Alexandria Real Estate Equities Inc (ARE) 2017 Q1 法說會逐字稿

Good afternoon, and welcome to the Alexandria Real Estate Equities Incorporated First Quarter 2017 Financial and Operating Results Conference Call. (Operator Instructions) Please note, this event 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 Alexandria's first quarter earnings call. And with me today are Dean Shigenaga, Steve Richardson, Peter Moglia, Tom Andrews, and Dan Ryan.

So to open, I'd like to congratulate the entire Alexandria team for a truly superlative first quarter. This month of May is Alexandria's 20th anniversary celebrating its May 1997 IPO listing on the New York Stock Exchange, and what better way to celebrate than a great first quarter and also, Alexandria's inclusion into the prestigious S&P 500.

We recently mailed our 2016 annual report to shareholders and I'm proud to read the quote on the cover which defines Alexandria in which we're both proud and grateful. Alexandria has achieved the 3 outputs that define a great company: superior results, distinctive impact and lasting endurance - Jim Collins, renowned author and business strategist.

In our shareholder's letter, we highlight our very bold strategic decisions in 2004, '05 and '06 to pursue the urban campus cluster strategy in Mission Bay, Cambridge and New York City, and that strategy and setup decisions over a decade ago pre-staged today's megatrend of urbanization, leading to the fostering of innovation and collaboration, and certainly has resulted in superior results and strong total returns for Alexandria shareholders.

In fact, General Electric CEO, Jeff Immelt, said recently that he changed out his suburban office in Connecticut where he saw deer for an urban office campus in Boston where he sees engineers, techies, kids with big ideas and sharp minds out to change the world, and that does describe it.

I want to highlight a quick first quarter snapshot and Dean will take a bit of a deep dive. As you know, FFO beat the street by about $0.03. We raised guidance $0.02 at the midpoint and as Dean will highlight, releasing spreads up, early renewals and same-store growth were really very positive.

Strong internal metrics, positive cash, same store property growth, great releasing spreads and 1.3 million square feet of leasing. Strong external growth was also a hallmark of the first quarter, with continuing lease development deliveries and very improved balance sheet metrics.

With respect to demand, I'd say very solid continuing demand both for life science and technology, companies which really intersect in our core urban campus cluster markets. One of Alexandria's biggest challenges today is we simply don't have enough space to handle our own tenant demand as well as other nontenant demand.

On the supply side, we continue to see continuing constrained supply in each of our core urban cluster markets. Leasing, as you see from the press release and the sup, 1.3 million square feet this quarter, cash up about 17.8% on the back of really the Novartis, Genentech Roche and the Vir Biotech leases. And in fact, we do have a tenant ready to take all of Lilly's vacated space in San Diego, and we're working through that negotiation right now.

We're active on the acquisition front. And as I stated at the front end, we have more demand today than we have space available. So we're active in Cambridge, Mission Bay, SoMa, Greater Stanford, San Diego and the Research Triangle Park.

We're really focused on unique and valuable locations where we can scale. We remain highly disciplined in our location selection and in our assumptions so as to provide economically advantageous projects.

On the development side, one of the best and most highly leased pipelines in the industry. We have, fortunately, and will continue to be highly disciplined in all aspects of our development with respect to managing project costs, managing project underwriting, tenant underwriting, timeliness, leasing and yields.

On the 100 Binney leasing front, I'm pleased to say we have 4 signed letters of intent which cover all of the remaining space, except about 22,000 square feet. And although executed LOIs are not signed leases, we have a very high confidence level these will all get done. And by the way, we do have backup.

I want to highlight a few other developments quickly. 399 Binney which was acquired at -- when we acquired One Kendall Square, we're working on this in preconstruction and already seeing really good demand.

In Research Triangle Park, we acquired a redevelopment asset that we are redeveloping and have solid demand for both the labs there and the greenhouses.

And at 279 East Grand, we're working through preconstruction issues and negotiating with several users as well. So the prospects for future pipeline look pretty positive.

On the health of our life science and tech tenant base, these tenants are strong and well-capitalized, with very strong continuing R&D funding. And on the life science side, as we've said before, about $150 billion globally, $39 billion added to that from the U.S. government, another $30 billion from U.S. philanthropy and another $11 billion on the venture side. This is, in past year and this year, we expect it to be at or above those levels.

The NIH was fortunate to get a $2 billion funding boost over the next 5 months under the bipartisan spending deal that was reached Saturday night in Congress and a plus for the policy of strong government support for biomedical research.

We have a very strong continuing tenant base, 51% of our AVR is investment grade, 78% of our top 20 tenants is investment-grade and 79% of our AVR is from Class A properties and AAA locations.

