Alexandria Real Estate Equities, Inc. (ARE) Q4 2016 Earnings Report, Transcript and Summary

Hello and welcome to the Alexandria Real Estate Equities Inc Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now 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. I now would like to turn the call over to Joel Marcus. Please go ahead.

Thank you, Paula and welcome everybody to the fourth quarter and year-end 2016 earnings call. With us today is Dean Shigenaga, Tom Andrews, Steve Richardson, Peter Moglia, Dan Ryan and John Cunningham. First of all congratulations to the entire Alexandria family on a truly stellar 2016 by all financial and operating metrics and executed with transparency, integrity and responsibility, we're very proud of our accomplishments. Our primary mission as you know is provide mission critical infrastructure in our collaborative and innovative urban campuses and capital to help solve disease and hunger. Looking forward to 2017, we will celebrate our 20th anniversary as a New York Stock Exchange listed company and very proud of you - that if you had invested $10,000 in ARE at the IPO in May of 1997, you'd be worth a whopping $10,980,000 with a 1098% total return far outpacing the RMZ at 524%, Berkshire at 468%, S&P 500 at 280% and NASDAQ at 282%, a track record we’re all very proud of. I'm going to put my macro comments at the end, but I want to just highlight a few things in the quarter and year-end and Dean will do the same. As you know our revenues and earnings grew approximately 9%. We had a very strong fourth quarter and year - and full-year leasing despite minimal lease expirations and cash rents up about 12%. The fourth quarter was heavily and positively influenced by leasing in Cambridge. Same property results up strongly at about 6% and $90 million plus of NOI growth from our highly leased development pipeline. Operating margins ticked up and remain very strong. Occupancy stayed pretty steady. And we continue to have strong value-add acquisitions in Cambridge and San Diego during the year. We successfully exited India. Our rental revenues from investment grade tenants about 49% today. Dean will talk about the balance sheet which we're very proud of moving in a very strong and flexible direction. We have minimal exposure to interest rate increases due to the very low variable rate debt as well. As we look at 2017, 2017 is shaping up to be truly very strong year and we'll give updates obviously quarterly and I'm sure we'll have quite a few both as the internal and external growth as you know from the press release and supplement we closed on 88 Bluxome in the San Francisco South of Market sub-market and look forward to a highly successful future project there. We executed lease extensions which Dean will talk about with Novartis well in advance of their explorations at 100 and 200 Tech Square with strong rental rate growth. We anticipate onboarding over $100 million of NOI in 2017 from our highly lease development pipeline. We continue into 2017 and expect it to continue at a high record occupancy and strong continuing demand. The macro demand again is exhibited by limited supply continuing strong demand as I said and favorable rental rate increase trends and strong asset valuations as well. The underlying health of the tenant base is very good. The life science drivers continue to be very positive including positive government support, increased medical innovation, continued significant R&D investment and the continued move to externalization of R&D by big pharma to smaller companies. If you look at page 38 of the supplement, the 2017 deliveries include 100 Binney, our anchor tenant with Bristol Myers. We've certainly have a hard time getting another large tenant in there because the building is very now identified with Bristol Myers. So we've moved now to a floor by floor leasing approach and expect to have probably three, four floors leased over the next quarter or two. 510 Townsend, we're on target to deliver to strike. 