Earnings Call Transcript - ARE Q4 2014

Operator, Operator

Welcome to the Alexandria Real Estate Equities, Inc. Fourth Quarter and Year End 2014 Earnings Conference Call. My name is Jenifer and I will 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. Please note that this conference is being recorded. I will now turn the call over to Rhonda Chiger. Ms. Chiger, you may begin.

Rhonda Chiger, IR

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of Federal securities laws. Actual results may differ materially from those projections and forward-looking statements, and 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 Form 10-K, Annual Report and other periodic reports filed with the Securities and Exchange Commission. And now, I would like to turn the call over.

Joel Marcus, President and CEO

Thanks, Rhonda, and welcome everybody to our fourth quarter and year-end 2014 call. With me today are Dean, Peter, Steve, and Dan. I want to start out with a couple of macro comments. First of all, I'm really proud of what our amazing Alexandria team collectively accomplished in 2014, our 20th anniversary year. We are really blessed to have a great business, an outstanding opportunity set, and a business which passionately and positively impacts the quality of human health every day. We had an exceptional year with strong core growth and significant growth from completion of highly pre-leased value creation projects. Important to our success this year was Alexandria’s Class A facilities and our collaborative science and tech campuses, along with the hot urban innovation clusters, characterized by rising rents, giving us pricing power, rising occupancy, and constrained supply in our core urban cluster markets. 2014 also saw the U.S. FDA hit an 18-year high with drug approvals, 41 novel medicines versus 27 the year before, and we’re very proud that 56% of those 41 companies were ARE client tenants. There were a number of significant breakthrough treatments for various cancers and rare diseases. Dean will comment on guidance in a few minutes, but the midpoint of the guidance as we go forward for 2015 is 510, which is an 8.3% growth. When combined with our dividend, we're predicting a double-digit return for this year. Internal growth operations in leasing are characterized by very strong year-end occupancy at 97% for North American operating properties. We have very solid same-store or same-property NOI growth, and the fourth quarter witnessed solid leasing, particularly in North Carolina and San Diego. Let me comment on two markets briefly. One is the Cambridge, Boston market. The mark-to-market analysis we’ve done internally indicates this is a continuing durable market, our so-called Greater Boston cluster, and we’re expecting growth of about 17.5% on a cash basis and 21.8% on a GAAP basis. Occupancy is up 200 basis points to 98.8% compared to 4Q '13; lease rates were in the $60 plus range, triple-net for existing product; and prospects seeking large blocks of space at our Alexandria Center at Kendall Square are anticipating rents in the low $70s, triple-net on a GAAP basis. In the San Francisco cluster, occupancy is up by about 120 basis points from the same period a year ago to 98.9% in the operating asset base, and worth noting that we resolved the remaining vacancy last week. So we’re now fully 100% leased. Lease rates for new product are in the mid to high $50, triple-net, as the office allocation continues to constrain supply of new product in the Bay Area. The mark-to-market refresh indicates further growth to about 11.7% cash and then somewhere between 17% and 18% on a GAAP basis. And as I'll mention in a moment, we’re advancing the entitlements and lease negotiations at 510 Townsend and anticipate completion in the near term, as well as finalizing the design this month for what will prove to be an absolute world-class and iconic tech facility for Uber at Mission Bay, adjacent to the league-leading Warriors arena. We’ll disclose yields on those in the 1Q supplement once our construction costs and so forth are finalized. Moving to external growth briefly, we had good leasing progress on our value-add development projects, both at Longwood and the Alexandria Center for Life Science in New York City. I want to comment a little bit on the near-term value creation development pipeline. At Campus Point, Dan has been very successful. He expects to finalize the lease for about 75% of the project, with the new building hopefully this month, entitlements following shortly thereafter, and construction starting probably by the second quarter. At 50 Binney, we look to finalize the lease for the full 50 Binney project in the first quarter and hopefully finalize a lease in the second quarter for 60 Binney, as that construction is fully underway. For 100 Binney, we’re trading paper with at least five substantial space users. Construction will depend upon significant pre-leasing, but we expect that to happen in the relative near term. Coming back to Townsend Street, we expect the lease to be finalized this month, entitlements to follow in March, and probably kick off construction by the end of the second quarter. As many of you noted, we did acquire a number of projects over the past quarter, including the remaining 10% interest in Alexandria’s Tech Square Center, which we purchased from MIT, half of which is paid this year and half next year. As we indicated in the supplement and in the press release, we see very significant upside in the lease rolls, and that project is probably the single best-located project in all of Cambridge. We also acquired another project from MIT, their 640 Memorial Drive. Dean may make a comment or two. We did have a 5.9% initial cap rate, moving to 6.4% at 116 when the rental phasing is completed. This purchase in the mid-Cambridge market ties to our 780 and 790 Memorial Drive clustered development that have been very highly leased and successful. I'm not going to get into details on the balance sheet; I’ll ask Dean to comment on a number of subjects and then we’ll open it up for Q&A quickly.

