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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello and welcome to the Alexandria Real Estate Equities Fourth Quarter and Year-End 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Also, please note this event is being recorded.
I now would like to turn the conference over to Paula Schwartz of Investor Relations. Please go ahead, ma'am.
Thank you and good afternoon everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's periodic reports filed with the Securities and Exchange Commission.
I now would like to turn the call over to Joel Marcus. Please go ahead, Joel.
Thank you, Paula, and welcome everybody to our fourth quarter and year-end 2017 call. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, Tom Andrews, and Dan Ryan. So, I started off last call with a Harvard Business Review quote and I'm going to do the same from the January-February 2018 issue about culture; 'Strategy offers the formal logic for a company's goals and orients people around them, but culture expresses the goals through shared values, beliefs and guides activity through shared assumptions and group norms. Culture fosters an organization's capacity to thrive.'
So, to the women and men of the Alexandria family whose idea meritocracy and mutual respect culture coupled with our solemn mission to build the future of life-changing innovation, thank you for an operationally excellent fourth quarter and year-end 2017 and thank you for the significant funds raised, funds contributed and countless hours of service to our philanthropic focus, the communities in which we live and do business, groundbreaking biomedical research and military families.
And also thank you for the treasure trove of sustainability awards highlighted on Page 42 of our supplemental, which are nothing but really kind of astounding Nareit's Most Innovative award, California's Highest Environmental Honor, World's first WELL Certified Laboratory, GRESB's #1 Health & Well-being company in the U.S., and the first REIT to be named Fitwel Champion. So, I congratulate the entire team on those amazing awards and accomplishments.
Alexandria, and Dean will talk more about the details, is positioned well for continued growth. We are projecting 9% growth for 2018 and we clearly have a very clear path, detailed on Investor Day, to potentially double the revenues of the Company over the next five years. The macro fundamentals stay strong, strong demand from highly innovative entities, limited supply, favorable rental rate trends, high occupancy levels, and continued asset valuation strength.
The five fundamental pillars positively impacting life science demand continue to remain positive, strong life science venture capital investment, robust NIH funding, favorable FDA regulatory environment, strong medical research philanthropy support, and high levels, very high, all-time high levels of commercial R&D funding.
For the first time, our revenues exceeded $1 billion for 2017 and our total market cap touched at the end of the year about $18 billion. So, starting with a $19 million [indiscernible] around 24 years ago, that's a wonderful accomplishment. Our total shareholder return exceeded 20% in 2017 and our total return from IPO through the end of the year was almost 1,350%. So, we're very proud of those accomplishments.
Our total asset base in North America approximates 30 million square feet and our high occupancy continues at about 96.8%, more about strong and stable cash flows and the demand for our space in our key markets. We have continued to maintain high operating margins, which are very important, and strong retention rates over the last five years, exceeding 80%.
Let me switch now to really focus on the continuing and consistent strong demand in our key life science cluster markets and highlight a little bit about leasing this year. It was our second highest yearly leasing volume ever, 4.6 million square feet, 39% in San Francisco, 26% in Greater Boston, and 18% in San Diego, and broken down about 55% were re-lease and renewals, about 20% previously vacant space, 20% development delivered space, and 5% redevelopment delivered space. We had 12.7% growth in cash rental rates and we expect to exceed that in the coming year.
Moving to life science industry itself for a moment, Bill Gates at his keynote at the J.P. Morgan Conference talked about research in biotech and pharma and concluded by saying that the industry is the most important factor for the skills, experience and capacity they have necessary to turn discoveries into commercially viable products, and that remains our critical mission.
The biotech index was up about 20-plus-percent in 2017, so another strong year. Venture capital reached a, really set some all-time highs, $20 billion in annual funding, exceeding $15 billion in 2016, which was a nice uptick. The IPO market remained open, 37 deals for about $3.5 billion, and we continue to see that this year will be another strong year for high-quality companies. And already in 2018 we've seen two large merger and acquisition deals announced, Celgene's acquisition of Juno, a tenant of ours in Seattle, and Sanofi's acquisition of Bioverativ, which was a spin-out out of Biogen, another tenant of ours in the Greater Boston area.
