Alexandria Real Estate Equities Inc (ARE) 2017 Q3 法說會逐字稿

Good day, and welcome to the Alexandria Real Estate Equities Third 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 with Investor Relations. 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 the Joel Marcus. Please go ahead, Joel.

Thanks, Paula, and welcome, everybody, to our third quarter call. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, Dan Ryan and Tom Andrews.

The Harvard Business Review September-October 2017 had a really great quote that seems to exemplify this quarter's performance, and it is "Neither great leadership nor brilliant strategy matters without operational excellence." And so to the women and men of the Alexandria family, thanks to each and every one of you from the bottom of my heart for a truly great third quarter 2017 of truly operational excellence.

Some of the notable accomplishments this quarter, we're very pleased that the Green Star designation by GRESB was granted to Alexandria. It's actually quite hard to achieve for laboratory property type that operates 24/7 as opposed to traditional office, and we were given the #1 in the United States for health and well-being module, a very great kudos to our team in that regard.

We're also very proud of our total return to date from IPO through the third quarter of 1,211% compared to the RMS of 546% and the S&P 500 at 334%. Common stock dividend is up 8% over last year at this time, and the balance sheet, as Dean will talk about, is in the best shape ever in the history of the company. Revenues for the third quarter and year-to-date are up about 23%. 50% of our annual revenue from investment grade -- is from investment grade tenants, really, an industry-leading standard -- not standard, but industry-leading stat. Our average lease duration is about 9.4 years, coming from the top 20 tenants, which are about 45% of our annual revenue. We've made significant progress in bringing down our preferred stock outstanding to now less than about $75 million in the aggregate, and we're working hard to achieve, over time, an upgrade in our investment-grade rating. Importantly, our margins were up 200 basis points from -- to 71% from a year ago at this time; cash same-store NOI at 8 -- 7.8%; and leasing spreads for renewals up 24% GAAP, 10% cash; strong contributions from both San Francisco and Greater Boston. We see we have continuing and consistent strong demand in our key life science markets.

On the industry side, the NASDAQ Biotech Index is up about 18.5% this year. On the NIH funding at about $34 billion is very strong. The Senate currently has a bill to increase that next fiscal year up to $36.1 billion and the House has a bill of $35.2 billion, so we feel we're in very good shape.

The FDA has a new really superb commissioner in Scott Gottlieb, whom we hosted about 2 weeks ago. He's breaking old barriers, less time for approvals and trying to decrease the cost of clinical trials, all of which will be very, very important for not only the industry but patients. This year, approvals to date, 35, and we're on track potentially to receive 40 drug approvals. About 46% are Alexandria tenants.

Biomedical research this year will contribute on the philanthropy side about $33 billion to overall funding, which is a historic high, and venture capital funding this quarter were almost at $6 billion, the highest quarterly investment ever and on track to break $15 billion for the year for life science venture capital.

Worldwide total biopharma R&D is about $160 billion, and according to most IMF stats, to increase about 2.5% per year through 2022, which is a good sign. And also, for the first time, U.S. scientists working in a lab have edited the disease-causing gene mutation out of a human embryo, a really amazing breakthrough and promises to really revolutionize disease treatment. And as you recall from much of what we've said before, there are about 10,000 diseases known to mankind, and only about 500 have been addressed medically, so we're at a 5% level, really in the early innings.

On health insurance, keep the following in mind: about 67.5% are private insurance, provided by employer or purchased directly by the consumer; 37.3% are government coverage; and about 8% -- 8.8% are uninsured. That's the playing field for 2016.

On external growth, we're on track to deliver this quarter 510 Townsend to Stripe, whose recent valuation is about $9 billion; 505 Brannan to Pinterest, whose recent valuation is about $12 billion; ARE Spectrum in San Diego to Vertex, one of the best NASDAQ performers of the year, market cap today is about $36 billion; and the balance of 400 Dexter, we hope to conclude soon to Juno Therapeutics, whose recent valuation is about $5 billion.

