Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q2 2015
Operator, Operator
Welcome to the Alexandria Real Estate Equities’ Second Quarter 2015 Earnings Conference Call. My name is Vicky 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 this conference is being recorded. I will now turn the call over to Paula Schwartz. Please go ahead.
Paula Schwartz, Rx Communications Group
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. With that, I'll turn it over to Joel Marcus. Please go ahead, Joel.
Joel Marcus, CEO
Thank you very much. With me today are Dean Shigenaga, CFO; Steve Richardson, Chief Operating Officer; Peter Moglia, Chief Investment Officer; Tom Andrews, Executive Vice President, and Dan Ryan, Executive Vice President, so welcome to our second quarter call. I think the second quarter has really two key storylines for our best-in-class office REIT. The first one is price discovery for ARE and its assets, and I believe deserving of cap rate compression and multiple expansion. Secondly, there was the sheer historic leasing volume in the second quarter, testament really to the location's quality of assets and really the leasing team. Dean will go through the balance sheet and guidance in detail but we did increase guidance to 524. So when you take our projected FFO for the year plus the dividend, we're looking at a low double-digit total return. On the science and technology front, the industries themselves remain at the forefront of growth and leadership in our innovation economy seeking to attract the best talent and really the best urban submarkets where, now as you can see from the supplement, ARE derives 75% of our annual base ramp from Class A assets and AAA locations. We're very proud of this really crowning achievement and coupling that with investment-grade client tenants of about 53% of our ABR. We feel that we really accomplished something pretty special. The demand for our urban campuses has really never been stronger. On the FDA front, again increases in the FDA approvals have been driven by a better understanding of the disease biology and a greatly improved regulatory process. Year to date for 2015, there have been 20 approvals and ARE client tenants have garnered 60% of those, again we’re very proud of that. I think one big note on the policy side is that some representatives passed the 21st Century Cures Act on July 10th now moving to the senate for discussion more likely in September. A couple of key provisions during that need for increased funding to the NIH and the FDA, which if the bill passes, will be very welcomed; improved investment in certain areas of critical science the bill aims at removing barriers to increased research collaboration; it has certain guidance incorporating patient perspectives into the drug development process; it also has guidance to ensure patients can be treated based on their unique characteristics of their disease, so-called personalized precision medicine. There is a section on modernized clinical trials which will be very important, greater use of patient-generated registries and biomarkers, the development of certain new medical apps, and potential orphan drug exclusivity for rare diseases. On the technology side, machine learning and Big Data have contributed greatly to the intersection of tech and life science. We see continued strong growth in the sharing economy and we’re also pleased to mention that our new client tenant, Strike, our tenant at 510 Townsend raised the new round of financing, valuing the Company at approximately $5 billion led by Visa, American Express, and Sequoia. They also announced a new partnership with Visa. Moving on to the sale of the 70% interest in our 225 Binney. We’re very pleased with a highly respectable cash cap rate. We believe that this was very attractive to a group of high-quality institutional investors; it also monetizes the core asset. And really, evidences significant value creation. We hope it’s meaningful on an NAV data point and it’s certainly important as it raises significant equity-type capital to help fund our development pipeline. The yield is reflective of what long-term investors are willing to accept. We won’t speculate about the upside in 13 years, but we believe it’s significant. The building, as many of you know, is 305,000 square feet in the heart of Kendall Square developed by our Greater Boston team in the Alexandria Center Kendall Square base quarter development and really the strongest life science submarket in the country, a lead goal building, 100% triple net leased to Biogen through September 30, 2028 with two five-year renewal options at 95% of our market ground. There was a significant pool of interest from buyers, and likely we will continue to look at monetizing select assets and Dean will talk to you about sources and uses in a bit. We’re very pleased that a sophisticated investor like TIAA paid a low cap rate reflecting the high value they placed on the real estate and the residual value. Notwithstanding, there is no chance to increase rents for the next 13 years. I think that recognizes the value in Cambridge are more a function of extreme supply constraints, high barriers to entry, and limited availability of space for the universe of life science, pharma-biotech, and technology that want or need to be in Kendall Square versus simply a snapshot at current rent. I think our partner recognized there is minimal releasing risk in a submarket with low single-digit vacancy rates and the demand that is currently substantially in excess of inventory. Ironically, there is obviously significant upside if Biogen were to vacate early and rents were to go to market. I am sure they took comfort in the dramatic leasing velocity in the Binney Street corridor and our transactions with Sanofi Genzyme, Bristol-Myers Squibb and the long-term value of the Binney Street assets and the greater Kendall Square project that we’ve done. I also think that capital values in Kendall Square clearly continue to increase. I think our partner’s confidence in the long-term value of 225 Binney validates our laser focus on developing and knowing irreplaceable mission-critical assets in the top innovation clusters. The end-users attracted to these markets are really highly discriminating in their location decisions. As you know, there’s a need to hire and retain top talent who want to work in these dynamic submarkets, their need to collaborate on product development and scientific research drives their real estate decisions unlike financial and professional service firms who view real estate more as a commodity. The life science and tech companies view their real estate location decisions as integral to their operations which makes them somewhat more rent-insensitive, although they’re clearly very