Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q1 2015
Operator, Operator
Welcome to the Alexandria Real Estate Equities, Incorporated First Quarter 2015 Earnings Conference. My name is Blesia and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note today's event is being recorded. I will turn the call over to Rhonda Chiger.
Rhonda Chiger, IR
Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of Federal securities laws. The company's actual results may 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. And now, I would like to turn the call over to Joel Marcus. Please go ahead.
Joel Marcus, CEO
Thanks Rhonda and welcome everybody to our first quarter 2015 call. With me today are Dean Shigenaga, Peter Moglia, Steve Richardson, Dan Ryan, and Tom Andrews. We finally decided to hold this call with investors despite what was said. The story of the first quarter is strong leasing in our development pipeline and needless to say, we are very proud of our entire team's strong first quarter performance across the company. Our long-term strategic optionality planning is paying significant dividends; we’re located in the best submarkets with the best assets and operations, taking advantage of the exceptional market demand, which gives us significant pricing power. There is a perfect confluence of significant science and technology demand for our urban innovation campuses. It's all about acquisition and retention of talent, and in 2025, millennials will make up 75% of the workforce. Companies are very attuned to location. Regarding demand, the very limited supply, coupled with our timing of deliveries from our development pipeline, which is highly leased and offers strong yields, equals a compelling growth story, both internally and externally. We're pleased to report that 52% of our ABR is from investment grade client tenants, and when combined with an average lease duration of around 9 years from our top 20 tenants, we have strong cash flow and high-quality long-term tenants. Dean will talk about guidance; we updated the midpoint of guidance to 522, approximating 8.5% growth plus a 3% dividend, which gives investors double-digit growth for 2015. Science and technology entities are at the forefront of growth and leadership in this innovation-oriented economy, competing for the best talent in the best submarkets. In the Life Sciences industry, compelling factors include faster FDA approvals; in fact, there were 10 new drug approvals in the first quarter, and 50% were ARE tenants. Today, Biogen's CEO, George Scangos, announced that Biogen was committing $2.5 billion to Alzheimer’s research in their R&D budget. More NIH funding is coming, big bio-techs have emerged, and more venture-backed companies have become dominant. Big Pharma is in good shape and migrating towards urban cores. Personalized medicine and effective targeted therapies have come of age, driving an increase in life science industry reliance on tech platforms. Commenting on yesterday's sell-off, biotechs were broadly down about 3% to 5%, but the group is up 15% year to date and 50% over the past year. It’s tripled over the last three years, so the sector remains a market leader without any specific catalyst; and trading volumes are not alarming. The tech sector PE is about 5% lower than the S&P market, with favorable earnings growth, along with secular trends driving growth in corporate networking security, smart mobility, explosive e-commerce, cloud computing adoption, and digital health. For our internal growth operations in leasing, we had a very strong quarter of approximately 1 million square feet leased with significant rental rate increases; 40% of this square footage leased was from Greater Boston and 31% from San Diego, with 84% of the cash increase coming from Greater Boston leases. Occupancy, which Dean will comment on, will likely stay flat or decline slightly in the next quarter due to two move-outs Dean will mention. We had very good same-property NOI growth. For our external growth, we have more opportunities than we can undertake. Our current pipeline at 60 Binney has 250,000 square feet, and we're down to two prospective tenants, expecting leasing progress above pro forma in the second quarter. A 100 Binney in the near-term pipeline is about to secure an anchor lease; we've signed a letter of intent for more than half the building and expect to kick off construction soon. It's also important to note our future development opportunities are valued at approximately 3.2 million square feet, with Seattle at 452,000 square feet, San Francisco at 1.1 million square feet, San Diego about 1 million square feet, Greater Boston about 150,000, and New York City about 420,000. I will leave Dean's comments on the balance sheet and guidance, and finally on the dividend. We will clearly increase cash flows shared with shareholders, so look for continued dividend increases based on Board decisions. Now I will turn it over to Peter.
