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Life-Sci REITs HCP and BioMed Realty Report Q1 Financials; Update Leasing, Financing Activity

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HCP and BioMed Realty, two of the nation's largest publicly-traded owners of life sciences space, offered largely upbeat updates on their leasing, financing, and first-quarter results during separate conference calls earlier this week following release of their quarterly financial results.

HCP said occupancy at its 100 life sciences properties inched to 91.4 percent during the first quarter from 91.1 at the end of 2008, and 91 percent in the year-ago quarter.

The increased occupancy helped elevate HCP's net operating income for the segment 22.5 percent year-over-year, to $51.7 million in Q1 '09 compared to $41 million in Q1 '08, according to HCP's filing with the US Securities and Exchange Commission.

Another factor in the increase: The "mark-to-market" raising of rents to market levels as leases came due and were renewed or signed with new tenants, Paul Gallagher, the company's chief investment officer, said during a conference call on April 28.

One key factor he cited in HCP's optimism on the life-sci sector: The proportion of industry tenants that have less than 12 months of cash on hand is 2 percent of HCP's total base rent, though surveys have shown much larger percentages of life-sci companies in that circumstance. The Biotechnology Industry Organization this past winter reported 45 percent of public life-sci companies had less than 12 months on hand, a proportion that ranged widely depending on the region in a separate study by Deloitte [BRN, April 17].

HCP also reported a 5.3 percent year-to-year quarterly gain in funds from operations — which exclude gains or losses from real estate dispositions — from $121.5 million to $128 million, though net income dipped from $44.6 million to $43.3 million.

Yesterday, BioMed Realty Trust of San Diego reported even stronger FFO results, jumping 53 percent from $31.1 million in Q1 '08 to $47.7 million in Q1 '09. Revenues for the quarter rose 39.5 percent over the year-ago period, from $67.4 million to $94 million. The real estate investment trust raised its 2009 guidance range for FFO per diluted share from between $1.60 and $1.80 a share to between $1.72 and $1.82 a share.

BioMed Realty and HCP are two of the three largest publicly-traded life-sci real estate investment trusts. The other life-sci REIT, Alexandria Real Estate Equities of Pasadena, Calif., announced April 30 that it will release its first quarter results and discuss them with investors on May 7.

Boston: CLS Nears $350M Deal

Kent Griffin, BioMed Realty's president and CFO, told investors the REIT was close to signing a new deal with three lenders for $350 million in financing over five years for the 704,159-square-foot Center for Life Science in Boston, an 18-story building nearing completion in the city's pricey Longwood Medical Area. The REIT and lenders have agreed to "an interest rate in the high 7’s with a targeted closing date in June," he said.

"Having agreed to the key terms in making solid progress on the remaining deal points, we believe we will be in a position to close the financing by mid-year," Griffin said.

BioMed would not disclose the three lenders involved, except to say that one of them was part of the syndicate that previously financed construction of the Center for Life Science.

Asked by Brendan Maiorana of Wachovia Securities to explain the 7-percent interest range given the project's distinction as a trophy asset in a large life-sci market, Griffin said Center for Life Science "is an extremely large size in a market where lenders do not want to provide large loans.

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"So if that same asset was a $50 million loan size I think you would get significantly better terms," Griffin added. "That said, if it was a traditional office building or traditional lab building, you wouldn’t get anywhere near the terms we are getting where we are. I think those two things are sort of balanced out, which is why we are talking about a coupon [interest rate] in the high 7’s."

Griffin again defended the interest rate in addressing another analyst, David Rodgers of RBC Capital Markets: "I think based on where we are in this credit market and doing a loan of this size I think we are getting the most efficient terms."

Center for Life Science is 91 percent leased. The most recent deals came during the first quarter, when Japanese-owned Kowa Company, a conglomerate with a pharmaceutical division that focuses on fighting diseases such as arteriosclerosis, kidney disorder, and diabetes, agreed to lease the approximately 24,400-square-foot 17th floor. Children's Hospital Boston agreed to expand its space as well. [BRN, Jan. 26].

