Marking its fifth anniversary as a public company this week, BioMed Realty Trust had cause to celebrate, as the life science space developer reported double-digit gains in revenues and leasing activity during the second quarter compared with the year-ago period, despite the ongoing economic upheaval.
But the publicly traded real estate investment trust also acknowledged some continued challenges — namely weak leasing for properties in Seattle and the East Bay section of the San Francisco Bay Area — along with the strengths it trumpeted in a recent conference call with investors.
BioMed finished Q2 '09 with a 33 percent gain in net income, to $18.2 million from $13.7 million in the second three months of 2008. The gain translated to $0.20 per diluted share, barely ahead of Q2 '08's $0.19 per share — but nearly double the 11-cents-per-share gain expected by a consensus of analysts.
That result prompted the company to raise its full-year earnings-per-share guidance to between $.63 and $.67 per share, up from its May 22 guidance of $.57 to $.67 per share, and a narrower range than the initial net income guidance that it provided last October of between $.54 and $.74 per share.
"Our leasing teams continue to execute," said Alan Gold, BioMed's chairman and CEO, addressing analysts on a July 30 conference call following the release of second-quarter results. "In the face of ongoing macroeconomic challenges, BioMed continued to demonstrate what differentiates our business model and our organization."
BioMed also raised its guidance on funds from operation — a common measure of REIT financial performance that is outside of generally accepted accounting principles — to between $1.64 and $1.68 per diluted share, up from guidance the company provided in May of between $1.57 and $1.67 per share, but below the initial per-share guidance range offered last October of between $1.60 and $1.80.
"Our [revised] guidance implies a quarterly FFO in the low 30s [cents per share] beginning in the third quarter. From there, we expect it to hold stable and steady to the fourth quarter in 2010 or beyond, until we see a more expansive leasing environment," Kent Griffin, BioMed's president and chief financial officer, said on the conference call.
Total revenues for BioMed rose 21.6 percent, to $86.1 million from $70.8 million in Q2 '08.
During Q2, BioMed completed development of two West Coast projects — the 96,188-square-foot 530 Fairview Ave. North, part of a two-building Fairview Research Center planned for Seattle's South Lake Union section; and the nearly 1.4 million-square-foot former Sun Microsystems campus in Newark, Calif., which BioMed has since renamed its Pacific Research Center.
However, 530 Fairview, which BioMed constructed new, finished Q2 at 55.9 percent leased, with the anchor tenant, a wholly owned subsidiary of Novo Nordisk, leasing some 36,900 square feet in a deal the REIT announced last October. The percent leased is down from 65.9 percent in Q1 '09, but well above the year-ago percentage of 17.9 percent. According to the commercial real estate data service LoopNet, 41,500 square feet remains available at 530 Fairview, at an asking rent of $55 per square foot per year.
PRC, which BioMed acquired in July 2006, has plateaued with 24.2 percent leased during the second quarter, or 336,461 square feet of its space, same as 2Q '08. Addressing analysts earlier this year, Gold blamed the low lease rate on the fact that a substantial portion of the project was expected to be leased to non-lab users: "That asset, more than the rest of our portfolio, is affected by the broader commercial real-estate market conditions," he said at the time [BRN, Feb. 17].
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Complicating efforts to lease 530 Fairview, Gold said in the call last week is Seattle's growing supply of office space for lease or sublease. According to figures by the commercial real estate firm Cushman & Wakefield, downtown Seattle's office vacancy rate has zoomed from 8.3 percent in Q2 '08 to 14.7 percent during Q2 '09. The rise reflects a burgeoning construction pipeline projected this year to complete 2 million new square feet of office space; and continuing shriveling demand due to the collapse of the Seattle Post-Intelligencer newspaper and Washington Mutual bank; and space givebacks by DHL Express, Microsoft, Qwest Communications International, and Sun Microsystems.
But the BioMed chairman and CEO said last week that 530 Fairview should ultimately find tenants from the city's growing number of life sciences employers.
That market is really taking it on the chin right now. We believe that will have an impact going forward on us," Gold told analysts on the July 30 conference call.
"We're seeing a significant drop-off in the basic office type user. But we are continuing to see demand coming from life-science users. And I think the fact that we have a high-quality location, a high-quality asset with available capacity in our balance sheet to provide improvement dollars for tenants, continues to bode well for us in being able to attract tenants to the Pacific Research Center," Gold told analysts in the call.
Gold said he retained that optimism even while acknowledging that life-sci companies have slowed down their real estate expansion activity in response to the economic slump.