Peter Moglia, CIO
Okay, good afternoon. I want to make some comments on the investment market and cap rates. The national investment market has continued to be healthy through the first quarter of 2015, illustrated by a further compression in cap rates by 5 basis points in the fourth quarter of 2014, for a national average of 6.11% according to the PWC Korpacz Investor Survey. Alexandria's strategy focuses on allocating capital to the innovation gateway coastal cities of Boston, Cambridge, New York City, San Diego, San Francisco, and Seattle, continues to drive our NAV higher. Year-over-year cap rate compression in these markets has been two times that of the national average at 34 basis points. The office sector, in particular, is expected to lead in value growth, followed by warehouse, lodging, apartments, and retail. This is attributed to improving fundamentals, with a focus on office investment from foreign capital and pension funds. There was a notable transaction in the first quarter in the Seattle region: 307 Westlake and South Lake Union traded for a 5.6% cap rate and a record price per square foot of $859. This trade is indicative of the cap rate compression that lab office assets have experienced over the past year. During Investor Day, we noted a sales comp at 25/1st Street in Cambridge, Massachusetts, known as the Davenport building. That sales comp was confirmed at a 4.55% cap rate and a price per square foot of $637. We also had the closing of One Memorial Drive at a 4.9% cap rate and a healthy $1,096 per square foot. We noted during Investor Day a comp that gave some long-awaited price discovery in South San Francisco, 701 Gateway, an office building that traded at a 5.5% cap rate. Adjacent to Mission Bay, the tech office building 444 De Haro Place in Potrero Hill traded to Ares Management for a 4.5% cap rate and $669 per square foot, stabilized with major leases executed in 2014. To conclude, we continue to monitor movements in interest rates and still believe that although recent days show leading indicators have turned higher month-to-month, investor sentiment remains negative on the rate outlook. Still, this sentiment appears validated by 10-year treasury yields remaining near lows and the Fed's projected lower rate cap forecast during the last FOMC meeting. With that, I will hand it over to Steve.
Steve Richardson, COO
Thank you, Peter, and good afternoon everybody. The San Francisco to Stanford clusters theme reflects a broad and deep demand. Life science requirements total over 2 million square feet, significantly up from six months ago, along with another 8 million-plus square feet of tech office demand, of which 2.7 million square feet is in the City of San Francisco alone. Alexandria's leadership in developing creative and collaborative urban campuses is generating tremendous interest in the market. We are fully engaged with deep and trusted relationships across both science and technology industries, with at least five users seeking unique big blocks exceeding 200,000 square feet. A closer look at the market reveals robust leasing activity, with Uber leasing 300,000 square feet at 555 and 685 Market Streets. Lending Club has doubled its footprint to 252,000 square feet with a lease of 112,000 square feet across eight floors at 595 Market. Additionally, Advent Software renewed its lease for 129,000 square feet at 600 Townsend Street, located near our 510 Townsend project. Other leases include 120,000 square feet at 221 Main Street for another tenant. WeWork has leases pending for 91,000 square feet at 995 Market and 1161 Mission, and Mixpanel has leased 65,000 square feet at 405 Howard while Omnicom leased another 45,000 square feet at 600 California. With this activity, we anticipate lease rates for new products will push beyond mid-$50 triple net and into the mid-$60 triple net, driven by high demand and limited availability—more specifically, there's no availability in Mission Bay and only 3.4% in the SoMa district, down 300 bps from 6.4% during Q1 of 2014. At 510 Townsend Street, we're on track to secure entitlement later this summer and have signed a long-term full building lease with a disruptive technology company, Stride. We expect to break ground later this year and will provide further updates on timing and delivery. Mission Bay remains very healthy with continued interest and existing tenants seeking expansion. The Warriors are breaking ground later this year, and our joint venture with Uber is progressing. Our regional teams, with 30 years of experience and networks across the political, governmental, brokerage, and science and tech realms, have positioned the company for continued outperformance in the San Francisco market. Movements south show a resurgence in South San Francisco, which is at 1% vacancy. Our Amgen Onyx campus has brought some market space for sublease, but we have long-term leases in the campus with an investment-grade tenant. Lease rates are now reaching mid-$40s and higher for existing products. Lastly, the reported 98.5% regional occupancy has been resolved to back to 100%, and the mark-to-market of properties provides further growth potential with approximately 10% cash and 15.2% on a GAAP basis. I will now turn it over to Tom.