Dean Shigenaga, EVP and CFO

Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. I have four important topics to cover today. First, our strong performance in 2014 and continued focus on growth in FFO per share and growth in net asset value. Second, I want to touch on our quality cash flows and disciplined capital allocation in high-value urban innovation clusters. Third, I’ll provide an update on our significant progress on our capital plan for 2015, and key considerations for net asset value, and lastly, I'll close out with comments on guidance. Jumping right in, the fourth quarter was a very strong quarter of performance with FFO per share of $1.23, and this wraps up an outstanding year with total shareholder return of 44.7%. Our FFO per share for the full year was $4.80, up 9.1% over 2013. Our strong performance in 2014 is projected to continue into 2015, with our mid-point of FFO per share of $5.20 or 8.3% over 2014. Our strong cash NOI growth from value creation deliveries throughout 2014 is driving significant growth in NOI and cash flows in 2015, with further increases from significant value creation deliveries in 2015. We continue to focus on growth in FFO per share and net asset value in 2015 and beyond. Key drivers of growth in FFO per share and net asset value in 2014 included significant quarter-over-quarter growth in net operating income and cash flows, which we expect to continue into 2015, driving continued growth in net asset value. The quality of our ABR has improved significantly in recent years, supporting high-quality and strong cash flows. The three key areas driving the quality of ABR and cash flows include; first, 56% of our ABR is derived from investment-grade rated client tenants, again this represents an industry-leading statistic. Second, 83% of our ABR is generated from high-value urban centers of innovation, including Greater Boston, primarily the submarkets of Cambridge along with the Medical Center, the San Francisco Bay Area, primarily Mission Bay, Suma, Palo Alto, and the Stanford Research Park. In New York City, San Diego, primarily Torrey Pines and UTC, and in Seattle, primarily in Lake Union. 83% of our ABR R&D's high-value centers of innovation reflect a significant focus of our capital allocation over many years in our urban innovation cluster submarkets. Third, we remain disciplined in our allocation of capital going forward. 85% of our capital allocation in 2015 is projected to be in the same high-value urban centers of innovation that drive 83% of our ABR today. Additionally, over one half of our capital allocation for 2015 is projected to be invested in two of the top destinations for science and technology innovation in the Cambridge and Mission Bay/Suma submarkets. Let me briefly clarify our initial cash yield for the purchase of our ground lease hold interest at 640 Memorial, located in Mid Cambridge. Our release disclosed an initial cash yield of 6.4%. For clarification, one of the two leases we acquired with the property has about one year remaining before a rent concession burns off. Our cash yield, as Joel mentioned, on day one is approximately 5.9% to 6%, which increases to about 6.4% in about 12 months. Moving next to the progress in our dispositions and our capital plan for 2015, we have $235 million in dispositions identified to date, of which about $113 million was completed in the fourth quarter and January of 2015. We have an additional $122 million of properties held for sale, and these proceeds from the sales will be invested immediately into substantially leased Class A value creation development projects. The mid-point of our 2015 guidance for asset sales is approximately $390 million, with $178 million completed or identified and held for sale. The remaining of our mid-point guidance is about $212 million, representing our sale proceeds. At a high level, a portion of the $212 million in proceeds from the remaining asset sales will provide a benefit or a reduction of leverage, reducing our debt to offset a reduction in EBITDA. The exact mix of land versus operating asset sales will be determined in the next couple of quarters. On capital, let me briefly touch on approximate pricing for unsecured bonds. At a high level, we believe pricing for 10-year unsecured bonds in the last month would have been roughly about 180 basis points over 10-year treasuries or approximately 3.6%. In 2015 we have the flexibility to execute a 10-year bond deal with a maturity in 2025, providing us the opportunity to both extend the weighted average remaining term of outstanding debt and continue to ladder maturities.

