Earnings Call Transcript - ARE Q2 2018

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the Alexandria Real Estate Equities' Second Quarter 2018 Conference Call. Please note, this event is being recorded. At this time, I would like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

Paula Schwartz, Investor Relations

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. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Joel Marcus, Executive Chairman

Thank you, Paula, and welcome everybody to our second quarter call. And with me today are Steve Richardson, Peter Moglia, Dean Shigenaga, Dan Ryan, Tom Andrews, John Cunningham. Once again, I have the distinct pleasure and honor to thank our first-in-class team for delivering a truly outstanding second quarter with superb operational excellence. Life science tenants in each and every one of our clusters and submarkets recognize the Alexandria brand for the highest quality, highest reliability, best-in-class service, and best collaborative partnering. These qualities substantially enhance our pricing power in each of our markets, and the statistics bear that out. We're also in the first year of the 5-year growth plan we announced at Investor Day 2017 to double the revenues of the company. As Steve will talk about, we've had and continue to expect to have strong per share FFO performance during 2018 and have great visibility for growth into 2019. As all of you know, our urban clustering strategy is based on the belief that clustering similar businesses together boosts productivity, operating efficiency, and innovation. About a year after we became public, we read one of Michael Porter's works on competition, particularly a chapter entitled, Clusters and the New Economics of Competition. He noted successful businesses are typically found within close proximity to one another or in clusters despite technological advances allowing companies to operate from anywhere. The clustering approach, which we adopted, has been a smart strategy that's paid off in great locations in clusters like Cambridge, San Diego, San Francisco, Seattle, New York City, and so forth. I think underpinning the growth, as I’ve said a number of times, we're still in the early innings of discovery of diagnostics therapeutics, whether they'd be cures or really effective treatments. We’ve only addressed about 5% of the diseases that are known to mankind. I think it's also good to note, as we did last quarter, the five key reasons why this industry is working on all cylinders right now. We are seeing historic growth in the funding for the National Institutes of Health, a very strong and innovative Food and Drug Administration, more research spending on medical philanthropy than ever, we're experiencing record years in venture capital, and we continue to see robust spending on R&D by commercial-stage biopharma companies. In fact, I think Ian Read of Pfizer this morning announced an increase in their R&D spending, which is good news. I want to comment briefly before I turn it over to Steve on our New York City life science cluster, which I was proud to lead the launch with an amazing and talented team. That team has built, leased, and operated our flagship campus at the Alexandria Center for Life Science, New York City in an outstanding fashion and has helped start and/or recruit its world-class tenant base. We’ve had to truly create a commercial life science tenant base there where none existed. With the recently announced acquisition of 219 East 42nd Street, one of Pfizer's current headquarters buildings within a short 13 blocks of our ACLS campus close to Grand Central, we made an outstanding purchase at $580 a square foot with a strong current yield and a medium-term leaseback to Pfizer. What's particularly of interest to us is the future 350,000 square feet of ideal lab/office redevelopment. So East Side Medical Corridor is in proximity to Grand Central and our own anchor campus, with medium-term leaseback with Pfizer's strong yields and excellent cost per square foot. Finally, I want to address something that is near and dear to all our hearts, what really matters to employees and team members, in general, and here at Alexandria. Recently, there was a study by Harvard Business Review that spoke about a single word: Respect. There is old respect, which we accord equally to all members of our team. There is earned respect, which recognizes individuals who display valued qualities or behaviors and acknowledges that each member has specific strengths and talents, and there is identity development, or self-respect in a sense of unique self. Just as instability can spiral, so too can a culture of respect, and that is why we at Alexandria deeply care about respect in our work life. So Steve, take it away.