And finally, before I turn it over to Dean, so far, 2017 has seen a fast start for FDA approvals, with 19 new drug approvals to date, 5 of which were approved in the past week, and Alexandria has 7 tenants, about 37% of those approvals. So we're looking at, I think, a very positive backdrop to our operations.

So let me turn it over to Dean for some deep dives.

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. As Joel mentioned, we are off to great start in 2017 and have increased our guidance for FFO per share for '17 by $0.02 to $6.02 at the midpoint, really due to continued strong rental rate growth on recently executed early lease renewals.

We are now on track to deliver 9.3% growth in FFO per share in 2017 and 36.7% growth in FFO per share over the 4 years ending December 31, 2017.

There are 4 important topics I will cover today. First, continued solid market fundamentals; second, continued solid internal growth; third, strong and disciplined external growth, including very important comments about the potential significant understatement of net asset value; and fourth, continued discipline of allocation of capital and management of our balance sheet.

Market fundamentals remain strong in our urban innovation cluster markets. Demand remains strong and supply of existing Class A space remains very limited. We are in a unique position with a highly experienced and regarded team with strong relationships that position us well to be the preferred partner to provide collaborative campuses and urban innovation clusters.

We continue to execute and deliver solid internal growth, also known as our same property net operating income growth. Cash same property net operating income growth was very solid at 5.5% for the first quarter. Leasing activities for the quarter was also very strong at 1.3 million rentable square feet. Early lease renewals are generally unpredictable from a timing perspective since these opportunities are dependent on decisions by our tenants. However, executed early lease renewals represented approximately 65% of our leasing activity for the quarter.

Importantly, our team captured rental rate growth of about 28% and 18% on a cash basis on total leasing activity this quarter.

In reviewing various sell-side models for the quarter, we noted that most models did not capture the near-term impact of significant rental rate growth on leasing activity. The most models, as many of us are aware, we build off the prior quarter NOI and adjust for acquisitions, dispositions and development and redevelopment projects and add a growth rate for typical same property NOI growth.

Our rental rate growth on several recently executed lease renewals and releasing the space grew significant and immediate growth in revenue, net operating income and FFO per share, resulting in our $0.02 increase in our midpoint of guidance for 2017 FFO per share.

60% of this increase was driven by executed leases with strong rental rate growth, and 40% was attributable to a slight average occupancy pick up throughout 2017 as compared to our prior guidance.

EBITDA margins are very strong and they have improved in recent quarters to 67%. TIs and leasing commissions included in our disclosures of nonrevenue enhancing capital expenditures for the quarter were $18.4 million, up about $6.7 million. $4.5 million of this increase was driven by leasing commissions on the recently executed 10-year lease extension on 303,000 rentable square feet with Novartis located in Cambridge.

As anticipated, our occupancy declined slightly in the quarter to a solid occupancy of 95.5%. The primary driver of this slight decline in occupancy was due to the expansion of Eli Lilly from 125,000 rentable square feet to 305,000 rentable square feet at our recently completed Class A redevelopment project at 10290 Campus Point Drive. Lilly vacated 125,000 square feet at 10300 Campus Point and we, as Joel had mentioned, are in negotiations with a tenant for most of this space.

As we look forward over the next 2 quarters, we expect occupancy to improve into the 96% range and closer to where we began the year.

We are in a very unique position to provide inspiring real estate solutions to drive collaboration and innovation for some of the top biopharma entities, focused on making life better for people throughout the world.

Over the past 4 quarters, we have completed 10 new Class A properties and we have another 7 new Class A properties that we expect to complete in 2017.

The deliveries in 2017 alone are projected to generate another $100 million of incremental net operating income. Additionally, these deliveries are weighted toward the back end of 2017 and will drive significant net operating income growth in 2018.

In order to maintain high-quality engineering and asset management services among other services, G&A expenses have grown with the growth in new Class A properties and cash flows. And it's important to highlight that G&A expenses has improved slightly in recent quarters to approximately 0.6% of total assets.

We are also in a very unique position in these well-located land parcels to decide, if appropriate, to address the demand from high-quality and innovative entities with ground up develop of new Class A properties.

This quarter, our supplemental package includes a new disclosure on Page 38 of certain development and redevelopment projects, aggregating 1.5 million rentable square feet that are undergoing marketing and pre-construction with potential delivery dates in 2018 and 2019. The project start date and initial occupancy date for each project is subject to leasing and/or market conditions. These potential developments and one redevelopment are, on average, targeting about a 7% cash yield. We also added a new disclosure on Page 39 for other potential near-term projects, aggregating another 2 million square feet that could also address demand in the market with potential delivery in 2019, 2020 and beyond.

Let me provide very important comments on the potential understatement of net asset value as of March 31, 2017.

