Alexandria Real Estate Equities' (ARE) CEO Joel Marcus on Q2 2016 Results - Earnings Call Transcript

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Alexandria Real Estate Equities Inc. (NYSE:ARE) Q2 2016 Earnings Conference Call August 2, 2016 12:00 PM ET

Executives

Paula Schwartz - IR

Joel Marcus - CEO

Dean Shigenaga - CFO

Tom Andrews - EVP

Steve Richardson - COO

Peter Moglia - CIO

Dan Ryan - EVP

John Cunningham - SVP

Analysts

Manny Korchman - Citi

Nick Yulico - UBS

Jamie Feldman - Bank of America Merrill Lynch

Kevin Tyler - Green Street Advisors

Richard Schiller - Barns

Sheila McGrath - Evercore ISI

Karin Ford - MUFG Securities

Operator

Good day and welcome to the Alexandria Real Estate Equities Inc. Second Quarter 2016 Earnings Conference Call. My name is Lisa and I’ll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and please note that today’s conference is being recorded.

I would now like to turn the call over to Paula Schwartz. Please go ahead, ma’am.

Paula Schwartz

Good morning. 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.

Joel Marcus

Thank you, Paula and welcome everybody to our second quarter earnings call. And with me today actually here in New York City is Dean Shigenaga, Tom Andrews, Steve Richardson, Peter Moglia, Dan Ryan and John Cunningham. And I want to extend a congratulations to the entire Alexandria family for a very strong second quarter performance really in all respects.

I think the key themes for the second quarter revolve around a strong core internal growth performance, successful early deliveries of our development pipeline with strong yields, continuing strong health of our tenant base and really a truly superb execution of our capital plan. So let me move to a couple of macro themes if I can.

It's hard to imagine, but today, there are approximately 10,000 diseases that we've identified that afflict humanity and we've only addressed about 500. So we're still literally in the very early innings of our quest for prevention, treatment and cure of dreaded diseases and this battle is mission-critical for humanity. Really an answer to that challenge, there is very significant R&D investment that continues to drive innovation and demand on a global basis, $145 billion of global biopharma R&D, $38 billion of US government funding heavily at the NIH, $11 billion of US venture capital and $30 billion of philanthropic money. So the total now exceeds $200 billion for R&D, quite a stellar dedication of resources, which in all respects end up really helping our business in a material manner.

Our high barrier to entry urban cluster markets remain rock-solid. If you look at the continuing strong demand, we see that in virtually every market today with highly constrained supply, which is obviously a very good thing. Rents are up on average about 15% over the past year and we’re continuing to see and maintain high occupancy. If you look at the Cambridge cluster market and Tom will be available during Q&A, current supply is about 429,000 square feet of vacancy for lab, today's demand is something around north of 2 million square feet, with about 40 tenants focused on Cambridge, and based on recent forecast of brokers in the market for laboratory, they’re forecasting rents in 2018 for lab to be $80 to $85 triple net.

Alexandria is blessed with a unique business model. Our strong internal growth in core is, I think, well known and driven heavily by 96% of our leases have annual steps and many of those are 3%. Our performance this quarter on rental rate increases 27.1 on a GAAP and 9.3 on a cash. Certainly were, I think, very important to the company and key drivers included Cambridge, San Francisco and Research Triangle Park. And as I said last quarter, we’re seeing and Dean may comment further, in 2016, we’re continuing to see tenants aggressively seek us out to extend their lease terms, which roll in future years where they have no options and that’s something that clearly, it will start benefit for internal growth purposes.

We’re seeing slight occupancy gains since we’re at pretty high occupancy today at 97% and we’re seeing very -- solid same property performance, Dean will comment further, 4.9 and then 6.4 on a cash basis. One of the most important attributes every investor should note is that ARE’s great current strength, 53% of our annual base rent is from investment-grade tenants, here in 2Q of ‘16, 82% of our top 20 are investment-grade with lease durations of approximately 8.4 years. So we've got a great runway for solid, consistent and safe cash flows.

Turning to external growth, Alexandria's business model, a unique business model, has been simplified by strong external growth. We have, as you know, a strong, highly leased, development pipeline, driving that growth, and as set forth in the sub and in the press release, our CIP for the second half will deliver approximately 1 million square feet, which is today 90% leased, targeting NOI of somewhere between 51 million and 56 million and in 2017 and the early part of 2018, 2 million more square feet, approximately 74% pre-leased with NOI onboarding and at that point of about 130 million to 140 million. So a total of well north of 3 million square feet.

