Alexandria Real Estate Equities Inc (ARE) 2016 Q1 法說會逐字稿

Welcome to the Alexandria Real Estate Equities, Inc., first-quarter 2016 earnings conference call. My name is Craig, and I will be your operator for today's call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the conference 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.

Thank you, Paula, and welcome, everybody, to the first-quarter Alexandria call, and welcome, everybody.

And with me today are Dean Shigenaga, Peter Moglia, Steve Richardson, Tom Andrews, and Dan Ryan. And I want to open up as I always like to do to congratulate the entire Alexandria family for another strong quarter, operationally and financially. Also want to recognize the passing of Rich Jennings, a long-time director of Alexandria, who passed on February 28th after our last earnings call, and Rich was such an important influence on the development of the Company, and we're going to miss him a lot.

Let me start right away. At a recent investment conference, I presented three key take-aways for 2016. The first being that our markets are continuing to stay rock solid with strong demand, little or no supply, rents up over the past year, about 15%, and continuing high occupancy. Secondly, our highly preleased value add pipeline, which will continue to drive growth and earnings NAV and decrease in leverage, where we've also been able to achieve significant yields is really key take-away two.

Number three would be fundamentals are really overtaking sentiment in the life science factor, and so far, at the tactical ground level, as I mentioned, there are no cracks. Novel and innovative biopharmaceutical products will be the key to managing the cost of chronic disease.

On the core, quickly, continued very strong performance in our urban innovation cluster markets. We had a strong 6.2% cash same-store NOI growth, strong occupancy of 97.3%, and continuing strong margins. On the leasing side, again, in virtually all of our markets, very tight, and we're seeing strong demand and good performance. We leased about 390,000 square feet this quarter, down from other quarters, because we're having less space to lease, due to high occupancy at about 17% cash rent spreads, contributed heavily by Cambridge, San Francisco, Seattle and Research Triangle Park.

Important to keep in mind, 52% of our total ABR this quarter from investment grade tenants, so, very strong underlying credit to our cash flows. When we think about underlying tenant demand and tenant health, we see that that continues very strong. In the greater Boston area, 97.6% occupied, and again, very strong demand. We believe that 100 Binney and Longwood will be fully spoken for here, pretty quickly.

On the San Francisco side, we're 100% occupied. We're continuing to see strong life science and demand from credit tenants, particularly, and also very strong tech demand, and we're proceeding on our build-to-suits at various stages for Uber, Pinterest and Stripe. As some of you know, Stripe was featured on 60 minutes on Sunday night.

In New York City, we're moving to 99%-plus occupancy; again, more demand there than we have space available.

San Diego, we've got some roll. We're about 94.5% occupied, but the Nautilus campus availability, about 77,000 square feet, I think will be fully spoken for here, pretty momentarily.

Seattle at 99.2% occupancy: again, strong, continuing demand from both the tech and life science sector. Maryland, 95.9% occupancy: solid demand, better than we've seen over the last decade, and at RTP we're 98.6% occupied: very strong demand and most of the remaining space will soon be spoken for.

On the development asset side, we're pleased to be realizing NAV at this stage of the cycle on our 2016 deliveries. We're 90% leased, 95% leased or negotiating, and as we've indicated in the sup, we expect $75 million to $80 million of incremental annual NOI at initial cash yields of, generally, 7% or north of that.

Our 2017 and 2018 deliveries were up to 72% leased, and 84% leased or under negotiation, and our estimated annual incremental NOI, about 120 to 130, and that's been increased due to the Vertex build-to-suit in San Diego. Again, initial cash yields averaging about 7%-plus.

With respect to the life science industry, a recent report by United Health Foundation concluded that an astonishing -- this number is truly astonishing, 72%, so, almost three-quarters of Americans have at least one of the five most impactful unhealthy behaviors. So, pay attention here. Smoking, physical inactivity, insufficient sleep, excessive drinking or obesity, and these combine to be the primary contributing -- among the primary contributing factors to extraordinary rise and continuing increase in healthcare costs.