Most NAV models start with GAAP net operating income and back out straight-line rent to derive cash net operating income. And then most NAV models divide this cash NOI amount by market capitalization rate to determine the value of the operating portion of our asset base.

As of March 31, 2017, our recently completed development and redevelopment projects have approximately $95 million of annual free rent that will result in significant understatement in most NAV models.

At a reasonable market capitalization rate on this $95 million of rent concessions, NAV models could be understated by $20 to $25 per share. Importantly, approximately $40 million of annual cash rents commenced on April 1, 2017, and this is primarily related to 75 | 125 Binney Street and 50 and 60 Binney Street. So we encourage investors to carefully review NAV estimates for important valuation considerations.

I would like to congratulate Steve Richardson, our COO, and our San Francisco team for their outstanding relationships and reputation in the market which ultimately developed into an opportunity to work in partnership with the Golden State Warriors and Uber. We recently entered into an agreement to purchase a 10% interest in a joint venture with Golden State Warriors and Uber and expect to close this JV in 2018.

This joint venture would develop 2 high-quality office buildings and will lease the buildings to Uber. Alexandria will manage the development of these buildings and also earn a development fee.

Our balance sheet and credit metrics are very strong today and provide us significant flexibility. Importantly, we continue to focus on improvement in our credit profile and long-term cost of capital.

By the end of this year, we are forecasting the following strong metrics: leverage in the range of 5.3x to 5.8x, both on a net debt to adjusted EBITDA and a net debt plus preferred to adjusted EBITDA basis; liquidity of $2.2 billion today, combined with low balance sheet leverage really provides significant flexibility to be disciplined and patient with capital market activity; our fixed charge coverage ratio is greater than 4x; our development pipeline is approximately 10% or will be approximately 10% by the end of the year, and this includes projects under vertical construction as well as future projects that provide us optionality to address the demand from some of the most innovative entities; we have no debt maturities in 2017, very limited maturities in '18 and a very manageable set of maturities in the few years thereafter; and we have very limited unhedged variable rate debt at about 5% of total debt today.

Our strategy for funding growth has been consistent and consistently executed year to year. We will continue to focus on investing significant cash flows from operations after dividends, fund a significant component of construction with long-term fixed rate debt on a leverage-neutral basis with significant growth in EBITDA, continue to seek opportunities to reinvest capital from selected real estate sales and remain disciplined with use of common equity.

Our goal is to combine our disciplined management of our development pipeline with a strong and flexible balance sheet and continue to remain disciplined in funding our business in a manner that allows us to drive solid growth and per-share earnings, net asset value and growth in common stock dividends per share.

Closing the guidance here, we provided an updated guidance for 2017 and is fully detailed on Page 6 of our supplemental package. Again, our 2017 guidance for FFO per share at the midpoint was increased $0.02 to $6.02, again driven by strong rental rate growth and recently executed early lease renewals.

We remain in a very unique position within the REIT sector today, with solid market fundamentals, solid life science fundamentals and exciting innovation focused on improvement in the quality of life. We were also well positioned with long-tenured and a highly regarded senior and executive leadership, combined with a unique science and technology team that allows us to be an important partner to some of the world's most innovative entities.

Thank you, and I'll turn it back to Joel.

Operator, if we could go to Q&A, please?

(Operator Instructions) And our first question today comes from Emmanuel Korchman with Citigroup Global Markets Inc.

That was very formal. Joe, you talked about earlier, the lack of space within your developments for both new and existing tenants. Was just wondering how that impacts the way you think about doing new development. Does it make you a little bit more aggressive on whether it be timing or lease up or location of properties to help take advantage of this equilibrium between demand and supply?

No. I think if you go back to my prepared remarks, I think what I said was we would continue to be, I think "highly disciplined in all aspect of the development with respect to cost underwriting, timelines leasing, yields." And so I don't think anything has changed but it is frustrating in some cases where we're unable to handle requirements for especially, tenants who have certain needs. But we're doing the best we can to overcome that, but I don't think it will change our philosophy or the way we're doing things.

And then Dean, on the Warrior, Uber venture, what type of role do you think Alexandria will play? And what does sort of a 10% seat at the table get you there?

Manny, it's Steve Richardson. Yes, we're playing a very active role in the project management oversight of the vertical construction of the 2 office facilities. Neither of the entities have development experience so they're relying on us primarily to execute on that. We're thrilled to be right in the middle of that partnership, right in the heart of Mission Bay. We think it's a fantastic attribute and amenity overall and kind of a unique, one-of-a-kind destination. So we're very excited about it.

Steve has visions of holding up the NBA championship.

Are there any development or other feeds that come your way because you're sort of taking that role in the project?

Yes, yes, Manny. No, it's a formal development management agreement, and we're busy. The team's done a fantastic job and we certainly do have development management fees there, yes.