We had three successful deliveries in the second quarter and Dean will comment on that, New York, Illumina and Longwood, with very strong yields and we've hit a 7% yield on our New York developments, so great kudos to the New York team. Leasing has stayed strong and we did indicate new starts far Vertex in San Diego and a parking garage for Illumina. With respect to our major acquisition during the quarter and Tom will be around to answer questions here during Q&A, we did sign a purchase and sale agreement to acquire One Kendall Square and we believe that the location of that campus and the attributes of that campus present exactly what we would want when looking for external growth through acquisitions, which we typically don't make many of, seven buildings aggregating almost 645,000 square feet, 98.5% occupancy.

We think we can move those, the yield on this project to potentially the mid-sixes over the next couple of years. We think that allocating capital to the world's leading life science cluster sub market and Cambridge is a smart thing to do, and it gives us an excellent opportunity to expand our current campuses in close proximity at the MIT Technology Square and the Alexandria Center at Kendall Square. We think we can significantly increase NOI and cash flows. We think in place rents are substantially below market. More than 50% of the leases expire over the next three years and we've got a great opportunity to convert significant office space to lab space at significantly higher rents and we've got a great land parcel for development, about 172,000 square feet, which we will aggressively pursue and closing will be dependent upon loan assumption.

And I guess finally, before I turn it over to Dean here, when we look at key future projects, we’re currently evaluating for future development, the two projects in Cambridge, once we close on Tech Square -- I’m sorry, on One Kendall Square, the 172,000 square feet, we will aggressively move that forward and we’re looking carefully at the additional 100,000 square feet of development we have at Tech Square. We’re also looking carefully at Grand Avenue in South San Francisco and the Illumina campus. So these opportunities in each of these locations represent where we have in hand or very strong tenant demand.

So without further delay, let me turn it over to Dean for more color on the quarter.

Dean Shigenaga

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. As Joel mentioned, we're taking this call from New York today. Just want to cover three important topics, first, our consistent execution and delivery of very strong internal and external growth, second, the disciplined management of our balance sheet and then lastly, key highlights on our updated guidance for 2016, accelerated timing of improvement of leverage goals and closing remarks.

I just wanted to make a quick, but very important note, we wanted to take a moment to congratulate our entire team on their consecutive Gold NAREIT CARE award. We are very pleased to be recognized as the best in class REIT that delivers transparency, quality and efficient communications in reporting to the investment community.

Moving on to consistent execution and delivery, strong internal and external growth, our team continued to execute on our differentiated business strategy, focused on unique collaborative campuses and urban innovation cluster submarkets, limited to no supply of Class A space continues to drive rental rate growth on re-leasing the space and lease renewals, including significant benefit from early lease renewals. Solid leasing activity in the second quarter of 817,000 rentable square feet, rental rates were up 27.1% and 9.3% on a cash basis.

We delivered consistent and solid same property NOI growth for the second quarter, up 4.9% and 6.4% on a cash basis. One quick note on straight-line rent during the second quarter, we did receive a $9 million contractual cash payment that drove a significant reduction in straight line rent for the quarter. Looking forward into the third quarter, straight-line rent is expected to be consistent with prior quarters. Occupancy was solid at 97%.

Moving onto external growth, our team continued our disciplined allocation of capital, 96% of capital for 2016 is targeted for investment in to high-quality facilities and urban innovation clusters, including very robust in San Francisco, New York City, San Diego and Seattle. We completed and delivered earlier than expected. The third build-to-suit on campus in University Town Centre in San Diego for Illumina, a global leader in genomics, we also completed and placed in the service the remaining 63,000 rentable square feet, including about 34,000 square feet of vacancy at our second world-class center of innovation in New York City. The key takeaway from this project is that we exceeded our initial forecast cash yields by 40 basis points for a very strong final cash yield of 7%.

Moving onto the disciplined management of our balance sheet, I just think given the volume of events that we’ve executed on during the quarter, I want to quickly highlight the key items. We repurchased 53 million of par value of our Series D. About half of that was in the second quarter and the other half occurred in July. We issued about 348 million at $95.31 per share under our ATM program and expect to file a new program. We announced 256 million in proceeds to be received primarily in 2016, from two separate joint ventures at 10290 and 10300 campus point at a 5.7% cash cap rate. We issued 350 million, 3.95% 10-year unsecured bonds, completed 304 million in commitments under a secured construction loan for 100 Binney Street, raised 165 billion in commitments under our recently amended unsecured senior line of credit, aggregate commitments available for borrowing increased by 150 million. We extended the maturity date to October 2021 and reduced pricing 10 basis points to LIBOR plus 1%.

We executed 200 million in interest-rate swaps and interest-rate cap at 2% for up to 150 million of notional. We also executed 724 million in future proceeds from the issuance of common equity and the forward sale agreements. The goal of the forward was to lock in the cost of capital to fully fund the acquisition of One Kendall Square, while we obtain approval from the lender for the assumption of $203 million secured loan. We expect to complete the approval for the loan assumption over the next 2 to 3 months, then complete the acquisition of One Kendall Square and settle the forward sale agreements from the common stock offering.

