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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number: 1-32261
BIOMED REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
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Maryland |
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20-1142292 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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17140 Bernardo Center Drive, Suite 222
San Diego, California
(Address of Principal Executive Offices) |
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92128
(Zip Code) |
(858) 485-9840
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, $0.01 Par Value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See description of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act (check one):
Large accelerated
filer þ Accelerated
filer
o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
The aggregate market value of the 46,371,216 shares of
common stock held by non-affiliates of the registrant was
$1,105,953,502 based upon the last reported sale price of
$23.85 per share on the New York Stock Exchange on
June 30, 2005, the last business day of its most recently
completed second quarter.
The number of outstanding shares of the registrants common
stock, par value $0.01 per share, as of March 14, 2006
was 46,746,632.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement with respect
to its May 19, 2006 Annual Meeting of Stockholders to be
filed not later than 120 days after the end of the
registrants fiscal year are incorporated by reference into
Part III hereof.
BIOMED REALTY TRUST, INC.
FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PART I
Forward-Looking Statements
We make statements in this report that are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (set forth in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended). In particular,
statements pertaining to our capital resources, portfolio
performance and results of operations contain forward-looking
statements. Likewise, our statements regarding anticipated
growth in our funds from operations and anticipated market
conditions, demographics and results of operations are
forward-looking statements. Forward-looking statements involve
numerous risks and uncertainties and you should not rely on them
as predictions of future events. Forward-looking statements
depend on assumptions, data or methods which may be incorrect or
imprecise, and we may not be able to realize them. We do not
guarantee that the transactions and events described will happen
as described (or that they will happen at all). You can identify
forward-looking statements by the use of forward-looking
terminology such as believes, expects,
may, will, should,
seeks, approximately,
intends, plans, estimates or
anticipates or the negative of these words and
phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans or
intentions. The following factors, among others, could cause
actual results and future events to differ materially from those
set forth or contemplated in the forward-looking statements:
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adverse economic or real estate developments in the life science
industry or the Boston or California regions, |
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general economic conditions, |
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our ability to compete effectively, |
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defaults on or non-renewal of leases by tenants, |
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increased interest rates and operating costs, |
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our failure to obtain necessary outside financing, |
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our ability to successfully complete real estate acquisitions,
developments and dispositions, |
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our failure to successfully operate acquired properties and
operations, |
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our failure to maintain our status as a real estate investment
trust, or REIT, |
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government approvals, actions and initiatives, including the
need for compliance with environmental requirements, |
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financial market fluctuations, and |
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changes in real estate and zoning laws and increases in real
property tax rates. |
While forward-looking statements reflect our good faith beliefs,
they are not guarantees of future performance. We disclaim any
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise. For a further discussion of these and other factors
that could impact our future results, performance or
transactions, see the section below entitled Item 1A.
Risk Factors.
General
As used herein, the terms we, us,
our or the company refer to BioMed
Realty Trust, Inc., a Maryland corporation and any of our
subsidiaries, including BioMed Realty, L.P., a Maryland limited
partnership (our Operating Partnership), and 201
Industrial Road, L.P., our predecessor. We are a REIT focused on
acquiring, developing, owning, leasing and managing laboratory
and office space for the life science industry. Our tenants
primarily include biotechnology and pharmaceutical companies,
scientific research
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institutions, government agencies and other entities involved in
the life science industry. Our properties and primary
acquisition targets are generally located in markets with well
established reputations as centers for scientific research,
including Boston, San Diego, San Francisco, Seattle,
Maryland, Pennsylvania and New York/ New Jersey.
We were formed on April 30, 2004 and commenced operations
on August 11, 2004, after completing our initial public
offering. Our initial public offering consisted of the sale of
27,000,000 shares of common stock at $15.00 per share,
resulting in gross proceeds of $405.0 million. On
August 16, 2004, in connection with the exercise of the
underwriters over-allotment option, we issued an
additional 4,050,000 shares of common stock and received
gross proceeds of $60.8 million. The aggregate proceeds to
us, net of underwriting discounts and commissions and offering
costs, were approximately $429.3 million.
Simultaneously with our initial public offering, we obtained a
$100.0 million revolving unsecured credit facility, which
we used to finance acquisitions and for other corporate purposes
prior to being replaced on May 31, 2005 with a
$250.0 million revolving unsecured credit facility with
KeyBank National Association and other lenders.
On June 27, 2005, we completed a follow-on common stock
offering of 15,122,500 shares at $22.50 per share,
resulting in gross proceeds of $340.3 million. The net
proceeds of $324.0 million were used to repay the
outstanding balance on our revolving credit facility, to repay
our $100.0 million unsecured term loan, to acquire
properties and for other corporate purposes.
As of December 31, 2005, we owned or had interests in 39
properties, located principally in Boston, San Diego,
San Francisco, Seattle, Maryland, Pennsylvania and New
York/ New Jersey, consisting of 62 buildings with
approximately 4.8 million rentable square feet of
laboratory and office space, which was approximately 91.1%
leased to 87 tenants. Of the approximately 423,000 square
feet of unleased space, 274,677 square feet, or 64.9% of
our unleased square footage, was under redevelopment. We also
owned undeveloped land that we estimate can support up to
706,000 rentable square feet of laboratory and office space.
Our senior management team has significant experience in the
real estate industry, principally focusing on properties
designed for life science tenants. We operate as a fully
integrated, self-administered and self-managed REIT, providing
management, leasing, development and administrative services to
our properties. As of February 28, 2006, we had 50
employees.
Our principal offices are located at 17140 Bernardo Center
Drive, Suite 222, San Diego, California 92128. Our
telephone number at that location is (858) 485-9840. Our
website is located at www.biomedrealty.com. We make available
through our website our annual report on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to such reports filed or furnished pursuant to
Sections 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission. You can also access on our website our Code of
Business Conduct and Ethics, Corporate Governance Guidelines,
Audit Committee Charter, Compensation Committee Charter, and
Nominating and Corporate Governance Committee Charter.
2005 Highlights
On January 11, 2005, we leased 61,826 rentable square
feet in phase two of our Industrial Road property, located south
of San Francisco, to Nuvelo, Inc. under a seven-year,
triple-net lease. Nektar Therapeutics, an existing tenant at the
property, had leased approximately 46,000 square feet of
this space until August 2007, which it had never occupied. We
agreed to terminate Nektars lease of its phase two space
in exchange for termination payments. Nektar continues to lease
approximately 80,000 square feet of space in phase one of
the property, which lease expires in October 2016.
On April 19, 2005, we entered into a lease amendment with
Centocor, Inc., a subsidiary of Johnson & Johnson.
Under the amendment, Centocor agreed to lease an additional
79,667 rentable square feet at our King of Prussia property
located in Radnor, Pennsylvania through March 31, 2010. The
new lease replaced the
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existing portion of the master lease with an affiliate of The
Rubenstein Company, the original seller of the property, with
respect to this space. Annualized base rent of $1.3 million
and certain tenant reimbursements received under the new lease
have correspondingly reduced the rent received under the master
lease.
On May 31, 2005, we completed the acquisition of a
portfolio of eight properties including one parking structure in
Cambridge, Massachusetts, and an additional property in Lebanon,
New Hampshire, from The Lyme Timber Company, an affiliate of
Lyme Properties. We refer to these properties as the Cambridge
portfolio. The Cambridge portfolio consists of ten buildings
with an aggregate of approximately 1.1 million rentable
square feet of laboratory and office space, which upon
acquisition was 96.8% leased with an average remaining term of
ten years, and includes the parking structure with 447 parking
spaces. The purchase price was $523.6 million, excluding
closing costs, and was funded through borrowings under three
credit facilities with KeyBank National Association and other
lenders, described below, and the assumption of approximately
$131.2 million of mortgage indebtedness.
In order to finance the Cambridge portfolio acquisition and
provide additional working capital, on May 31, 2005, we
entered into three credit facilities with KeyBank and other
lenders under which we initially borrowed $485.0 million of
a total of $600.0 million available under these facilities.
The credit facilities include a senior unsecured revolving
credit facility of $250.0 million, under which we initially
borrowed $135.0 million, a senior unsecured term loan
facility of $100.0 million and a senior secured term loan
facility of $250.0 million. We borrowed the full amounts
under the senior unsecured term loan and senior secured term
loan facilities. We repaid the senior unsecured term loan with
the proceeds of our follow-on offering in June 2005. As of
December 31, 2005, we had $17.0 million outstanding
under our unsecured revolving credit facility and
$250.0 million of outstanding borrowings under our senior
secured term loan facility.