505 Brannan Street on target to deliver this year [indiscernible] the spectrum on target to deliver to vertex and similarly with 400 Dexter to Juno. Page 39 of the supplement are probably nearest term starts as we gain good leasing traction will be 161 First Street in Cambridge which is part of our Binney corridor arrangement with the city for residential, 399 Binney at One Kendall Square. East Grand South San Francisco beyond the Merck building, a development start potentially in Seattle and 9800 Medical Center in Maryland where we've seen a significant tick up in demand particularly at the governmental level. Since Investor Day as many of you know the 21st Century Cures Act was signed into law on December 13 providing the NIH with almost $5 billion over a ten-year period of increased funding and the FDA about $0.5 billion as well. Let me move to a couple of macro comments and one would be the ACA, the Affordable Care Act, we expect a five-step process to take all of 2017. Number one would be a budget resolution giving congressional committees the authority to use the budget reconciliation process for ACA changes, I guess people refer to this as the nuclear option. Continuing, number two, executive orders on parts on ACA. Number three would be repeal. Number four would be replace including to the extent that it is defined a brand of universal coverage and certainly preexisting condition coverage. And then number five would be altering the taxes and other pay-fors including things like the Cadillac tax. The second macro item I'd like to focus on or a third maybe would be the pricing of medicines and therapies. And as many of you know who watch television today or reading both social media and the press, there was a meeting at the White House among the President and a number of CEOs from bio-pharma and I think there were a number of key messages from that meeting. Certainly the intent to reduce FDA regulations and timelines for approvals. Although the FDA over recent years has done I thought a pretty excellent job. Lower taxes and repatriation which for the life science industry would mean something in the range of $100 billion to $150 billion of cash brought back, easing of constraints on small innovative biotech companies, stimulation of innovation, a desire to bring operations back to the US and increase hiring in the United States both for R&D and manufacturing. And when you get to pricing, it was pretty clear that the President did not state or say that Medicare was going to that the law would be - he would seek change to the law to have Medicare set prices. There's a long history behind that the Medicare Modernization Act of 2003 which established Medicare Part D specifically imposed a ban on negotiation of drug pricing by the Secretary of Health and Human Services and the reason that was because they did not want governmentally mandated price controls. There still is as part of Medicare Part D large private insurers which do negotiate drug prices. And even if a ban were repealed and they in fact did negotiate, the government must cover all drugs and fix protected classes which include and oftentimes expensive treatment such as the areas of cancer, autoimmune neurodegenerative disease, psychiatric conditions and a few others. And recently the Congressional Budget Office said that amending the Non-Interference clause meaning allowing Medicare to go and negotiate with the manufacturers would have a negligible effect on the federal drug spending. And they would not be able to leverage deeper discounts for drugs than risk bearing private plans. So I think it seems like that may not be in the cards and that’s a good sign. The President did clearly call per price lowering without ruining margins is the goal. And he also mused about higher prices in the US versus overseas and that really brings up a trade issue. And as most of us there are the R&D driven firms versus the abusive firms and the abusive firms have gotten about 95% of the [indiscernible]. And a good example of I think responsible and we hope it's a throwback to the past, Merck recently released a pricing action transparency report last Friday and it showed over the last six or seven years the average yearly price increase of Merck medicines or therapies was actually less than 10%. They also did note that the average discount grew from something like 27% in 2010 to almost 41% in 2016. So pretty interesting history and a lot to be unfolding over the year and coming quarters here in 2017. I think the market has reacted favorably to that meeting and I think we're pleased with that. So without further ado let me turn it over to Dean for additional color on the quarter and the year.