Joel Marcus, President and CEO

Next, I want to touch on some key NAV considerations. For your reference on Page 4 of our supplemental, you’ll find a brief outline of key considerations for NAV models in our Company from recent dispositions and assets held for sale. The key point here is that various important items included in our fourth-quarter results will drive a meaningful overall increase in net asset value due to the following: continued significant growth in cash NOI in the fourth quarter by $4.6 million or $18.3 million on an annualized basis. This is on top of the cash NOI growth for the third quarter of about $5.8 million or $23.4 million on an annualized basis. We expect significant growth in cash NOI quarter-to-quarter to continue, which has been and will be a key driver of growth in NAV going forward. We have increased our developable square footage by approximately 416,000 square feet, 88% of which represents increases for near-term development projects located in University Town Center, including 214,000 square feet at 5200 Illumina Way and about 103,000 square feet at Campus Point, and we continue work on finalizing these entitlements. Page 4 of our supplemental package highlighted other key NAV considerations, including the sale of real estate located in Toronto. The key highlights of this transaction are that we had an operating property classified in rental properties generating operating losses due to operating expenses of about $1.4 million per year related to ground rent expense. As such, we believe most NAV models had no value or negative value attributed to this investment. We completed this sale in January 2015. So if you update your model for the fourth-quarter NOI, remember to make an additional adjustment to increase NOI to eliminate the annual operating expense of $1.4 million. Additionally, since most NAV models likely attributed no or negative value for this asset, please remember to add the proceeds from the closing of the sale of $54 million as a positive adjustment to NAV. Also, because of the factors I just described, we believe the impairment of $16.6 million for this asset had no impact on most NAV models. I should also point out that the impairment is primarily related to foreign currency exchange rates, taxes, and other closing costs for that property. The next item to consider for NAV is the impairment related to the sale of nine land parcels with seven old industrial buildings located in South San Francisco. The buyer of these assets operates to redevelop and develop industrial buildings. These parcels were previously classified as land held for future development. The impairment charge was about $24.7 million and will slightly offset increases in NAV I just described. Further details on this sale are also included on Page 4 of our supplemental package. Briefly on 500 Forbes, this is a high-quality core-like asset located in South San Francisco that we acquired in 2007. However, we did recognize an impairment related to the write-off of non-cash items, including both the net book value related to an acquired below-market lease and improvements we received from the prior tenant. We expect to complete the sale of this property at a market cap rate reflective of a high-quality asset with quality improvements and an investment-grade rated tenant. Since most NAV models value at this property based on cash NOI and a market cap rate consistent with our expected sale, we believe this non-cash impairment of $9.6 million has no impact on most NAV models of our Company. It's important to note that the proceeds from these sales will be immediately invested into highly leased value creation development projects at very attractive cash yields relative to current market capitalization rates. Additionally, these sales and immediate investment into value creation projects are well-aligned with our overall strategy to continue to grow FFO per share and net asset value. In closing on this topic, several drivers in our fourth-quarter results will result in a significant increase in net asset value, including significant growth in cash NOI, additional FAR that we are adding to key near-term ground up development projects, and a net positive impact from completed and pending sales, including any impacts from impairment charges.

Dean Shigenaga, EVP and CFO

Briefly I want to comment on our 7% series D preferred stock. You may have noticed during the quarter we purchased about 513,000 shares or roughly 5.1% of our outstanding 7% series D preferred stock for an aggregate price of about $14.4 million or $27.98 per share. This results in a preferred stock redemption charge of about $2 million or about $0.03 per share. Our guidance assumes that we do not repurchase any additional shares of our outstanding 7% series D preferred stock in 2015. Lastly, on guidance, the detailed assumptions underlying our guidance for 2015 are included on Page 5 of our supplemental package. We are extremely pleased with the solid execution by our team in 2014, with the delivery of strong growth and cash NOI, FFO per share up 9.1% over 2013 and significant growth in net asset value. We remain focused on continuing this growth into 2015 with FFO per share forecasted up at 8.3% over 2014. A key driver for our growth in net asset value has been, and will continue to be, the significant growth in cash NOI quarter-to-quarter. We believe we have the right assets, in the right locations, and the best roster of our client tenants, and we remain focused on continuing to build our best-in-class franchise. With that, I'll turn it back to Joel.