Self-discipline and smart wellness and prevention could make huge in-roads in managing these healthcare costs. Also, innovative biopharmaceutical products, which change the face of disease, ease suffering, create happier and healthy lives and extend lives, clearly, are part of the answer here. And then, finally, before I turn it over to Dean, who's going to take a deep dive on the balance sheet, I'd like to remind everybody that buyer demand for our assets is strong, and we expect to continue to recycle assets to fund our first-in-class development pipeline.

I think you'll see continued announcements, probably in the June time factor, and Dean can highlight a little more about that. So, Dean Shigenaga.

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody.

Again, I've got three important topics to highlight today. First, consistent execution and strong results driven by solid fundamentals, continued asset recycling, and then lastly, our funding strategy and prudent management of our balance sheet.

Starting with our consistent execution quarter to quarter and year to year, really driven by our unique business strategy, solid fundamentals and our best-in-class team. As Joel had highlighted, fundamentals remain solid, both for our business and the life science industry. Rental rate growth was very strong, up 33.6% and 16.9% on a cash basis.

Tenants continue to evaluate early lease renewals, one to two years prior to their contractual lease expiration date. And as a reminder, we are operating in a very supply-constrained and strong rental rate environment. Same-property cash NOI growth continued its strong trend with cash NOI growth of 6.2%.

Key drivers include our triple-net lease structure and high quality tenant roster, which drives quality and stable cash flows, and contractual annual rent escalations approximating 3% per year drives consistent growth in cash flows. Occupancy was very solid at quarter end at 97.3%. Continuing into our ongoing asset recycling program, we have three key categories of funding for 2016, excluding debt funding from construction loans and the unsecured bond market.

At the midpoint of our guidance for 2016, we have approximately $630 million of capital needs, primarily for our accretive development pipeline, and this is beyond debt, including $350 million of real estate dispositions, $155 million for acquisitions, and $125 million of other capital and/or sales of equity investments. At a very high level, we've identified approximately one-quarter of the $630 million, primarily related to the announcement of our plans to monetize our real estate investments in Asia.

We also have identified another one-half of our $630-million target, and these sales are at various stages, including one key joint-venture deal that should be under LOI, shortly. Since these transactions are in process and have not reached the criteria for classification as held-for-sale, we have limited information we can share today, but do plan to provide detailed disclosures as appropriate in the future. This leaves us with about one-fourth to one-third of the $630 million to identify or solve for over the next couple of quarters.

So, we feel good about where we are in early 2016 with our funding outlook for the year. Turning to Asia, on April 22nd, the Company committed to the monetization of its investments in Asia over the next 12 months, and obtained approval from our Board of Directors to proceed accordingly. Our cash yields and our investments in India were reasonable, and generally in the 10% to 12% range.

However, we recognized impairment charges in March and April, aggregating $181.9 million, including consideration of foreign currency exchange losses of $49.8 million. We believe this highlights a unique situation of real estate generating solid yields, with high-quality, multi-national credit tenancy, the names of Novartis, Glaxo, and others. However, valuations today in these developing international markets do not appropriately value these attributes.

More importantly, we believe it's prudent to move forward with the recycling of this capital for investment into higher value Class-A developments in our key urban innovation clusters. Our estimate of proceeds from these sales is just north of $100 million, and we expect to complete these sales over the next 12 months, in up to seven to 10 different transactions.

As of today, we completed the sale of one land parcel, at a price of approximately $7.5 million. While we have no other binding sale agreements today, certain investments are under review by potential buyers. As we advance each transaction, we will provide appropriate detailed disclosures.

It's important to note that our detailed balance sheet and operating information disclosures on page 51 of our supplemental package, there you will find disclosures of our operating results that reflect our investments in Asia generated an FFO loss of approximately $53,000 for the first quarter of 2016. As a result, the sale of Asia is the equivalent of the sale of land, and will generate important capital for investment into our highly-leased development pipeline, with cash yields of approximately 7%.

