BioMed Realty Trust, Inc. (NYSE:BMR)
Q2 2014 Earnings Conference Call
August 6, 2014 1:30 PM ET
Richard Howe – Senior Director-Corporate Communications
Alan Gold – Chairman & Chief Executive Officer
Kent Griffin – President & Chief Operating Officer
Bruce Steel – Managing Director, BioMed Ventures
William Kane – Vice President-Leasing & Development
Joe Reagan – Vice President & Regional Executive, Wexford Science & Technology LLC
Dan Cramer – Vice President & Regional Executive, Wexford Science & Technology LLC
John Bonanno – Senior Vice President-Leasing & Development
Greg Lubushkin – Chief Financial Officer
Richard Howe – Senior Director-Corporate Communications
Jordan Sadler – KeyBanc Capital Markets
Ross Nussbaum – UBS
Dave Rodgers – Robert W. Baird & Company
Welcome back, everyone. I do hope that you enjoyed the presentation by Bruce Katz and the panel discussion, and again, thank you, Bruce, Ed, John, and Tim for a most lively discussion. Let’s give him another hand please. Thank you.
Now, we move onto our Q2 2014 Earnings Conference Call. At this time, all participants on the phone and on the webcast are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that the conference call is being recorded.
Our earnings call includes a slide presentation to accompany our prepared remarks. If you are on the webcast and not currently viewing the slides and would like to, please go to www.biomedrealty.com, click on the Investor Relations tab on the left and then click the Q2 2014 BioMed Realty Trust Inc. earnings conference call link. We have posted these slides on the Investor Relations tab of our website under the title Investor Presentation, August 2014.
So we're doing our earnings call a bit differently today, and are pleased that you will be hearing from several of our senior market executives, along with Alan Gold, Chief Executive Officer; Ken Griffin, President; Greg Lubushkin, Chief Financial Officer.
Before we begin, I would like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors.
For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K, as well as the company reports file periodically at the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. And a one more announcement for people in the room is that that our networking reception would start at the wrong time on your agenda, it will start at 3:00 PM immediately after this conference call.
So with that, I would now like to turn the program over to Alan Gold.
Well, thank you, Rick. It's fitting and a pleasure to be back here at the New York Stock Exchange for today's BioMed Realty Investor Day 2014 and our second quarter earnings announcement. It’s also exciting that we hold our Investor Day here, because today marks the 10th anniversary of BioMed Realty's IPO, the beginning of our journey to be the leading provider of real estate to the life science industry.
I want to take a step back to focus on the vision and strategy that allowed us to build this company from just a few people and 400,000 square feet of space 10 years ago to where we are today, with 237 people and 17.2 million square feet of laboratory and office space.
In founding this industry over 20 years ago, Gary Kreitzer and I identified the unique growth potential and opportunities associated with the real estate needs of the life science industry. And after 10 great years leading BioMed Realty, I can say that our vision has been proven right, the market, our track record have proven the opportunity we saw is there, and we developed the right strategy for capitalizing on the opportunity. This strategy is centered on people, expertise, and relationships.
At BioMed Realty, our success comes from fantastic execution by the best team in the industry, and you will have the opportunity to hear from some of them in a few moments. We listen closely to our tenants and other partners in the life science industry to ensure that we fully understand and anticipate their real estate needs. This has served as well as we make new investments in our current and new markets, and it has helped us learn a lot over the last 20 years.
For me, one key lesson learned is that the life science industry is still in its infancy and will continue to grow. This may seem incredible given how far the industry has come, but the strength of the life science industry in the market continues to amaze me as it gains momentum far beyond our original expectations. To understand why the life science industry is really at the beginning of its growth, it is important to recognize why the life sciences is different from other industries. This starts with today's population expecting to live longer and people wanting those lives to be as fulfilling and unfettered from illness as possible.
We are still trying to tackle and understand many diseases such as cancer, HIV, Alzheimer's, and pandemic diseases. Several decades ago we saw that the demographic trends driving demand for more and better healthcare to improve life and the technological advances in the sciences would be, perhaps, the most important drivers of growth in our economy and a permanent frontier of innovation. This demand driver has become even stronger.
To this end, the capital investment in biotech companies is growing and will continue to grow, because the opportunity is endless. Venture capitalists, the public sector, universities, philanthropy, institutional investors know that the demand for new technologies and drugs is enormous and only growing. To put this growth into perspective, in 2007, there was just under $40 billion of capital raising in the life science industry.
Six years later, capital investment in the industry grew to almost $90 billion, and the momentum continues. Today, as we mark our 10th anniversary as a public company, I probably observed that the industry, our portfolio, and our team are in the best position we have ever been. And the opportunities in front of us have never looked better. Today, we are realizing the opportunities associated with well-established centers of innovation like Cambridge, San Diego, and San Francisco, and also participating in the advancement of these and other innovation districts in places like St. Louis, North Carolina, and Philadelphia providing space for research, but more than that.
Literally and figuratively providing the connection for life science research and the commercial world to turn innovation, ideas from scientists into dreams come true for the patient populations they serve. Before we get into the second-quarter results, Kent is going to go through – going to take us through where we are today and provide more color on where were going forward from here. Kent?
Thanks, Alan. First, I want to add my thanks to Bruce and the esteemed team panel for taking the time to share their insights on the growing momentum of the innovation districts across the US, and how life science organizations, specifically, are playing a pivotal role in the growth of the centers of innovation, which are in turn providing the economic engines for these communities.
As Alan mentioned, we see research development and the commercialization of healthcare solutions accelerating. And our BioMed Realty team has a proven track record of success in delivering this comprehensive suite of real estate services as the dynamic requirements and unique demands of the life science community continue to evolve.
Now we started our company with the founding model and principles of our strategy to use real estate to create these connection points within the life science industry. And this strategy is focused on markets and opportunities, which include the critical elements of strong, self-sustaining markets. It starts with proximity to premier academic and research institutions. It's a highly skilled workforce, a healthy portfolio of strong commercial life science companies of varying sizes and a wide range of scientific focus and an access to financial partners.
So as we start to think about what we are going to do over the next 10 years, I find it helpful first to look at what we've done over the last 10. We have expanded the depth of our expertise, now with more than 230 professionals across the U.S. and the UK. We broadened our base of the relationships, now with more than 350 tenant partners. We've increased our gross asset base to more than $7 billion. And our property portfolio now includes more than 17 million square feet, including more leased square feet in the United States than any other company in our sector.
Our land bank for future development is now up to more than 7 million square feet and we've dramatically enhanced our capital position, our liquidity, and our credit profile, most recently with the upgrade to BBB by S&P, as well as the positive outlook from Moody's, and now with a $900 million revolving credit facility. I'm excited to consider this as the foundation from which we can accomplish so much more over the next 10 years, building further from our position now of leadership and strength.
So, looking forward, we see several primary trends that are shaping our market opportunity. Demographics will continue to drive the demand for healthcare solutions that extend and improve the quality of our lives. This permanent frontier of research and innovation continues, again, emanating from the centers of academia, premier research universities, medical schools, and research organizations. The public sector, both U.S. and worldwide, continues to provide an accommodative environment for innovation, both in terms of funding new research and a cooperative regulatory framework, as it is both rational and politically expedient.
Capital will continue from a diversified range of sources, including pharma, partnerships, licensing, M&A transactions, as well as the public markets, private venture capital, as well as philanthropy and state-sponsored research. Now, considering these macro drivers, we – not surprisingly, are focused on leasing, leasing, and leasing, leveraging the skills and relationships of our best in the industry operating team to maximize the operating cash flow of our portfolio. We are selectively acquiring and developing highest-quality properties, extremely well located in close proximity usually adjacency to the primary demand drivers, and consistently match funding new investments, properly capitalizing our company, creating capacity to capture future opportunities, and importantly, driving down our cost of capital over time to more effectively serve our tenants.
