Welcome to the Alexandria Real Estate Equities Inc. third quarter 2015 earnings conference call. My name is Lauren, and I'll be your operator for today's call. 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 will now turn the call over to Paula Schwartz. Please go ahead.

Thank you, and good afternoon everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now, I'd like to turn the call over to Joel Marcus. Please go ahead, Joel.

Thank you, and welcome everybody to the third quarter call. Today with me are Dean Shigenaga, Chief Financial Officer; Steve Richardson, Chief Operating Officer; Dan Ryan, Executive Vice President; and Tom Andrews, Executive Vice President. And firstly, I'd like to start by congratulating the entire Alexandria team on a truly excellent third quarter; operating and financial results, really in all respect. Let me turn to the core to start the conversation. We had a very solid third quarter, 96.2% occupancy. We leased over 1 million square feet. And as you know, with the 4 million square feet year-to-date is for 2015 the highest in the company's history, with average lease term this quarter of about 8.7 years, very good. I think that really goes to the heart that the team has successfully executed and taken advantage of this great high-demand environment. Also 8.8% cash leasing spreads, 4.8% cash same-store property NOI growth, coupled with strong annual escalations in virtually every lease and triple-net lease structure in virtually every lease also has really driven our high margins. We're very proud of the core. Really proof positive, our client tenant user base wants to be on Alexandria campuses and in Alexandria owned and managed Class A buildings, because we are the brand. And we take the time and make it our business and solemn commitment to understand our tenants businesses, their space needs, growth as well as their challenges. And most of the facilities we deal with are really mission-critical facilities of our user base. Moving to demand, to give you a sense of what we see at the operating ground level. It's certainly true, there is a very supply constraint space availability in Alexandria's urban campus markets, particularly Cambridge and the City of San Francisco. This tightness of availability has certainly…

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. I've got three important topics to cover today. First, growth in NOI and net asset value through highly lease value creation projects; second, prudent management of our balance sheet and our funding strategy; and third, key capital matters for the fourth quarter, including important comments on our self registration filing this morning. Jumping right in, growth in net operating income and net asset value through disciplined allocation of capital into highly-leased development and redevelopment projects really have highlighted nicely in our supplemental. And Joel referenced Page 35 and 36, I encourage you to take a look at those two pages. But for the fourth quarter of '16, we're expecting to deliver about 1.5 million square feet by then. It's fairly backend weighted. This is highly leased at about 89%. And we're going to deliver about $75 million to $80 million of annual incremental NOI upon stabilization of the square footage. Additionally, on Page 36 of our supplemental, we've highlighted another 1.8 million square feet, again highly leased at 71%. That is going to contribute another $105 million to $110 million of annual incremental NOI upon stabilization. And these are projects scheduled for completion really in 2017 and 2018. All this square footage, about 3.3 million square feet is targeted with average cash yield just north of 7%. In comparison, we recently announced the partial sale of two Class A properties with one located in Mission Bay and the other located in Cambridge at an average cap rate of 4.6%, really highlighting the tremendous value we have generated through the ground up development of these two properties. This also highlights the value creation in process on approximately 3.3 million highly-leased rentable square feet, again to be placed in service in 2016, 2017 and…

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

[Operator Instructions] Our first question comes from Manny Korchman with Citi.

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

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

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

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

Yes, the actual sale amounts, exactly.

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

I mean, can we think about it in terms of multiples, so was it 2x gain? Was it sort of flat to what you held? Can you give us some idea of just the magnitude?

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

My other question was, so there has been some recent news on Biogen cutting its work force. Has that impacted yours or do you think it will impact [technical difficulty]?

Yes, so I'll ask Tom to speak on that.

It was reported that Biogen might cut about 800 heads in Cambridge, in Eastern Massachusetts. Recall, they lease or own about 1 million square feet in Kendall Square and they lease about 350,000 square feet in Weston 128, which is 50% subleased to another company. But we see no evidence that that's relatively small layoff in terms of the total headcount and space occupancy is going to impact Kendall Square at all.

That may impact their future need for space here in the short-to-medium term, but certainly they're not abandoning space that they have. And we own their headquarters building together with TIA, so that were in great shape of that building.

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

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

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

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

As Joel mentioned, we did have multiple parties pursuing the space that we ended up selecting bluebird for. We have multiple parties looking at the remaining space at 100 Binney where we're working to do some additional leasing on our remaining 180,000 or so square feet, which delivers in late calendar '17, so its not uncommon at all for us to have multiple prospects and we're managing carefully to try to optimize our tenanted growth.

