Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BioMed Realty Trust, Inc. (NYSE:BMR)

Q2 2012 Earnings Call

August 1, 2012 12:00 p.m. ET

Executives

Rick Howe - Director of Corporate Communications

Alan Gold - CEO

Greg Lubushkin - CFO

Kent Griffin – President

Matt McDevitt - EVP, Real Estate

Analysts

Chris Katen - Morgan Stanley

Brendan Maiorana – Wells Fargo Securities, LLC

Tayo Okusanya - Jefferies

John Stewart - Green Street Advisors

Ross Nussbaum - UBS

Rich Anderson – BMO Capital Markets

Rob Stephenson - Macquarie

Operator

Welcome to the Q2 2012 BioMed Realty Trust Incorporated Earnings Conference Call. My name is Christine and I will be your operator for today’s call. (Operator Instructions)

I will now turn the call over to Rick Howe, Senior Director of Corporate Communications. Rick, you may begin.

Rick Howe

Thank you, Christine, and welcome, everyone. Today’s second quarter 2012 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.biomedrealty.com, click on the investor relations tab on the left and then click the Q2 2012 BioMed Realty Trust, Inc. earnings conference call link. We have also posted these slides on the investor relations tab of our website under the title “Investor Presentation August 2012.”

Presenting today are Alan Gold, Chief Executive Officer, Kent Griffin, President, Matt McDevitt, Executive Vice President of Real Estate, and Greg Lubushkin, Chief Financial Officer.

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 statement, 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 in 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 a result of new information, future events or otherwise.

I will now turn the call over to Alan Gold. Alan?

Alan Gold

Thanks, Rick. And welcome everyone to our second quarter 2012 earnings call and presentation. Our excellent operating financial results in the second quarter, strong leasing, significant cash flow growth and high-quality new investments demonstrate again our ability to leverage our operating platform and our sound flexible capital position to create value for shareholders.

The best-in-class BioMed Realty team delivered outstanding top and bottom-line results, including a 10.3% increase in core FFO per diluted share, and a 22.2% increase in AFFO per diluted share, which is a good proxy for our cash flow driven by more than 450 basis points of positive net absorption and 6.4% year-over-year growth in cash NOI for our same property portfolio as a result of our consistent execution of our leasing program.

And during the quarter, we acquired almost 300 million in high-quality life science assets, with a GAAP yield of 7.5%, comprising over 600,000 rentable SF 100% leased, plus an additional 140,000 SF of development potential. These investments were highlighted by back-to-back transactions announced in mid-June, through which we creatively expanded our premiere property portfolio.

First, we entered into a partnership with Shire Regenerative Medicine, a subsidiary of Shire, a global biopharmaceutical company, to develop a 28-acre project and consolidate their San Diego operations. Then, on the same day, we announced our investment in Granta Park, an internationally-recognized life science research park in the core Cambridge, U.K. life science market. We are very excited about each of these investments, and Kent will discuss them in more detail in a moment. But when looking at these transactions collectively, we are especially pleased with how they provided tangible illustration of the robust nature of our fully-integrated operating platform and our ability to leverage BioMed Realty particular skill, expertise and relationships in life science real estate to create lasting value.

Before I hand it over to Matt and Kent, I’d like to review the current trends and observations in the life science industry. The big picture remains very positive. First, the long-term demographic trends and the aging and extended life span of the population continue to serve as the drivers of demand for more innovation and improvements in medicine. Importantly, the many FDA approvals over the past 18 months serve as a testimony to the ability for our biotechnology and pharmaceutical sectors to continue to make scientific advances that can improve the human condition.

There have been 16 FDA approvals in the first half of the year, following 30 in 2011, and our tenants have continued to garner a disproportionately large piece of the approval pie, with Amylin, Vertex, Genentech and Arena all receiving drug approvals in 2012. And in turn, capital raising has continued at a healthy level, with partnering transactions, public equity offerings and private equity debt financings totaling 27 billion for the first six months of 2012. Now this is below the blockbuster pace for 2011, but consistent with the heavy volumes we experienced in 2009 and 2010.

The AmEx Biotech Index continues to outperform the broader market for the year, posting a 32% increase year-to-date compared to 9% for the S&P 500. M&A activity continues at a healthy clip, and most notably with GlaxoSmithKline’s acquisition of Human Genome Sciences. This is an enormous positive, as GSK represents a very material credit upgrade to our largest tenant, which has one of the longest lease terms in our tenant roster. A full 10.4% of our rents are leased to what will soon be a GSK subsidiary with 14 years of remaining lease term, not to mention the fact that the remaining term is firm, with no lease termination options for GSK. The impact on our tenant portfolio is equally positive, as approximately 40% of our tenant roster will be comprised of investment-grade life science companies and research institutions, with an average remaining term on their leases of nine years.

Now a few data points about GSK. They are one of the world’s leading multinational research-based pharmaceutical and healthcare companies. Headquartered in the U.K., GSK has almost 100,000 employees in over 100 countries, with major research centers in the U.K., in the U.S., Spain, Belgium and China. Their products focus on a significant range of approved prescription medicines, vaccines and consumer healthcare products. Their current equity market cap is $113 billion, and the company is rated A1 by Moody’s and A+ by Standard & Poor’s. This event serves as a tremendous validation of our assessment of the risks and opportunities of our strategic decision to acquire these assets from HGS in a sale lease back in 2006. We’re excited to welcome GSK on board as our soon-to-be largest tenant.

I will now turn the call over to Matt, who will discuss our second quarter leasing activity in detail. Matt?

Matt McDevitt

Thanks, Alan. Positive leasing momentum continued again through the second quarter, with over 350,000 of leased space, comprising 23 transactions. Gross leasing success for the quarter translated into 187,000 SF of positive net absorption. New leasing volume continues to produce the larger share of activity, with 16 transactions for 260,000 SF.