And we see this program delivering value for our shareholders across a variety of fronts. It starts with our dividends, which is well covered, we paid out just 62% of our FFO in the second quarter, a dividend that is further protected based on a very strong lease maturity profile, with an average remaining lease term of over eight years, and leases that are heavily weighted to world-class research institutions, big pharma, multi-billion dollar market cap biotechs.
In fact, today 84% of our rents come from research institutions and publicly traded companies. From there, we also have contractual rent escalations that typically range between 2% in 3% and a supply demand equation in the marketplace that today supports continued market rent growth. And we have the ability to continue to lease-up our current operating portfolio even further. And behind that, we have – currently have 1.4 million square feet under active development that is already more than 83% pre-leased, which we expect to deliver over the next two years.
Behind that, we have the future development pipeline, from our now 7 million square foot land bank, and we continually pursue additional external growth opportunities, new acquisitions, new developments projects, much of which I expect to come from existing tenant relationships and again, with physical adjacencies to our current portfolio.
Okay, so now let's dig a little deeper, starting with the state of the life science industry. As Alan had touched on, the life science industry is enjoying an extraordinary environment with respect to access to capital. And if you look back, it's not surprising, given that over the last one year, over the last two years, over the last five years, over the last 10 years, the biotech market has outperformed the broader market. Again, a critical part of our thesis when the company was started, providing the foundation of our growth.
As we look forward, it's especially exciting to look at all the sources of capital that are available, perhaps most notably, over the last year, the IPO activity which has been truly extraordinary. And to provide some more color on this arena, I'm going to invite Bruce Steel to come up. As many of you may recall, Bruce runs our BioMed Ventures program, after having had extensive operating and investment experience in the biotech sector in San Diego, is actually including one of our tenants. Bruce?
Thank you, Kent. Everybody hear me? Yes. So, the performance you just saw from that last slide is indicative of the astonishing value that's been created in the biotechnology sector, including the old guard of companies such as Amgen and Genentech, and now a newer crop of sustainable stable companies that are driving the biotechnology sector, including our tenants such as Regeneron, Alexion, Biogen Idec, and the like. It's been truly remarkable. This is an incredible time in the biotech sector, which consequently is an incredible time for BioMed Realty.
The pace of innovation has never been greater. The access to capital has never been more accessible via the equity markets and biopharma partnering and the economic health, the economic and health drivers, have never been more critical. And so all of this really is driven by innovation and world-class entrepreneurs and scientists and executives driving technology to meet critical unmet medical needs.
So speaking a little bit, I would like to highlight some of those technologies. And if you roll back the clock a little bit, it's been just over 10 years since we first sequenced the Human Genome Project and J. Craig Venter's Celera genomics efforts. That effort took over 10 years and over $3 billion to sequence the first human genome. Today, we can do that in a little under a day and about $1,000 for a full human genome sequence. That complete changes the landscape around direct discovery, drug development, and how we can treat human healthcare needs.
We would like to highlight, for example, one of the latest companies we brought into our portfolio, Craig Venter's latest company, Human Longevity, which is based around this ability to sequence the human genome for more direct specific tailored health monitoring and treatment to enable us to live longer, healthier lives. So, we are very pleased with that relationship.
To highlight a few of the leading technologies, just emerging out of two of our core relationships from the real estate portfolio at the Broad Institute and the Wyss Institute is the concept of gene editing using CRISPR technology, where you can actually go in and synthetically engineer your DNA code to treat disease. Gene therapy, which has been around for a while, but is now finally, really starting to take hold with validated proof-of-concept in human patients.
Most recently, Spark Therapeutics in Philadelphia and Regeneron are leading the field in gene therapy. And then last but not least, you've got immuno-oncology, where you are harnessing the body's own immune system to fight cancer. Several of our larger biopharma partners, including BMS, Genentech and MedImmune are leading the field of immuno-oncology. So it’s truly a fascinating time. We, as you've seen here, believe this has tremendous growth potential.
Kent spoke to the IPO market. But it's difficult to predict what happens in the public markets, but this has really been astounding. We have seen IPO activity at a level that we really haven't seen since late 1999 and 2000. We've just crossed I think the 100th company that's gone through the public window over the last year and a half, including 40 so far in the first-half of this year, I think about a dozen over the last two weeks.
So clearly, access to capital and the public markets is helping these companies raise the cash they need to hit critical milestones and drive future value around their companies and their programs. This has also filtered down to the venture capital sector. As Kent highlighted, you've seen venture capital this year, in the first half of over $5 billion raised, that would be an annualized pace of close to $10 million, which is truly staggering.
That's on top of 2013, where you saw about $7 billion of venture capital raised into the biotech sector. All that basically implies that these companies are as well-funded as they've ever been and will have every shot at achieving those value-creating milestones for their patients and for their companies and their investors.
This slide summarizes sort of the aggregate capital picture. First half of 2014, over $50 billion raised broken down between the public equity markets, debt, venture capital, and partnering, which is obviously critically important. I would look to highlight a couple of very interesting case studies that speak to the strength of the capital markets and the partnering environment.
First would be with Moderna Therapeutics, one of our relationships in the Boston area, where they recently announced $125 million partnership with Alexion, another relationship that we maintain, which included $100 million upfront payment and then $25 million equity investment. That followed a transaction in last year in 2013, with AstraZeneca that was a $350 million transaction, including $240 million in upfront payments and a $110 million investment.
More recently, Intarcia Therapeutics, a privately held company developing a GLP-1 program to compete in what is really one of the largest segments of diabetes healthcare, recently announced $200 million private capital raise on top of a $200 million offering last year or in late 2012, with a current private valuation approaching $2 billion.
And the last, some of you may have seen an announcement around Theranos in Forbes. Theranos is one of our key real estate relationships in the Bay Area, where they've just come out with a little bit of a summary on their financing history. They've raised over $400 million from private investor at a valuations in the neighborhood of $9 billion.
So not only are the public markets incredibly strong, but you're also seeing private market investment activity at a pace and valuation ranges that you've really not seen before in this sector. So we think all that bodes incredibly well for the future of the sector and the future of BioMed.
Thanks, Bruce. I'm struck by all the references anecdotally that Bruce provided, how consistently we see the connection between raising capital and leasing space. So, Moderna had their capital raised, they leased more space; Theranos is doing very well, access to capital, leasing more space, as we just announced. So we are pleased to continue to see that.
Now, all of this strength is what's driving our – the strength in the capital markets and the strength of the life science industry and their innovation is what's driving our results. And really, in the second quarter, we delivered over 800,000 square feet of leasing, tracking well ahead a plan. And perhaps most notably, the leasing success was very broad-based with important leasing success is in San Diego, in San Francisco, in Cambridge, but also in New York and St. Louis and Philadelphia, it was very broad- based.
And accordingly, our net absorption is ahead of plan, helping drive our lease percentage to up over 92%, which again, is up over 700 basis points from where we were at the end of 2009. And just after the close of the quarter, we announced the lease expansion and extension with Bristol-Myers Squibb at Woodside Tech Park in the Bay Area. BMS is going to take an additional 61,000 square feet for 10 years and extend their lease on the existing 133,000 square feet for their hub of research in pioneering cancer treatments, also in the area of immunotherapy that Bruce had mentioned.
On the investment front, we've remained opportunistic in a very tight market with three key strategic investments during the second quarter, each of which is located at that intersection of academia and private enterprise. We've added 1 million square fully leased, primarily to Alexion, Yale University, and the Yale New Haven Hospital System, immediately adjacent to the Yale School of Medicine, which we discussed at length on our last quarter. We've made our second investment now in Cambridge, UK with a 42,000 square-foot facility 100% leased to Takeda.