focused and diligent and willing to pay to be in AAA buildings in top locations with superb owner-operators. We’re in the enviable position of owning real estate that will experience exceptional and sustained capital appreciation and rent growth. Moving on to internal growth, we hit an all-time high for any quarter over 1.9 million square feet of leases; really historic and a great achievement for the Company; 29% came from our Greater Boston, primarily Cambridge operations; 26% from San Diego and 22% from the San Francisco Bay region. Occupancy was down slightly due to two rolls Dean talked about; again, same solid same-property NOI growth for the quarter and strong margins. On the external growth side, we have an opportunity, Dan and his team, to acquire 10290 Campus Point Drive immediately adjacent to our current Campus Point project, which added 304,000 square feet at $105 million or about $356 per square foot. Qualcomm is in for a short time and has been entirely released by Eli Lilly who wants to go through some redevelopment and Dean can take you through the machinations. But essentially, Lilly ends up netting leasing about 72,000 more square feet from us. Notable leasing achievements include 300,000 square feet at 510 Townsend Street as we just mentioned, our 208,000 square foot lease to Bristol-Myers Squibb at 100 Binney and 90,000 square feet to Juno at 400 Dexter. We expect to announce in the not-too-distant future the completion of a lease to a full building user at 60 Binney and we continue to be well-leased, well-preleased in a highly visible pipeline that now has visibility into 2016, 2017, and then 2018. As we mentioned in the sub capital allocation for this year, 45% to Cambridge, 22% to San Diego, 13% to Mission Bay, 4% to New York, and 16% to others. Dean will comment on the balance sheet but we expect to be at 6.9x net debt-to-EBITDA at year-end. And on the dividend side, with continuing low payout ratio and growing cash flows, we expect the Board to continue dividend increases sharing our increasing cash flows with investors. So with that said, let me turn it over to Dean.
Dean Shigenaga, CFO
Alright. Thanks, Joel. Dean Shigenaga here. Good afternoon, everybody. I have got three important topics but really wanted to take a brief moment to express our appreciation for our team for recognition as the 2015 recipient of the NAREIT Gold Investor Communication and Reporting Excellence Award. It truly is an honor for the company to receive this award and our team will continue to focus on transparency, quality, and efficiency of reporting and communication to the investment community. I have three topics today. First, I want to cover the continued strong performance from our Class A buildings in AAA locations. Second, provide an update on our solid balance sheet, access to diverse sources of capital and brief comments on key items for the second half of '15. And third, briefly on our disciplined allocation of capital and management of our value creation pipeline. So kicking it off with our continued strong performance, our strategic focus on unique, collaborative campuses and urban innovation cluster submarkets continue to drive very strong operating and financial results. We reported FFO per share of $1.31, up 10.1% over the second quarter of 2014. Demand for our Class A assets in AAA locations also continues to drive strong leasing activity. We updated our guidance and increased the midpoint of our range of FFO per share from $5.22 to $5.24. FFO per share growth for 2015 is now greater than 9% representing our second consecutive year of very strong growth above 9%. We remain on track to reach our occupancy guidance range of 96.9% to 97.4% by year-end. However, as disclosed over the past couple of quarters, two lease expirations in the second quarter drove a temporary decline in occupancy. One lease was for 128,000 rentable square feet at 19 Presidential located in the suburbs of Boston and that lease expired at a rate of about $25. And another lease for about 82,000 rentable square feet at 2525 State Highway 54 in Research Triangle Park expired at a rate of about $20. Both of these were single-tenant buildings and we are marketing each building for multi-tenancy at rental rates equal to or above the expiring rates. We remain well-positioned with high-quality buildings and tenancy. Cash same-property NOI growth has averaged about 5% over the last 10 years and the midpoint of our guidance is above this average at 6%. This performance is driven primarily by a favorable restructure with 94% of our leases containing annual rent escalations. Additionally, strong demand for our Class A buildings in AAA locations has driven high leasing volume and pricing power in our key urban cluster submarkets. For the second consecutive quarter, this has been the primary driver of the increases in our strong FFO per share guidance for 2015. Next, turning to an update on our solid balance sheet, access to capital, and some brief comments for the second half of the year. Our balance sheet is very solid with well-laddered debt maturities, and really limited maturities through 2018. Additionally, our balance sheet liquidity is very strong at approximately $1.1 billion. Turning to sources of capital for 2015, our guidance has decreased about $90 million at the midpoint to $1.05 billion. Included in the overall guidance is the following: 12% of our $125 million from net cash provided by operating activities after dividends; 15% or roughly $155 million from a net incremental increase in debt; and 73% or 770 million from asset sales and other sources of capital which I will touch on in a moment. Included in our net incremental debt for the year is the issuance of $50 million of unsecured notes offsetting this increase. There’s a reduction in some projected proceeds from asset dispositions which results in a modest net increase in incremental debt for 2015. I should take a moment to highlight the recent volatility in the debt capital markets. In the month of July, over $100 billion of unsecured bonds were issued driven primarily by M&A activity and it seems like the M&A activity will likely continue to drive new issuance volume in the near term. All-in pricing including new issue concessions is higher today versus 90 to 120 days ago. Given the recent volatility in the debt capital markets, we prefer not to speculate on pricing for our future transactions but suffice it to say that guidance can absorb the range of interest rates reflected at recent volatility. More importantly, we have significant liquidity on the balance sheet and have the flexibility to be patient on the timing of the issuance of our unsecured notes. We are also working on two secured construction loans. One of which will fund the construction in 2015 