In addition to the acquisition of the Cambridge portfolio,
during 2005, we acquired 13 properties containing approximately
978,149 rentable square feet of laboratory and office space
that was 73.4% leased at acquisition.
From our initial public offering through December 31, 2005,
we have declared aggregate dividends on our common stock and
distributions on our operating partnership units of
$1.4997 per common share and unit, representing five full
quarterly dividends of $0.27 and a partial third quarter 2004
dividend of $0.1497 per common share and unit.
Subsequent Events
On January 12, 2006, we completed the acquisition of the
land at 530 Fairview Avenue in Seattle, Washington through our
joint venture with an affiliate of EDG Commercial Real Estate.
The total purchase price was approximately $2.7 million,
paid in cash. We entered into the joint venture to develop a
five-story, 93,000 square-foot laboratory facility to be
named the Fairview Research Center.
On January 13, 2006, we completed the acquisition of a
property located at 900 Uniqema Boulevard in New Castle,
Delaware. The property consists of an 11,293 square-foot
single-story laboratory facility. The total purchase price of
approximately $4.7 million was funded with cash and the
assumption of approximately $1.8 million of mortgage
indebtedness.
Growth Strategy
Our success and future growth potential is based upon the unique
real estate opportunities within the life science industry. Our
growth strategy is designed to meet the sizable demand and
specialized requirements of life science tenants by leveraging
the knowledge and expertise of a management team focused on
serving this fast growing industry.
Our external growth strategy includes:
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an ability to capitalize on managements extensive
acquisition expertise and extensive industry relationships among
life science tenants, property owners and real estate brokers, |
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a focus on acquiring properties leased to high quality life
science tenants at attractive yields with potential upside
through lease-up, redevelopment or additional development, |
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the selective development of life science space in target market
locations, and |
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an emphasis on location of potential acquisitions in relation to
academic and research institutions to support long-term value. |
Our internal growth strategy includes:
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access to cost-effective capital, enabling us to finance tenant
improvements and lease available space to high quality,
long-term tenants, |
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predictable and consistent earnings growth through annual
contractual rent increases, |
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close monitoring of our existing tenants to address
opportunities to renew, extend or modify existing leases and
find additional expansion opportunities, |
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continual evaluation of redevelopment opportunities to convert
existing office and warehouse space into laboratory
space, and |
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an ability to leverage tenant-financed improvements to encourage
tenant renewals or to substantially increase rental rates at the
end of the lease. |
Target Markets
Our target markets Boston, San Diego,
San Francisco, Seattle, Maryland, Pennsylvania, New York/
New Jersey and research parks near or adjacent to
universities have emerged as the primary hubs for
research and development and production in the life science
industry. Each of these markets benefits from the presence of
mature life science companies, which provide scale and stability
to the market, as well as academic and university environments
and government entities to contribute innovation, research and
personnel to the private sector. In addition, the clustered
research environments within these target markets typically
provide a high quality of life for the research professionals
and a fertile ground for new life science ideas and ventures.
Positive Life Science Trends
We expect continued growth in the life science industry due to
several factors:
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the aging of the U.S. population resulting from the
transition of baby boomers to senior citizens, which has
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the existing high level of, and continuing increase in, research
and development expenditures, as represented by a recent
Pharmaceutical Research and Manufacturers of America (PhRMA)
survey indicating that research and development spending by its
members climbed to a record $39.4 billion in 2005 from
$37 billion in the prior year, and when combined with
non-member companies, totaled a record $51.3 billion in
2005, and |
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escalating health care costs, which drive the demand for better
drugs, less expensive treatments and more services in an attempt
to manage such costs. |
We are uniquely positioned to benefit from these favorable
dynamics, coupled with the corresponding positive impact on our
life science industry tenants.
Experienced Management
We have created and continue to develop a life science real
estate-oriented management team, dedicated to maximizing current
and long-term returns and growth for our stockholders. Our
executive officers have acquired, developed, owned, leased and
managed in excess of $1.7 billion in life science real
estate. Through this experience, our management team has
established extensive industry relationships among life science
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tenants, property owners and real estate brokers. In addition,
our experienced independent board members provide management
with a broad range of knowledge in real estate, the sciences,
life science company operations, and large public company
finance and management.
Regulation
Our properties are subject to various laws, ordinances and
regulations, including regulations relating to common areas. We
believe that we have the necessary permits and approvals to
operate each of our properties.
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Americans with Disabilities Act |
Our properties must comply with Title III of the Americans
with Disabilities Act, or ADA, to the extent that such
properties are public accommodations as defined by
the ADA. The ADA may require removal of structural barriers to
access by persons with disabilities in certain public areas of
our properties where such removal is readily achievable. We
believe that our properties are in substantial compliance with
the ADA and that we will not be required to make substantial
capital expenditures to address the requirements of the ADA. The
tenants are generally responsible for any additional amounts
required to conform their construction projects to the ADA.
However, noncompliance with the ADA could result in imposition
of fines or an award of damages to private litigants. The
obligation to make readily achievable accommodations is an
ongoing one, and we will continue to assess our properties and
to make alterations as appropriate in this respect.
Under various federal, state and local environmental laws and
regulations, a current or previous owner, operator or tenant of
real estate may be required to investigate and remove hazardous
or toxic substances or petroleum product releases or threats of
releases at such property, and may be held liable for property
damage and for investigation,
clean-up and monitoring
costs incurred in connection with the actual or threatened
contamination. Such laws typically impose
clean-up responsibility
and liability without regard to fault, or whether the owner,
operator or tenant knew of or caused the presence of the
contamination. The liability under such laws may be joint and
several for the full amount of the investigation,
clean-up and monitoring
costs incurred or to be incurred or actions to be undertaken,
although a party held jointly and severally liable may obtain
contributions from the other identified, solvent, responsible
parties of their fair share toward these costs. These costs may
be substantial, and can exceed the value of the property. The
presence of contamination, or the failure to properly remediate
contamination, on a property may adversely affect the ability of
the owner, operator or tenant to sell or rent that property or
to borrow using such property as collateral, and may adversely
impact our investment on that property.
Federal regulations require building owners and those exercising
control over a buildings management to identify and warn,
via signs and labels, of potential hazards posed by workplace
exposure to installed asbestos-containing materials, or ACMs,
and potential ACMs in their building. The regulations also set
forth employee training, record-keeping and due diligence
requirements pertaining to ACMs and potential ACMs. Significant
fines can be assessed for violating these regulations. Building
owners and those exercising control over a buildings
management may be subject to an increased risk of personal
injury lawsuits by workers and others exposed to ACMs and
potential ACMs as a result of these regulations. The regulations
may affect the value of a building containing ACMs and potential
ACMs in which we have invested. Federal, state and local laws
and regulations also govern the removal, encapsulation,
disturbance, handling and/or disposal of ACMs and potential ACMs
when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a
building. Such laws may impose liability for improper handling
or a release to the environment of ACMs and potential ACMs and
may provide for fines to, and for third parties to seek recovery
from, owners or operators of real properties for personal injury
or improper work exposure associated with ACMs and potential
ACMs. See Risk Factors Risks Related to the
Real Estate Industry We could incur significant
costs related to governmental regulation and private litigation
over environmental
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matters involving asbestos-containing materials, which could
adversely affect our operations, the value of our properties,
and our ability to make distributions to our stockholders
under Item 1A. below.
Federal, state and local laws and regulations also require
removing or upgrading certain underground storage tanks and
regulate the discharge of storm water, wastewater and any water
pollutants; the emission of air pollutants; the generation,
management and disposal of hazardous or toxic chemicals,
substances or wastes; and workplace health and safety. Life
science industry tenants, including certain of our tenants,
engage in various research and development activities involving
the controlled use of hazardous materials, chemicals, biological
and radioactive compounds. Although we believe that the
tenants activities involving such materials comply in all
material respects with applicable laws and regulations, the risk
of contamination or injury from these materials cannot be
completely eliminated. In the event of such contamination or
injury, we could be held liable for any damages that result, and
any such liability could exceed our resources and our
environmental remediation insurance coverage. See Risk
Factors Risks Related to the Real Estate
Industry We could incur significant costs related to
government regulation and private litigation over environmental
matters involving the presence, discharge or threat of discharge
of hazardous or toxic substances, which could adversely affect
our operations, the value of our properties, and our ability to
make distributions to our stockholders under Item 1A.
below.