Tom Andrews, EVP, Regional Market Director, Greater Boston
Thanks, good afternoon everyone, it's Tom Andrews. I’ll talk about the greater Boston region. The greater Boston life science market continues to enjoy very favorable supply-demand characteristics, particularly in the highly sought East Cambridge and Kendall Square sub-markets, which are concentrated areas. Class A lab vacancy stands around 3%, and office vacancy is about 5%. Overall Cambridge vacancy is below 10% for all categories of office and lab space. We're tracking around 2 million square feet of lab demand and about 2.5 million square feet of office demand focused in Cambridge, in a total market size of approximately 18 million square feet. Demand is driven by multi-national life science and tech companies, newly public clinical-stage drug companies, and well-capitalized venture-backed firms, all desiring proximity to MIT and the amenity-rich Kendall Square neighborhood. Overall occupancy in the region increased about 140 basis points to 98.9% occupancy in our 4.3 million square foot operating portfolio. The tight market has led to substantial increases in asking rents for both lab and office spaces. Class A lab asking rents have moved from the mid to high $50 triple net into the 60s, and we’re even seeing offers in the 70s triple net. In the office market, current asking rents for Class A Kendall Square office space firmly sit in the 50s and 60s on a triple net basis, translating to the 70s and 80s on a gross basis. This has prompted tenants of all sizes to act quickly, locking down early renewals, such as our 83,500 square foot office renewal with MIT at 600 Tech Square, achieving nearly double the net rent compared to expiring rates. We are actively negotiating, as Joel mentioned, with multiple users for the approximately 270,000 square foot 60 Binney portion of that project, currently under construction. As also noted by Joel, we have signed a letter of intent for about half of the approximately 417,000 square foot near-term development project at 100 Binney Street, which stands as the only shovel-ready commercial development site in Kendall Square at this time. Given this momentum, we anticipate announcing one or more large lease deals in the coming quarters at Alexandria Center at Kendall Square. In March, we delivered a fully leased 388,000 square foot redevelopment project at 75/125 Binney Street, now 99% leased to ARIAD Pharmaceuticals. ARIAD, as we've tracked, is considering various sub-lease scenarios for up to about 40% of that project. They are actively working on their tenant improvements, with expectations to occupy a significant portion early in 2016. With our Longwood Center in Boston, which is our joint venture development project and we hold a 27.5% stake, we are in negotiations representing over 103,000 square feet of additional space. If completed, these leases would bring us to 63% occupancy in this 413,000 square foot project with three remaining floors. We're encouraged by the modestly higher tenant activity in the submarket lately. Finally, we anticipate an on-time early May delivery of the fully leased 112,000 square foot redevelopment project at 225 2nd Avenue in Waltham. Now I will pass it to Dean.