The FDA really had a banner year. There were 46 new entities who were approved, and if you added those two additional approvals, they marked the modern day record for the FDA, and of the 46 drugs approved, 43% were ARE tenants. In 2017, the FDA approved a record number of drugs with orphan indications and eliminated the entire backlog of pending orphan drug designation requests. The FDA continues to be a world-leading gate-keeping agency. In 2017, 36 of the 46 new molecular entities were in the U.S. before any other country and 15 or 33% were first-in-class drugs, very important.
Tax reform is I think going to be a significant boon to the industry. Certainly the reduced corporate tax rates for many of the biopharmaceutical companies will be very positive and the repatriation of earnings will also be very, very significant.
So, moving on to additional comments, I'm going to ask Dean to highlight a number of key accomplishments and to give a bit of a roadmap for 2018, then I would come back and do a little bit of a follow-on before we go to Q&A. Dean?
Thanks, Joel. Dean Shigenaga here and good afternoon everyone. The combination of solid execution of our unique business strategy and operational excellence led our highly experienced team to deliver on our expectations for a truly outstanding year of operating and financial performance in 2017. We reported FFO per share of $6.02, up 9.3%; really hit our expectations for strong growth for both the fourth quarter and the year; consensus NAV at the end of 2017 was up over 13%, capturing the significant high quality growth in cash flows; and common stock dividends for 2017 were $3.45, up 7%.
Internal growth was very strong in 2017 and above our 10-year average cash same property NOI growth of 5%, and I'll touch on this and the next few topics in more detail in a moment. External growth, primarily through ground-up development, was well executed by our team. They delivered a number of great collaborative, innovative spaces on time, under budget and at great returns on our total investment. Our strong multiyear growth engine, when combined with a very strong balance sheet, continues to drive strategic per share growth, and I'll also provide very important and brief comments on our strong outlook for 2018.
Touching on key comments on our high-quality, stable and increasing cash flows, as Joel mentioned, our total revenues exceeded $1.1 billion this year, up 22% over 2016. 55% of our annual rental revenue today is generated from tenants that are either investment-grade or have a market capitalization greater than $10 billion. This represents an industry-leading statistic and huge thanks to our science and technology team for their expertise underwriting key industry trends and leading life science and technology entities. Our technology-related tenants for the year, as of year-end represented 11% of our annual rental revenue, 74% of which is generated from either investment-grade or large-cap entities.
Cash NOI was up $90 million in 2017 or 15%, driven really roughly by equal contributions from three key areas of our business, strong cash same property net operating income growth of 6.8%, also significant contribution from our pipeline of development and redevelopment projects which included 1.3 million rentable square feet of new Class A buildings that were completed in 2017, and contributions from recent acquisitions primarily One Kendall Square that we acquired in late 2016. All but one acquisition in 2017 was primarily focused on development and redevelopment value-added opportunities.
EBITDA margins were very strong at 68%. As Joel mentioned, we had our second-highest year of leasing volume at 4.5 million rentable square feet. Rental rate growth was up 12.7% on lease renewals and re-leasing of space.
We continued to deliver solid growth in net effective rents, really highlighting the strength of our real estate and life science industry fundamentals. Importantly, rental rates continue to support a disciplined approach to strategic and selective ground-up development projects, one project at a time.
For NAV models, on Page 1 of our press release we continue to highlight significant contractual near-term growth in annual cash rents of $96 million, of which $78 million will commence through the fourth quarter of 2018. It's really important to recognize $26 million of this will commence in the first quarter, $31 million will commence in the second quarter. That's $57 million just in the first half of 2018. This $96 million in contractual rent growth is related to the development and redevelopment projects that were recently placed in the service and are currently generating GAAP revenue.
Let me briefly comment on an impairment recognized in the fourth quarter. As required under GAAP, we recognized an impairment of $3.8 million as a result of an unrealized loss position for 12 months related to an investment in a biotech company. It's important to also recognize that we remain optimistic that our investment will be fine over time. However, we were required to write down the book value of this investment.
Moving on to our disciplined management of our development pipeline, we are in a unique position today with very well-located land parcels in key centers of innovation that provides us with the option to meet the demand from highly innovative entities. We will carefully review each incremental opportunity before deciding to proceed.
Over the past 10 years, we have proven our disciplined approach and ability to generate strong returns from our development pipeline. Let me just highlight a few of the great statistics over the last decade. 5.5 million rentable square feet of new Class A properties with significant pre-leasing prior to the commencement of vertical construction, with one exception this quarter that will be meaningfully leased shortly after commencement of construction.
