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BioMed Realty Trust Paint Bright Picture Despite Recent Dip in San Fran Life-Sci Leasing

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Top executives at BioMed Realty Trust last week sought to reassure investors that the group expects to weather the ongoing economic and financial storms despite a recent dip in life-sci leasing in the San Francisco Bay Area.

Speaking at an investor conference, Alan Gold, CEO of the publicly-traded real estate investment trust, and Kent Griffin, president and chief operating officer, cited stronger activity at two nearly-completed Northeast projects and a stash of cash they said was strong enough for the company to continue paying its customary dividend — while acknowledging a slowdown in lteasing in the Bay Area, the life-sci industry's largest, and traditionally strongest, market.

Several commercial real estate brokerages have recorded fourth-quarter spikes in vacancy rates for the sub-markets in and around San Francisco [BRN, Jan. 12], as tenants respond to the weakening economy by delaying signing new leases or renewing existing ones.

"In general, I think the San Francisco Bay Area is going to be highly affected by the current economic situation," Gold told investors attending BioMed's presentation at the Citi 2009 Global Property CEO Conference, held in Naples, Fla. “We see weakness in some of the Bay Area market, particularly in the South San Francisco market. But we also believe that that’s a very strong market that will recover over the long term.”

Gold added that BioMed thinks it can still be successful in the Bay Area given the region's highest-in-the-nation pace of life-sci startup activity due to venture capital: “There’s still a lot of innovation, and a lot of exciting new companies being formed, so we’re still pretty bullish on it.”

The fourth quarter, however, saw a dip in regional VC activity according to two quarterly surveys: MoneyTree Report, released by PricewaterhouseCoopers and the National Venture Capital Association, using ThomsonReuters data, recorded $308 million in 23 Bay Area VC deals, down almost 8 percent from $334 million in 32 deals. Dow Jones VentueSource saw an even sharper 40-percent regional decline, to $218.8 imllion in 15 deals, from $363.1 million in 21 deals [BRN, Jan. 26; Jan. 19]

Gold said BioMed can establish a beachhead in the Bay Area through its Pacific Research Center, the nearly 1.4 million-square-foot former Sun Microsystems campus in Newark, Calif. For the REIT to succeed, it would have to improve upon its current 26-percent leased, as well as fourth-quarter leasing activity of 336,000 square feet that fell short of BioMed’s 500,000-square-foot goal.

"That asset, more than the rest of our portfolio, is affected by the broader commercial real-estate market conditions given that a substantial portion of the project is expected to be leased to non-lab users at least initially," Gold said last month on BioMed’s fourth quarter conference call [BRN, Feb. 17]. "We did have a couple of larger tenant prospects pull back on their leasing plans at the end of [last] year as a result of the economic turmoil. And we just expect that the leasing is going to continue to be tougher in the broader Bay Area, and for that property over a period of time."

BioMed is not alone. Rival life-sci REIT Alexandria Real Estate Equities has cited the weak economy in deciding to hold off on earlier plans to break ground on new buildings at its Alexandria Science and Technology Center at Mission Bay, in San Francisco.

Speaking last week, Gold expressed optimism about how PRC will perform this year, saying BioMed expects to complete several new deals with life-sci and other tenant businesses seeking to cut space costs compared with pricey South San Francisco and nearby Peninsula communities.

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"We feel really, really excited about the fact that we have a project that can offer a low-cost alternative to what's going on in the greater Bay Area, and provide a unique campus environment for not only life science tenants, but general office tenants," Gold said. "We're seeing continued activity and tours."

But BioMed isn't depending on low rent alone to clinch lease deals at PRC. Gold said the REIT would continue to pay the $10 to $30 per square foot range toward improvements of tenant space that it pays at redevelopment sites. TI can typically go between $100 and $150 at newly-built life-sci properties.

But in the high-demand Boston/Cambridge, Mass., market, the REIT recently signed two life-sci companies to deals with zero tenant allowances:

• Vertex Pharmaceuticals in January inked renewal leases for a combined 292,000 square feet at two buildings it occupies in Cambridge — 192,000 square feet at 200 Sidney St., and its entire 100,000-square-foot headquarters at 130 Waverly St. [BRN, Jan. 19]

• Also in January, Japanese-owned Kowa Company agreed to lease 24,400 square feet at the Center for Life Science in Boston, at a sky-high rent of about $80 psf triple net, reflecting the center’s location in the pricey Longwood Medical Area.

Kowa is among tenants have have reduced the amount of available space at the Center for Life Science to 9 percent. Slated for completion by the end of the first quarter, CLS is one of three projects that Gold and Griffin said BioMed was committed to finishing in 2009.

The other two projects — both pegged for mid-year completions — are the five-story, 94,000-square-foot Fairview Research Center (530 Fairview Ave.) in Seattle, where a Novo Nordisk subsidiary late last year leased 36,900 square feet; and a $145 million, 360,000-square-foot addition to the Landmark at Eastview, which has a Tarrytown, NY, address but technically straddles the Westchester County, NY, towns of Greenburgh and Mount Pleasant.

"We've completed construction and are in the lease-up stage” for the addition, most of which has been leased to Regeneron Pharmaceuticals, Griffin said. Only 100,000 square feet of the addition remains left to lease at the campus, where Profectus Bioscience during the fourth quarter leased 20,000 square feet there for the Institute of Human Virology, its first commercial operation.

"Activity has been fairly robust,” Griffin said. “We're continuing to see tours and interest in the remaining space."

While Griffin and Gold did not discuss it at the investor conference, BioMed is in talks with prospective tenants for even more space it hopes to build at Landmark, namely on the site of an existing parking lot across from the campus’ main entrance [BRN, Feb. 9].

BioMed is not planning to break ground on any new projects during 2009, Griffin said.

Gold and Griffin said BioMed had the ability to complete new projects and operate existing ones because of a balance sheet the company calls relatively strong. The company’s debt to asset ratio stands at 42 percent, 60 percent of the REIT’s properties are unencumbered by debt, and the company has the capacity to raise more than $500 million between its cash and the remainder of its credit line — more than enough to fund a development and redevelopment pipeline it pegged at $225 million.

As a result, he added, “we anticipate continuing to pay a dividend roughly at our current level.” BioMed has traditionally paid dividends of 75 to 85 percent of its adjusted funds from operations, which unlike the traditional FFO benchmark accounts for capital spending to maintain existing properties.

Griffin said BioMed’s financial strength reflected in part a tenant roster weighed toward larger life sciences employers. He said life-sci employers account for about 96 percent of BioMed’s rent revenues — of which 44 percent come from mature public biotech companies such as Vertex and Human Genome Sciences; 19 percent from mid-stage, generally private biotechs; 15 percent from bio and pharma giants like Genzyme and Schering-Plough; another 15 percent from research institutions; 4 percent from non life-sciences tenants; and only 3 percent from early stage startup biotechs.

Another advantage for BioMed, he said, was its focus on longer-term leases; the company’s average lease length has grown to nine years, counting deals completed in the first quarter, from eight years in 2007. And with the Vertex deal, Griffin noted, no more than 5 percent of BioMed’s leases will expire in any of the upcoming five years.

Even during the economic upheaval, Griffin said, life-sci companies and research institutes have generally continued developing new drugs and technologies, a trend he said BioMed expects to benefit from even in the current economic upheaval:

"We're continuing to see advances in research that are helping support continued capital raising on the life science front, which in turn is supporting continued leasing of space," he said.

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