Second-quarter net debt to adjusted EBITDA was 6.8 times and I’ll cover our leverage goals in a moment. Liquidity, as of the quarter end, was 2.4 billion. In summary, our team completed the majority of our key items for 2016 capital plan, accelerated the timing of the improvement of our leverage goals and extended our weighted average remaining term of outstanding debt.

Lastly, turning to the guidance, the accelerated timing of our leverage goal and closing remarks, the detailed assumptions underline our guidance for 2016 are included in page 10 of our supplemental package. We narrowed the range of our guidance for FFO per share diluted from $0.10 to $0.06 with no change to the midpoint of $5.51. Key considerations for the midpoint of our FFO per share guidance of $5.51 after execution of significant debt and equity capital market activity, -- activities to date, in 2016 include.

In recent years, we’ve been able to meaningfully increase FFO per share guidance above our initial guidance at the beginning of each year. In 2016, we have held our FFO per share guidance at $5.51, since first announcing guidance at our annual Investor Day in 2015. We’ve had very strong internal and external growth from solid demand for our Class A facilities. I’ll touch on increases in guidance for rental rate growth and same property NOI growth in a moment.

Early lease renewals continue to drive core operating performance and mitigate leasing downtime. Our value creation pipeline, we are ahead of our initial projections on completion and delivery of several spaces, including building six for Illumina, the space at Longwood and the execution and lease up and delivery of space as is versus redevelopment at Barnes Canyon in San Diego. We also achieved better pricing on capital market activity in the first quarter or actually in June, I should say, as we completed our unsecured bond offering at 3.95%. And this was inside of the interest rate that we had assumed in our initial guidance.

Internal growth has been solid and continues to drive operating performance. We increased the midpoint of our guidance for rental rate growth on lease renewals and release in the space by 5% and 1% on a cash basis. Our ranges for guidance for rental rate growth are now up 19% to 22%, and up 7% to 10% on a cash basis. We also increased the midpoint of our guidance for same property NOI growth by 0.5% to 1% on both a GAAP and cash basis. Our updated ranges for same property NOI growth is up 2.5% to 4.5% and up 4% to 6% on a cash basis.

We accelerated the timing of our leverage goals and are now targeting fourth quarter annualized net debt to adjusted EBITDA in a range from 6.2 times to 6.6 times or midpoint of 6.4 times. Our goal by the end of 2017 remains focused on improvement of net debt to adjusted EBITDA to less than six times. We have about 162 million of par value of our Series D convertible preferred stock outstanding as of today and we will continue to look for opportunities to repurchase shares.

We continued with a disciplined management of our value creation pipeline and are on track to further reduce our pipeline as a percentage of gross real estate to the 10% range by year-end. Our differentiated business strategy focuses on Class A assets and AAA locations and urban innovation clusters and continues to track some of the most highly innovative and successful companies. With our best in class team, we look forward to consistently executing and delivering growth and FFO per share and net asset value quarter-to-quarter and year-to-year, while we also improve our credit profile and long-term cost of capital.

With that, I’ll turn it back over to Joel.

Joel Marcus

Operator, if we can go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we will take our first question from Manny Korchman with Citi.

Manny Korchman

Hey, guys. Thanks. Maybe we just think about the tenant environment, has there been any change in either the VC funding environment or changes in sort of IPL landscape and how your tenants are thinking about growth?

Joel Marcus

So Manny, I guess two items. One would be with respect to venture capital funding in the first quarter, venture firms raised virtually an all-time record amount of funding for investment into life science entities, which we feel will be invested over the next year or two or three, depending on the length of the fund. So that's a very, very strong sign. The venture capital market remains robust. The IPO size has been a little tougher this year than last year. There have been, I think, more than -- 12 or more IPOs on the life science industry side. Devon performed nearly as well as last year, but the market still is open for innovative companies that have unique products. So there is funding and then the M&A environment continues to be fairly robust. I think we mentioned last time, or if we didn’t, just an update, one of our tenants, Stemcentrx, that was in our South San Francisco portfolio got sold at fairly early stage cancer stem cell company to AbbVie for almost $12 billion. So we see that, as you look out on the landscape, things look pretty healthy.

Manny Korchman

Thanks, Joel. And a couple of questions on One Kendall, the first, just what’s sort of your development timing there and what are you thinking about doing. The second, the other part of the project and then sort of development piece, it's pretty well leased and seemingly stabilized. Are you thinking about holding onto that in its entirety or is there a chance that you partner that out to somebody?

Joel Marcus

Yeah. So let me give you a topside view and then I’ll ask Tom to be specific. So with respect to the timing of the development, I think we’re going to be pretty aggressive once we close and then Tom can give you more color and then I think with respect to the after that sales, we don't have any current intent to joint venture that outside.