Our next question comes from Sheila McGrath with Evercore.

Joel, in New York, you're about 98% leased, so essentially full. I was just wondering when you think about moving forward on the option parcel, where does that stand? And are there any other opportunities in the New York market for Alexandria?

Yes, Sheila, the option parcel, we are having in-depth discussions on that, both with the city and with potential users. We do have demand internally but that's, I would say, an elongated process because of the nature of negotiating, the nature of site due diligence and then ultimately, constructing the tower. So we are looking forward to moving that forward but I think over the shorter or medium-term, we're certainly looking at opportunities in New York City to accommodate the tenant base there. So I think, over time, you'll see us do some things in the city for sure other than at the Alexandria Center.

Okay, and then on 100 Binney, that's good news with the 4 LOIs. Just wondering if these are life science tenants or tech tenants.

3 of the 4 are life science.

And then, Dean, can you just remind us on the forward equity commitment, how those additional shares ramp in the balance of the year?

Sure, Sheila. It's Dean here. So the forward, it was about 6.9 million shares, if I recall correctly, 2.1 million taken down at closing. So call it roughly 1/3 at closing, 2/3 on a forward basis. And the concept of it was really to match our funding needs. So we had a number of transactions that closed in the first quarter that was required for the immediate funding. Second quarter consisted of closing one of the acquisitions. The second partial installment on the Uber payment for -- unwinding the joint venture and then capital required for the retirement of our Series E preferred stock. So when we originally put the forward in place, our outlook was to bring some of it in quarter-to-quarter to match our funding needs.

And our next question comes from James Feldman with Bank of America Merrill Lynch.

Can you -- you had mentioned, it looks like 6 projects potentially delivering in '18 or '19 or beyond of future starts. Can you maybe handicap or maybe just give us more color on discussions for those and are there any that you would start spec at this point?

Well, I think I mentioned 3 that were pretty active in marketing and pre-construction which is 399 Binney which, assuming we turn the 4 LOIs into actual leases at 100 Binney, that would leave virtually no space available there. So 399 Binney becomes important, we do have 110 in particular but several tenants looking at some or all of that space. So we're certainly looking hard at that and working on everything we need to do to go vertical on that when we're ready. We did close an acquisition in Research Triangle Park and we're redeveloping that as we speak and there is existing demand that we're trying to meet. And then the 279 Grand, as we said, we have several users we're negotiating with and we're moving that forward in preconstruction and marketing before we go vertical. We'll make decisions based on how we think the market is and where we think our leasing is.

Okay, and then I guess, just sticking with San Francisco. Maybe just talk about your appetite to take additional development risk outside of Mission Bay and markets obviously filling up -- fill that pretty quickly. Just in terms of moving life science around that market, where do you think the best odds are right now for the spillover?

Jamie, it's Steve Richardson. Yes, I mean, as we look at Mission Bay all the way down to Stanford, you've got a vacancy rate probably in the 2% range. Demand has actually picked up year-over-year, and we're tracking 2.8 million square feet now versus 2.2 million square feet. And it is distributed in Mission Bay, South San Francisco and the greater Stanford cluster. I think you did see in the disclosure, the acquisition of a property in that greater Stanford cluster. So we're working hard to make sure we've got adequate supply to meet the demand that is in the market today.

And then finally, Joel, you mentioned the budget and life science funding. Anything else we should be watching in the pipeline here in terms of budget discussions or any other bills or funding opportunities that might be out there that might help or hurt the business?

Well, I think that the R&D side of the business is humming along I think it is strong. It's stayed strong year-to-year from both pharma and bio. The NIH, as you know, will have this additional $2 billion. The FDA has some incremental additional. They actually need probably more but they've done a great job of approvals this year with 19 to date which is almost a record. And I think we'll just wait to see how the broader healthcare issues that's had. It's kind of interesting because if you think about healthcare in general, the one thing that's not talked about that could actually help save significant cost is tort reform and that adds a gigantic amounts of cost to health care because as you know, the medicines only are about a 10% to 15% part of that budget whereas doctors, hospitals and all the other services and products really make up the bulk of the 85% to 90%. And if we were able to achieve tort reform, that would be, I think, a huge, huge benefit to the healthcare system on a cost basis.

Our next question comes from Michael Carroll with RBC Capital Markets.

Joel, can you talk a little bit about the land sites that you purchased this quarter? What's your current thought on banking land? And what's your time line we should think about these projects maybe having groundbreaking?

