Alexandria Real Estate Equities, Inc. (ARE) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Alexandria Real Estate Equities Inc First Quarter 2017 Financial and Operating Results 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 Alexandria's first quarter earnings call. With me today are Dean Shigenaga; Steve Richardson; Peter Moglia; Tom Andrews and Dan Ryan. So to open, I would like to congratulate the entire Alexandria team for a truly superlative first quarter. This month of May is Alexandria's 28th anniversary celebrating its May 1997 IPO listing on the New York Stock Exchange and what better way to celebrate than a great first quarter and also Alexandria's inclusion into the prestigious S&P 500. We recently mailed our 2016 annual report to shareholders and I'm proud to read the quote on the cover, which defines Alexandria in which we're both proud and grateful. Alexandria has achieved the three outputs that define a company, superior results, distinctive impact on lasting endurance; Jim Collins, renowned author and business strategist. In our shareholders letter, we highlight our variable strategic decisions in 2004, 2005 and 2006 to pursue the urban campus cluster strategy in Mission Bay Cambridge in New York City and that strategy and set of decisions over a decade ago presaged today's megatrend of urbanization, leading to the fostering of the innovation, collaboration and certainly is resulted in superior results and strong total returns for Alexandria's shareholders. In fact General Electric CEO, Jeff Immelt, said recently that he changed out his suburban office in Connecticut, where he saw dare for an urban office campus in Boston, where he sees engineers, techies, kids with big ideas and sharp minds out to change the world. And that’s does describe it. I want to highlight a quick first quarter snapshot and Dean will then take a bit of a deep dive, as you know FFO beat the street by about $0.03. We raised guidance $0.02 at the midpoint, and as Dean will highlight realizing spreads up, early renewals and same-store growth were really very positive. Strong internal metrics, positive cash same-store property growth great releasing spreads and 1.3 million square feet of leasing, strong external growth was also a hallmark of the first quarter with continuing lease development deliveries and very improved balance sheet metrics. With respect to demand, I would say very solid continuing demand both for life science and technology companies, which really intersect in our core urban campus cluster markets. One of Alexander's biggest challenges today is, we simply don’t have enough space to handle our own tenant demand as well as other non-tenant demand. On the supply side, we continue to see continuing constrained supply in each of our core urban cluster markets, leasing as you see from the press release from the sub 1.3 million square feet this quarter, our cash up about 17.8% on the back of really the Novartis, Genentech, Roche and Vir Biotech leases. And in fact, we do have a tenant ready to take all of Lilly's vacated space in San Diego and we are working through that negotiation right now. We are active on the acquisition front and as I stated at the frontend, we have more demand today than we have space available. So, we are active in Cambridge, Mission Bay/SoMa, Greater Stanford/San Diego and the Research Triangle Park. We really focused on unique and valuable locations where we can scale. We remain highly disciplined in our location selection and in our assumptions towards provide economically advantageous projects. On the development side, one of best and most highly leased pipelines in the industry we have fortunately and we will continue to be highly disciplined in all aspects of our development with respect to managing project cost, managing project underwriting, tenant underwriting, timeliness, leasing and yields. On the 100 Binney leasing front, I am pleased to say we afore signed Letters of Intent, which cover all of the remaining phase except about 22,000 square feet and although executed LOIs are not signed leased, we have a very high confidence level these will all get done and by the way we do have back up. I want to highlight a few other developments quickly, 399 Binney which was acquired at when we acquired One Kendall Square, we are working on this and preconstruction and already seeing really good demand. In Research Triangle Park, we acquired a redevelopment asset that we are redeveloping and have solid demand for both the labs there and the greenhouses. And at 279 East Grand, we are working through preconstruction issues and negotiating with several users as well. So, the prospects for future pipeline look pretty positive. On the help of our life science and tech tenant base, these tenants are strong and well capitalized with very strong continuing R&D funding, and on the life science side as we have said before about $150 billion globally, 39 billion added to that from the U.S. government and another 30 from U.S. philanthropy and another 11 billion on the venture side. This is in past year and this year, we expect it to be at or above those levels. The NIH was fortunate to get a $2 billion funding boost over the next five months under the bipartisan spending deal that was reached a Saturday night in Congress and a plus for the policy of strong government support for biomedical research. We have a very strong continuing tenant base, 51% of our ABRs investment grade, 78% of our top 20 tenants is investment grade and 79% of our ABRs from Class A properties in AAA locations. And finally before I turn it over to Dean, so far 2017 has seen a fast start for FDA approvals. We’ll maintain new drug approvals today, five of which were approved in the past week and Alexandria has seven tenants down 37% of those approvals. So, we’re looking at I think very positive backdrop to our operation. So, let me turn over to Dean for some deep dive.