Tom Andrews

Thanks, Joel. So the development side is about 172,000 square foot development site that is permitted with the city, have the special permit. Needs design completion, which we will begin promptly here after we select the design team and a group to go forward on the design. That will probably take about six months, which will coincide with some preconstruction activity that needs to be done in the site and work around the parking garage and movie theatre to make -- to repossession some driveways and things like that, so we can do development on the site. And then we expect the development to take about 18 months to construct.

Manny Korchman

Thanks, guys.

Operator

And we’ll now take a question from Nick Yulico from UBS.

Nick Yulico

Thanks. Hi, everyone. I was hoping you could just talk a little bit about the demand in the market for the San Francisco area for life science and then how are you thinking about what your conversations are like with tenants, because you don't -- prospective tenants because I guess your outbound portfolio is full, your development portfolio is fully occupied and you really only I guess have that tennis club project that still needs prop M. So I mean, maybe if you’re just talking about demand in the market and then how are you thinking about how you might be able to accommodate from that demand?

Joel Marcus

Yes. So I'll just make a comment or so and then I’ll give -- let Steve give you the detailed color. Contrary to popular belief, San Francisco has not fallen into the ocean. It’s actually remained extremely healthy, both on the lab and the tech side and demand has been robust and Steve will give you details.

Steve Richardson

Nick, hi, it’s Steve Richardson. As Joel just mentioned, I mean we’re tracking over 2.5 million square feet of lab demand only and that’s, in addition, to 5.9 million square feet of tech demand in San Francisco only. So you’re right, it has remained very healthy. We are 100% leased. Year-to-date, we've actually done 158,000 square feet of early renewals and we have another 200 plus thousand square feet in negotiations. So big companies like Celgene who renewed earlier a few months ago, are identifying Mission Bay as a long-term destination and the discussions we’re having with them are how do they secure and lock up their space. So we continue to see a very healthy broad market out into the future in San Francisco.

And on the development side, again, we’re 100% leased with three ground-up projects coming out of the ground with Pinterest, Stripe and Uber. So healthy on that side as well. And on the East ground site, getting to the activity there in South San Francisco, the vacancy rate in South San Francisco has now dropped to 4.8%. So that’s about 440 bps lower than just last year. So very continued strong demand with upward pressures on lease rates there too.

Nick Yulico

And then do you have any update on when you think you might get Prop M approval for that tennis club project in the city itself?

Steve Richardson

Yes. So we’re monitoring that very closely. We have what we think is a very, very robust package of community benefits, which is going to be high on the list of city requirements and so we are very bullish on that. You may have read, we came to an agreement with the tennis club members. So we have an absolute clear path now for entitlements there and everybody is moving in the same direction. So stay tuned over the next several quarters for an update on entitlements.

Nick Yulico

All right. Thanks, everyone.

Operator

And we’ll go next to Jamie Feldman from Bank of America Merrill Lynch.

Jamie Feldman

Thank you. Joel, you outlined potential projects where you’re seeing good demand where you may start over the relatively near future, can you talk to us about the cost of some of these projects and how you guys are thinking about financing, especially after a large amount of financing you did to kind of -- to carry your needs through ‘16, and technically ‘17 and ’18 based on your ability to raise debt, but just maybe help us think about the capital plan going forward, if you do need to start here?

Joel Marcus

Yes. I’ll ask Dean to comment on that. I think when it comes to the three areas that I mentioned, the two projects on Cambridge, one is the One Kendall Square which Tom just spoke to, potentially adding on to Tech Square where we’ve got 100,000 square feet of entitlements, the Grand Avenue project, which Steve talked about, which that market has really become so tied in. And as you know, Verily has taken over the Amgen sub lease that the former on its space, it’s pretty clear that there is pretty robust demand in that market and then Illumina on that campus, we literally got a built-in tenant who is clamoring for more space and almost we have to hold them off, but as far as the capital side of it, I think we probably wouldn't begin any starts over the next quarter too. I think we will evaluate where we are, but we clearly would look at where we are on a pre-lease base, where we are on the construction cost basis, on a yield basis and potentially we start something in the -- again, a lot depends on the macro environment potentially next year, but I will leave it to Dean to comment on funding strategy.

Dean Shigenaga

Hi, Jamie. It’s Dean here. I would say it's good to think about what we've done over the last few years in funding our growth, primarily construction and development projects. The key difference, I think in 2017 as an example versus 2016, Jamie, is that we’ve got probably clearly as you look at our disclosures, a larger EBITDA growth in ’17 over 16 as compared to ‘16 over ’15. And the key behind that is that it allow us to debt fund more of our growth in 2017 as compared to 2016 through debt.