Stephen Richardson, Executive Vice President

Thank you, Joel. I'll be covering the markets this afternoon. But before I do that, I'd like to build on Joel's comments and underscore the profound shift in the sciences that is driving the success of Alexandria's highly differentiated strategy. We had the pleasure of listening to George Demetri, a world-renowned doctor and Director for one of the key oncology centers at the Dana-Farber in Cambridge, expressing his strong enthusiasm for the shift in a compelling interview with one of his patients who has survived cancer for several years due to these new therapies. These breakthroughs underpin our stellar results and a defining strategy. Several highlights include: We have an industry-leading investment grade large market cap tenant quality comprising 55% of ARR, and 83% of the top 20 tenants' ARR is from this class of investment-grade or large market cap companies. 78% of our ARR is from Class A facilities in key gateway markets on the East and West Coasts with AAA locations adjacent to the country's leading research universities and institutions. The product type we work with day-in and day-out is mission-critical. The tenants absolutely demand sophistication and deep expertise in design, construction, leasing, and operations and a long-term partnership approach. Our science and technology teams' unique expertise underwriting cutting-edge companies provides unmatched insight into the life science industry. As Peter will touch on later in the call, the clearly visible pipeline driving growth through 2018 and 2019 totaling 2.6 million square feet is 84% leased at great yields generating significant NAV. Let's take a look at the market. We're seeing robust and high-quality demand evident across all of our core clusters. As you can see from the supplemental, 65% of leasing this quarter is early renewals, and 58% year-to-date are early renewals, clearly indicating a strong sense of urgency in the market. As we look at market-to-market, Cambridge had a 1.6% vacancy rate at our Investor Day during November of 2017; today it's 0.7%. Demand was at 1.8 million square feet then, and it's 2.2 million square feet today. San Francisco at that time had a 5.5% vacancy rate, now it's 3.3%. There was 2.5 million square feet of demand then, and now we have 2.8 million square feet of demand. San Diego had a 7% vacancy rate during November of '17, it's now at 5.2%, and demand remains solid with about 859,000 square feet. Maryland's vacancy rate has remained about the same at 3%, but demand has increased from 379,000 feet to 511,000 feet, and it's important to note that VC funding has more than doubled to $370 million, and 52 life science companies have been started in the past 18 months providing important diversification from NIH-related entities. Finally, Seattle's vacancy rate has stayed strong at just 1%, and demand is healthy as well at about 575,000 square feet. Our 1818 Fairview development has 169,000 feet of active life science demand in addition to the lease negotiating spaces referenced in the supplemental, so we expect to substantially resolve the balance of the leasing during the second half of 2018 well ahead of pro forma. Just a couple notable leases to highlight, particularly one that I think speaks to the differentiated strategy here at Alexandria. The 106,000 square feet in Seattle with the Fred Hutch at our flagship waterfront stream plant sports a 35% GAAP increase, a perfect example of the breakthroughs and therapies noted above and the virtuous cycle in our clusters. Fred Hutch licensed key CAR-T technology to Juno Therapeutics. Juno, in turn, delivered groundbreaking clinical outcomes with these novel therapies. Celgene then acquired Juno for $9 billion, and a portion of the proceeds flow to Fred Hutch as a shareholder, and the Hutch in turn is now expanding its research efforts at 1201, truly an excellent outcome. Seattle is quickly becoming a center of innovation for immunology, especially immuno-oncology, and has a longstanding reputation as a center for global health and infectious disease research. A 50,000-square-foot lease with AstraZeneca in Gaithersburg, Maryland, is a clear indication of the health of that market as we referenced about. One especially notable lease this quarter was in Cambridge at 152,000 square feet with Sarepta at 215 First Street with a huge 53% GAAP increase. The markets are very strong in all of our key clusters. With that, I'll turn it over to Peter.