Now, looking more closely. We highlighted three specific property leasing priorities for 2012: 650 East Kendall in Cambridge; 201 Elliott in Seattle; and PRC in San Francisco. Starting with the highlights of the quarter is our 126,000 SF lease with AVEO Pharmaceuticals at 650 East Kendall. The premiere multi-tenant research facility in the heart of Kendall Square, life science’s super-cluster. AVEO is a cancer therapeutics company that recently received positive top-line results from a phase 3 clinical study for oral, one-daily treatment for patients with advanced renal cell carcinoma, and has two additional product candidates for the treatment of various cancers.

And we’ve enjoyed significant success in Cambridge overall, with over 400,000 SF of leasing over the last 18 months. We’ve already signed our first two leases at Cambridge Place, a little bit ahead of plan, and I’ll expect we’ll meet or exceed our leasing plans for the project by year-end. As the quarter ended, we signed up two new tenants at Fresh Pond, bringing that property also to 100% leased.

Now across the river, at the Center for Life Science Boston, we’ve expanded with Harvard, who is taking an additional 9,000 SF. No, not the top floor premium space. It’s actually the first floor space that was originally zoned for retail, but we worked with the city and were able to convert the space to office, getting even better economics on the overall project. Overall, excluding our Rogers Street and Cambridge Place lease-up acquisitions, we’ve taken our Boston/Cambridge portfolio up to 97% leased as of June 30.

Our second strategic leasing goal for 2012 was PRC. As previously announced in the second quarter, we announced a 60,000 SF lease at PRC Research Center North with Depomed, a specialty pharmaceuticals company which is marketing three FDA-approved products and pursuing two product candidates in clinical development. With another 9,000 SF life science tenant added during the second quarter, we now have executed leases totaling over 300,000 SF at PRC just this year, and almost 700,000 SF in the past two years, bringing our total occupancy up to approximately 65%. Now also in Fremont, Newark submarket, just around the corner, we added another tenant at our Ardenwood Venture Project, bringing that property up to 78% leased. Overall, occupancy in San Francisco is up over 350 basis points in one quarter.

Our third strategic goal was in Seattle, at 201 Elliott, which we addressed with the Omeros lease discussed in our last call. In addition, at our 530 Fairview property, we’ve expanded with two existing tenants, including Novo Nordisk and Presage, bringing that project also to 100% leased. We’re very pleased to have addressed these three primary leasing targets for 2012, and we still have the balance of the year to push occupancy even higher.

On the renewal front, during the second quarter we renewed and extended seven leases for 87,000 SF. This included roughly a 20,000 SF extension for a non-life science-based Genentech, at the Gateway Business Park in South San Francisco. In addition, subsequent to quarter-end, we extended our 80,000 SF lease with Vertex, at the Torreyana Road property in San Diego, through 2018. This represents our second five-year extension with Vertex since we acquired the property in 2007.

With the Vertex extension and the additional leasing I mentioned in Cambridge this quarter, we have now reached 1.2 million SF, with five months still remaining in the year. This sustained leasing success during the first three quarters of the five-quarter plan has pushed net absorption over the same period to 464,000 SF, which has now exceeded our five-quarter net absorption goal of 400,000 SF, again with two quarters remaining. I’m extremely proud of our leasing team for having successfully executed on this plan.

Leasing interest and activity remain brisk on both coasts, driven by the continued strength and resiliency of the life science industry and the creativity and thorough understanding of tenant needs by our leasing, development, acquisitions and operations teams. I’ll now turn the call over to Kent to discuss our investment activity. Kent?

Kent Griffin

Thank you, Matt. New investments in the second quarter were a direct result of our success at leveraging our strong platform, our industry expertise and our valued relationships, to identify and execute on attractive new investment opportunities. Now before I get to our U.K. investment, I’d like to review our new development project with Shire Regenerative Medicine.

This creative transaction demonstrates the depth of skills and expertise of our team in a way that produces a very attractive risk-adjusted return opportunity for our shareholders. We acquired two adjacent development sites comprising approximately 28 acres in the Sorrento Mesa submarket of San Diego, at a total cost of approximately $50 million. Concurrently, we signed a 20-year lease with Shire Regenerative Medicine, formerly Advanced BioHealing. Shire intends to construct a multiphase laboratory office warehouse and manufacturing facility. The site can ultimately accommodate 800,000 SF, and the lease can be extended up to an additional 20 years. The effective yield over the initial term for our lease is just over 8%.

Now as background, we had been working closely with Advanced BioHealing to develop a real estate solution to support their growth, when in May of 2011 it was announced that they would be acquired by Shire. Shire’s a $16 billion equity market cap global biopharmaceutical company headquartered in Dublin. Fast forward 13 months later, we were able to announce our project, which with Shire’s support now has the potential to be much larger in scale versus what had been previously contemplated with ABH. This transaction is the culmination of creative and extensive collaboration efforts to identify and execute on a real estate solution which will fully support the development and manufacturing needs of a premiere global pharmaceutical company’s expansion into San Diego. It also demonstrates the positive impact of M&A activity in the life science industry, via increased capital flows and funding. There’s a clear and unmistakable linkage between the acquisition of ABH by Shire in 2011 and this transaction, to develop this large, multiphase campus for the development and commercialization of important regenerative medicine therapies in San Diego.