Joel Marcus, President and CEO

Thank you. Operator, let's open it up for Q&A please.

Operator, Operator

And we will take our first question from Smedes Rose from Citi.

Smedes Rose, Analyst

I wanted to ask you about your Technology Square purchase. Was there any decision around buying the 10% now versus at some other point, was there some sort of trigger that you needed to buy that now? And if you could give maybe a little more color on the 100,000 square feet that you could potentially explore as well. And then just more broadly, are there additional opportunities with MIT, where you would be the natural buyer, I guess?

Joel Marcus, President and CEO

Well, this is Joel. The timing is really influenced not by us but by the decision of MIT's Management Company to sell certain assets to invest in development projects both on and off campus. That was the key factor in determining the timing for Tech Square and 640 Memorial Drive. As for other opportunities, those would certainly be of great interest since Cambridge is one of our key markets. Regarding the 100,000 square feet, we are currently focused on its design and entitlement. I'm not sure I can share much more at this point. Tom isn't available today, but I will note this and we will provide updated details during our next conference call.

Smedes Rose, Analyst

Okay. And then could I just ask one more about the land bank that you've talked about potentially selling pieces from? You mentioned Forbes Boulevard and South San Francisco, but is there more or much more from the 2006, 2007 sort of vintage, if you will, that you would look to bring to market this year?

Joel Marcus, President and CEO

Not particularly. We did use a set of parcels there for the development of the Onyx campus, which when Onyx got acquired by Amgen, they succeeded to those assets. We do have another set of parcels for development, but I think that's something we'll continue to look at as time goes on. So it's possible, but nothing certain at the moment.

Operator, Operator

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

Jamie Feldman, Analyst

So if you look at your acquisition guidance and what you've already done year-to-date or scheduled to do year-to-date, you've hit that number. So what does the acquisition pipeline look like from here?

Joel Marcus, President and CEO

I don't think we have anything that is in the near term, but we look at everything that comes to market that we feel is in the sweet spot of either the nature of the facility or the location. But I don't think we have anything in the near term that we're looking at. And as I just said to Smedes, the timing of the Tech Square acquisition or of the sale by MIT and the decision to market 640 Memorial Drive is really driven by their own capital needs and decision-making timing, which had nothing to do with ours.

Jamie Feldman, Analyst

And then you had mentioned you were starting to build a cluster in the mid-Cambridge market. Can you talk about what might be different about that segment of Cambridge, whether it's tenants, building types, or if that becomes a real investment for the future for you guys, what’s different about it?

Joel Marcus, President and CEO

Well, I think if you look at a map, it's directly west of East Cambridge. It encompasses and circles around toward Harvard Square. There are a number of owners and developers in that area; MIT certainly has an important toe hold. Some years ago we owned a property next to 640 Memorial called 620 Memorial that was ultimately leased to Pfizer. Back 10 to 12 years ago we built 790 Memorial Drive and 780 Memorial Drive, which have been real important anchors for us in that mid-Cambridge market. We like that market, and when this opportunity came up, we decided to move on it.

Jamie Feldman, Analyst

Okay. And then I guess a similar question in San Francisco. As Mission Bay is filling up, what's kind of the next cluster you could create there? Will you go further south, or are you just trying to keep penetrating the CBD?

Joel Marcus, President and CEO

I think you will see it expand naturally. You can't move east from Mission Bay because that's the Bay, but you can move south, west, and north. Those would be the natural extensions at Mission Bay.

Jamie Feldman, Analyst

Okay. And then finally on the land sales in the quarter, any impairments? If we look at our current land bank, what level of impairments do you think you still need to see if you did sell some of that remaining land? Or is it now more of a mark to market?