So, moving on to our prudent management of our balance sheet, I just want to start with our at-the-market program, what we issued in the first quarter and our plans going forward. During the first quarter we raised about $25 million under our at-the-market offering program, and used the proceeds to improve our all-in balance sheet leverage, including preferred stock.

We repurchased, in open market transactions, approximately $23 million of par value of outstanding 7% Series D preferred stock. As of March 31st, we have about $214 million of Series D outstanding, down from the $250 million initially issued. Our repurchases to date have been executed at prices of less than $28 per share. We believe the use of a modest amount of equity capital to retire a portion of this 7% convertible preferred security in the first quarter was prudent.

While still attractive to retire additional Series D preferred stock at market pricing today, the price of Series D has been tracking the movement of our common, and lately has been trading just north of $30 per share. So, our decision to use equity raised at $88.44 per share in the first quarter to repurchase Series D at $24 -- excuse me, $27.49 per share, resulted in roughly 5% less common shares required, versus executing the repurchases of Series D today at a price at roughly $30 per share with our common stock today, trading in the low to mid-$90 range. Purchases to date over two quarters have been completed at prices roughly neutral to FFO per share, and positive to all-in leverage.

Our 2016 guidance assumes no further purchases of our 7% Series D convertible preferred. However, we will continue to look for opportunities to repurchase outstanding shares from time to time. Going forward, our strategy is to continue to focus on ongoing growth in FFO per share and net asset value, and remain disciplined in funding growth through our highly-leased development pipeline, with various sources of long-term capital.

Turning to leverage, our net debt to adjusted EBITDA was 7.4 times for the current quarter annualized, 7.2 times for the trailing 12, and was in line with our expectation. We are on track to improve net debt to adjusted EBITDA and hit our range of 6.5 times to 6.9 times by year end, and this is on a current-quarter annualized basis.

We are also focused on the improvement in our net-debt-plus preferred to adjusted EBITDA, as shown by our $23-million reduction in our 7% convertible Series C preferred stock, with proceeds from our ATM program. We also remain focused on the ongoing improvement in both of our investment grade credit rating and our long-term cost to capital.

Lastly, a few other highlights, we've had very limited debt maturities in 2018. We anticipate a $150-million to $200-million reduction in 2016, related to outstanding borrowings under our unsecured term loan, with a maturity date in 2019.

Additionally, we are in the process of extending the maturity date of our unsecured line of credit, from 2019 to 2021, reducing pricing by 10 basis points and further extending the weighted average remaining term of outstanding debt. We have significant liquidity, which we believe reduces risk and allows us to be patient and flexible with the timing of capital events. As of quarter end, we have about $2 billion of liquidity, including a $304-million secured construction loan that we closed in April of 2016.

This loan will provide significant funding for the construction of 100 Binney Street in Cambridge, anchored by Bristol-Meyers Squibb, again, a very high-quality global biopharma company. We executed additional interest rate swaps aggregating $500 million, and we continue the disciplined management of our value creation pipeline and are on track to further reduce our pipeline as a percentage of gross real estate toward the 10% range by the end of the year.

We also continue the disciplined allocation of capital into our value creation pipeline, averaging 90% leased for deliveries expected this year, 81% leased overall, including primarily deliveries in 2017, and one project that will be delivered in 2018.

In closing, with guidance, the detailed assumptions underlying our guidance for 2016 are included on page 6 of our supplemental package. Just want to remind everybody our unique business model focuses on Class A assets in Triple A locations, in urban innovation clusters, and continues to attract some of the most highly innovative and successful companies. Additionally, with our best-in-class team, we look forward to consistently executing and delivering growth in FFO per share and net asset value, quarter to quarter and year to year, while we also improve our credit profile and long-term cost to capital.

With that, I'll turn it back to Joel.

