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

Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Thank you, Paula, and welcome everybody to our second quarter call. And with me today are Steve Richardson, Peter Moglia, Dean Shigenaga, Dan Ryan, Tom Andrews, John Cunningham. Once again, I have the distinct pleasure and honor to thank our first-in-class team for delivering a truly outstanding second quarter with superb operational excellence and really, really outstanding. Life science tenants in each and every one of our clusters and submarkets recognize the Alexandria brand for highest quality, highest reliability, best-in-class service and best collaborative partnering. These qualities substantially enhance our pricing power in each of our markets and the statistics bear that out. We're also in the first year 2018 of the 5-year growth plan we announced at Investor Day 2017 to double the revenues of the company. As Steve will talk about, we've had -- we have and continue to expect to have strong per share FFO performance during 2018 and have great visibility for growth into 2019. As all of you know, our urban clustering strategy is based on the belief that clustering similar businesses together boost productivity, operating efficiency, and innovation, a concept promoted by Harvard economist, Michael Porter. About a year after we became public and read his -- one of his many works, but the one on competition and a particular chapter entitled, Clusters and the New Economics of Competition, he noted successful businesses are typically found within close proximity of one another or in clusters despite technological advances allowing companies to operate really from anywhere. And that clustering approach, which we adopted has been a smart strategy that's paid off in great locations in clusters like Cambridge, San Diego, San Francisco, Seattle, New York City and so forth. I think underpinning the growth, as I’ve said a number of times is we're still in…

Thank you, Joel. I'll be covering the markets this afternoon. But before I do that, I'd like to build on Joel's comments and underscore the profound shift in the sciences that is driving the success of Alexandria's highly differentiated strategy. We had the pleasure of listening to George Demetri, a world-renowned Doctor and Director for one of the key oncology centers at the Dana-Farber in Cambridge, expressing his strong enthusiasm for the shift in a compelling interview with one of his patients who has survived cancer for several years due to these new therapies. These breakthroughs underpin our stellar results and a defining strategy. Several highlights include: We have an industry-leading investment grade large market cap tenant quality comprising 55% of ARR, and 83% of top 20 tenant's ARR is from this class of investment grade or large market cap companies. 78% of our ARR is from Class A facilities in key gateway markets on the East and West Coast with AAA locations adjacent to the country's leading research universities and institutions. The product type we work with day-in and day-out is mission-critical. The tenants absolutely demand sophistication and deep expertise in design, construction, leasing, and operations and a long-term partnership approach. Our science and technology teams' unique expertise underwriting cutting edge companies provides unmatched insight into the life science industry. And finally, as Peter will touch on later in the call, the clearly visible pipeline driving growth through 2018 and 2019 totaling 2.6 million square feet is 84% leased at great yields generating significant NAV. Let's take a look at the market. We're really seeing robust and high-quality demand evident across all of our core clusters. As you can see from the supplemental, 65% of leasing this quarter is early renewals and 58% year-to-date are early renewals, clearly indicating…

Thanks, Steve. Those are outstanding fundamentals, and the reason probably driving what I'm going to say right now as I update everybody on our near-term pipeline. After that I'm going to touch on cap rates, and then I'm going to address CapEx since it's become a top of my topic since the Green Street July 19 report on this subject. With the cost to complete of $868 million should deliver another 2.6 million square feet of Class A facilities in AAA locations of gateway markets, we are well-positioned to continue to driving significant NAV growth well into 2019. The projects that we'll deliver through the balance of '18 and '19 are a combined 84% leased, giving investors clear visibility of the value creation ahead. In the second half of '18, we're going to deliver a 0.5 million square feet, including 399 Binney Street in Cambridge, which is 75% leased with all but the retail space under negotiation. This wonderful addition to our One Kendall Square campus is expected to stabilize at a 6.7% cash yield in a market that is at least 4% cap rate. 9625 Towne Centre Drive and University Town Center submarket of San Diego will be delivered to investment-grade tenant Takeda in the fourth quarter at a 7% stabilized cash yield, and our 5 Laboratory Drive project in the Research Triangle Park is quickly becoming a focal point of the AgTech community with 38% of the project leased and serious prospects for another 30% of that space. Yields on this project are expected to be in the high 7s. In 2019, we'll be delivering over 2.1 million square feet, including the first phase of our Alexandria Park redevelopment in Palo Alto, which has already been fully leased to a tenant that was subsequently purchased by a $27…