Dean Shigenaga, CFO
Thanks Tom, Dean Shigenaga here. Good afternoon everyone. I want to cover three key topics: our continued strong performance in the first quarter; our disciplined allocation of capital based on diverse sources; and lastly, an important NAV-related matter. As you know, our strategic focus on unique, collaborative science and technology campuses and urban innovation clusters drove very strong results in the first quarter. We reported FFO per share of $1.28, which is a 9.4% increase over the first quarter of '14, up $0.05 or 4.1% over the fourth quarter of '14, exceeding consensus by $0.02. We refined our FFO per share guidance for 2015, adjusting the range from $0.20 to $0.10 and increasing the midpoint to $5.22, reflecting strong rental rate increases on lease renewals. As Tom mentioned, we executed several leases in Greater Boston that experienced significant cash and GAAP rental rate increases, driven largely by a lease for about 84,000 rentable square feet at Technology Square, with cash rent increasing from $25 triple net to approximately $53 triple net. This rental increase was anticipated but exceeded expectations, contributing to the increase in our 2015 guidance. We are well-positioned with a high-quality asset base in key coastal gateway cities with high barriers to entry, extremely limited supply of existing cloud-based space, and very limited future development, compared to significant demand. Our overall mark-to-market print on in-place leases today in San Francisco and Greater Boston generally ranges from 10% to 20%, with opportunities for significant rental increases on select early renewals. As noted during our Investor Day back in December, we had two single-tenant properties with expirations in Q2 of '15: one lease for around 128,000 rentable square feet at 19 Presidential Way in Woburn, Massachusetts, expiring on May 31st, 2015, at a rental rate of $25 per square foot triple net; another for about 82,000 square feet at 2525 NC Highway 54 in Durham, North Carolina, that expired on April 24th at a rate of $13 per square foot triple net. We are marketing both spaces for lease. This will result in a temporary decline in occupancy by approximately 0.5% in Q2; however, we remain on track to hit our target occupancy range of 96.9% to 97.4% by year-end. Our balance sheet is in excellent shape, and I will review our capital plan shortly. We remain disciplined in our development activities, with highly leased projects and non-income-producing assets reduced to 12%. We're executing on our long-term strategy to deliver growth in FFO per share and NAV, while also improving our net debt to adjusted EBITDA of less than seven times by year-end. Leverage was 7.5 times at quarter-end, representing the peak for the year, which will decline in Q3 and Q4. As for our capital allocation and access to diverse sources of capital, 86% of our capital for 2015 is focused on dynamic and collaborative campuses in key coastal science and technology gateway cities igniting innovation, including Cambridge, Mission Bay, SoMa, Manhattan, and Torrey Pines in the ETC market. Our capital plan at the midpoint guidance includes approximately $1.15 billion, with approximately $490 million or 43% sourced from net cash provided by operating activities after dividends, incremental debt, and a non-cash acquisition in a tax-deferred structure. The remaining $655 million or 57% of the $1.15 billion is detailed on page four of our supplemental package. We have identified asset sales aggregating $475 million and are progressing with the remainder of our capital plan of approximately $180 million. We expect to expand access to capital by selling an interest in 225 Binney Street to a top-tier joint venture partner by year-end. We have three dispositions lined up for this year, including two single-tenant Class A buildings—one in South San Francisco and one in Cambridge—and a residential project located in Cambridge. All three dispositions are at various negotiation stages and projected to close this year. Based on our comments on these transactions, we're limiting information until they're finalized. At the midpoint of our guidance, these three sales are projected to generate roughly $370 million in proceeds, based on $16 million of cash NOI, including 80% of the NOI for 225 Binney Street at our target JV interest midpoint. The proceeds from these sales are aimed for the latter part of 2015, with the remaining capital of roughly $180 million sourced from real estate sales identified in the coming months and from additional asset sales or limited use of our ATM program. We aim to concentrate on sales of operating properties and land. Additionally, our ATM program has $150 million remaining and is set to expire in early June. We're expecting to re-file our program later this year and do not plan to utilize significant amounts under the new ATM program. This perfectly underscores our intention to fund highly leased value-creation development projects, allowing for long-term value delivery to our shareholders while remaining prudent with equity issuance. Briefly, regarding