Now moving on to Granta. During the second quarter, we announced and closed on our investment in Granta Park in the United Kingdom’s Cambridge market. The hub of this Cambridge life science market is obviously the world-renowned historic University of Cambridge, established in the early 1200s, just a little before the signing of the Magna Carta, with a reputation for academic excellence, especially in the life sciences, boasting graduates who have garnered 20% of the Nobel Prize winners in medicine and chemistry. As is the case in the United States, proximity and access to premiere academic and research institutions is a prerequisite for sustainable core life science market, and this Cambridge life science cluster is no exception, as it is home to over 1,000 science and technology companies in close proximity to the University of Cambridge, the Wellcome Trust, the largest charitable medical research organization in the world, as well as the prominent research institutes, the Cavendish Laboratories and the Babraham Institute.

More specifically about Granta Park. We purchased this property in mid-June for approximately $196 million U.S., excluding a transaction cost of approximately $12 million, with in-place annual cash NOI of approximately $16 million U.S. This 472,000 SF life science campus is 100% leased, and located on 100 acres just outside the city center of Cambridge. In addition to the existing campus if 11 buildings, the modern state-of-the-art Granta Park research campus developed over the last nine years includes 140,000 SF of additional development potential, which will allow us to expand the campus according to the needs of the world class tenant roster, a virtual who’s who of global pharmaceutical companies and biotechnology names. As a result of this transaction, we are expanding our existing relationships with MedImmune, a subsidiary of AstraZeneca, which will actually move up to become our 11th largest tenant, and Pfizer, which is our tenant in both Boston and North Carolina.

In addition, we are establishing exciting new relationships with Global Biotech’s Gilead Sciences and PPD as a result of this investment. Again, the park is currently 100% leased, with an average remaining lease term of approximately eight years.

We are excited about this first international investment for a variety of reasons. First and foremost, the initial [inaudible] investment is very attractive on economic terms, with an estimated initial yield in excess of 7% even after considering all transaction costs, tax leakage, incremental G&A, and that’s without giving consideration to the developable land. Historically, the opportunity to invest in the U.K. at higher returns than like-property investments in the U.S. have been rare to say the least, and as evidenced by more recent investments by other REITS in retail office and other sectors, the dislocation in the capital markets in Europe created a compelling investment window. Based on our knowledge of the market and judicious use of capital, we were able to capitalize on this opportunity to the immediate benefit of our shareholders.

Secondly, this investment establishes our presence with immediate scale in what is the top life science market in Europe. While the park’s needs in the near term are limited, given that it is 100% leased, we do expect to have boots on the ground in Cambridge even as we leverage local leasing and property management in operations expertise.

From a capital allocation perspective, this is a long-term investment, and we will endeavor to manage our foreign currency exposure accordingly. Greg will discuss in more detail that we have elected to hedge, via borrowings in locally-denominated currency, at roughly 80% of the principal value of the investment, which we view as the most effective means for managing our foreign currency exposure.

Other investments during the quarter. Last quarter, we walked through the details of our acquisitions of the Nancy Ridge property on Arena’s campus in San Diego, as well as the Broadway property leased to Genentech on the peninsula in the Bay Area, so I’m not going to spend any time going through these deals again on this call.

We have also acquired a participating interest in a $355 million construction loan secured by a first priority position on the 1.1 million SF Fan Pier development at the Seaport in Boston, which is 95% leased to Vertex for 15 years. Our portion of the investment represents up to $255 million of the secured construction loan, with a scheduled maturity of September, 2014. The loan bears interest at LIBOR plus 550 basis points, with a 1% LIBOR floor, which obviously compares very favorably to our revolving credit facility, which has an initial term that extends out to 2015 and a marginal barring cost of L+155. While relatively short-term in nature, nonetheless we are very excited about the attractive risk-adjusted return opportunity, and once again, our ability to leverage our platform and our expertise.

Also subsequent to quarter-end, we closed on the Belward Campus Drive acquisition. It was originally scheduled to close in June, but actually closed just about a week ago.

And in summary, the new investments we’ve executed in the second quarter, individually and collectively, allow us to leverage our core competency, our expertise in life science real estate, to tangibly create value for our shareholders. I’ll now turn the call over to Greg, to review the financial highlights for the quarter. Greg?

Greg Lubushkin

Thanks, Kent. Sustained leasing success and attractive risk-adjusted investments continue to drive earnings and cash flow growth. Core FFO per diluted share, which excludes the impact of acquisition-related expenses, increased 10.3% to $.32 for the second quarter, compared to $.29 for the same period of 2011. AFFO per diluted share increased 22.2% from $.27 in the second quarter of 2011. Cash basis consolidated NOI was up almost 21% over the second quarter of 2011, and same-store, or same-property, cash NOI, grew 6.4% year-over-year. During the same period, the same-property lease percentage increased 460 basis points from 81.3% to approximately 85.9%. We expect that same-property cash NOI will continue to grow for the foreseeable future, as a result of contractual rent escalations, and replenishing our [inaudible] backlog with current and future leasing success.

As of June 30th, cash rents have yet to commence on over 1 million SF of executed leases, which at an average rent of just over $23 per SF, represents a backlog of almost $25 million in annualized base rent, or $19.5 million after adjusting for the impact of the Pru JV lease.

Approximately 5 million in annualized cash rents will commence in the second half of this year, with the balance commencing throughout 2013. And remember, those are annualized cash rents commencing in the second half of the year, which would need to be prorated from the point in time in which the cash rents actually commence.

GAAP revenue recognition has yet to commence on approximately .5 million SF of our recent leasing, at an average rent of approximately $36 per SF, representing approximately $18 million in annualized base rent, or $12.5 million after adjusting for the impact of the Pru JV lease. Revenue recognition will commence in the second half of 2012 on leases representing approximately $8 million of annualized base rent, the majority of which will start late in the fourth quarter.