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

One of them, yes. They're all three public. One is an existing tenant, while two were existing tenants, and one is not, but the answer is yes.

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

Jamie, what we try to do is, as soon as we announce the new development to give as much information that's available at the time new projects commence. Occasionally, 400 Dexter, as an example is going through a few different iterations, but we do have a general sense of where we're going to fall out. But until we feel comfortable that the disclosures will be final, we prefer to wait until some of the moving pieces are resolved. I can tell you that generally speaking I think in Cambridge, we're probably looking roughly high level $900 a foot all-in at completion on 50 and 60 as an example. As a baseline, there is some different attributes in 100 Binney. And as we round out our budget, we'll disclose both the cost of completions and the returns, but I would say that you should keep in mind the returns are going to be very similar directionally with 50 and 60 Binney. And again, I gave you overall returns for all these projects that are delivering in '16, '17 and '18 and its just north of 7%. So I hope that gives you some comfort that we're building solid projects and we'll provide these disclosures in the near term.

So you said $900 per square foot in Cambridge, what about in Seattle?

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

But I'm saying cost per foot?

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

And then I guess just thinking about next year, do you think your same-store NOI would be higher or lower than what we've seen in '15, based on what you have coming up?

Well, Jamie, I think the way we'd like the community to think about same property performance, I think over a long term, cash same property performance is probably averaged about 5%. And I think the way you build up to that number is, keep in mind, you've got triple rent leases that would drive stable cash flows, but you've got annual escalations that are approaching 3% embedded in our leases. So your cash NOI will grow close to 3%. You're marking-to-market roughly, and I'm going to use simple math for the next step, roughly 10% of the portfolio being mark-to-market. And we're marking that close to 10% right now. So you get 1% drop and down to NOI on top of the 3% of the annual escalations. And then you've got the opportunity to early renew. And if you look at the leasing activity, the leasing activity is easily 2x, the expirations. And so we are getting ahead and capturing some rental growth, call it, somewhere between 1% to 3%. Dropping to NOI 3% would be just a home run year. But if you pick up 1% to 2%, now you built up a 5% to 6% base cash same property NOI performance. I don't want to get into guidance for 2016, which we'll do in December, but I think overall core performance is going to be very solid for '16.

Our next question comes from Sheila McGrath with Evercore.

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

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

I think, as Joel said, each of these transaction is different. So it's really hard, you really can't compare them, as if they're vanilla deals. There's always a nuance to them. And sometimes, for example, even a more creditworthy company, we maybe able to get them to pay more, because of the particular situation that they are in with respect to that particular deal. So I wouldn't say that there is any -- that you could consistently assume that we get more money from a tenant who might be less creditworthy than another tenant that might have been a candidate for the space. I mean it really comes down to specifics of the negotiation and the transaction.

And certainly, security deposit is different. But Steve, you could?

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

Joel, also you have a well leased development pipeline for '16, '17, '18, should we assume that you're remaining patient on other land development opportunities, or because you have it enough on the plate right now, are or you in the market looking for additional development opportunities?

Yes, I think in my prepared comments, Sheila, I mentioned that any new developments we'd be looking at pretty carefully. We've got the 1.5 million square feet that Dean mentioned on Page 35 and the 1.8 million on Page 36. That's a pretty robust pipeline for '16, '17 and '18. I think there are opportunities that will come to us whether they come through current campuses, for example, in San Diego or other locations. And certainly in New York we're in discussions on the new building. But I wouldn't say anything. We're not looking at kicking off anything imminently at all. And anything we do, we'd be mindful of the macro market environment, and then obviously the demand in the market and then just our overall cash usage for that particular year, so it's kind of a complex equation there that we look at.

One last quick one, just on construction cost. Any worry that construction costs or labor moving higher -- labor cost?

Certainly, New York is a big worry. I think today, we're very fortunate when we kicked off the West Tower back at the kind of the end of '12 and early '13 we had a really great price point in the New York market. Today, I don't think that would be true. So that's certainly an important factor. And again, Dan and Tom, and Steve can comment on pricing. Up till now, I think rental rate increases have outstripped construction price increases, but it's something to pay attention to.