debt transactions for the rest of the year, we plan on partially repaying and extending the maturity of our $375 million 2016 unsecured term loan, aiming to extend it to 2021; this provides flexibility in our capital structure while elongating our weighted average maturity. After this extension, our focus will shift toward reducing the outstanding balance on our 2019 unsecured term loan. As noted previously, we expect to issue unsecured bonds this year before any meaningful increases in all-in pricing settle. Today, we estimate all-in pricing for a 10-year bond to be in the range of 3.5% to 3.7%. We are also considering a secured construction loan for 50/60 Binney Street in Cambridge, which will partially fund this project's costs. Moreover, we're reviewing a secured loan for the JV development at 1455/1515 Third Street in Mission Bay, which will cover funding needs slated to begin in 2017 after both our company and our partner fund initial construction costs. Lastly, on a significant NAV matter, on March 24, we delivered 99% of our 75/125 Binney Street project to ARIAD Pharmaceuticals. From an NAV perspective, most models will value this 99% leased property above our investment to date but likely at a discount until it is operating as cash rents will start immediately upon delivery; however, there’s about a year and a half of free rent on a 15-year lease that we’ll spread over the first two years. As a result, approximately 80% of the annual rent of $30 million is considered straight-line rent. Therefore, 80% of this property’s value would likely be eliminated within models that back out straight-line rent to establish value based on the capitalization rate on in-place cash NOI. Full cash rents of $76.50 will commence in April 2017. We encourage investors to carefully evaluate the valuations of this Class A property in their NAV models as they update them. In conclusion, the detailed assumptions underlying our updated guidance for 2015 are included on pages 3 and 4 of our supplemental package. We find ourselves in a unique position with strong demand for Class A assets in key coastal gateway cities. Our capital plan is tailored toward creating value in SoMa and Mission Bay, while we strategically fund our growth through additional asset sales. We are continuously targeting growth in FFO per share and net asset value, confident that we have the right assets in the right locations partnered with the best client tenants, remaining devoted to enhancing our best-in-class franchise. I will now turn it back to Joel.
Joel Marcus, CEO
Thank you Dean. Operator, let's open it up for Q&A, please.
Operator, Operator
We'll go first to Smedes Rose of Citigroup.
Smedes Rose, Analyst
I was just wondering if you could talk a little more about your rationale for selling a majority interest in 225 Binney—why that asset and your thoughts around it?
Dean Shigenaga, CFO
As you evaluate capital planning, it is fluid—reflecting market trends and various capital sources. Given our needs to fund approximately $1.1 billion to $1.2 billion this year, we've laid out a dynamic yet prudent capital strategy that taps a variety of resources to optimize our cost of capital. The pricing for high-quality real estate is attractive for our company, and therefore, a joint venture interest in Project 225 Binney, which is fully leased with modest rent increases over time, allows us to tap the value created on this project. Initially delivered at roughly a 7.5-7.7% yield, a market cap today will enable us to monetize some created value and reinvest that capital into future value creation projects. Hopefully, that clarifies.
Smedes Rose, Analyst
I just wanted to ask, I know you noted that Amgen's space has returned to the market in South San Francisco. What’s your outlook on demand for that and the anticipated pace of subleasing it?
Steve Richardson, COO
The resurgence of activity in the South San Francisco market has resulted in only 1% direct vacancy. We're in contact with the Amgen team regularly and are hopeful about the potential for subleasing, given the strong local demand.
Operator, Operator
We'll go next to Nick Yulico of UBS.
Nick Yulico, Analyst
Could you remind us what the cost was to build the residential site in Cambridge?
Dean Shigenaga, CFO
We're probably in the low $40 million range by the time we finish.
Nick Yulico, Analyst
So you anticipate selling it at a premium, I imagine?
Dean Shigenaga, CFO
That residential site is part of a larger entitlement effort tied to the overall Binney Street development. It features lower-priced units within the residential aspect. So, while we expect to break even or realize a slight gain, remember it's part of the broader project.
Joel Marcus, CEO
The interest from buyers is substantial, numbering in the several dozens.
Nick Yulico, Analyst
Okay, so when trying to calculate a cap rate on the stable sales, if we base that on cost, what’s the expected outcome?
Dean Shigenaga, CFO
Yes, that gives you a good estimate of where the cap rate might average for the two transactions we're discussing and will provide more details when the sales close.
