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BioMed Realty Trust, Inc. (NYSE:BMR)

Q1 2010 Earnings Call Transcript

May 4, 2010 1:00 pm ET

Executives

Rick Howe – Director, Corporate Communications

Alan Gold – Chairman and CEO

Matt McDevitt – EVP, Real Estate

Kent Griffin – President, COO and CFO

Analysts

Brendan Maiorana – Wells Fargo

Chris Kattan [ph] – Morgan Stanley

Jordan Sadler – KeyBanc Capital Markets

Rich Anderson – BMO Capital Markets

John Guinee – Stifel Nicholas

Operator

Good day, ladies and gentlemen and welcome to the Q1 2010 BioMed Realty Trust earnings conference call. My name is Carmina, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Rick Howe, Director of Corporate Communications. Please proceed, sir.

Rick Howe

Thank you, Carmina. And welcome everyone. Today's first quarter 2010 earnings call includes a slide presentation to accompany our prepared remarks. If you are not currently viewing the slides and would like to, please go to www.bioMedreally.com, click on the Investor Relations tab on the left and then click the Q1 2010 BioMed Realty Trust Inc. earnings conference call link. We will also be posting these slides on the Investor Relations tab of our website. Presenting today are Alan Gold, Chief Executive Officer, Matt McDevitt, Executive Vice President Real Estate and Kent Griffin, President and Chief Financial Officer.

Now, before we begin, I would like to remind everyone of the Safe Harbor statement included in yesterday's news release. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today's conference call. These forward-looking statements are based on the company's current expectations and involve significant risks and uncertainties, some of which are beyond the control of the company and are subject to change based on various factors. Actual results may differ materially from those expressed or implied by the forward-looking statements. For a detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the news release issued yesterday and filed with the SEC on Form 8-K as well as the company's other SEC filings including its most recent annual report on Form 10-K and quarterly reports on Form 10-Q. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as the result of new information, future events or otherwise.

With that said, I will now turn the call over to Alan Gold. Alan?

Alan Gold

Thank you, Rick. And welcome to BioMed's first quarter 2010 earnings call. We're extremely pleased to have a lot of positive things to talk about this morning. First, the Life Science Industry continues to have strong fundamentals. Second, we had a very strong first quarter. We executed 155,000 square feet of leasing and announced both our first new acquisition and our first new build to suit transaction in quite some time. We also had record revenue, rental revenues of $70.6 million for the quarter and announced funds from operations of $0.33 per diluted share. Third, new investment opportunities, one which closed just yesterday and the second of which we also expect to close in the second quarter. I will let Matt talk about each of these opportunities in a moment.

And finally, the tremendous milestones we have achieved related to our capital structure. BioMed Realty Trust received investment grade corporate credit ratings from both Moody's Investor Services and Standard & Poor's. We are pleased with these significant milestones, less as transformational events but more as validations of the effectiveness of our business model, our discipline execution and our prudent management of our capital structure. Over the long term, I believe that the investment grade credit ratings and the access to the unsecured credit will have a very positive impact on our company. Which Kent will discuss further.

BioMed stands today as the first and only REIT dedicated, exclusively to the Life Science Industry with an investment grade corporate credit rating. Now I'd like to touch on the state of the Life Science Industry which as always is really at the heart of our business model. 2010 is off to a very solid start for the industry, as evidenced by the 30% appreciation of the MX biotech index in the first quarter. And we see continuing scientific advancements and innovation and importantly continued success in raising capital which ultimately translates into greater demand for space.

Partnering transactions totaling $6.1 million or $6.1 billion were completed in the first quarter of 2010. A 29% increase over the same quarter last year. One particular partnering transaction of note announced during the quarter was the collaboration between Isis Pharmaceuticals and GlaxoSmithKline for which Isis is eligible to receive almost $1.5 billion in license fees and milestone payments. And importantly following the announcement of the collaboration, Isis and BioMed entered into a build to suit agreement, once again demonstrating the linkage between raising capital and the leasing of space.

Financing transactions reached $2.9 billion in the first quarter including the IPO for Ironwood Pharmaceuticals which raised over $203 million in net proceeds for our tenant at 301Binney in Cambridge. And the Pace to follow on public equity transaction increased dramatically in the first quarter, up 78% over the same period last year to just over $1 billion. Venture capital activity demonstrated some modest improvement over the prior quarter. $1billion invested in the first quarter, including a $25 million Series D financing for revance therapeutics in January.