Peter Moglia, Senior Vice President

Thanks, Steve. Those are outstanding fundamentals, and the reason probably driving what I'm going to say right now as I update everybody on our near-term pipeline. After that, I'm going to touch on cap rates, and then I'm going to address CapEx since it's become a top of my topic since the Green Street July 19 report on this subject. With the cost to complete of $868 million, we should deliver another 2.6 million square feet of Class A facilities in AAA locations of gateway markets. We are well-positioned to continue driving significant NAV growth well into 2019. The projects that we'll deliver through the balance of '18 and '19 are a combined 84% leased, giving investors clear visibility of the value creation ahead. In the second half of '18, we're going to deliver 0.5 million square feet, including 399 Binney Street in Cambridge, which is 75% leased with all but the retail space under negotiation. This addition to our One Kendall Square campus is expected to stabilize at a 6.7% cash yield in a market that is at least a 4% cap rate. 9625 Towne Centre Drive in the University Town Center submarket of San Diego will be delivered to investment-grade tenant Takeda in the fourth quarter at a 7% stabilized cash yield, and our 5 Laboratory Drive project in Research Triangle Park is quickly becoming a focal point of the AgTech community with 38% of the project leased and serious prospects for another 30% of that space. Yields on this project are expected to be in the high 7s. In 2019, we will be delivering over 2.1 million square feet, including the first phase of our Alexandria Park redevelopment in Palo Alto, which has already been fully leased to a tenant that was subsequently purchased by a $27 billion publicly traded company, enhancing our credit before the paint was even dry. 681 Gateway in South San Francisco is basically 100% leased or under negotiation with strong initial cash and GAAP yields of 7.9% and 8.5%, respectively. 279 East Grand, also in South San Francisco anchored by Alphabet subsidiary Verily and in various stages of negotiation for all of the remaining space, is expected to deliver spectacular 8.1% cash and 7.8% GAAP yields. Finally, 1818 Fairview in Seattle is making excellent progress with 24% under lease or negotiation and another 115,000 square feet of serious prospects actively engaged. All the activity there is life science-related, confirming that Seattle's life science market is certainly gaining momentum. Initial stabilized yields for this project are projected to be 6.7% on both the cash and GAAP basis in a sub-5 cap rate investment market. Speaking of cap rates, on the last earnings call, we described a sizable deal that was pending in Cambridge. It's been disclosed that Forest City and its partners bought out MIT's 50% interest in a portion of lab/office product at University Park in East Cambridge, and I understand the purchase price applied a low 4% cap rate. In addition, we wanted to add to the Seattle commentary by mentioning 2 new sales comps in South Lake Union, both 404 Fairview Avenue North, a 350,000-square-foot office building, and 202 Westlake Avenue North, a 130,000-square-foot office building recently sold to institutional investors at 4.2% cap rates at prices in the high $900-per-square-foot range, illustrating that Seattle is indeed one of the most desirable investment markets in the country and that investors are still willing to pay healthy prices for core assets in gateway markets. To wrap up our comments, we wanted to touch briefly on Green Street's CapEx report of July 19. One of the differentiating factors of our business model is the reusability of our building improvements. Green Street's analysis of our office peers revealed annual CapEx in the range of 26% to 31%. Those of you who attended our Investor Day may recall our 5-year average being approximately half the lower end of that range. With that, I'm going to go ahead and pass it on to Dean.