for 50 and 60 Binney Street in Cambridge. The other construction loan will provide funding beginning in 2016 for the construction of our unconsolidated JV development for Uber at 1455 and 1515 Third Street in Mission Bay. Both loans are expected to close this year and will significantly increase our balance sheet liquidity to over $1.7 billion by year-end. We will disclose the key terms of each loan in the future. Asset sales are an important component of our sources of capital and we will continue to focus on growth in FFO per share and net asset value while we fund our highly leased value creation projects while also improving our net debt to adjusted EBITDA to less than seven times by year-end. Our midpoint of guidance for dispositions and other sources of capital is $770 million and consists of the following: about $550 million or 71% has been identified and is working through various stages. This includes $94 million completed to date, a $190 million under contract related to the sale of a 70% interest at 225 Binney, roughly a 4.5% cap rate, and about $266 million working through the process. The remainder is about $220 million, and as a policy, we do not speculate on potential sales that have not been identified but we'll continue to focus on sales of both operating properties and land. More importantly, we will continue to provide disclosure of specific sales when they are identified and classified as held for sale. Additionally, as mentioned last quarter, our ATM expired in early June and we expect to file a new program. Turning to our allocation of capital and management of our value creation pipeline. Our investment strategy focuses on the allocation of capital to Class A buildings and AAA locations that really should translate into higher long-term value for our shareholders. 84% of our capital for 2015 will be allocated primarily to four higher-value clusters of markets including Cambridge, Mission Bay, SoMa, Manhattan, and Torrey Pines/University Town Center. We've been very disciplined with our value creation activities; we have a modest-sized pipeline undergoing construction today. Our value creation pipeline has declined to about 12%, with about one half of our pipeline under active construction and the other one half representing near-term and future projects. Over the past five years, we have commenced about 4.1 million rentable square feet of ground-up developmental projects with about one half of that representing fully pre-leased single-tenant projects and the other one half representing multitenant projects that on average were 36% pre-leased. Our value creation projects under active construction today aggregating about 2 million rentable square feet were 71% leased and 17% under negotiation. I think the other key attribute of our discipline is we really are on budget. Of the 4.1 million rentable square feet that commenced over the last five years, these projects have been completed, and the projects completed today are about 1.9 million of that rentable and have on average been completed under budget with initial cash yield slightly above our estimates at the commencement of these projects. Lastly, on guidance and closing comments here, the detailed assumptions underlying our updated guidance for 2015 are included on page three and four of our supplemental package. We are really in a unique position with strong demand for Class A assets in urban innovation cluster submarkets. Internal growth remains very strong. We have a visible and highly leased multi-year value creation pipeline. We continue to focus our strategy of generating cash growth and cash flows from operating activities, FFO per share, and net asset value. We are also focused on increasing our common stock dividends while retaining significant cash flows for investment into highly leased value creation projects. We believe we have the right assets, the right locations, and the best roster of 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, CEO
Thank you very much, so that's our formal comment. Operator, do you want to open it up for Q&A please?
Operator, Operator
Thank you. We’ll take our first question from Smedes Rose with Citi.
Smedes Rose, Analyst
I wanted to ask a little more about the San Diego purchase for $105 million. What do you expect to spend to upgrade the facility thinking about Lilly’s new? And how do you think about the stabilized returns there? And then just want to make sure you were far along on the entitlement process for construction at the adjacent building, that about to be put on hold now?
Joel Marcus, CEO
Let me ask Dan to provide some insights. We haven't fully projected construction costs yet, so Dan will give you a rough estimate. The same goes for yields; when we finalize our budget, we’ll include that in the supplement, but we anticipate it to be above 7 generally. Dan can elaborate on the details of the deal.
Dan Ryan, EVP, Regional Market Director
We expect that we will exceed a 7 in terms of cash and GAAP for that opportunity. Lilly consists of two components: one is the existing space at 10300 Campus Point Drive, and the other is a built-to-suit building we had planned adjacent to that 10300 location. We decided to terminate the built-to-suit project in favor of this new acquisition. We are currently reworking the site plan to consolidate the entitlements into a new building that will be on the 10290 site.
Joel Marcus, CEO
And Steve maybe construction of…
Steve Richardson, COO
I guess we’re estimating maybe 300 plus or minus.
Joel Marcus, CEO
Yes, exactly.
Smedes Rose, Analyst
And then I just want to ask you on 225 Binney, obviously is very attractive cap rate and you mentioned the number of potential buyers there. So could you talk about a little more kind of the range of buyers? I mean were they mostly institutional like TIAA or were they family office as well or foreign sovereign funds or anything on that?
Joel Marcus, CEO
Well, we talked to quite a number of people. And I would say there was a large group of very interested buyers including a number of sovereign wealth funds. But because of certain investment restrictions for sovereign funds, as you know, if they were to hold over a majority of an interest creates tax issues for those and it is we finally ended up focusing on domestic high-quality institutions that could own greater than 49%. So, it was a great mix and it was mostly high-quality institutions and foreign sovereign funds.
Operator, Operator
We’ll go next to Sheila McGrath with Evercore.
Sheila McGrath, Analyst
On the San Diego acquisition, I was just wondering if you could help us understand how that all slow through. Will it be like an acquisition of 105 million with the Qualcomm lease and then start capitalizing? Or how will that hit the P&L, or just teens?