On Page 36 of the supplemental, the projects we're delivering in 2018, 2019 are going well. 399 Binney, we're actually almost fully spoken for. 266 and 275 Second Avenue, pretty much fully leased. It was a tenant-driven acquisition. Our Mission Bay towers for Uber, 100% leased there. Our 213 East Grand Avenue projects, 100% leased to Merck. Our 279 East Grand Avenue in South San Francisco, we're about 50% in negotiations with the current tenant. 681 Gateway, which we look forward to getting back next year in South San Francisco to move from office to laboratory in a pretty hot market, so we're very much forward -- looking forward to redeveloping that and re-leasing it. Our project at 9625 Towne Centre Drive, 100% leased to Takeda. Our project at 1818 Fairview, before we go vertical, we're hoping to land an important tenant. Our 9900 Medical Center Drive, a situation that we're trying to expand our core campus in the Rockville/Maryland location. And 5 Triangle Drive, we're about 40% in negotiations with a range of important tenants. So things are actually moving very, very well.

On the acquisition side, we completed 3 acquisitions of note: one on Route 128 I just referred to, does specifically meet a tenant requirement; the acquisition in South San Francisco as well to specifically meet a tenant requirement; and a Rockville acquisition to expand our key campus in Rockville. We will continue to make strategic acquisitions as appropriate as we move forward through the fourth quarter and into 2018.

And let me turn it over to Dean.

Thanks, Joel. Dean Shigenaga here. Good afternoon, everyone. We are pleased with our continued strong execution by our team, again, quarter-to-quarter and year-to-year, and remain on track to deliver 9.3% growth in FFO per share as adjusted for 2017. We are in an excellent position today in 5 key areas: first, continued solid internal growth; second, continued strong and disciplined external growth; third, solid real estate and life science industry fundamentals; fourth, solid execution supported by a strong balance sheet; and fifth, an exceptional team led by a highly experienced group of senior leaders that continue to execute and deliver exceptional results.

We have continued solid internal growth, driven by the quality of our buildings, locations and strength of the real estate and life science industry fundamentals. In the third quarter, leasing volume was solid at 787,000 rentable square feet in light of minimal contractual lease expirations. Rental rate growth was strong and up 24.2% and 10% on a cash basis. The strong rental rate growth on leasing activity in the quarter will have limited benefit in the fourth quarter since most of the rental rate increases will commence in 2018. Year-to-date, we executed 3.2 million rentable square feet of leasing. This activity included 1.9 million square feet of lease renewals and re-leasing of space, 61% of which was represented by early lease renewals related to contractual lease expirations in 2018, 2019 and 2020.

Fundamentals in our submarkets remain very solid and continue to drive solid growth in net effective rents. Leasing commissions and tenant improvements on lease renewals and re-leasing of space have remained minimal in 2017 as well as the prior year in 2016 and, overall, have remained very consistent year-to-year. Importantly, the growth in net effective rents in 2017 over 2016 reflects the growth in rental rates and is not impacted by concessions.

Same-property NOI performance continues to generate consistently solid growth. Third quarter same-property NOI growth was up 2.2% and 7.8% on a cash basis. Quarterly same-property results may range a bit from time to time as compared to the results for a 12-month period. Year-to-date 2017 same property NOI growth was 2.3% and 6.2% on a cash basis. And we're on track to meet our guidance of up 2% to 4% and up 5.5% to 7.5% on a cash basis for 2017.

Key drivers of our solid and high-quality same-property cash NOI growth include: contractual rent escalations in 95% of our leases, averaging about 3%; high-quality and stable cash flows from a REIT industry-leading tenant roster, with 50% of our annual rental revenue from investment-grade tenants; and lastly, strong real estate and life science industry fundamentals driving continued rental rate growth on leasing activity.

EBITDA margins are very solid at 68% and reflect improvement over many quarters, primarily due to the growth in the scale of our business and improvement in the quality of our asset base with recently completed development of Class A properties. We remain on track to hit our goals with our development and redevelopment projects in 2017. We are also on track with $91 million of our target $100 million of incremental net operating income commencing in 2017, with the remaining $8 million commencing in the first quarter of '18 related to 4 recently executed leases, aggregating about 91,000 square feet at 100 Binney Street.

Briefly on 100 Binney Street, 79% of that project was placed in service in late September. The returns are very strong and are up from our initial forecast. We're now expecting an initial stabilized cash yield of 7.4%, highlighting the significant value our team has generated from this Class A facility, leased to some of the most innovative entities in the world. The improvement in yields were driven by both better-than-forecasted rental rates and a significant reduction in cost at completion. 75% of the cost reductions were driven by changes in the final design and use and 25% from solid execution from our team on proactive management of a very high-quality and innovative development project.