Total revenues were $125 million, once again the highest in the company’s history and a 17% improvement over the second quarter of 2011. Rental revenues of $96 million were up 18% year-over-year, and the highest in the company’s history for the 10th consecutive quarter. Including the acquisition-related expenses, which total $.08 per diluted share for the quarter, FFO per diluted share calculated in accordance with NAREIT standards was $.24 for the second quarter 2012, as compared to $.29 for the same period in 2011.

We recorded a net loss available to common shareholders in the second quarter of $8.7 million, or $.06 per diluted share as a result of $12.2 million of acquisition-related expenses, primarily for Granta Park.

Our quarterly common dividend remained at $.215 per share, or $86 per share annualized, with an AFFO payout ratio of 65%. G&A expenses at $8.6 million were in line with previous quarters, but are expected to increase over the balance of the year, which I’ll address in more detail shortly in the guidance discussion.

As for our capital activity, in late June we completed a $250 million public offering of 10-year, 4.25% unsecured senior notes to pay down our unsecured line of credit. The issuance was very well received in the market, as we priced the transaction with no new issue premium. In addition, earlier this morning, we closed on an amendment to our unsecured term loan that converts a portion of the borrowings from dollars, pound sterlings, to serve as a hedge against the bulk of our foreign currency exposure associated with our U.K. investment. Effectively, we’re converting approximately 156 million of dollar borrowings into 100 million pound sterling borrowings, which represents approximately 80% of our principal investment amount. Separately, we’ve swapped the same notional amount of borrowings from floating rate to fixed, which results in an effective rate on the 100 million pound sterling, inside of 2.4% on this portion of the term loan.

So after all of this transaction activity, we sit at only $78 million outstanding on our revolving credit facility at June 30th, with over $650 million in capacity and a very strong credit profile. Our fixed charge coverage ratio held steady at three times. Debt as a percentage of gross assets was 39.6%. Debt to adjusted EBITDA is roughly 6.5 times. Secured debt as a percentage of total gross assets is down to 10.3%, and 79% of our rents are unencumbered. We continue to operate well within our comfort zone on leverage. Relationships with the rating agencies remain very constructive, and during the second quarter both published their annual reviews, reiterating their investment grade ratings and stable outlooks.

And lastly on guidance, we’ve narrowed the range for core FFO to a range of $1.26 to $1.28 per diluted share, excluding acquisition-related expenses. This brings the bottom end of the range up by $.04 and holds the top end. FFO guidance, including acquisition-related expenses, is set at $1.18 to $1.20 per diluted share.

The updated guidance is based on the following assumptions. Granta Park, the Shire lease and Belward acquisitions are adding approximately $10.5 million of NOI to the back half of the year, or $5.25 million per quarter, getting you to approximately $93 million in NOI on a quarterly basis. The impact of new leasing, move-outs, variability in operating expenses gives us an approximate range of between $92 and 94 million for quarterly NOI.

Our quarterly G&A run rate is projected to be between $9 and 9.5 million. Based on the financing activity completed in the first half of the year, we’re projecting interest expense over the second half of the year to be in the mid-$50 million range, or $27.5 million per quarter, net of capitalized interest of approximately $2 million per quarter plus or minus.

This results in a forecast of quarterly FFO for the second half of the year between $.32 and $.33 per diluted share, lower probably in the third quarter, trending up as we move through the balance of the year, and full-year guidance of between $1.26 and $1.28 per diluted share. The midpoint of $1.27 is up $.02 from the midpoint of $1.25 in previous guidance. We estimate that leasing will continue to be in the range of 250,000 SF per quarter, plus or minus.

Regarding our capital plan, with approximately $17 million in redevelopment spend last week, we expect approximately 6 million of that will be spent over the balance of the year. We’re forecasting capital requirements associated with executed leases will aggregate in the range of $60 million, and expect that approximately 50 million of that will be spent over the balance of the year.

Finally, as we discussed last quarter, our Investor Day is scheduled for the afternoon of Monday, November 12th, immediately prior to NAREIT. We recently sent out another save the date notice with additional details. If you didn’t see it, let Rick Howe know and we’ll get you on the mailing list. A formal invitation with full details will be sent out shortly. We look forward to seeing many of you in San Diego in a few months. And with that, I’m going to turn it back over to Alan.

Alan Gold

Thanks, Greg. Now before taking your questions, we want to acknowledge the efforts of our best-in-class employees throughout the company. They’re hard work continues to drive our operating and financial successes quarter after quarter, year after year. Now Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator instructions).

Operator

(Operator instructions). Our first question is from Chris Katen of Morgan Stanley. Please go ahead.

Chris Katen - Morgan Stanley

Good morning. Kent, I was hoping you could spend a little more time talking about the participating loan you made in the Fan Pier. How do you expect that to be drawn down over time? And it sounds like you will just fund it on the line, but maybe you could just add a little more color on how it was sourced and how it will be funded over the next few years.

Kent Griffin

Sure, so yes, we're very excited about the loan. It is short, relatively short term in nature. So it matures in 2014, so from our perspective, it makes sense to fund it via the credit facility because it's both match funded and from a term perspective. We've got actually much more term on our line than the term on the construction loan. In addition, the fact they're both LIBOR based, so there's a natural add. And basically, it's a spread investment of close to 500 basis points. So we think that's sort of a natural approach.

In terms of timing, when you drive by the project from the outside, you can see construction has made significant progress. We would expect to start to have draws by the end of this year, but obviously, a very small amount. It's not generally expected to be fully funded until early 2014. So we won't really get a fully drawn amount until 2014.