Dean Shigenaga, CFO
You’re correct, Sheila, there is a short lease back for about 90 days and then the project I think effective October will enter our redevelopment program and we’ll commence the process of converting that to its assets lab use. So there is a very short lease back period.
Sheila McGrath, Analyst
Regarding 505 Brannan Street, you mentioned that there was a significant upzoning. I'm curious about how long that process will take and your level of confidence in achieving that upzoning.
Steve Richardson, COO
Sure, as you saw, phase one is fully entitled that first 135,000 square feet and then phase two will be part of the adoption of the Central SoMa plan. So we have a number of thought about strategies to lock that down. But ultimately I think it will be a couple of years out before we do lock down the propM allocation for that property as well.
Sheila McGrath, Analyst
So, you’ll go forward with just phase one initially?
Steve Richardson, COO
Yes, we will.
Sheila McGrath, Analyst
And do you think that will be tech or life science?
Steve Richardson, COO
It could be either, and we have strong demand from both sectors.
Operator, Operator
We’ll go next to Jamie Feldman with Bank of America Merrill Lynch.
Jamie Feldman, Analyst
I guess starting out on 225 Binney, are you going to receive a management fee on that 70%? And if so, what’s the percentage rate?
Peter Moglia, CIO
Yes, we are going to receive standard property management fees, but we have been asked by our partners not to disclose that percentage, so I am sorry I can’t give that to you.
Jamie Feldman, Analyst
And then I think you guys had about an $80 million change in investments on the balance sheet to getting flow through earnings. Can you talk about what’s in there?
Joel Marcus, CEO
Not company specific, but you’re correct our unrealized gains are up to almost $140 million. It’s a handful of companies that we've more initially invested in when they were private and they’re not publicly traded companies with a significant aftermarket. I think somebody asked the question maybe a year or a year and a half ago about what the mark-to-market potential and I conservatively mentioned it was 2x. And so I think you get some sense for the upside in that investment goal. And I think from a P&L perspective we have been realizing some gains but they've been fairly modest time-to-time and that gives us a steady flow of other income. I think what we might consider over time is selectively monetizing some of that portfolio and reinvesting that capital into our business.
Jamie Feldman, Analyst
And is any of that in your guidance in terms of source of capital or income or anything?
Joel Marcus, CEO
Only from the standpoint of the normal run rate, Jamie, we typically have $1 million to $2 million of investment gains a quarter, typically more like $1 million. So that run rate is in there but anything large we would try to carve out and identify for you. So the answer is no, there is nothing lumpy included in our guidance.
Jamie Feldman, Analyst
Okay. And then I guess bigger picture, we've seen a lot of health insurer consolidation over the last month or so. Can you guys talk about what impact do you think that may have on the broader healthcare space and your business potentially?
Joel Marcus, CEO
Well, I think that chapter is yet to be written. I guess you could draw some analogy as to the airline industry that it's going to be bumpy and you can't always get deeps when you want. So I think that now with the Affordable Care Act having been reconfirmed in a number of specific areas by the Supreme Court I think what will shake out is you will have three or four, it looks like three, but you will have other dominant providers and they will be important in influencing how they insure under the law and under the ACA and obviously important in negotiating with the industry. So but that's yet to play out.
Jamie Feldman, Analyst
What impact do you think it might have on just capital flows to pharmaceuticals, is there a talk of that CapEx?
Joel Marcus, CEO
I don’t think so. I think it certainly is as strong as we've ever seen it. If you just look at the M&A activity almost every day, although a lot of that's in the generic space, certainly you look at the venture side and what's big in the venture side is not only venture but institutional crossover, investors putting large sums of capital into companies that are private and that ultimately go public, and you see that both in life science and tech and then obviously the IPO market I think remains pretty strong. Remember something else that I think is going to be a huge benefit to this industry and nobody has really talked about it, is there is a bill working its way through Congress and I have a high degree of feeling that it is going to pass and that is a one-time tax Obama is in favor of it on companies that have large foreign cash overseas, a lot of in the tech sector. Pharma itself has over $200 billion of cash, a significant amount of that is overseas. So if there's a one-time tax or something they are projecting between 14% and 16% that will fund infrastructure in the U.S., that's going to mean that there could be $100 billion plus money flowing back to the U.S. for reinvestment. I think that's going to be a huge boom to this industry.
Jamie Feldman, Analyst
Okay. And then just my final question. Good execution on 225 Binney, are you getting more assets you want to put in the market for sale?
Joel Marcus, CEO
I think you will see us look at another core asset. There certainly we've been contacted by quite a few people, I wouldn’t say there is alignment or door, but there are quite a few looking. So we're looking at a couple of core assets and then clearly we have a number of non-core assets and land parcels that we're working on. So the answer is yes.
Operator, Operator
We will go next to Kevin Tyler with Green Street Advisors.
Kevin Tyler, Analyst
Hi guys. Policy on the tenant at 225, they've been in the news, stocks selling off 20% plus as drug sales slowed down. Can you comment a bit on the broader state of the market, the biotech market and then some of the read through on such a large company losing that much of its market value overnight?