Our development pipeline and redevelopment projects undergoing construction as of 9/30 consisted of the following: 1.5 million rentable square feet. It's highly leased at 81% and represents about $1.2 billion at completion, which includes about $540 million of cost to complete. We've got very solid initial cash yields averaging approximately 7% on our total investment, and these amounts include 651,000 square feet, that is 97% leased and on track for delivery in the fourth quarter. Our team is also working diligently on leasing, marketing and pre-construction on another 1.3 million square feet spread across 4 development projects and 1 future redevelopment project. We have not yet commenced aboveground construction on these projects that are, on average, 45% committed and are expected to generate very solid initial cash yields of approximately 7%.

Turning briefly to net asset value. Certain of our development and redevelopment projects that were recently placed into service have contractual rents aggregating $70 million that have not yet commenced. $60 million will commence through the next 5 quarters, through third quarter of '18 as follows, about $10 million in the fourth quarter of '17 and then $23 million, $14 million and $13 million in the first, second and third quarter of 2018. Free rent periods on our pipeline of projects delivered in the third quarter and projects currently under construction, generally range from 3 to 6 months, with a few exceptions. Importantly, contractual cash rents will commence fairly quickly after these projects are placed into service.

Our balance sheet is in an excellent position today. We remain on track to achieve our leverage goals of 5.3x to 5.8x, both on a net debt and a net debt plus preferred to adjusted EBITDA. Our fixed charge coverage ratio is also very strong and north of 4x, and liquidity is very significant at $1.7 billion. We continue to focus on improvement in our long-term cost of capital and maintaining significant liquidity for flexibility to execute our strategic goals.

In 2016 and year-to-date 2017, we redeemed or repurchased 293 million of preferred stock at a weighted average annual dividend on those securities at about 6.7%. The retirement of preferred stock was part of our overall strategy to improve our capital structure and our balance sheet leverage. However, I should also mention that we believe it's appropriate to utilize preferred stock as a source of capital, but for the moment, it was important to retire these securities.

During the third quarter, we issued 2.1 million shares through our at the market common stock offering program at about $120 per share. This efficient capital will be utilized to fund significant value creation opportunities through the development of new Class A buildings. Additionally, we also will settle our outstanding forward equity sale agreements that represent about 4.8 million shares, and we'll settle that in the fourth quarter.

As a reminder, our usual detailed assumptions included in our guidance for 2017 is disclosed on Page 5 of our supplemental package. We narrowed our range of guidance for FFO per share as adjusted to a range of $6.01 to $6.03, with no change in the midpoint of $6.02.

Briefly, let me point out a couple of comments for certain models out there. Common shares outstanding as of 9/30 was 94.3 million shares, and we have about 4.8 million shares under the forward equity sale agreements that we anticipate settling here in the fourth quarter, and that will be added to the outstanding share count. Also, G&A expense as a percentage of total assets and total revenues have been improving and was approximately 0.64% and 6.8%, respectively.

We will provide guidance for 2018 earnings per share and FFO per share, along with detailed underlying assumptions at our annual Investor Day event on November 29, and therefore, we're unable to comment on details of our 2018 guidance until then. Keep in mind that real estate and life science industry fundamentals remain very solid providing for a great operating environment going forward.

In closing, we are pleased with the continued strong results, remain on track with our current pipeline of projects that are highly leased and have a great balance sheet to support our strategic goals and have an excellent team and senior leaders that drive strong execution.

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

Operator, we'll go to Q&A.

(Operator Instructions) The first question will come from Sheila McGrath with Evercore.

Joel, I was wondering if you could give us some insight on the revisions upward on the leasing spreads. How much of that was driven by tenants wanting to renew earlier than expiration? And do you see this trend continuing?

Yes, let me have Dean comment on that.

Sheila, it's Dean here. Yes, the key drivers of the growth in leasing or rental rate growth in the current quarter was driven primarily by early lease renewals. Like I said in prior quarters, it's pretty difficult to project early leasing activity on renewals. It's really contingent on the tenants' needs. But 61% of our re-leasing activity this year was driven by early renewals that go out over 1 to 3 years forward beyond the current year. Looking forward, I suspect we'll continue to have opportunities, but they're really hard to predict and project at the moment.

But I think that underlines a -- I think, in a number of the key markets, the tenants focus on trying to lock down space at current fair market rental rates and not kind of play the lottery for the future, and I think that bodes well for us.