And in Philadelphia's University City district, we've collaborated with Drexel, where we've secured a development site that can ultimately deliver 2.3 million square feet. As our markets are tightening, it is supporting selective new construction, which we believe will be a catalyst for future growth or for growth in future years. As we've effectively added almost 700,000 square feet to our active development projects, while increasing our pre-leased percentage to 83% this quarter.
So in Seattle, for example, we are kicking off the construction of our second building at our BioMed Realty Research Center for 122,000 square feet at 500 Fairview Avenue. So next what we are going to do is we're going to drill down and take a closer look at some of these key specific projects and how we are serving our tenants, capturing these growth opportunities at the asset level. So I'd like to start as usual with Boston-Cambridge, which is and remains our largest market and where we have the leading portfolio of life science real estate.
So I'd like to introduce Bill Kane who runs our Boston-Cambridge market. Bill, a lot of you probably recall, was a part of the Lyme development team that pioneered Kendall Square and helps develop, what is today the cornerstone of our portfolio. Bill?
Thank you, Kent. Cambridge, as you might probably already know is a wonderful place to do business for all the reasons that Ed and Tim mentioned. All the market fundamentals are healthy, they are thriving, it's just one big happy place. Just to recall for a bit, looking back at 2013, I'm going to talk little bit about the market and how BioMed has done.
2013 was an extraordinary year for us, for our team. We leased a little over 500,000 square feet. We added to our portfolio of Moderna Therapeutics. We extended the Broad Institute. We added Momenta Pharmaceuticals. We're really, really proud of that year and we put a lot of work into the leasing, the development, and the strategic relationships that we carried.
I'm here taking all the credit for it. We actually had a team in Cambridge that deserves all the credit for it. So unfortunately, I'm not going to steal that from them. But what was remarkable is that, we brought our 3 million square foot portfolio to 95% leased and we're really, really proud of that. It's an extraordinary position to have in such a robust, strong market.
So looking – moving forward to today, what are the dynamics happening today? You see a slide behind me that describes the make-up of the market, who is in it, obviously a lot of strong, high-caliber tenants. And last quarter, lab leasing eclipsed to 100,000 square feet. Now add to that 700,000 square feet of lab tenants in the market right now looking for space. It's a pretty remarkable dynamic right now. A lot of pressure, a lot of activity, and for BioMed, it introduces some questions. What do you do with all that demand and opportunity when you are 95% leased?
Well, the answer to that is you look for unrealized value within your portfolio. So one term that we like to use is forward leasing. One example of that is at 325 Vassar, where you may recall we repositioned the building. We leased it up pretty quickly. We engaged this new form of development called Universal Flex Lab, which allows companies to roll in and out or make adaptations to the space with very little capital, very little effort. And we found an opportunity to pre-lease or forward lease some of the space in the second floor to BIND Therapeutics.
So they enjoy the benefit of the security of having space that they know they can move into and we enjoy the benefit of securing a longer-term, over time with no downtime. So that's an interesting transaction we did, they are going to officially start in 2015 and we've already inked that amendment.
Another example is at 301 Binney. We are literally leasing space that we don't actually have. And that's where Biogen has actually subleased space from Ironwood 80,000 square feet roughly, and we just consented to that sublease. We've been working closely with Ironwood and Biogen to memorialize that agreement. We are working closely with them to build up the space.
So, Ed, welcome to our Cambridge portfolio. I look forward to working with you. We're really excited about that. Basically, everybody wants to be in Kendall Square. And then one more example of some of the dynamics that are happening, is Cambridge Place. You may recall a couple of years ago, we bought three buildings in Kendall Square. We immediately realized some leasing success in 210 Broadway. Within one year, we leased up the entire building, and over the course of that, the rents continued to escalate over 20%. Then we moved our efforts over to 60 Hampshire. We took Identix out. We put them in 320 Bent. We repositioned the building. And by the end of last year we had two tenants competing for the space, literally racing through the leasing process.
Isotope 1, we are building out their space now, they are just moving in. We are really excited about that. Now, we are on to the third building, 50 Hampshire fully leased to CDM. CDM is not life science company. What can we do with that? Well, the rates are way below market, so we found an opportunity to move them out, memorialize a termination agreement, just announced it today, and those leases – I'm sorry, those rates are effectively facing a market that is over 50% of what they are today. So we are really excited about that kind of value generation, one, two, three, all three buildings. So that's really what we are working on today. It's an extraordinary market to be involved in.
Now I owe you an update on 450 Kendall, my favorite project in the world. 450 Kendall, you may recall is 53,000 square feet, five levels, ground-up development, right in our Kendall Square development, the 12 acres that we own and control and operate. It's all private land, publicly accessible, skating rinks, canoes and kayaks. This is the last parcel that we have to develop. What's remarkable, there is three things that are really interesting about this building. First of all, my favorite, is we incorporated this, what we call intelligence design, where we incorporate all the best practices of our portfolio and all of our teams.
So as we're programming the building, we actually incorporated Kevin Slein's input from across the whole portfolio on how he is managing facilities more efficiently and the new technologies that are adopting. We talked to Tracy (indiscernible) and Tracie Hager about the new efficient ways of operating buildings. Tim Stoll, John Bonanno collaborating about different development technologies in different ways to build the building. So we incorporated all of that into this building.
Second really neat thing is architecture. This building is sitting within a, I would say, an architecturally competitive environment, it's right next to Stefan Behnisch's design at 500 Kendall, literally footsteps away from Genzyme Center. It's near Ehrlich's design of 675 West Kendall, it's near Paul Zajfen's design at 650 East Kendall. So we really had to do something special. So you can see on the slides, we added a lot of vertical fins, LED lights that are going to behave through some kind of data stream.
So this new, hyperactive really innovative design that's going to be the node kind of activity in the area. And the third really interesting thing is just being in it. You run upstairs, you walk out on the balconies and you see the views, the kayaks and canoes, the Kendall Square environment, so that’s a – it's a really neat facility. So when you compare the demand that we're facing in the market and you compare the scale and the quality of this building, we are seeing some really, really extraordinary demand. And I'm really excited to announce what we are going to – who we are going to have, the strategic relationships we're creating. Nothing I'm announcing yet, but we are close and it's going to be really interesting.
In conclusion, I wanted to kind of take all this activity and dynamic and think about the future. The pressure that this area is facing in Cambridge, in Kendall Square, specifically is extraordinary, like nothing we've ever seen. I mentioned the 700,000 square feet of life science tenants in the market. There is 900,000 square feet of office tenants in the market, there's the Googles and Microsofts, so we have that tug of war of space going on right now.
We're really, I would say, optimistic about where we are today, but there is actually a bit a, I would say a conflict of uses. What it does, is puts a real tight strain on the smaller users. I wouldn't say the start-ups, but the small to mid-sized venture-backed companies or even the larger companies that want 40,000, 30,000, 50,000 square feet. It’s hard for them to compete. You have Biogen, you've got Novartis, you've got Broad Institute, you've got Takeda. They are going in there and they are gobbling up more space. I forgot to mention Pfizer.
So in conclusion, what I'm hoping to do is take all this pent-up demand and relieve it at Fort Washington. And then I'm going to leave you on that note, as well. It's another update that I owe you in the next few quarters on what we're doing and the ideas we're coming up with in terms of repositioning that space and using that area as a release valve for all this really extraordinary demand, demand that we've never ever seen before, in my 15 years, I've never seen before in the Kendall Square area.