Joel Marcus, CEO
Yes, remember too that that company has increased its valuation dramatically. I actually did an interview with George Scangos about a year ago at an event in San Francisco and I remember asking him what the market cap of Biogen Idec was the name previously when he started and it was $14 billion. I asked him what his worry was and he said he thought that market cap was going to go down in negotiating his contract. So you saw it go north of $100 billion and they did have a sell off. Let me speak to Biogen itself; I think the management team is a great team. George is a highly seasoned professional. Obviously they lowered estimates for their multiple sclerosis franchise and that was not welcoming to the street and obviously significantly cut value, and this is by analysts and others the value attributed to their pipeline. One of the really big potential values from that pipeline was their Alzheimer's drug and obviously the drug missed hitting a significant response on key measurements and it also demonstrated, I guess, some evidence of brain swelling among some limited number of patients. But one believes that they still have a good chance of having good phase three results; it's difficult, expensive, and risky but that's where they're headed. Anybody who can crack Alzheimer's really will be the beneficiary of just an unending number of patients, unfortunately. I think you know you have to look at a lot of the tech and a lot of the biotech companies and obviously their price based on their revenues and on their pipeline of products or opportunities. I think when somebody has to bring a little more reality to guidance than they had, I think you see a pretty large sell-off but I think some of that bounce back and I think the company over time will recover much of that valuation; so it still is a very well-valued company so we aren't worried. But I think you know in any industry that has... I mean look what happened to Google on the Plus side; their CFO came in and announced some really disciplined approach to cost-cutting and the stock just popped dramatically. So that's the marketplace.
Kevin Tyler, Analyst
Okay, I appreciate that. In terms of, Dean this one might be for you, in terms of the acquisition guidance for the year I think you brought it down $50 million this quarter versus last quarter. Just wondering what might have driven that move; was it a capital allocation decision or was there something else driving it?
Dean Shigenaga, CFO
There's some details on page three of our supplemental package for reference but in short, we had one transaction including our guidance last quarter, was about a $135 million transaction and really at the seller's request timing has been moved back to the first quarter of '16. So that transaction's still there, it's just not part of 2015 anymore. Offsetting that reduction of $135 was the purchase of the Campus Point building.
Operator, Operator
We'll go next to Mike Carroll with RBC Capital Markets.
Mike Carroll, Analyst
Can you guys describe what you've planned for 10300 Campus Point, when Eli Lilly decides to vacate? Well, when they vacate to go to 10290.
Joel Marcus, CEO
I'll ask Dan to comment.
Dan Ryan, EVP, Regional Market Director
Hi, this is Dan again. We feel really good about the prospects of backfilling that. It's a very highly built-out lab office space that they spent a significant amount of their own capital on that we will be the net beneficiaries for. We are currently in paperwork with four-plus tenants already. This is going to be some of our best space in the portfolio. So we generally expect a significant, you know, 15% plus or minus increase in current rent at the lease. We feel the downtime will be very short given where we are with current discussions and a fairly modest amount of capital to get there.
Joel Marcus, CEO
I should clarify that lease is about 125,000 square feet and the contractual expiration is in the fourth quarter of '16.
Mike Carroll, Analyst
Okay then how are your discussions I guess progressing with the city on the north tower land site option? Are those just a formality and that site is going to be yours?
Joel Marcus, CEO
Well, I don't know that anything's ever a formality but we do have a legal option that lasts for 17 years so I feel good about that but we are in deep discussions. We had several meetings with the city this week, we have a discussion going on about increasing the FAR and how that might work and so that's where we are but we expect a resolution to that and some decision this year, maybe within the next quarter or so. So that's moving along pretty intensively.
Operator, Operator
We'll go next to Ross Nussbaum with UBS.
Ross Nussbaum, Analyst
Can we talk a little bit more about page four in your supplemental? I just want a little more clarity on the asset sales that you're targeting through the end of the year. I guess the first question is, where are you processing with 500 Forbes in South San Francisco? I know that was listed last quarter in the south as well, is that, where are you in terms of getting that thing professionally.
Joel Marcus, CEO
So, let me comment briefly and then Steve can add some comments. The, everything in the category of pending and targeted, the only transaction that is under contract today is 225 Binney which you're well aware of. Everything else is not at that stage yet but moving through various areas. I don't know if Steve wants to comment anything further.
Steve Richardson, COO
Hi Ross, it’s Steve Richardson. Yes, we've fully engaged the marketing team now. We've got packages out, we've been touring prospective buyers through the property so we're in the early innings of the overall marketing process. We'll keep you updated as time moves along.
Joel Marcus, CEO
And then somebody asked before Ross about would with our success at 225 Binney would we look at another core asset sale and the answer is yes; we're active on another core asset potentially so stay tuned on that. The 240,000 square feet with $8.2 million of NOI that get identified as other, what exactly is that?
Dan Ryan, EVP, Regional Market Director
We’re not prepared to provide more color on what we have. But let me just say that we have a number of assets that we’ve targeted that could allow us to achieve our targeted dispositions. So we have flexibility in what we execute there, and we have a number of projects where our operating assets we're looking at.
Ross Nussbaum, Analyst
And how does that other category differ from what you have laid out as projected remainder of asset sales, that additional $195 million to $245 million? That stuff that's not on the market yet. I am trying to understand the new launch there.
Dan Ryan, EVP, Regional Market Director
Yes, the stuff that’s not quite as advanced as what totals up to roughly the midpoint of $550 million which includes the pending and targeted. So we have a little bit of work here to quickly resolve over the next few months. And we expect to be in a position to give you better color on this entire targeted disposition here for ’15.