Okay, great. And then just as a follow-up. On the -- I think this is guidance-related for you, Dean. On the 91,000 square feet to be placed in service in first quarter for 100 Binney, is that part of the driver of the higher capitalized interest in fourth quarter that you cite in kind of the footnote on guidance?

Yes, Sheila. So the comment on our guidance page on Page 5 as it relates to being on the upper end of our range of guidance for capped interest and on the lower end of the range for interest expense and net, which is the number reported on the income statement, it's actually really related to the acquisition of future value creation opportunities. I think the way to think about it, Sheila, is, as we acquire future value creation projects, we're required to capitalize interest while we entitle the project. But these projects are actually funded with long-term capital, and because, by and large, there's very little to no income at the moment, we equity fund the acquisitions. So we have growth in capped interest but no corresponding growth in interest cost. But the third point I'd probably make is that when you think about FFO per share, it's basically relatively neutral to earnings because you're getting about a 4% yield from the capped interest on the investment, but you're having to equity fund that long term for the moment.

The next question will be from Manny Korchman with Citi.

Maybe going back to just tenant growth plans and sort of the way they're approaching space. Given the tight markets you operate in, sort of how are tenants thinking about the space they're going to need and in those situations where they look around and there's just nothing new coming? How are they solving for that sort of need without having new space to build into?

Okay. So maybe let me ask Steve to address that.

Yes, Manny, it's Steve. Yes, a good example is a recent renewal and expansion that we had in Mission Bay with an existing tenant. It was, in fact, an early renewal, but it was also in combination with an expansion. So where we had existing tenants in place adjacent to this one dominant-anchor tenant, they've gone ahead and committed at the end of the expiration of the adjacent tenant's terms to go ahead and expand into that space and through the long-term lease. So we're seeing a combination of, as Joel mentioned, locking down space but then also controlling adjacent space for expansion.

And Manny, it's Tom Andrews. I'll expand on that a little bit, too. I mean, in Cambridge, certainly, it's a very, very tight market. Current lab vacancy in East Cambridge is only about 1.5%. And so consequently, we're seeing tenants and their brokers get out into the market sooner than they normally would to look at their options for space. We're certainly seeing some tenants select different submarkets, whether they're suburban or other urban submarkets other than East Cambridge because of the tightness of the market. And we see some tenants try to figure out growth strategies that involve maybe trying to do some of their work remotely and having multiple locations. Sometimes, it's a suburban location and an urban location together. So tenants are doing different things to try to solve, and we're obviously working closely with our group of tenants and the prospects that are in the market to try to help them solve their further space needs.

And then, Joel, maybe one for you, just in terms of succession. It's a topic we've spoken about on prior calls. Can you give us an update on when we might find out more? Is it going to be at Investor Day? Or do we need to wait into next year to find out sort of more on that plan?

I think I've said -- I mean, that's a board ultimately timing decision, et cetera, and sometime on or before March 31, but you'll see it will be totally seamless, so it should be great. As I said, we've been in the process for over 2 years, been coached by Jim Collins, and we're very comfortable with kind of the process.

Our next question will be from Rich Anderson of Mizuho Securities.

When you have Pinterest, Stripe and Uber, including them, I guess, up and running, where does your tech exposure get you to as a percentage of the total portfolio? And maybe describe your level of comfort at that range.

Rich, Dean Shigenaga here. The percentage will creep up a little bit as we approach the end of the year, but I think, all in all, you've got so much growth coming online over the portfolio that it will mute that impact a little bit. We're probably going to approach somewhere around 10%. I don't have the exact statistic in front of me, but it's in that general range, Rich.

Yes, and I think in general, we meet with the -- because they're all private companies, we meet with the companies quarterly, the senior management teams. A lot is written about each of these companies. They're well-known. We think each one is a highly disruptive -- or disruptor in their space that is not a flash in the pan. These are not dot-com companies from the last generation. Stripe has proven itself to be an amazingly broad-based company with amazing talent, I think Pinterest as well. Uber, you read a lot about. I think once they get their self straight at the board level, I think they brought in a new CEO that, I think, will be able to rationalize the company. It certainly is an important company and one that, whether it's worth $70 billion or $55 billion, I don't think is much of an issue. I think what they're doing in the marketplace and how they continue to execute we see in their markets, I think, is a testament in the company. But obviously, we pay a lot of attention to these companies, and we have, on staff, several people who have -- are trained engineers and underwriters. So we're pretty good at understanding these companies beyond the financial. I mean, in any company, you obviously look at management, you look at the financial strategy and you look at the niche, and so we pay a lot of attention to that.