Chris Katen - Morgan Stanley

Thank you very much, and then Matt, if you could talk a little bit more about the leasing environment. You talked about I guess with the inclusion of July's leasing, you were kind of 1.2 million square feet goal. As you revise your goals for the balance of the year, what do you think is achievable based on the conversations you're having and the pipeline you have now? And if you have any specific remarks for …

Matt McDevitt

Why don’t I give you the bigger picture of kind of how we see the markets? So we kind of view the top four or five, the essentially Boston, followed by San Francisco, then Seattle, and San Diego just kind of right behind it. So as I described in my remarks, we're seeing good activity in really both of our markets, both coasts. And so activity is really coming from a lot of our existing tenants. And so we're seeing some growth not only outside the market, but really inside of our existing portfolio.

Chris Katen - Morgan Stanley

And another way, you haven't really seen any kind of deceleration in the conversations you were having with your core tenancy?

Matt McDevitt

No, not at all. Actually, I would say it would be the opposite. We're seeing an increased activity level with our existing tenants. Across the board, maybe aside of New Jersey or Pennsylvania, we're seeing vacancy rates that were hovering probably in the double digits. And some of these markets are coming into the single digits. Frankly, Seattle is already in the single digits. And I wouldn’t be surprised if Boston by the end of the year is in a single digit category.

Chris Katen - Morgan Stanley

Got it, thanks. Just with those low vacancies, are you raising your rent expectations for next year as you begin to think about releasing?

Kent Griffin

Chris, this is Kent. I don’t think we're ready to comment quite yet on 2013. I think we can say we are seeing some improvement in terms of conditions because of the tightening of the markets. While we're not seeing a lot of movement on face rates, we are seeing concessions decrease, so the effective rents, we are seeing some positive improvement on that front particularly in San Diego as well as Cambridge. But I would prefer to not project 2013 until our next call.

Chris Katen - Morgan Stanley

Understood Kent, thank you very much.

Kent Griffin

Sure, thanks.

Operator

Thank you. Our next question is from Brendan Maiorana of Wells Fargo. Please go ahead.

Brendan Maiorana – Wells Fargo Securities, LLC

Thanks, good morning out there. Alan, you talked about the GK acquisition with Human Genome. As you sort of look at that transaction, what do you think that means over medium or even longer term for the I-270 Maryland market?

Alan Gold

I mean the only thing I can perhaps refer to is what happened with MedImmune was acquired by AstraZeneca and that was actually a very positive event for the I-270 Maryland market. MedImmune is basically doubled in size. And AstraZeneca is actually focused a lot of its R&D efforts in growing its platform through MedImmune. That's what we've seen.

We believe that and we know for a fact that GSK has one of the largest or HGS, now GSK, has one of the largest patent portfolios out there for a large biotech. And they have some very exciting products that they picked up with the HGS acquisition. Not the least one is the approved drug, Benlysta.

Brendan Maiorana – Wells Fargo Securities, LLC

Would you imagine that some of the current HGS folks would leave and would start as has happened in the past of the larger M&A transactions that have happened in the space?

Alan Gold

We believe that that's actually the case. And that's one of the things you actually need in order to have a sustainable life science cluster is you need successes in the biotechnology companies to create these serial entrepreneurs who have funds to start new businesses. And the way the serial entrepreneurs are created is through acquisitions of their successful previous endeavors. So we've seen that in the past. Genentech Hybratech in San Diego, Genentech in San Francisco, MedImmune up in the Shady Grove area, so we believe there are great possibilities for that to occur, yes.

Brendan Maiorana – Wells Fargo Securities, LLC

Sure, okay, thank you. Greg, I know you mentioned that the balance sheet is in very good shape and your leverage relative to a lot of the peer reads that are out there is low, but you've got as you highlighted in your guidance outlook, you've got another it sounds like $56 million of CapEx related to redevelopment and leasing CapEx and you guys continue to lease a lot of space. On your spending capital on leasing, you've got the investment in the Fan Pier construction loan. And your leverage levels are sort of towards the high end of where they've been over the past several quarters. Do you feel like you've got a lot of long term capacity on your balance sheet as it sort of sits there? Or do you think that if you guys do anything significant in terms of investment, it's going to require it coming back to the capital markets?

Greg Lubushkin

Certainly as we sit here today, we have $78 million on the line at June 30th. So there really is no immediate need for additional capital because we don’t have a use of proceeds. The later part of your comment, if something significant happens, would we have a need for capital? I think the answer is yes. We would. If something significant happens, we would have to evaluate sources and uses of capital including equity. And kind of in between that to the extent that we're dealing with smaller transactions, acquisitions, we would look to potentially match fund on a leverage neutral basis. Those type of transactions through the ATM, which we've got roughly $100 million of additional capacity.

But as we sit here today and look over the balance of the year, we think from a leverage perspective, we're in good shape. And have again absent significant transactions as you pointed out, no immediate plans to raise additional capital.

Brendan Maiorana – Wells Fargo Securities, LLC

You guys did on a clean basis, you did $.32 in the second quarter and your guidance as you point out for the back half of the year is $.32 to $33 a quarter. Given the acquisitions that hit largely towards the end of the quarter, and grant, the Barth being the most significant of those, why would we not expect that guidance to move up a little bit more than that? I would have thought it would have been $.01 higher per quarter. Is there something in the back half of the year to maybe expect that run rate to be a little less than it might otherwise be?

Greg Lubushkin

In the fourth quarter, mid to late fourth quarter, you're going to start to see the impact of a lawn for example. We've discussed that move out. That is going to have an impact on the back half of the year.

Brendan Maiorana – Wells Fargo Securities, LLC

I thought that was like a December 15th or December 30th move out.

Male

Yes, Bennett, I think probably the more material change would be the fact that while we've acquired roughly $300 million in new investments, we've actually put long term financing in place via the bond yield as well as the interest rate swap that Greg alluded to. That is north of $400 million, so we've actually fixed a significant portion of debt. So we're getting a higher financing rate, but because we're getting more term, ten years in the case, obviously the bond deal, and I think that's what's offsetting the incremental growth above the investment.