Joel Marcus, CEO
And one asset in that other, for example, is an important project that we have gone to the tenants who has expressed interest in potentially acquiring it, so we have a discussion there. But we also are working on a sale package, so these are all not just imaging that we’re going to sell something; these are actually pretty active and trying to move them to an active sale position.
Ross Nussbaum, Analyst
And then my last question is really around the last footnote on that page. And you guys have made a pretty hefty profit being biotech investors over the past few years. What’s preventing you from, just from a risk standpoint, given the massive run-up in biotech stocks in the last four to five years? Why not take pretty hefty profits, sell down a lot of those positions rather than, I don’t want to guess that we’re gambling. But gamble those on biotech continuing to run up.
Joel Marcus, CEO
I am going to let Dean answer that; he did address it in a previous question to some extent. But I think to some extent we have taken some. There are a number of companies there that have achieved pretty nice valuation. So you have to remember too, these are a number of them are development stage companies. And to the extent they turn out to be future Amgen’s, Biogen’s, Celgene’s and so forth, the upside is even far greater than one can imagine with the realization of that pipeline. But we get your question, so Dean can answer it.
Dean Shigenaga, CFO
It’s a balance there at the end of the day. Part of our focus over the next four quarters will be looking to monetize components of that so we can reinvest the capital. So we are looking at that. A couple of them recently had their Initial Public Offerings, so it's a bit of a lock-up period as well they can see.
Joel Marcus, CEO
But we do see that as the source for our development pipeline as we needed.
Operator, Operator
We’ll go next to Dave Rodgers with Baird.
Dave Rodgers, Analyst
Maybe just a broader question on the development pipeline, I think Dean mentioned that the value creation pipeline has come down and the size of the company overall. But how do you envision that going forward? As you move into ’16, are there sufficient projects and span that you’ll be able to kind of keep that pipeline at a fairly large level, or do you see it coming down before you can kind of get entitlements and everything ready for another round?
Dean Shigenaga, CFO
Well, I think... Yes, go ahead.
Joel Marcus, CEO
I was going to say Mike there are two things to consider; our active projects under construction today are highly leased and are going to be delivered over the next number of quarters. Page two of our press release highlighted as well as page 30 or so in our supplemental highlight the rough timeline of near term projects. But the stuff that we’re going to commence in the second half of ’15 that fits in the near term pipeline today, 1.1 million square feet is 80% leased and 20% under negotiation. So we do have very good visibility into really high-quality developments that will generate EBITDA and cash flows going out into basically ’16, ’17 and ’18 in that time frame. So you got this visibility from a siding perspective. The overall value creation pipeline might grow and dollar value temporarily but it will sell back down as we deliver a number of projects call it over the next six quarters.
Dave Rodgers, Analyst
And then I guess with regard to and maybe more acquisition of redevelopment assets to get product to market a little bit faster. Should we expect as you move late into this year, or maybe even early in the next year, that you start looking at a greater number of acquisitions to bring that product in line faster, or are you pretty happy just going ground-up development and those discussions that you’re having?
Joel Marcus, CEO
Well, I don’t think we have to. I think you get great value. If you just look at the pipeline that’s being articulated and you look at the page 22 spreadsheet, it’s pretty robust. There are too many people out there that have control on their balance sheet of future value creation and future cash flowing assets out to 2016, 2017, 2018, and then over time maybe beyond. We only look at the acquisition market really opportunistically; we underwrite everything but look at it pretty carefully. And a lot of times you don’t even see things coming up like the Qualcomm deal. If you were to look at that a year ago or six months ago, you don’t even know some of these things happen. So we're not so focused on acquisitions. I don’t think we need to do that as a elevated for this, the company as a mainstay. But we clearly look at it as a way to build our franchise where it makes sense and where we have great in-sale sites or projects.
Dave Rodgers, Analyst
Obviously a lot of asset sales in the pipeline, and that's the primary source of funding for new development. The equity is still off the table and not something that you are considering for this year and early next year?
Joel Marcus, CEO
Well, as I think we've said before, it's our lowest priority as far as funding. And so we think that free cash flow obviously that we can generate by bringing on additional cash flow and then obviously asset sales, land sales are our primary focus.
Operator, Operator
We will go next to Rich Anderson with Mizuho Securities.
Rich Anderson, Analyst
Thanks. Good afternoon. Is it correct that the original discussion with 225 Binney was 80% not 70% of the value of the asset?
Joel Marcus, CEO
Yes, I don’t know that we had; we talked to a pretty broad range of people running from 49% to 100% depending upon what people were thinking and then we came upon what we felt was appropriate for our continuing interest and the partner's long-term interest. So that's how we felt about it.
Dean Shigenaga, CFO
Richard it's Dean here. I would only add one other comment. I think our guidance last quarter gave a range from 70% to 90% … when we were airing down the terms of the deal.
Rich Anderson, Analyst
That's fair. Very, very thank you. And as far as TIAA's perspective, what it is for them in your mind besides obviously high valuable asset until 2028 there is nothing going to happen on their 4.5% return. So is that purely just, they are just a believer in Cambridge for the long term, is that where their mind is do you think?