Joel Marcus, President and CEO

It's challenging to predict land values, Jamie, but if you reference Page 37 of our supplemental information, you'll see that we categorize our land holdings into two groups. We currently have 2.3 million square feet available in the near term, which is actively being negotiated, so I won't focus on that. The future group consists of around 2.9 million square feet, and the largest part, spread across various markets, is priced at $32 per square foot. I'm not particularly worried about that amount; it's quite modest. For the remainder, we have valuable locations like Technology Square and some residential projects in Cambridge, as well as other properties on Grand Avenue. These could be monetized depending on the buyer. Recently, we sold a property in San Francisco to an industrial buyer for approximately $80 per square foot. While there may be a slight reduction in prices, these amounts are relatively small. Overall, I believe we are in a strong position.

Operator, Operator

And we will go next to Sheila McGrath from Evercore ISI.

Sheila McGrath, Analyst

The GAAP cap rate on 500 Forbes looks to be about 5%. I'm just wondering if the cash cap rate is going to be close to that and could you describe the level of interest from buyers for that asset?

Joel Marcus, President and CEO

The GAAP cap rate is shown on our disposition page on the supplemental, probably at about 51, Sheila, as you stated. I think the cash number trails that just a tad, maybe somewhere in the 30 to 40 basis points behind that.

Sheila McGrath, Analyst

Okay, and were there a lot of potential buyers interested in that asset?

Joel Marcus, President and CEO

Let us not comment on the transaction itself, other than to say that you have a very high-quality asset, one that I think will be very attractive. You can get a sense of our approximate price point that we expect to complete the transaction. So I think it's an attractive trade for us.

Sheila McGrath, Analyst

And then on 50, 60, and 100 Binney, the supplemental says 2016 and '17. If they are complete in '16, that would be very late in the year and not contributing. How should we think about timing in '16 for those projects?

Joel Marcus, President and CEO

Yes, I think it's hard to speculate on timing too specifically because there’s a lot of negotiations ongoing and it ultimately will depend on the terms of the lease. However, it's safe to say that if it contributes to '16 at all, it will be in the fourth quarter. That's probably the earliest. But the exact timing for each of those buildings will depend specifically on the lease negotiations. We can provide better color as we execute transactions.

Sheila McGrath, Analyst

Okay, and last question on the investment page. You did have some unrealized gains. Was there an IPO or two and should we assume that there will be some sales from that bucket in 2015?

Joel Marcus, President and CEO

Yes, we had — actually, over the past two years, I think we've had 14 IPOs. So yes, there will be, I'm sure, sales over the coming quarters and years.

Operator, Operator

And we will go next to Michael Carroll from RBC Capital Markets.

Michael Carroll, Analyst

Hey Joel, can you discuss the demand you're seeing at the Illumina campus in the UTC? With a doubling of the size of the project that's under development, has the timing changed on the potential projects that are in the near-term value creation pipeline?

Joel Marcus, President and CEO

Yes, Dan is here. So I'm going to let him comment.

Dan Ryan, EVP and Regional Market Director, San Diego

Yes, good morning. So when you ask about the demand, in terms of Illumina's growth, it has been extremely robust. The delivery of this next phase essentially taps out their existing entitlements. We're in front of the city now to entitle for about 350,000 square feet of additional space, and they have asked us to go ahead and progress on that additional square footage that we think we can get.

Michael Carroll, Analyst

Could you expect that to break ground in the next few years as well? Is there enough demand for that?

Dan Ryan, EVP and Regional Market Director, San Diego

Yes, I think that's a fair assumption.

Michael Carroll, Analyst

Okay, great. And then I guess my last question, can you talk about your asset sales in general? How much of the portfolio going forward do you want to sell? Is it that you just want to raise capital through asset sales, or are there other assets that you want to dispose of?

Dan Ryan, EVP and Regional Market Director, San Diego

For now, we have shared our guidance for what we aim to achieve in 2015, targeting a midpoint of $390 million. Out of this, $178 million has either been held for sale, completed, or is pending, leaving us with $212 million to complete for the rest of the year. This amount consists of a combination of remaining land and some operating assets, and we will provide more details in the upcoming quarters. Although it's difficult to predict what 2016 will entail, we will explore our options as we navigate our capital plan, similar to this year, while considering the balance between debt funding and the potential to recycle assets for reinvestment.

Operator, Operator

And we will go next to Rich Anderson from Mizuho Securities.