So, that's it. What I'd like to do is turn the floor over to my colleague at Wexford Science & Technology, Joe Reagan. Joe is – Joe actually used to head up development for University of Pennsylvania Health Systems and now he has some really exciting things to talk to you about what he is up to. Joe, you are on.
Thanks, Bill. Everybody hear me okay? Good afternoon. I'm going to talk a little bit about Philadelphia. I feel a little bit of a loss coming up here following behind the panel and President Fry, who kind of stole a little bit of my thunder. Maybe what I will do it is rather than talk about the drivers, try to convert it to more of a conversation about real estate, that's what we hear about.
So as you look at the diagram here, this is looking from the west towards the east. Center City is off the image above 30th Street station. John mentioned the rail yards, those are directly to the north of the station. Drexel here, closest to the station, University of Pennsylvania, the Pennsylvania Health System, the research engine, all located in this general precinct, the Children's hospital, they are number one children's hospital in the U.S., a significant research Institute, as well as patient care. And then, in the center, University City Science Center where we have two projects that I will talk about in a little bit. To the bottom Penn Presbyterian Hospital, part of the Penn Health System, and then the development site that Kent mentioned in his remarks and John, as well will talk about that a little bit.
The – it’s really hard to describe to you the density of activity. It's not the density that Bill was speaking about a second ago, but it's really the density of the University and the University Research is going on there. We've got a white line dividing the two universities and another one off the bottom edge of the page, but until you walk through the campuses, you don't really appreciate how inter-digidate the two are and the activity of students, the research that's going on there. It's really a remarkable environment.
University City is the – has the highest occupancy rate of the Philadelphia market, well over 95% in the Science Center historically. Our absorption last quarter was 5.7%, as reported by Jones Lang LaSalle, that's against the flat absorption in the central business district and about one-half of that of that 5.7% in the Navy Yard, the other large development district in the city. That volume of activity that continuing development is what's pushing us to expand our operations in University City. Can I have the next slide, please?
So as we talk about the two properties we have in the Science Center 3711 and 3737 Market Street, 3711 is about 95% leased. We are continuing to have activity there as some of the early roll out. Drexel is in discussions with us to expand their presence there. That occupancy is characterized primarily by graduates from graduate companies, from the Science Center's incubator. One Avid Radiopharmaceuticals was purchased by Eli Lilly two, three years ago. They've gone from two people in the incubator to almost 28,000 square feet in the building and a significant investment by Lilly.
So 3737, we are now 81% leased at the end of June. Excuse me, we are delivering that building on time, on schedule at substantial completion for the (indiscernible) was completed last month. Our first tenant moved in this past weekend, they will be generating rent as of August 1. And the anchor tenant, the Penn Health System, will be generating rent as of September 1 of this year. We've got Sparks Therapeutics Bruce mentioned in this remarks on the top floor a little over 28,000 square feet. They are well under construction, expecting deliver before the end of the year. They’ve received – they are a growing company coming out of Children's Hospital received a $50 million investment by CHOP as part of the roll out from CHOP.
And then the last leasing growth in 3737 is Corner Bakery. They have – they will occupy the ground floor retail facing on to Market Street. Very important for us in terms of developing and continuing to sustain the street scape activity within the Science Center and to support the building, itself. We are very happy with that lease. They took a little while, but I guess all retail does, but we got it over the line.
So a view here from the north, from the Presbyterian looking back at the building, Market Street here, 38th Street here, the entrance on the corner there. That 3737 at 81% is actually 100% leased from the original building. As some of you remember, we had initiated construction of 11 stories and half way along had increased it by two floors to accommodate some growth requests from the University of Pennsylvania. So as we finish that, we are a little bit bigger than we planned to.
Here is a view of the main entrance taken probably two months ago, prior to finishing up the ground floor lobby and the retail area. It's all completed now. And 3711 is to the right there, the glass and brick building to the side. So as we look at that, the level of leasing in 3737 and 3711 and the historic occupancy rates in the Science Center, we have to ask ourselves where is our next product coming from.
And in part, response to that with the support of Drexel and President Fry, we were successful with Drexel to purchase 14 acres here from the school district of Philadelphia and under a 99-year ground lease from Drexel. We have the development potential of 2.3 million square feet development to take probably take 10 years at least to complete. That development is intended to be a true mixed-use environment, consistent with the kind of innovation clusters that we've talked about at Wexford as a company and Bruce and his panel did today.
We look at the next slide, thank you. This is a view from the north looking across towards Penn. A mixed-use development including residential, lab office product, academic space for Drexel, the K-8 school that John mentioned, as well as academic expansion, and an additional residential. The Science Center is just at the edge of the image there. The idea is – if I could have the next one please, is there another one? No.
Well, the idea with the plan, as we are developing it is to create an outdoor convening space, we are calling it the Market Square, that will be ringed by retail and residential liner to create an activated environment, that weak networking space that Bruce mentioned, I think it was Bruce mentioned in his comments as well as by running the grid of the city through the 14-acre site to make the connection back to Market Street and the Science Center in a manner wide enough, almost a Boulevard to link the two public spaces from Market Street to Market Square and create that true innovation cluster, 24-hour environment that we talked about in the presentation.
I think, that's it for my remarks. I'm going to turn it over to Dan Cramer, excuse me Dan, who is the Senior Vice President for Wexford and responsible for the @4240 project in St. Louis. Thank you.
Thanks, Joe. Good afternoon. As some of you may recall, our St. Louis project @4240 was one of the three active development projects that were underway when we were in the midst of a merger a year ago between Wexford and BioMed Realty. Since then, that project has been completed – the construction has been completed. The project has achieved LEED platinum status, one of the few projects in the St. Louis area that has that designation and we have stabilized the property. A lot of that is well ahead of what we originally planned for @4240. Some of the reasons that property has leased up so well relate to some of the things that the panel discussed earlier today.
@4240 as Bruce Katz mentioned, is in a research park called Cortex. This research park is a – it's a not-for-profit entity that operates it, but it is controlled by – primarily by three major institutions that surround the park, one is Washington University, one is Barnes-Jewish Medical Center, and the other is St. Louis University, all three of those are very powerful and preeminent research generators.
As a result of that, we see an enormous amount of activity that has been generated within the boundaries of Cortex Park. We appreciate the recognition that Bruce has given us, both today and in some of his publications for the work we have done in Cortex Park. We spent many years with the leadership at Washington University and at Cortex helping them develop master plans to create a sense of place there. We have funded significant amount of infrastructure to turn the roads into at a much more attractive street scapes to bury the utilities, to create public areas, to put new fiber in. So we are very excited about the prospects for Cortex. And we think that the growth potential for this is unlimited.
There are a couple of things that have helped us in addition to that. One is that we have enjoyed strong support from Washington University both as a tenant and as a driver of research and economic development area, that’s been really, really important to us as we have begun to build out our space. In addition, this area of St. Louis is sort of their midtown area, it's called the Central West End. And according to Colliers International, there is about $3 billion worth of new construction in retail and residential in this area. So it's already really one of the hottest markets in St. Louis and it is particularly attractive to the Millennials and to the new entrepreneurs and researchers that are looking for that urban walkable environment. And that is very positive for what we're trying to do in Cortex.
Finally, we also have been very excited about the formation of a number of innovation centers. Now, Bruce talked about this earlier, but I will go through it very quickly. We have Cambridge Innovation Center, which will occupy @4240. This is their first operation outside of the Boston metropolitan area. We are very pleased to have them. They will take 300,000 square feet in the building and they have proved to be a very strong draw for other tenants.
Nearby in a building that we also own is BioGenerator, which as described before, is a co-working wet lab environment. It just expanded from 8,000 square feet to 20,000 square feet and the response for that has been enormous. They have been – they have filled up very quickly. They have some very top-notch scientists that have chosen to try and commercialize some of their products there in that space and it’s proven to be a very positive influence on what's happening in Cortex.