Thank Joel, Dean Shigenaga here, good afternoon everyone. Alexandria is very pleased to report another extremely successful year and consistent execution of our business model resulting in very strong operating and financial performance. Total revenues were up 9.3% to $922 million. Net operating income was up 10.5% to $643 million. During the past three years, we have generated tremendous growth and value for our stakeholders. FFO per share growth was 25%, consensus NAV growth was 61% and common stock dividend growth was 23%. Therefore important topics I will cover today, first, we have very solid market fundamentals continuing in our key urban centers of innovation. Second, we have solid internal growth consisting of stable high quality net operating income from a REIT industry leading tenant roster and an asset base of Class A properties located in urban centers of innovation. Third, we have solid external growth through development and redevelopment of new Class A properties to meet the demand from some of the most innovative entities producing new and transformative therapies and solutions to improve quality of life. And fourth, we have and we will continue to maintain a solid and flexible balance sheet with an important strategic goal of improvement in our credit profile and long-term cost to capital. We remain in a unique position within the REIT sector today with positive attributes in each of these three or four areas that allows our best-in-class team to deliver consistent growth in earnings, cash flows and common stock dividends. First, market fundamentals remain strong in our dynamic urban centers of innovation today including Greater Boston, San Francisco, San Diego and Seattle. Our key submarkets today generally have strong demand and very limited supply of Class A space and limited capacity for developers to build new properties. We continue to deliver solid internal growth also known as our same property net operating income growth. Our average same property NOI growth has outperformed the average of traditional office REITs over ten years. Solid market fundamentals and life science demand combined with our favorable lease structure continues to drive strong internal growth outlook. For 2017, our cash same property net operating income growth guidance is 5.5% to 7.5%. Takeda has recently announced the acquisition of Ariad Pharmaceuticals. This represents a huge win for both Ariad and Alexandria as we will benefit with an enhancement of the credit profile of Takeda and it will add Takeda to our industry leading tenant roster. Subsequent to year end, our team executed a ten-year lease extension with Novartis, one of our top five tenants consisting of 47,255 rentable square feet at 200 and 100 Technology Square in Cambridge respectfully. Rental rate growth on average for these two leases were up 42% and 20% on a cash basis and will be reported in our leasing activity for the first quarter of 2017. We're off to a very strong start with rental rate growth on leasing activity for the year. Leasing volume however will likely be light due to the limited contractual lease expirations of 985,000 rentable square feet for the year and our highly lease development of new class A properties. As a landlord of choice our team is working diligently to build 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. During 2016, we completed ten new Class A properties. These properties were on average 96% leased and deliveries in 2016 will generate 92 million of incremental annual net operating income. This NOI exceeded our original NOI forecast by almost 15 million or 20% compared to the forecast that was provided this time last year. The significant beat relative to our original forecast is primarily related to the delivery of the site at 1455 and 1515 Third Street to Uber in November of 2016. Our best in class team continues to execute on our current pipeline consisting of nine new Class A properties, 1.9 million rentable square feet. That is 95% leased or negotiating and will generate significant growth in net operating income and cash flows. Let me provide a few very important comments regarding net asset value and cash flows. Contractual rental payments related to the recently completed developments at 75/125 Binney Street and 50 and 60 Binney Street, we have significant steps in cash rents commencing on April 1 of 2017 as free rent periods end. Cash rents of these two properties will increase significantly by 10 million per quarter or 40 million on an annual basis. As of April 1 of ’17, 100% of the cash rents will be in place at 75/125 Binney Street and approximately 50% of the cash rents will be in place at 50 and 60 Binney Street. Let me also briefly comment on the new deal with Uber. Effective in November of 2016, we entered into a 75-year ground lease for the land at 1455, 1515 Third Street and we also leased Uber the existing parking garage. These leases commenced immediately in November. Our total investment in the real estate now is about 155 million and our initial yields are 14.4% and 7% on a cash basis. Cash rents will commence in November of 2017 for the ground lease. The initial 15 years of the ground lease provide for 3% annual rent escalations and then annual escalation at CPI with a minimum of 1.5%. NAV models should consider a positive adjustment to pick up the value of this transaction. Cash NOI today is zero and very nominal in the first quarter of ’17 as the commencement of the parking garage lease. And therefore typical NAV models based on cash NOI will accidentally overlook the value of this transaction. Our balance sheet and credit metrics remain very strong today. By the end of this year we are projecting leverage at or below six times both on a net debt and net debt plus preferred to EBITDA and our fixed charge coverage ratio will also be very strong a greater than four times. We have no debt maturities in 2017, limited maturities in 2018 and expect to reduce outstanding term loan balances. 200 million of the 2019 term loan maturity will be repaid in 2017 and another 200 million of this maturity will be repaid in early 2018. Pricing of long-term fixed rate unsecured notes for ARE in recent months have been very solid and range from slightly below 4% to about 4% reflecting favorable tightening of spreads over ten-year treasuries offsetting the increase in ten-year treasuries. Remember our issuance of ten-year unsecured notes in June of 2016 was at a coupon of 3.95%. Our strategy for funding growth has been 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 and EBITDA, continue to seek opportunities to reinvest capital from selected real estate sales, and remain very disciplined with the use of common equity. Our goal is to continue to remain disciplined in funding our business in a manner that allows us to drive solid growth in per share earnings and at net asset value and growth in our common stock dividend per share. We provided updated guidance for 2017 as detailed on Page 6 of our supplemental package. We updated the upper end of our range for uses of capital to reflect the retirement of the remaining outstanding balance of our Series E preferred stock aggregating about $87 million today, plus any premium necessary to retire the securities. More importantly, our guidance for 2017 reflects continued consistent execution by our best-in-class team, continued strength of our market fundamentals, solid internal growth, solid external growth through development of new Class A buildings and continued discipline allocation of capital and management of our balance sheet. Thank you. And I'll turn it back to Joel.