Well, Pinterest is definitely disrupting my household, I'll say that.

Your wife's busy on that, right?

This year, you combined asset sales and equity issuances as a one line item in your guidance, and most of that has come through equity channels. Not to kind of tap you for an '18 guidance number, but it seems to me, you don't have much to sell from a property perspective. Is that correct? I'm not looking for a guidance number, but just wondering, is there a non-core portfolio that's brewing behind the scenes that we're not seeing right now?

Well, I think there's always a few odds and ends that are some legacy assets. We do hope to extricate ourselves from China and a few other assets. But I think the joint venture route is one that always -- we used that pretty heavily a couple of years ago. So I think we have multiple options out there, and we feel pretty good about where we are today.

Okay. And last question. Drug company stocks have done okay in terms of business, but their stocks have taken a little bit of a hit lately. I don't know if that's an Amazon risk about them getting into the business. I'm just curious, Joel, if you have a view about Amazon entering the business and being a disruptor, so to speak, and if that weighs on your mind at all at this point.

I think that's focused. I mean, pharmaceutical sales at the endpoint, retail pharmacy sales are kind of where they're looking to disrupt. And so that's different than research-driven manufacturers. And I've always thought that the current system is pretty inefficient when you have PBMs, the pharmacy benefit managers, between the manufacturers and the ultimate users and so forth. So I think, to me, I think it's going to rationalize the system. But I don't think that's weighed so much on drug stocks. I think each one has been somewhat individual. Celgene made a pretty major change in their 2020 guidance on overall revenues, Merck had an EU issue with Keytruda, their new cancer drug. I mean, each one is kind of explainable. As I said, Vertex has kind of knocked the ball out of the park this year. A recent M&A transaction, Kite, was purchased by Gilead for almost $12 billion and just got approval on the second cancer immunotherapy. So I think we're pretty comfortable. The Index, at least, on the biotech side, is up. It was at almost 19% year-to-date, which has certainly outpaced many of the other industries. So I think we feel pretty good. I think the regulatory side is super positive with Scott Gottlieb. I think the tenor in Washington is constructive, and I think there's a positive business climate behind it. And if the -- whatever shape the current tax bill takes place and we're able to -- the industry is able to repatriate both at the biotech and pharma level hundreds of billions of dollars, maybe between $100 billion and $200 billion or more from overseas cash, that's going to be a net positive for the industry. So I'm pretty bullish.

The next question will be from Jamie Feldman of Bank of America Merrill Lynch.

I guess, just sticking with Richard's question or a similar topic. Just to throw into that, how do you think about the risk of just pharmaceutical pricing and all the rhetoric around trying to take pricing levels down and how that will...

Well, the reality is, drugs account for only about 10% to 15% of total health care spend, and they're the only sector that actually can drive costs down. Hepatitis C is a great example. That disease is now curable. The problem is, and the reason that there was a lot of concern about when Gilead came out with their cure product, Sovaldi, was that insurance companies, they capture you as a patient for a year. And if they have the choice of buying a cure for you or just maintaining you because you may be in somebody's health plan next year, what do you think they're going to do? So it's less the price of the drug because it's clear, if you can cure a disease, the downstream cost effect is huge. And then if you translate that to metabolic diseases, you translate that to neurodegenerative diseases, imagine if we could cure, prevent or treat effectively Alzheimer's, dementia, the cost to the system, way, way down. So I'm not too worried that, ultimately, high-quality drugs are going to make measurable impacts, are going to be well-received in the system. The system needs some changing, and the intermediaries are part of this issue that disaggregate because PBMs typically want to see higher drug prices so they can increase their margins on sale, because they get a benefit of the difference between the drug price and what ultimately the list price and what they sell it at. So there's a number of misaligned incentives. And so if the drug companies, the pharmacy benefit, managers and the manufacturers, the research manufacturers, are able to kind of align themselves, then I think the system is going to actually work really well.

Okay. And then the net effect is no dollars getting squeezed out of -- on your side of the business?