The last center is something called the Center for Emerging Technologies. It was an existing center that was languishing a little bit. It was for start-up companies. Cambridge Innovation Center agreed to come in and not only manage it for Cortex, but also to remodel it and make it more fitting for the start -up community in St. Louis. So those three combined have really helped us lease up this building very quickly. This is @4240, it is a renovation of an existing historic building. It's a very exciting project. To-date, we are just shy of 90% leased. Some of the tenants include Washington University, which was an anchor tenant, but has also, since then has expanded significantly.
We have, as I mentioned before, Cambridge Innovation Center. We have other companies like Manifest Digital, or AB Mauri, and as Tim Rowe mentioned earlier, we have Boeing Ventures, which is an investment arm of the world's largest aerospace company. The – we have now about 55,000 square feet of qualified prospects for the balance of the space, which far exceeds our availability. So as a consequence, we are going to expand this building by 20,000 square feet. We'll start that this fall and will probably complete in sometime early spring next year, and we have a number of tenants that we feel will grab that space up fairly quickly.
In addition, we have piqued the interest of a number of very large research companies that are interested in being at Cortex. We need some capacity for that. So you may recall, last year we acquired 7 acres adjacent to @4240 for future development. We have begun to develop some early massing plans for that. We believe we can build about 500,000 square feet of new research and wet lab space on this property. In addition, we can build about 200 residential units, in keeping with the mixed-use concept. So this will be – we'll move forward to keep the plans current and be available for future capacity, should demand dictate.
In conclusion, we are extremely excited about what's happening in St. Louis. We believe that the Cortex will represent what we call knowledge community, a prime example of a knowledge community and with the drivers of St. Louis University and Washington University and the medical institution and this concentration of the entrepreneurial activity of St. Louis, we think that the opportunities are really unlimited for this area. Thank you. Back to Kent.
Thanks, Dan. On the West Coast, we also have a number of exciting projects that are on the horizon, highlighted, obviously, by yesterday's announcement on our kick-off of 500 Fairview. And to walk through some of these projects, I'm going to invite up, or ask John Bonanno to come up. John has been doing real estate development for probably a lot longer than he'd like to admit. But he's a Senior Vice President and has been actually a critical part of our development program and part of our success on all of our development efforts. So, John, would you join us? Thanks.
Thank you, Kent. Our development program is rightly unique, necessarily so, because we serve specialized needs. But what sets us apart is our ability to create environments with that magnetic draw, adaptive, efficient spaces in which tenants can thrive, evolve, and expand. Our enhanced laboratory shells are highly adaptable, saving time and money, while maximizing utilization and operational uptime, fantastic for our tenants and resulting in increased occupancy rates, which is fantastic for us.
These concepts hold true for the current tenant as well as the next. The depth of our industry experience and the expanse of our portfolio provides us with a superior knowledge base to apply creative thinking, incorporate leading-edge technologies, and formulate best practices, creating value for tenants and, ultimately for you, the investor.
We take a comprehensive approach to adaptive spaces, a formula of a sort to meet any user program. The formula includes key consistencies in design and modular systems that optimize spaces for each and every use. We apply these same principles to our development, redevelopment, renovation, and tenant improvement projects, just one of the many things we are doing as a company that has driven the highest leasing pace in the industry for several years running. And to build relationships resulting in repeat business of our customers, our success is evident in recent lease expansions with Bristol-Myers Squibb, Craig Venter, Novo Nordisk, Regeneron, and others.
Another common thread for our ground-up developments is that each is located in the very best sites in the very best submarkets. Seattle, the South Lake Union district has been transforming for many years and is the center of the Seattle life science hub. Last year's approved redesign opens the door for greater density and its continued evolution into an urban center. Our BioMed Realty Resource Center development is ideally situated, elevated Lake Union and among restaurants and housing and a scientific community of world-class research institutes.
Today, rents are about $50 per square foot for Class A properties and trending higher. Lab vacancy has fallen below 5%, similar to that of Cambridge. Each of our tenants in Seattle is advancing its science with strong success. Novo Nordisk, NanoString, Presage, Omeros, and of course, Bristol-Myers Squibb. Our 530 Fairview tenants need room to grow and thus, our decision to kick-off 500 Fairview. With the groundbreaking later this month, our vision is well on its way. The design capitalizes on adjacency to 530 Fairview project, by allowing the building to function separately or as one, very unique.
The development scheme conceived at the time of our acquisition has come together as envisioned, with the second building taller, providing architectural interest and increased density on a floor plate designed to maximize the beautiful urban views and natural light. Again, because the floors align, tenants may occupy either buildings or both as if it were one.
Recently, Novo Nordisk extended its lease at 530 and will expand to 500 upon its completion. For Novo, it will feel exactly like their building grew, exactly when it needed to, providing an elegant solution and a permanent home. The budgeted project cost is roughly $600 per square foot and on market rents will deliver attractive yields of plus or minus 7.5% on stabilization, while expanding and indeed enhancing our already successful 530 Fairview building.
South San Francisco, as you have seen, we continue to gain leasing momentum across the San Francisco Bay Area. Recently, Theranos expanded and extended at PRC and BMS expanded in Redwood City. If you recall last quarter, we relocated our spaces to Kaiser Drive, enabling the BMS expansion, increasing absorption and revenue with an early mark-to-market. Nonetheless, South San Francisco is the epicenter of the Bay Area. It's the submarket with the highest density of life science users and enduring demand for quality lab space.
Currently, countless successful laboratory users are expanding throughout the Bay Area. Gateway at Pacific is well-positioned to capture that user demand. Its iconic urban design, campus design, irreplaceable locations, rich amenities with capacity for future expansion is very hard not to like. It's a 550,000 square foot campus and entitled for future phases. Construction will commence upon signing of an anchor tenant.
San Diego, where leasing activity has been brisk and remains strong, we have completed nearly 400,000 square feet of leasing in the first-half of 2014 with Synthetic Genomics, Human Longevity, Craig Venter's companies, Affymetrix and 23 others. Our San Diego portfolio is over 93% leased, the greater market not far behind. And so we are seeing positive rent growth and conditions strengthening for the breaking ground on our i3 project. Once again, we have entitled and designed a truly iconic life science campus on among the most prominent visible sites in the market.
Up on a bluff directly overlooking the 805 freeway off-ramp leading into University Town Center. It offers unsurpassed visibility. The campus offers a university-like atmosphere with three buildings totaling 300,000 square feet structured below grade parking, a cafe, outdoor auditorium, rooftop gardens, fitness center and so much more. The design is as functional as it is iconic, maximizing flexibility and leasing opportunities. It's also a model of energy efficiency, designed to include things like fuel cells, green roofs, biofiltration zones, use of recycled water for the irrigation and cooling towers, and abundant naturally ventilated areas.
I3 will be 30% more efficient than LEED Platinum requires, while providing a fantastic healthy environment for our tenants. We could not be more pleased with our development projects, each the culmination of years of preparation, planning, and our collective experience. Thank you, and with that I'll turn you back to Kent.
Thanks, John. So in addition to what all the things that we're doing in United State, we were also happy to announce yesterday that we have now made our second investment in Cambridge UK where upon completion just next year in 2015 we will take ownership of a 42,000 square foot build-to-suit research facility for Takeda Pharmaceuticals.
So this is essentially for them an expansion of their adjacent building which is about 40,000 square feet, which is where they've developed a full pipeline targeting a whole range of unmet medical needs, Alzheimer's, diabetes, obesity and inflammatory disease.