So, in aggregate, as you recall over the last number of years, we’ve had free cash flows of $125 million. You add on EBITDA growth and we’ve been funding anywhere from 400 million to 500 million of growth from these two components, meaning debt funding through EBITDA growth and then the consumption of retained cash flows after dividends. Beyond that, we’ll continue to utilize recycling of capital, Jamie, through asset sales and I think it’s just an important technology that we will continue to be very disciplined in our approach, in looking at capital sources to fund growth and navigate through the markets as they unfold over the next few years.

Yes, and anything we do, our focus is to maintain the lowering of leverage to 6 or less than 6. That is one of the highest priorities and nothing we do would alter that goal.

Jamie Feldman

Okay, that's helpful. And then I guess as we think about the TIAA-CREF JV, maybe can you talk to us about that as a potential source of capital going forward, and then maybe additional JVs you might be thinking about?

Joel Marcus

So we certainly have enjoyed a high-quality relationship, Peter and Dan led the joint venture on the -- joint ventures on the Campus Point assets. We view them as a long-term partner and I’m not able to comment on anything in the future, but I think we both will look for opportunities to continue to work together. We think they represent a AAA partner of ours.

Jamie Feldman

Would you look at additional JVs or do you have a...

Joel Marcus

You mean other partners or additional...

Jamie Feldman

Additional.

Joel Marcus

I don't think we have that our radar screen so much.

Jamie Feldman

And then finally thinking about ‘17 expiration, your expiring rents are 27.99 a foot. Can you talk to us about maybe current mark to market on some of those unmet group of leases what we might be looking at?

Peter Moglia

Hey Jamie, it’s Peter Moglia, I could run through the North American regions for you, kind of give you a sense of where the AVR is in the market rents are today, keep in mind that AVR I believe includes straight line rent, market rent I’ll give will be the initial rents. So Greater Boston, we’re got a $37.81 expiration ADR, rental rates range there from 40 to 76 in Cambridge, obviously our portfolio is heavily weighted towards Cambridge, so which should be a significant opportunity there. San Francisco at 17 we had a $32.78 rents expiring in ‘17 as market rent there ranges from $48 in the South San Francisco area to $65 triple net in Mission Bay, so again a pretty big opportunity in mark to market there. New York, we have market rents in the area of $80 to $85 per lab here, so anything that comes up I'm sure will be a nice rollup. San Diego we have a $30.25 expiration, market rent there ranges from about 33 in the Sorrento Valley Sorrento area up to $49.45 in the UTC, so another significant mark to market opportunity. Seattle we were at 45.10 that is fairly close to market today but I would say market is really 48 to 54, so I think there is still an incremental opportunity there. In Maryland, the expiration is 19.11 in ‘17 and there is literally 2% vacancy in Maryland right now which for a long time was a weak market and it added to push rent and so we are going out with proposals today in the $28 to $32 range, so possibly Maryland pretty significant growth next year. And then, at Research Triangle Park, at the 13.61, again we are at about 18 for the older product up to 30 for our newer products at it creek, so that should answer your question.

Operator

And we will go now to Kevin Tyler from Green Street Advisors.

Kevin Tyler

Dean, I might have missed it earlier but on the guidance for common equity and available for sale of securities, it looks like after you back out some of the ATM issuance and the forward sale, I couldn't tell for sure but did your up the guidance for either the equity sale piece or the additional equity issues or how do those pieces kind of play out going forward?

Dean Shigenaga

Kevin, it’s Dean here, yes, you are correct, our guidance was updated to reflect the capital market activities that we've announced to date, so on that front everything that we planned in our guidance has been completed on the debt and equity front. Big picture, I think from the first quarter to the second quarter guidance, equity related needs increased by about $950 million about 50% of that increase was attributed to the capital required to fund - fully refund One Kendall Square on a leverage neutral basis, yet about another 20% very roughly of the capital to reduce leverage by three tens of a churn, you had about 10% of the capital that cover series D repurchases that have been completed to date and then roughly 20% of the remainder or the remaining 20% was really related to timing differences on both acquisitions and dispositions and how the EBITDA interplays with your leverage metrics at the end of the day. So hopefully that color helps Kevin.

Kevin Tyler

But just the equity security sales is that still on track for the 125?

Dean Shigenaga

I’d say broadly speaking we are monetizing a decent number of equity securities while at the same time some of the proceeds are being offset currently by other investment opportunity, so the gross proceeds are on track, our net reinvestment I think has increased a little bit offsetting the ability to retain some of the capital for 2016.

Kevin Tyler

And Joel when the [indiscernible] deal came to the market the first time around a bit back in’13, you’d said that you hesitated to pursue similar strategy, in part I think some of the challenges that you mentioned were government budgets and university credit profile. I just wondered today as we talk about more broadly university link strategy outside of the key clusters, does that investment model make any more sense for you or Alexandria if you could actually go out and build it organically?