In addition, our leases generally provide that (1) the
tenant is responsible for all environmental liabilities relating
to the tenants operations, (2) we are indemnified for
such liabilities and (3) the tenant must comply with all
environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate our statutory liability
or preclude claims against us by governmental authorities or
persons who are not parties to such an arrangement.
Noncompliance with environmental or health and safety
requirements may also result in the need to cease or alter
operations at a property, which could affect the financial
health of a tenant and its ability to make lease payments. In
addition, if there is a violation of such a requirement in
connection with a tenants operations, it is possible that
we, as the owner of the property, could be held accountable by
governmental authorities for such violation and could be
required to correct the violation and pay related fines.
Prior to closing any property acquisition, we obtain
environmental assessments in a manner we believe prudent in
order to attempt to identify potential environment concerns at
such properties. These assessments are carried out in accordance
with an appropriate level of due diligence and generally include
a physical site inspection, a review of relevant federal, state
and local environmental and health agency database records, one
or more interviews with appropriate site-related personnel,
review of the propertys chain of title and review of
historic aerial photographs and other information on past uses
of the property. We may also conduct limited subsurface
investigations and test for substances of concern where the
results of the first phase of the environmental assessments or
other information indicates possible contamination or where our
consultants recommend such procedures.
While we may purchase our properties on an as is
basis, all of our purchase contracts contain an environmental
contingency clause, which permits us to reject a property
because of any environmental hazard at such property. We receive
environmental reports on all prospective properties.
We believe that our properties comply in all material respects
with all federal and state regulations regarding hazardous or
toxic substances and other environmental matters.
Insurance
We carry comprehensive liability, fire, workers
compensation, extended coverage, terrorism and rental loss
insurance covering all of our properties under a blanket policy,
except with respect to property and fire insurance on our
McKellar Court and Science Center Drive properties, which is
carried directly by the tenants. We believe the policy
specifications and insured limits are appropriate given the
relative risk of loss, the cost of the coverage and industry
practice. We do not carry insurance for generally uninsurable
losses such as loss from riots or acts of God. We also carry
environmental remediation insurance for our properties. This
insurance, subject to certain exclusions and deductibles, covers
the cost to remediate environmental damage caused by future
spills or the historic presence of previously undiscovered
hazardous substances. We intend to carry similar insurance with
respect to future acquisitions as appropriate. Our properties
located in the
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San Diego, San Francisco and Seattle areas are subject
to earthquakes. We presently carry earthquake insurance on our
Industrial Road property in San Francisco and on our east
coast properties, but do not carry earthquake insurance on our
other properties in San Francisco or on our properties in
San Diego or Seattle. The amount of earthquake insurance
coverage we do carry may not be sufficient to fully cover losses
from earthquakes. In addition, we may discontinue earthquake,
terrorism or other insurance, or may elect not to procure such
insurance, on some or all of our properties in the future if the
cost of premiums for any of these policies exceeds, in our
judgment, the value of the coverage discounted for the risk of
loss. See Risk Factors Risks Related to the
Real Estate Industry Uninsured and underinsured
losses could adversely affect our operating results and our
ability to make distributions to our stockholders under
Item 1A. below. However, we believe that all of our
properties are adequately insured, consistent with industry
standards.
Competition
We are one of only two publicly traded entities focusing
primarily on the acquisition, management, expansion and
selective development of properties designed for life science
tenants (the other such entity being Alexandria Real Estate
Equities, Inc.). However, various entities, including other
REITs, such as health care REITs and suburban office property
REITs, pension funds, insurance companies, investment funds and
companies, partnerships, and developers invest in properties
occupied by life science tenants and therefore compete for
investment opportunities with us. Because properties designed
for life science tenants typically contain improvements that are
specific to tenants operating in the life science industry, we
believe that we will be able to maximize returns on investments
as a result of:
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our expertise in understanding the real estate needs of life
science industry tenants, |
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our ability to identify, acquire and develop properties with
generic laboratory infrastructure that appeal to a wide range of
life science industry tenants, and |
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our expertise in identifying and evaluating life science
industry tenants. |
However, many of our competitors have greater financial
resources than we do and may be able to accept more risks,
including risks with respect to the creditworthiness of a tenant
or the geographic proximity of its investments. In the future,
competition from these entities may reduce the number of
suitable investment opportunities offered to us or increase the
bargaining power of property owners seeking to sell. Further, as
a result of their greater resources, those entities may have
more flexibility than we do in their ability to offer rental
concessions to attract tenants. These concessions could put
pressure on our ability to maintain or raise rents and could
adversely affect our ability to attract or retain tenants.
Additionally, our ability to compete depends upon, among other
factors, trends of the national and local economies, investment
alternatives, financial condition and operating results of
current and prospective tenants, availability and cost of
capital, construction and renovation costs, taxes, governmental
regulations, legislation and population trends.
Foreign Operations
We do not engage in any foreign operations or derive any revenue
from foreign sources.
Segment Financial Information
Financial information by segment is presented in Note 11 to
the consolidated financial statements in Item 8 of this
report.
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Risks Related to Our Properties, Our Business and Our
Growth Strategy |
Because we lease our properties to a limited number of
tenants, and to the extent we depend on a limited number of
tenants in the future, the inability of any single tenant to
make its lease payments could adversely affect our business and
our ability to make distributions to our stockholders.
As of December 31, 2005, we had 87 tenants in 39
properties. Two of our tenants, Vertex Pharmaceuticals and
Genzyme Corporation, represented 15.8% and 10.5%, respectively,
of our consolidated rental revenues for the year ended
December 31, 2005, and 12.3% and 7.2%, respectively, of our
total leased rentable square footage. While we evaluate the
creditworthiness of our tenants by reviewing available financial
and other pertinent information, there can be no assurance that
any tenant will be able to make timely rental payments or avoid
defaulting under its lease. If a tenant defaults, we may
experience delays in enforcing our rights as landlord and may
incur substantial costs in protecting our investment. Because we
depend on rental payments from a limited number of tenants, the
inability of any single tenant to make its lease payments could
adversely affect us and our ability to make distributions to our
stockholders.
Tenants in the life science industry face high levels of
regulation, expense and uncertainty that may adversely affect
their ability to pay us rent and consequently adversely affect
our business.
Life science entities comprise the vast majority of our tenant
base. Because of our dependence on a single industry, adverse
conditions affecting that industry will more adversely affect
our business, and thus our ability to make distributions to our
stockholders, than if our business strategy included a more
diverse tenant base. Life science industry tenants, particularly
those involved in developing and marketing drugs and drug
delivery technologies, fail from time to time as a result of
various factors. Many of these factors are particular to the
life science industry. For example:
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Our tenants require significant outlays of funds for the
research and development and clinical testing of their products
and technologies. If private investors, the government or other
sources of funding are unavailable to support such development,
a tenants business may fail. |
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The research and development, clinical testing, manufacture and
marketing of some of our tenants products require federal,
state and foreign regulatory approvals. The approval process is
typically long, expensive and uncertain. Even if our tenants
have sufficient funds to seek approvals, one or all of their
products may fail to obtain the required regulatory approvals on
a timely basis or at all. Furthermore, our tenants may only have
a small number of products under development. If one product
fails to receive the required approvals at any stage of
development, it could significantly adversely affect our
tenants entire business and its ability to pay rent. |
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Our tenants with marketable products may be adversely affected
by health care reform efforts and the reimbursement policies of
government or private health care payors. |
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Our tenants may be unable to adequately protect their
intellectual property under patent, copyright or trade secret
laws. Failure to do so could jeopardize their ability to profit
from their efforts and to protect their products from
competition. |
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Collaborative relationships with other life science entities may
be crucial to the development, manufacturing, distribution or
marketing of our tenants products. If these other entities
fail to fulfill their obligations under these collaborative
arrangements, our tenants businesses will suffer. |
We cannot assure you that our tenants in the life science
industry will be successful in their businesses. If our
tenants businesses are adversely affected, they may have
difficulty paying us rent.
8
Because particular upgrades are required for life science
tenants, improvements to our properties involve greater
expenditures than traditional office space, which costs may not
be covered by the rents our tenants pay.
The improvements generally required for our properties
infrastructure are more costly than for other property types.
Typical infrastructural improvements include the following:
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reinforced concrete floors, |
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upgraded roof structures for greater load capacity, |
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increased
floor-to-ceiling clear
heights, |
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heavy-duty HVAC systems, |
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enhanced environmental control technology, |
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significantly upgraded electrical, gas and plumbing
infrastructure, and |
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laboratory benchwork. |
Our tenants generally pay higher rent on our properties than
tenants in traditional office space. However, we cannot assure
you that our tenants will continue to do so in the future or
that the rents paid will cover the additional costs of upgrading
the properties.