Thank you. And operator we could open it up for Q&A kindly.

[Operator Instructions] Our first question comes from Nick Yulico of UBS. Please go ahead.

Couple of questions, first on the same store cash NOI growth guidance for this year of 5.5%, 7.5%. Can you go through some of the building blocks of how you get to that level because it seems a little high when considering that your occupancy is going to be either flat or down and your re-leasing spreads are less than 10%.

Dean?

Nick, it’s Dean here. Two ways to think about this, let me talk a little bit more generally about what I see both for ‘16 and ‘17. I think fundamentally as you know our annual steps or structural rent escalations average about 3% and so there's always the baseline for cash same property performance. What you have at least in ’16 I think we've got about 1% growth in same property performance with some occupancy gains. We do have opportunities to still gain occupancy in the same property pool. And so you can still get about 1% from that. And I think you're driving about 2% at least over the two years in that general range from mark to markets on leasing activity and as you know the mark to markets have been pretty robust. And where we're getting real upside I think is on the early renewals. But what you probably also have embedded in 2017 is some benefit from cash coming in as concessions burn off. Keep in mind redevelopment and development projects are excluded from same property results until the asset is in service for both comparative periods for the entirety of the period. But occasionally as a concession burns off during that period you might have a slight benefit. I don't have the details right in front of me, Nick, to go through the exact build up to the 7.5%. But we are ahead of our ten-year average which is about 5%, so it is a very strong same property year for 2017.

And then I guess going back to the two Binney projects you mentioned with the cash NOI commencing. Are either of those projects being added to the same-store pool this year?

Yes, 75/125 Binney Street is because it's been in service for the comparative period but 50 and 60 Binney was just delivered so that it’s excluded from same property performance.

And if I go back to - you had the footnote in the supplemental about 20 million of annual cash NOI, annualized cash NOI and it commences I guess in April. So you get 75% of that in 2017. That's about $15 million off your 2016 cash same-store NOI base, which was 497 million. That's about 3% benefit right there for your same-store alone. Is that - am I right in the way I'm calculating that?

You’re right in that general calculation, Nick, I’d say the one thing that probably offsets that benefit this year is related to the move out of Lilly space at 10300 as we move Lilly from 10300 to 10290 in the brand new redevelopment we delivered to them. So we do expect a little downtime as we transition Lilly's former space at 10300 to re-tenant that space.

Just last question for you, Joel. Can you talk about the ATM usage in the fourth quarter and whether it seems like it might have been done actually prior to the election and what was sort of your thinking on the ATM in the fourth quarter?

Sure, Dean here again Nick. I would say the capital raise in the ATM program was always anticipated in the previously disclosed guidance assumptions that we have provided. So I would say that we pretty much hit our expectations in the capital raise for the program.

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Joel, I was hoping you could give some more thought to - you'd mentioned a pick-up in demand in suburban Maryland, just kind of what you're seeing post election in terms of demand from the government, government type tenants in that region and then also as you're thinking about the Bay Area, whether tech has slowed or picked up versus life science given some of the things we're hearing about these activity.

So let me - thanks Jamie, let me give you a little bit of thought on, we did issue a press release last week on Maryland. We've had pretty good success maybe excellent success over the last two years in leasing there and for a long time maybe the better part of a decade since the Internet bubble Maryland was really pretty languishing and we were unsure we lightened up, we certainly recycled assets out of that market. But over the last two years, we've seen a noticeable change part of that is a lack of new supply or even existing supply which is a good. Number of companies starting to grow up and take more space and certainly with the infusion of new money into the NIH not only the 21st Century Cures but there was an appropriation over the last year that injected another 2 to 3 billion. We're certainly seeing a number of government requirement, so we've gone from pretty negative to a more positive view on that submarket. And Steve, you want to comment on tech?

Sure. Jamie, hi it’s Steve. Certainly on the lab side we continue to see steady demand, we're tracking about 2.4 million square feet which is roughly the same that we were tracking last year. So steady demand and that's against the backdrop of really an increased tightening in the market and we've got really zero availability in Mission Bay, down to 3.5% availability versus 7.9% a year ago in South San Francisco and 0.9% availability in the peninsula compared to 2.3% a year ago. So you've got very steady demand on the life science side with a tightening market availability certainly. The tech demand is somewhat similar, we're tracking about 2.9 million square feet now that's roughly in the range of the 3-plus million square feet that we've been tracking in San Francisco for the past year or two. And then down on the peninsula a similar story of about 4.5 million square feet tracking, which is within 5% of what we've been tracking the last year or two. So demand stays very healthy both on the lab and tech side and I think particularly healthy given the various supply constraints on the lab side.

I guess going back to the ATM usage, did you guys debate at all changing your mix of capital needs through dispositions versus equity as you were thinking about your guidance going forward? Or how do you think about that balance given you've raised so much equity so far?

Jamie, it’s Dean here again. I'd say our programs have been pretty consistent over a number of years now and we actually want to continue to utilize selective asset sales as appropriate whether that it is a core asset with a nice cap - tight cap rate on it or whether it's a non-core asset that’s just appropriate to put in the portfolio. So we'll continue to look at our options. I think in any given environment we're always evaluating different debt. And I'll call it the equity type capital whether it's asset sales, real estate assets sales or common equity and just remain very disciplined in trying to find the right balance of disciplined and overall cost of capital to fund these outstanding really high quality development projects. Great tenancy, great cash flows really well located real estate and so I think we've been very prudent over the years and will continue to act in that same manner.