Scientific innovation and access to a broad range of capital continued to create sustained demand for life Science research space, which is BioMed's focus. The combination of our world class facilities, strategically located, uniquely designed and constructed and expertly managed and our enhanced credit position provides even greater opportunity for BioMed to create and build partnerships with Life Science organizations in support of their mission critical research and innovation toward delivering important, new and improved cost saving therapies to the market.

I will now turn it over to Matt McDevitt to discuss our acquisition and leasing results for the first quarter. Matt?

Matt McDevitt

Thanks, Alan. With our leasing activity in the first quarter continuing the momentum we had in the fourth quarter, we completed 13 transactions for 155,000 square feet of space, consisting of eight new leases for approximately 84,000 square feet and five lease extensions for approximately 70,000 square feet. This puts us just over 74% of our five quarter plan with still three quarters remaining. As previously highlighted, we expanded the Ironwood Pharmaceuticals lease by an additional square feet, our 301 Binney property in Cambridge.

Increasing our total lease percentage at the Roger street project to 71%, we're in active discussions with high quality tenants for the balance of the project. In conjunction with the previously announced build to suit transaction with Isis, which we believe may be the only build to suit executed in the industry for over two years, we also extended their lease out to 2031 for 29,000 square feet at our avenue property. Now, with leasing still our top priority, we are proud to be able to put the word acquisitions back into the acquisition and leasing team with our first new acquisition in more than two years, announced in February. We've expanded our footprint in the Maryland Life Science market to the acquisition of 55 and 65 West Watkins Mill Road property in the heart of the I-270 corridor, nicknamed DNA alley.

We acquired two buildings totaling 82,400 square feet for approximately $14.4 million. The properties are 100% leased to two tenants, net immune, a wholly owned subsidiary of AstraZeneca and Genentech a public biopharma company developing novel gene-based therapeutic drugs and vaccines. We also acquired a land parcel in conjunction with entering into a long-term lease with Isis Pharmaceuticals for a new build to suit project. The Isis build to suit was a direct outgrowth of our focus on developing strong, long-term, strategic partnerships with our tenants to meet their continually evolving needs. We acquired land near Isis' current facility at our property on which we will build a new 176,000 square foot state-of-the-art office and laboratory facility. Upon completion of construction, Isis will lease the entire building for a 20 year-term. The total leased space to Isis will increase to 205,000 square feet.

Now, just yesterday we closed on the acquisition of five Life Science buildings in Rockville, Maryland for approximately $53 million. The property includes approximately 218,000 square feet of Life Science space and is 100% leased to the J. Craig Venter institute in a sale leaseback transaction. We are very excite to have been chosen by Dr. Craig Venter as one of the fathers and original architects of the Human Genome project that forced this new relationship with JPDI [ph] a world renowned research institute dedicated to the advancement of Science of Genomics. Approximately two thirds of the rents are subject to a 10 years lease with a balance on a short-term lease with rents that are comfortably below market.

We expect to close in the next few weeks on the acquisition of 50. This acquisition is a 57,000 square foot building adjacent to our 55 and 65 West Watkins Mill Road Buildings and is fully leased to ultimate Bio solutions and integrated Genome Company specializing in biopharmaceutical, diagnostics, agricultural and food nutrition research. We expect the purchase price to be approximately $14.2 million. Once this acquisition is complete, we'll have expanded our footprint in the Maryland market to eight properties comprise of 16 building, representing 1.5 million square feet of space, all 100% leased in the Maryland market.

Conveniently, these new investments highlight the range of new investment opportunities that we are pursuing, including traditional third party owned acquisitions, build to suits, sale leaseback transactions. Taken as a whole, the new investments represent approximately $159 million of new investments; with an in place cash NOI representing a cash yield of approximately 8.3% with at or below market leases in place on each of these acquisitions. Also of note, these four new investments include five tenants. Each of which represents a different segment of our target tenant base, including a preeminent research institute, DCDI, a subsidiary of an A-rated big pharma, AstraZeneca a largest established biotech, Isis Pharmaceuticals, a medium sized public biotech, Genentech. And a medium sized private biotech Ocimum Biosolutions.

These new investment initiatives have the added benefit of strengthening our market position in both Maryland and San Diego with properties that are 100% leased. Collectively, these transactions increase the size and diversity of our portfolio and we believe will provide value to our stockholders over time. In summary, we are very encouraged by our investment success, which reflect once again our commitment to attracting, retaining and expanding relationships with the very best Life Science tenants, by acquiring and owning world class research facilities located where tenants want to do their research.

With that being said, I'll now turn the call over to Kent.