Dean Shigenaga, CFO

All right. Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I want to briefly cover first, our inaugural Corporate Responsibility Report, for the third time NAREIT Gold Award for Communications & Reporting Excellence, second quarter results, and significant revenue and cash NOI growth, our continued strong internal growth, provide a brief overview of our highly leased value-creation pipeline, cover our balance sheet and improving credit metrics, and I'll close out with comments on our updated guidance, importantly on our $0.03 increase in the midpoint of our FFO per share growth. Corporate responsibility, just wanted to thank Jennifer Banks, our co-CEO and General Counsel, Vince Ciruzzi, our Chief Development Officer, Ari Frankel, AVP of Sustainability & High-Performance Buildings and his team, and Katie O'Brien, our Executive Director of Corporate Communications for their excellent work on our inaugural Corporate Responsibility Report that we issued in June. This report captures our efforts focused on important environmental, social, and governance matters and our goal of making a positive and meaningful impact on the health, safety, and well-being of our tenants, stockholders, employees, and the communities in which we live and work. This report also includes our 2025 sustainability goals for ground-up development, environmental impact, reduction of energy, carbon, water, and waste, and healthy building certifications. We are very honored to have been selected for the third time as NAREIT's Gold Award winner as #1 in the large-cap category by an independent panel of judges for Communications & Reporting Excellence to the investment community. A huge congrats to our entire team. Thank you, guys. We reported very strong second quarter results that highlight excellent and efficient execution by our team on our strategic and operational goals. Total revenues for the quarter were $325 million, up 19% over the first quarter of '17. Cash NOI for the second quarter annualized was $818 million, up $125 million or 18.1% over cash net operating income for the fourth quarter annualized. FFO per share diluted as adjusted was reported at $1.64, which is up 9.3% over the second quarter of 2017. We reported continued and strong internal growth that reflects the strength of our real estate and life science industry fundamentals and our unique and differentiated business strategy. Occupancy remains very strong. It was up 50 basis points to 97.1%. Briefly on One Kendall Square, our team is well ahead of timing for capturing the mark-to-market opportunity for below-market leases. To date, our team has executed 280,000 rentable square feet of lease renewals and leasing of space for approximately 3 times the leasing that we had originally anticipated by June 30. However, this accelerated leasing did result in temporary vacancy at One Kendall Square, with occupancy dipping to 80% for a couple of months before rebounding to about 88% as of June 30. Rental rate growth on leasing activity continues to remain very strong. Over the past four years, rental rate growth on leasing activity has ranged from 20% to 28% on a GAAP basis and 10% to 14% on a cash basis. Rental rate growth for the second quarter was 24% and 12.8% on a cash basis, in line with this trend and puts us on track for updated full-year guidance on rental rate growth. On our early renewals, Steve touched on this briefly, but roughly 2/3 of our lease renewals and leasing of space in the first half of the year really related to early lease renewals. 1/3 of these related to expirations in '21, '22, and '23. Now that we're about halfway through 2018, we have better visibility on the portion of early renewals, including those that were executed in the second quarter, and we have increased our full-year guidance for rental rate growth. Additionally, as we look back at value-creation leasing by our team in the first half of '18 that highlights amazing execution, over 1 million rentable square feet related to new Class A properties undergoing development and redevelopment, including 594,000 with Uber in Mission Bay, 133 rentable square feet with several very high-quality venture-backed biotechs at 399 Binney Street in Cambridge, 104,000 rentable square feet with Verily, which is a subsidiary of Alphabet at 279 East Grand, 61,000 rentable square feet with a really exciting DNA synthesis company at 681 Gateway in San Francisco, and 34,000 square feet with several Ag biotech entities at 5 Laboratory Drive and Research Triangle Park. Very recently, we signed a lease for 26,000 rentable square feet with Lonza at 9900 Medical Center Drive and Shady Grove. The first half same-property NOI growth was strong and in line with our guidance for the full year of 2018. Our second quarter same-property cash NOI growth was also solid but also reflected the temporary vacancy at One Kendall Square, and it reflects no cash growth benefit from our recently completed development project at 75/125 Binney Street since full cash rents commenced on April 1, 2017. Importantly, we remain on track with all the same-property performance for both the 6 and 12 months ending December 31, 2018. Peter had briefly covered our pipeline in detail, just to provide a brief overview of summary. There are 3.5 million square feet targeted for delivery in '18, '19, and '20. 2.6 million of that is really targeted for '18 and '19, that's 1.8 billion at completion, 84% leased that will generate strong yields of 7.3% and 6.8% on a cash basis. Behind that, we have about 908,000 rentable square feet undergoing marketing while we execute on preconstruction activities to reduce the time to deliver these projects. Turning to our balance sheet. We completed the issuance of $900 million in unsecured senior notes at a weighted average rate of 4.35% and a weighted average term of 8.8 years. $450 million of the notes were related to our sustainability initiatives with proceeds allocated to fund certain eligible green development and redevelopment projects that either have or are expected to receive LEED Gold or Platinum certification. In July, we also partially repaid $150 million of our outstanding construction loans. Later this year, we anticipate repaying the remaining $200 million outstanding under our 2019 unsecured term loan. As you look back over 2017 and including the full year of 2018, we will have refinanced over $940 million of variable-rate level based debt, further strengthening our balance sheet and our credit profile. We have recently commenced an amendment process to our line of credit and our 2021 term loan, focused primarily on extending the maturity date to 2024 with an opportunity to slightly improve pricing and increase the overall capacity under our line of credit. We expect to close this amendment in the third quarter and will provide more details shortly after closing. We also remain on track to achieve our key credit metric goals and remain committed to continued improvement in our credit metrics each year. Our target for the fourth quarter annualized net debt-to-adjusted EBITDA for 2019 and 2020 is to move closer to 5 times. Unhedged variable-rate debt is targeted to be less than 5% at the end of this year, and we are reviewing our options to cover our remaining equity capital for 2018 from additional real estate sales. Additionally, we expect to file a new aftermarket offering program at some point over the next 1 to 3 quarters. In closing on guidance, we updated our guidance for earnings per share to a range of $2.87 to $2.93 and FFO per share as adjusted to a range of $6.57 to $6.63. This represents a $0.03 increase at the midpoint for FFO per share as adjusted, with key drivers being a combination of continued strength of our core operations and growth from our recently announced acquisitions. I should point out that this $0.03 increase follows the $0.02 increase in our midpoint from last quarter. We also increased the midpoint of our guidance for occupancy up 20 basis points to a range of 97.1% to 97.7%, and rental rate growth of 400 basis points and 200 basis points on a GAAP and cash basis for each range. Our range for GAAP and cash rental growth is now 17% to 20% and 9.5% to 12.5%, respectively. Just as a reminder, we have a large pool of same-property assets that drive growth in net operating income. $0.01 in bottom-line FFO per share growth only increases same-property NOI growth by about 15 basis points. Thus, as a result of the improvement in our outlook for occupancy and rental rate growth on leasing activity, it is reflected in the strength of our range of guidance for a strong same-property growth for 2018. So with that, I'll close it out and turn it back over to Joel Marcus.