Thanks, Joel, Dean Shigenaga here, good afternoon everybody. As Joel, we’re off to a great start in 2017 and have increased our guidance FFO per share for 2017 by $0.02 to $6.02 at the midpoint, really due to continued strong rental rate growth on recently executed early lease renewals. We are now on track to deliver 9.3% growth in FFO per share in 2017 and 36.7% growth in FFO per share over the four years ending on December 31, 2017. There are four important topics I will cover today. First, continued solid market fundamentals. Second, continued solid internal growth. Third, strong and disciplined external growth including very important comments about the potential significant understatement of net asset value. And four, continued discipline of allocation of capital management of our balance sheet. Market fundamentals remain strong and our urban innovation cluster markets demand remain strong and supply of existing Class A space remains very limited. We are in a unique position with a highly experience and regarded team with the strong relationships that positioned us well that would be the preferred partner to provide collaborative campuses and urban innovation clusters. We continue to execute and deliver solid internal growth also known as our same property net operating income growth. Cash same property net operating income growth was very solid at 5.5% for the quarter. Leasing activity for the quarter was also a very strong at 1.3 million rentable square feet through release renewals or generally unpredictable from a timing perspective since these opportunities are dependent on decisions by our tenants. However, executed early release renewals represented approximately 65% of our leasing activity for the quarter. Importantly, our team captured rental rate growth of about 28% and 18% on a cash basis on total leasing activity this quarter. In reviewing various sales side models for the quarter, we noted that most models did not capture the near-term impact of significant rental rate growth on leasing activity. The most models as many of us were built off the prior quarter NOI and adjust for acquisitions, dispositions and development and redevelopment projects and had a growth rate for typical same property NOI growth. Our rental rate growth on several recently executed lease renewals and releasing the space through significant and immediate growth in revenue and operating income and FFO per share resulting in our $0.02 increased in our mid-point of guidance for 2017 FFO per share. 60% of this increase was driven by executed leases with strong rental rate growth and 40% was attributable to a slight average occupancy pick-up throughout 2017 as compared to our prior guidance. EBITDA margins are very strong and have improved in recent quarters of 67% TIs and leasing commissions included in our disclosures of non-revenue enhancing capital expenditures for the quarter were 18.4 million, up about 6.7 million, 4.5 million of this increase was driven by leasing commissions on the recently executed 10-year lease extension on 303,000 renewable square feet with Novartis located in Cambridge. As anticipated, our occupancy declined slightly in the quarter to a solid occupancy of 95.5%, the primary driver of this slight decline in occupancy was due to the expansion of the Eli Lilly from 125,000 rentable square feet to 305,000 rentable square feet at our recently completed Class A redevelopment project at 10290 Campus Point Drive. Lilly vacated a 125,000 square feet at 10300 Campus Point, and as we Joe mentioned are in negotiations with tenant for the most of the space. As we look forward over the next two quarters, we expect occupancy to improve into the 96% range and closer to where begin the year. We are in a very unique position to provide inspiring real estate solutions to drive collaboration and innovation for some of the top biopharma entities, focused on making life better for people throughout the world. Over the past four quarters, we have completed 10 new Class A properties and we have another seven new Class A properties that we expect to complete in 2017. The deliveries in 2017 alone are projected to generate another 100 million of incremental net operating income. Additionally these deliveries are weighted toward the backend of 2017 and we’ll drive significant net operating income growth in 2018. In order to maintain a high quality engineering and asset management services among other services, G&A expenses have grown with the growth in new Class A properties and cash flows and it's important to highlight the G&A expenses has improved slightly in recent quarters to approximately 0.6% of total assets. We are also in a very unique position with well located land parcels to decide, if appropriate to address the demand from high quality and innovative entities with ground up development of new Class A properties. This quarter our supplement package includes a new