CLS delivered on its promise of energy efficiency during the first quarter, Griffin added, when the project was certified to the second-highest or "gold" rating of the Leadership in Energy and Environmental Design system developed by the US Green Building Council.

Tarrytown, NY: New Lease on Life

In suburban New York, BioMed Realty terminated a lease set to expire in 2012 with Emisphere Technologies for 80,000 square feet at The Landmark at Eastview, Gold announced during the conference call. The office-lab campus has a Tarrytown, NY, address but straddles the Greenburgh-Mount Pleasant town line. Emisphere vacated the space in 2007 when it shifted its corporate headquarters and, a year later, its research facilities, to Cedar Knolls, NJ. The company took a one-time $3.8 million restructuring charge on the research space shift during the fourth quarter of 2008, accounting for about half of Emisphere's reported $7.7 million loss for the period.

BioMed quickly inked a 15-year lease for the entire space with Regeneron Pharmaceuticals, which is already set to expand into 194,000 square feet of a $145 million, 360,000-square-foot expansion of the campus set to be completed this year. In return, BioMed Realty allowed Regeneron to back out of a deal reached in 2007 to lease about 40,000 square feet at the campus. That space will remain in the operating portfolio, Griffin said, and be marketed to tenants, rather than be taken off the market and redeveloped.

"Beyond that, we don’t expect [Regeneron] to take any additional space at the current time," Griffin predicted.

Watch List Watching

But Landmark at Eastview may face an even larger vacancy, Gold warned, if the largest tenant on BioMed Realty's "watch" list of tenants at risk of returning space — specialty chemicals maker Chemtura Corp. — returns all or most of its 180,000 square feet.

Chemtura, among the larger tenants in the 752,000-square-foot campus despite being headquartered in Middlebury, Conn., filed for Chapter 11 bankruptcy protection on March 18, citing declines in customer order volumes due to the weak economy, and the unwillingness of a lender to extend a waiver on repayment of debt. The company now operates on $400 million in debtor-in-possession financing it obtained through Citibank.

"Despite our efforts to increase liquidity, including through the potential sale of a business, our reduced liquidity position, combined with the anticipated expiration of our bank waiver, led us to determine that a court-supervised restructuring was the best course of action," Chemtura Chairman, President, and CEO Craig Rogerson said in a statement.

At present, Gold said, Chemtura subleases 80 percent of its space to two companies — therapeutics developer Progenics Pharmaceuticals, and Momentive Performance Materials.

"That is probably where most of our concern is right today," Gold said of Chemtura.

Gold said the current state of Chemtura's space reflected one trend in today's life-sci real estate market — tenants are seeking to save on rent costs by subleasing space: "What we are seeing is a pick up in sub-leasing availability partly as companies try to conserve cash potentially by sharing their occupancy costs with others. We do expect this trend to continue."

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Washington Sees Change

Across the country in Bothell, Wash., BioMed Realty capitalized on the restructuring of another watch-list tenant. The drug developer MDRNA changed its name from Nastech Pharmaceutical Co., and restructured its operations toward making RNA interference-based therapies. As part of that restructuring, Gold said, BioMed Realty amended its lease with MDRNA so it can receive from the company upfront cash and stock in the short term. The amended lease also allows BioMed Realty to market the property for lease, then terminate the lease once a new tenant is ready to sign.

"Needless to say, this amendment was the right thing for us as it allows us to get a head start on securing a new tenant and ultimately helping MDRNA restructure in a way that provides a win-win solution for both parties," Gold said. "This is a really good example of the benefit of having early insight into your tenants and how it helps us manage risk."