The project is in a long term ground lease, it's on a land that's owned by Trinity Hall which is one of the colleges of University of Cambridge. It is in Cambridge Science Park which is the original science park in England and adjacent to a very walking and bikeable distance to the Cambridge community with – today it houses over a 100 companies and it has all the amenities that are afforded by having that close proximity to the university.
So we're using a local development partner, Dev Sec, which is a well-known construction development in the UK. We will effectively acquire it when it's completed in the third quarter of 2015. Our basis is going to be roughly $575 a foot, with Takeda funding a significant portion of the build-out. And our initial yield compares very favorably, particularly considering what's happened to cap rates which are compressed in Cambridge and London over the last couple of years since we have first acquired Granta Park. So our yield is roughly 6.5%.
So occupancy in the Cambridge market is very tight, less than 5% vacancy and we see continuing and actually increasing global interest in the Cambridge area specifically which I think again demonstrates that critical factor that we keep talking about which is the proximity and access to academia which is driving demand for real estate.
So these projects, I hope give you a pretty clear roadmap as to how we will continue to grow with our tenants and with our industry. Selectively pursuing core locations with proximity to those key demand drivers and developing the highest quality facilities that can most importantly very effectively serve those dynamic needs of our tenants in our industry, all the while doing this in a risk mitigated way that delivers superior risk adjusted returns for our shareholders.
And on that note we'll finally get to the, I guess, the earnings part of our earnings day discussion and I'd like to have Greg talk through our second quarter financial results. Greg?
So now we're coming to my favorite part of the entire day. Thanks a lot, Kent.
Top line results in the second quarter continued a long streak of record breaking revenues as our rental and total revenues for the quarter $121 million and $171 million respectively.
Top the previous records from the same period last year by 12% and 7%, driven by the leasing success of the last few years as well as our new investments. Included in total revenues for the second quarter was, $8.1 million prepayment fees, which we received from the early repayment of our investment in the Fan Pier construction loan. This enabled us to report second quarter FFO and core FFO of $0.40 per diluted share and AFFO of $0.32 per diluted share, net income was $0.10 per diluted share.
Second quarter, same property net operating income on a cash basis increased 6.7% year-over-year, the increase in same property cash NOI excludes our King of Prussia property from the same-property pool. The lease there reached term at the end of the first quarter and that property has been moved to our development potential. Had we kept KOP in the same property pool, same property cash NOI would have still been up 3.2%.
Our total consolidated revenue backlog on GAAP revenue basis associated with previously signed leases is now $65.6 million, an increase of 47% over the end of the first quarter, partially driven by the prelease construction activities for Alexion, Yale and Takeda. This total comprises roughly $26 million in future annual gap revenue commencements from our operating portfolio and another $39 million from the development portfolio.
And to the joy of many of you here, this quarter we have provided additional detail surrounding the time of these future commencements on page 32 of our supplemental.
As we reported on last quarter's call, April was a very busy and productive month, in our sustained efforts to enhance the balance sheet and maintain our strong liquidity position. Most notably, we received an upgrade of our investment grade corporate credit rating to BBB flat from Standard & Poor's. And then completed a $400 million offering of unsecured notes priced to yield 7.25% – excuse me, 2.75%, had it backwards – to maturity and oversubscribed by more than seven times from the initially announced offering size.
We also repaid the mortgage on the Center for Life Science, Boston with a 7.75% coupon, there's where that was coming from, at the earliest possible date without incurring prepayment penalties. After quarter end, we converted approximately $44.5 million of our exchangeable notes to common equity issuing approximately 2.6 million shares. Remember, these exchangeable notes are already accounted for as equity, so essentially this has no impact on our FFO but it reduces our leverage further.
And as discussed we expect that the balance of the original $180 million in exchangeable notes will be converted by early next year. And also subsequent to year end we refinanced the secured loan in our joint-venture with Prudential. The balance of the loan remains roughly $139 million, of which our share 20% totals just under $28 million. We reduced the margin from 300 basis points to 205 basis points over LIBOR and extended the maturity to August 2015 with the ability to extent a year beyond that.
We remain committed to a rock solid capital position, as part of our strategy to drive down our costs for capital. As of June 30, our fixed charge coverage ratio stands at 4.7 times. Debt as a percentage of gross assets is 40%. With net to debt adjusted EBITDA at 6.6 times.
With the repayment of the Center for Life Science mortgage, secured debt to total gross assets declined to 6.5% with unencumbered rents not comprising more than 83% of our total rents. Our un-hedged variable rate debt is 13.5% of our total debt and 5.5% of our gross assets. And the capacity on our unsecured line of credit is $745 million. Our team has accomplished a great deal in the first-half of the year, these prudent measured steps have added to our proven track record of proactively managing our balance sheet, providing the liquidity support on internal growth and pursuit the strategic new investment opportunities, which in turn will continue to drive our future growth.
Moving to our guidance for the balance of the year, during the second quarter the Fan Pier construction loan paid off. We had guided to a range of $8 million to $9 million in construction loan revenue for the year, but with the interest and prepayment fees received in the second quarter we will recognize construction loan revenue of $11.2 million for all of 2014. So about $0.025 more than we had anticipated in the second quarter but a $0.015 less than what we anticipated getting in the quarter with the net impact of bumping the numbers up about a $0.01 for the full year.
In addition in yesterday's press release, we announced the termination of our lease at our 50 Hampshire property in Cambridge, Massachusetts, that was not a Bristol-Myers lease; that was a lease with another tenant and I apologize for any confusion created by the press release. We'll be receiving $8.5 million termination payment in the first quarter next year, which net of GAAP adjustments, principally a straight line, acceleration of straight line, will add $7.5 million in additional revenue, recognized ratably between August of this year and next March. This will add another $0.02 to the back-half of this year and an extra $0.01 to the first quarter of 2015, with the lease now expiring on April 1, 2015.
So for some of the sum of these two items is reflected in yesterday's press release, we've bumped and narrowed the range of our guidance to a $1.51 per share to a $1.55 per share with the $1.53 at the midpoint, up $0.03.
Our 2014, midpoint includes the $0.02 of no determination revenue and implies for the back-half of the year and average of $0.36 per quarter. We are expecting the third quarter to be a $0.01 or so lower than the fourth quarter for a few reasons. First, the timing of our future rent commencements is weighted towards later in the quarters and in the year. Second, we're expecting some incremental tax leakage, approximately $0.01 related to state subsidy we believe we'll receive in the third quarter and finally the third quarter will include only two months of the no determination revenue versus a full quarter for the fourth quarter.
We expect to provide more formal guidance next quarter when we report earnings. Thank you and I'm going to turn the program back over to Alan.
Thanks, Greg. As the team has shared with you today, the life science industry is growing and our tenants in markets remain very strong, providing an excellent backdrop for a continued growth. We appreciate the ongoing support of our investors and financing partners and our entire BioMed team is looking forward to delivering and growing into the 2015 and beyond.
Now, because we are live from New York, the Q&A will be handled little differently this quarter. So first, we'll take questions from our guests here in the audience and then from those of you over the phone. For anyone with questions in the room please wait for a handheld microphone so that everyone here and on the webcast can hear your questions.
And also at the end of this call we invite everybody to stay around for a cocktail reception. Now, with that we are ready for the first question.
I don't see any questions. I think we're done.
No question? Okay. We have a question over here.
Thanks. Just a question on the acquisition pipeline, you've got New Haven and Takeda not too far in the rear view mirror, recently completed. I don't know if that means it's too soon for another investment, but could you just comment on potential timing, what the pipeline looks like, when we do see something, is it likely middle-of-the-road, bolt-on type in nature, and maybe if you can comment on the potential yields you are looking at, as well? Thanks.