All right. Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I want to briefly cover first, our inaugural Corporate Responsibility Report, for the third time NAREIT Gold Award for Communications & Reporting Excellence, second quarter results and significant revenue and cash NOI growth, our continued strong internal growth, provide a brief overview of our highly leased value-creation pipeline, cover our balance sheet and improving credit metrics, and I'll close out with comments on our updated guidance, importantly on our $0.03 increase in the midpoint of our FFO per share growth. Corporate responsibility, just wanted to thank Jennifer Banks, our co-CEO and General Counsel, Vince Ciruzzi, our Chief Development Officer, Ari Frankel, AVP of Sustainability & High Performance buildings and his team, and Katie O'Brien our Executive Director of Corporate Communications for their excellent work on our inaugural Corporate Responsibility Report that we issued in June. This report captures our efforts focused on important environmental, social and governance matters, and our goal of making a positive and meaningful impact on the health, safety and wellbeing of our tenants, stockholders, employees and the communities in which we live and work. This report also includes our 2025 sustainability goals for ground up development, environmental impact, reduction of the energy, carbon, water and waste and healthy building certifications. We are again very honored to have been selected for the third time as NAREIT's Gold Award winner as the #1 in the large cap category by an independent panel of judges for Communications & Reporting Excellence to the investment community. So a huge congrats to our entire team. Thank you, guys. We reported very strong second quarter results that highlight excellent and efficient execution by our team on our strategic and operational goals. Total revenues for the quarter were $325 million, up 19% over the…

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

[Operator Instructions] And your first question will be from Manny Korchman of Citi. Please go ahead.

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

Well, Manny, thanks for asking the question. Well, first of all, a cluster, if you look at the 2 leading established clusters both kind of the Greater Boston cluster and the San Francisco Bay cluster, those really evolved in the late '70s and early '80s and took literally a generation to really grow and become what they are today. And so New York is really in the first decade of a 25-year process. So what you may see in other clusters, you won't necessarily see today in New York and Manhattan just given its limited geography and the density of buildings and people there is going to evolve somewhat differently, but we do believe and we've said this for a long time, the East Side Medical Corridor is really where people want to be with, relatively if there is such a thing, easy access or at least fairly good access to the institutions and to the ecosystem. So that's kind of how we think about the shape of the Manhattan market. And over time, I think, you will see it evolve in ways that even today we can't actually necessarily predict. But our focus has been the East Side corridor, and this is a, in my view, a bull's-eye and a home run in that sweet spot.

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

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

Thanks.

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

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

Manny, I think, that question may have come -- sorry, Jamie, that question may have come up last quarter or the quarter before. And I think my reference was that just look back historically where we've been, every year it does vary a little bit. I think over the last 3, 4, 5 years, its' probably been in the $10 million to $20 million range. Currently, it's on a path to probably get to the upper end of that. And I would say that much of our activity is really event-driven. We do from time-to-time sell some of the public securities as a result of a company reaching its IPO or being acquired by a public company. But as an example in the second quarter, this gain was really event-driven. It was related to an acquisition of a biotech company, and that resulted in the majority of that gain that was recognized this quarter. So leading into the quarter, we had no idea that, that particular transaction would have occurred. And so I think that's the most important thing to keep in mind. We don't necessarily control the gains that are being realized. They do occur because of great events that are occurring in the marketplace.