Rich Anderson, Analyst

What is your tenant retention percentage generally, and how has it trended over the recent past?

Joel Marcus, President and CEO

I think we did a study about a year ago looking back, probably, seven years, and the retention rate has been pretty consistent as we roll that forward. It's averaged about 85% over that time frame. The only qualifier I'd give is that, as you know, we acquired a couple of assets recently that were development targets right out of the gate. We had a lease in place but generally had about 12 months of remaining term, so we’ll exclude something like that because that’s intentional targeted lease rolls that were planned for redevelopments. But it’s a very solid retention rate. You can tell from our occupancy stats and our leasing performance that it's all very consistent, so very strong retention.

Rich Anderson, Analyst

Okay, and then looking at the leasing schedule, the average lease term of 4.3 years for this quarter has kind of moved around that number over the past few quarters. What is your desire to make that a longer or shorter number, considering the strength of the markets?

Joel Marcus, President and CEO

Yes, it depends, Rich, so much on the nature of the lease, the nature of the location, and multi-tenant buildings with companies that grow rapidly and need flexibility on space. Three, five, and seven years are kind of where the sweet spot is, and then you get into development. You see this quarter was about over 10 years. You see in the larger blocks of space 10, 15, and 20. That’s really how it's broken down for years, and years, and we don’t expect to change that.

Rich Anderson, Analyst

Okay. Considering NAV, you are aiming for a stabilized return of 7% to 8%. If you were to sell those assets once stabilized, what do you believe the market would pay for them?

Joel Marcus, President and CEO

Well, of course, it depends on what market you are in.

Rich Anderson, Analyst

I'd say Cambridge. So let's go high.

Joel Marcus, President and CEO

Well, I think you’re probably looking at a potential sub-five cap rate.

Rich Anderson, Analyst

Okay. And where do you think a range would be? If that’s the floor, do you think it could be six at the top, depending on where you are in the country?

Joel Marcus, President and CEO

Again, it depends on the nature of the building. If you have an older multi-tenant building, it would be higher than five, but if you have a new Class A facility with a long-term lease and an investment-grade tenant, you’re not going to be above that.

Rich Anderson, Analyst

Got you. And then last question. You took Asia out of the occupancy statistics. I'm curious if there is anything symbolic about why you did that? Is there any change in strategy in Asia, or could you comment on that?

Joel Marcus, President and CEO

No change. Really, Asia represents such a small portion of our business, and as you know, we’re focused on our domestic growth opportunities here. We continue to focus on leasing up our properties, but we have some work ahead. However, it’s a small piece of the business.

Rich Anderson, Analyst

It is small, but do you think the long-term strategy is to be there at some point in five, 10 years or something like that?

Joel Marcus, President and CEO

I’d say it's hard to speculate. I think we yield nicely in India on the operating assets. You can tell from our disclosures that China has been a little tougher on the returns. It's hard to foresee what the future holds. But clearly, investors and management and the board want us to focus on our core urban clusters here in the United States.

Operator, Operator

And we’ll go next to Michael Knott from Green Street Advisors.

Kevin Tyler, Analyst

You commented earlier on Mid-Cambridge. Can you give some color on that as it relates to cap rates in Cambridge overall? The cash lease yield reported was about 5.9, as you said on 640 Memorial Drive, and I was curious about the appropriate spread between Mid-Cambridge and Kendall Square, let’s say?

Joel Marcus, President and CEO

Unfortunately, Tom is not here, so we’ll note that question for our next call. However, I can share my perspective on this. It really depends on the specifics of the facility, such as whether it is new or somewhat dated, if it is multi-tenant or single-tenant, the nature of the lease credit, and its exact location. Regarding 640 Memorial Drive, I believe it has a ground lease. It is a well-developed, relatively new facility with two tenants that have long-term leases, situated in the heart of Kendall Square. My estimation is that it might see a decrease of around 50 basis points, potentially dropping to a five.

Dean Shigenaga, EVP and CFO

There is no upside on those rents as well. They are long-term; there's no near-term ability to try to mark to market. So it’s more of a stabilized asset.