Kent Griffin

Thanks, Matt. I'll start by updating our portfolio results and activity, then review the first quarter financial results, walk through our revised guidance and finally our recent capital transactions and pro forma capital structure. Through first of portfolio activity, through March 31st our total portfolio occupancy across the board increased 60 basis points primarily driven by the 100% leased new investments. The balance of our portfolio essentially flat with the roughly 163,000 square feet of gross leasing and preleased deliveries offsetting approximately 150,000 square feet of expirations and 21,000 square feet of terminations.

Our lease percentage for the current operating portfolio is down sequentially, primarily associated with the 154,000 square foot 201 Elliott property which is unoccupied, moving from the redevelopment bucket and into the lease-up bucket. We've added additional information in our supplement that summarizes the weighted average lease percentage based on dollars invested, which more accurately reflects the economic impact of our leased investments. So for our consolidated portfolio, as of March 31 on this basis, our total operating portfolio is approximately 83% leased and our current operating portfolio is approximately 88% leased.

After giving effect to the just announced medical center drive acquisition and the pending 50 West Watkins acquisition on a pro forma basis, our total portfolio increases to 73 properties representing more than 11 million rentable square feet. And the consolidated current operating portfolio moves to 87% leased or 88.3% leased on a weighted average basis. Our overall tenant mix remains consistent with 88% of rents from research institutions and public companies. We are proud to be able to add Isis Pharmaceuticals to our top ten tenant roster which represents 58% of our rents and consists exclusively of Life Science research institutions, A-rated companies and large established public companies.

(inaudible) is edged out of the top 10 tenant, but we are excited about the recently announced partnership agreement with Novartis for which array receives a $45 million upfront and milestone payments and could generate an additional $422 million in future milestone payments. Our lease expiration schedule remains very strong with average annual rent expirations of approximately 3.4% through 2015. As for our financial results for the first quarter, total revenues were approximately $93 million with rental revenues at a record $71 million up approximately 3% from the first quarter 2009. Same property portfolio is 87% leased with cash basis NOI from those properties down 1.5% from the first quarter of 2009, but again, excluding the four properties for which we previously received lease termination income, the same property cash NOI was up 1.9% year-over-year, primarily as a result of contractual rent escalations.

Operating margins were 71%, in line with recent results and our expectations. G&A expenses were stable while interest expense for the first quarter was $21.3 million, an increase of 4% from the prior quarter, primarily due to interest expense associated with the issuance of $180 million in senior exchangeable notes during the quarter. FFO for the quarter was approximately $34 million or $0.33 per diluted share, compared to approximately $48 million or $0.56 per diluted share in the first quarter of 2009. Our dividend remained at $0.14 per share which reflects a payout ratio of approximately 42% of FFO.

Moving to our FFO guidance, we have revised our 2010 FFO guidance since last quarter's earnings release to a range of $1.10 to $1.20. The revised guidance includes approximately $0.08 of dilution associated with the company's $228 million common stock offering in April and approximately $0.07 of dilution for the $250 million senior unsecured notes offering also in April. In addition our guidance includes approximately $0.02 per diluted share of expenses in the second quarter associated with the announced acquisitions and expenses associated with the pay down of the secured term loan.

If significant portion of dilution associate with this items, is offset by the strong first quarter operating results and the announced acquisitions. As a reminder, our guidance does not include any assumptions related to any future financing or investing activity beyond those discussed today, nor does it include the impact of the potential conversion of our exchangeable notes which we estimate would be penny per share per quarter. Now moving to the balance sheet, it's been a pretty eventful first four months of the year. Started the very first week of January when we issued exchangeable notes with a 3.75% coupon, providing us $180 million of gross proceeds. And with the benefit of the additional liquidity we ultimately elected to pay down $100 million of our $250 million secured term loan, which was scheduled to expire in the third quarter 2012.

We also repurchased approximately $6.3 million of our 4.5% exchangeable notes which holders may put back to us at par in 2011. During the quarter we issued approximately 950,000 shares under our continuous offering program that generated approximately $15 million in net proceeds. The in April, we received investment grade corporate credit ratings from both Moody's Investor Services and Standard & Poor's. We are very pleased and view this as a significant validation of the quality of our specific portfolio, the strength of our tenant roster, our disciplined execution of the business model, particularly the performance of our portfolio through the economic cycle over the last 24 months and our management team and importantly, a validation of our capital strategy and a recognition of the consistent series of measured steps that we have taken to properly manage our balance sheet and ensure that we have ample liquidity to execute our business plans.