South of Bothell, within the East Bay submarket of the San Francisco Bay Area, BioMed Realty terminated another lease with a troubled life-sci company. CellGenesys had been occupying 100,000 square feet at the three-building, 263-073-square-foot Bridgeview Technology Park in Hayward, Calif. One impetus to the landlord's action: Cellgenesys had been paying $18 per square foot in rent, well below market rate.

"As a result of the termination we received cash and shares of stock representing approximately two years of rent," Gold said.

Bay Area: REITs Pursue Redevelopment

Also in the Bay Area, Griffin said, BioMed Realty placed the south side of its Pacific Research Center campus — buildings 8, 9, and 10, and the development pads — into service. The move allowed the REIT to start capitalization or seized capitalization on that portion of the campus in the first quarter, ahead of its original expectations. "In part, [BioMed Realty is] recognizing that the leasing environment is more challenged and our expectation is that leasing will take longer."

The move brought to 49 percent the amount of space placed into service at PRC, which remained about 25 percent leased.

"We continue to see activity at PRC. However, the greater Bay Area is experiencing a tremendous amount of difficulty," Gold said. "The fact is there is a lot of that product coming on line, and in addition to that, on a non-life science basis, there is a tremendous amount of sub-lease space coming on line that hasn’t been fully even reported in the market. It is affecting the demand that exists out there."

Also in the Bay Area, Gallagher of HCP disclosed a combined 49 percent pre-lease rate for three projects comprising his REIT's portfolio in the region — from the Oyster Point II life-sci campus in South San Francisco, where Amgen has pre-leased buildings A and B, totaling a combined 251,000 square feet; to Redwood City, Calif., where HCP is redeveloping two buildings totaling 89,000 square feet within its Seaport Center campus.

The projects help explain why HCP's life-sci segment accounts for almost all of the $25 million the company funded during the quarter for construction and other capital projects.
HCP did not report any progress on Oyster Point's Building C, whose core and shell was completed late last year. The 87,586-square-foot building is being marketed through the real estate firm CB Richard Ellis.

Gallagher said the REIT was able to keep occupied all 193,000 square feet of life-sci space whose leases rolled over during the first quarter by retaining tenants for 80 percent of the space, and converting the remaining 66,000 square feet for a new life science user, a move he said allowed the company to raise rent revenue by 65 percent.

During the first quarter, Gallagher said, HCP completed more than 125,000 square feet of leases, of which 104,000 square feet related to previously occupied space. The remaining 21,000 square feet of leases were signed by tenants who agreed to move into previously vacant HCP space in the San Diego area's Torrey Pines submarket, he added.

While rents for first-quarter lease renewals climbed 6 percent over previous rents, overall HCP recorded a 6.8 percent dip in rent revenue, reflecting a 90-day extension on 20,000 square feet of space at a building and region HCP did not disclose, for a tenant that has significantly downsized its operations and, according to Gallagher, will vacate at the end of its term.

"I look at it as we were able to collect a little bit of rent for 90 days, and it had an impact on how it was reported. If you take that guy out, you actually flip from minus-6.8 to positive-6 percent, so we think it's a good story. We collected some cash for 90 days, as opposed to losing it for that 90-day period," Gallagher said.

HCP's ability to do that later this year will be constrained by a short supply of space whose leases will be rolling over, he said.

"Our life science portfolio has limited lease expirations over the next two years. Lease expirations for the remainder of 2009 total 316,000 square feet and represent only 0.8 of HCPs annual revenue," Gallagher said. "Looking further into 2010, we have 567,000 square feet of expirations, which represent only 1.4 percent of HCP's annualized revenue. We have already addressed 136,000 square feet or 24 percent of 2010 expirations at mark-to-market increase in rents of 7 percent.

"While tenant demand has slowed with the broader economy, HCP continues to pursue a pipeline of leasing prospects of approximately 500,000 square feet for existing space," Gallagher added.
Those deals, he cautioned, will get harder to complete in coming months: "We continue to see deals where terms are shorter and have experienced protracted negotiations as decision makers remain reluctant to enter into new longer term commitments."

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