Joel Marcus, Executive Chairman

Okay. Operator, can we go to Q&A, please.

Operator, Operator

And your first question will be from Manny Korchman of Citi. Please go ahead.

Manny Korchman, Analyst

Hi, everyone. Good afternoon. Joel, you opened the call talking about cluster markets and both sort of your entry barrier success there. I was hoping you could help us frame New York in a more specific way with the cluster markets as a focus, the building you're acquiring is, I guess, near your East River campus, but I wouldn't call it a cluster per se. And then you also have the risk of new developments that are already going on and will be going on near the new projects. So how do you sort of put all that together and connect it back to your cluster theory?

Joel Marcus, Executive Chairman

Well, Manny, thanks for asking the question. First of all, a cluster, if you look at the two leading established clusters, both the Greater Boston cluster and the San Francisco Bay cluster, those evolved in the late '70s and early '80s, taking literally a generation to grow and become what they are today. New York is really in the first decade of a 25-year process. Therefore, what you may see in other clusters, you won't necessarily see yet in New York and Manhattan, just given its limited geography and the density of buildings and people. However, we believe the East Side Medical Corridor is where people want to be, with relatively easy access to the institutions and the ecosystem. That's kind of how we think about the shape of the Manhattan market. Over time, I think, you will see it evolve in ways that even today we can't predict. Our focus has been the East Side corridor, and this is, in my view, a bull's-eye and a home run in that sweet spot.

Manny Korchman, Analyst

Thanks, Joel. And maybe one for Dean, the acquisitions you've done to date are right at the midpoint of your guidance range, but you only have $50 million left to hit the high end. Is that just guiding right now to what you see in the pipe, and that number is likely to move upwards? Or is the acquisition environment just sort of more difficult, and that $50 million is probably about accurate?

Dean Shigenaga, CFO

Yes, Manny, I think it's indicative of our view at the moment. At the beginning of every year, at Investor Day, we do give an outlook on acquisitions, and typically it's fairly nominal as it exists at all. That really has to do with the fact that we don't know what will hit the market that makes sense to acquire. Peter and the team keep a good pulse on activities in the market, and if something makes sense, we may bid on it, but ultimately, winning the project is a whole different conclusion. We really need to make sense of the deal. Right now, we don't see a lot remaining on the horizon, but something could come up, Manny. If it does, we'll keep the market informed.

