San Diego-based BioMed Realty Trust anticipates higher than 9 percent cash-on-cash initial return from its $298 million South San Francisco acquisition of two life-science properties.
Kent Griffin, president and chief operating officer of BioMed, said the company paid all cash for the acquisitions, which include the 205,000 square-foot Science Center at Oyster Point and the 284,000 square-foot Gateway Business Park.
The purchases include an agreement with the city of South San Francisco that would permit the redevelopment of the Gateway campus to approximately 1.23 million square feet, a net increase of nearly 950,000 square feet. “This redevelopment would cover tearing down some of the existing space and then rebuilding,” Griffin said. The company does not expect to pursue the redevelopment immediately but could at some point in the not-too-distant future.
The expected 9.4 percent cash return is based on net operating income from the properties in the current year. Income should not change in 2011 because both Gateway and Science Center are 100 percent leased and rents are fixed. “The rents were established at the high point of the market,” Griffin said. At current market-rate rents, the cash return would be between 7 percent and 8 percent.
Oyster Point is 100 percent leased to Irish biotechnology company Elan Corp. for the next 15 years. Gateway Business Park is 100 percent leased to Elan, FedEx Corp. and Genentech Inc., a member of the Roche Group. These leases have terms that extend another two years to four years.
BioMed is a real estate investment trust focused on providing facilities for the life-science industry. The company’s tenants primarily include biotechnology and pharmaceutical companies, scientific-research institutions, government agencies and other entities involved in the life-science industry.
With the current acquisitions, the company owns or has interests in 82 properties, representing 144 buildings with approximately 12.1 million rentable square feet predominantly in major U.S. life-science markets including Boston, San Diego, San Francisco, Seattle, Maryland, Pennsylvania, New York and New Jersey. With the two new South San Francisco properties, the Bay Area becomes the company’s second-largest market after the Cambridge-Boston region, as measured by current annualized base rents. Elan becomes the company’s fourth-largest tenant, representing approximately 7.2 percent of current annualized base rents as of June 30.
In the second quarter, BioMed reported net income available to common share holders of $4.2 million on revenue of $92.9 million. The company reports third-quarter financials Nov. 3.
BioMed already owned multiple properties in South San Francisco as well as Fremont. It also has holdings in Brisbane, Hayward and San Carlos. In 2006, it acquired Newark’s nearly 1.4 million square-foot Pacific Research Center, a former Sun Microsystems campus. Through June, occupancy in the property stood at 27 percent.
South San Francisco is an attractive market to own life science properties because “there is proximity to San Francisco and the Peninsula for companies and service providers that are part of the life science business,” Griffin said.
“Our industry is a tenant-driven business, and the tenants have stated that they want to be in this market,” Griffin said.
The company is interested in markets from Berkeley to Stanford and beyond. It has acquired two thirds of its assets and developed the other one third. At present, it is seeking to expand its portfolio almost solely through acquisitions. It would consider build-to-suit projects but speculative construction is out of the question right now. “Rents really need to increase by 10 percent to 20 percent for us to consider doing a new multi-tenant development project,” Griffin said.
At the same time it bought the two South San Francisco buildings, BioMed announced the hiring of Anne Hoffman as a senior vice president of development working at the Pacific Research Center. “She will be helping us with all of our efforts on our properties in the San Francisco region,” Griffin said. Hoffman was president of Chamberlin Associates, the seller of the two South San Francisco campuses that BioMed just acquired. Since 2005, her duties included acquisition, finance, development, operational and disposition activities.