Investment-grade or large-cap tenants supported 81% of the annual rental revenue generated from ground-up development projects over the last decade. Our highly experienced team has on average beat our target delivery dates, completed projects under budget, and exceeded our original return expectations. In 2017 we completed six development projects on time, aggregating 1.3 million rentable square feet, at initial cash yields of 7.1%, including 645,000 rentable square feet that were completed in mid 4Q 2017.
These highly innovative and collaborative spaces were built for some of the leading life science and technology entities, including Bristol-Myers, Facebook, Stripe, Vertex Pharmaceuticals, Pinterest, Illumina, Juno Therapeutics which Celgene is acquiring, and several very high quality venture-backed biotech entities. We are proud to be an important partner to some of the world's most innovative entities and through our unique business helping them improve the quality of life through the discovery of new therapies and technologies.
Today we have 2.3 million rentable square feet under construction, including one project undergoing pre-construction, that are on average highly leased at 80% and expected to generate very strong initial cash yields averaging 6.9% on our total investment.
Our balance sheet today is in excellent position of strength and flexibility. We exceeded our balance sheet leverage goals this year with net debt-to-adjusted EBITDA of 5.5x with a very strong commitment for continued improvement year-to-year. Our fixed-charge coverage ratio was greater than 4x, we had $2 billion of liquidity at the end of the year, and we continued our disciplined execution of long-term capital to fund strategic growth.
We executed an opportunistic second unsecured bond offering in November of 2017 and strategically repaid two construction loans and reduced unhedged variable rate debt to 1%. Pricing of long-term 10-year fixed-rate bonds for Alexandria remains very attractive at approximately 4% today. To put this into perspective, a 4% 10-year bond deal is about 35 basis points lower than the 10-year bond we issued a little over two years ago in November of 2015. This reflects the significant improvement in spread over the 10-year treasury for Alexandria, driven by the tremendous improvement in our credit profile over the last two years. Importantly, we are investing capital in the new Class A properties at very strong initial cash yields of about 7%.
We have completed a significant component of our capital needs for 2018 with the execution in early January of the issuance of common stock under forward sale equity agreements that will provide net proceeds of $817 million. Our goal with this offering was to continue our prudent approach toward management of our balance sheet while our team executes on a very well defined set of growth opportunities for 2018 and beyond. We expect to settle these forward sale agreements as we match our funding needs throughout the year.
As of the end of 2017, our balance sheet is the strongest it ever has been and will continue to improve year to year. A few additional key highlights include, we have no debt maturities in 2018, we have two loans maturing in 2019, and we expect to repay the outstanding $200 million 2019 unsecured term loan later in 2018, and we also look for an opportunity to repay a portion of our $325 million construction loan with an initial maturity in 2019, but it's important to note that we have extension options to extend the maturity to 2021.
Lastly, I just want to make a few key highlights on our strong outlook for 2018. As usual, our detailed underlying guidance assumptions for 2018 are included on Page 7 of our earnings release and supplemental package. We are off to a great start this year and our team continues to focus on execution of another strong year, with projected FFO per share growth of 8.8%. We are uniquely positioned in the real estate industry with continued high quality growth and cash flows from a high-quality tenant roster and strong growth from our unique internal and external growth platform.
In closing, in my closing comments before I turn it back to Joel, we are pleased with our strong results for 2017 and strong outlook for 2018 and our team continues to execute on a pipeline of new Class A properties. We have solid fundamentals and a strong balance sheet to support strategic goals and are led by an excellent team and senior leaders with key industry relationships that provide us access to some of the most important real estate and leasing transactions in the country. Joel?
Let me make a few more comments and I'll turn it over to the operator to go to Q&A. So, on November 29 at Investor Day, I told analysts we would be announcing new officer roles during the first quarter of 2018. I am sometimes told that area of the deep bench. In reality, we have no bench. Every single member of our executive team, all nine of us, are first team 24/7 players. And since we are in the Super Bowl week, an analogy might be fitting.
The New England Patriots are the best franchise in football over the last decade, and even longer. Their system is the best and has now the talented individuals into a real powerhouse team where the franchise, the team and the individuals are all about greatness of the organization.