Operator, Operator

The next question will be from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman, Analyst

Great, thank you. I guess, sticking with Dean here. So you had a decent amount of recognized gains from the investment portfolio in the quarter. Can you just talk about how you've included those in guidance for the year? How much is in your guidance for the quarter, or just as you think about the year overall, how much you include or have you included?

Dean Shigenaga, CFO

Jamie, I think that question may have come up last quarter or the quarter before. Historically, gains have varied a little bit. Over the last 3, 4, or 5 years, it's been in the $10 million to $20 million range. Currently, it's on a path to probably get to the upper end of that. Much of our activity is event-driven. We do sell some public securities as a result of a company reaching its IPO or being acquired. In the second quarter, this gain was event-driven, related to an acquisition of a biotech company, and that resulted in the majority of that gain recognized this quarter. Leading into the quarter, we had no idea that transaction would occur. That's the most important thing to keep in mind.

Jamie Feldman, Analyst

Okay. But you typically assume that $10 million to $20 million per year is the right way to think about?

Dean Shigenaga, CFO

That's where it's been for the last 3, 4, or 5 years, if I recall correctly, Jamie.

Jamie Feldman, Analyst

Okay. And then I guess, just thinking more about the Pfizer acquisition and redevelopment. This is an investment in the infill market with a redevelopment component in an older market. Do you think—as you think about your business going forward and where you do see these cluster markets, are you supposed to see more of that rather than kind of Greenfield ground-up from Alexandria?

Joel Marcus, Executive Chairman

I think, again, it depends on the market. We've done some of that all along in a number of markets, and we still have, obviously, a robust development pipeline in other markets. You'll see some of both. This was an unusual situation. It was known that Pfizer was looking over time to do something. But as Dean said early on, when things come to the market, you react to them. You don't necessarily know a year or two out or even sometimes quarters out exactly what's going on. You'll see us do a combination of those. That's been our bread-and-butter.

Jamie Feldman, Analyst

Okay. And then last one from me, just any thoughts on the tenant credit watch list. Are there any tenants you're concerned about right now?

Dean Shigenaga, CFO

Jamie, it's Dean here. If you look at the top 20 tenants that we got disclosed, they're all in really great position today. 83% of that top 20 list is either investment-grade or $10 billion or greater in valuation. So really no significant concerns out there.

Joel Marcus, Executive Chairman

Yes. Our number one tenant, Illumina, had a good day today, up about 10%. Our underwriting is very thorough and ongoing, and at the moment, I think we feel very comfortable with our tenants. We've avoided, I can think of one case in the Bay Area, the Theranos building, because we believed that the business was going to fail. We thought it was good real estate but just not appropriate to pursue. We're pretty careful about what we do.

Jamie Feldman, Analyst

Okay. Thank you.

Joel Marcus, Executive Chairman

Thank you, Jim.

Operator, Operator

The next question will be from Sheila McGrath of Evercore ISI. Please go ahead.

Sheila McGrath, Analyst

Hi. Yes. Another question on the New York Pfizer acquisition. Just to clarify, the current cap rate on that is 6.7%, and what kind of returns do you expect on the redevelopment? Is there any excess development rates given zoning changes in that area?

Joel Marcus, Executive Chairman

Yes. So John Cunningham is on. John want to highlight, at least initially, not in too much depth there.

John Cunningham, Senior Vice President

Yes. As far as the additional density, the nice thing about the asset is that we bordered at 9.6 FAR by rate, currently at 15 FAR. There is additional 230,000 square feet of density available. Given additional changes based on the Midtown's rezoning, it could go up to about 21 FAR, but we haven't considered utilizing that level of FAR for this site; however, we're confident we'll keep our options open going forward.

Peter Moglia, Senior Vice President

I confirm the cap rate is 6.7%. Regarding the $580-per-square-foot value, if you value that leaseback from Pfizer and subtract it from what we paid, you're essentially getting it for the land value. Thus, we're paying for the land value but getting a building that we can leverage off of. In 6 to 7 years when we start planning for the redevelopment, we'll have a great basis from which to price the next generation of Alexandria in New York life science real estate.