Okay. Thanks, Dean. And operator, you can open up the lines for Q&A, please.

Thank you very much. Ladies and gentlemen, at this time we will begin the question-and-answer session.

(Operator Instructions)

And our first question does come from the line of Emmanuel Korchman with Citi.

Good afternoon, everyone. Joel, maybe I'll turn this one to you. There have been concerns about some of the higher technology markets, mostly on the West Coast, but sort of around the country. What are you seeing from tenants, and maybe especially what you're seeing from their financial sponsors and how they're thinking about new space and expansions.

Are you talking about tech tenants?

For you guys both on the tech and life science side, if you would.

Well, I think on the life science side, we're seeing a continuation of what we've seen, certainly, over the last number of years, and that is both high quality credit tenants moving into the clusters, establishing bases and continuing to expand. Great examples are Bristol-Meyers at 100 Binney, bringing a big footprint into Cambridge, IBM Watson recently coming into our part of our 75125 Binney. I think there's no shortage on the life science side because of the nature and the DNA and the ecosystem.

They want to be in the best cluster locations, and I think it's clear that Cambridge, San Francisco itself, San Diego, Seattle, New York City, remain the top spots for those clustering. On the tech side, maybe I'll ask Steve to give some observations a bit in the Bay area.

Yes, hi, Manny, it's Steve. We do continue to see a healthy, if not historic, demand. We're tracking about 6 million square feet in the San Francisco market right now.

We've got six tenants looking for more than 100,000 square feet, 23 tenants looking for more than 50,000 square feet. You've got a vacancy rate in SoMa of 3.7%. You had a number of sublease transactions that reduced the sublease space to about 1.6 million in the market, which is right where we were at the beginning of 2015, with great tenants taking additional space and expanding. So, we see it healthy on both sides. Just to add to the life science, in particular, in the Bay area, you saw the recent announcement with Stemcentrix being purchased by AbbVie, in excess of $10 billion, and then a very public pursuit of Medivation, which is in our Mission Bay building in Illinois, by Sanofi, so very healthy capital markets on the life science side, for sure.

Dean, maybe one for you. When you think about sort of the volume of the ATM issuance and the pref paydown, what criteria do you put out there to figure out how much ATM to do, or how much pref to retire?

Manny, the challenge, I think, with Series D is it's a very institutionally-held security. There's probably a little bit of retail in there. But I think what I've shaken loose to date has been primarily retail, and the institutional ownership is probably fairly sticky.

And so as a result, I think most of the activity will be relatively small as we can unwind an institutional position. It's more dependent on that, Manny. When we saw pricing dip into the sub-$28 range, we felt it was prudent to try to tap some.

It's still attractive at today's pricing. We'll see where we end up over time, because I think we'd like to unwind a little bit as we go.

Great. Thanks everyone.

Thank you.

And our next question does come from the line of Kevin Tyler, with Green Street Advisors.

Good afternoon, guys. Joel, can you take us through the process a little bit, following on Manny's question, when you're deciding between tech and life science tenant, if both are interested in one of your spaces, do you find you get more of a network effect, perhaps, from the tech tenants today, given you have a higher concentration on the lab side?

Well, I think the answer to that, and maybe the Uber land at Mission Bay was a good example. I think we, for many years, believed that Mission Bay would become an intersection of life science and technology in that campus area, and certainly because of the synergies between the two, but it wasn't until Uber really intersected with us, did that really become a reality, and I think having done Uber really opened up the, I think, what we -- what our capabilities were as a Company, and the execution and skill and capabilities as we began to expand our Mission Bay into the SoMa area. So, I think, to me, that's a great example of that happening on the ground.

Okay. And if you were choosing like for like, though, at this point, would your preference still be for life sciences, or if you had similar terms maybe it's a difficult question to answer, but I guess if you had two high-quality tenants how do you think about one versus the other, life science versus tech?