I guess, I'll comment on the acquisition pipeline. Our team is perpetually focused on trying to create opportunities in each one of our core markets, so we're always trying to create opportunities. The pipeline is I would say very full in terms of a volume of potential opportunities. I would also comment or caution though that it is very aggressive competitive environment today. I think we see continuing aggressive interests in our asset class. Not surprisingly the performance of our portfolio, and our business, and our markets is attracting a lot of attention. So we are seeing continued competition.
Your question about the character if we would have announced and acquisition, because we don't really comment specifically about opportunities that may or may not happen because they haven't closed, but I would say, we are historically and today continue to be focused on asset-by-asset building of our company so we are typically focused on individual assets or collection of assets that are all in close proximity or adjacency versus large portfolio transactions that you might see in other sectors.
So, it's a long-winded way of saying the investments we would make going forward you would think would be very consistent with the things we've been doing over the last 10 years.
Okay. Great. And then maybe just given the panel discussion that we had, and the guest speaker, and the importance of market clusters or innovation districts, does that make you feel all the more like you are in the right districts right now and there's no need to ever look at another geography or do you feel like there could be more innovation districts down the road for BioMed?
So I think without a question we are in the right district today. I mean I think, it's I don't think there's a person on the planet who would argue with Cambridge, San Francisco, San Diego, Philadelphia, these locations that already are established centers. I think University City is the oldest science park in the United States.
So I think we are clearly in the right location today. That doesn't mean we couldn't expand into additional innovation districts but I think by and large you expect more of our expansion to be in the markets we're in because we already have such a large presence, but also the fact that we are continuing to build these specific districts. So we've added to our position in the Raleigh-Durham area. We're adding to our position in Seattle.
So I think it's going to be – there will be opportunities to participate in the growth of other markets but overwhelming I expect it to be growing not only these markets where we already have a presence and we already have knowledge, but we already have relationships. And so if you look at our development pipeline, when we added Wexford, for example, every one of those three projects were all repeat relationship projects. They were the next project with that university.
I think that's the general character you'd probably expect to see.
Kent, so you had that slide up there that had 92% leased, but 1.6 million square feet of leasing opportunity. When I sort of think about your portfolio, 92% kind of feels like a stabilized number, because it takes a long time to get some tenants in, there is a little bit of probably frictional vacancy in there. So, where do you think you can really push vacancy and do you feel like 92%, which is up from the mid-80%s a few years ago, is a pretty stabilized number?
So, that, there are couple of different answers to that question. The first, you know as many of our market leads are here, so the answer is 100% leased is the only acceptable lease percentage. But we definitely believe that there is room to push occupancy further, we're feeling it, we see it in some markets, as Bill mentioned in Cambridge, and we're pushing those levels in San Diego and other markets. But I think you're right, I think there is an increasing difficulty further up the lease percentage you get.
Is it possible to be above 95% leased in our asset-class? Absolutely. Is it the right long term strategy for our business, probably not, because as you see in places like Seattle we are treating places to grow with our tenants and you see like what we're doing in – with @4240 by adding space and what we did with 3737 in Philadelphia where we added space literally while we were under construction. So I do think your observation is correct.
I think it's unlikely we would push materially north of 95% for any extended period of time. We may be for brief periods of time – I wouldn't say over leased, very well leased in many of these markets. But the more leased we are in these markets the more we're going to look for expansion space for our tenants.
Okay. And then – I had a follow-up on 50 Hampshire. I think Bill mentioned rents were up, mark-to-market was sort of 50% there, but you've got an office tenant that's in there now. So is that 50% office to office, is that office to lab?
That's office to office, just straight office to office.
And would you expect to have that be office or do you think you'll convert that to lab?
I think it's likely to stay office. There's a possibility to do some light lab in there but just based on the bones of the building it's more likely to stay primarily office. And we didn't pollute that discussion with the incremental economies if we were to do it as lab. So for starters for today and really probably for the full term, just look at that as an office to office and that's really why we were – this is a positive opportunistic termination if you will. This is a tenant who we were able to move essentially out of the way to capture what a very clearly well below market range.
Any sense of how long you think downtown is likely to be?
Well, I think again, Bill is here so we're not expecting any downtime.
But as far as our investors we should expect a lot of downtime. I don't know that I would want to comment exactly but clearly if we are able to lease that space within 12 months or so when we've terminated we would have effectively just a straight mark-to-market from the old rents to the new rents and this will a tremendous homerun for us. Thanks, Brendon.
Additional questions from the audience?
Do you have any questions from the audience?
If there are no more questions in the audience we are going to try to take some calls from the – or questions from the call. So, operator can you please queue up the first call and our people in the AV will hopefully will be able to transmit that to the room. Thank you.
Yes, thank you. (Operator Instructions) And our first question here comes from Mr. Jordan Sadler from KeyBanc Capital Markets. Please go ahead.
Jordan Sadler – KeyBanc Capital Markets
Thank you, and good afternoon. I wanted to just take a second to address sort of capital recycling opportunities. Congratulations on the 10-year mark. This is a milestone. Curious about sort of the opportunity to cull [ph] the portfolio, given the demand for assets in some of your markets today?
Thanks, Jordan. Yes, there are some opportunities for capital recycling and it is something we are looking at very selectively. As we talked about in the past, in each of our markets and if you look at our portfolios you can see there is a lot of synergies between having this accumulation of assets all within great proximity. It allows us to do very interesting things like last quarter when we moved Arstasis from one asset, moved them across the bay next to PRC and then we're able to expand this quarter with BMS.
So, really having a portfolio of assets all around the same, in the same close proximity is very important to us and why we built the portfolio that we have. At the margin there are a few opportunities for capital recycling and I do think that, that's on the horizon for us. And we – if we did a little bit of that at end of last year, I think we could do it again by the end of this year in what I'd call modest amounts but I would not expect from a any major disposition – substantial disposition strategy or reconstitution of what we're doing, we're continuing to grow in these markets. Does that answer your question?
Jordan Sadler – KeyBanc Capital Markets
Yes, and that's helpful. I guess, I was thinking of – as you guys were walking through 50 Hampshire in particular and that being and office tenant. And obviously, an opportunity for you guys to create some significant value for yourselves, given the termination opportunistic re-leasing, maybe with an office tenant to something like that end up on the radar as being like a non-core asset. I was curious about how you would think about it.
Well, I think it remains to be seen as – I think some of the discussion on the panel talked about the demand for not only lab space but also office space and our markets are strong. But importantly, a lot of that office demand is office for life science companies. And so, it's very possible that that leasing could take the character of some of our existing relationships acquiring office space, taking space in a project like that. And we would probably think twice about monetizing that asset if it was part of a broader relationship with an existing tenant.
In addition to, our overall strategy of having a fully integrated operating platform and a platform that can accommodate the variety of needs from our tenants, having office space adjacent to our existing laboratory facilities adds greater value to our overall portfolio and enhances our relationships with our tenant partners.
Jordan Sadler – KeyBanc Capital Markets
Okay. I guess, the other side of the question is really more geared toward acquisition opportunities sort of what you are seeing out there in your markets, in terms of stabilized assets. You've done a good job picking off some selective properties. What are you seeing out there and how do you think about existing markets versus new markets, as we talk about the geography a little bit more?
So, again, we are seeing an extremely competitive environment on the acquisition side. Cap rates have compressed very well known, especially with the transactions that have happened in Cambridge over the last 12 months in addition to what's happened in Seattle. And certainly some of the transactions we are tracking that could occur in the Philadelphia area or Cambridge, UK would suggest even more value creation from what we've already done relative to where we think things are trading. Does that answer your question.
Jordan Sadler – KeyBanc Capital Markets
It does. But new markets, I mean, obviously Cambridge – anything else that's sort of on the radar in terms of new markets, or do you stick to the existing footprint from here?