Joel Marcus, CEO
Well, I think in my introductory comments I spent quite a bit of time going through how I think they look at it and institutional investors looked at. I won't go and repeat that at the moment but I think the investors we have talked to and they are quite a few certainly well more than a dozen, had a very, very positive and strong view of that market and wanted to have a strong foothold in a AAA location in a Class A building with a great tenant. I think that's where institutional money is certainly part of it is focused today.
Rich Anderson, Analyst
My, I apologize I missed the beginning of your call. So pardon.
Joel Marcus, CEO
It's okay, okay.
Peter Moglia, CIO
It's Peter Moglia, I just wanted to add one other very important factor that drove TIAA do this transaction which was they wanted to do something with Alexandria, I mean they work with the best operators in the best locations and they identified us as that and that was a very important aspect of this transaction for them. So we are very proud of that and we think that their brand and their acumen in examining our real estate and us is a great testament to our quality.
Rich Anderson, Analyst
I guess the question I was having was is this going to be a reoccurring relationship going forward with them?
Peter Moglia, CIO
Very well could be.
Rich Anderson, Analyst
Okay. Regarding the investments in companies and Dean you spoke about. Is there any situation where you are both an investor and a landlord?
Dean Shigenaga, CFO
There are, I would say the investments; probably 80% are non-tenant investments and probably 20% or so are that are fair number.
Joel Marcus, CEO
That's correct, in that range.
Rich Anderson, Analyst
Is there any kind of restrictions about selling or buying stock if you are also, have business as a landlord tenant, I don’t know if you would be?
Joel Marcus, CEO
Not regulatory, but I can tell you internally we ensure that we look at these transactions separately. In other words, the lease is a separate transaction and if we decide to invest we handle that separately from that decision to lease space.
Rich Anderson, Analyst
Okay. And then last question. Joel you I think you referenced 20 FDA approvals so far in 2015 I got that much detail at the beginning of the call. But is it true also that not many in the way of blockbusters in terms of profitability of those drugs, is that, would you say that that's a fair statement relative to previous years? And maybe just some color around the profitability as opposed to just the straight on approvals of the drugs?
Joel Marcus, CEO
No, I don’t think that's true, I think you're also seeing a new class of cholesterol-lowering drugs which are likely to be kind of new era blockbusters. Clearly some of the cancer drugs will be, I think it remains to be seen if any of the CNS drugs get approval and become; they likely would become but that's something that remains to be seen. But now I think that the drugs that are being approved today, you have to remember too we're also in an era of as I said precision medicine, so a lot of drugs that are being approved are for various targeted rare and often diseased patient populations, patients that you know haven't been able, haven't been responsive to mainline therapy; so you see some of that. So don't assume they're not profitable but you can assume that they're more niche drugs and that's a matter of just better biology and better science and better regulatory science as I was saying earlier. You know, you do have some pretty big blockbusters like you know the Hep C cures and others so this is the new generation of drugs I think is a very great set of promising opportunities so we view it as pretty highly positive.
Operator, Operator
We’ll go next to Jim Sullivan with Cowen Group.
Jim Sullivan, Analyst
Thank you, good afternoon. Joel I'm curious with the benchmark pricing here 225 Binney and continuing discussions in some other assets and some other markets. I wonder if you could give us kind of a handle if you will on how we should think about cap rates in Cambridge versus cap rates for the rest of the portfolio and particularly, I'm thinking about New York City and San Francisco, San Francisco generally and to what extent we should expect differential cap rates, higher or lower in either of those markets and then also if you could touch on to what extent kind of the ratio of general office space to lab space might impact the cap rates.
Joel Marcus, CEO
So maybe take it one by one. I think in, and Tom hearing can come in on that Cambridge cap rate beyond 225, but I think it's fair to say that we see continuing cap rate compression in that market, I think it's true. We may end up selling one or more assets in the San Francisco Bay Area that I think will bring good cap rate data to the table as well, and so I think you're going to see again some cap rate compression in that market certainly vis-a-vis your assets. New York City we don't plan to sell the New York Center but I think Peter reported back a quarter or two ago I think FL Green sold an asset or bought an asset, I can't remember, not too far from our estate, and it was on a long-term ground lease, I think at a... There was a seven cap rate. Actually, we talked about that at Investor Day. It seems like New York is probably the only major market that from first quarter to second quarter had a small uptick in their cap rate according to Corpax but all our other markets actually stayed stable or even dropped. One thing that I really noted to Joel before this call when I was doing some researches, was that since the suburban Maryland market actually had a 22 basis point decrease in cap rate. So I found that to be very encouraging considering we do have holdings there but overall I think cap rates Jim are going to remain stable. You know the tenure has gone up about 25 basis points from the last quarter; there's still about a close to a 400 basis point slack between the historical cap rate and the margin it usually has with the tenure. So if it goes up, if interest rates go up even more I don't think it's really going to affect cap rates until maybe it starts to go up by 100 basis points or so. I think we're going to have a long run of continued stabilization, maybe even some more compression as the sovereign funds continue to pour money into these markets that we're in. And as Joel alluded to, we had quite a number of investors looking at 225 Binney; I think we'll have quite a number of investors looking at the next project we have. So overall, I think to answer your question, I think the Cambridge cap rate that you saw was very healthy I would expect that assets of that quality will continue to trade at that level and I think we're probably looking at least another 12 months of stable cap rates and then we'll see how external factors affect that.