Sheila McGrath, Analyst

Okay, great. And then on acquisitions, I guess, Peter, the stabilized yield in the supplemental on 100 Tech Drive and the Maryland life science portfolio, those yields go up to like 8.7 and 9.1. I'm just wondering if those yields are just rolling in place leases to market? Or are you redeveloping those buildings?

Peter Moglia, Senior Vice President

100 Tech Drive is already delivered, and so is the Maryland portfolio. It's a 100% leased portfolio. There is a little bit of rollover coming in the next couple of years, but we fully expect to reach those numbers and potentially be a little better.

Sheila McGrath, Analyst

Okay. And last question, you were active on ATM this quarter. It doesn't look like you need that much additional equity capital based on the plan. Just if you could touch on what assets are for sale? Is it non-core? Or are you looking to do a joint venture of a stabilized asset?

Dean Shigenaga, CFO

Sheila, it's Dean here. We have $230 million remaining of equity capital sought for the rest of this year, excluding the forward that we can settle by the end of the year. The goal is to look at dispositions. We do have some non-strategic assets that we're selling, but importantly, we want to look at something of high value that would be attractive cost of capital and a disposition here.

Joel Marcus, Executive Chairman

A partial interest disposition. We're working through the details of that, and we'll provide more color over the next—maybe by the next call, we'll give a little more detail around our plans there.

Sheila McGrath, Analyst

Okay, great. Thank you.

Dean Shigenaga, CFO

Thanks, Sheila.

Operator, Operator

The next question will be from Tom Catherwood of BTIG. Please go ahead.

Tom Catherwood, Analyst

Thank you. Good afternoon, everybody. Steve and Dean, just on the forward leasing that you mentioned, you noted that roughly 2/3 of leasing has been forward. 1/3 is on leases that expire in '21, '22, '23. What are the mechanics as far as when you recognize the same-store NOI growth? Are those leases blends and extends? Does the growth kick in once the natural lease term expires? How does that flow through to your earnings?

Dean Shigenaga, CFO

Tom, it's Dean here. It depends on the transaction. An extension of the lease will usually trigger straight lining GAAP revenue. The actual commencement of the cash rents, which in this environment is generally upward, will depend on the negotiation, probably more frequently that occurs at the initial expiration date and then steps as opposed to bringing that all the way forward. Some early renewals were in one case, in Cambridge, connected to an expansion. So you have an early renewal and expansion all combined together.

Stephen Richardson, Executive Vice President

Tom, this is Steve. To add to that, just to be clear, blend and extend implies some type of concession; that's absolutely not what's happening here. These are early renewals with a sense of urgency in the market, and people are coming to us to lock down space. With vacancy rates of 1%, 2%, 3%, tenants are acutely aware of competition for space.

Tom Catherwood, Analyst

Got it. So to clarify, if it was just the first scenario, Dean, where it's an extension, the GAAP store same-store NOI change would be recognized now, and the cash would kick in later years whenever that natural expiration was, correct?

Dean Shigenaga, CFO

Correct. To remind, some of these early renewals also relate to One Kendall Square. Some of it is re-tenanting with the new tenant, allowing us to capture cash rents much sooner.

Tom Catherwood, Analyst

Got it. And switching over to developments, on Page 5, you guys list 493,000 square feet of development rights that you acquired this quarter. If you go back to your kind of land holdings, it looks like these development rights are spread amongst Greater Stanford, San Diego, RTP, and an undisclosed bucket of other value-creation projects. Can you walk through these additional opportunities and kind of how they came to fruition this quarter?

Joel Marcus, Executive Chairman

I think we don't want to get into specifics at this time. There are some assemblages and other key strategy involved. So hold your question for a couple of quarters, and we'll lay that out.

Tom Catherwood, Analyst

Very fair. Then maybe I'll try one development, one hopefully that you can talk on. The development rights did seem to jump up for the third phase of the New York City Alexandria center; is that something you could talk about?