And in addition, I was also going to mention that you're looking at some incremental G&A in the back half of the year as well. But to Kent's point, we're going from a line cost, marginal line cost of 155 over to having done the bond deal right at the end of the second quarter at 4.25%. attractive as it was, it's an increase in rate. And as attractive as fixing the rate on the pound sterling piece of the term loan is we're taking that from 165 over LIBOR floating to 2.4 fixed. So I mean you add all that up, and you end up at the $1.27 for the full year.

Brendan Maiorana – Wells Fargo Securities, LLC

Okay, all right, thanks guys.

Male

Thanks, Brendan

Operator

Thank you. Our next question is from Tayo Okusanya of Jefferies. Please go ahead.

Tayo Okusanya – Jefferies

Yes, good afternoon, just a couple of questions. First of all, anything new in regards to negotiations with Vertex in Boston?

Male

Thanks, Tayo. The short answer is no. obviously, we are excited about the extension just on with Vertex in San Diego, which is the second time we've extended them since we acquired the asset. But in Boston Cambridge, we don’t expect any news up until the point of their termination notice would be required. I wouldn’t that as a negation negotiation, just as a wait until that date.

Tayo Okusanya – Jefferies

Got it, okay, that's helpful. And then earlier on in the call, Alan, I think you kind of spelled out some of the successes in your portfolio in regards to tenants getting FDA approvals on some of their major drugs. Just kind of curious whether that's creating any new demand for space that you can take advantage of with these tenants.

Alan Gold

I think that we look for positive growth in all of our markets from these new drug approvals, whether they're in our portfolio or they're outside of our portfolio. We think that that generated demand.

We have continuously seen in our portfolio as an example of that demand, we have seen continuous increased demand from Regeneron up in our Landmark [Inaudible] so it continues to outperform our expectations.

And we believe as their success grows that they will continue to grow with us like all of our tenants where we have availability of space.

Male

And Tayo, I think you also can look at some of the extensions we've done. We've just done a small extension with Genentech this quarter, and a larger extension with Vertex. They're both approval recipients.

Tayo Okusanya – Jefferies

Great, and then lastly Alan, in the past you've always been very helpful about giving us your thoughts about each of the key markets. I was curious. Can you give us a sense of what you're seeing demand supply wise?

Alan Gold

Again, I think that we're seeing very healthy activity in all of our markets. As we've discussed, we believe that our strongest market continues to be and remains the Boston Cambridge area followed by San Francisco. And then perhaps because of how tight Seattle is, Seattle being right up there along with a distant fourth being San Diego, there continues to be activity. All that being said, we still see activity in every one of our markets. And have signed even small leases out in our Pennsylvania market, which we perceive to be one of the weaker markets for the life science industry.

Tayo Okusanya – Jefferies

Okay, great, thank you.

Operator

Thank you, our next question is from John Stewart of Green Street Advisors. Please go ahead.

John Stewart - Green Street Advisors

Thank you. Could you please speak to leasing costs on the activity during the quarter? And maybe you could specifically help us break out where some of the big numbers are coming from and how we should think about that in terms of basis of net effect of rents on some of the big assets and leasing activity.

Male

Sure, and if you look at our supplement where we break out, I think it's page 32, we break out the leasing activity and we break it into renewals versus new leases, and then we separate the new leases first versus the second generation.

Obviously on the renewal leases, our total for TILC's and convections is less than $2.00. That's obviously something that's pretty attractive. And usually those numbers are low, but this is even …

John Stewart - Green Street Advisors

It wasn’t that number that caught my eye.

Male

Well, I'm just going down from the top of the page. That's the first group. And then actually I'll come back to the one that perhaps caught your eye, which was First Generation. But the Second Generation leasing is also low in the $20.00 neighborhood all in inclusive of leasing commissions, which again is lower than what we would forecast or budget on a project by project basis.

Perhaps when you're referencing on the new leases First Generation, we had about 220,000 square feet with an average TI cost of $120. That's obviously driven by AVEO, which is $150 a foot. And right in line with our expectations for a brand new project being leased from the shell condition.

So again, that's the line item that will be available from quarter to quarter. Absolutely dependant on the specific nature of the space that's being delivered. And in this case, the bulk of the space was being delivered form [inaudible] condition.

John Stewart - Green Street Advisors

And so, I guess you're giving us cost per square foot, but just to be clear, this includes unconsolidated as well as consolidated leasing activity?

Male

Correct, and the only – it does include both, but the only lease that is included in this that would be unconsolidated would be that AVEO lease. So from a capital requirement but also from a revenue contribution, we would expect 20% of that.

John Stewart - Green Street Advisors

Okay, and can you please remind us what exactly how much NOI from Elana is going to roll off, what the run rate on that number will be? That drops off call in January 1 of next year.

Male

Yes, you're looking at something in the neighborhood of about $11 million. Cash GAAP as we've discussed is a lot less. GAAP is about $6.5 million.

John Stewart - Green Street Advisors

Okay, and Kent, could you speak to the pre-payment penalty on the mortgage at the Center for Life Science? When should we think about potentially being able to refinance that mortgage?

Kent Griffin

It's a great question. Unfortunately, the answer is it's cost prohibitive. So we won't look to pay that loan until we have the opportunity to do it without pre-payment penalties. So really mid 2014.

John Stewart - Green Street Advisors

Just out of curiosity, what is the penalty?

Kent Griffin

I don’t have the calculation off hand, but we've looked at it frequently, and it's not attractive.

