Good afternoon and welcome to the Alexandria Real Estate Equities Inc First Quarter 2017 Financial and Operating Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now turn the conference over to Paula Schwartz. Please go ahead.

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

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

Thanks, Joel, Dean Shigenaga here, good afternoon everybody. As Joel mentioned, we’re off to a great start in 2017 and have increased our guidance FFO per share for 2017 by $0.02 to $6.02 at the midpoint, really due to continued strong rental rate growth on recently executed early lease renewals. We are now on track to deliver 9.3% growth in FFO per share in 2017 and 36.7% growth in FFO per share over the four years ending on December 31, 2017. There are four important topics I will cover today. First, continued solid market fundamentals. Second, continued solid internal growth. Third, strong and disciplined external growth including very important comments about the potential significant understatement of net asset value. And fourth, continued discipline of allocation of capital management of our balance sheet. Market fundamentals remain strong and our urban innovation cluster markets demand remains strong while supply of existing Class A space remains very limited. We are in a unique position with a highly experienced and regarded team with strong relationships that position us well to be the preferred partner to provide collaborative campuses and urban innovation clusters. We continue to execute and deliver solid internal growth, also known as our same property net operating income growth. Cash same property net operating income growth was very solid at 5.5% for the quarter. Leasing activity for the quarter was also very strong at 1.3 million rentable square feet through lease renewals or generally unpredictable from a timing perspective since these opportunities are dependent on decisions by our tenants. However, executed early lease renewals represented approximately 65% of our leasing activity for the quarter. Importantly, our team captured rental rate growth of about 28% and 18% on a cash basis on total leasing activity this quarter. In reviewing various sales side models for the quarter, we noted that most models did not capture the near-term impact of significant rental rate growth on leasing activity. Most models, as many of us know, were built off the prior quarter NOI and adjusted for acquisitions, dispositions and development and redevelopment projects and had a growth rate for typical same property NOI growth. Our rental rate growth on several recently executed lease renewals and releasings is significant and has immediate impacts on revenue and operating income and FFO per share, resulting in our $0.02 increase in our mid-point of guidance for 2017 FFO per share. 60% of this increase was driven by executed leases with strong rental rate growth and 40% was attributable to a slight average occupancy pick-up throughout 2017 compared to our prior guidance. EBITDA margins are very strong and have improved in recent quarters, with TIs and leasing commissions included in our disclosures of non-revenue enhancing capital expenditures for the quarter were $18.4 million, up about $6.7 million. $4.5 million of this increase was driven by leasing commissions on the recently executed 10-year lease extension on 303,000 renewable square feet with Novartis located in Cambridge. As anticipated, our occupancy declined slightly in the quarter to a solid occupancy of 95.5%. The primary driver of this slight decline in occupancy was due to the expansion of Eli Lilly from 125,000 rentable square feet to 305,000 rentable square feet at our recently completed Class A redevelopment project at 10290 Campus Point Drive. Lilly vacated the 125,000 square feet at 10300 Campus Point, and as Joel mentioned, are in negotiations with tenants for most of that space. Looking forward over the next two quarters, we expect occupancy to improve into the 96% range, closer to where we began the year. We are in a very unique position to provide inspiring real estate solutions to drive collaboration and innovation for some of the top biopharma entities focused on making life better for people throughout the world. Over the past four quarters, we have completed 10 new Class A properties and we have another seven new Class A properties that we expect to complete in 2017. The deliveries in 2017 alone are projected to generate another $100 million of incremental net operating income. Additionally, these deliveries are weighted toward the backend of 2017 and will drive significant net operating income growth in 2018. In order to maintain high quality engineering and asset management services among other services, G&A expenses have grown with the growth in new Class A properties and cash flows, and it's important to highlight the G&A expenses have improved slightly in recent quarters to approximately 0.6% of total assets. We are also in a very unique position with well-located land parcels to decide, if appropriate, to address the demand from high-quality and innovative entities with ground-up development of new Class A properties. This quarter our supplement package includes a new disclosure on Page 38 of certain development and redevelopment projects aggregating 1.5 million rentable square feet that are undergoing marketing and preconstruction, with potential delivery dates in 2018 and 2019. The project start date and initial occupancy date for each project is subject to leasing and/or market conditions. These potential developments and one redevelopment are on average targeting about 7% cash yield. We also added a new disclosure on page 39 for other potential near-term projects aggregating another 2 million square feet that could also address demand in the market with potential delivery in 2019, 2020 and beyond. Let me provide very important comments on the potential understatement of net asset value as of March 31, 2017. Most entity models start with the gap net operating income and back out straight-line rent to derive cash net operating income; most models divide this cash NOI amount by a market capitalization rate to determine the value of the operating portion of our asset base. As of March 31, 2017, our recently completed development and redevelopment projects have approximately $95 million of annual free rent that will result in significant understatement in most NAV models. At a reasonable market capitalization rate on this $95 million of rent concessions, NAV models could be understated by $20 to $25 per share. Importantly, approximately $40 million of annual cash rents commenced on April 1, 2017, primarily related to 75/125 Binney Street and 50 and 60 Binney Street. So, we encourage investors to carefully review NAV estimates for important valuation considerations. I would like to congratulate Steve Richardson, our COO, and our San Francisco team for their outstanding relationships and reputation in the market, which ultimately developed into an opportunity to work in partnership with the Golden State Warriors and Uber. We recently entered into an agreement to purchase a 10% interest in a joint venture with Golden State Warriors and Uber and expect to close this joint venture in 2018. This joint venture would develop two high-quality office buildings and lease them to Uber. Alexandria will manage the development of these buildings and also earn a development fee. Our balance sheet and credit metrics are very strong today and provide significant flexibility. Importantly, we continue to focus on improvement in our credit profile and long-term cost of capital. By the end of this year we're forecasting the following strong metrics: leverage in the range of 5.3 times to 5.8 times both on the net debt to adjusted EBITDA and in net debt plus preferred to adjusted EBITDA basis. Liquidity of $2.2 billion today combined with low balance sheet leverage provides significant flexibility in a disciplined manner with capital market activity. Our fixed charge coverage ratio is greater than four times. Our development pipeline is approximately 10% or will be approximately 10% by the end of the year and this includes projects under vertical construction as well as future projects, and that provides us optionality to address the demand from some of the most innovative entities. We have no debt maturities in 2017, very limited maturities in 2018 and a very manageable set of maturities in the three years thereafter. We’re also very limited on hedge variable rate debt of about 5% of total debt today. Our strategy for funding growth has been consistent and consistently executed year to year. We will continue to focus on investing significant cash flows from operations after dividends, fund a significant component of construction with long-term fixed rate debt on a leverage neutral basis alongside significant growth in EBITDA, continue to seek opportunities to reinvest capital from selected real estate sales, and remain disciplined with the use of common equity. Our goal is to combine our disciplined management of our development pipeline with a strong and flexible balance sheet while continuing to remain disciplined in funding our business in a manner that allows us to drive solid growth in per share earnings, net asset value and growth in common stock dividends per share. Closing the guidance here, we provided an updated guidance for 2017 as fully detailed on Page 6 of our supplemental package. Again, our 2017 guidance FFO per share with the midpoint was increased by $0.02 to $6.02, again driven by strong rental rate growth and recently executed early lease renewals. We remain in a unique position within the REIT sector today with solid market fundamentals in both life science fundamentals and exciting innovation focused on improvement in the quality of life. We’re also well-positioned with long-tenured and highly regarded senior and executive leadership, combined with a unique science and technology team that allows us to be an important partner to some of the world's most innovative entities. Thank you and I'll turn it back to Joel.