Yes, we're seeing some pressure on some construction material, particularly glazing. That has kind of been offset by savings and structural steel due to Chinese sort of drop off in usage. So on balance, we're cautious. We're trying to really primarily focus on some of these long lead items to be able to lock that in today. But we don't think it's a super material impact, but I don't know how you guys feel in your markets.

I'd say that we've got major projects underway, where we've done a vast majority of the buyout in prior months. So I think we feel very comfortable. As Joe was saying that the rental rate increases that we experienced in the market certainly outstripped the construction price increases that we were seeing when we were buying out these jobs. But we do watch it very carefully. Curtain wall, as Dan mentioned is a tough trade right now. There is so many projects going vertical in the eastern cities with curtain wall, so it's tough, but we've got that well managed on our projects in Cambridge.

I think we're seeing pricing pressure from subcontractors. I think they're very busy in the Bay area, in particular, with both the residential and life science and technology construction under the way. What we do though for each of these projects, especially as we get into '17 and '18 deliveries is have a very clear annual escalation in construction pricing. So that is well baked into their pro formas and the anticipated yields, so we don't think we'll be surprised beyond what we've already got already baked in.

Our next question comes from Rich Anderson with Mizuho Securities.

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

I think Rich, what's important to keep in mind on leasing performance, at least going out for the next 12 months is that, we are dealing with some of the best buildings in the best locations in very, very supply constraint markets. And so we're in a good environment, where the best most innovative companies are looking to be in the best facilities in the best markets. And I would think that leasing activity is going to remain very robust going out for the next 12 months. And I would not be surprised to find guidance following fairly close to our expectations for '15.

The reason I ask you is I'm looking at '16 expirations, and you have Research Triangle, Canada, Maryland whereas this year it was San Francisco, if I'm reading this right. So just wondering if the geographical footprint will play a role?

Well, it's a little bit of that, but you also have to keep in mind that the leasing activity in a given year also benefits from renewals that you can't identify from the supplemental, which is I'd believe Page 24, which shows our expirations down by category. And that's also an important driver, so getting ahead of some expirations that are beyond '16 will also contribute. I would say, the big picture, the market drivers are fairly obvious that the two top markets are big drivers of leasing activity, but I think the top five all contribute very nicely to '16.

You mentioned, and I understood the roadmap to funding development, and you kind of got it covered, so to speak, to $500 million, but are there any situations that you see where the funding of development would meaningfully exceed $500 million in any of the next couple of years?

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

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

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

If you had a choice between the two, and you had to make a choice, would it be FFO growth or NAV growth as a guiding strategy?

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

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

I think it's a very good positive for them. The truth be known, analyst like you guys followed both of us, but in most of the submarkets that we're in, we actually virtually don't compete with them outside of some assets in Cambridge. Seattle, very little competition; in San Francisco very little competition; San Diego, even though they're based there, it hasn't been a lot of competition. And New York, not the same thing, so as a macro company, yes, but on a submarket basis. But I think it's a positive for them.

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

You mean assets that we might be interested in?

Yes.

Yes, I could say publicly, we have no interest in any other onsets.

Our next question comes from Jim Sullivan with Cowen Group.

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

That's a tough question to answer, because number one, we're as you know very highly leased both in our operating portfolio and then the development and redevelopment side. Each market is different. Seattle tends to be tech and institutional. San Francisco tends to be biotech pharma and tech. San Diego tends to be more biotech and pharma. Maryland has been kind of a broad-base of different of companies, lot of service companies and things. Research Triangle is turning out to be an ag tech Mecca. New York, we just landed Nestle, their skincare group. And Lilly up for another building, but it seems broad-based in the life science area and then Cambridge is heavily biotech pharma and tech. So each market really has its own dynamic, but at the moment, we haven't seen any dramatic change in any specific market that I could give you, but I try to characterize what we're seeing on the ground. There are some tenants that, because of lack of availability are sometimes giving up expansion or just looking maybe at different locations. But at the moment I'm not sure I could give you anything specific.

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

No. not at all, but I do think that people are paying attention to the capital markets. Obviously, pharma doesn't need to, because they don't finance through the capital markets. Big tech also doesn't so much finance through the big capital markets, but obviously the private guys on the private side in tech, and obviously the biotech market are focused on the capital markets. So people are paying attention to the shift that's happened over the past couple of months. There is no question about, just board room talk.