And then just finally we know Pfizer is looking for space in New York. Is Alexandria Center on the list? I think it's mostly an office usage but is that something you guys would consider?

I don’t know whether we’re on the list or not but my guess is there's a corporate office headquarters and one would imagine they would be looking in for additional office kinds of developments. And they're highly cost conscious on corporate HQ.

Our next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Yeah. Thanks. Can you just provide some details surrounding what led up to the recent transaction with Uber? Who approached to and what's the main reason ARE wanted to do that deal? Did you just want to reduce your concentration to the market?

So maybe Dean, you can start and Steve wants to add to that.

Oh, I’ll let Steve chime in.

Michael, hi, it’s Steve. Yeah. It really evolved over time as Uber became more and more engaged in the design process and as time went by and the additional enhancements they wanted to add to the shell, I think it became apparent to both parties and we're still working very closely together in a partnership. We're managing the entire construction of the facility and we expect to manage the facility once it's delivered as well, but as far as the restructuring, we stepped back and said really, we both had Paramount objectives that we wanted to meet. One was, their continued design and investment in the shell and so this structure really gets to that goal certainly very well, and at the same time, we wanted certainty of delivery and to really resolve our investment in the project. We had been kept all along through the investment in the project. So what we've ended up with is a structure that met both parties’ objectives long term, the economics remained identical, perhaps, they were enhanced a bit with the longer term ground lease there, but I think it's been a great outcome that everybody's very pleased with.

Okay. And now what type, I mean I'm assuming the company is going to be earning some type of development fee, I mean, how close are you going to be helping them design that process?

We are absolutely their development partner and yes, we are earning a development fee.

Okay, great. And then looking at the sup, I know it says the company has about 1.7 million square feet of anticipated near term development starts, are those all 2017 events? I mean, how do you define near term?

Yeah. So I think Mike when I went through my prepared comments, I tried to give some context to the ones we think could be more near term. I'm not sure we're prepared to give you a start date or year or time, but I indicated that 161 First Street which has to go resi, we are actually going to be moving out commercial tenants as part of our development agreement with Cambridge will be front and center, 399 Binney, we’re already responding to proposals for that. So that we see as a fairly near term. We are looking at East Grand in South San Francisco, an additional start there as we have pretty high demand in that market. Similarly in Seattle and Maryland, but we'll keep you posted on when those may happen.

Okay. Great. And then finally, John, I know you have just said historically that the key driver for life science real estate demand is the pace of FDA drug approvals, which has been strong, but there was a drop off last year. Has or will this impact tenant demand?

Yeah. I don't think I ever said it was, I don't know, maybe a key, not the key, but yeah, it’s an important key for those companies that are before the agency and as you may or may not know, the reason for the dip was there were a bunch of rejections this year and there are also I think five approvals that actually got accelerated into 2016, I'm sorry 2015 that would have otherwise been in 2016, but I think overall, the year was a pretty good year and I think we garnered out of the 22 approvals I think we had almost 75% were ARE clients. So we feel pretty good about that and hard to say where the FDA goes from here. The president indicated that he has his APEC and he's looking to streamline timeframes and approaches. So who knows? I mean it can only get faster it looks like at this point.

Our next question comes from Emmanuel Korchman of Citi. Please go ahead.

Hi, everyone. Good afternoon. Joel, just given sort of the intensity of things happening in Washington and like you said, we've got a lot of news flow coming at us today, how are tenants approaching their decisions differently than maybe they were a couple of months ago or maybe even a couple of years ago. Is it inspiring them to move more quickly, less quickly, are they waiting to hear something specific, just give us a flavor as to how those discussions are going?

Yeah. That's a really interesting question and it is I think very company specific. Where companies are transacting matters and need additional space or they just got an approval on a big drug and they're needing to ramp up the infrastructure for that launch, they move ahead. I think if somebody is just sitting back and looking at what's going to happen for example as I mentioned, there's about $100 billion to $150 billion of overseas cash, that's a pretty telling amount and if all or part of that was able to be brought back, I think that will influence people pretty dramatically to do things, but I don't think people are ready to spend that money yet, but we still see in each of the markets, we're near all-time highs in overall occupancy and demands have stayed very strong. You can just see by Novartis re-upping a year ahead of time or more, Merck initiating a new development. We see quite a number of things in the queue. So I don't think despite the frenetic pace of what the administration is doing compared to past administrations, this is a business person without political experience. So it's a different environment. I think companies are pretty much going about their business, but I do think that those of you saw the roundtable discussion today, virtually every CEO who was in the room was talking about hiring more people, expanding in the US and clearly the President was encouraging them to do so. So we think that all augurs pretty favorably. The only downside will be is, the trade issue because obviously that's one of those things that people have to keep in mind. This is a worldwide market and it's important. Europe is an important market, even though, it's many markets and Japan is an important market as well as a burgeoning China. So we will see, but overall, pretty positive.