A good example is that very issue at Mission Bay on those parcels. There was a multinational pharma that had -- that's actually a current client that had expressed substantial need for space. But its inability to take all of the space, totaling almost approximately 500,000 square feet and moving at a very rapid speed, really, I think hindered its ability to compete with an Uber. So, I don't think so much it's an either/or, except in unusual cases, but where it's happened, I think you have to look to where you can get the best execution. Obviously, you have the look at credit term, terms of deal and so forth. There's so many aspects, but I think that's a good case study comparison, because it actually happened in a life-science-dominated market at Mission Bay.

Okay. Thanks. And the, Dean, obviously in the market for construction financing, based on recent experience in Cambridge, it looked like the [L-plus-200] terms for the construction loan at Bay Street were a bit wider than deals in the recent past, but I was just curious if you're seeing the lending standards tighten up a bit.

I'd say we've seen very good reception to construction financing, given the quality of the real estate that we've been putting to the market for construction financing. I think the pricing on this transaction is more reflective of the nature of the relationship we were establishing with a new lender.

It's pretty typical down the fairway of what they focus in on. There was an important opportunity to tackle a very large financing opportunity. Typically, if we worked within our bank group, I think pricing would be closer to what we achieved previously in the L-plus-150 range.

But I think we also have to acknowledge the regulatory environment today is changing and putting some pressure on pricing with financing from banks, and I think construction loans fall into that category. So, I'm a little off on the market there. We were really focused on building a new relationship with a premier lender to help provide large project financing.

Okay. I appreciate the time, guys.

Thank you.

Our next question does come from the line of Dave Rodgers, with Robert W. Baird.

Maybe, Joel, I just want to start with you and you can farm it out if you want. Two questions on leasing in the quarter. I think you indicated in the supplement, four leases really impacted the spreads in the quarter.

I don't know if you can provide any details on that in terms of who or where, but that might be interesting. A second one on leasing in the quarter, did you contemplate going direct with Alphabet or was there something about that sublease that didn't make sense?

So, I'll maybe do the first one. I'll ask Steve to address the second. So, on the leases that drove our leasing stats, Cambridge and San Francisco were the most contributory, as I mentioned, and then Seattle and RTP also were contributory.

But I think Cambridge and San Francisco certainly won the day. With respect to the [Binney] sublease, Steve, you can give a bit of background.

Hi, Dave. It's Steve. They had toured the market. We were certainly involved in every step of the process and really acted in partnership with Amgen. But ultimately, from a transaction structure perspective, it made a lot more sense to stay in a sublease situation. So we've acted as a very proactive facilitator in the transaction, have a nice direct relationship, but from a transaction structure it just made sense to go the sublease route.

Great. Thanks for that. And then maybe on the 2017 expirations that now show up in the supplement, two bigger groupings of expirations for 2017, I guess in San Diego and in Cambridge.

I don't know if Tom wants to comment, or Joel, you can throw in there -- any big or large blocks of space coming up that we need to watch for. And a fairly low percentage so far of already negotiated or anticipated leases, so do we expect a lot more leasing activity to need to be done for those spaces as we go into 2017?

Tom, you could talk you about 400 Tech and 200 Tech Square.

Yes, so both 400 tech and 200 tech square, where we have some significant expirations, we're already very actively discussing pretty much all of what's scheduled to come available next year. In 200 Tech, it's pieces of the Novartis premises, and we're actually very close to buttoning up lease transactions that will take that space out of play. And then in 400 Tech Square, we have one particular tenant with a calendar 2017 expiration, who has an extension right, and they've asked for a couple more months to exercise their right, because they have a significant milestone to achieve or not. If they achieve it, they may need more space. If they don't achieve it, they'll stay in the space and extend. So, we're very comfortable, given the leasing activity in Cambridge, with near-zero vacancy rate that we'll have no difficulty at all re-leasing that space if the companies there choose to exit.

And Tom, do you want to comment on the other one, 215 First, we've got a roll of 36,000 with comp.

