BioMed Realty Trust Inc Earnings Call Nuggets: GAAP Rents, Boston

On Wednesday, BioMed Realty Trust Inc (NYSE:BMR) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

GAAP Rents

Brendan Maiorana – Wells Fargo Securities: I had a question to start with Greg, and the 625,000 square feet of tenants that are going to take occupancy, with 1 million square feet of cash rent that’s yet to commence. If I look at your straight line rent adjustment in the quarter, it’s actually quite low, and it has moved down, can you help us reconcile just what may be going on in the financials with respect to low straight line rent adjustments which would suggest there is not a lot of embedded occupancy growth, versus your comments of having about 1 million square feet of tenants that are ultimately going to take and start paying cash rents?

Greg N. Lubushkin – CFO: well the 625,000 are the square footage of the GAAP rents that haven’t yet commenced. There is 1 million of cash rents that haven’t yet commenced. To the extent that that difference is there, there are instances of which we are recognizing GAAP rents in that straight line adjustment. However, the decline in the straight line adjustment, reflects the significant number of tenants that we had, that started paying cash rents literally in the first quarter of this year. Specifically, and the biggest one by far was, Isis Pharmaceuticals at the Gazelle property, where we started GAAP revenue recognition mid last year, when we delivered that property six months early. The cash rents didn’t start kicking in until early this year, so that’s going to be a straight line adjustment down fairly significantly. Then at CFLS, with the rents – significant rents we are getting there on a cash basis from Pfizer and Harvard, those fully kicked in, in the first quarter of this year as well, which also contributed to the decline in the straight line adjustment. It really sprinkles throughout the rest of the properties with the leasing success we have had at PRC and Vassar as a couple other examples as well.

Brendan Maiorana – Wells Fargo Securities: That’s helpful. Then how you compare the 625,000 of GAAP rents that will commence versus I think it’s 390,000 square feet of expirations that you have for the remainder of the year, what’s your expectation on the retention of the expirations?

Matthew G. McDevitt – EVP, Real Estate: Well we have got some level of retention built into the numbers. Obviously we got 625,000 square feet of GAAP rents to commence, that are far in excess of the expirations that we have for the year. We’re obviously fully expecting to be able to continue to grow our FFO and cash flow.

Brendan Maiorana – Wells Fargo Securities: Then a question maybe either for Alan or Kent. With respect to the Forbes Boulevard and the 550 Broadway asset swap, how should we look at that transaction, given that the Forbes Boulevard property was a value add, redevelopment play, but you effectively swapped it for $5 million less than book value, and for those of us that would like to give credit for upside potential within your portfolio, and thinking about upside potential in the value add and lease up portfolio, effectively swapping for what was $5 million below cost, was there just not the upside that you believed that existed in that asset previously?

R. Kent Griffin, Jr. – President and COO: This is Kent. I think that’s a good question, a fair question. If you look back at when we acquired the Forbes Boulevard asset, we had limited presence at the time in South San Francisco and obviously it was a very different more heady environment, particularly in south San Francisco, where rents like in the Elan case, were pushing $70 a foot. So the economics supported the basis that it was north of $100 a foot for Shell property, fast-forward five years later, the rent environment is different and add up with the basis of north of $100 a foot. Our perspective is that we already have what we perceive to be much better redevelopment prospects at Eccles Avenue and with our project at Gateway. So we have significant opportunity to provide a fair amount of high-quality, A quality space to meet the tenant demand for the foreseeable future, and we’ve felt like the Forbes Boulevard property was just a much lower priority for us.

Brendan Maiorana – Wells Fargo Securities: Then maybe related to that – last question for me, if we look at the Depo lease and I think we were talking about the Theranos lease on the last call, but if we look at that lease, it again looks like you’re getting a return, that is call it kind of mid sixes on a cash basis at PRC, and I think the Theranos lease, I don’t recall a specific, so I thought it was sort of in that 6.5% to 7% stabilized yield on your adjusted cost basis for the property there. Is that a fair representation of returns that you would get — that you would expect to get now on the basis in your lease up assets, or is it something specific to the assets PRC and Elliott Avenue that will cause what would appear to be lower than target returns on lease up assets?