Great. And then gain on the impairments in 4Q, I guess you attributed part of that to the India exit, but it seems like it's probably more than just India, it’s probably other markets as well. Is that a correct lead and then maybe you can give us an update on timing to get out of your other global markets you talked about exiting?

Yeah. I think there was a small amount in the fourth quarter, Manny, related to domestic or US real estate transactions, including some costs we expensed related to [indiscernible]. But at the end of the day, we're beyond and out of India now, I think which is a huge positive in being able to reinvest that capital and we're working our way through two remaining assets that we own in China and stay tuned. I don't want to try to forecast on stuff we look to monetize in Asia, because timing is more difficult to predict than it is in the US, but we are working on that.

Right. And last question for me. It looks like the NOI expectations from development projects in 2017 is higher now than it was back in November at Investor Day. Can you just talk about what projects are either moves or accelerated to get that number sort of up in the presentation provided?

Yes. So Manny, on the, I think this is in reference to the incremental NOI disclosed that we expected for 2017 has grown roughly 10 plus million dollars. I don't have the exact number right in front of me, Manny. We were at the upper end of our range at Investor Day as there were still some moving pieces and there still are today. We do still have some space that we need to resolve on the lease-up, but it’s very little. And we also moved up a piece of 400 Dexter into 2017 as well. All in all, fairly small adjustments, it’s a big number overall, because you're talking $100 million, but I think we move the number about maybe 10%.

Our next question comes from Rich Anderson of Mizuho Securities. Please go ahead.

Thanks and good afternoon. So Dean, gas rental revenue went up about $21 million third quarter to fourth quarter. Is that entirely, looking at development placement service for projects placement service, plus the Uber deal, does that explain all that gap path quarter-over-quarter?

The biggest delivery would have been 15, 60 Binney which was delivered literally at the end of the third quarter. I'm starting to, I think the second largest delivery was Uber and that transaction. We also had the acquisitions close, which drove top line revenue and I think we also had enough parcel pick up possibly until another project at San Diego 10. All right. But those are the big, those are the big deliveries, Rich.

There is nothing funny. I mean, not funny, but I mean these are just investments, there's nothing else in that that quarterly increase in GAAP revenue that we should be backing out or not thinking of as recurring?

No, not at all, Rich.

On the topic of CapEx, you mentioned relatively light in terms of lease expirations this year, high levels of occupancy, should we assume that your recurring CapEx number will be significantly down, I know these were dramatic, but significantly down versus 2016?

It's really dependent, Rich, but I guess if you had to say apples-to-apples, right now, I would say would be down just because volume could be down from roughly 3 million square feet for 2016, but it should remain fairly consistent on a square footage basis for any lease renewals and release in a space. Those numbers, Rich, are fairly, they're fairly small to start with. So, it probably doesn't beg too much.

But what could move that would be early lease renewal activities, tacking stuff in ’18 and so on, which could temporarily boost up CapEx. Is that the right way to think about it, but for now, the number apples-to-apples might be lower?

Yeah. But any upside on early renewals, Rich, I think to the extent you have a little CapEx with recapturing a significant mark-to-market, I think it's a home run.

Yeah. Sure. Okay. Next, what is the office to lab conversion potential at One Kendall?

Yeah. This is Tom Andrews, Rich. It’s relatively modest office space in that complex and a little bit more than lab space currently on a percentage basis, but there are a number of -- there are several suites within the complex that we're evaluating for potential conversion when leases burn off.

Okay. And last question, Takeda and Ariad, is there any kind of issue about a change in the amount of space that area would need. I guess, the credit enhancement, but what about just the pure need for square footage in the future?

Yeah. This is Tom once again. We don't have that answer yet. It is encouraging to know that Takeda was out in the market looking for additional space prior to the announcement of the Ariad deal, which suggests that their existing campus in Cambridge is full and the Ariad acquisition may help them control space if they actually need it.

Our next question comes from Sheila McGrath of Evercore ISI. Please go ahead.

Yes. Joel, on the Novartis extension, did they downsize some of that Novartis square footage in another location and was there any free rent or TI? And last question, was that early renewal already factored into your 2017 same store NOI guidance?

