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HCP’s Net Operating Income for Life-Sci Leases Rises 16 Percent in Q2 on Improved Occupancy

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By Alex Philippidis

HCP attributes a 16-percent jump in second-quarter net operating income to increased occupancy and previously executed mark-to-market rent increases for its life-science segment, the REIT reported this week.

HCP's life-sci NOI, which represents about half of the firm’s profits, rose to $45 million from almost $38.8 million year over year. Despite this increase, total net income for the quarter plummeted 59 percent to $91.8 million, or 35 cents per diluted share, from $225.9 million, or 96 cents per share, in the year-ago period.

HCP, which is based in Long Beach, Calif., said total life-science leasing contracted 26 percent to 349,000 square feet from 470,000 square feet recorded a year earlier. The company did not disclose the number of leases it attained in either period.

Despite that decline, the percentage of life-sci space occupied across HCP's portfolio rose to 91.1 in the second quarter of '09 compared with 88.1 in Q2 '08.

Leases in the current quarter comprised 310,000 square feet of previously occupied space that was renewed at an average decline in rental rate of 13.6 percent. Such rent declines are likely to be repeated in upcoming quarters, HCP predicted.

During the second-quarter conference call, Paul Gallagher, HCP's chief investment officer, said the REIT also expects to renew its life-sci property leases with lower mark-to-market rent increases as a consequence of the ongoing economic upheaval.

Gallagher said that decline would not hurt HCP since its life-science portfolio has a limited lease-expiration profile over the next two years. He noted that lease expirations for the remainder of 2009 total 184,000 square feet, representing only 0.3 percent of HCP's annualized revenue. These numbers will rise in 2010 to 274,000 square feet of expirations, or 0.8 percent of HCP’s annualized revenue.

Also during the second quarter, HCP said total funds from operations grew 23 percent to $146.1 million, or 55 cents per share, from $119.1 million, or 50 cents per share year over year.

The company said it expects to gain from its purchase, announced Aug. 3, of a $720 million participation in first mortgage debt of HCR ManorCare, a provider of post acute care services, for about $590 million, of which only $165 million will be cash.

HCP said it would raise its guidance for the rest of 2009 on funds from operations, a measure of REIT financial strength that falls outside of generally accepted accounting principles. HCP now projects FFO of between $2.13 and $2.19 per share, up 6 cents from its previous guidance.

HCP also continues to develop five buildings in the San Francisco Bay Area totaling 515,000 square feet: the three-building, 329,000-square-foot Oyster Point complex and the 97,000-square-foot Modular Labs IV property, all eight in South San Francisco; and the two-building, 89,000-square-foot 500/600 Saginaw Drive within the Seaport Center campus in Redwood City. This last project is an office campus that is currently being converted to life-sci use with anchor tenant Abbott Laboratories leasing 40,000 square feet.

While the $261 million Oyster Point campus is 76 percent pre-leased — due entirely to Amgen's taking all of the 122,000-square-foot Building A and the 129,000-square-foot Building B — that share drops to 49 percent when the Modular Labs and Saginaw buildings are included.

In an 8-K filing with the US Securities and Exchange Commission, HCP said it expects to complete 500/600 Saginaw by the fourth quarter of this year, and the Modular Labs project by the third quarter of 2010.

"Despite the general slowdown in tenant demand HCP continues to pursue a pipeline of leasing prospects of approximately 500,000 square feet for existing space," Gallagher said. "We have begun to see increased activity in the second quarter as large institutional clients seek space to accommodate expansion needs or relocate functions."

He offered an example of that activity: "We recently executed [a letter of intent] for one of these projects that if converted to a lease would bring the previous percentage on the pipeline to nearly 53 percent," Gallagher said on the conference call, without furnishing details about the prospective tenant or the property, or confirming that the size of the lease would be about 29,160 square feet.

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