Joel Marcus

And the Westward opportunity came to us I think they were represented by Goldman Sachs back in 2013, we actually knew almost every site because we have looked at it broadly whether it be Miami, Winston-Salem, Baltimore, Saint Louis, Illinois a variety of places and we took a very hard look at their platform and what they were doing and certainly impacted us in the sense that it really condemns us once again that the urban innovation cluster model is really the one that we think is the best to pursue for us. I think coupled with the fact that we’re always worried probably the biggest issue that we see in that model is the releasing downstream because if you're in a place like Winston-Salem we or in Baltimore, we are in Baltimore at one point, the depth of the market is such that or the lack of the depth of the market is such that you’re really reliant on the institutional tenant base, now it’s a good tenant for sure, high quality in general but it is in the deep one so if they decide to leave you got a problem and in a lot of cases they want to own so there is some times a requirement that you have neither sell it back or they want to purchase and I get the other thing which has been exemplified by our struggle with Longwood, government budget have been under pressure in the last couple of years with underfunding from the NIH and that seems to be turning around a bit which is a good news situation but a lot of times institutions referred to own rather than lease and we've certainly seen that in the Longwood area. So I think for anybody just go around and bidding and the ultimate buyer I think it represents a platform that works for their business but certainly relates to our business.

Operator

[Operator Instructions] And we will go now to Richard Schiller with Barns.

Richard Schiller

First question on New York City that the vacancy rate dropped there, the footnote shows that 62,000 square feet came online, could you describe the activity you’re seeing on the remaining 34,000 feet that is vacant.

Joel Marcus

Sure, I’m going to ask John Cunningham who runs our New York City region to do that.

John Cunningham

Hey Rich how are you, the activity we have on the remaining floor in the West tower which is the 14th floor which represents majority of that vacancy is actually real strong, we have leased out for half the floor right now and we recently had a press release about a month and a half ago for [indiscernible] we’ll doing on the other half of that floor. That will pretty much use of all of the vacancy we have won small suite associated with the accelerator and still remains on the eighth floor precise on that we will be 100% full.

Richard Schiller

And just a high-level macro question, in some of your prepared remarks you guys were talking about how tenants are relatively looking to renew leases with 2 million square feet of demand and 400,000 square feet of vacancy like in the Cambridge area, how do you balance tenant renewables versus trying to get higher rents later on in the future?

Joel Marcus

That's a good question I will ask Tom to reflect on that.

Tom Andrews

It is certainly challenging, I mean, we have lots of tenant relationships in our portfolio in Cambridge and we like to have a balance between really promoting those relationships but also knowing that there may be others who are prepared to pay higher dollars. So we kind of walk that tightrope and it is challenging right now and in the long run we think we make good decisions on that and I'm able to as you seen [indiscernible].

Joel Marcus

Again, I think in the remarks if broker estimates are correct, if rents in 2018 are in the $80 to $85 triple net range then that does give us cause to think about how we think about delivering space over the next year or two and how we charge for that space, so that analysis is certainly ongoing and something that is top of mind and certainly one of the motivations that we had for moving on the One Kendall Square acquisition.

Tom Andrews

Certainly one things we’ve done, it’s Tom again, and certainly one of the things we tried to do in this part of the business cycle is really extent term and being gain higher rents for longer duration and also certainly reduce the TI allowances and really try to make sure we’re spending sort of our own capital as possible in the spaces [indiscernible].

Unidentified Analyst

Hey Joel, [indiscernible] just to follow up on that comment and questions as well, I guess I wanted a little bit about, last kind of year or so or six months it sounded like on the lot of calls that you would become a little bit more cautious about starting development and I don't want to call it a change in tone, it’s all that you kind of, address that how you want but seems like now we're talking about multiple development opportunities on among multiple sites, has there been a change in tone among your tenants, do you feel better, I guess maybe reconciled as to if I'm thinking about is correctly.

Joel Marcus

That's a good question Dave, I think again we have a very robust pipeline set of deliveries ’16, ‘17 into early ’18 so there is no reason for us in the past to double down on that you know we've got to know why coming for over the coming quarters and we wouldn't get any additional credit for adding on to that but plus it complicates the capital rates but because we've I think had great success in advancing our capital plan are leverage goals and we are well into the second half of deliveries, in ‘16 I think we can afford to take a look at where we are with the future potential development so it is really a matter of too much change in tone at and where things haven't changed on either side we feel positive on both sides but I think is just a maturation of the plan and they look at what's going on in ‘18 and ’19, so I think it still just a natural evolution.