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

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

Joe, you talked about earlier that the lack of space within our developments for both new and existing tenants. I was wondering, how does that impact the way you think about doing redevelopment? Does it make you a little bit more aggressive on whether the timing or lease-up or location properties to help take advantage of that basic delivery between demand and supply?

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

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

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

Steve has visions of holding up the NBA Championship.

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

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

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

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

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

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

Three of the four are life science.

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

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

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

Can you provide details on the six projects that might be delivered in 2018, 2019, or later? Can you share insights on the discussions regarding those projects and whether any of them are ready to move forward at this time?

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

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

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

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

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

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

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

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

And then what other types of opportunities are you tracking? Should we expect more purchases throughout this year and possibly next year or is this just kind of a one-time thing?

I think it really depends. If I look back to 2004 and 2005 when we acquired 3 million square feet from Catullus, it wasn't our intention to buy everything at once, but it became a situation where we had to take it all or nothing. I don’t expect to encounter that kind of scenario again, but you never know. For instance, One Kendall Square wasn’t land, but there was a parcel available that we didn’t anticipate coming to market when we started in 2016. So, it's difficult to predict when sellers or owners might choose to liquidate their assets.

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

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

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

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

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

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

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

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

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

Dean, I didn’t fully get the timing of the settlement of the forward. Do you think it'll be ratably over the course of this year? And maybe you said, asked differently, what does your guidance assume in terms of fully diluted share count for 2017?

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

I think that answered my question. Thank you. I have a question, on the Golden State Warrior joint venture and Uber as the lessee, I mean what is to stop Uber from going down a wind path like they did at 1455? That’s not mentioned correctly how I am describing it, but resulted in you nonetheless restructuring that arrangement. Is there anything embedded in this joint venture that will preclude that from happening again?

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

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

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

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

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

What’s your average escalator?

We’re really close to 3% contractually today.

And that’s set escalator on CPI escalator?

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

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

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

Hi, Tom. It’s Steve. Again, the markets are healthy across the board from Mission Bay down to the Greater Stanford Cluster, mostly seeing an uptick in activity. We’re tracking 2.8 million square feet of lab demand today. A year ago, that was 2.2 million square feet, and I think you referenced 2.4 million square feet last quarter. In terms of tech demand, we’re tracking an uptick there as well, at 4.1 million square feet versus 3.7 million square feet in Q1 2016 at San Francisco alone. It’s a little flatter down in the Peninsula; we’re not seeing Google and Apple in the market with quite the same large block appetite right at this very moment. However, across the board, it continues to be very healthy and, in fact, has seen some uptick from a few quarters ago.

I appreciate that. And as we take a look at the new development site down at 960 Industrial Road, it looks like the surrounding area is heavily industrial, even by South San Francisco standards. What is it about the submarket and the specific site that you think makes it fit for your life science portfolio?

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

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

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

Got you. And then as far as overall?

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

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

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

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

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

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

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

Tom, you could comment on Cambridge?

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

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

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

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

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

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

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

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

Of the recent land acquisition, I know you got the entitlements. Do you still have to work through entitlements at the tenant's club site? And are all those lab sites on the stuff you acquired in the last quarter or so?

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

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

And the first three, you feel pretty good about being able to achieve those?

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

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

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

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

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

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

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

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

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

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

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

Yes, what we have left saw on that line item in our guidance, which still includes equity and dispositions, is roughly $400 million to $466 million or so is from the sale with the condominium interest on the Longwood project. That lease is called at roughly $330 million so far beyond that, and we’re working through that over the remainder of the year.

Do you have any assets in the market right now?

Nothing too significant.

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

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

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

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

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

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

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