Well, I think the fact that we have a record number of highly leased pipeline deliveries, Dean has updated every quarter, a pretty robust schedule of deliveries. Page 3 of the press release and sup obviously show the first quarter at 0.3 million square feet. And second through the fourth quarter, at well over 1 million square feet. It's pretty clear that the current pretty intense development, highly leased development we're getting toward the end of those deliveries and over the next year or so. And so we're looking at opportunities to continue to expand to meet that need. And I think that's what you see in the acquisitions, both the expansion of our campus at One Kendall Square, as Steve has reported, the SoMa acquisition, this joint venture that Dean and Steve talked about with the Warriors and Uber, the Greater Stanford acquisition and a number of pieces of puzzles in San Diego and a redevelopment at Research Triangle Park. So we're trying to be thoughtful. We certainly want to maintain a prudent amount of nonincome-producing assets on the balance sheet so that we maintain a strong and flexible balance sheet. I think we're at a great point, as Dean shared with you. So I think you'll continue to see us just try to be, as I've said a couple of times, super disciplined here.

Okay, great. And then what other types of opportunities that you're tracking out there I guess, in purchasing land sites? Should we expect more purchases throughout this year and possibly next year? Or is this kind of like a onetime thing?

I think so much depends on, I mean, if I go back to 2004, 2005, when we bought 3 million square feet from Catellus, it's not like we wanted to buy it all at once but it became available and it was take it all or nothing. I don't think we'll have that situation again but you never know. One Kendall Square, it's not land but there was a land site there, we didn't see it coming to market when we started 2016. So you just never know when sellers may decide or owners may decide to achieve liquidity. It's so hard to tell.

Next question comes from Dave Rodgers with Robert W. Baird & Co.

Maybe talk a little bit about your comfort level today, just given the demand that you've seen for starting more projects on spec. And to the extent that you would do that, how would you think of that in the context of capital at risk or the balance sheet? And is there any change in kind of the tenant mix that you're seeing, the smaller, larger tenants, full build-to-suits or just smaller users that would make you want to go that route or avoid that route at this point?

Well, I think both in the prepared remarks and in the answer to a previous question, I think we've said we're pretty focused on maintaining the discipline and the underwriting that we've maintained, whether it be costs, underwriting tenants, adhering to timelines, leasing, yields, et cetera, maintaining our balance sheet in as good a shape as it is today. So I think it really is a 1-by-1 decision and I think we'll continue to be vigilant, disciplined and really careful. But I think the good news is we are delivering really, a massive amount of highly leased development through this year with substantial NOI, as Dean said, approaching about $100 million. So I think that makes a huge difference. So I don't think you'll see us do anything that we haven't kind of -- you haven't -- that we've been doing over the last few years.

Sure, okay. And then Dean, your comment about $95 million of annualized free rent, that was as of the first quarter and then $40 million of that starts to go away April 1. What's the remainder of the roll off this year and early next, if that's correct?

I think the one other large number is probably the Uber ground lease that I commented on last quarter. I believe that's October and November, roughly $11 million of cash NOI that will commence at that point in time. I think the rest are just a number of projects. But as we go through, I think you'll see the next, call it, 2Q and really, 2Q being the biggest burn off of free rent i.e. the biggest step in cash rents. And then 3Q earns a little bit more of a bump but it's relatively modest. I think it's really just important to say, at the end of March 31, that was the free rent from the deliveries. And again on April 1, $40 million of annual cash rents will commence. It commenced and all we ask is that everybody carefully look at their NAV models to be sure we're not losing valuation there because this is all real, contractual and it has been delivered. So...

So Dave, following up on your question. One, a way to think about -- another way to think about your question is 213 Grand which we put into the development pipeline, we really haven't planned to do it. But when Merck decided to open a West Coast research headquarters, it became pretty clear this was an ideal fit. And so that's a good example of where we took a fallow land site in a market that's come back nicely to meet the need of a long-time tenant and relationship. And so at 399 Binney which is the land parcel at One Kendall, we have quite a number of companies. In fact, I had a long conversation with one CEO on Friday in Cambridge, literally like begging us to have space. They wanted 100 Binney but they can't, so they're likely to go to 399 Binney. So those are the kinds of things that would move us to go forward with vertical construction. Same thing at 279 East Grand, we've got a number of pretty hot users that are in deep discussions with us. And if one of those matures, we would likely push that forward. But again, we're trying to be very careful about managing all aspects of meeting that demand but against the backdrop of maintaining a great balance sheet position as well.

I think that makes a lot of sense. And maybe lastly for me, you've done a good job addressing some of your recent rolls in the portfolio, your tenant rollover. Anything that we're watching kind of now through the middle of '18 that's coming up?

Dave, it's Steve Richardson. In '18, it's pretty well distributed. We've only got 4 projects in excess of 50,000 square feet. The largest one is in South San Francisco. That market has rebounded nicely. We're actually engaging the tenant today in discussions and that's the latter half of '18. So '17 looks like it's in very good shape. And as we start looking into '18, I think we're pleased with the way those are distributed and probably a solid 2/3 or more are in kind of the core clusters as well.