John Stewart - Green Street Advisors

I trust you. Lastly, could you please give us a little more color on the participation in the construction loan? I mean, what's the loan to cost? Who's the developer? And I mean obviously, you are quite familiar with the Vertex, but what's the thought process? It just seems a little bit off the beaten path.

Male

Sure, so our enthusiasm for the investment in the loan is predicated based on our understanding obviously of Life Science real estate specific market and specific improvements that are being produced. But also a pretty strong understanding perhaps the strongest understanding of the Vertex is a credit of anyone out there. And when we look at the risk adjusted return potential, we find it extremely attractive for our shareholders.

From a loan to cost, I think the cost information hasn’t been made public. But the lease with Vertex is public, has been made public. And you can look at the yield on – the debt yield is almost 20%. So it's extremely attractively priced. We think it's effectively mispriced particularly given the short term nature and the successes that Vertex has had with additional drug approvals. We think it's an excellent opportunity.

John Stewart - Green Street Advisors

Are you thinking of it as a loan to own investment at all?

Male

The short answer is no. We are really excited about this particular loan investment, period, since we are not acquiring the equity in the asset. The loan investment we think makes a lot of sense for us.

John Stewart - Green Street Advisors

Okay, thank you.

Operator

Thank you, our next question from Ross Nussbaum of UBS. Please go ahead.

Ross Nussbaum – UBS

Hi, good morning, guys. A couple questions from me. I'd be curious, it's tough to figure out exactly where your NAV is in part because there's just so few transactions that occur of Life Science properties. If you had to go across your key markets, where do you think cap rates are for your type of assets?

Male

I think it's a good question, but I also don’t think you can go – you can't just generically state it market by market. You really have to go asset by asset. And that's the Life Science industry includes some of it which is office, some of which is laboratory, and some of which is warehouse or manufacturing. And those cap rates are very different and those also very dramatically by the tenant, the age of the tenant and obviously lease terms.

So I think it's inappropriate or some of a false precision to try to apply cap rates by market generically. I think if you do have some transaction data points, I think you're better off looking at the most recent investments that we and others have made in the space. And then comparing relative value creation that's occurred or not occurred in relation to that investment.

Ross Nussbaum – UBS

When you say that the spread between, if I looked at Cambridge and took a high quality A rated big diversified global pharma company, and said, okay, the cap rate on that asset is X. How much higher would the cap rate be on a more speculative growth kind of a tenant? Are we talking 200 basis points?

Male

I think the first question is really the location and the quality of the asset. I think that spread narrows when you're in the core market with a high quality asset. And I also think where you are in Cambridge matters dramatically. So being in where we are in Kendall Square or in Cambridge, in the heart of Cambridge, that's one thing. But as you go out to the suburbs, we don’t have a lot of product out there. But that's a dramatically different cap rate environment. And so I don’t know that you can make that statement blanketly across Cambridge.

Ross Nussbaum – UBS

Safe to say that you think the blended cap rate through your portfolio is lower than the implied cap rate on your stock?

Male

I think that's fair.

Ross Nussbaum – UBS

Okay, second question, can you guys talk a little bit about what you're seeing or what your outlook is over the next let's call it 18 months or so in terms of NIH funding, what it means specifically for any of your tenants, and more broadly for overall demand for the Life Science sector?

Male

Okay, it's a really good question, and it's one that we find very difficult to answer just given the tremendous amount of uncertainties with the politics that exist in the U.S. today.

If you were going to handicap it without sequestration, the NIH budget is expected to stay level or flat. In the event that sequestration occurs, there is anywhere estimates of a drop of anywhere from $3 to $4 billion in the NIH budget. But that's still highly variable depending on whether or not politicians change or come up with solutions shortly thereafter the elections.

All that being said, the NIH budget and the influence of NIH is a significant impact in the Life Science industry in that it does help grow new technologies and a fund basic research that is happening at the research institutions and universities around the country. And without that I got gas in the engine or influence in the engine for demand, I think there would be a significant drop in the Life Science industry. But because we believe it will continue and has continued for a long period of time and because we believe politicians on both sides believe that the biotechnology and Life Science industry are key to the future economic growth of the U.S., we think that that's going to continue to be a very strong motivator for future growth in the NIH and for the country as a whole.

Ross Nussbaum – UBS

Okay, I think Abe [Inaudible] had a question as well.

Abe [Inaudible] – UBS

Hey, guys. On Elan, I was just wondering if any potential prospects have been identified given your expectation to get that space back.

Male

We are in active discussions with some prospective tenants, although it is early stages because we don’t have the space back yet. But we have had some inquiries and some discussions that we are working through. But I think it's a little premature because until we get the space back, it's going to be tough to execute on.

Operator

Thank you, our next question is from Rich Anderson of BMO Capital Markets. Please go ahead.

Rich Anderson – BMO Capital Markets

Thanks, good morning out there. First just hopefully a one answer no question or answer, but is there any such thing as a change of control provision imbedded in a lease such that GFK would be able to get out of something? I'm hoping the answer is no, but I just figure I'd ask.

Male

No.

Rich Anderson – BMO Capital Markets

No such thing in the industry?

Male

No.

Rich Anderson – BMO Capital Markets

Okay good, I didn’t know. I figured I'd ask. Getting back to the equity raise question, the Branagh Park deal, you obviously did the hedging strategy. But you would have normally financed that with maybe a more balanced approach to equity and debt. So although you're saying that there's no immediate need to raise capital, doesn’t that create at least some incremental need in the future to raise equity just because you went about it in a way that would be meek from a debt versus equity standpoint?

Male

I was going to say, let's go back to when we got the investment grade rating because that's the reference point that we look at when we talk about reigning in leverage neutral as we acquire going forward. And at the time that we made our presentation to the reigning agencies, we were at debt to total gross assets at about 39%. And that's where we are today.