As we discussed in past we have managed our capital structure consistent with an investment grade REIT. Then after receiving our investment grade rating we issued approximately $13.2 million shares of common stock generating net proceeds of $219 million, further strengthening our capital position. We were then able to access the unsecured market through a $250 million, 10 year senior unsecured notes offering with a coupon of 6.125%. We then repaid the balance of the secured term loan in late April. We believe these transactions accomplish a number of important things for us. First, we were able to access an efficient market, noting that historically speaking a 6.3% yield on a 10 year unsecured financing is relatively attractive. Second, we were able to obtain more term with respect to our debt which more appropriately matches the long-term assets and long-term leases that we have with long-term capital.

Third, we were able to reduce our exposure to floating interest rate risk and with LIBOR at less than 1% on absolute terms we see greater risk of LIBOR increasing than decreasing from here. Fourth, we were able to create more capacity under our $720 million line of credit, which we believe will support new investment activities and continued growth. Finally, we were able to further diversify our capital sources, reducing our reliance on the bank market and other forms of financing. While the credit markets are significantly improved from where they were a year ago, there still remains a significant void in financing the commercial real estate industry. And it will take time to see if the early start to 2010 leads to a sustained return of the CMBS market.

So given all of the activity I think it's helpful to walk forward our balance sheet from where we were at the end of the quarter to where we sit today. Starting with our balance sheet at March 31 and including on a pro forma basis, the equity offering, the unsecured bond offering, the secured term loan repayment, we then add the recently closed medical center drive acquisition and the pending 50 West Watkins acquisitions, as a result we have reduced our consolidated total debt to under $1.3 billion. And our weighted average debt maturity moves from 5.8 to 7.9 years, again highlighting a more appropriate matching of long term leases with long term debt.

Our debt to total assets goes to approximately 37% and we estimate our fixed charge coverage to be approximately 2.2 times on a pro forma basis. And our debt to adjusted EBITDA is down to 5.2 times on a pro forma basis, a very healthy level based on this important metric. Our unencumbered rents are approximately 67%. Our secured debt as a percentage of total assets drops to 19%. And our unhedged variable rate debt drops to zero. From a liquidity perspective, our line balance is roughly $150 million, leaving approximately $570 million of capacity, in addition to our $37 million of cash on a pro forma basis.

Our accomplishments in the first quarter and throughout April represent an inflection point in our company's history; serve as tremendous testimony to the company's sustained commitment to a sound financial foundation. We are again grateful to our lending and financial partners, recent and long saving for all of their efforts and support on our behalf during these exciting times for BioMed. And before I turn it back to Alan for your questions, I do want to invite everyone to visit our website to review our 2009 annual report which is online for the second consecutive year. The site features a variety of videos and content about our results in 2009. And finally, want to remind everyone that we are hosting our 2010 Investor Day one week from today at the Landmark Eastview Campus in Terrytown. Space is limited so if you have not done so already, please contact Rick Howe, our Director of Corporate Communications, after the call.

And with that, turn it back over to Alan.

Alan Gold

Thanks, Kent. Before I have the operator begin the Q&A session, I want to extend my thanks to all of the BioMed team who proved once again the value of hard and smart work throughout the first four months of 2010. Now, operator, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana – Wells Fargo

Thanks. Good morning. Kent, as we look at your – kind of your pro forma balance sheet with leverage at less than 40%, but then I look at your coverage metrics, debt coverage at 2.2 times and debt to EBITDA around five times, as you look to lease up your portfolio, those metrics will improve. If you lease up the portfolio, let's say 90% or I'm not sure exactly what your goals are but let's just use that as a number, would you feel comfortable having those metrics stay the same and then, hence, kind of increasing your leverage on a debt to gross asset value basis?

Kent Griffin

I think – we think about our credit profile across all the metrics and no one metric is defining our governing in terms of how you think about the overall capital structure. More generally speaking, I think we're very comfortable with where we are and I think we would expect to continue to maintain the conservative capital structure that we've had. I do think we have capacity to make additional investments but we're going to focus on not just the debt to total assets but fixed charge coverage and each of the other metrics.

Brendan Maiorana – Wells Fargo

So as we kind of look at it today, is this sort of a level that you would – I mean, is this – should we view this as you raised a fair amount of capital and you're in a position to, kind of, grow pretty comfortably from here or should we think to the extent that you do some opportunities beyond what you guys have just recently announced that there would be more capital raising that would need to occur?