Our next question comes from Rich Anderson with Mizuho Securities.

Dean, I didn't fully get the timing of the settlement of the forward. Did you say ratably over the course of this year? And maybe asked differently, what is your guidance assume in terms of fully diluted share count for 2017?

Yes, ratably over the 3 quarters that we took down the immediate close Q1 and then the plan is Q2 and Q3. As far as total shares outstanding, I don't have it in front of me but you can just roll that forward...

I think that answers my question, yes. A question on the Golden State Warrior joint venture and Uber to be the lessee. I think what is to stop Uber from kind of going down or wanting to go down an over design path like they did at 1455? That's not maybe correctly how I'm describing it, but it resulted in you nevertheless to sort of restructure that arrangement. Is there anything embedded into this joint venture that will preclude that from having to happen again?

Rich, it's Steve Richardson. Yes, we are under construction on that site so the design is locked in. They are working on the interiors but from an exterior perspective, fully improved, fully entitled, no changes to the exterior design. And actually, ground has been broken and under construction.

Okay, fair enough, great. Another quick one for Dean and maybe I should know this, but I don't, so when is the timing of that installment, that $56 million for the -- related to the Uber JV purchase?

Well, it's somewhat contingent on construction milestones. If I had to guess, over the next call it, 6 months to 8 months, I would suspect it would be spread over evenly over that timeframe. But it is contingent so if they don't hit the milestones we set out in the payment plan -- but if I had to guess, Rich, I think it would be paid this year. But I think it works to our advantage if we don't pay them, if they end up being deferred. It's just hard from a modeling perspective for you guys.

Okay, last question and kind of bigger picture. Acknowledging that the cash same store number is the more important one at midpoint of 6.5%, still the GAAP number lags that pretty substantially and that your GAAP lease role is spectacular still. I'm curious what are the dots that connect that difference. And when do you start to see the GAAP same store number actually catch up and maybe even surpass the cash number from a total same-store NOI growth perspective?

I think the simplest way to think of it is long term, call it over a 10-year average, our portfolio has generated about a 5% cash same property net operating income growth. And that's not unusual based on what we've been doing lately. I think what may surprise most is that the GAAP 10-year average is closer to 2%. And I think that has more to do with the high and stable occupancy that we operate at, slightly over 95% for 10 years. And that drives a very consistent same property pool and it leaves you with only leasing activity to mark-to-market. And the GAAP numbers, we do get significant growth but you're only drawing 10% of that at best in any given year into the portfolio. So it's -- the cash increases are contractual and so you've got much stronger cash same property performance over the long haul. I think when you see occupancy declines or volatility, I should say, in traditional sectors, you tend to see much stronger GAAP performance because they're losing tremendous GAAP NOI just from occupancy and then they rebound on the upside when occupancy is growing. You can gain same property performance faster on occupancy than you can get on annual steps, right?

What's your average escalator?

We're really close to 3% contractually today.

And that's a set escalator, not a CPI escalator?

Yes, yes, most of them are fixed steps. Most of the escalators are fixed contractually.

And we have our next question from Tom Catherwood with BTIG, LLC.

Steve, just you partially addressed this in a previous answer but I wanted to drill down a bit. Last quarter, you referenced 2.4 million square feet of lab demand that you're tracking in San Francisco, about 2.9 million square feet of tech demand and then another 4.5 million square feet in the peninsula. How does that kind of track today?

Tom, it's Steve. Again, the markets are healthy across the board from Mission Bay down to the Greater Stanford clusters, partially seeing an uptick in activity. We're tracking 2.8 million square feet of lab demand today. A year ago, it was at 2.2 million square feet and I think you referenced it was 2.4 million square feet a quarter or 2 ago. And a number of those are large, investment-grade, high-quality tenants out there in the market. Tech demand, we're tracking again an uptick there as well, 4.1 million square feet versus 3.7 million square feet from Q1 in 2016 at San Francisco alone, and maybe a little flat or down on the peninsula. We're not seeing Google and Apple in the market with quite the same large block appetite, at least right at this very moment. But across the board, continues to be very, very healthy and in fact, somewhat of an uptick from a few quarters ago.

Appreciate that. When we take a look at the new development site down at 960 Industrial Road, it looks like the surrounding area is heavily industrial, even by South San Francisco standards. What is it about the submarkets and the specifics sites that you think makes it a fit for your life science portfolio?