Because of the unique and specific improvements required for
our life science tenants, we may be required to incur
substantial renovation costs to make our properties suitable for
other life science tenants or other office tenants, which could
adversely affect our operating performance.
We acquire or develop properties that include laboratory space
and other features that we believe are generally desirable for
life science industry tenants. However, different life science
industry tenants may require different features in their
properties, depending on each tenants particular focus
within the life science industry. If a current tenant is unable
to pay rent and vacates a property, we may incur substantial
expenditures to modify the property before we are able to
re-lease the space to another life science industry tenant. This
could hurt our operating performance and the value of your
investment. Also, if the property needs to be renovated to
accommodate multiple tenants, we may incur substantial
expenditures before we are able to re-lease the space.
Additionally, our properties may not be suitable for lease to
traditional office tenants without significant expenditures or
renovations. Accordingly, any downturn in the life science
industry may have a substantial negative impact on our
properties values.
The geographic concentration of our properties in Boston and
California makes our business particularly vulnerable to adverse
conditions affecting these markets.
Ten of our 39 properties are located in the Boston area. As of
December 31, 2005, these properties represented 39.6% of
our annualized base rent and 26.3% of our total leased rentable
square footage. In addition, 16 of our 39 properties are located
in California, with nine in San Diego and seven in
San Francisco. As of December 31, 2005, these
properties represented 26.7% of our annualized base rent and
32.0% of our total leased rentable square footage. Because of
this concentration in two geographic regions, we are
particularly vulnerable to adverse conditions affecting Boston
and California, including general economic conditions, increased
competition, a downturn in the local life science industry, real
estate conditions, terrorist attacks, earthquakes (with respect
to California) and other natural disasters occurring in these
regions. In addition, we cannot assure you that these markets
will continue to grow or remain favorable to the life science
industry. The performance of the life science industry and the
economy in general in these geographic markets may affect
occupancy, market rental rates and expenses, and thus may affect
our performance and the value of our properties. We are also
subject to greater risk of loss from earthquakes because of our
properties concentration in California. The close
proximity of our seven properties in San Francisco to a
fault line makes them more vulnerable to earthquakes than
properties in many other parts of the country.
9
Our tax indemnification and debt maintenance obligations
require us to make payments if we sell certain properties or
repay certain debt, which could limit our operating
flexibility.
In our formation transactions, our executive officers, Alan D.
Gold, Gary A. Kreitzer, John F. Wilson, II and Matthew G.
McDevitt, and certain other individuals contributed six
properties to our operating partnership. If we were to dispose
of these contributed assets in a taxable transaction,
Messrs. Gold, Kreitzer, Wilson and McDevitt and the other
contributors of those assets would suffer adverse tax
consequences. In connection with these contribution
transactions, we agreed to indemnify those contributors against
such adverse tax consequences for a period of ten years. This
indemnification will help those contributors to preserve their
tax positions after their contributions. The tax indemnification
provisions were not negotiated in an arms length
transaction but were determined by our management team. We have
also agreed to use reasonable best efforts consistent with our
fiduciary duties to maintain at least $8.0 million of debt,
some of which must be property specific, that the contributors
can guarantee in order to defer any taxable gain they may incur
if our operating partnership repays existing debt. These tax
indemnification and debt maintenance obligations may affect the
way in which we conduct our business. During the indemnification
period, these obligations may impact the timing and
circumstances under which we sell the contributed properties or
interests in entities holding the properties. For example, these
tax indemnification payments could effectively reduce or
eliminate any gain we might otherwise realize upon the sale or
other disposition of the related properties. Accordingly, even
if market conditions might otherwise dictate that it would be
desirable to dispose of these properties, the existence of the
tax indemnification obligations could result in a decision to
retain the properties in our portfolio to avoid having to pay
the tax indemnity payments. The existence of the debt
maintenance obligations could require us to maintain debt at a
higher level than we might otherwise choose. Higher debt levels
could adversely affect our ability to make distributions to our
stockholders.
While we may seek to enter into tax-efficient joint ventures
with third-party investors, we currently have no intention of
disposing of these properties or interests in entities holding
the properties in transactions that would trigger our tax
indemnification obligations. The involuntary condemnation of one
or more of these properties during the indemnification period
could, however, trigger the tax indemnification obligations
described above. The tax indemnity would equal the amount of the
federal and state income tax liability the contributor would
incur with respect to the gain allocated to the contributor. The
calculation of the indemnity payment would not be reduced due to
the time value of money or the time remaining within the
indemnification period. The terms of the contribution agreements
also require us to gross up the tax indemnity payment for the
amount of income taxes due as a result of the tax indemnity
payment. Messrs. Gold, Kreitzer, Wilson and McDevitt are
potential recipients of these indemnification payments. Because
of these potential payments their personal interests may diverge
from those of our stockholders.
We have a limited operating history as a REIT and as a public
company and may not be successful in operating as a public REIT,
which may adversely affect our ability to make distributions to
stockholders.
We were formed in April 2004 and have a limited operating
history as a REIT and as a public company. Our board of
directors and executive officers have overall responsibility for
our management, but only our Chief Executive Officer, Executive
Vice President and one of our independent directors have prior
experience in operating a business in accordance with the
requirements of the Internal Revenue Code of 1986, as amended,
or the Code, for maintaining qualification as a REIT. We cannot
assure you that our management teams past experience will
be sufficient to operate our company successfully as a REIT or
as a public company. Failure to maintain REIT status would have
an adverse effect on our cash available for distribution to
stockholders and would adversely affect the price of our common
stock.
Our expansion strategy may not yield the returns expected,
may result in disruptions to our business, may strain our
management resources and may adversely affect our operations.
We own properties principally in Boston, San Diego,
San Francisco, Seattle, Maryland, Pennsylvania and New
York/ New Jersey, each of which is currently a leading market in
the United States for the life science industry. We cannot
assure you that these markets will remain favorable to the life
science industry, that these markets will continue to grow or
that we will be successful expanding in these markets.
10
In addition to the 13 properties we acquired in connection with
our initial public offering, we have acquired an additional 26
properties, and we expect to continue to expand. This
anticipated growth will require substantial attention from our
existing management team, which may divert managements
attention from our current properties. Implementing our growth
plan will also require that we expand our management and staff
with qualified and experienced personnel and that we implement
administrative, accounting and operational systems sufficient to
integrate new properties into our portfolio. We also must manage
future property acquisitions without incurring unanticipated
costs or disrupting the operations at our existing properties.
Managing new properties requires a focus on leasing and
retaining tenants. If we fail to successfully integrate future
acquisitions into our portfolio, or if newly acquired properties
fail to perform as we expect, our results of operations,
financial condition and ability to pay distributions could
suffer.
We may be unable to acquire, develop or operate new
properties successfully, which could harm our financial
condition and ability to pay distributions to our
stockholders.
We continue to evaluate the market for available properties and
may acquire office, laboratory and other properties when
opportunities exist. We also may develop or substantially
renovate office and other properties. Acquisition, development
and renovation activities are subject to significant risks,
including:
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changing market conditions, including competition from others,
may diminish our opportunities for acquiring a desired property
on favorable terms or at all. Even if we enter into agreements
for the acquisition of properties, these agreements are subject
to customary conditions to closing, including completion of due
diligence investigations to our satisfaction, |
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we may be unable to obtain financing on favorable terms (or at
all), |
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we may spend more time or money than we budget to improve or
renovate acquired properties or to develop new properties, |
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we may be unable to quickly and efficiently integrate new
properties, particularly if we acquire portfolios of properties,
into our existing operations, |
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market conditions may result in higher than expected vacancy
rates and lower than expected rental rates, |
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if we develop properties, we may encounter delays or refusals in
obtaining all necessary zoning, land use, building, occupancy
and other required governmental permits and authorizations, |
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we are less familiar with the development of properties in
markets outside of California, |
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acquired and developed properties may have defects we do not
discover through our inspection processes, including latent
defects that may not reveal themselves until many years after we
put a property in service, and |
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we may acquire land, properties or entities owning properties
which are subject to liabilities and for which, in the case of
unknown liabilities, we may have limited or no recourse. |
The realization of any of the above risks could significantly
and adversely affect our financial condition, results of
operations, cash flow, per share trading price of our common
stock, ability to satisfy our debt service obligations and
ability to pay distributions to our stockholders.
Our success depends on key personnel with extensive
experience dealing with the real estate needs of life science
tenants, and the loss of these key personnel could threaten our
ability to operate our business successfully.