With respect to Alexandria, and as Jim Collins, renowned author and business strategist, was quoted on the cover of our annual report, Alexandria has achieved the three outputs that define a great company, superior results, distinctive impact, lasting endurance.
Our executive management team will stay on the field of play and all of us will remain starters 24/7. We'll change positions in the second quarter, but all the players will remain starters and will continue to execute our five-year strategic growth plan with operational excellence in our system that is in idea meritocracy and a cornerstone is respect for each and every member of our 300-person strong first team.
We'll continue to build the future of life-changing innovation through our four pillars, and let me end with before I go to Q&A with a quote I actually sent to our team about a year ago. If you develop a pure and sincere motivation and if you are motivated by a wish to help on the basis of kindness, compassion and respect, then you can carry any kind of work in any field and function more effectively, written by the Dalai Lama himself.
So, with that, we'll go to Q&A.
[Operator Instructions] The first question comes from Jamie Feldman with Bank of America Merrill Lynch.
For Joel, I guess I just want to go back to the comments you just made. So you said, switching positions in the second quarter. Just thoughts on timing and what the Street should be expecting here?
Announcement in the first quarter and position shifting in the second quarter.
Okay, all right, thank you. That's helpful. Can you speak more broadly about we've seen some M&A news in this space, specifically Juno and Celgene, I know Dean mentioned it on the call, can you just talk through the implications for the leases you have in your portfolio with any of the deals that have been announced lately? And then I guess also bigger picture, if you go back through cycles, M&A cycles in life science, what have been the implications for demand and maybe vacancy and subleasing in your portfolio?
Sure. So, first things first, on Juno, as you know we built their corporate headquarters. They will be acquired by Celgene. Celgene actually already has an important presence in Seattle. This is really a pretty critical bolt-on to the business of Celgene. They already had a big investment in Juno, so they weren't strangers al all. I think Celgene had invested over $1 billion in the company previously.
And so this really opens up Celgene, which has a magnificent cancer franchise, to the area of immuno-oncology which is in a sense one of the pieces of the future of human healthcare. So, they will continue to maintain the Juno presence, probably strengthen it, and I think you'll see that franchise continue to grow pretty rapidly.
On the other side of the fence, I'll have Tom speak to, we had a company that spun out of Biogen, Bioverativ, which is a tenant of ours being acquired here over the last announcement over the last couple of weeks. And so, Tom, maybe speak to that.
Sure. So, Bioverativ spun out of Biogen I think about two or three years ago, and we put them in above 120,000 square feet of space in Waltham, Massachusetts just outside of Boston, and we anticipate based on what we know about the acquisition that Bioverativ will remain in place there as a Sanofi unit in that location. It happens there's a couple of Sanofi buildings immediately adjacent to the building that we own that Bioverativ is in.
So we don't see any negative implications. Historically, M&A has really had really two flavors if you go back over the last decade or so. Where you see a strategic acquisition of a real franchise and a talent pool, the acquiring company tends to use that as a base, and most of those times those companies remain in the hubs of where they are located because the bigger company wants access to talent, hiring and retention.
There are occasions where companies are bought really for a product opportunity or a unique one-off technology, and sometimes those are folded in, but I think historically we haven't had any significant negative implications on rentals from M&A.
It's Peter Moglia. Just one anecdote would be Eli Lilly and Company. They entered San Diego, I can't remember the name of the company they had bought, but at the time they went into one of our buildings and they were in about 20,000 square feet. And they eventually grew to where they are today in San Diego at 300,000-plus square feet.
So, those are stories that we've seen before. We've also seen ImClone come into or be purchased by Eli Lilly in New York and more than double their anticipated size once they stabilize their occupancy at Alexandria Center for Life Science. So, there's a few other examples but probably we have to take those off-line.
The next question comes from Manny Korchman with Citi.
Dean, if we go back to the $3.8 billion charge you mentioned in your comments that you have confidence that over time everything will work out fine, just wondering what gives you that confidence if you can give us some more details on the securities [indiscernible].
So, we won't disclose what security it is, but it is a publicly traded company, and as Dean said, the rule is writing down, taking an impairment when you've got a duration of decline in value of about 12 months or so. We know the company very intimately, we know the founders, we know the pipeline, and I think we have I would say a super high level of confidence that the write-down will be recovered and probably more than that. That's all I really want to say at this point.