Yeah. We’ll come back to that. Let me ask Tom to come in on these first two questions.

Novartis had been leasing up until a couple of years ago, about 425,000 square feet at the Tech Square Campus. Upon completion of this extension, I believe that about third, about 320,000 square feet. So they have downsized a little bit in the campus as you're probably aware, they've added their own campus down the street of about 500,000 square feet. So pretty modest downsizing within our campus. That space has all been re-leased to others at good rent bumps. There was no free rent offered and the TI allowance associated with was very modest.

So Dean, you could comment on the same-store?

Yeah. So Sheila, you probably were looking at for input on insight into two areas, one, same store and leasing. I would say Novartis in that early renewal was very significant. It was a key component of our assumption and I would say that we were cautious as we prepared guidance as well as updating guidance for this year. We held things firm where they were previously at Investor Day. So, Novartis puts us in a great position to perform well, both on same-store and leasing and hopefully as we make our way through the year, there's some upside as we attack other early renewals.

Okay, great. And just on 88 Bluxome, is that, I think you mentioned in the supplement that it's on a short term lease, how should we think about that in terms of, is that five years out, seven years out, how should we think about that say in terms of development timing?

Yeah. Much sooner, but Steve, you can talk about the 2 in 2.

Sure. Sheila, hi, it's Steve. We are actively pursuing entitlements and we have been for a while now. So as you've seen in the supplement, we've got design drawings. We've been into the city for a number of months. We have a really rich set of community benefits, so we think we're very well positioned. So we'll look over the next year or two for entitlements and have a sublease or a leaseback during that time. If we need to extend, we can go ahead and extend, but I think right now, we're thinking of a one to two your horizon.

Okay. And last question, Joel, you mentioned potentially a new start in South San Francisco. I was wondering has the Merck built-to-suit prompted more interest in that location and if you could remind us, how much remaining entitlement you have there?

Yeah. So Steve, if you want to take it, but the answer is yes.

Yes. Again Sheila, that market overall is very healthy. We've just got about a 3.5% vacancy and certainly with Merck taking our next to last large parcel, we are focused intently now on the 279 East Grand parcel. We've seen other leases transacted there as well, 5 Prime sits about 115,000 feet, and possible foods about 60,000 feet and about three other tenants taking 30,000 feet just in the past quarter here. So it's a very healthy market and we're just positioning ourselves to be absolutely ready for an anchor tenant and having initial conversations with a couple of different groups.

Our next question comes from Tom Catherwood of BTIG. Please go ahead.

Thank you. Good afternoon everybody. Following up on the South San Francisco comments, Steve, hearing your thoughts on obviously low vacancy rates there and the potential development site, it looks like you sold off though one of your development sites at 560 Eccles. This had been kind of in your key near term starts previously. What was the change in strategy there that made you want to get rid of it now?

Hi, Don. It’s Steve again. Yeah, this was a parcel that was a little bit unique. It was part of an assemblage effort we had a number of years ago. So you had very challenging access through an easement along a large warehouse facility that ultimately will stay a large warehouse for a long period of time. There was significant site work that would have need to have been completed and it was a little bit of a one-off as a standalone parcel. So given the other activity, we certainly had in South San Francisco, we thought it made good sense to go ahead and recycle that capital and put it into projects like 213 East Grand that are well underway.

Got it. Also saw the note in there about looking forward to a condo sale at I believe it's 360 Longwood, can you talk a little bit about that detail, including how the value is set and how the management of that asset would work going forward?

Yeah. Hi, Tom, this is Tom Andrews. So that condo sale came out as a result of a fixed price option that was negotiated back in 2011 when we had signed the anchor lease with Dana-Farber Cancer Institute for the Longwood center development at 360 Longwood. Recall that we were a 27.5% partner with two other investors in that development. And so the price, which is about $1,150 a square foot was, as I said, a fixed price option that was really integral to getting the anchor lease signed. I would note that the company has no other significant fixed price options in its entire portfolio. So you won’t see this type of sale again. And we're not planning on doing any future fixed price options. It was kind of a situation when you deal with an institution like Dana-Farber in a market like Longwood, it was really integral for the deal and so they are getting a price, which is really below what we consider to be market there.

Got it. I appreciate that. And final one for me, Tom, sticking in Cambridge, on One Kendall Square. Obviously there's a significant amount of roll coming over the next two to three years. Is there any expectation that you could get back any large blocks of space there and is there any expectation that you could maybe like get that with Novartis, pull some of those leases forward into 2017?