Peter Moglia, CIO
It's also worth noting that rent impacts originate from an affordable component as part of the entitlement agreement with the city of Cambridge. Thus, when applying the market rent and calculating cap rates, the affordable component should be factored in since about 40% of it aligns with that.
Nick Yulico, Analyst
What about potential acquisitions in Mission Bay and SoMa?
Dean Shigenaga, CFO
If you could hold off on commenting more on that until we release more information, Steve can give you a brief on Prop M.
Steve Richardson, COO
Yes, it's Steve. Presently, there is supply in the pipeline, and we anticipate that winding down with few large projects likely to receive allocation. Thus, we’ll experience the effects of Prop M later in 2016 and into 2017.
Nick Yulico, Analyst
Okay, thanks. Just a quick question about the non-cash acquisitions as a source of capital—is that an OP unit deal or something similar?
Dean Shigenaga, CFO
Essentially, yes.
Operator, Operator
We'll go next to Jim Sullivan of Cowen Group.
Jim Sullivan, Analyst
Thank you. Back in December, during the Analyst Day, you mentioned leasing step expectations for the year were in the 14% to 17% range on a GAAP basis. First quarter was obviously ahead of that. Given that, I wonder if you could update us on your expectations for the year and if that range remains the same.
Dean Shigenaga, CFO
Jim, it's Dean Shigenaga. With our leasing steps this quarter nearing 31% on a GAAP basis, our guidance of 14% to 17% remains valid. It’s challenging to forecast upside when the demand is so robust and supply limited. Remember, this was just the first quarter and our results, while exceptional, represent only 25% of our annual activity. I expect the remaining activity will align with our guidance though we have a positive market trend that could influence future performance.
Jim Sullivan, Analyst
What about the mark-to-market situation in regions outside of Cambridge and San Francisco?
Steve Richardson, COO
In Cambridge, we’re around 59% cash; about 10% in San Francisco; and nearly 5% in Torrey Pines. Overall, we have approximately 2-3% positive mark-to-market in Maryland and a solid 10.6% in Seattle and 12% in RTP. Across the board, we’re performing well, showing recovery and stabilization.
Jim Sullivan, Analyst
So it sounds like if the market condition remains strong, you may see positive trends into 2016 and 2017 as well?
Dean Shigenaga, CFO
Indeed, it’s difficult to grasp the rapid changes in rental rates. The strong market suggests good potential for leasing statistics through 2016 and 2017.
Operator, Operator
We'll go next to Jamie Feldman of Bank of America Merrill Lynch.
Jamie Feldman, Analyst
Could you delve deeper into the requirements for permits and approvals related to construction at 510 Townsend and 10300 Campus Point? In a recent press release, you mentioned requiring clearance for some hurdles—can you provide more details?
Joel Marcus, CEO
Yes, Steve will elaborate on the 5,000 to 10,000, and then Dean will discuss Campus Point, followed by my comments on Seattle.
Steve Richardson, COO
We've initiated the internal process for several quarters, completing submissions, environmental impact reviews, and traffic studies. Those efforts are nearly finalized, targeting a planning commission meeting in August, with expectations for a smooth transition to entitlement at that time.
Joel Marcus, CEO
And when can we break ground, Steve?
Steve Richardson, COO
We plan to break ground shortly after, in the fall.
Dean Shigenaga, CFO
In San Diego regarding Campus Point, we cleared all hurdles and have reached the public notice stage, expecting final approval by July 4th, with smooth sailing anticipated for ground breaking at that time.
Peter Moglia, CIO
As for our 400 Dexter project in Seattle, we expect to secure the necessary approvals within the next 60 days, while we advance on design. The city is very supportive of our efforts aimed at capturing Geno Therapy developments.
Joel Marcus, CEO
We anticipate breaking ground as soon as possible within the next quarter.
Jamie Feldman, Analyst
Did you say you have Prop M approval for the 5,000 to 10,000 projects, or do you still need it?