Yes, that one we are in negotiations with three or so different parties right now, in terms of who might fit best in that. It's very interesting and unique situation in Cambridge right now. We're in virtually every space becomes available there are multiple prospective tenants, and it's a matter of winnowing through the most suitable, and then trying to strike the transaction that's most appropriate for the landlord, in our view. So, I think we don't have any worries at all about getting that promptly re-leased.

One other subnote, Steve, in 1500 Owens.

Yes, and Dave, maybe to provide broader context at the outset here, we're seeing very active pipeline of early renewals. We've completed about 180,000 square feet of 2017 and 2018 renewals.

The one Joel referenced specifically, we are trading paper, so it's beyond just discussions. We expect that to have that completed the next quarter.

And we've got another 100,000 feet beyond that, where we're in active discussions for early renewals as well. So, pretty strong trend.

All right. Great. Thank you.

Thank you.

And our next question does come from the line of Jamie Feldman, with Bank of America Merrill Lynch.

Thank you. I guess just first question, housekeeping. When during the quarter did you guys raise the equity?

It was over time, Jamie. I don't -- it's relatively small.

It was over the course of the quarter?

Yes, pretty much.

Okay. And then can you -- looking at the investments on the balance sheet, it looks like the balance has come down since last quarter.

Is that a change in valuation or did you sell some? How do we think about the move?

A little bit of both. But, as you know, the valuation of biotech and life science, generally, has been moving around quite a bit. I would say that it did dip as of March 31st. It recovered about a month later, and it scaled back a tad. So, net-net there's been some decent movement, just from a valuation perspective, and it's purely the publicly-traded securities we're discussing. We did realize about $11 million of proceeds during the quarter, so we did tap some of the gains during the quarter. But the bulk of it had just to do with changes in stock price. I would say, as Steve had mentioned, there's healthy activity in the market, broadly, some of which includes our underlying investments. And I would guess that in the near term you'll see some large mark-to-markets coming into the public portfolio, soon.

So, if you look at page 52 of the sup, you get a snapshot of what we have publicly, and at the moment, our net unrealized gains are about 3X of our cost, and then out of the private side, as Steve mentioned, we had made an early investment in a company called Stemcentrix, which occupies East Jamie Court, and that return could be as high as 25X.

Okay. And then, as we think about your future development pipeline, any kind of early thoughts on when you might start, relatively soon?

Well, I think if you go to page of the sup, we've kind of expanded it, page 41, key future projects and we've tried to give a little bit of context with some renderings, etc. We don't have any plans at the moment, I think, as I said last quarter, to initiate any new developments.

We did, obviously, move Vertex to active, but at the moment, our pipeline is strong. It's full. It's highly leased. And we don't see any reason to start any new projects.

As you think ahead to next year and your growth prospects and the strength of your markets, do you think you would start as many projects in 2017 as you did in 2016?

If you come to Investor Day, I'll tell you.

Going to make me wait that long.

Of course.

Okay. And then you made some pretty positive comments that 100 Binney, Nautilus campus, pretty well committed. Can you just give some more color there?

I think in Nautilus, Dan, you could give a little color on what's the activity there, it's been very strong.

Jamie, it's Dan. Yes, we've been really pleased. We just signed a letter of intent with a major Japanese firm to take roughly 30,000 square feet of our 3565 building. So, that will only leave about 10,000 square feet there, and we executed a letter of intent on Friday with an existing tenant to expand and take the 25,000 square feet of availability there. So, we'll be 100% here in the next 30 days or so.

And Tom, maybe comment on activity on 100 Binney, which seems to be, these days, pretty extraordinary actually.