Yes. I mean, we're working towards those goals. You might have seen an announcement that Merrimack Pharmaceuticals, which is a largest tenant in the complex has sold a couple of marketed oncology products to Ipsen, which is a French kind of mid-size pharmaceutical company with about $6.5 billion market cap. They sold a couple of assets to them and Ipsen is going to sublease some space from them, Merrimack now with a lot of capital behind it is going to become a clinical stage biotech company with a much smaller headcount requirement. So there is a real opportunity there to potentially recover some of their space and also do term extensions with both Ipsen and Merrimack. So it's a little early to predict how that's going to come out, because there are a lot of moving parts associated with it, but we're definitely working towards trying to accelerate some of the potential rent mark-to-markets in that complex.

Our next question comes from Dave Rodgers of Baird. Please go ahead.

Yeah. Good afternoon, guys. I guess on the asset sales and potential common equity as part of your guidance, can you talk about what assets or the volume of assets that you might be in the market with today in terms of getting toward that goal for the year?

I don't think we want to identify anything at this point, Dave, publicly.

Yeah. And in terms of, are you actively marketing or is this something and I know there's two categories right, it's non-core kind of a core plus that you can sell at really good prices. And I can understand not identifying the assets. I guess trying to get a sense of what you prefer today relative to kind of your cost of capital, if there's kind of an advantage going one direction to the other?

Dave, I think, stay tuned as we make our way through white collar as we can.

Okay. Thanks. And maybe Tom, just two questions in Cambridge, I think there were some comments about 399 Binney and maybe there's some activity about a built-to-suit or some development there. Is that tech, is that more biotech, how does that fit into the Cambridge landscape and I guess a similar question for the remaining availability at 100 Binney?

At 399 Binney, which is a development side at One Kendall Square, we're designing that to go either way office or laboratory space. We've had discussions with both types of tenants, but nothing to report yet in terms of a deal that's imminent. With respect to 100 Binney, that that too is designed to be either lab or office space as you know, Bristol-Myers anchors that building with lab space, but we're actually actively talking to a tech tenant about a full floor and possibly two floors of the remaining spaces available there.

And then maybe last Joel, just rounding up with you, of the space that you talked about maybe commencing this year and I don't know if this is asset, I would apologize, what percentage of that is lab versus tech?

Well, I didn’t say anything about anything starting this year. I said, as a definitive, I said that we were, we believe that as we gain leasing traction, certain projects could come to the top of the list and I named five of those, particularly 161 First, which will be because it's resi, but yeah, I don't think we would want to speculate, but other than to say what Tom said about 399 East Grand is likely lab, Seattle could be either and 9800 medical center in Rockville would be lab.

Our next question comes from Jed Reagan of Green Street Advisors. Please go ahead.

Hi. Good afternoon, guys. A lot of my questions have been asked. I'm sorry if I missed this, but have you seen any evidence of cap rates changing for lab product in your markets or financing getting tougher for buyers? And I'm thinking especially on sort of the lower quality end of the spectrum?

Yeah. Jed, there has only been a couple of trades from quarter-to-quarter that was the dry dock building and Seaport in Boston, a fairly large many tenant multi-tenant building, very low credit. I believe it's also on a ground lease traded at about 5.5 cap rate. That felt very normal to us when we saw that data. And then there was a trade in Maryland where BMR sold a building on Shady Grove Road to a investor that is placing CalPERS money. That was at 7.0 cap rate, actually right on the dot where Green Street looks at or how Greet Street values Rockville. So, so far, there has not been any more contraction nor any expansion in laboratory cap rates that we can see.

Okay. And any ebbs and flows that you guys have been able to discern in terms of bidding tends or maybe new buyers in the hopper, especially maybe overseas investors?

Well, Peter, go ahead and then I could come.

Well I do know that, we’re pinged often by people with ideas about or clients that would love to get exposed to our product type that include foreign entities, but as we've said, we're really not ready to disclose any plans about asset sales, but I would say we went pretty thoroughly through it at Investor Day. There is definitely a cadre of over 50 institutional investors that have participated in the bidding tends or have actually purchased things. Certainly, on the [indiscernible] deal, I believe that we had at least 16 to 20 initial bitters that was whittled down to about a final 8. All very high quality investors, obviously MIT ended up purchasing that. But, yeah, there's no change. Again, there's probably just like the cap rate answer, there's been no major expansion of that pool that we know of yet, but we don't believe there's any contraction either.

[Operator Instructions] Seeing no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Joel Marcus for any closing remarks.

Thank you, everybody. We're about one hour in and we appreciate your attention. Look forward to talking to you on first quarter call. Thank you again.

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