And Joel, maybe in a similar vein, if you can give us some more details on the Alexandria's chief capital platform and how much capital you are actually going to put up into that venture?
We announced that we have essentially collaborated with one other large venture operation together with several strategic pharma partners and will look to make strategic seed stage investments. There is no limit. It really is a balance sheet limit. Each of the other companies are probably 5 or 10-plus-times our size. So, there is no limit. So we'll do what we think is useful and appropriate and strategic case-by-case.
The next question comes from Nick Yulico with UBS.
Just had a question on your same-store NOI guidance, specifically difference between cash and GAAP, last year you had cash NOI growth, same-store NOI growth was nearly 7%, your GAAP was 3%, just about a 400 basis point differential this year. Your cash is 10% at the midpoint and GAAP is 3.5%. So that's over 600 basis point differential. So, I'm just wondering what's driving that widening spread between cash and GAAP and whether it's solely the benefit from developments delivered in 2016 now entering the same store pool where free rent is burning off.
Nick, it's Dean Shigenaga here. I'd say we probably commented historically that GAAP typically has averaged about 2% and cash has averaged about 5% over the last decade. So you've always had a differential in the performance, and I think our same property results are unique in the sense that occupancy never really has a meaningful impact.
Specifically to 2018, when we have guided to a midpoint of 10% cash same-property NOI growth, you do have the benefit as we've talked on, on previous calls, the burn off of some rent concessions from the recently delivered developments. It's important also to remember though, if we back those out, you still end up at a very strong cash same-property NOI run rate of roughly 5%.
I think going forward Alexandria along with a number of other REITs will continue to look at how to improve the same-property disclosures to facilitate a better understanding, but you still have really strong core growth after you back out the free rent concessions.
Okay, that's helpful. And then Joel, just going back to your comments on the tax plan benefiting this sector and your tenants, can you just elaborate a little bit on that, how you think this may play out?
Obviously reduced. I mean, if you take the past week [indiscernible] had a big pop and it was indicated that their internal plan provided for a 20% tax rate, and it turned out, they after-tax reform, it looked like it was going to be closer to 9%. So, the stock took a big jump. I mean that's on a simple immediate impact.
Another one is, the industry probably has somewhere between $100 billion and $200 billion of cash overseas, and as that is repatriated, and interestingly enough, Celgene only had about $9 billion overseas. Amgen and Gilead have the most. You could imagine more M&A or big strategic relationships that would kind of fuel additional investment into R&D.
The next question comes from Sheila McGrath of Evercore.
Joel, it looks like you made a leasing progress at 399 Binney and 681 Gateway. I just wondered if you could give us an update on the leases, types of tenants and how the rental rates were versus your expectations.
So I'll ask Tom to do 399 Binney.
Yes, we signed three leases with tenants at 399 Binney. They are all well-capitalized venture-financed companies with strong pedigree and management teams. I believe they were all minimum 8 year to 10 year leases and the rents were right in line with our expectations for the property. The remainder of the space that we have to lease a little bit more challenging in terms of window line but we have some interesting activity and we'll see if we can get that leased up. The building is just coming out of the ground fast now and we'll be ready to deliver those almost three leases late this year.
And current rental rates in [indiscernible]?
So, very high 70s to low 80s per square foot for [indiscernible] in good locations, good buildings, low 80s per square foot.
Let me ask Steve to speak to 681 Gateway.
We are really pleased there. That lease actually doesn't roll until the latter part of this year, September of 2018. And because we've been 100% leased for almost two or three years now, we have pent-up demand in the existing portfolio. So without really any marketing campaign, we do have competition for this space. We're advancing the lease document with one tenant and we are essentially oversubscribed for the balance of the space there. So, very healthy dynamic continues. More broadly tracking, 2.5 million square feet, demand slightly up, this time last year was about 2.4 million square feet. So, just very pleased with the progress of 681 Gateway.
Rental rates in the market?
Rental rates in the market are $60 net and room to continue to climb there as well.
Okay, great. And then, Joel, I think in the prepared remarks you've mentioned that doubling the revenues in the next five years. I just wanted to reconfirm that that's what you said and that also is that from just the existing pipeline in the supplemental or do you have some projects that are kind of in the works that we don't necessarily know about yet?