Yes. I mean, the problem with the industry historically has been a lot of companies have historically just had incremental products that they extend life 3 months, 5 months, 6 months, 10 months. That's not a real important drug. And I think those will fall by the wayside, as they should.

Okay. That's helpful. You guys mentioned net effective rent growth up year-over-year. Can you just talk through the major markets and how much you think it is up year-over-year and whether you think that growth is sustainable?

Sustainable is always a fun one to talk about and predict the future, Jamie. So maybe I'll just say that fundamentals remain solid, which is a great backdrop to enter into and going forward. But if you think about Cambridge, Mission Bay, South San Francisco and even down in San Diego, I'd say, on average, you're upper -- you're almost at the top of a single-digit range for year-over-year growth in net effective rent. But what I also mentioned in my commentary that's important is TIs and leasing commissions are fairly nominal on leasing a renewals and re-leasing a space. So the net effective rent you're seeing is really growth in rental rate, but they're one and the same as far as the growth year-over-year. So concessions are not impacting our markets today.

Okay. How much are construction costs up over that same time? I know they're less of an impact for your TIs, but just generally?

6% on average. That may vary in New York, maybe higher because of Hudson Yards and some of the big projects. But by and large, I think we've given that number before. I think across the country, we'd say 6% would be a reasonable average.

Yes, unfortunately, Jamie, as we talked about on my commentary, the pipeline under construction and the pipeline that we have to lease right behind it, about 1.3 million square feet that's really near-term stuff. We're still projecting about a 7% overall cash yield on our total investments. So rents are definitely keeping up or outpacing the cost of construction for us.

Okay. And then last for me, the 279 East Binney, you mentioned a tenant, I think you said, in the portfolio that's interested in that space. Would that leave some space behind?

I'm sorry, you may have misspoke. 399 Binney or 279 East Grand?

I wrote it down quickly.

I thought you said 279 East Binney.

I may have. The project where you said you've got a tenant who's looking at 50% of the space and that's coming from the portfolio?

Yes. That's the current tenant, Google's subsidiary barely who's in the campus.

So they'd just be expanding?

That's correct.

The next question will be from Michael Carroll with RBC Capital Markets.

Yes, Joel, have you noticed an uptick in competition when acquiring and developing high-quality lab space, particularly from the other REITs? It just seemed that several REITs have recently highlighted the new focus on the lab space.

I don't think it's any different than we've seen over the last couple of years. Every market, there's a different set of competitors for different reasons, doing different things. I think our view of the world is we try to do what we do and be the best in the world at it and not be distracted by outside issues. And in underwriting, if we can't get to where we are, we don't buy it or build it. And so I think that's how we continue to operate.

Okay. And you're not seeing any increased competition from outside the REIT pool? It's been pretty much the same over the past few years?

Yes. I mean, I think it varies from time to time. I mean, I think we still see there has been, although maybe less this year than last year, a large pool of private capital, particularly from overseas or the pension funds. I think that's waned a little bit this year. But if you have -- if you're an institutional investor and you have -- you need to put money to work, you're going to gravitate to the great markets. So there's not a surprise about that.

Okay, great. And then, Dean, off of Sheila's question earlier, I know you have been highlighting over the past several years that tenants are electing to renew their leases early when they have an expiration in a few years out. I mean, has that started to wane? I mean, have you pooled a lot of those tenants forward already? Or is that still pretty strong?

Well, I think if you look at the mix of early renewals going back several years, Michael, it's typically our leasing activity for renewals and re-leasing a space has been about equal or to maybe a 50% greater number volume-wise relative to the contractual expirations at the beginning of the year. So typically, we're anywhere from 7% to 10% with contractual expirations. The renewals are doubling that number. So we're getting anywhere from 15% to 20% of the portfolio being attacked annually through leasing activity. So we historically have had this recurring volume in recent years. Hard to predict the future, but it's been pretty consistent.

Our next question comes from Jed Reagan with Green Street Advisors.

In terms of the mark-to-market rent spreads, the increased guidance gets you to about 12% or so for this year at the midpoint. Is that a fair estimate where you'd say the overall portfolio sits relative to market today?

Jed, it's Steve Richardson. Yes, that's roughly in line. The overall portfolio gap is a little north of 10% there, so that's pretty consistent.

Okay, that's helpful. And I think you guys mentioned that 399 Binney is almost spoken for. Have you gotten incremental leasing done beyond the 73% of LOIs that was talked about in the supplemental?