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

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

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

Well, I think again it depends on the market, but we've done some of that all along in a number of markets, and we still have obviously in other markets or even in some of those same markets, a robust development pipeline. So I think you'll see some of both. This was an unusual situation. I'm sure we could -- one knew that Pfizer was looking over time to do something. But as Dean said early on, when things come to the market, you react to them. You don't necessarily know a year or 2 out or even sometimes quarters out exactly what's going on. But I think you will see us to do a combination of those two. That's been our bread-and-butter.

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

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

Yes. And I think our number 1 tenant Illumina had a good day today. I think they are up about 10% or so, that's very good. So our underwriting is very thorough, very in-depth ongoing and at the moment, as Dean said, I think we feel very comfortable with our tenants. And very frankly, we've avoided, I can think of one case in the Bay area, in fact, I think I was interviewed on this at CNBC Power Lunch a couple of months ago, we decided not to take on the Theranos building. It went for sale up in the Stanford Research Park because of the belief that the business was going to fail, and there would be repercussions from that both financially and reputationally. So we thought it was good real estate, but it was something we just didn't feel appropriate in pursuing. So we're pretty careful about what we do.

Okay. Thank you.

Thank you, Jim.

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

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

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

Yes. As far as the additional density, the nice thing about the asset is that we bordered at 9.6 FAR by rate, it's currently at 15 FAR. So there is an additional 230,000 square feet of additional density available. And then given the additional changes at the -- based on the Midtowny's rezoning, it could go up to about 21 FAR, 21.4. We have not really considered and utilizing that level of FAR for this site, but are confident that we'll keep our options open going forward in the future.

Hey Sheila, it's Peter Moglia. I guess, just I confirm the cap rate is 6, 7. So I think -- and I think Joel touched on it, I think one of the key things to this is the $580-per-square-foot value. If you sit down and break the numbers, and you take, okay, you're getting a big leaseback from Pfizer for 6 years, if you just value that leaseback and subtracted it from what we paid, you're essentially getting it for the land value. And I think -- so we're paying for the land value, but we're getting a building that we're going to able to leverage off of. So in 6 to 7 years when we start planning for the redevelopment, we're really going to have a great basis from which to price the next-generation of Alexandria in New York life science real estate.

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

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

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

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

A partial interest disposition.

So we're working through the details of that, and we'll provide more color over the next -- maybe by the next call, we'll give a little more detail around our plans there.

Okay, great. Thank you.

Thanks, Sheila.

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

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

So Tom, it's Dean here. It depends on the transaction, an extension of the lease will usually trigger 3 straight lining GAAP revenue. The actual commencement of the cash rents, which in this environment is generally upward, will depend on the negotiation, probably more frequently that occurs at the initial expiration date and then steps as opposed to bringing that all the way forward. And I think the other thing to think about is part of the early renewals were in one case, in Cambridge as an example, was connected to an expansion. So you have an early renewal and expansion all combined together. And the expansion component would commence upon and delivery of the expansion space. So hopefully that gives you a sense for what to expect.

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

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

Correct. And then to remind, some of these early renewals is also One Kendall Square. I shouldn't say early, some of it's releasing. So one of the expirations was, I believe, 2023 expiration related to re-tenanting with the new tenant, which allows us to capture the cash rents much sooner.

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

I think we don't want to get into, because there are some assemblage and some other key strategy. So I'd say, Tom, kind of hold your question for a couple of quarters, and we'll lay that out.

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

Right. So we have signed a letter of intent on May 31 with the city. We're working -- John and the team are working on the ground lease negotiations. We expect to have a building that will be enhanced in size from what we believe, but I would say stay tuned, the announcement will be forthcoming fairly shortly.

Got it. Thanks, Joel.

Thank you.

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

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

I'd say, broadly, the ATM usage this quarter, in the second quarter was driven by acquisitions broadly, Rich. And when we see the deal flow, that was under contract, we did go forward into the ATM program. The timing may not be matched perfectly in all circumstances, but I think at the price point that we did raised the capital, it was fairly attractive to do so at the time we did.