So, on Investor Day, Sheila, I think we took a kind of a trip through each of the regions and gave a vision of if we were able to build out what we own, which really are pretty prime location parcels that we could in fact come close to doubling the revenues of the Company, and that's kind of the broad game-plan of the Company. It's not a guidance number at the moment but it is a path to get there and we feel pretty comfortable with that. And I think we mentioned that San Francisco had the biggest growth trajectory based on what we own. So, that is just what we own on balance sheet today, nothing else.
Okay, great. Thank you.
The next question comes from Jed Reagan with Green Street Advisors.
Maybe a question for Dean, can you just give a little bit more color on potential timing for when you guys expect to draw-down the new forward equity raise? I mean should we think of that as more a back half of the year type of event and then how you'll balance that against further issuance of the ATM?
It's Dean here. I think in 2018, maybe one way of thinking of it is, you look back to 2017, I think you would have found that we pretty much brought in our equity almost evenly through the year except the fourth quarter had tad a bit more, and that was primarily driven by uses through the year. We had a higher construction amount in the fourth quarter of 2017. We also had a handful of acquisitions that settled down in that period as well.
So I think when you take all that into consideration, roughly speaking the equity in 2017 was kind of taken down evenly, and that included occasional uses of the ATM program through the year to round out our overall capital needs.
I would add, in 2018, consistent with what we did in 2017, you will see us search for opportunities to continue to dispose off what I would call some non-core assets, and as we make our way through the first couple of quarters of the year, we hope to give you some additional color around dispositions.
Okay, that's helpful. I guess separately, job growth has been slowing in San Francisco recently in a number of industries. Are you feeling that on the ground for your tenant base in that market? And maybe specifically for life sciences, are you seeing any signs of job growth or demand growth slowing?
It's Steve Richardson. No, we are not experiencing that at all. Conversely, just in the last 60 days, we've had three Bay Area IPOs raising over $500 million, Denali, Menlo Therapeutics and ARMO. So, we are seeing first-hand continued thriving market. I think it was very upbeat JP Morgan conference that was held in San Francisco at the beginning of January. And again, we are 100% leased and working to solve a high-class problem to continue to provide Class A facilities for our client tenants.
That's helpful I guess. Just maybe just last one if I may, Joel, you mentioned some of the thoughts related to tax reform. One thing you didn't touch on with respect to this state and local tax deductions, I mean that all represent less of a tax cut for folks in high tax states like California, New York, Massachusetts, and maybe a benefit for kind of low tax states like Washington. Are you concerned that takes the wind out of the sales? I mean many of these cluster markets like the Bay Area or Cambridge, does it make you any more constructive on say a Seattle or potentially even an Austin, Texas down the line?
I think the answer is, Silicon Valley is now moving to Texas or Nevada or Florida, and the state does, speaking about California, it does have I think need to get some of its financial act together but I think there are some people who have achieved fortunes who are moving to non-tax states. But the average person that's working and living, I think being in those markets and in those environments, I know when it was 2 degrees in New York, I think it was 89 here in Los Angeles, it's hard to imagine there would be huge numbers flocking to a lot of those states.
So, the honest truth is, I think people in very high tax brackets are very sensitive to that, but the average person or the professional person who make up the bulk of employees that work with our tenants aren't doing that. I do think though that places like Seattle and certainly Austin do represent very nice opportunities for the future. Certainly Austin may be a cluster over the next decade, partially because Texas is a low tax state and partially that got a very positive business climate.
Our original founding investor, Jacobs Engineering, actually amazingly we had throw-away space and we started this company in their basement, they just moved recently to Texas to take advantage of a no-tax environment, because they just did not want to pay the high taxes. But that's headquarters, their operations are worldwide, and so the bulk of their people stayed where they are.
Okay, appreciate those thoughts. Thank you.
The next question comes from Richard Anderson with .
I apologize, I got knocked off the call. So if I'm repeating anything, just tell me. First one, Joel, do you have any concern at all or interest I guess, I guess we all have some interest about where Amazon's second headquarters end up and you guys now have 11% of your business in the tech business, just curious what your thought is on that or if it's not really occupying much of your mind at this point?