We're down to the short strokes on approximately 110,000 square foot lease, with a public biotech company that's in the Cambridge market currently, and has a lease expiration that they need to deal with. So, that's moving toward completion. And then we have, on the balance of the space, which is about 110,000 square feet, or 2 1/2 floors, we're starting to see more and more activity, even though the space is not going to be deliverable for -- until early, or occupiable until early calendar 2018. And that's -- it's interesting that we're seeing 30,000- and 40,000-square-foot requirements nearly two years out from occupancy date, requesting proposals from us. So, as I mentioned earlier, we're kind of sorting through and trying to figure out the best prospects to engage with, and that will play out over the next several months.

I would also put a footnote on that. Bristol-Meyers has half the building. The other half is still uncommitted in various stages of discussions, etc.

But we've been told that we will have, likely, two credit tenant RFPs for as much space as we can provide them. So, there's no shortage of demand in the market for that building. And there's no competitive first-in-class project coming to fruition at the moment.

Okay. All right. Thank you.

And our next question does come from the line of Sheila McGrath with Evercore.

Yes. Joel, I was wondering if you could give us an idea of how the rents at 75, 125 Binney compare to 100 Binney now, a couple years later, and how the construction costs have moved; how the rents look then and now, and then construction.

So, I'm going to maybe give an opening, then I'll ask Tom to talk about it. But I think it's fair to say we did reach a high-water mark when we signed ARIAD back a couple of years ago, and I think today we'll be reaching a new high-water mark with 100 Binney. But I'll let Tom discuss kind of the comparison of both, and some of the construction-cost situations.

Yes, I think, Sheila, the rents have moved. I don't have the figure directly in front of me, but about $10 a square foot on a GAAP basis, so the average rent over the term from when we struck a deal with ARIAD to where we are right now. I would say that we have offered -- been able to offer somewhat less dollars in TI allowance for the -- in connection with that increased rent. So, if you adjust it for TI dollar commitment, it's an even better move up.

In terms of the cost, I think some people have -- I saw some comment related to the expense, particularly 100 Binney, and one thing to recognize there is in the Bristol-Meyers situation where we have a landlord build, we do have to carry the cost of the tenant's investment over and above the TI allowance as part of the basis in the property.

So, I think you see a high number there because of that, more than anything else. So, though construction costs have been increasing, I would say they certainly have not increased faster than rents have.

Okay. And then just on 75, 125 Binney, there was some talk in the market that ARIAD was going to put more sublease space back to market. Is there any update there?

We have heard various things. They are building out nearly -- I'd say over 75% of the space that they are leasing and are nearing completion with that buildout, leaving about 25% of their direct space; and this is exclusive of the IBM Watson space, so this is about 215,000 square feet that they have not subleased.

They've been building out that space. The current information we have from them is that they intend to occupy, but they are -- we know that they are entertaining some discussion with subtenant prospects, particularly on the non-built-out portion of the space.

Okay. One last quick one. Any thoughts on 1 Kendall Square? I think that was hitting the market for sale, if there's any update there, and if you had any interest in the property.

We've seen the flier, and that's all we've seen. So, we don't know much more than that at the moment.

Okay. Thank you.

Thanks, Sheila.

(Operator Instructions)

And our next question does come from the line of Rich Anderson with Mizuho Securities.

Thanks. Good afternoon.

Just a quick one on San Diego. Has there been any additional thought about looking downtown, or is there a need to first kind of firm up the role and points north, before you would consider that type of move?

So, maybe I'll open that and then ask Dan to comment. I think we see that there is still a lot to do, as you can tell by our activity up in Torrey Pines and University Town Center, the Illumina campus, the Campus Pointe campus; so, we have our hands pretty well occupied with a lot of moving parts and trying to capture as much of the quality demand in that market as we see.

I think we've certainly paid attention to what's going on downtown, but I don't think that it is necessarily as ready for prime time as some of the other locations, if you look at the Mission District in San Francisco, or some of the early activities. I don't think you see them at the same level, but Dan, you can comment on the ground.

