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HCP Promises Business as Usual After Closing $2.9B Slough Portfolio Purchase

Health Care Property Investors is promising business as usual after closing on its $2.9 billion acquisition of the US portfolio of British-owned Slough Estates USA — a deal that transforms the real estate investment trust into the largest of three major owner-developers of laboratory space on the West Coast.
In announcing it had closed on the SEUSA portfolio earlier this month, following approval by shareholders of its parent company SEGRO July 26, HCP emphasized it was retaining the portfolio’s entire management team and would stick to SEUSA’s pipeline of development projects, announced in March.
“It’s clearly a long-term asset for us,” Mark Wallace, HCP’s executive vice president and chief financial officer, told BioRegion News. He would not elaborate or answer questions, saying the REIT had a longstanding policy of not consenting to interviews.
HCP arguably made a strong statement about California’s top life science markets when it shelled out $2.9 billion, including assumption of $1.2 billion in debt, for SEUSA’s roughly 5.2 million square feet of space in 83 properties in South San Francisco and San Diego County.
The deal also included SEUSA’s development pipeline of 3.8 million square feet the company had committed to build in both regions; as well as another 3.3 million square feet in as-yet-unscheduled future development phases in South San Francisco and San Diego County.
Two biotech giants, Genentech and Amgen, are HCP’s top two tenants, and also account for a combined half-million square feet of space within its 3.8 million square foot development pipeline. 
“Away from that, which gets you to the remaining 3.3 million square feet, we’ve got very, very modest ambitions with respect to when that build-out occurs. It’s about, on average, 15 percent a year, beginning in ’08. You go out five to six years before you see that fully built out,” HCP Chairman and CEO Jay Flaherty told analysts on June 6, speaking at the National Association of Real Estate Investment Trust Investor Forum.
As of March, SEUSA had planned to break ground in September on its latest US property, the 326,000-square-foot 494 Forbes Blvd. in South San Francisco. The company has also sought approvals to build 540,000 square feet at Sierra Point in Brisbane, Calif.
If the market remains as tight as it is today, he continued, HCP could speed up construction of its development pipeline.
“But that would be only after we cross over a 50-percent pre-leased metric. We try to be pretty conservative about going down that path,” Flaherty added.
Seeking a Sublease
One development pipeline project is now under construction — the three-building, 320,000-square-foot Britannia Oyster Point II campus on 8.84 acres in South San Francisco. The campus includes two buildings leased to Amgen — one 120,000 square feet, the other 115,000 square feet — and slated for completion in the first quarter of 2008, as well as a third building of 85,000 square feet that is being built “on spec,” without a major tenant signed first.
Late last month, however, Amgen hired GVA Kidder Matthews to market for sublease its space at 331 and 333 Oyster Point Blvd. The biotech giant won’t say why, insisting instead it has not ruled out its planned expansion into the campus (See related story, this issue). ELENA: link to 1A
The sublease deal not only won’t hurt HCP since its lease with Amgen remains intact, but should help the REIT by generating new tenant interest in the tight South San Francisco lab space market, said Dino Perazzo, a senior vice president with CB Richard Ellis specializing in the San Francisco Bay life sciences market.
“They want momentum to pick up in South San Francisco.  And what better way to introduce the quality of your product than exposure to a class A, newly constructed life science campus?” said Perazzo, a director of CBRE’s Global Life Sciences Group.
James Bennett, senior vice president of life sciences with GVA Kidder Matthews, said he could not discuss the Amgen sublease without permission from the company. Bennett is marketing the Amgen sublease properties along with another senior vice president of the firm, Craig Zodikoff.
He did say the planned spec building at Oyster Point marks a different approach from SEUSA, which had typically sought anchor tenants before moving ahead with new lab buildings. “They really have not typically done much on spec. The economies of scale being what they are, it made sense to build the smaller building at the same time [as the Amgen buildings].”
The spec building’s shell is set to be completed in the fourth quarter of this year or the first quarter of 2008. Bennett said in an interview the spec building could be easily filled given its size and the demand from prospective life sciences tenants for lab and research space in the tight South San Francisco market: “It is pretty small potatoes in the overall scheme of things. There’s certainly a reasonable amount of demand out there,” Bennett said.
GVA Kidder Matthews said the vacancy rate for South San Francisco has reached “less than 5 percent” for South San Francisco. Another commercial real estate brokerage, San Francisco-based Aegis Realty Partners, said vacancies reached “below 10 percent” of the Bay Area’s 20 million square feet of lab space in its second-quarter East Bay Office Market Report, but added: “New construction is scarcely keeping up with the current demand. It is predicted that in the next 12 months, 30 start-up biotechnology companies will spawn from Northern California alone.”
That will be a particularly pressing problem for early-stage companies, warned a third brokerage, NAI BT, in its San Francisco Office Report - Q2 2007: “The opportunity for small to medium sized companies looking to lease creative and plug-and-play spaces in South of Market brick and timber buildings remains slim, particularly within [the] 5,000 to 10,000 square foot range.”