Our future success depends, to a significant extent, on the
continued services of our management team. In particular, we
depend on the efforts of Mr. Gold, our Chairman, President
and Chief Executive Officer, Mr. Kreitzer, our Executive
Vice President, General Counsel and Secretary, Mr. Wilson,
our Chief Financial Officer, and Mr. McDevitt, our Regional
Executive Vice President. Among the reasons that
Messrs. Gold, Kreitzer, Wilson and McDevitt are important
to our success is that each has a national or regional
reputation in the life science industry based on their extensive
real estate experience in dealing with life science tenants
11
and properties. Each member of our management team has developed
informal relationships through past business dealings with
numerous members of the scientific community, life science
investors, current and prospective life science industry
tenants, and real estate brokers. We expect that their
reputations will continue to attract business and investment
opportunities before the active marketing of properties and will
assist us in negotiations with lenders, existing and potential
tenants, and industry personnel. If we lost their services, our
relationships with such lenders, existing and prospective
tenants, and industry personnel could suffer. We have entered
into employment agreements with each of Messrs. Gold,
Kreitzer, Wilson and McDevitt, but we cannot guarantee that they
will not terminate their employment prior to the end of the term.
The bankruptcy of a tenant may adversely affect the income
produced by and the value of our properties.
The bankruptcy or insolvency of a tenant may adversely affect
the income produced by our properties. If any tenant becomes a
debtor in a case under the Bankruptcy Code, we cannot evict the
tenant solely because of the bankruptcy. The bankruptcy court
also might authorize the tenant to reject and terminate its
lease with us, which would generally result in any unpaid,
pre-bankruptcy rent being treated as an unsecured claim. In
addition, our claim against the tenant for unpaid, future rent
would be subject to a statutory cap equal to the greater of
(1) one year of rent or (2) 15% of the remaining rent
on the lease (not to exceed three years of rent). This cap might
be substantially less than the remaining rent actually owed
under the lease. Additionally, a Bankruptcy Court may require us
to turn over to the estate all or a portion of any deposits,
amounts in escrow, or prepaid rents. Our claim for unpaid,
pre-bankruptcy rent, our lease termination damages and claims
relating to damages for which we hold deposits or other amounts
that we were forced to repay would likely not be paid in full.
Compliance with changing regulation of corporate governance
and public disclosure may result in additional expenses and may
have a negative impact on our business.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002 and new rules and regulations of the Securities and
Exchange Commission and the New York Stock Exchange, or NYSE,
are creating uncertainty for companies such as ours. These new
or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of
specificity, and as a result, their application in practice may
evolve over time as new guidance is provided by regulatory and
governing bodies, which could result in continuing uncertainty
regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. Our
efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in,
increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities
to compliance activities. In particular, our efforts to comply
with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related regulations regarding our required assessment of our
internal control over financial reporting and our external
auditors audit of that assessment has required the
commitment of significant financial and managerial resources. We
expect these efforts to require the continued commitment of
significant resources. Further, our board members, Chief
Executive Officer and Chief Financial Officer could face an
increased risk of personal liability in connection with the
performance of their duties. As a result, we may have difficulty
attracting and retaining qualified board members and executive
officers, which could harm our business. If our efforts to
comply with new or changed laws, regulations and standards
differ from the activities intended by regulatory or governing
bodies due to ambiguities related to practice, our reputation
may be harmed.
Future acts of terrorism or war or the risk of war may have a
negative impact on our business.
The continued threat of terrorism and the potential for military
action and heightened security measures in response to this
threat may cause significant disruption to commerce. There can
be no assurance that the armed hostilities will not escalate or
that these terrorist attacks, or the United States
responses to them, will not lead to further acts of terrorism
and civil disturbances, which may further contribute to economic
instability. Any armed conflict, civil unrest or additional
terrorist activities, and the attendant political instability
and societal disruption, may adversely affect our results of
operations, financial condition and future growth.
12
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Risks Related to the Real Estate Industry |
Significant competition may decrease or prevent increases in
our properties occupancy and rental rates and may reduce
our investment opportunities.
We are one of only two publicly traded entities focusing
primarily on the acquisition, management, expansion and
selective development of properties designed for life science
tenants. However, various entities, including other REITs, such
as health care REITs and suburban office property REITs, pension
funds, insurance companies, investment funds and companies,
partnerships, and developers invest in properties containing
life science tenants and therefore compete for investment
opportunities with us. Many of these entities have substantially
greater financial resources than we do and may be able to accept
more risk than we can prudently manage, including risks with
respect to the creditworthiness of a tenant or the geographic
location of its investments. In the future, competition from
these entities may reduce the number of suitable investment
opportunities offered to us or increase the bargaining power of
property owners seeking to sell. Further, as a result of their
greater resources, those entities may have more flexibility than
we do in their ability to offer rental concessions to attract
tenants. This could put pressure on our ability to maintain or
raise rents and could adversely affect our ability to attract or
retain tenants. As a result, our financial condition, results of
operations, cash flow, per share trading price of our common
stock, ability to satisfy our debt service obligations and
ability to pay distributions to our stockholders may be
adversely affected.
Uninsured and underinsured losses could adversely affect our
operating results and our ability to make distributions to our
stockholders.
We carry comprehensive liability, fire, workers
compensation, extended coverage, terrorism and rental loss
insurance covering all of our properties under a blanket policy,
except with respect to property and fire insurance on our
McKellar Court and Science Center Drive properties, which is
carried directly by the tenants. We believe the policy
specifications and insured limits are appropriate given the
relative risk of loss, the cost of the coverage and industry
practice. We also carry environmental remediation insurance for
our properties. This insurance, subject to certain exclusions
and deductibles, covers the cost to remediate environmental
damage caused by unintentional future spills or the historic
presence of previously undiscovered hazardous substances. We
intend to carry similar insurance with respect to future
acquisitions as appropriate. We do not carry insurance for
generally uninsurable losses such as loss from riots or acts of
God. A substantial portion of our properties are located in
San Diego and San Francisco, California and Seattle,
Washington, areas especially subject to earthquakes. We
presently carry earthquake insurance on our Industrial Road
property in San Francisco and on our east coast properties,
but do not carry earthquake insurance on our other properties in
San Francisco or on our properties in San Diego or
Seattle. The amount of earthquake insurance coverage we do carry
may not be sufficient to fully cover losses from earthquakes. In
addition, we may discontinue earthquake, terrorism or other
insurance, or may elect not to procure such insurance, on some
or all of our properties in the future if the cost of premiums
for any of these policies exceeds, in our judgment, the value of
the coverage discounted for the risk of loss.
If we experience a loss that is uninsured or that exceeds policy
limits, we could lose the capital invested in the damaged
properties as well as the anticipated future cash flows from
those properties. In addition, if the damaged properties are
subject to recourse indebtedness, we would continue to be liable
for the indebtedness, even if these properties were irreparably
damaged.
Our performance and value are subject to risks associated
with the ownership and operation of real estate assets and with
factors affecting the real estate industry.
Our ability to make expected distributions to our stockholders
depends on our ability to generate revenues in excess of
expenses, our scheduled principal payments on debt and our
capital expenditure requirements. Events and conditions that are
beyond our control may decrease our cash available for
distribution and the value of our properties. These events
include:
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local oversupply, increased competition or reduced demand for
life science office and laboratory space, |
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inability to collect rent from tenants, |
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vacancies or our inability to rent space on favorable terms, |
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increased operating costs, including insurance premiums,
utilities and real estate taxes, |
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the ongoing need for capital improvements, particularly in older
structures, |
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costs of complying with changes in governmental regulations,
including tax laws, |
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the relative illiquidity of real estate investments, |
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changing submarket demographics, and |
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civil unrest, acts of war and natural disasters, including
earthquakes, floods and fires, which may result in uninsured and
underinsured losses. |
In addition, we could experience a general decline in rents or
an increased incidence of defaults under existing leases if any
of the following occur:
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periods of economic slowdown or recession, |
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rising interest rates, |
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declining demand for real estate, or |
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the public perception that any of these events may occur. |
Any of these events could adversely affect our financial
condition, results of operations, cash flow, per share trading
price of our common stock, ability to satisfy our debt service
obligations and ability to pay distributions to our stockholders.
Illiquidity of real estate investments may make it difficult
for us to sell properties in response to market conditions and
could harm our financial condition and ability to make
distributions.
Equity real estate investments are relatively illiquid and
therefore will tend to limit our ability to vary our portfolio
promptly in response to changing economic or other conditions.