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

Yes, I don't want to broadcast their pipeline of leasing. But I would say that Lilly had certainly a positive quarter. Celgene's kind of on the turnaround doing better, it had -- stock had lagged for a while; bluebird is still in a very strong position, but doing the same thing. So I would say, in general, almost all of these have, I think strengths of businesses that -- they have been slow, I mean, it's hard to say on any given quarter, but I think in general, there is positive absorption from some of these, not necessarily all at this point, but some of these tenants for sure.

And when you look at them as also competitors like MIT, is there any -- or I should say -- I shouldn't say like them, but MIT is a competitor, do others kind of fit that mold too at all?Or they're generally lassies?

Well, I think because MIT has a gigantic endowment and they have a pretty huge real estate strategy, they're pretty unique in that regard.

Okay. And then lastly on the Pfizer deal, $580 a square foot going in. I hear you on getting a lot of NOI back over the next couple of years, and may be seeing that land value as a basis. But is this -- when you think about redevelopment, is it too soon to talk about what that could be in terms of a per pound type of investment? Or should we just be thinking about this as an acquisition in and of itself and we'll worry about that 7 years from now?

Yes Tom, it's Peter Moglia. I'd say it's the latter. We're going to collect rent for 6 years, and we'll see where it goes from there. But I think of it this way, one of the most efficient ways for us to provide space to the market is through redevelopment of an existing building that we can get at below replacement costs, and we are very below replacement cost. So we'll be in a price per pound that should be very competitive, if not extremely competitive versus new product when that comes to the market.

Okay. And no chance that it -- I mean could it exist as just this asset? Or it absolutely would need to be redevelopment, I don't know the building, so?

It would absolutely -- it's expired. I think it would be a missed opportunity if we just decided to take some lease and keep it running the way it is now. But yes, I think, we're going to add a lot of value.

Okay, sounds good. Thanks.

Thank you.

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

Yeah, thanks. A little bit off of Rich's question, you guys go out there and acquire some of these acquisitions, I guess, particularly the land sites, and I'm looking at 701 Dexter, specifically. How long do you kind of underwrite before you'll start breaking ground on those projects? And do you think you will start breaking ground on Dexter sometime soon?

Well, it's Peter Moglia. That submarket is very hot right now. And as Steve laid out in his comments and I in mine, the momentum of the life science market there is gaining steam. There is no doubt that the tech market there has been on fire for quite a bit. So there is still a great need for product there. We're going to focus ours towards the life science side, but we're pretty confident given what we're doing at 1818 East like right now that we're going to be able to follow up with other projects soon after that. So we bought that with the intent of designing and entitling it fairly quickly.

Okay, great. And then how long does that entitlement process take? Is it something like 2019 start?

We're constrained by the city's Master Use Permit process. I think in the quickest month we ever got was about 9 months. So we probably wouldn't be in a position to even pull a permit for another call it 12. So yes, so that would be sometime in the end of '19 would be at the earliest we could even address that. Okay, great. And then Steve, can you give us a quick update on the San Francisco market? And what's your expectations of receiving any (inaudible) allocation with the Times Square side?

The market as we've talked about is extremely healthy. There is no availability of life science space in Mission Bay. You have a very small vacancy rate, 2%, 3%, 4% in kind of Mission Bay and SoMa on the tech side. The city is moving forward. They've passed one stage of the political process. Therefore, the central SoMa adoption, they do have a recess in August. They've received a number of comments. They do have a few filings against the plan. Our understanding is that those are being actively worked on and resolved. And when they come back in September, they are going to move expeditiously. And I think as we maintain now for several quarters the thought is that each of the projects will be receiving an allocation so that they can move forward on a phase basis thereby providing the city with all of the community benefits front-loaded. So we expect that, that will be the outcome by the end of the year.

Okay. Thank you.

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

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

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