Steve Richardson, COO
No, we’ll seek that approval through the planning commission this summer, in August.
Jamie Feldman, Analyst
Alright, can you provide a ballpark figure for the total costs associated with the 50 to 60 Binney project?
Dean Shigenaga, CFO
Jamie, it's Dean. You’re likely looking at a cost approaching around $1,000 per foot for our investment into the project.
Joel Marcus, CEO
With rents at the absolute upper end, the yield potential is attractive compared to today’s cap rates.
Jamie Feldman, Analyst
A strategic question: you seem to have reduced your disposition guidance but increased acquisition activity. Given your sentiment on pricing for sales, why such a shift? Shouldn’t you consider selling more and acquiring less?
Joel Marcus, CEO
Actually, Jamie, we are selling. We have increased our disposition strategy this quarter; the numbers reflect approximately $200 million in incremental dispositions on a cash basis.
Jamie Feldman, Analyst
I thought you decreased sale guidance, no?
Joel Marcus, CEO
No, dispositions increased overall. Net, there's about $65 million in cash influx for acquisitions but a significant mid-point increase in dispositions, which nets out appropriately.
Operator, Operator
We'll go next to Sheila McGrath with Evercore.
Sheila McGrath, Analyst
Good afternoon. I was curious about the Tech Square lease that you mentioned with the $25 rate—was that a notably old lease? Are there other leases in Tech Square that are similarly well below market?
Dean Shigenaga, CFO
That lease dated back to 2010, during the recovery period post-recession. It was a renewal with MIT at that market valuation and classified as a gross rent. So that exemplifies how remarkably the office market has shifted since 2010. Currently, the number of other leases at Tech Square that are well below market value are minimal. To clarify, the original lease rate was gross, so the earlier figures were converted to a net rate, allowing for an apple-to-apple comparison in today’s market context.
Sheila McGrath, Analyst
Understood, thanks for that clarification. What about the auction property in New York? It seems to be moving more swiftly now; is this something that could take years or is it nearer term? Also, could you touch on the potential for upside there?
Joel Marcus, CEO
The city recently announced funding of over $150 million for two venture fronts and cited a growing need for additional lab space in New York. They identified our Alexandria Center for Life Science as a potential outlet for relief on the immediate horizon, particularly for our north parcel. The city encourages us to pursue this by working with us hand in hand around zoning adjustments. We anticipate breaking ground by late next year with deliveries possibly in 2018. This is fairly realistic for us.
Sheila McGrath, Analyst
Would the terms of this ground be similar?
Joel Marcus, CEO
Yes, it would likely be an amendment to the existing ground lease, simplifying it compared to negotiating a new lease initially. Pricing is one of our primary considerations; obviously, we aim to be competitive to attract tenants, which aligns with the city’s interests in making it viable for New York headquarters.
Sheila McGrath, Analyst
Great, thank you.
Operator, Operator
We'll go next to Michael Carroll of RBC Capital Markets.
Michael Carroll, Analyst
Hey Joel, could you share some insights on the acquisition guidance? What’s the breakdown between stabilized assets and increasing assets—mention was made in your press release.
Dean Shigenaga, CFO
Most of our pending transactions are geared toward value-added opportunities. Some may yield minimal in-place cash flows, but consider that nominal for now.
Joel Marcus, CEO
As we mentioned last time, the MIT transaction concerning the Memorial Drive property represented an opportunistic situation and not one we actively pursued traditionally.
Michael Carroll, Analyst
Considering the value of acquisitions, how much capital do you expect to invest in these properties going forward?
Joel Marcus, CEO
Much of this will depend on local permitting abilities, et cetera. We described the pipeline chart on Page 30; that visual aids in understanding each project, both under development and near-term.
Dean Shigenaga, CFO
Importantly, it doesn’t affect our construction spending this year; as noted, our guidance remains consistent with last quarter.
Operator, Operator
We'll go next to Rich Anderson of Mizuho Securities.