Well, I think almost all of the space is under lease and negotiation. Tom can give you some further color.

Yes. The 73% reflects the 3 signed letters of intent that we have right now that we hope to convert into leases over the next few weeks.

And then there's additional conversations beyond that?

Yes. I mean, I'll just let Tom speak in a moment, but I think what we were excited about is we saw a pretty large demand for 100 Binney. And so as we kicked off 399, we felt that there was enough momentum in the market that we would see a pretty receptive audience. Tom, you could give other color.

Yes. And at the same time, I'll mention the balance of the One Kendall Square development, where we have a number of opportunities to convert office space to lab space and also to take leases that are currently well under market and re-tenant them as market rates. We're making good progress on that right now. That is a very active corner of Kendall Square right now between the 399 Binney new construction and -- which is just kicking off, and the redevelopment or the re-tenanting of portions of the balance of the One Kendall Square campus.

Okay. I appreciate that. And then just last one for me. Your capital plan has about $850 million of development spend this year. I know you're not offering specifics on 2018 at this point, but kind of ballpark, is the $850 million sort of a reasonable range of development spend to think about as we guide over the next few years?

No, I don't think it's fair to comment about each of the years going forward over the next few years, Jed. So maybe as it relates to 2018, stay tuned for Investor Day. And every few quarters, we give a little more color on what the pipeline is starting to look like, which will give you that visibility beyond. But it's a little early to talk about '19 and '20.

The next question will be from Dave Rodgers with Robert W. Baird.

Joel, I just wanted to ask about Seattle. You did some leasing at Dexter this quarter. I wasn't sure if that was a lab tenant or not, but I realize you don't have a lot of space left there. Are you seeing just the lab tenants pushed out of that market by what's happened in the tech activity? Or are you seeing any interest in kind of moving further south, either into San Francisco or San Diego, from that market? And do you have any longer-term discussions with your tenants there that might be pushing out of the market and looking for somewhere else?

Well, we did sign a lease there with ClubCorp. I think we indicated that. And we're down to a final, about 31,000 feet, which we're in late stages of discussions with Juno. We expect them to take that. They've had some good news based on the Kite acquisition. And the valuation of that company certainly puts Juno in a pretty nice position. I think Seattle is a tough market. It's a super low cap rate market, as you know. It's a tight market. The behemoth, Amazon, is -- obviously has lots of -- that's their home base and lots of activities going on. So I think companies are always looking at opportunities. But I think we see -- we have some unique land resources and locations inside Seattle, in the best of locations in South and East Lake Union. So I think we're looking forward to meeting the demand of our tenants and maybe even some that are not tenants over the coming few years. I would say, people are probably more migrating from the Bay Area to Seattle than vice versa, given cost of living and tightness in the San Francisco Bay Area.

Joel, it's Peter. If you wouldn't mind, I'd like to comment a little bit. One of the things that we have seen, even though, as Joel mentioned, it's been a slow growth market for lab, we have seen the entrance of Celgene and Bluebird into the market, and they have steadily increased their presence and they've brought, basically, the vacancy of Seattle lab to low single digits. There's also a number of large research institutions in Seattle, and they've been fairly dormant growing over the past few years, and that's been driven by a lack of NIH growth -- funding growth. But we are seeing now some potential demand coming from the institutions as well. So I think it's stacking up that Seattle may restart itself a little bit better on the lab side. And the fact that the tech industry is in there gobbling up space, is probably only good news for rental rates on the lab side. That's it.

One more for Dean. It did look like you used some ATM in the third quarter, if I saw correctly, but you said then you have the forwards still to settle in the fourth. Was that a function of pricing or just some form of execution? Just wanted to understand that better. And then with regard to maybe are you putting that timing around the remaining preferred that's outstanding?

So a couple questions, I think, embedded there. The current ATM usage really had to do with an opportunity to fund our needs this year. And so at $120, we felt the cost was attractive. On the forward timing, I think, for your model, probably best to think about December, and that has more to do with spending anticipated in the quarter. All things equal, those transactions probably simply would be funded mid-quarter, but then we also have earnings contributions from our project deliveries, which are, on average, about November, mid- -- I'm sorry, mid-to-late November on average. So we're just trying to match the timing of the settlement with these other 2 considerations.

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 all very, very much, and we look forward to talking to you about 2018 on Investor Day, November 29. Thanks so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.