We are not involved in that, but I would say, if I had to guess, I guess two places, one would be just outside D.C. which is rumoured to be a logical place because of the desire to maybe be more active in policy, or Texas which is a thriving no-tax state. So, I don't know, I don't have any inside information. I have talked to a number of groups in both the South and the Midwest and a number of people have actually frankly said, we're kind of bidding on it or trying to qualify, but the reality is we hope we don't get it because if it comes to our neighborhood, it's going to change our culture dramatically, which I thought was pretty fascinating from the Midwest and the South. So, that's all I know, which isn't much.
Okay. A question maybe for Dean, again, stop me if it's been asked, but on the 10% same-store NOI growth forecasted for 2018, could you give me the roadmap just as a reminder? I know you have really sort of 9% mark-to-market, escalator is around 3% for a handful from older portfolio, occupancy up-ticking on an average, but how does that get you to 10%? Is there a free rent burn component, are there tenant recoveries that are embedded in that, how do we get all the way up to 10%, if you could help us with that?
Sure. I'll briefly cover it again, Rich. Bottom line, our 10 year average has been 5%. If you were to back out recently delivered development/redevelopment projects that have free rent burning off, you'd get into that 5% to 6% range. If you recall, I think at Investor Day I highlighted that our average occupancy through the year, it might move around quarter to quarter, but when you compare 2018 quarter to quarter versus 2017, we're going to pick up about 1% benefit to the same property results in 2018. So, you still have very strong core, what I'll call core same property performance, and you really boost that to the 10% range in our guidance through free rent burn-off.
Okay [indiscernible]. And then lastly, one very minor change from your guidance issued at Investor Day was now you have a debt-to-EBITDA below 5.5x. Is that just a reflection of taking down some of the forward equity or how would you characterize that minor change?
I'd say, importantly we ended up ahead of our expectations. It's funny that we do pick up on the fact that it's 5.5 and it could have been 5.6 and that would have been outstanding as well. I would say, generally speaking, we've been moving leverage in the direction that it's headed and when you round out at a 10th of a turn better, it's just the way the things land.
Okay, so it's just rounding error type stuff?
Yes, and I think importantly, our objective going forward, Rich, is to continue to improve that. We got rid of the upper end of the range that was up to maybe 5.8 at Investor Day because it just didn't make any sense. We are not moving leverage up. It's only going down slightly from this point and that's why we cited, from this point forward it will be below 5.5.
The next question comes from Dave Rodgers with Baird.
Maybe the first question on acquisitions or maybe a two-part question on acquisitions, first for Dean and then for Joel. Dean, can you tell us that the $720 million midpoint for acquisition, kind of what the plan is for cash flowing versus non-cash flowing or maybe average cap rate that you kind of anticipate as the year goes on? And second part for Joel, Joel, maybe talk about the competitive landscape for acquisitions right now? You guys have obviously closed some fairly high cap rate acquisitions just given where we are in the cycle and even this quarter. Looks like you're set to close on Summers Ridge [indiscernible] on a cash basis. So maybe just a little color on kind of what you're seeing, are you one of the few out there that's really still active in the market?
So, Dave, it's Dean here. Let me just answer the high level question about expectations for 2018 acquisitions. There is still a pretty significant value-add focus on that pipeline. As a result, day one returns or yields are roughly slightly positive to bottom line FFO, and then at a stabilized basis upon completion of development or redevelopment activities you are going to hit right down the middle of our fairway long term, it's still about 7% on average cash yields.
It's Peter Moglia. For what we have got in the pipeline, I would say it's definitely weighted to the development/redevelopment side but probably more balanced than we've been historically the last few years, where there are some stabilized opportunities that we are trying to get into. There is a number of people out there that want to joint venture with us that have good projects that we can get into and that would deliver fairly quickly but would be at yields that are typical of our own development. So, those are the types of things we're seeing right now.
On the competitive side, I don't know if Joel or any of the market heads had any commentary around that?
I'm not sure when you say 'competitive side', meaning…
I guess what are you seeing out in the market as you are bidding for these transactions? I mean, are you finding more people, more companies bidding on lab assets, is that a cluttered space or are you kind of finding yourselves somewhat alone and continuing to be very active in that space?
This is Peter again. So, on the redevelopment and development things that we are buying, I mean they are not necessarily exclusively laboratory. I mean they could be office product as well. So, we do see a lot more competition when we're looking at those types of opportunities. Obviously in the lab realm like Summers Ridge that we're doing in San Diego, there was competition there as well because it was a stabilized property and there is obviously more comfort for a lot of parts that would like to get into lab space to get into something that is cash line for a long period of time.