“I don’t see any change with Slough. The same management team is on board, the same people, the same approach to their business, as far as I can tell. By all means, they will be as competitive as they always have been with [Alexandria] and BioMed.”

That tightness in the market has helped push average “asking” rents sought by landlords to between the high-$2s and low-$3s per month per square foot, Bennett said. However, that average is higher for top-dollar new lab space being developed by HCP and another REIT, Alexadria Real Estate Equities: “They’ll be looking at $4, $4.25 per month, per square foot, triple net.”
Alexandria is constructing a spec project on 15.75 acres in South San Francisco, the four-building, 540,000-square-foot 249 East Grand Ave.; and has completed the shell of the two R&D buildings comprising the 162,000-square-foot East Jamie Court.
Those projects are in addition to its Mission Bay campus a few miles north in San Francisco, where Alexandria is constructing the 155,000-square-foot 1500 Owens St. and plans later this year to start work on an equal amount of space at 1600 Owens St., which is approved for 229,000 square feet [BioRegion News, Aug. 13].
Alexandria had hoped to develop even more space in South San Francisco, but got outbid by Slough earlier this year on three warehouse properties — 328 Roebling Road, 340 Roebling Road, and 233 East Grand Ave. A month later, Slough placed its US portfolio for sale, in order to focus on building office space in the United Kingdom and the rest of Europe, where it projects rents will rise even further than the US as the biotech industry grows over the next few years; HCP emerged as the buyer in June [BioRegion News, June 11].
In addition to Britannia Oyster Point II, HCP is carrying out SEUSA’s plans for Britannia Oyster Point I, a seven-building, 582,000-square-foot campus; as well as Britannia East Grand, a seven-building, 783,532-square-foot campus of 27 acres, leased entirely to Genentech and slated for completion next year.
Management Continuity
In announcing the closing of the SEUSA acquisition Aug. 1, as it did when it announced the deal in June, HCP emphasized it would retain SEUSA's management team led by Marshall Lees. Lees, who had been the president and CEO of SEUSA, joined HCP as an executive vice president, with expanded responsibilities over its life sciences portfolio. Two SEUSA executives, Randall Rohner and Jon Bergschneider, were hired by HCP as senior vice president and vice president, respectively.
“I don’t see any change with Slough. The same management team is on board, the same people, the same approach to their business, as far as I can tell. By all means, they will be as competitive as they always have been with [Alexandria] and BioMed,” Bennett said.
CBRE’s Perazzo agreed with that assessment.
“Historically, [SEUSA’s] strength has been as developers. [HCP] will not lose sight of that, but they’ll also have the ability to consider investments and conversion properties. They have the full support of HCP to do what they do best, which is produce and provide life science space, not only in the Bay Area and San Diego, but all over the world,” he said.

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