Kent Griffin

I think, it really depends on the types of investments we would see. Certainly, for a smaller level of new investment, we’d be very comfortable taking on that investment as is. The more significant the new investment and the size of the investment opportunity, the more likely we would expect to finance it with a substantial portion of affirmative capital.

Brendan Maiorana – Wells Fargo

Okay. And then in terms of your capital stack and now being investment grade, how do you think about the kind of level of mortgage financing that you've got relative to tapping the unsecured market as you did, but doing more so going forward?

Kent Griffin

Well, I think we will continue to be opportunistic on the capital side as well, meaning that I don't think we – I think we will from time to time pursue secured financings. However, I think the unsecured market is a fairly efficient and effective market for us in executing our business. As we think about new investment opportunities and trying to match fund new investments with capital, the ability to first know your cost of capital fairly with some degree of precision, based on the liquidity of the bond market, your ability to access the bond market efficiently and more quickly match fund your capital raising with your capital deployment, I think that the margin might have a bias towards unsecured debt over secured debt.

Brendan Maiorana – Wells Fargo

Okay. That's helpful. And then on the leasing side, you guys have had very good success leasing up a lot of – some of the newer space that's come online. It seems like some of the existing space or maybe second generation leasing, not renewal, but maybe second generation for getting new tenants is a little bit more challenging. I mean, just looking at from an outsider's perspective, is it – do you feel like it's particularly more difficult to lease second gen space or new tenants going into that space relative to first gen space.

Alan Gold

I don't think that you've accurately characterized what's actually occurring, because we don't believe that there's any issue in leasing second generation space at all. I think what you're highlighting and focused on is that we have acquired a lot of – and have available a lot of assets that have gone into redevelopment and we've put them in – in the redevelopment form. And they're currently in shell condition and that space, we have a lot of and we continue to work through that space and leasing that space over time. And we have had success and we continue to see tremendous amount of interest in that space as we move forward. We currently look at our portfolio. We have very little built out, ready to go laboratory space that is unleased.

Brendan Maiorana – Wells Fargo

Okay. So as we kind of think about the lease-up of the – I guess shell space as you go forward and you look out at your markets and the level of activity that is there, I know that being in kind of low 80s occupancy level is not where you want your portfolio to be. So how should we think about over the next couple of years? How that occupancy number may move up and trend?

Alan Gold

Well, I will reiterate that our first and top priority is leasing our – the opportunities that we have within our existing portfolio. We believe that the space that we have provides tremendous opportunity for the company to generate internal growth and we are focused on that and we believe that that is where we're going to achieve our greatest leasing success as we move forward.

Each individual market is unique and depends on what the activity in the individual market, but we are seeing demand across all our markets for our product type. And we believe that the success that we had in the fourth quarter of leasing over six or just under 600,000 square feet, combined with the success that we have leased in the first quarter and the ability to continue to capitalize on the activity that we see will generate the success of meeting our goals of – that we put forth.

Brendan Maiorana – Wells Fargo

So Alan, I think in your guidance, I think what you guys had stated at the end of last year was an increase in kind of overall portfolio occupancy of 250 to 500 basis points and it sounds like activity level is pretty good. So I mean, as we look out, should we expect that number to kind of accelerate going forward? I'm just trying to get a sense of sort of where we are in the cycle?

Alan Gold

Yeah, so if you look at our leasing expectations, we expected to do 1 million square feet over the five quarter period. The fourth quarter was a tremendous quarter and – but as we indicated after that call, we expect – we did not adjust our leasing expectations. We think 100 to 200,000 square feet is a fairly normal leasing cycle and if we continue on that pace for the next three quarters, we'll actually exceed – be able to exceed our leasing target.

From a net absorption perspective, we have a lot of net absorption, positive net absorption in the fourth quarter and I expect that or we expect that if you did 100 to 200,000 square feet of leasing, that would offset – roughly offset the scheduled expirations that we have and so from here we could be flat to modestly positive, depending on how much success we're able to generate on the leasing side.

Brendan Maiorana – Wells Fargo

Okay. All right. Thank you.

Operator

Our following question comes from the line of Chris Kattan [ph] with Morgan Stanley. Please proceed.

Chris Kattan – Morgan Stanley

Hi. Good morning. My question's on the acquisitions, I guess a couple related questions, one is, is there something you're seeing in Maryland above your other markets that makes you really want to acquire in those markets or was that situation-driven and then the second is on pricing. Specifically, the 50 Watkins, looks like – I just jotted the numbers down, sounds like it's 285 a foot versus the neighboring properties at 175 a foot. Can you talk a little about the pricing metrics there that made this a compelling acquisition and what replacement cost might be for these assets, if you thought about that?