Again, I would emphasize, our portfolio has continued to build in the primary markets where we are located. So, for example, while we have expanded our presence in St. Louis and other places, we've made additional investments in Cambridge every year, over the last three years.
So we are primarily focused on the locations, again, where we already are. And so the overwhelming majority of our new investments would come from our existing markets. But I wouldn’t foreclose the opportunity to be another location, assuming that location had all those critical elements we've talked about, proximity to a top-tier research institution a market that had an abundance of tendency with respect to other commercial tenants, a skilled workforce, access to capital, all those other critical elements. So again, most of our investment activity will follow the path that we've laid out.
Jordan Sadler – KeyBanc Capital Markets
Okay. Thank you.
Thanks. Thanks, Jordan. Operator next question?
Your next question here comes from Ross Nussbaum from UBS. Please go ahead sir.
Ross Nussbaum – UBS
Hey, guys, good afternoon. A couple questions. First, just want to clarify, in Cambridge on the lease terminations, did I hear that you are expecting it would be about at 50% mark-to-market based off of expiring rent in the current market rent?
That’s correct. So for those of you who couldn't his question, his question was clarifying, when we talked about the mark-to-market of the office space that we've just terminated, and yes, the answer is we believe that is roughly 50% above the office rents that we just terminated.
Ross Nussbaum – UBS
And how much incremental capital do think you need to inject in that building to achieve that, do you have to turn that into a multi-tenant building?
Again, this is an office building. So the tenant investments are obviously lower than office building relative to lab. So we would be talking about what I would characterize as a traditional office TI, which in that market is $50, could be $25 to $75 depending on what you're doing, but call it $50, as a general market assumption.
Ross Nussbaum – UBS
When I look at your balance sheet in your development schedule, in rough math, it looks like you have given or take just under $400 million I guess remaining to fund on the development pipeline. Can you walk through over the next year or so what your plans are for funding that?
So if you look at our development pipeline, it's in the supplement, we characterize exactly how much we've spent and how much is left. And we will be completing those projects over the next two years. We have capacity, both, not only, obviously on our line, but we also have general leverage capacity to fund that development. And the reason for that is if you recall last year, we raised equity essentially three times, the first as we were kicking off one of our development projects for Generon.
We did it essentially twice around the Wexford portfolio as part of that transaction, which essentially pre-equitized, if you will, or fully capitalized, not only of the investments we made, but also our expected cost to complete those projects. And so we effectually over-equitized our self-last year in order – in contemplation of being able to fund this committed development project.
So, I guess, taking your question all the way through, if we were to add today all of the remaining cost to complete those projects to our balance sheet, and excluding and including the conversion of the notes, which is ongoing today. It would push our leverage up to 40.8%, I think it was somewhere in that range. So pretty darn close to our 40% debt to total asset level. So we feel very comfortable with our ability to complete those projects and remain frankly, very much in line with our current credit profile.
Ross Nussbaum – UBS
Okay. And that leads to my last question, which is, can you add some color on the Philadelphia Drexel project specifically, give us an idea of what the development schedule may look like, what funding needs be? And then maybe just share with us, what are the ground lease payments, are you capitalizing those and what was the $18 million investment you made? Just some color around all that?
So the question was really about timing for the – our new project in Philadelphia, as well as some clarity on the ground lease payments. Timing again, not dissimilar to what you see in most of our other markets, it’s going to be tenant driven. So I would expect these assets – these projects to follow the same model, where we would expect to kick-off with an anchor tenant and then complete leasing.
So today, we still have work to do to finish the bill, I know we've made great progress, and we are attracting ahead of, I think most of your expectations with respect to 3737. But when that completes, we still have a fair amount of site work to do for the site in planning and master planning, everything getting, everything in position to move forward. But our timing, again, would be very much dependent on as we secure those tenants, so I can't provide great clarity, because it’s all tenant driven.
As far as the ground lease payment, I think our investment is very favorable. I think, all-in, we're less than $20 per square foot, I think, it’s closer to $15 per square foot, and it’s essentially a prepay ground lease, which is what that initial investment ultimately turned into – it was a little more complicated structurally. But that's effectively what the investment we've made has prepaid that ground lease.
Ross Nussbaum – UBS
Perfect. Thank you.
Thanks. Next question, operator?
I guess our next question here comes from Dave Rodgers from Baird. Please go ahead, sir.
Dave Rodgers – Robert W. Baird & Company
Hey, good afternoon, guys. Greg, maybe for you one question just on the quarter. I didn't hear if you addressed this. But can you talk about the impact on interest expense from removing the Philadelphia assets out of the operating pool, which I assumed happened pretty early in the quarter. But any color around timing and amount would be helpful?
Not sure I fully heard your question, Dave. But I think you were just remembering back to the question you raised in your note this morning, there was an increase in capitalized interest that was roughly $1 million quarter-over-quarter that really relates to two factors. One, the asset in Philadelphia, the KOP asset, which is now in our pre-development portfolio and is under, from an accounting perspective, active development recapitalizing interest on.
But then secondly, we also had the acquisition in New Haven, the 100 College asset between the two of those that comprises the – virtually all of the increase in the cap interest you are seeing this quarter. If there was something else that I missed in your question, you're going to need to repeat it because it was tough to hear here.
Dave Rodgers – Robert W. Baird & Company
Sorry, maybe this'll be better. With regard to follow-up on that, the timing of the J&J asset that went into the redevelopment bucket, that was pretty early in the quarter, so no really incremental impact going into 3Q?
It went in April 1.
Dave Rodgers – Robert W. Baird & Company
The lease terminated March 31 or midnight March 31 and then went in on April 1.
Dave Rodgers – Robert W. Baird & Company
Okay. That's helpful. Thanks. Can you talk about, you had a big leasing quarter, obviously. Can you talk a little bit about the volume of leases that are signed, but not commenced and kind of how those play out over the next couple of quarters in terms of the commencements?
So I think, that’s best reviewed by looking at the supplement page 32. So we've added to help this type of discussion, some additional color on exactly how much revenue commences in each of the respective quarters or how much is expected based on our current delivery schedules.
But I would also add, and remind those that use those schedules, that those are annual rents. And so that's the quarter in which the rent will start and the annual rents associated with the leases that commence revenue in that quarter are what's presented on page 32 in the supplemental.
Dave Rodgers – Robert W. Baird & Company
That's great. We will go back and take a look at that. Thanks. And the last question would be, can you talk separately about the ranges across your portfolio and the land bank – both land and construction cost increases that you are seeing, particularly as you're getting more active on the development side? Thank you.
So, I guess, I'll talk more generally, I don’t know that it's – I don't think and I don’t know if we're going to be able to go through all $7 million square feet today, but the – in general your point is correct, we are seeing increasing increases in land value at least in terms of the things we're pursuing.
Frankly, that's why we are focused the unique opportunities where we have some sort of relationship or something that we can bring to the table that allows us to secure land at what we think as a very favorable – a very favorable economics. I think our basis in the land at Philadelphia I think it's close to half of what the original basis had been on some of the previously committed projects had been.
But that's a bit of an anomaly because of the situation we were in terms of our opportunity to help make that project happen. More generally, we're seeing increasing asset values across the board, whether stabilized assets, assets that require lease-up but as well as land. And I think that's the only discussion that can be done sort of side-by-side.
Operator, next question.
And at this time I'm showing no further questions for the audience over the phone.
And so, are there any other questions here on the room? Anybody else who wants to ask a question? Don't make me call on you now. Okay. Alan, would you like to wrap up?
Okay. All right, with that I like to thank everybody for joining us here today and for helping us celebrate our 10 year anniversary since our IPO. Thank you all. And don't forget the reception immediately following this call. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.
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