"We believe that over the last six months, maybe nine months, that tenants have recalibrated themselves, raised additional capital, extended their runways, positioned themselves to endure what could be a long period of time of greater difficulty in the greater macro[economic] environment, but at the same time, continue to move forward with their existing drugs in their pipelines," Gold said. "And as those drugs achieve success, I think that has more of an impact on leasing than being able to raise capital does today."
For PRC, Fairview, and other properties, Gold said, the best hope of filling available space lies with drawing expanding life-sci companies
During the second quarter, BioMed inked 17 lease deals for a total of about 250,000 square feet, compared with 14 deals totaling 327,000 square feet in Q2 '08. One-third of that activity stemmed from a single lease — the approximately 77,000 square feet taken by Regeneron Pharmaceuticals at the Landmark at Eastview near Tarrytown, NY. Regeneron will occupy space vacated by Emisphere in 2007 after it relocated its corporate headquarters to Cedar Knolls, NJ, in 2007.
Earlier this year, BioMed terminated Emisphere's lease, which had been set to expire in 2012, and allowed Regeneron to back out of a deal reached in 2007 to lease about 40,000 square feet at the campus [BRN, May 1].
The Regeneron deal, announced May 1, expands the drug developer's presence to 554,434 square feet. That presence includes the 229,643 square feet Regeneron will move into in two of three new buildings totaling 360,000 square feet, in a $114.9 million expansion — down from a year-ago estimate of $145 million — that BioMed is completing.
Regeneron's relocation within Landmark at Eastview is set for the third quarter of this year, by which time BioMed will shift the expansion space into its operating portfolio, Gold said.
Regeneron will likely vacate the most amount of space during the second half of this year. The company is set to move out of 129,224 square feet at Landmark at Eastview, in a lease set to expire in September, and the following month is set to vacate a separate 35,875 square feet at the Tarrytown lab-office complex.
"Our relationship with Regeneron serves as a prime example of partnership and collaboration. As Regeneron was BioMed's third largest tenant just after our [initial public offering], they leased just 212,000 square feet and had the remaining lease term of 3.8 years. By Q3, Regeneron will be leasing approximately 400,000 [square feet], with an average remaining lease term of 15 years," Gold said.
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Landmark at Eastview is also the home of the company likely to bring the most new space to market in 2010, namely the 178,750 square feet last leased by Chemtura.
Even as the economy has slowed down leasing, Gold said, the pace of signing tenants during the second quarter remains on track with BioMed's goal, started in the fourth quarter of last year, of completing leases for 1 million square feet by the end of 2009.
"We remain confident that we're going to achieve our leasing goal for 2009," Gold said.
One key way BioMed hopes to achieve that goal, Gold and Griffin told analysts, is by filling its tenant roster with larger, more established biotech and pharma companies, and larger research institutions, seeking expansion space. Larger established public and private life-sci companies account for the plurality (44 percent) of space leased by tenants in BioMed properties, followed by mid-stage public and private companies with 19 percent, then research institutions and top-rated public life-sci companies, both of which were at 15 percent.
Of the remainder, 4 percent consists of non life-sci tenants, and 3 percent, early-stage biotech startups.
BioMed would not discuss its interest in one larger employer cited by an analyst as looking to possibly join the REIT's tenant roster. Craig Mailman of KeyBanc Capital Markets sought comment on talk in real estate circles that the Broad Institute is preliminarily looking for more than 100,000 square feet in its hometown of Cambridge, Mass., for a use projected to be funded through the $787 billion American Recovery and Reinvestment Act, the federal economic stimulus measure enacted in February by President Obama.
"Our 301 Binney asset has the only floorplate that can accommodate a tenant that's looking for greater than a 50,000-square-foot requirement," Gold said, declining further comment on the Broad or other tenant prospects.
Yet even in pursuing larger tenants, BioMed is finding the going to be slower now than a year ago, and more dictated by the growth needs of specific companies than an overall positive trend for the life-sci industry, let alone for the broader economy.
"We are seeing traffic, but the traffic is more from the fact that somebody's got a program and their program is progressing and they have to grow, and they have to expand in order to push that program through to the next level. Overall I can say that traffic has moderated or slowed, and we expect that to continue to be on that pace going forward," Gold told analysts.
Another factor in a future slowdown of leasing activity, Griffin said, is the fact that BioMed's tenant prospects are large companies and research institutions, "so they're going to take longer as well."
Yet BioMed is in better shape than many other commercial developer/landlords to weather the current economic storm, analyst David Rodziewicz of Morningstar Research wrote on July 30.
"Overall, we expect BioMed will face some head winds over the next couple years, although maybe not as severe as other property types as the company maintains a fairly well capitalized tenant base on longer-term leases," according to Rodziewicz. "Although BioMed will likely face a difficult operating environment in the near term, we believe the company has positioned itself to better manage the challenges it might face."