Alan Gold

Sure, I guess we'll probably answer this in stages.

Chris Kattan – Morgan Stanley

Okay.

Alan Gold

The first point related to the Maryland market, I think we're looking at – we are looking and we will continue to look at opportunities in each of our markets. I don't think it would be accurate to draw the conclusion that we are particularly focused on the Maryland market. That said, the Maryland market happens to be fairly attractive and it's a market where we have wanted to have more availability in that market and so we are excited about being able to do that. As far as the relative pricing, the 55, 65 west Watkins acquisition had a little bit of office component to it, which affects obviously the per square foot valuations. And I think we are very comfortable that each of those acquisitions is pretty comfortably below the replacement cost. So part of our enthusiasm for the opportunity.

Chris Kattan – Morgan Stanley

And you said the cash yield was an 8, 3, what, across all these acquisitions?

Alan Gold

It's a blended number across all three acquisitions in the development.

Chris Kattan – Morgan Stanley

Got it. Got it. Thank you very much.

Alan Gold

Thanks.

Operator

Our following question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Jordan Sadler – KeyBanc Capital Markets

Thanks and good morning out there. Struggling a little bit to understand the full guidance reduction. I know you laid it out nicely in terms of what the dilution is from the capital raises and from acquisitions, but you did $0.33 in the quarter at the low end of your range, you got $1.10. If you just sort of do the math, you end up at a run rate of $0.25 to $0.26, which means a seven plus cent diminution on a quarterly basis. So I'm trying to reconcile that with not only the dilution that you have there but also the acquisitions that you completed there in the quarter, that you just announced today and the one you have teed up. So may be help us out? Is there anything one time in 1Q that I missed?

Kent Griffin

I don't think so. We can certainly spend more time offline walking through it. If you take the equity offering, relatively straightforward, assuming as we used the proceeds to pay down our credit facility and do the same for the bond issuance, you can see that those things range close to $0.05 a quarter of dilution on a run rate basis. In addition, if you take the $0.02 of charges, that is a second quarter event by itself, so if you're at 32 – 33 for the quarter, back off $0.05 on a quarterly basis, you're at a run rate of 28. And then you've got $0.02 lower to give you a rough – in the ballpark number for where Q2 could end up but you had that $0.28 run rate for the balance of the year, I think it puts you right in line with our guidance.

Jordan Sadler – KeyBanc Capital Markets

Well I guess – what I feel like I'm missing is what is the benefit of the 70 plus million dollars worth of acquisitions that were not in the original guidance? What will likely be on a GAAP cap rate basis probably north of nine, excluding the development, it sounds like and then we were just talking with Brendan about what seems like positive absorption and I don't know if that's more guided toward the midpoint of the range or not but these things seem like they're in motion. What are the contributions from those two pieces?

Kent Griffin

I think if you do the math based on the acquisitions, you get roughly a little over a penny a quarter of benefit from the acquisitions, from the announced acquisitions.

Jordan Sadler – KeyBanc Capital Markets

Okay. And the leasing progress, is it relative to 1Q?

Kent Griffin

We had expectation. Our basic core portfolio performance is consistent with our expectations.

Jordan Sadler – KeyBanc Capital Markets

Okay. So but just going back to sort of that discussion, the portfolio – the core portfolio performance and contribution to FFO will trough out at what point during the year?

Kent Griffin

I guess I don't know that we intend to give sort of a month by month or quarter by quarter exact guidance level. But in terms of the lease-up assumption, we commented that we accomplished the bulk of our positive net absorption that we forecasted. We accomplished that in the fourth quarter and we guided to – we do have a little over 300,000 square feet of expirations for the balance of the year and so additional leasing that we would do beyond that would have a late in the year impact and would have a muted impact on our overall FFO expectation.

Jordan Sadler – KeyBanc Capital Markets

Okay. Maybe I'll circle up offline a little bit. My other question is just regarding sort of the investment grade rating and now this advantage in terms of your cost of capital. Two pieces here. One, what do you view as sort of your relative benefit in terms of the cost of capital on the debt side and then how is that affecting your underwriting on new investments?

Kent Griffin

Two different questions there. So in terms of the relative cost of capital, I think historically speaking as we have talked about in the past, you've been able to often times get similar sort of face level interest rates relative to borrowing in the secured market. However, you have increased flexibility, operating flexibility and I think you're more able to efficiently get better term. And so I think the biggest benefit is not having to rely on LIBOR-based loans and for a company of our size, to have $1 billion plus of LIBOR-based loans, I think is – while it's attractive to FFO in the short term, it imposes much greater financial risk over the long term..