disclosure on Page 38 of certain development and redevelopment projects aggregating 1.5 million rentable square feet that are undergoing marketing and preconstruction with potential delivery dates in 2018 and 2019. The project start date and initial occupancy date for each project is subject to leasing and or market conditions. These potential developments and one redevelopment are on average targeting about 7% cash yield. We also added a new disclosure on page 39, for other potential near-term projects aggregating another 2 million square feet that could also address demand in the market with potential delivery in 2019, 2020 and beyond. Let me provide very important comments on the potential understatement of net asset value as of March 31, 2017. Most entity model start with the gap, net operating income and back out straight line rent to derive cash, net operating income; and then most entity models divide this cash NOI amount by a market capitalization rate to determine the value of the operating portion of our asset base. As of March 31, 2017, our recently completed development and redevelopment projects have approximately 95 million of annual free rent that will result in significant understatement in most NAV models. At a reasonable market capitalization rate on this 95 million of rent concessions NAV models could be understated by $20 to $25 per share. Importantly, approximately 40 million of annual cash rents commenced on April 1, 2017, and this is primarily related to 75/125 Binney Street and 50 and 60 Binney Street. So, we encourage investors to carefully review NAV estimates for important valuation considerations. I would like to congratulate Steve Richardson, our COO and our San Francisco team for their outstanding relationships and reputation in the market, which ultimately developed into an opportunity to work in partnership with the Golden State Warriors and Uber. We recently entered into an agreement to purchase a 10% interest in a joint venture with Golden State Warriors and Uber and expect to close this JV in 2018. This joint venture would develop two high quality office building and lease the buildings to Uber. Alexandria will manage the development of these buildings and also earn a development fee. Our balance sheet in credit metrics are very strong today and provide a significant flexibility. Importantly we continue to focus on improvement in our credit profile and long-term cost to capital. By the end of this year we're forecasting the following strong metrics, leverage in the range of 5.3 times to 5.8 times both on the net debt to adjusted EBITDA and in net debt plus preferred to adjusted EBITDA basis. Liquidity of 2.2 billion today combined with low balance sheet leverage really provides significant flexibility with the disciplined in patient with capital market activity. Our fix charge coverage ratio is greater than four times. Our development pipeline is approximately 10% or will be approximately 10% by the end of the year and this includes projects under vertical construction as well as future projects and that provides us optionality to address the demand from some of most innovative entities. We have not debt maturities in 2017, very limited maturities in 2018 and a very manageable set of maturities in the three years better after. And we're very limited on hedge variable rate debt of about 5% of total debt today. Our strategy for funding growth has been consistent and consistently executed year to year, we will continue to focus on investing significant cash flows from operations after dividends, fund a significant component of construction with long-term fixed rate debt on a leverage neutral basis with significant growth in EBITDA continue to seek opportunities to reinvest capital from selected real estate sales and remain disciplined with the use of common equity. Our goal is to combine our discipline management of our development pipeline with the strong and flexible balance sheet and continue to remain disciplined in funding our business in a manner that allows us to drive solid growth and per share earnings, net asset value and growth in common stock dividends per share. Closing the guidance here we provided an updated guidance for 2017 as fully detailed on Page 6 of our supplemental package. Again our 2017 guidance FFO per share with the midpoint was increased $0.02 to $6.02, again driven by strong rental rate growth and recently executed early lease renewals. We remain in a very unique position within REIT sector today with solid market fundamentals both life science fundamentals and exciting innovation focused on improvement in the quality of life. We were also well positioned with long tenured and a highly regarded senior and executive leadership combined with a unique science and technology team that allows us to be an important partner to some of the world's most innovate entities. Thank you and I'll turn it back to Joel.