Rich Anderson, Analyst
I have what might sound like a basic question: does 225 Binney have a lesser appeal compared to the broader Alexandria standard due to its specifics?
Joel Marcus, CEO
Not at all; in fact, there's a substantial buyer interest owing to the location's closeness to Biogen’s main cluster campus, making it an ideal asset.
Rich Anderson, Analyst
Regarding the two leases vacating on May 31st—what are the implications for guidance at this stage?
Joel Marcus, CEO
We anticipate some downtime as we look to re-tenant these spaces, which could turn either single-tenant or multi-tenant—however, we are in talks for potential new tenants.
Rich Anderson, Analyst
Comparing the $25 rates in Massachusetts to the $13 rate for North Carolina, how do they fare against today’s market?
Tom Andrews, EVP, Regional Market Director, Greater Boston
This property is situated along the Route 128 corridor north of Austin. The $25 rate closely aligns with current market trends, and our acquisition as a sale leaseback occurred a decade prior, geared for multi-tenant leasing.
Joel Marcus, CEO
In North Carolina, this property was acquired some years ago with EPA involvement. Rent expectations there fall in the low $20s on a triple net basis; we see solid rental opportunities for that asset.
Dean Shigenaga, CFO
As for the ATM usage—your current calculation shows trading below consensus; what’s your strategy about deploying it?
Joel Marcus, CEO
We never stated expectations for immediate ATM deployment; the last use was back in 2012–2013, and we haven't utilized it since. The remaining deployment period ends in June, but we’ll refresh it in due course. We have not committed to any current utilization.
Dean Shigenaga, CFO
It's critical to emphasize our focus on sales, but we intend to make it clear that we aim to re-file the ATM program when applicable.
Rich Anderson, Analyst
Lastly, do you have percentages on your portfolio backed by VC funding?
Joel Marcus, CEO
Our chart on page 21 of the supplement indicates that private biotechnology amounts to about 6.8% of our ABR, which serves as a reasonably accurate approximation.
Operator, Operator
We'll go next to Kevin Tyler of Green Street Advisors.
Kevin Tyler, Analyst
A high-level question: how do you evaluate lab space fundamentals today—including rents, tenant demand, etc.—against the previous peak in the 1990s?
Joel Marcus, CEO
Today, it's fundamentally different. If you reflect on my opening remarks, you’ll see that the market dynamics in ‘99, 2000, and 2001 revolved primarily around market-driven peaks, where company valuations fluctuated significantly. Nowadays, the business models, drug approvals, and specific focus on bringing drugs to market differ immensely; we've entered a renaissance period that has substantial longevity. Faster FDA approvals are a fundamental change compared to the previous environment.
Operator, Operator
We'll go to Dave Rodgers of Baird.
Dave Rodgers, Analyst
A couple of inquiries, Joel. Regarding the disposition pipeline, can you discuss the decision to sell the asset in India and what that indicates for your long-term plans in the region and Asia?
Joel Marcus, CEO
We possess a number of unproductive assets, namely land in Hyderabad, where we'd intended to develop but ultimately pivoted toward selling them, especially since is no momentum for a medical office building. We were content to pass this asset to an operator better positioned to secure the necessary approvals.
Dave Rodgers, Analyst
What about employing joint venture capital in Cambridge—are there other markets you’d focus on for potential partners?
Joel Marcus, CEO
Our considerations for selecting joint venture partners hinge on various factors, most notably the ability to extract value from developed assets in today's cap rate environment. Assets like 500 Forbes are prime examples due to their strategic positioning and favorable cap rate dynamics, as is the 225 Binney property—these attributes provide clear alignment for prospective partners.
Operator, Operator
And currently, there are no other questions in the queue. I'll turn the conference back to management for any additional remarks.
Joel Marcus, CEO
Thank you everyone for your time; we’re right at one hour. We look forward to our second quarter call. Thank you again.
Operator, Operator
That does conclude today's conference. Thank you for your participation.