To the extent the properties are not subject to triple-net
leases, some significant expenditures such as real estate taxes
and maintenance costs are generally not reduced when
circumstances cause a reduction in income from the investment.
Should these events occur, our income and funds available for
distribution could be adversely affected. Furthermore, our
Landmark at Eastview property is subject to a ground lease until
certain property subdivisions are completed, at which time the
ground lease will terminate and we will obtain fee simple title
to the property. If those subdivisions are not completed, the
property will remain subject to the ground lease, which could
make it more difficult to sell the property. In addition, our
Colorow Drive property is subject to a ground lease, which could
make it more difficult to sell the property. If any of the
parking leases or licenses associated with our Cambridge
portfolio were to expire, or if we were unable to assign these
leases to a buyer, it would be more difficult for us to sell
these properties and would adversely affect our ability to
retain current tenants or attract new tenants at these
properties. In addition, REIT requirements may subject us to a
100% tax on gain recognized from the sale of property if the
property is considered to be held primarily for sale to
customers in the ordinary course of our business. To prevent
these taxes, we may comply with safe harbor rules relating to
the number of properties sold in a year, how long we owned the
properties, their tax bases and the cost of improvements made to
those properties. However, we can provide no assurance that we
will be able to successfully comply with these safe harbors. If
compliance is possible, the safe harbor rules may restrict our
ability to sell assets in the future and achieve liquidity that
may be necessary to fund distributions.
We may be unable to renew leases, lease vacant space or
re-lease space as leases expire, which could adversely affect
our business and our ability to pay distributions to our
stockholders.
If we cannot renew leases, we may be unable to re-lease our
properties at rates equal to or above the current rate. Even if
we can renew leases, tenants may be able to negotiate lower
rates as a result of market conditions. Market conditions may
also hinder our ability to lease vacant space in newly developed
properties. In addition, we may enter into or acquire leases for
properties that are specially suited to the needs of a
particular tenant. Such properties may require renovations,
tenant improvements or other concessions in order
14
to lease them to other tenants if the initial leases terminate.
Any of these factors could adversely impact our financial
condition, results of operations, cash flow, per share trading
price of our common stock, our ability to satisfy our debt
service obligations and our ability to pay distributions to our
stockholders.
We could incur significant costs related to government
regulation and private litigation over environmental matters
involving the presence, discharge or threat of discharge of
hazardous or toxic substances, which could adversely affect our
operations, the value of our properties, and our ability to make
distributions to our stockholders.
Our properties may be subject to environmental liabilities.
Under various federal, state and local laws, a current or
previous owner, operator or tenant of real estate can face
liability for environmental contamination created by the
presence, discharge or threat of discharge of hazardous or toxic
substances. Liabilities can include the cost to investigate,
clean up and monitor the actual or threatened contamination and
damages caused by the contamination (or threatened
contamination). Environmental laws typically impose such
liability regardless of:
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our knowledge of the contamination, |
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the timing of the contamination, |
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the cause of the contamination, or |
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the party responsible for the contamination. |
The liability under such laws may be strict, joint and several,
meaning that we may be liable regardless of whether we knew of,
or were responsible for, the presence of the contaminants, and
the government entity or private party may seek recovery of the
entire amount from us even if there are other responsible
parties. Liabilities associated with environmental conditions
may be significant and can sometimes exceed the value of the
affected property. The presence of hazardous substances on a
property may adversely affect our ability to sell or rent that
property or to borrow using that property as collateral.
Some of our properties have had contamination in the past that
required cleanup. We believe the contamination has been
effectively remediated, and that any remaining contamination
either does not require remediation or that the costs associated
with such remediation will not be material. However, we cannot
guarantee that such contamination does not continue to pose a
threat to the environment or that we will not have continued
liability in connection with such prior contamination. Our
Kendall Square A and Kendall Square D properties are located on
the site of a former manufactured gas plant. Various remedial
actions were performed on these properties, including soil
stabilization to control the spread of oil and hazardous
materials in the soil. Another of our properties, Elliott
Avenue, has known soil contamination beneath a portion of the
building located on the property. Based on environmental
consultant reports, management does not believe any remediation
would be required unless major structural changes were made to
the building that resulted in the soil becoming exposed. We do
not expect these matters to materially adversely affect such
properties value or the cash flows related to such
properties, but we can provide no assurances to that effect.
Environmental laws also:
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may require the removal or upgrade of underground storage tanks, |
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regulate storm water, wastewater and water pollutant discharge, |
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regulate air pollutant emissions, |
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regulate hazardous materials generation, management and
disposal, and |
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regulate workplace health and safety. |
Life science industry tenants, our primary tenant industry
focus, frequently use hazardous materials, chemicals, heavy
metals, and biological and radioactive compounds. Our
tenants controlled use of these materials subjects us and
our tenants to laws that govern using, manufacturing, storing,
handling and disposing of such materials and certain byproducts
of those materials. We are unaware of any of our existing tenants
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violating applicable laws and regulations, but we and our
tenants cannot completely eliminate the risk of contamination or
injury from these materials. If our properties become
contaminated, or if a party is injured, we could be held liable
for any damages that result. Such liability could exceed our
resources and any environmental remediation insurance coverage
we have, which could adversely affect our operations, the value
of our properties, and our ability to make distributions to our
stockholders.
We could incur significant costs related to governmental
regulation and private litigation over environmental matters
involving asbestos-containing materials, which could adversely
affect our operations, the value of our properties, and our
ability to make distributions to our stockholders.
Environmental laws also govern the presence, maintenance and
removal of asbestos-containing materials, or ACMs, and may
impose fines and penalties if we fail to comply with these
requirements. Failure to comply with these laws, or even the
presence of ACMs, may expose us to third-party liability. Some
of our properties contain ACMs, and we could be liable for such
fines or penalties, as described above in Item 1.
Business Regulation Environmental
Matters.
Our properties may contain or develop harmful mold, which
could lead to liability for adverse health effects and costs of
remediating the problem, which could adversely affect the value
of the affected property and our ability to make distributions
to our stockholders.
When excessive moisture accumulates in buildings or on building
materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period
of time. Some molds may produce airborne toxins or irritants.
Concern about indoor exposure to mold has been increasing
because exposure to mold may cause a variety of adverse health
effects and symptoms, including allergic or other reactions. As
a result, the presence of significant mold at any of our
properties could require us to undertake a costly remediation
program to contain or remove the mold from the affected
property. In addition, the presence of significant mold could
expose us to liability to our tenants, their or our employees,
and others if property damage or health concerns arise.
Compliance with the Americans with Disabilities Act and
similar laws may require us to make significant unanticipated
expenditures.
All of our properties are required to comply with the ADA. The
ADA requires that all public accommodations must meet federal
requirements related to access and use by disabled persons.
Although we believe that our properties substantially comply
with present requirements of the ADA, we have not conducted an
audit of all of such properties to determine compliance. If one
or more properties is not in compliance with the ADA, then we
would be required to bring the offending properties into
compliance. Compliance with the ADA could require removing
access barriers. Non-compliance could result in imposition of
fines by the U.S. government or an award of damages to
private litigants, or both. Additional federal, state and local
laws also may require us to modify properties or could restrict
our ability to renovate properties. Complying with the ADA or
other legislation could be very expensive. If we incur
substantial costs to comply with such laws, our financial
condition, results of operations, cash flow, per share trading
price of our common stock, our ability to satisfy our debt
service obligations and our ability to pay distributions to our
stockholders could be adversely affected.
We may incur significant unexpected costs to comply with
fire, safety and other regulations, which could adversely impact
our financial condition, results of operations, and ability to
make distributions.
Our properties are subject to various federal, state and local
regulatory requirements, such as state and local fire and safety
requirements, building codes and land use regulations. Failure
to comply with these requirements could subject us to
governmental fines or private litigant damage awards. We believe
that our properties are currently in material compliance with
all applicable regulatory requirements. However, we do not know
whether existing requirements will change or whether future
requirements will require us to make significant unanticipated
expenditures that will adversely impact our financial condition,
results of operations, cash flow, the per share trading price of
our common stock, our ability to satisfy our debt service
obligations and our ability to pay distributions to our
stockholders.
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Risks Related to Our Organizational Structure |
Conflicts of interest could result in our management acting
other than in our stockholders best interests.
Our executive officers and directors beneficially own 6.2%
of our common stock and exercise substantial influence over our
business and, as a result, they may delay, defer or prevent us
from taking actions that would be beneficial to our other
stockholders. As of February 28, 2006, our
executive officers, directors and entities affiliated with them
beneficially owned an aggregate of 375,416 shares of our
common stock and units which may be exchanged for
2,673,172 shares of our common stock, representing a total
of approximately 6.2% of our outstanding common stock.