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

So that's an interesting question, and the answer is, it has not slowed down appreciably at all. We tend to like big idea companies, big platforms, multiple shots on goal with products, great management teams, great syndicates. And I would say, we have not seen any slow down in the pace of new opportunities that have been presented to us at all believe it or not. What is slowing down is the exit of the pipeline not ours, but the biotech pipeline having gotten through that really high quality companies. There are some companies that haven't been able to get out, but there is also a new crop of pretty high quality companies that I think you probably see a file either have done seven filings or will be filling ahead of JPMorgan Healthcare. So I think you'll see a pick up in that, but we've not seen a slow down on the private investment on the biotech side at all.

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

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

Well, I think the budget deal that appears worked out between the Republicans and the Democrats, and it looks like both houses will be on board and ultimately the President is on board, I believe. I think it will be a net positive for the institutional side of things a bit, providing incrementally about $1 billion to $2 billion more annually to the NIH. Tom can comment on the ground, but I think one thing that surprised us, and I think we said it on past calls, is the slowdown in institutional activity like in Longwood, whereas Cambridge has been on fire. And a lot of Cambridge tenants won't go to Longwood. It kind of surprised us, there hasn't been more activity.

Just to echo what Joel said, I mean we expected more growth and more demand out of the Harvard affiliated Longwood institutions, where we're at about 63% leased I think on that asset. And we've got some groups kicking around, but not really moving very swiftly on the remaining 150,000 square feet or so that we have to lease there. We're hopeful that this potential budget deal that Congress is talking about could result in some additional NIH funding and instigate some additional activity. The other area where funding comes to these institutions commonly is through philanthropy. And there are some potential demand drivers from some foundation groups that are looking to invest over there, but we haven't seen any real estate activity out of that yet.

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

So maybe let me just comment. I think, if you go back to our total acquisitions for the year, at the beginning of the year we probably couldn't have told you that this was the array of acquisitions we would be pursuing. The MIT acquisition, as we mentioned, came up really quite by circumstance. The deal that Dan executed with Qualcomm and re-tenanting that building with Lilly, again, came to market kind of serendipitously and it presented a great opportunity to expand our campus. But months before that, we didn't have any idea of planning for it. So I think our primary external growth platform has been focused on development, so we haven't really been focused on some kind of benchmark for acquisition. And I think that's probably true of without getting into guidance for 2016. I think that's probably true of 2016 as well.

The last one I had just, can you give us any insight into the inquiry that you may have received from other institutions interested in your properties. So I guess, hence, eventually your sales or dispositions. But has it increased at all since the BioMed news has surfaced?

Well, I'm not sure. We did a pretty methodical set of meetings back about a year-and-a-half ago, when originally looking potentially for a JV partner on some developments, which morphed into a different kind of an approach. And I would say, I personally did like 15 or 16 101s. And I think virtually every single group we met with, all brand names, expressed high-levels of interest for the quality of the location, quality of asset, quality of management and quality of tenancy. And I think even today, we still do have a number of people that do approach us about getting involved in whether it's an asset sale or potentially partnering on development. So that's kind of ongoing. I don't know that the Blackstone deal either increased or somehow hastened it. I think it's been pretty consistent over the last two years, since we've been kind of moving in that direction.

Our next question comes from Dave Rodgers with Baird.

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

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

Yes, David, in Cambridge, as you know, much more of the demand that we've seen there has been on the life science side, but it's been both lab and office space, much more of the recent growth both lab and office space. And look, I think there certainly are some younger companies who are getting queasy at the rental rates and are looking elsewhere. But as I said, we've got multiple parties looking at the remaining space that we have. We have multiple parties looking at that 60 Binney, when we transact with the bluebird deal. We have multiple parties looking at 100 Binney. So we're not seeing a great -- we're not seeing people withdraw from the location because of pricing.

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

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

So I'll have Dean comment it for the moment.

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

Again, going from an office to a lab, and so all these are in a pretty good shape. We're working on lease up of 11 Hurley and 9625 just a bit -- I'm sorry 11 Hurley is under negotiation; 9625, we're working on. But it's just premature to talk about the status of those negotiations, but we do have ongoing negotiations. Again, I think the overall returns are going to fall on average here, 7%-plus on the initial cash yields. As far as the future pipeline, we do have a little bit that's disclosed in the supplemental and the expiration schedules. That's potential, but it's pretty small. So I don't see anything in the portfolio today that represents a redevelopment over the next, call it, year or two.

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

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

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

We won't see a what?