Kevin Tyler, Analyst

Okay, thanks. On the development side, you guys are continuing to talk about bringing development down. As a percent of gross investment, the number you're quoting is 13% in the first quarter. But is there any broader read-through on that number indicating a shift in strategy toward acquisitions versus development going forward? How much of the reduction can you attribute to portfolio growth or just recent deliveries?

Joel Marcus, President and CEO

Yes, so I'll address strategy and then let Dean touch on the arithmetic calculation. No change in strategy. We view ourselves as best at creating value through development and redevelopment. We do take the opportunity on occasion to look at acquisition. 640 Memorial Drive was unusual for us. Tech Square was right up our sweet spot, because we've covered it. We've approached MIT for years trying to buy that interest, but they haven’t been ready because they didn’t have a use for the proceeds, and then they decided they were ready. It depends, but it is fair to say that we believe we can create better value by creating value, not buying someone else's value.

Dan Ryan, EVP and Regional Market Director, San Diego

Yes, and let me add some color. I would say that the land bank dropping down to 13%, or I should say non-income producing assets as a percentage of gross real estate, declines to 13%, and that's really through — substantially through deliveries, offset a little bit by an increase in construction spend. If you want to put that into perspective, that's still roughly $1.4 billion of non-income producing assets, with 50% of that being active projects which are highly leased and about another 25% of that number sitting in near-term developments like 50 Binney, 60 Binney, and 100 Binney. We have a good-sized future pipeline, but as we grow, that percentage will naturally become a smaller piece of our business, while still providing us great opportunities to grow respectively with build-to-suit opportunities. Our focus will be careful and prudent on how much land we carry to minimize carry costs and deliver products to market as quickly as we can.

Operator, Operator

And we'll go next to Dave Rodgers from Baird.

Dave Rodgers, Analyst

Joel, one question for you regarding the backlog of demand and interest in your four key hub markets. What's the breakdown, maybe, between tech office or traditional office and lab demand? Are lab tenants in any particular market being priced out by higher rents? Are there particular markets where lab demand has really ebbed as the tech office demand has been flowing?

Joel Marcus, President and CEO

Yes, I'd say maybe just taking a quick look around the country, I think Seattle tech demand and lab demand have been steady across the board. I think it depends on the site specifics. In San Francisco, clearly tech demand — if you took a benchmark today, it's probably 10 times what lab demand is. But yet certain markets remain key hotspots for laboratory properties, especially South San Francisco and Mission Bay, despite Uber's arrival. I think in some of the other markets, there has been a gravitation toward tech. In San Diego, I don’t know, Dan, could you speak to that?

Dan Ryan, EVP and Regional Market Director, San Diego

Yes, we find that the life science demand is more significant than the tech demand in this area.

Joel Marcus, President and CEO

And moving to the East Coast, in the Research Triangle Park, the ag demand and tech demand are really dominating there. Maryland is with lab demand, but we haven’t seen a big tech influence there. In New York, we're focused mainly on life sciences; we haven’t really gravitated toward tech for our center. However, in Silicon Valley and New York City, certain REITs have seen strong tech demand. We think we’re creating a life science market there. It's a little different for us. In Cambridge, lab or office demand from lab companies is still a mainstay, but there is increasing demand by large tech users. So we’re seeing both sides of it. I don’t think any significant lab tenant is getting priced out of the market, because if you check the health of the biotech and pharma industry, it's the best it's ever been for those sectors. Thus, with over $200 billion on their balance sheets, if they want a site, they'll go after it and if they’re competing against a big tech tenant, they can go head to head.

Dave Rodgers, Analyst

I'm assuming that Uber building is not a lab-ready building. Are there any other new construction projects of the major variety that you're looking at or started that are not going to be lab-ready at some point in the future?

Joel Marcus, President and CEO

Let’s say it's not lab-ready. It would be lab-capable would be a better way to describe it. Clearly, Townsend is likely to sign a lease very soon with a well-known tech tenant. For the Binney project, it's kind of a combination of who is bidding on that between life sciences and tech. We will see what shakes out there. Generally, if we build a building — I think Tom and Steve went through this in a prior call — we try to try to make it lab-capable if it's in Cambridge or Mission Bay hotspots. It’s only a few dollars extra per square foot to do that.