Consequently, our executive officers and directors have
substantial influence over us and could exercise their influence
in a manner that may not be in the best interests of our
stockholders.
We may choose not to enforce, or to enforce less
vigorously, our rights under contribution and other agreements
because of conflicts of interest with certain of our
officers. Messrs. Gold, Kreitzer, Wilson and
McDevitt, some of their spouses and parents, and other
individuals and entities not affiliated with us or our
management, had ownership interests in the properties
contributed to our operating partnership in our formation
transactions. Under the agreements relating to the contribution
of those interests, we are entitled to indemnification and
damages in the event of breaches of representations or
warranties made by Messrs. Gold, Kreitzer, Wilson and
McDevitt and other contributors. In addition, Messrs. Gold,
Kreitzer, Wilson and McDevitt have entered into employment
agreements with us pursuant to which they have agreed to devote
substantially full-time attention to our affairs. None of these
contribution and employment agreements were negotiated on an
arms-length basis. We may choose not to enforce, or to
enforce less vigorously, our rights under these contribution and
employment agreements because of our desire to maintain our
ongoing relationships with the individuals involved.
Our charter and Maryland law contain provisions that may
delay, defer or prevent a change of control transaction and may
prevent stockholders from receiving a premium for their
shares.
Our charter contains a 9.8% ownership limit that may
delay, defer or prevent a change of control transaction.
Our charter, with certain exceptions, authorizes our directors
to take such actions as are necessary and desirable to preserve
our qualification as a REIT. Unless exempted by our board of
directors, no person may own more than 9.8% of the value of our
outstanding shares of capital stock or more than 9.8% in value
or number (whichever is more restrictive) of the outstanding
shares of our common stock. The board may not grant such an
exemption to any proposed transferee whose ownership of in
excess of 9.8% of the value of our outstanding shares would
result in the termination of our status as a REIT. These
restrictions on transferability and ownership will not apply if
our board of directors determines that it is no longer in our
best interests to attempt to qualify as a REIT. The ownership
limit may delay or impede a transaction or a change of control
that might involve a premium price for our common stock or
otherwise be in the best interest of our stockholders.
We could authorize and issue stock without stockholder
approval that may delay, defer or prevent a change of control
transaction. Our charter authorizes us to issue
additional authorized but unissued shares of our common stock or
preferred stock. In addition, our board of directors may
classify or reclassify any unissued shares of our common stock
or preferred stock and may set the preferences, rights and other
terms of the classified or reclassified shares. The board may
also, without stockholder approval, amend our charter to
increase the authorized number of shares of our common stock or
our preferred stock that we may issue. The board of directors
could establish a series of common stock or preferred stock that
could, depending on the terms of such series, delay, defer or
prevent a transaction or a change of control that might involve
a premium price for our common stock or otherwise be in the best
interests of our stockholders.
Certain provisions of Maryland law could inhibit changes
in control that may delay, defer or prevent a change of control
transaction. Certain provisions of the Maryland General
Corporation Law, or the MGCL, may have the effect of inhibiting
a third party from making a proposal to acquire us or of
impeding a change of control. In some cases, such an acquisition
or change of control could provide our stockholders with the
17
opportunity to realize a premium over the then-prevailing market
price of their shares. These MGCL provisions include:
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business combination provisions that, subject to
limitations, prohibit certain business combinations between us
and an interested stockholder for certain periods.
An interested stockholder is generally any person
who beneficially owns 10% or more of the voting power of our
shares or an affiliate thereof. The business combinations are
prohibited for five years after the most recent date on which
the stockholder becomes an interested stockholder. After that
period, the MGCL imposes special voting requirements on such
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control share provisions that provide that
control shares of our company acquired in a
control share acquisition have no voting rights
unless holders of two-thirds of our voting stock (excluding
interested shares) consent. Control shares are
shares that, when aggregated with other shares controlled by the
stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors. A
control share acquisition is the direct or indirect
acquisition of ownership or control of control
shares. |
In the case of the business combination provisions of the MGCL,
we opted out by resolution of our board of directors with
respect to any business combination between us and any person
provided such business combination is first approved by our
board of directors (including a majority of directors who are
not affiliates or associates of such person). In the case of the
control share provisions of the MGCL, we opted out pursuant to a
provision in our bylaws. However, our board of directors may by
resolution elect to opt in to the business combination
provisions of the MGCL. Further, we may opt in to the control
share provisions of the MGCL in the future by amending our
bylaws, which our board of directors can do without stockholder
approval.
The partnership agreement of our operating partnership, Maryland
law, and our charter and bylaws also contain other provisions
that may delay, defer or prevent a transaction or a change of
control that might involve a premium price for our common stock
or otherwise be in the best interest of our stockholders.
Our board of directors may amend our investing and financing
policies without stockholder approval, and, accordingly, our
stockholders would have limited control over changes in our
policies that could increase the risk we default under our debt
obligations or that could harm our business, results of
operations and share price.
Our board of directors has adopted a policy of limiting our
indebtedness to approximately 60% of our total market
capitalization. Total market capitalization is defined as the
sum of the market value of our outstanding common stock (which
may decrease, thereby increasing our
debt-to-total
capitalization ratio), plus the aggregate value of operating
partnership units we do not own, plus the book value of our
total consolidated indebtedness. However, our organizational
documents do not limit the amount or percentage of debt that we
may incur, nor do they limit the types of properties we may
acquire or develop. Our board of directors may alter or
eliminate our current policy on borrowing or investing at any
time without stockholder approval. Changes in our strategy or in
our investment or leverage policies could expose us to greater
credit risk and interest rate risk and could also result in a
more leveraged balance sheet. These factors could result in an
increase in our debt service and could adversely affect our cash
flow and our ability to make expected distributions to our
stockholders. Higher leverage also increases the risk we would
default on our debt.
We may invest in properties with other entities, and our lack
of sole decision-making authority or reliance on a
co-venturers financial condition could make these joint
venture investments risky.
We have in the past and may continue in the future to co-invest
with third parties through partnerships, joint ventures or other
entities. We may acquire non-controlling interests or share
responsibility for managing the affairs of a property,
partnership, joint venture or other entity. In such events, we
would not be in a position to exercise sole decision-making
authority regarding the property or entity. Investments in
entities may, under
18
certain circumstances, involve risks not present were a third
party not involved. These risks include the possibility that
partners or co-venturers:
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might become bankrupt or fail to fund their share of required
capital contributions, |
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may have economic or other business interests or goals that are
inconsistent with our business interests or goals, and |
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may be in a position to take actions contrary to our policies or
objectives. |
Such investments may also have the potential risk of impasses on
decisions, such as a sale, because neither we nor the partner or
co-venturer would have full control over the partnership or
joint venture. Disputes between us and partners or co-venturers
may result in litigation or arbitration that would increase our
expenses and prevent our officers and/or directors from focusing
their time and effort on our business. In addition, we may in
certain circumstances be liable for the actions of our
third-party partners or co-venturers if:
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we structure a joint venture or conduct business in a manner
that is deemed to be a general partnership with a third party,
in which case we could be liable for the acts of that third
party, |
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third-party managers incur debt or other liabilities on behalf
of a joint venture which the joint venture is unable to pay, and
the joint venture agreement provides for capital calls, in which
case we could be liable to make contributions as set forth in
any such joint venture agreement, or |
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we agree to cross-default provisions or to cross-collateralize
our properties with the properties in a joint venture, in which
case we could face liability if there is a default relating to
those properties in the joint venture or the obligations
relating to those properties. |
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Risks Related to Our Capital Structure |
Debt obligations expose us to increased risk of property
losses and may have adverse consequences on our business
operations and our ability to make distributions.
We have used and will continue to use debt to finance property
acquisitions. Our use of debt may have adverse consequences,
including the following:
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Required payments of principal and interest may be greater than
our cash flow from operations. |
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We may be forced to dispose of one or more of our properties,
possibly on disadvantageous terms, to make payments on our debt. |
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If we default on our debt obligations, the lenders or mortgagees
may foreclose on our properties that secure those loans.