So I think, it has, I think the benefit, maybe less in terms of FFO guidance, but much more related to the long-term stability and financial strength of our capital structure. So I think, that's the primary benefit.

To your other point in terms of how does it change our underwriting? I don't think it changes our underwriting at all on an asset-by-asset basis. I mean, I think, our cost of capital has really zero to do with the expected return, the potential return opportunity of a new investment. So I don't think it changes anything on that front.

Jordan Sadler – KeyBanc Capital Markets

You're saying your cost of capital is unaffected virtually over a long-term base – over a long-term period by the investment grade rating?

Kent Griffin

No, I didn't. No, what I said was, I think, our cost of capital has no effect on the expected opportunity from new investments.

Jordan Sadler – KeyBanc Capital Markets

I know, but in response to the first question, it sounds like, you don't see really a relative benefit as a result of the, you said, you could borrow at similar rates on property level debt overtime?

Kent Griffin

And I said similar rates but you're relying on shorter term debt, and a greater mix of LIBOR based loans with greater variability. So you may have a similar base rate in terms of your cost of capital but your overall cost of capital is we think clearly better with an investment grade rating, because you'll be able to get better term and have less variability. Similar term, similar rate with better term and lower variability from our perspective is a lower risk and ultimately, a lower cost of capital.

Jordan Sadler – KeyBanc Capital Markets

And so maybe is it safe to say that leveraged returns are less of an influence or factor as you're underwriting assets, if it's not necessarily having much of an impact on that?

Kent Griffin

And we’ve been, we always communicated, our underwriting on an asset – is on an asset-by-asset basis, focused very much, almost exclusively on unleveraged returns.

Jordan Sadler – KeyBanc Capital Markets

Okay. Thanks.

Kent Griffin

Thanks, Jordan.

Operator

Our following question comes from the line of Rich Anderson with BMO Capital Markets. Please proceed.

Rich Anderson – BMO Capital Markets

Hi. Good morning to you guys out there.

Alan Gold

Good morning.

Rich Anderson – BMO Capital Markets

And if I could just get back quickly to the guidance question, Jordan, was going through, if I do the math there's $0.17 of new items. That would bring your guidance to 106 to 116 versus your previous guidance, but it's 110 to 120. That means there's $0.04 pickup from acquisitions, is that it?

Kent Griffin

That's basically the math.

Rich Anderson – BMO Capital Markets

Okay. I just want to make sure. And question on San Francisco, you mentioned, D.C. showing some positive signs. Could you take a guess at a timeline on when that market starts to show improvement or is it showing improvement already?

Alan Gold

Well, I think San Francisco, I mean, the D.C. market we described as goes across all markets and it's really four of those very small tenants that really have that type of capital need.

What we are seeing in the Bay area, though, is that the greater economy, the improvement in the greater economy is now showing signs in the San Francisco market and in the office sector and in the R&D sector, we're seeing renewed interest on leasing larger blocks of space by the like – the R&D companies, the software, engineering and tech companies, which is a very positive sign, very helpful for us in the – for the product that we have in the Bay area.

In addition to the continued success that we're seeing and the continued interest from the Life Science sector. We are, I think, very optimistic that the if the economy continues to go in a positive growing fashion that the Bay area has a great chance of benefiting from that.

Rich Anderson – BMO Capital Markets

Is it a fair expectation that PRC becomes less occupied before it becomes more occupied?

Alan Gold

I don't know that that's, I mean, we don't know that that's a fact. I think that we are – we have tremendous amount of demand in that market. We are currently seeing requirements and tours that have, for our product type and in the last 90 days, we have seen over 23 new tours in the Pacific Research Center. I don’t – I can't say that I would see that that would be a possibility, it could.

Rich Anderson – BMO Capital Markets

Okay. I can appreciate the acquisition activity that's all 100% leased and that brings certainly a safety metric to the equation. But is that kind of what you're after right now? Or are you willing to investigate some assets with more hair on them from an acquisition perspective, more lease-up type opportunities? Is it now the time in the market where that becomes a more attractive alternative for you guys?

Kent Griffin

It really depends on the market. I don't think that we're going to be looking for lease-up opportunities adjacent to Pacific Research Center.

Rich Anderson – BMO Capital Market

Okay. Good.