You look at other metrics, and we've actually improved since that point and time from early 2010 to June 30th with fixed charge improving 36% going from 2.2 to three times. Our debt adjusted EBITA is flat for that period of time. Unencumbered rents are up 30%. You look at our secured debt as a percentage of total assets, it's been cut more than in half.

So we do like to fund our investments in a match funded way to remain leverage neutral. But go back again to last November when we raised the equity that we did to create the capacity to do future investments, and now fast forward to today, and we're at exactly the point that we were when we got the investment grade rating. So that's why as we sit here, we say that we are comfortable with where we sit from a leverage perspective and have no immediate plans to raise equity setting aside the fact that even if we did, we don’t have a use of proceeds.

Rich Anderson – BMO Capital Markets

Perfect, thank you for that color. When you did Branagh Park, I was looking at some local press releases in the city of Cambridge. And they were referring to BioMed. Who is this BioMed? Does anyone? You're a nobody to them. Obviously, you're going to bet a whole lot of exposure now and maybe have already. What does that mean in terms of future investments outside of the U.S.? Not just in the U.K., but maybe in other countries? Is that something that's kind of on the longer term radar screen?

Male

I think that's a good question and a fair point. I think we are really excited about this opportunity in Branagh Park. And it is 11 buildings, almost 500,00 square feet. So it is a presence and a platform on a standalone basis.

I do think it has and will open other opportunities for us. But a lot has to come together for those opportunities to materialize into an investment opportunity that we would actually pull the trigger on.

I think if you look at what we did in New York with the Landmark investment, it's turned out very, very well. And the tenants there continue to grow. We've had to expand the campus. But from the time we made that initial investment, it was seven years before we ended up acquiring the Acorda campus nearby.

So yes, I think it opens opportunities for us, but I would be cautious in having an expectation with respect to the timeline.

Rich Anderson – BMO Capital Markets

Okay, and then the last question is it looks like you're going to beat your leasing guidance as you did in previous years. When you started the year, I remember we met at [inaudible] in November. You said it's a little bit different going into '12 because you had the advantage of all the capital raising that was going on in the industry in '11 and '10 or maybe just '11. But at any rate, you kind of had a little bit more of a conservative view of '12. Now it looks like things are going to exceed your leasing guidance. What has happened if anything? What two or three broadly things have happened to put you in a position to beat your leasing expectations or do you think you were just going in with more of a conservative approach heading into '12?

Male

I think if you look at '11, the capital raising was extraordinary. And that's what pushed us ahead. And even in the leasing success we've had some of that results from the strong capital raising that we're getting in the fourth quarter of last year and the early part of this year. So I think our continued success on the leasing front is number one, attributable to the capital raising that the [inaudible] continue to enjoy. That's really the number one piece.

I would also say we've had a couple of some big ills. So our opportunity at PRC was a large transaction. And a couple of those deals really moved the needle in terms of pushing ahead of plan.

If you took out a couple of those big deals we could not have gotten, we would be basically right on track with our expectations.

Rich Anderson – BMO Capital Markets

What's the deal size average for '12 versus '11? Would you have that number?

Male

I don’t have it handy. We can calculate it for you, but there are occasionally big deals. And we've had big deals in '11. And we've had some in '12. And it's those big deals that are the ones that typically push us above our targets. Those are harder deals to count on, but our basic blocking and tackling lease execution is really what is the basis for our leasing expectations.

And frankly, with our portfolio getting more and more fully leased, we have fewer large blocks of space available that make it more difficult to dramatically exceed our leasing goals like we have for the past two and a half years.

Rich Anderson – BMO Capital Markets

Great, thanks for the color.

Male

Thanks.

Operator

Thank you, our last question is from Rob Stephenson of Macquarie. Please go ahead.

Rob Stephenson – Macquarie

Thanks, just quick three questions. What the same story on the guidance imbedded in the revised guidance now?

Male

We haven't published that. It will be approximately the same as what you saw in the second quarter as we move through the balance of the year though.

Rob Stephenson – Macquarie

Okay, and then the three projects that you guys are now cross finding as pre-development, how far are you away from same market rents that would allow to start construction there?

Male

It's a good question, and I would also mention there are a couple of other projects that could ultimately be development sites as well like in Seattle. But in each of those cases, we're really doing work that's prep work that's pre-development to be in a position to do projects. And I think in most of those cases, it would really, well, in almost every one of those cases, I think it would be concurrent lease i.e. of build to suit project.

It's our perspective that that development does make sense in the current rent environment, and really in any one of our markets yet. But I do think that we are at a point where build to suit, their rents are close enough, market rents are close enough where you could have an opportunity with a tenant who has a specific desire in terms of location where our specific sites are located in particular as well as a certain space requirement size that we could do build to suit based on this tenant demand. Just exactly like the Shire transaction.

Rob Stephenson – Macquarie

Do you think you would start any of these this year, or do you think they're mostly a '13 event?

Male

Well, I don’t think we would start any of these without a tenant. I just want to make sure everybody's clear. And so I think it's – obviously, we haven't announced anything, so clearly nothing would get started this year because if we announced something, it would require more time.

Rob Stephenson – Macquarie

Okay, and then last question, when did or when does the Shire lease start?

Male

It started right at the middle of the year, in '12.

Male

Cash rent started July 1.

Rob Stephenson – Macquarie

Okay, perfect, thanks guys.

Operator

Thank you. We have no further questions at this time. I will now turn the call back over to Alan Gold.

Alan Gold

Thank you, and I'd like to thank everybody for joining us here today. And once again, thank our employees for their continued hard and smart work. And I'll see you all next quarter. Thank you.

Operator

Thank you Ladies and Gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BioMed Realty Trust CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts