Two major publicly traded owners of life science property last week disclosed they had both added to their already large portfolios during the third quarter. And while both real estate investment trusts grew their holdings in California, one also reported it was increasingly looking overseas for future growth.
Alexandria Real Estate Equities has expanded its holdings in the San Diego market, reported progress in leasing two life sciences campuses it is now constructing, and vowed to expand its budding portfolio of overseas holdings, the company told analysts on Nov. 6.
Meantime, Alexandria’s rival in the life science market, BioMed Realty Trust, closed on two California acquisitions in the third quarter for a total $49 million and reported steady leasing activity in the New York and Cambridge, Mass., markets.
During a conference call that followed the reporting of its third-quarter earnings, Alexandria disclosed it had acquired eight San Diego properties totaling more than a half-million square feet for $190 million. Alexandria acquired the 109,780-square-foot 13112 Evening Creek Drive South, within San Diego’s Sabre Springs development, for $32.8 million; as well as seven properties Alexandria did not identify on the conference call, and which a spokeswoman would not identify afterward. Alexandria executives told analysts the sites were part of the 30-building, 1.6 million-square-foot San Diego-area portfolio once owned by CarrAmerica.
That portfolio has flipped at least twice over the past 18 months, with CarrAmerica selling those holdings to Blackstone Group, which last summer sold them to Arden Realty, the West Coast arm of GE Real Estate. An Arden Realty executive had said over the summer it would sell the buildings within five years [BioRegion News, July 16], while talk among brokers had Alexandria among three potential buyers for portions of that portfolio.
The purchase raises to more than 1.5 million square feet Alexandria’s holdings in the San Diego region, which accounted for most of the $337.8 million it disclosed that it paid during the third quarter for nine California sites totaling 660,950 square feet. The ninth was a 135,000-square-foot building in South San Francisco.
“Our overall strategy here was optimistic, and also offered us the opportunity to upgrade the overall quality and depth of our portfolio while simultaneously enhancing occupancy,” said James Richardson, Alexandria’s president.
Richardson joined with Alexandria chairman and CEO Joel Marcus and CFO/principal accounting officer Dean Shigenaga to discuss with analysts the company’s third-quarter performance as well as several planned projects for the fourth quarter and next year.
By snapping up the San Diego space, Alexandria acquired leases with some of the largest institutional and business tenants leasing space in the market. They include the Scripps Research Institute, Merck, Gernzyme, and Biogen Idec.
Marcus noted that Alexandria’s relationship with Scripps extends coast-to-coast. The REIT is close to opening a 46,000-square-foot incubator space in Jupiter, Fla. — the Alexandria Innovation Center at 555 Heritage Drive — intended to build on a close relationship his company has developed with Scripps in housing many of its startups in and around the institute’s home base of La Jolla, Calif.
Alexandria finished the third quarter with net income of $22.9 million, up nearly 21 percent from just under $19 million in Q3 of 2006, on revenue that rose 22.9 percent, to $104.1 million from $84.8 million in the year-ago period.
Funds from operations, a key measure of REIT performance, rose 21 percent year-to-year, to $42.7 million in the third quarter from $35.2 million in Q3’06.
While Alexandria explained its San Diego acquisition as one that capitalized on the West Coast’s second-largest life sciences cluster, the region is also the home base of archrival REIT BioMed Realty Trust.
BMR finished the third quarter by closing on two California acquisitions for a total $49 million. The REIT paid $16.5 million for the 67,000-square-foot 5870 Pacific Center Blvd. in San Diego’s Sorrento Valley submarket, which is fully leased to the medical technology company Artes Medical; and $32.5 million for a 238,000-square-foot warehouse building on Forbes Blvd. in South San Francisco, which the company said it would redevelop.
Matthew McDevitt, regional executive vice president with BMR, told analysts the South San Francisco building would be redeveloped with life science use in mind at $137 per square foot, which would translate into $32.6 million.
He said the San Diego acquisition was an off-market transaction that the company considers “a great example of our value-added investment program.
“We tied the property up, which was 100-percent leased to two tenants. While under contract we were able to negotiate a lead termination with one of the tenants and leave the balance of the space to Artes, at more than 50-percent markup in rents,” McDevitt said.
BMR chipped in an additional $36 per square foot for tenant improvements, he added.
BMR finished the third quarter with about $16.5 million in net income, up 52 percent from the year-ago quarter’s $10.8 million, on revenue that rose almost 1.6 percent, to $64.8 million from $63.8 million. The company’s FFO rose an annual 2.8 percent, to $30.8 million in Q3 from just under $30 million a year ago.
