear, the Campus Point acquisition is going from office to lab. Hurley is going from whatever it was before to a lab. Looks like we have a deal for that whole building. And then 9625 we're not certain, it could go lab or it could go office but that remains to be seen.

Great, thank you.

We have a follow-up question from Manny Korchman with Citi.

It's Michael Bilerman with Manny. Joel, I take it when the proxy comes out for BioMed, we will not see a REIT then in any of the disclosure, given your comments?

We won't see a what?

A REIT. We won't see a Company Alexandria mentioned in there?

I don't think so (laughter).

Dean, and I'm sure you probably have this at your fingertips, thinking about deb to EBITDA as you're going to embark on this fixed-income unsecured issuance, I'm sure the fixed-income investors are going to look at your Q3 numbers on an annualized basis. They'll back out the securities gains; they'll back out the FAS income and they'll get to 7.9 times debt to EBITDA and they're going to ask you if you have a target --

I'm not so sure about that.

Well, they may. Because they tend to be -- in fact they tend to be --

That's fuzzy math, Mike.

Well it's not fuzzy math, they are going to -- see they're not going to annualize securities gains, right?

I think what they are going to look at what our target is at year end and is it achievable?

Correct. And that's where I was going, right? Because maybe you can -- and getting there, you got $600 million of sales, $300 million that are done, $300 million that are in the works. You also have $200 million of construction spend offset by $30 million of free cash flow.

You get to seven times, but that doesn't take into account the lost EBITDA. The debt balance at the end of the year is going to be lower because you have $600 million of sales. But you'll still be earning income on most of the assets so there will be a slight tick back up.

So maybe you can just bucket getting into 2016 getting down to that 6.5 target. The EBITDA from all of the development and redevelopment, how much is coming online next year versus the incremental capital spend that you will have in furthering the development pipeline for the 2017 and 2018 starts. And then how much -- what is the plug effectively, if any, in terms of sales to get you to the right 6.5?

Yes, so Michael, just to clarify. Part of my comments during the prepared section of the call was to really focus on less quarter-to-quarter variations and metrics which we all know tend to be volatile versus more long-term metrics. And we are going to hit 6.9 by the end of this year and once we get beyond 2015, we will start to migrate closer to 6.5. There's no expectation for us to hit it in 2016, just to be clear. But we will make the move towards that over the couple years following 2015.

There's a lot of moving parts, as you highlighted, in our business because we have a tremendous pipeline of development opportunities that are highly leased. But we have a very disciplined approach in funding that, as I outlined in our prepared comments. And so we'll provide as much color, I think, that makes sense at Investor Day to help investors navigate or at least follow our path on leverage. But beyond leverage, our overall goals that we want to accomplish in 2016. I don't think anybody will find it a mystery for us to maintain leverage sub-7 as we go into 2016 and then continue that downward on average over the next two years.

And how much NOI do you have lost in the fourth quarter from the $600 million of sales? So if that $600 million is, call it, about a 4.6% cap, so about $28 million of annualized NOI, how much are you suffering from a dilution standpoint in the fourth quarter in your guidance?

Well, Michael, why don't we wrap up the fourth quarter because we do have $600 million of dispositions. Half is under contract, the other half is not yet, so the timing of those transactions are still pending.

But you're right. There will be EBITDA loss through the dispositions. But you're talking about very low cap rate transactions on average, which is attractive capital that's funding our business. And because it's a low cap rate, overall average disposition for the fourth quarter, it is attractive from a replacement to common equity.

I think we're making, as you probably can appreciate -- the math works out from the ability for us to replace the need for common equity in a manner that is cheaper. Had we had the need to raise the equivalent of whatever the equity proceeds of that $600 million was, Michael, in common equity, it probably would have resulted in even more dilution because it would have had a higher cost of capital applied to that.

Agreed. Lastly, on the security sales. If I go back to last quarter, at least a lot of the conversation was of this $225 million of projected remaining asset sales. At least I was led to believe that a majority of that would have been the public securities that were sitting on your books.

It sounds like the sales in the third quarter perhaps were only about $30 million if it had the same book-to-gain ratio and doesn't appear as though there's anything set for the fourth quarter. So had there been a change in the way that you're looking at liquidating the securities book at all?

No, not at all Michael. I think my commentary over the last two quarters, at least the last quarter if not the prior to that, had indicated that it would probably take time for us to monetize the gains, partly because some of its locked up for a period of time. So there wasn't any expectation of an immediate monetization of it.

I think you'll see us continue to monetize some of those gains as we look out over the next 12 to 24 months. But we feel really comfortable with -- these are a very short list of companies that generate the $100 million-plus of unrealized gains, and they are solid companies. So we're not concerned about the gains vaporizing overnight, but we do plan to monetize some of them.

I guess you'll put that back in the sup next quarter in terms of the sales proceeds so that we can track it a little bit? That would be helpful.

Yes, we can definitely help you guys with that disclosure, but it's --

It will be in the quarter, at least for the supplemental it would be good to have.

Its been relatively small, so we haven't really highlighted it much, Michael, but we can think about that.

Okay, thanks.

Thank you.

It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

Okay, thank you very much. We're five minutes over, but we appreciate [that] and we'll look forward to talking to everybody on the fourth-quarter and year-end call. Thanks, everybody.

This concludes today's call. Thank you for your participation.