Dean Shigenaga, CFO
I would say also Jim in thinking about our asset base as I mentioned actually in the second page of the supplement before the press release we start to try to highlight what we think are the important best-in-class office REIT attributes that we have and then highlighting 75% of our ABR now comes from these Class A assets and AAA locations with 53% of ABR from investment-grade tenants so I got to believe that as people look at NEB and look at cap rates with respect to our asset base they'll take note and I think adjust them appropriately down. I think on the office lab side, not sure I can comment. Tom can maybe give you some color in Cambridge or in cap rate office versus lab.
Peter Moglia, CIO
I believe there haven't been comparable prices in Cambridge, and this may be different from one of the ACP trades, particularly concerning city interest in that university area. There were many leases of older buildings, with an average age of around 19 years, which are not quite at the Class A level like the newer assets found in Kendall Square.
Tom Andrews, EVP, Regional Market Director
It was also a minority non-controlling interest as well, so that certainly could have discounted the price. So I think…
Jim Sullivan, Analyst
Okay, and then finally from me. Can you give us an update in terms of the demand for space in Cambridge, and what impact that’s having on market rents? And maybe if you kind of relate that to your Cambridge portfolio, your 100 owned portfolio. How you feel about where those rents are versus the market?
Tom Andrews, EVP, Regional Market Director
Yes, Jim. We're noticing the very tight market conditions in Cambridge right now. We have active negotiations and proposals going out for the remaining space we have. Regarding 100 Binney, we have committed about half of that building to Bristol-Myers Squibb. We are experiencing significant upward movement in our sales, and we are aggressively increasing rents for potential tenants due to the scarcity of available space in the market and the number of prospective tenants currently looking.
Peter Moglia, CIO
And Jim this is Peter Moglia, one other thing I wanted to ground out is as Tom mentioned rents have been continuing to increase in Boston, rents are continuing to increase in San Francisco, they’re continuing to increase in San Diego. We’re even seeing it in Seattle as well for life science space, and that’s just going to continue to put pressure on cap rates, so I guess kind of round up your original question.
Joel Marcus, CEO
So on Cambridge just to get back to one number, I think you could see something between 12% and 15% mark to market there this year.
Operator, Operator
We’ll go next to Smedes Rose with Citi.
Smedes Rose, Analyst
Dean just want to come back to the investment side, can you basically tell us the largest, not by name on who it is but by dollars, the largest public holding that you have of that $173 million. What does the single largest position amount to? And on the private side, about $190 million or so, what would be the concentration in the largest investment there?
Dean Shigenaga, CFO
We don't have that information readily available, but I would estimate that there are about six companies that comprise the majority of that mark to market, Michael.
Smedes Rose, Analyst
For the $140 million of mark to market that’s about six companies you’re saying?
Dean Shigenaga, CFO
Yes, about half a dozen that make up a good majority of that.
Smedes Rose, Analyst
And how widespread is the $190 million of that, like 30 investments or 10 investments?
Dean Shigenaga, CFO
Well, it’s pretty widespread.
Smedes Rose, Analyst
So it’s a lot?
Dean Shigenaga, CFO
Yes.
Smedes Rose, Analyst
It seems that in the first quarter, some companies went public, resulting in your available-for-sale cost downs increasing from $22 million to $34 million, which remained unchanged in the second quarter. The significant sequential increase in unrealized gains was primarily due to the stocks of those public companies rising by 50% to 60%.
Dean Shigenaga, CFO
Yes, the big increase had a lot to do with IPOs in the current quarter.
Smedes Rose, Analyst
But your cost base has stayed at $34 million. So I would have thought you would have had seen more transfer out of the five bucket into the public if they’ve done public in the second quarter?
Dean Shigenaga, CFO
The majority of it relates to two investments that went public during the second quarter that drove the majority of the increase in unrealized gains.
Smedes Rose, Analyst
And then as we think about this disposition of $195 million to $245 million, the projected asset sales have securities effectively versus hard assets versus land because all of them have different sort of embedded costs to Alexandria?
Dean Shigenaga, CFO
Yes, we are not prepared to get into that specific number right now, Michael. It is a component that you will see us reinvest over, call it the next four quarters or so. Just to give you an example, in July alone I think we monetized a little bit of our balance but it's relatively small in scale of the unrealized gains. So we are focused on it, and you will see us get to it over time.
Smedes Rose, Analyst
But most of the stuff is in progress, so it is $200 million to $245 million of other assets, remainder of assets sale?
Dean Shigenaga, CFO
No, we mentioned earlier, Michael, that the more advanced items fall into the category just above that. I'm looking at the page right now. The category pending in targeted asset sales, specifically 225 Binney, falls under P&S as you know. The rest of the transactions in that balance are at various stages and are not yet at the P&S level, but they are actively progressing through the transaction process. We have a number we are working on at much earlier stages, which is $220 at the midpoint. We feel quite confident in our ability to execute here. Additionally, there is strong interest in our core assets and, as Joel mentioned, we have tenant interest in a specific asset. So we are seeing good activity currently.
Operator, Operator
It appears there are no further questions at this time. So I'd turn the call back over to Joel Marcus for any additional or closing remarks.
Joel Marcus, CEO
I just want to thank everybody for joining our second quarter call and we will talk to you on the third quarter. Thanks again very much for your time.
Operator, Operator
That does conclude today's conference. We thank you for your participation.