Yes, it's really a combination of things, Tom. And historically, what we've seen are the large tech tenants in the Stanford Research Park, the Mountain View Shoreline Business Park and now, the Menlo Park area, really drive out the life science tenants from those markets. Stanford themselves are currently underway, building a million-square-foot campus in Redwood City. Facebook continues to expand in Menlo Park, placing a lot of pressure for tenants there. And then ultimately, Google controls nearly all of the Shoreline Business Park in Mountain View. So when you take a look at that, the boundaries of the Greater Stanford's cluster really being pushed further north and further south, and life science tenants that we continue to have discussions with do have a desire to be in that Greater Stanford cluster. So we think this is going to be a great opportunity. It is rail served, with the Caltrain station within walking distance. We do have downtown San Carlos right there, so we think it's actually a pretty unique location.

Got it. And then one quick one for Dean. You addressed how the TIs jumped this quarter partially because of the early lease renewals, but there was also a note in here just about some tenant-funded improvements as well. Can you talk a little bit more about the make of those? And also in general, how tenant concession packages are trending in your markets?

Well, responding to the CapEx disclosure specifically and then I'll let one of the R&Ds talk about trends on incentive packages. But the CapEx alone, I think the Novartis lease is a good example. Not only did we have leasing commissions that drove a big step quarter-over-quarter, but I think they've been in the space, well, ever since we acquired the asset back in 2006. So there was little of refreshing capital in the renewal in there. So the comments were just focused on that specifically, more than anything else.

Got you. And then as far as overall?

Yes, Tom, it's Steve again. Maybe overall at least for San Francisco, I'll let Dan comment as well and Peter. If you take the 2 examples in the supplemental, the Genentech renewal there, they were looking to lock down space so we had no downtime, minimal TIs, really no concessions. And then the Vir Technology space in Mission Bay was actually very competitively sought after space. So it was the complete opposite, there were really no concessions, it was a very competitively built space.

Yes, we've seen similar -- this is Dan Ryan. For San Diego, we've seen a softening of the free rent concessions. So that's been firming up. I think the TI allowances have been about the same that they have been for about the past 12 months.

And this is Peter Moglia, just to add on to what Dan just said about free rent. That's probably the biggest thing that I've noticed, the lease to underwrite about a month per year for a long-term lease deal, and that's turned into a half month. Otherwise, I'd say everything else has pretty much been stable.

Next question comes from Jed Reagan with Green Street Advisors.

If I can just follow up on that question. I'm curious if you could just go around the horn and talk about the magnitude of rent growth you're seeing in your markets at this point.

Jed, it's Steve Richardson. On a mark-to-market basis as well as the rent growth basis, we're at about 22.9% on a mark-to-market basis in the existing portfolio. And Mission Bay, for example, now with the most recent lease, we saw probably in the mid-teens rent growth over the past year. So continued pricing pressure. I think we had said early in the year that we expected the rate of growth to moderate. But ultimately, there is still very healthy growth and upside there in the market.

Yes, I think the 2 most recent renewals that we've had a new lease and a renewal lab corp went up significantly on their renewal. It was probably a plus 20% increase. And similarly in our Sorrento locations, we're seeing a pretty healthy increase of about midteen percent increase in cash yields.

Tom, you could comment on Cambridge.

Yes, I'd say similarly, we have -- we're still seeing rent growth here in Cambridge, maybe a little moderated over the pace of last year and the year before, but definitely still growing rent and concessions are flat to down. In other words, more favorable to the landlord. So it continues to be a tight market, sub 5% availability rate and clearly that's positive for rent growth and concession reduction.

I think some of the numbers you guys have quoted sounds like there are more sort of mark-to-market on new leases. I guess I was looking a little more for just kind of space rent growth in a year-over-year basis, just kind of market trends.

Steve, just to be clear, the 2 examples I cited were actual deals in the market. They weren't a mark-to-market adjustment. Sorry if I confused that with the mark-to-market comment at the outset.

And Jed, it's Peter Moglia. One thing I just wanted to note because we're doing a lot of land acquisitions right now is that when we underwrite these acquisitions, we are using untrended rents based on today. Even though we've had significant rent growth, we're not counting on that to make our numbers in the future. And then when we do trend rents, we typically hold it at a CPI level. We don't try to underwrite spikes and things like that. So I just wanted everyone to be clear that when we're speculating on future returns, it's based on what we see in the market today.

And then something like the San Diego, the 15%, would that be kind of a current market rent trend?

Yes, that was both a renewal on the one case and a new rent in the other. So it's one of each in that case.

Okay, just on a separate topic, so after your recent land acquisitions, I think your land bank's about 7% or so of your operating asset base. I'm just curious if you have kind of a ceiling for how high you'd feel kind of comfortable growing that number to?