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

[Operator Instructions] Our first question today comes from Emmanuel Korchman with Citigroup Global Markets Incorporated. Please go ahead.

Joe, you talked about earlier that the lack of space within our developments for both new and existing tenants. I was wondering, how that impact the way you think about doing redevelopment doesn’t make you a little bit more aggressive on whether the timing or lease up or location properties to help take advantage of that basic delivery between demand and supply?

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

And then Dean on the Warriors, Uber venture, what type of role do you think Alexandria will play and what is sort of 10% seen at the table get you there?

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

Steve has visions of holding up the NBA Championship.

Are there any development or other fees that come your way because you are taking that role in the project?

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

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

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

Yes, Sheila. The option parcel we are having in that discussions on that both with the city and with potential users, we do have demand internally. But that’s I would say an elongated process because of the nature of negotiating the nature of side due diligence and then ultimately constructing the tower. So we are looking forward to moving that forward. But I think over the shorter medium term we are certainly looking at opportunities in New York City to accommodate the tenant base there. So, I think overtime you will see us do some things in the city for sure other than the Alexandria center.

And then 100 Binney, that’s good news with the four LOIs. Just wondering as these are life science tenants or tech tenants?

Three of the four are life science.

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

Sure, Sheila. It’s Dean here. So, the forward is about 6.9 million shares, if I recall correctly 2.1 taking down and closing. So call it roughly third at closing. Two thirds on a forward basis and the concept there was really to match our funding needs, so we added a number of transactions that closed in the first quarter that was required for the immediate funding. Second quarter consisted of closing one of the acquisitions. The second partial installment on the Uber payment for unwinding the joint venture and then capital required for the retirement of our Series A preferred stock. So, when we recently put forward and place for our outlook was to bring some of it in quarter-to-quarter to match our funding needs.

And our next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Can you mention -- it looks like six projects potentially delivering in ’18 or ’19 or beyond of future starts. Can you maybe handicap or maybe just give us some more color on discussions for those and are there any that you would start to back at this point?

Well, I think, I mentioned three that we’re pretty active in marketing and preconstruction which is 399 Binney, which assuming we turn the four otherwise into actual leases that 100 Binney that would leave virtually no space available there. So, the 399 Binney becomes important, we do have one-time in particular. But several tenants looking at summer all of that space. So, we’re certainly looking hard at that and working on everything we need to do go vertical on that one were ready. We did close and acquisition in Research Triangle Park and we’re redeveloping that as we speak and there is existing demand that we’re trying to need and then the 279 grand as we said, we have several users were negotiating with and we’re moving that forward in preconstruction and marketing before we go vertical. We’ll make decisions based on how we think the market is and where we think our leasing is.

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

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

Okay. Thanks. And then finally, Joel, you mentioned the budget in life science funding. Anything else we should be watching in the pipeline here in terms of budget discussions or any of builds or funding opportunities that might be out there that maybe helped hurt the business?

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

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

Joe, can you a little bit about land side that you purchased this quarter. What's your current thought on banking lands and what's the timeline we should think about these projects maybe having groundbreaking?

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

And then what other type of opportunities that you're tracking at there I guess in purchasing land sites. Should we expect more purchases throughout this year and possibly next year or is this just kind of like onetime thing?

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

The next question comes from Dave Rodgers with Robert W. Baird & Co. Please go ahead.

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

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

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

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

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

And maybe lastly for me, you've done a good job addressing some of your recent roles in the portfolio, your tenant rollover, anything that we are watching now through middle of '18 that’s coming up?

Dave, hi, it's Steve Richardson. When '18 is pretty well distributed we have only got four projects in excess of 50,000 square feet. The largest one is in South San Francisco, that market is rebounded nicely. We are actually engaging the tenant today in discussions and that’s later half '18. So '17 looks like it's in very good shape and as we start looking into '18 I think we are pleased with the ways those were distributed and probably a solid two thirds or more are in core clusters as well.

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

Dean, I didn’t fully get the timing of the settlement of the forward. Do you think ratably over the course of this year and maybe you said asked differently? What is your guidance assume in terms of fully diluted share count for 2017?

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

I think that answered my question. Thank you. Question, on the Golden State Warrior joint venture and Uber to be the lessee, I mean what is the stop Uber from going down wind to go down Uber design path like they did it 1455, that’s not many correctly how I am describing it, but resulted in you nevertheless is sort of restructure that arrangement. Is there anything embedded in this joint venture that will preclude that from having to happen again?

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

Another quick one for, Dean, and maybe I should noticed, but I don’t so. When is the timing of that installment at $56 million for really to the Uber JV purchase?

Well, it's somewhat contingent on construction milestones, if I had to guess over the next call it six to eight months. I wouldn’t suspect it will be spread over evenly over the timeframe, but it is contingent. So, if they don’t hit the milestones we set out in the payment plan. But if I had to guess Rich, I think it will be paid this year. But I think it works to advantage, if we don't pay them, if they end up deferred it's just hard a modeling perspective for you guys.

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

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

What your average escalator?

We’re really close to 3% contractually today.

And that’s set escalator on CPI escalator?

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

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

Steve, just, now you've partially addressed this in a previous answer by one of the drill down a bit. Last quarter, you referenced 2.4 million square feet of lab demand that you're tracking in San Francisco, about 2.9 million square feet of tech demand and then another 4.5 million square feet in the Peninsula. How does that kind of attract today?

Hi, Tom. It’s Steve. Again, the markets are healthy across the Board from Mission Bay down to the Greater Stanford Cluster mostly seeing an uptake in activity. We’re tracking 2.8 million square feet of lab demand today. A year ago with that 2.2 million square feet and I think you reference, it was 2.4 million square feet a quarter two ago. And a number of those are large investment grade, high quality tenants out there in the market. Tech demand, we’re tracking again and uptake there as well 4.1 million square feet versus 3.7 million square feet from Q1 2016 at San Francisco alone. And maybe a little flatter down in the Peninsula, we’re not seeing Google and Apple in the market with quite the same large block apatite at least right at this very moment. But across the Board, it continues to be very, very healthy and in fact somewhat of an uptick from a few quarters ago.