The next question comes from Michael Carroll with RBC Capital Markets.
[Indiscernible] bit off of Dave's questions, Peter, can you talk a little bit about I guess your acquisition stance right now? It seems like the Company has been a little bit more aggressive recently. Is that mainly due to a lot of large development projects being completed and your cost of capital being improved or are you seeing better opportunities out there?
Obviously our cost of capital has allowed us the flexibility to go after things that may have had whole periods that were longer than we are comfortable with before because we have got the lower costs enable to carry things longer. But overall, I don't really think things have really changed much. I mean we just have happened to get serendipity with a number of things that have fit our profile that have come along in the markets that we want to invest in. So, I don't know if it's really changed. It's just been by chance.
I think I mean, if you go back a year in time when we bought One Kendall Square, you could never imagine that it would come to market. I mean, a lot of these things, as Peter just said, are serendipitous. They come when a particular seller or money partner decides to part with an asset, they believe it is a good time and we try to respond. We look at everything and we certainly don't go after everything, but we try to be very disciplined in how we think about what we want to do and how we want to do it.
Okay, thanks. And then just a quick follow up, can you talk a little bit about the stabilized assets that you are interested in? Do they have to have some type of unique components, some location, or is that just a good opportunity that pops up that you are willing to pursue?
This is Peter again. For stabilized assets, if we were going to pay a low cap rate for something, it would definitely have to be just in a Class AAA location and preferably have some mark-to-market opportunities in the future. But overall we tend to buy things that could have very little cash flow upfront but we can get to a 6%, 7%, 8% through leasing or mark-to-market opportunities within two to three years.
And I would say on acquisitions, we are not interested in paying somebody else for their value, Peter always says. We'd like to help create the value. So, that kind of guides our acquisition philosophy.
The next question comes from Karin Ford with MUFJ Securities.
A recent article said that the city of New York is soliciting proposals for a new life science campus and offering three city-owned sites. One of the sites I think is near the Alexandria Center and another is in Queens, close to Cornell's Tech Campus on Roosevelt Island and may have more expansion potential. Would Alexandria only be interested in expanding your existing site or do you think there is enough positive demand to drive a second cluster in New York?
[Red] [ph] RFP is pretty unusual because they don't want real estate developers bidding on it. They actually want users to come in and try to occupy spaces and then bring development expertise with them. So, I won't comment beyond that but that's the nature of the RFP.
Okay. And second question, I saw that a large healthcare technology company, Royal Philips, had signed a large lease for about 60% of the space in the first building under construction at Cambridge Crossing. Do you have a sense for what the rent comparison is there versus Kendall Square and do you think it will provide some leasing momentum for that location?
Remember that that's office, but I'll have Tom comment.
I think the rent there turned out to be pretty strong, not too much below Kendall Square level rents, maybe 5% to 10% below. And the balance of that building is available for lease. We're not certain if the developers are offering the balance of the building as potential lab space. I think they are in the middle of making that decision as the building is early in construction. But as Joel mentioned, the Philips lease is office space and a building that had been programmed for both lab and office.
Great. Thanks for the color.
We'll take our last question today from Tom Catherwood of BTIG.
Just one cleanup question, maybe for Steve. I know it's a small project but on 1655 and 1715 Third Street in San Francisco, the January 3 prospectus had listed this as under-construction with a closing I think it was January 5th for 39 million. The release yesterday indicated that it's more likely a February closing and a near-term start and only $31 million initial cost. What are the kind of moving parts and the pieces with this project that have kind of extended it out?
It's Steve. The horizontal construction – this is the GSW/Uber/Alexandria joint venture. We are a 10% partner there. What really needed to be completed was the horizontal construction or enable the vertical construction to start for the office tower. So, there was just a little bit of movement there over a couple of week period of time. But all is on track. You can see both the arena and the building starting to take shape on the site. So it's pretty exciting for Mission Bay.
Got it. Thanks guys.
As there are no more questions, I would like to return the call to Mr. Marcus for any closing comments.
Thank you very much everybody. Have a rest of a good day and we'll talk to you on first quarter. Thank you again.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.