Kent Griffin

But I do think that we are looking – I mean, I think the Cambridge market is still a very exciting market for us and so is the Maryland market, although our assets are 100% leased in the Maryland market. We think that that's a market that because of its proximity to the NIH and NCI and the FDA, is pretty exciting. San Diego, depending on the location, on the right location there could be some interest. But I think that's – I think our focus is on and continues to be leasing our existing portfolio.

Rich Anderson – BMO Capital Market

Okay. And then last question from me is on the Forest City deal with Healthcare REIT. Did you pass on that or did you not win that?

Alan Gold

I think people have thrown in the past term a little too loosely sometimes. For us that structure – a structured transaction like that is not – wouldn't necessarily work for us.

Kent Griffin

Be a nonstarter.

Rich Anderson – BMO Capital Market

Okay. Nonstarter. Thank you.

Operator

Our following question comes from the line of John Guinee with Stifel Nicholas. Please proceed.

John Guinee – Stifel Nicholas

Couple clarifications, probably Kent. When I look at page six, I look at your NOI on a cash basis. You go from roughly $59 million in the third quarter of '09 to $56 million in the fourth quarter of '09, to 59.2 in the first quarter of '10. And then if I look at the same numbers on an EBITDA basis, you go from $60.1 million in 3Q '9 to 53.2 in third quarter or fourth quarter of 2009 to $60 million today or in the first quarter of 2010. That's a very, very $3 to $6 million difference quarter-over-quarter over quarter with what's a pretty stable portfolio. Can you identify any one-time items or different payment schedules or different ways of treating OpEx that would give the company that big a difference?

Kent Griffin

I'll have to go back and look at that specific question. It's a fair question but I don't – I'd have to look into it. There's nothing that comes to mind, particularly unusual.

John Guinee – Stifel Nicholas

Just to make it simple, you go from $56 million of cash NOI in the fourth quarter of 2009, to 59.2, which is over a 5% increase without any change in occupancy or rent roll, I think.

Kent Griffin

Maybe what you're referring to is we did have some of the leasing that we executed last year, particularly in the fourth quarter, were leases that we were still doing the TIs and having those tenants in effect, so that's probably the difference that you're highlighting. For example, Regeneron is the most significant example where we were able to finish our TI commitment and have revenue recognition start.

John Guinee – Stifel Nicholas

Okay. Second, clearly, Pacific Research Center was a below market acquisition. Those things happen. And most people have dialed down the investment per square foot on the vacancy. We've got it at about 150 a square. Alan, if you were to sell that, try to sell these buildings today, what's a good number people should use if they want to be really conservative on that million square feet of vacancy?

Alan Gold

If I were to sell that today, probably 4, 500 bucks a foot. No. I mean, I think that – look. I think that there are very few comps or examples of vacant assets being sold in the broader market. We don't have any interest in selling the asset at this point. We really think that there is tremendous opportunity to be taken advantage with the property and the activity that we're seeing comes back to what we were starting to see, when we thought this was a great acquisition back in 2006. So I think that's the best way I can answer that.

John Guinee – Stifel Nicholas

Let me ask the question in a different way. You've had 23 tours in the last 90 days. If someone wants to take 100,000 square feet as is, whereas on a five-year lease, what are you quoting?

Alan Gold

In terms of a rental rate?

John Guinee – Stifel Nicholas

Yes.

Alan Gold

Are they a lab?

John Guinee – Stifel Nicholas

As is, where is, move in as is, where is. No TIs.

Alan Gold

We wouldn't quote that.

John Guinee – Stifel Nicholas

You wouldn't lease a building that you've had vacant for three or four years for a five year term on an as is basis?

Alan Gold

Well, I guess it's –

Kurt Griffin

I guess it's depending on the tenant.

Alan Gold

I guess it's depending on the tenant. Probably, I guess if they were going to use it and in our shell basis, just on a shell basis.

John Guinee – Stifel Nicholas

Yeah.

Alan Gold

Without any TIs?

John Guinee – Stifel Nicholas

I think so.

Alan Gold

Yeah. Then I think we would be in that – on an annualized basis somewhere in the 12 to 15 bucks a foot.

John Guinee – Stifel Nicholas

Okay. Great. Thanks.

Operator

Okay. We have no further questions at this time. I would now like to turn it back over to Mr. Gold.

Alan Gold

Well, thank you. I'd like to thank everybody for joining us here on this call and we look forward to next quarter's call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a wonderful day.

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Source: BioMed Realty Trust, Inc. Q1 2010 Earnings Call Transcript

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