Appreciate that. And we take a look at new development site down at 960 Industrial Road. It looks like the surrounding areas heavily industrial kind of even by South San Francisco standard. What is it about the submarket and the specific site that you think makes it fit for your life science portfolio?

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

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

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

Got you. And then as far as overall?

Yes, Tom, it's Steve again. Maybe overall at least for San Francisco, I'll let Dean comment as well and Peter. If you take the two examples in the supplemental, the Genentech renewal there, they were looking to lock down space. So, we have note down time, minimal TIs, really no concessions. And then the Vir technology space in Mission Bay was actually very competitively sort after space. So, it was the complete office, there were really no concessions, it was a very competitively built space.

Yes, we’ve seen similar -- it's Dan Ryan. For San Diego, we've seen a softening of the free rent concessions, so that's confirming us. I think TI allowances have been above the same as they have been since above the past 12 months.

This is Peter Moglia, just to add on what Dan has said about free rent, that’s probably the biggest things that I've noticed. The lease underwrite about a month per year for a long-term lease deal in that turned into a half month. Otherwise, that’s everything else is pretty been stable.

Next question comes from Jed Reagan with Green Street Advisors. Please go ahead.

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

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

Yes, I think the most two most recent renewals that we’ve had in new lease in our new lab corp went up significantly on their renewal that was probably a plus 20% increase. And similarly in our sounding locations, we're seeing pretty healthy increase of about mid teens percentage in cash yields.

Tom, you could comment on Cambridge?

I would say similar we have, we're still seeing rent growth here in Cambridge maybe a little moderated over the pace of last year and the year before but definitely still growing rent and concessions are flat to down in another more favorable to the land lord. It continues to be a tight market sub factors on availability rate and clearly that’s positive for rent growth and concessions reductions.

And I think some of the number you guys recorded, sounds like you're more sort of mark-to-market on new leases, I guess I was looking at montages kind of base rent growth in a year-over-year basis just kind market trends.

This is Steve. I mean just to be clear that two examples I cited were actual deals in the market. They weren't mark-to-market adjustments. Sorry, if I confused that with the mark-to-market comment at the outside.

And Jed, it's Peter Moglia. One thing I just wanted to note because we're doing a lot of land acquisitions right now, as that when we underwrite these acquisitions, we're using un-trended rents based on today, even though we have significant rent growth we're not counting on that to make our numbers in the future. And when than when we do trend rents we typically hold it at a CPI level, we don’t try to underwrite spike something like that. So, I just wanted everyone to be clear that when we're speculating on future returns, it's based on what we see in the market today.

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

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

Just on the separate topic, you are recently in acquisitions I think you land banks about 7% or so of your operating asset base and just curious if you have feeling for how high you feel comfortable growing that number to?

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

And then of the recent land acquisition I know you got the entitlements, you've got to work through at the tenant's club site. Is there entitlement you still have to achieve anything the other sites? And are those all lab sites on the stuff you acquired in last quarter or so?

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

Jed, it's Peter Moglia, it’s a 303 Binney Street. We are going through entitlements there. Obviously, we mentioned blocks some about that of course the Warriors project is already entitled at 916 Industrial Roads, we will be -- where we have commenced entitlement there. And then the Callan Road, Vista Wateridge acquisition in San Diego is undergoing entitlement and then the East Cornwallis Road in RTP is actually has existing entitlement. So, we don’t need to do anything there.

And the first three you feel pretty good you being above to achieve those?

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

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

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

Our last question comes from Tony Paolone with JP Morgan. Please go ahead.

Thanks. On 303 Binney, if I just put your entitlements now against the purchase price like $380 a quarter something. And it looks like, if you do get more density there, you’ll pay, there is earned out or you pay more. What would about look like do you think when it’s done?

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

But I mean, if I'm just reading a footnote and suggest that more entitlements you get there at to the purchase price. So, executive deal leverage on the 380 a quarter, is that correct?

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

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

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

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

Yes, what we have left saw on that line time in our guidance, which is still able to equity and dispositions. It’s roughly 400 to solve 66 million, 67 million or so is from the sale with the condominium interest on the Longwood project. That lease is called at roughly 330 million to saw far beyond that and we’re working through that over the remainder of the year.

Do you have any assets in the market right now?

Nothing too significant.

And then just last question for, Dean. The other income line is looking the last five quarters it’s been anywhere through change 1 million to over 10 million. What’s in the 2017 guidance for that line?

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

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

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

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

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

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