Hey, Jed, it's Dean here. I think the numbers that we typically look at is the overall pipeline, both active and future, is actually about 11% of gross real estate as of March 31. By the end of this year, it's expected to be just inside of 10%, call it in that 10% range. So I think our pipeline is actually very modest for the size of our balance sheet, and we're trying to be very disciplined in that area. So we've -- it may move around from time to time but it's more related to deliveries and construction of certain assets that grow that pipeline.

Okay, that makes sense. And then of the recent land acquisitions, I know you've got the entitlements, you've got to work through it, the tennis club site, but is there entitlements you still have to achieve in any of the other sites? And are those all lab sites on the stuff you've required in the last quarter or so?

So if we go through -- I'm just turning the page here, sorry, I got the wrong supplemental.

You want me to...

Sure, if you have it.

Jed, it's Peter Moglia. So 303 Binney Street, we are going through entitlements there. Obviously, you mentioned Bluxome, you know about that. Of course, the Warriors project is already entitled. At 960 Industrial Road, we will be -- we've commenced entitlement there. And then the Cowan Road and Vista Wateridge acquisition in San Diego is undergoing entitlement. And then the East Cornwallis Road in RTP is actually -- has existing entitlements, so we don't need to do anything there.

And the first 3, you feel pretty good about being able to achieve those?

Absolutely. I think we have probably the most seasoned entitlement team of any REIT.

Okay, great. And just last one for me, if I can. Maybe a question for Joel. I think you guys talked about the Congressional deal, reversing the proposed budget cuts for NIH spending on the '17 budget. I guess, just looking ahead to the '18 budget, how do you see that playing out? I know that the President of the new administration is still calling for significant cuts to NIH funding as part of that budget.

Yes, I think the budget cuts are not really specific to the NIH per se. They were kind of proposed to try to achieve a line of sight on the deficit with probably, tax reform in line. So I don't think most people are too worried about it. I think the members of the administration and certainly, both parts of Congress, both the Democrats and the Republicans, I think, for sure, have bipartisan views of maintaining or increasing the NIH budget. So I'm not really particularly worried about that.

Our last question comes from Tony Paolone with JPMorgan.

On 303 Benny, if I just look at your entitlements now against the purchase price of like $380 a foot or something, it looks like if you do get more density there, you'll pay -- there's an earn-out or you'll pay more. What will that look like do you think, when it's done?

Yes, Tony, I would say that any additional density would obviously improve the yields but the underwriting, just as -- we based our decision to do this transaction on what there is today. And as Dean alluded to, we are looking at our historic performance, or to achieve our historic performance which around a 7% yield based on what there is today. If we're able to get more entitlements in the future which we are fairly confident we will, it will lever that up a bit.

(inaudible) reading a footnote and suggests that the more entitlements you get, that it'll add to the purchase price, so does that give you leverage on that $380 a foot?

Yes, the cost per foot goes down the more that we -- the more square footage that we're able to get, it will blend into a lower cost per foot.

Okay, got it. And just apologies for not knowing this Uber, Golden State deal and what's kind of going on there now. But again, your price at about $600 a foot, what exactly does that get you? And what will be, do you think, the all-in when it's done?

That $35 million of our contribution at closing the joint venture is not just dirt. You're talking about significant site work, a parking structure. So call it -- it's land plus significant improvements and that skews the cost per square foot. I'd say all in, as I mentioned earlier in my prepared commentary, all the projects that we actually have queued up under marketing and preconstruction right now generally average about a 7% cash yield. And so that's where we're expecting to be, I mean, all in on all these new projects.

Okay. And then in terms of proceeds from dispositions in equity this year for back up the equity, it looks like you have $200 million to $450 million left. And apologies if you've covered this, but where do you expect that to come from at this point?

Yes, what we have left to solve on that line item in our guidance which is labeled equity and dispositions, it's roughly $400 million dissolved, $66 million, $67 million or so is from the sale of the condominium interest on the Longwood project. That leaves us call it roughly $330 million to solve for beyond that, and we're working through that over the remainder of the year here.

Do you have any assets in the markets right now?

Nothing too significant.

All right. And then just last question for Dean. The other income line, like over the last 5 quarters, it's been anywhere from 2 and change million to over $10 million. What's in the 2017 guidance for that line?

I think it's fairly modest on the front half of the year and it might be a little more normal on the back half of the year. But I think every year, it's averaged in aggregate at a fairly consistent level. Quarter-to-quarter, you may see some variation though.

But full year total, pretty comparable to say, like the last couple of years?

Yes, except the last couple of years had some large one-off quarters, if I recall correctly. So I think if you ignored some of the larger volume, there may have been 1 or 2 quarters that were a little larger over the last 2 years, and you'd have to almost ignore those.

This concludes our question-and-answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks.

Thank you, operator, and thank you, everybody, for taking time to join us for the first quarter call, and we look forward to talking to you for the second quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.