Dave Rodgers, Analyst

Of your 20 tenants, I think AstraZeneca is the only one that comes up in the next two years or before the end of 2016 with a major maturity. I think it’s 350,000 square feet. Are you having any discussions with them or can you talk at all about that tenant and their desire to remain in that space?

Dean Shigenaga, EVP and CFO

I think there are a few leases that come up. Some come up early; that's why it has 1.7 remaining years. Half of that space that comes up early is probably resolved and leased. We're working on the remainder, which is about a third of that ABR that I’m referring to of that $9.3 million. I don’t have the details with me.

Joel Marcus, President and CEO

That being said, I think it's fair to say that under the new leadership of Pascal Soriot, they obviously thwarted the Pfizer takeover. They've made a significant presence through their MedImmune acquisition in the Maryland market and have a large presence in the Boston market. They are not retrenching in any of the locations that we've seen.

Dean Shigenaga, EVP and CFO

The other two leases go out to '18 and '19. So it's really weighted by the near-term roll.

Operator, Operator

And we will go next to Jim Sullivan from Cowen Group.

Jim Sullivan, Analyst

Joel, I wonder if you could give us a top-down summary of your view of East Cambridge and mid-Cambridge. The Volpe site is still under negotiation, I gather, with the GSA. We keep hearing about yourselves and your peers in MIT looking to increase density wherever they can on the sites they control. There’s also local community pressure to increase residential space whenever any increased density is provided. As you think about value creation opportunities in East Cambridge and the adjacent mid-Cambridge, summarize how much additional square footage might be entitled in the next couple of years in East Cambridge and relate that to demand that you foresee continuing or emerging over the next two years?

Joel Marcus, President and CEO

This question I would probably pass on to Tom and try to address that in the next call. There is currently about 2.3 million square feet of demand from at least seven major potential tenants seeking blocks greater than 100,000 square feet in the East Cambridge area. The numbers are significant. MIT has a big development they're working on. I suspect some of the capital we've provided them will go into that — they have a large site that they can develop and will likely entitle and build over the next 18 to 24 months. The Volpe site is a large site that includes both commercial and residential. Obviously every developer between Boston and New York is looking at that. North Point site is not in favor, and that is a couple of million square feet for both commercial and residential — we understand that it’s currently being marketed, with significant foreign interest. Others are looking to add density, such as Boston Properties. There is a push to expand entitlements and available markets. However, tougher standards are coming from the Cambridge council regarding residential and traffic demands, which they'll have to balance over time. There's great opportunity, but there also are timeframes. We hit a sweet spot with our 50 Binney, 60 Binney, and 100 Binney. We developed when there was virtually no competition for Class A ground-up construction in that market when rents were near all-time highs. We feel very fortunate about that, but we'll always ensure our three and five-year plans are cognizant of growth in these markets. Both East-Cambridge and Mid-Cambridge make sense. You must remember that Alston is another gigantic future development controlled by Harvard across the river, which could provide space for many future companies. That's probably a five to ten-year project, but there is a lot happening in that market.

Jim Sullivan, Analyst

Yes. Can you also remind us when these sites might include residential as part of an increased density entitlement plan? What is your philosophy on that? Are you looking to bring developers in?

Joel Marcus, President and CEO

Yes, we've been required to build a certain amount of residential on the Binney street quarter, about 273 units, with an investment of approximately $40 million to $45 million for that project. That’s part of the negotiations we made with Cambridge when we were entitled and up-zoned our Binney street sites. That’s just part of doing business. In New York, many developers face the same issue — how to address the housing issue, which is front and center with the mayor and lots of other members. In this case, it makes sense; we haven't made any short-term decisions.

Jim Sullivan, Analyst

In terms of doing that, should we expect that to be on your own balance sheet, and not brought in together with a partner?

Joel Marcus, President and CEO

We’ve talked to partners about it, but in our case in Cambridge, the project was small enough that it made sense to internally manage it. However, we’re not really a long-term holder of residential assets. There are still no short-term decisions made. Becoming a commercial developer today in urban innovation cluster centers means that residential must be included going forward. Okay, thank you very much. We did it in less than an hour and we look forward to talking to you on the first quarter call. Thanks again, everybody.

Operator, Operator

And this completes today's program. Thank you for your participation. You may disconnect at any time.