Brisk Leasing Activity
Alexandria and BMR reported progress in four key regional markets:
* New York: Marcus said Alexandria’s talks “are proceeding very well” with a prospective tenant interested in leasing 150,000 square feet comprising half the West Tower within the 675,000-square-foot first phase of East River Science Park. He said Alexandria is also working to reach a “letter of intent” agreement with “a US-headquartered, European pharma firm” for additional space at the 3.5-acre campus, where a total 1.2 million square feet is planned. Rents at East River Science Park, he said, are expected “at the moment” to reach the same $65 per square foot, triple-net, range as in Cambridge, Mass.
McDevitt said BMR leased 36,000 additional square feet to Regeneron Pharmaceuticals at the $145 million, 360,000 square-foot set of three buildings under construction at the 275-acre Landmark at Eastview campus in suburban Tarrytown, NY. Regeneron triggered construction of the building last April when it completed a lease for 194,000 square feet, in a deal that made the company eligible for $10 million in tax breaks from the state Empire State Development Corp. and Westchester County Industrial Development Agency.
* Cambridge: Alexandria completed a $34.4 million sale-leaseback deal of four land parcels with Massachusetts Institute of Technology, a dealMarcus said would “further develop our relationship with MIT.” He said his company and the university may do another deal: “We are discussing with MIT another transaction in the broad area having nothing to do with our land, but where they may take the land portion [and] we may take the building portion on a potential redevelopment.”
BMR’s McDevitt reported the signing of a ten-year lease with Senior Whole Health for the entire 48,000-square-foot 58 Charles St. in East Cambridge. The deal is an expansion for the healthcare plan provider, which has until now leased 20,000 square feet at the building. All of the leases at the property were scheduled to roll in 2008. However, Senior Whole Health, which already leases close to 20,000 square feet, stepped up to take the whole building with rent equating to roughly 20 percent markup over the expiring rent.
“I think one way or another, we will have a presence on the ground in India in 2008, and we look to begin some effort at development in that country.”
* San Francisco: Richardson said Alexandria has started construction on the 158,000-square-foot 1500 Owens St., the second building planned for the Mission Bay campus, where the REIT has 2.2 million total square feet planned by 2011, plus rights to build another 2.7 million square feet. The first building, the 157,340-square-foot 1700 Owens St., has 90 percent of its space either leased or committed to tenants, with 70 percent occupied.
“We’ve had very good preliminary interest from a variety of large institutional and commercial users. We’re very encouraged by that activity,” Richardson said. “We expected there to be a lot of interest and demand, and it looks like that is the case.”
“And the names are blue-chip names,” Marcus added.
Richardson said Amgen’s release to market of 365,000 square feet for sublease in nearby South San Francisco had yet to affect activity at Alexandria’s properties in the region, both at Mission Bay and in South San Francisco.
* San Diego: BRM reported a five-year lease extension with Vertex Pharmaceuticals for the entire approximately 81,000 square feet at Torreyana Science Park (11010 Torreyana Road). The REIT acquired the building from Arden Realty in March for $33 million.
Alexandria will also expand its international development activity. Later this quarter, Richardson said, Alexandria will break ground on the second, more than 750,000-square-foot phase of the MaRS Discovery District research-office incubator campus in Toronto.
“We’re in discussions with several very large users on a pre-lease basis as we sit here today,” Richardson said. MaRS announced Alexandria as its developer partner for the second phase of its successful research-office incubator campus [BioRegion News, July 16].
In addition to announcing the timing of groundbreaking for the $1.2 billion BioQuarter campus it is developing with Scottish Enterprise in Edinburgh, Scotland — confirming an Oct. 29 report in BioRegion News [see SIDEBAR] — Alexandria also announced it has begun work on its first project in China.
The REIT has teamed up with a joint venture partner it identified only as a pharmaceutical to begin construction on two technology-flex buildings totaling 280,000 square feet, with the partner a potential tenant. Marcus said a key attraction of China to Alexandria is the country’s low construction cost — about $45 per square foot, roughly one-third the cost in the US — as well as its growing life sciences market.
The Chinese project was launched several months after Marcus joined pioneer biotech industry executive William Rutter and two others for a Feb. 25 meeting in China with that nation’s vice minister of science and technology, Shang Yong. The visit was the subject of a terse press announcement by the ministry.
Next year, Marcus said, Alexandria plans to break ground on a 4.5 billion rupee ($114.7 million) expansion of a 106-acre bioscience park in Bangalore, India, officials there announced June 4 [BioRegion News, June 11]. “Discussions and negotiations with the government are proceeding, but I think one way or another, we will have a presence on the ground in India in 2008, and we look to begin some effort at development in that country,” Marcus said during the call
He said Alexandria hopes to commence operations in India next year “in a limited way;” as well as “hopefully, enter one more European market via a joint venture.”