Joel Marcus, Executive Chairman

Right. We have signed a letter of intent on May 31 with the city. We're working—John and the team are working on the ground lease negotiations. We expect to have a building that will be enhanced in size from what we believe. Stay tuned, announcements will be forthcoming fairly shortly.

Tom Catherwood, Analyst

Got it. Thanks, Joel.

Joel Marcus, Executive Chairman

Thank you.

Operator, Operator

The next question will be from Rich Anderson of Mizuho Securities. Please go ahead.

Rich Anderson, Analyst

Thanks. Getting back to the ATM comment earlier. Is it fair to say you fast-tracked that quicker than at least we were assuming in our model? Was that driven by the Pfizer deal? Or was that always assumed to be a chunky issuance this quarter?

Dean Shigenaga, CFO

Broadly, the ATM usage this quarter was driven by acquisitions. When we saw the deal flow under contract, we went forward into the ATM program. The timing may not match perfectly in all circumstances, but given the price point we raised capital, it was attractive.

Rich Anderson, Analyst

Okay. And then Joel mentioned, Illumina having a good day today, Pfizer indicating more R&D spend, Biogen— we read that as good news with their Alzheimer's activity. Looking at your top 20 list, are there any that you could peg there or having similar good moments where they express to you that they need more space? I don't know if you could be company-specific, but are you getting that with regular flow of information from your top 20 tenants because of things going on within their organizations?

Joel Marcus, Executive Chairman

I don't want to broadcast their leasing pipeline, but I'd say Lilly had a good quarter. Celgene's turnaround has been doing better; Bluebird is in a strong position but doing the same thing. In general, there are positive absorptions from some of these tenants for sure, not necessarily all at this point.

Rich Anderson, Analyst

When you look at competitors like MIT, are there any others that kind of fit that mold?

Joel Marcus, Executive Chairman

MIT is unique due to their gigantic endowment and real estate strategy.

Rich Anderson, Analyst

Lastly on the Pfizer deal, $580 a square foot going in. I hear you on getting a lot of NOI back over the next couple of years and may be seeing that land value as a basis. Is this—when you think about redevelopment, is it too soon to discuss what that could be for per pound type investment? Or should we just be thinking about this as acquisition in and of itself?

Peter Moglia, Senior Vice President

It's the latter. We're going to collect rent for 6 years and see where it goes from there. One of the most efficient ways for us to provide space to the market is through redevelopment of an existing building that we can get at below replacement costs, and we are very below replacement cost. We're going to be in a competitive price per pound versus new product when it comes to market.

Rich Anderson, Analyst

Okay. Sounds good. Thanks.

Peter Moglia, Senior Vice President

Thank you.

Operator, Operator

The next question will be from Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll, Analyst

A little bit off of Rich's question, you guys go out there and acquire some of these acquisitions, particularly the land sites. How long do you underwrite before breaking ground on those projects? Do you think you will start breaking ground on Dexter sometime soon?

Peter Moglia, Senior Vice President

That submarket is very hot right now. The momentum of the life science market there is gaining steam. There is a great need for product. We plan to focus on the life science side, and we're confident that we can follow up with other projects soon after. We bought that with the intent of designing and entitling it quickly.

Michael Carroll, Analyst

Okay, great. And then, Steve, can you give us a quick update on the San Francisco market? What are your expectations of receiving any allocation with the Times Square side?

Stephen Richardson, Executive Vice President

The market, as we've talked about, is extremely healthy. There is no availability of life science space in Mission Bay. You have a very small vacancy rate, 2%, 3%, or 4% in Mission Bay and SoMa on the tech side. The city is moving forward, having passed one stage of the political process. They’ve received comments and have a few filings against the plan. We understand these are being actively worked on and resolved. We expect all projects will receive an allocation to move forward on a phased basis, providing the city with community benefits front-loaded.

Peter Moglia, Senior Vice President

Okay. Thank you.

Operator, Operator

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Joel Marcus for his closing remarks.

Joel Marcus, Executive Chairman

Thank you, everybody, for listening. We look forward to talking to you on the third quarter call. Thank you, everybody.

Operator, Operator

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