Hi, Rich. Yes, I think Joel had -- summarized that pretty well. We have been looking around down there quite a bit. I email Joel every other week with a new idea, most of which I get a no. But we think that long-term, there's probably a natural extension for what we're doing. But it's probably midterm out four or five years before we probably pull the trigger on something like that.

Can you comment on the stuff that -- where he says yes?

I've never said yes.

Mostly I just get the no back, saying will you lease the Lilly space and quit bothering me. (Laughter)

And then a bigger-picture question, talking about not adding to the development effort at this point, with kind of a lot to choose from later on. What is your comfort level in the next three or four years of the development pipeline, as a percentage of your total assets?

I think as Dean mentioned, our target has been, and this is also for our desire to upgrade to -- get upgraded to a triple-B-plus rating, is somewhere in the 10% to 15% range, and I think, Dean, on your end our target is --

We're hoping to be closer to that 10% number by the end of this year.

I'm sorry if that was mentioned earlier. I apologize.

No problem.

Thank you very much.

Thanks, Rich.

And our next question is a follow-up question from the line of Emmanuel Korchman, with Citi.

It's Michael Bilerman. Joel, the Company's efforts to go global clearly didn't pan out, I think, the way you sort of envisioned many years ago. Is there sort of any circumstances or any scenarios that you could foresee yourself trying to do it again, or has this sort of experience now sort of made you completely focus on the US?

Thanks, Michael. I think that, that's true. I think the US market has come a long way in the decade since we started in Asia and Europe, back in kind of the 2005, 2006 range.

I think there was a feeling that India and China would hold half the world's population, and could be really great markets. I think some day they will be, but they're still, I think too early for prime time, and you can tell, as Dean mentioned, we have almost $50 million in currency losses. I mean, I think it's hard for companies in the real estate sector to focus heavily on overseas operations.

I think that given our footprint, given our -- I think our high-quality, really amazing campus locations and tenants, there's no reason now to think about overseas, whether it be Europe or Asia. But if you go back pre-crash, those were pretty interesting markets, and I think the markets here in the United States were still in the process of evolving. But they've come an awfully long way in that decade.

So, what would need to change, either internationally or in the US, for you to -- I mean, look, there's currencies, there's political, there's so many other risks out there in going global, let alone just the time and the effort, of your time and effort and your team's time and effort, in making it happen. So, I guess could you envision a scenario where we could be talking about doing this again, or is it just completely off the table?

Yes, I think it's completely off the table. I think that over the next medium to longer term we'd look at newer markets in the United States, because there are markets here that are interesting. But again, maybe not ready for prime time.

Think about New York, where we won the RFP back in 2005, and here we sit a decade later with a campus. But these efforts are, literally, a decade-long effort and we've worked hard, not only things you guys see in the supplement, but an amazing amount of work at the cluster level, to really bring those clusters along.

So, I think there's no way that I could see, foresee, going overseas again. I think it would be expansion in the United States.

Right. And then just, I don't know if you have it handy, but outside of the impairment charges that were taken this quarter, do you sort of have total US dollars invested internationally, whether it was China, India, Scotland, Canada, and any other R&D markets, sort of the total expensed dollars that you invested? And ultimately, what you expect US-dollar-wise to get back, just to get at the financial sort of go-around?

Well, I think in Scotland we acquired options on land that we were able to exit that land and recoup our investment, and I think, make some money from that. In Toronto, we obviously were involved in the MARS project early on and restructured that, and we reported our exit from there and what happened. I think those two have been fully disclosed.

We haven't really done anything else outside of China and India. And I think China and India are pretty well documented in the supplement. There's nothing else out there that I'm aware of.

Great. Thank you.

At this time, there are no further questions in the queue. I would like to turn the call back over to Management for any closing comments.

Okay. Well, thank you very much. We closed early and we appreciate your time in a busy earnings season.

We'll talk to you for the second quarter. Thanks, everybody.

Thank you very much. Ladies and gentlemen, that will conclude the conference for today.

We do thank you for your participation. You may now disconnect your lines at this time.