R. Kent Griffin, Jr. – President and COO: I think you’re right talking about PRC. Clearly our yield expectation is lower today than when we made that initial investment, I don’t think that’s a surprise to anybody. In terms of new investments that we’d be making. Clearly we’d be coming in today at a different basis and a much better return potential. So I do think if you look at for example, what we’ve at Ardsley, another redevelopment project where we’re expecting very healthy high single digit yield, but low total return at what is a very attractive basis, and certainly much better basis than the investments that people were making in 2006 and ’07.

Brendan Maiorana – Wells Fargo Securities: But I guess, I am just trying to get a sense, may be this is difficult to do, but handicapping your lease up portfolio, which is call it roughly over $900 million of book value, what’s kind of the return that you expect to get as you lease those assets up on the current cost basis?

R. Kent Griffin, Jr. – President and COO: Well I think we have to that asset-by-asset, it is not a portfolio that all has homogenous characteristics, every space is different and unique and if you look at where our Fairview asset sat in the lease up portfolio a year ago, now it’s fully stabilized and the returns have been tremendous and so I don’t think you can – I think clearly the Forbes Boulevard is perhaps our lowest priority, lowest value add opportunity that we had in our portfolio. So you can appreciate why from our perspective we felt like it was an appropriate opportunity to use that as currency for what we think is a much better investment opportunity for our shareholders. You really have to look not just where our basis was, but in our (indiscernible) of opportunity today going forward.


Omotayo Okusanya – Jefferies & Co.: Just a quick question about Boston. I know you guys generally are very positive on the market, but just kind of curious about lease up at Binney and (indiscernible) in particular, that number has kind of stayed stagnant for a while, how you kind of reconcile that versus your views on the strong fundamentals in that market?

Greg N. Lubushkin – CFO: Thanks Tayo. We will reiterate we feel extremely confident in Cambridge. We think it is arguably the strongest market in the world for life science product. We continue to have success, both with Vassar, and now most recently announced with Fresh Pond and excluding the Roger Street assets, which we just acquired in the Cambridge place, which we just acquired – the balance of our consolidate portfolio is 97% leased. So I think that supports the reason why we are so confident in the strength of that market. So as far as the opportunities we have, we at Binney and Bent, we have made substantial progress and moved that portfolio up to 80% leased, with a lot of the leasing success we have had over the past 18 months, that has been a big part of that, and we are optimistic we will – I am confident that we will continue to have success in East Cambridge, both at Roger Street and also at 650 in our joint venture asset.

Omotayo Okusanya – Jefferies & Co.: Then one other question, when you just take a look at your tenant base, are there any tenants in there, where they are kind of close to getting FDA approvals on a drug that could potentially change their space needs, and is there any opportunity for you to take advantage of that or not?

R. Kent Griffin, Jr. – President and COO: We have several tenants that have drugs in late stage approvals. I think that – every time a drug gets approved, there is a potential for significant demand, and we are looking at that quite closely. I think that you have seen significant growth from tenant size in Cambridge and certainly our tenants in New York, with Regeneron and their growth there. I’m trying to think if you’re looking at the drugs with the most recent potential for approval you are probably looking at Ironwood and Arena Pharmaceuticals?

R. Kent Griffin, Jr. – President and COO: Exactly right.

Omotayo Okusanya – Jefferies & Co.: Do you kind of see opportunities, I mean where they are located and opportunities for them to pick up more space?

R. Kent Griffin, Jr. – President and COO: Well, I think we clearly have space potential for Ironwood actually at Rogers Street itself as well as the ability to source additional product for them. We have grown the portfolio with Arena over time as we’ve just announced today and we do have additional product in San Diego both that we have today and hopefully we continue to build that portfolio. So I do think we have expansion opportunities and while the focus is clearly on the end goal of drug approval and commercialization the reality is all of our tenants even if they are not at the point of applying for drug approval they are all at various forms of research and with the hope to achieve certain milestones that would advanced their research, which would require additional space. So we have lots of tenants that particularly many of the smart tenants that and most recent tenants announcement in Cambridge where their space needs and their need to grow will hopefully come long before their to the point of seeking at the approvals.