Unidentified Analyst

And just some of your earlier comments, I can go back and read if I have to but with joint venture in San Diego and what is that lively market or not and I guess if it was, can you talk about maybe the contrast in interest from potential joint venture partners between what you've done in Cambridge and what you just did in San Diego?

Joel Marcus

So we always talk to a number of folks when it comes to joint venture but I think it is fair to say that we've developed an extraordinarily good and mutually respectful relation with TIA, we think they're very high quality I think they feel like we are the franchise they would like to invest with in the life science industry and the core urban cluster market. So ultimately we would talk to them and give them the best shot of things but we are always looking at market as a public company, our fiduciary duty is always test market, so when you have a great relationship you will always feel that’s your first choice if at all possible and they've been extremely diligent flexible timeframe and so forth.

Peter Moglia

Yes, this is Peter, I would say that we've actually used UBS to help us with some of these relationships and made some meetings with a couple of sovereigns and others just to talk about potential projects just to get a gate in what their interest would be so we have an idea of the market but the end of the day the TIA partnership was one of that we felt was the right choice for in these project.

Operator

And we’ll now a take question from Sheila McGrath with Evercore ISI.

Sheila McGrath

Joel you mentioned in your remarks 3% annual increases across many of the leases, this appears to be have trended higher, I was just wondering if this is across all your market and this is the norm now and is it both for lab space and tenants base.

Joel Marcus

On the lab side it is certainly our standard that we try to achieve given where we are in macroeconomic I mean if inflation ever came roaring at one point in the company's history we went to a min 3 max 6 on annual increases but we think that this represents a stable market and acceptable market annual rental excavation. There are sometimes some changes to that especially on the development side where you might get a quarter point lower or something like that but by in large we try to maintain that across the portfolio in each of the markets.

Sheila McGrath

And then on just with the tightness in the market I was wondering if there is been improvement in trends on TI allowances that you would be giving tenants?

Peter Moglia

Hey Sheila this is Peter, one of the things I do is review all of the major proposals that are going out in total rents, pre-rents, TI especially given our sensitivity to capital, I have been counseling our regional leaders to lower TIs and I think we've done a really good job of doing that comp probably the best set of all because it's leverage he has in the market but here at the end of the day if we can lower TI significantly even if we have take a little bit less rent that's the way we prefer to do it.

Sheila McGrath

And last question just maybe Joel if you can give us an update on the Volpe process like where is that in the timeline and does that still remain of interest to Alexandria?

Joel Marcus

Yes, I will ask Tom to comment on that.

Tom Andrews

Yet we have a team putting together a response to the RFP which was issued a couple of months ago and we understand what we've planning to submit a response for the deadline of September 8 as the government is requesting proposals be submitted we believe that they intend to try to get a developer selected by year end approximately update on that one we learn more but we are planning to submit a proposal by September 8.

Operator

We will now take a question from Karin Ford from MUFG Securities.

Karin Ford

Can you please give us your latest thoughts on the potential impact of the upcoming election on your business and the business of the tenants?

Joel Marcus

As Karin, so we think that the election if you read the cover story of Baron a couple of weeks ago that probably is the best prognostication that I have read I'm not a political person but I think that really is the one that I think we adopt and we believe is true that the real race is in the House and Senate the predicted that the Republicans would retain the majority in the House and that the Senate was pretty close but Republicans might retain it that if they don't you would have a split house in Senate. As you know the president doesn't have a legislative authority although I guess our current president may be believe he does a bit. But I think it’s fair to say that the split government is a balanced government and I think we continue to see that moving forward. I think where it is important to us, we think there is been very strong support and that we've seen that in fact of supporting the NIH for basic biomedical research, really critical and this bipartisan Congress has supported that and we've seen over $2 billion increase over the past few months for the coming year and looks like that may go higher. We’d like to see more funding for the Food and Drug Administration because that they are clearly underfunded and have hundreds and hundreds of slots unavailable to the fiddle with the for the funding so that tends to be an important area although they approved a large number of drugs in the past couple of years and they’re on a pretty strong pace this year and then a good business pro-business or good quality business environment that we can see positive growth so that we get continued employment high ranks. So that's kind of the view that I think is the majority view on the street and I think we adopt that view.

Operator

And we will now take a follow-up question from Manny Korchman from Citi.

Manny Korchman

If we go back to One Kindle for a second, how much of the cost basis [indiscernible] for development and how much do the income for properties are set differently if you were to take the lands out of the what would be the going in yields?

Joel Marcus

The going in yields Manny are reflected in our disclosures in the supplement.

Manny Korchman

How many value do you attribute to the lands when you came up the idea? There has to be some rent value... I just want to ask that…

Joel Marcus

You are right, it is from a purchase accounting perspective man you are currently did allocate a portion of the investment to the development site on, 170 some odd thousand square feet at roughly twos approaching three a foot, 300 a foot which we believe is a market we will generate a very nice return on that investment and so the initial state voice you is reflective of the operating aspect today with the small allocation of the purchase price of the land side.

Manny Korchman

I think Michael has on this one

Unidentified Analyst

Hey Joel, I just had sort of curiosity you talked a little bit [indiscernible] about ramping developments and one of the things you talked about was the balance sheet in a much better position to be able to look towards funding that growth as well as a lot of government you have long target being released and curious if you think about One Kindle in market before much did your access and cost of equity capital play into the decision to buy One Kindle and how much of that is playing in increasing development and potentially looking at other acquisitions?

Joel Marcus

Well I think it's fair to say that the well our cost of debt capital certainly has been very favorable in this environment and our cost of equity capital with the stock doing pretty well we are certainly an important factor that we'd want to go out and do a large offering whether forward or not with the stock price that would be in the 70s which it was in the February so that certainly weighed heavily on our mind and our goal has always been how do we balance a couple of things one is maintain our goal on earnings continue to increase our net asset value and at the same time achieve our leverage goals for ratings increase so those are the three things we are clearly focused on as we look at One Kindle, but as I said we looked at this a couple of years ago and Mr. Moglia is sitting here to my right, he told my desire to buy that a couple of years ago for variety of good reasons but I have always felt that asset was unique, the address alone speaks to with One Kindle, it is rare to be able to find an urban campus in the best life science cluster in the universe or galaxy maybe and also the factors that were attended to that if brokerage estimates are right and we can get 80 to 85 triple nets in 2018 that gives us even more upside than our base case projections would hold, we think we can do well on the development and we also think there is a huge opportunity to convert office to lab there. So that was kind of the constellation of considerations broadly that we thought about.

Manny Korchman

And then as you think about where your stock sits today, I guess how many more opportunities do you and your team sort of trying to either aggressively uncover and I assume there is other assets like One Kindle that are out there in markets we would like to own, I'm just trying to get a sense of whether we may see more things come.

Joel Marcus

I don't think so, if you ask us at the beginning of the year did we plan on buying One Kindle I would tell you that we didn't even know was coming to market there was another asset One Lab and One Building that 245 first I think that went out of the bid their assets somewhat older but they are adjacent to Alexandria Center at Kindle Square, I would have loved to probably owned those variety of reasons coupled with the One Kindle Square acquisition we didn't see the upside in the role we didn't bid on that but we clearly underwrote and follow all the assets so I would say that we are not in general aggressively pursuing things but we are where we see I guess the one opportunity or the one characteristic of an opportunity we look at is where we see a great asset and a great location that we like to own for a long-term and we short to medium term ability to add significant value, we wouldn't buy just a fully stabilized asset for the next 10 or 12 years, just probably no interest in that. So our main focus is on our development pipeline though that's where our key focus is.

Manny Korchman

And just last one on the ATM so a perspective of how you can use it going forward how much of the significant ATM issuance was almost use of new One Kindle is coming and you want wanted it so you get as much equity as possible I'm just trying to get a sense of when you do the issue a new program how we should think about when you use it and the volume that you're going to use at a given moment can certainly the size of the issuance is as increased the equity deal was certainly sizeable in the quarter.

Dean Shigenaga

Hey Manny, it is Dean here. At some point we’ll refile the program only because it is a great tool they have an balance sheet, it’s a very efficient tool as we all know, as far as usage goes going forward the only thing that is contemplated at the moment would be to the extent that we retire any amount of serious D convertible preferred. we'd like the time that and match funded some common equity and I think again we been pretty clear on that strategy. As far as your question on the ATM usage in the second quarter and refunding the One Kindle. One Kindle was funded through the forward equity offering and we just saw opportunities to utilize the program in connection with changes in the overall capital plan outside of One Kindle Square, the mix of dispositions as an example, the ability to get ahead on our leverage goals as well was interplant into that thought process so hopefully that gives you a lot of color Manny.

Joel Marcus

I would say to the extent that we think about using that future and addition to what Dean said, we’d always try to think about it in a leverage neutral fashion in the sense that we want to try to maintain our earnings trajectory obviously grow our NAV and at the same time use it in whatever way that we might but in an accretive fashion. So, that's how we're trying to think about it and we try to be over the past quite a number of years as disciplined as possible in the utilization of equity.

Operator

And ladies and gentlemen with no additional questions I would like to turn the conference back over to Joel Marcus for additional enclosing comments.

Joel Marcus

Well, thank everybody we are one hour into the conference, so right on time, thank you for your question and we look forward to talking to you for third quarter results. Take care.

Operator

And ladies and gentlemen this does conclude today’s conference, and we thank you for your participation you may now disconnect and have a wonderful rest of your day.

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