A REIT, we won't see a company Alexandria mentioned in there?

I don't think so.

Dean, and I'm sure you probably have this at your fingertips, just thinking about debt-to-EBITDA, as you're going to embark on this fixed income unsecured issuance, I'm sure the fixed-income investors are going to look at your 3Q numbers on an annualized basis. They'll back out the securities gains, they'll back out the FAS income, and they'll get to 7.9x debt-to-EBITDA and they're going to ask you if you have a target --

I'm not so sure about that.

Well, they may.

I don't know.

Because they tend to be -- in fact they tend to be --

That's fuzzy math, Mike.

Well, it's not fuzzy math. I mean, they are going to -- see, they're not going to annualized securities gains, right?

I think they're going to look at what our target is at yearend and is it achievable.

Correct.

Yes.

And that's where I was going, right, because maybe you can in getting there, you got $600 million of sales, $300 million that are done, $300 million that are in the works. You also have $200 million of construction spend offset by $30 million of free cash flow. You get to 7x, but that doesn't take into account the lost EBITDA, right. The debt balance at the end of the year is going to be lower because you have $600 million of sales, but you'll still be earning income on most of the assets so there will be a slight tick back up. So maybe you can just bucket getting into 2016 getting down to that 6.5 target, the EBITDA from all of the development and redevelopment, how much is coming online next year versus the incremental capital spend that you will have in furthering the development pipeline for the '17 and '18 starts. And then what is the plug effectively, if any, in terms of sales to get you to the right 6.5?

So Michael just to clarify, I mean part of my comments during the prepared section of the call was really focus on less quarter-to-quarter variations and metrics, which we all know are tend to be volatile versus more long-term metrics and we are going to hit 6.9% by the end of this year. And once we get beyond '15, we will start to migrate closer to 6.5. There is no expectation for us to hit it in 2016, just to be clear, but we will make the move towards that over the couple of years following 2015. There is a lot of moving parts as you've highlighted in our business, because we have a tremendous pipeline of development opportunities that are highly leased, but we have a very disciplined approach in funding that, as I outlined in our prepared comments. And so we'll provide as much color I think that makes sense at Investor Day to help investors navigate or at least follow our path on leverage, but beyond leverage our overall goal that we want to accomplish in 2016. So I don't think anybody will find it a mystery for us to maintain leverage sub-7, as we go into '16 and then continue that downward on average over the next two years.

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

Well, Michael, why don't we wrap up the fourth quarter because we do have $600 million of dispositions; half is under contract, the other half is not yet, and so the timing of those transactions are still pending. But you're right, there will be EBITDA loss through the dispositions, but you're talking about very low cap rate transactions on average, which is attractive capital that's funding our business and because it's a low cap rate overall average disposition for the fourth quarter, it is attractive from a replacement to common equity. And so I think we're making, as you probably can appreciate, the math works out from the ability for us to replace the need for common equity in a manner that is cheaper. And we had the need to raise the equivalent of whatever the equity proceeds of that $600 million was, Michel, in common equity. It probably would have resulted in even more dilution, because it would had a higher cost of capital apply to that.

Just lastly, on the security sales. If I go back to last quarter, at least a lot of the conversation was of this $225 million of projected remaining asset sales. At least I was led to believe that a majority of that would have been the public securities that were sitting on your books. It sounds like the sales in the third quarter perhaps were only about $30 million, if it had the same book-to-gain ratio and doesn't appear as though there's anything set for the fourth quarter. So had there been a change in the way that you're looking at liquidating the securities book at all?

No. Not at all, Michael. I think my commentary over the last two quarters, at least, the last quarter if not the prior to that, had indicated that it would probably take time for us to monetize the gains partly because some of its locked up for a period of time. So there wasn't any expectation of an immediate monetization of it. I think you'll see us continue to monetize some of those gains as we look at over the next 12 to 24 months, but we feel really comfortable with -- these are very short list of companies that generate the $100 million-plus of unrealized gains and they are solid company. So we're not concerned about the gains vaporizing overnight, but we do plan to monetize some of them.

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

Yes, we can definitely help you guys with that disclosure.

It will be in the Q, but at least for the supplemental it would be good to have?

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

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

Thank you, very much. We're five minutes over, but we appreciate that and we look forward to talking to everybody on the fourth quarter and yearend call. Thanks everybody.

This does conclude today's call. Thank you for your participation.