Further, if we default under a mortgage loan, we will
automatically be in default on any other loan that has
cross-default provisions, and we may lose the properties
securing all of these loans. |
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A foreclosure on one of our properties will be treated as a sale
of the property for a purchase price equal to the outstanding
balance of the secured debt. If the outstanding balance of the
secured debt exceeds our tax basis in the property, we would
recognize taxable income on foreclosure without realizing any
accompanying cash proceeds to pay the tax (or to make
distributions based on REIT taxable income). |
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We may not be able to refinance or extend our existing debt. If
we cannot repay, refinance or extend our debt at maturity, in
addition to our failure to repay our debt, we may be unable to
make distributions to our stockholders at expected levels or at
all. |
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Even if we are able to refinance or extend our existing debt,
the terms of any refinancing or extension may not be as
favorable as the terms of our existing debt. If the refinancing
involves a higher interest rate, it could adversely affect our
cash flow and ability to make distributions to stockholders. |
As of February 28, 2006, we had outstanding mortgage
indebtedness of $232.3 million and $250.0 million of
borrowings under our secured term loan facility, secured by 13
of our properties, as well as $2.3 million
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associated with our unconsolidated partnership. We had
$30.7 million outstanding under our $250.0 million
revolving unsecured credit facility. We expect to incur
additional debt in connection with future acquisitions. Our
organizational documents do not limit the amount or percentage
of debt that we may incur.
Our credit facilities include restrictive covenants relating
to our operations, which could limit our ability to respond to
changing market conditions and our ability to make distributions
to our stockholders.
Our credit facilities impose restrictions on us that affect our
distribution and operating policies and our ability to incur
additional debt. For example, we are subject to a maximum
leverage ratio of 60% during the terms of the loans, which could
reduce our ability to incur additional debt and consequently
reduce our ability to make distributions to our stockholders.
Our credit facilities also contain limitations on our ability to
make distributions to our stockholders in excess of those
required to maintain our REIT status. Specifically, our credit
facilities limit distributions to 95% of funds from operations
or 100% of funds available for distribution plus cash payments
received under master leases on our King of Prussia and Bayshore
Boulevard properties, but not less than the minimum necessary to
enable us to meet our REIT income distribution requirements. In
addition, our credit facilities contain covenants that, among
other things, limit our ability to further mortgage our
properties or reduce insurance coverage, and that require us to
maintain specified levels of net worth. These or other
limitations may adversely affect our flexibility and our ability
to achieve our operating plans.
We have and may continue to engage in hedging transactions,
which can limit our gains and increase exposure to losses.
We have and may continue to enter into hedging transactions to
protect us from the effects of interest rate fluctuations on
floating rate debt. Our hedging transactions may include
entering into interest rate swap agreements or interest rate cap
or floor agreements, or other interest rate exchange contracts.
Hedging activities may not have the desired beneficial impact on
our results of operations or financial condition. No hedging
activity can completely insulate us from the risks associated
with changes in interest rates. Moreover, interest rate hedging
could fail to protect us or adversely affect us because, among
other things:
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Available interest rate hedging may not correspond directly with
the interest rate risk for which we seek protection. |
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The duration of the hedge may not match the duration of the
related liability. |
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The party owing money in the hedging transaction may default on
its obligation to pay. |
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The credit quality of the party owing money on the hedge may be
downgraded to such an extent that it impairs our ability to sell
or assign our side of the hedging transaction. |
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The value of derivatives used for hedging may be adjusted from
time to time in accordance with accounting rules to reflect
changes in fair value. Downward adjustments, or
mark-to-market
losses, would reduce our stockholders equity. |
Hedging involves risk and typically involves costs, including
transaction costs, that may reduce our overall returns on our
investments. These costs increase as the period covered by the
hedging increases and during periods of rising and volatile
interest rates. These costs will also limit the amount of cash
available for distribution to stockholders. We generally intend
to hedge as much of the interest rate risk as management
determines is in our best interests given the cost of such
hedging transactions. The REIT qualification rules may limit our
ability to enter into hedging transactions by requiring us to
limit our income from hedges. If we are unable to hedge
effectively because of the REIT rules, we will face greater
interest rate exposure than may be commercially prudent. In
connection with our $250.0 million secured term loan, we
entered into an interest rate swap agreement, which has the
effect of fixing the interest rate on the secured term loan at
6.4%. Other than this interest rate swap, we have not entered
into any hedging transactions.
Increases in interest rates could increase the amount of our
debt payments and adversely affect our ability to pay
distributions to our stockholders.
Interest we pay could reduce cash available for distributions.
Additionally, if we incur variable rate debt, including
borrowings under our senior secured term loan facility and our
senior unsecured credit facilities, to
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the extent not adequately hedged, increases in interest rates
would increase our interest costs. These increased interest
costs would reduce our cash flows and our ability to make
distributions to our stockholders. In addition, if we need to
repay existing debt during a period of rising interest rates, we
could be required to liquidate one or more of our investments in
properties at times that may not permit realization of the
maximum return on such investments.
If we fail to obtain external sources of capital, which is
outside of our control, we may be unable to make distributions
to our stockholders, maintain our REIT qualification, or fund
growth.
In order to maintain our qualification as a REIT, we are
required to distribute annually at least 90% of our net taxable
income, excluding any net capital gain. In addition, we will be
subject to income tax at regular corporate rates to the extent
that we distribute less than 100% of our net taxable income,
including any net capital gains. Because of these distribution
requirements, we may not be able to fund future capital needs,
including any necessary acquisition financing, from operating
cash flow. Consequently, we rely on third-party sources to fund
our capital needs. We may not be able to obtain financings on
favorable terms or at all. Our access to third-party sources of
capital depends, in part, on:
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general market conditions, |
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the markets perception of our growth potential, |
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with respect to acquisition financing, the markets
perception of the value of the properties to be acquired, |
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our current debt levels, |
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our current and expected future earnings, |
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our cash flow and cash distributions, and |
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the market price per share of our common stock. |
Additionally, if the ground lease underlying our Landmark at
Eastview property remains in place, it could be more difficult
to borrow using that property as collateral. Our inability to
obtain capital from third-party sources will adversely affect
our business and limit our growth. Without sufficient capital,
we may not be able to acquire or develop properties when
strategic opportunities exist, satisfy our debt service
obligations or make the cash distributions to our stockholders
necessary to maintain our qualification as a REIT.
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Risks Related to Our REIT Status |
Our failure to qualify as a REIT under the Code would result
in significant adverse tax consequences to us and would
adversely affect our business and the value of our stock.
We believe that we have operated and intend to continue
operating in a manner that is intended to allow us to qualify as
a REIT for federal income tax purposes under the Code.
Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only
limited judicial and administrative interpretations. The fact
that we hold substantially all of our assets through a
partnership further complicates the application of the REIT
requirements. Even a seemingly minor technical or inadvertent
mistake could jeopardize our REIT status. Our REIT status
depends upon various factual matters and circumstances that may
not be entirely within our control. For example, in order to
qualify as a REIT, at least 95% of our gross income in any year
must be derived from qualifying sources, and we must satisfy a
number of requirements regarding the composition of our assets.
Also, we must make distributions to stockholders aggregating
annually at least 90% of our REIT taxable income, excluding
capital gains. In addition, new legislation, regulations,
administrative interpretations or court decisions, each of which
could have retroactive effect, may make it more difficult or
impossible for us to qualify as a REIT, or could reduce the
desirability of an investment in a REIT relative to other
investments. We have not requested and do not plan to request a
ruling from the IRS that we qualify as a REIT, and the
statements in this report are not binding on the IRS or any
court. Accordingly, we cannot be certain that we have qualified
or will continue to qualify as a REIT.
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If we fail to qualify as a REIT in any tax year, we will face
serious adverse tax consequences that would substantially reduce
the funds available for distribution to our stockholders for
each of the years involved because:
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we would not be allowed to deduct distributions to stockholders
in computing our taxable income and would be subject to federal
income tax at regular corporate rates, |
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we could also be subject to the federal alternative minimum tax
and possibly increased state and local taxes, and |
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unless we are entitled to relief under applicable statutory
provisions, we could not elect to be taxed as a REIT for four
taxable years following the year in which we were disqualified. |
In addition, if we fail to qualify as a REIT, we will not be
required to make distributions to stockholders, and all
distributions to stockholders will be subject to tax as ordinary
corporate distributions. As a result of all these factors, our
failure to qualify as a REIT could impair our ability to expand
our business and raise capital and would adversely affect the
value of our common stock.
Even if we qualify as a REIT for federal income tax purposes,
we may be subject to other tax liabilities that reduce our cash
flow.
Even if we remain qualified as a REIT for tax purposes, we may
be subject to some federal, state and local taxes on our income
or property. For example:
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In order to qualify as a REIT, we must distribute annually at
least 90% of our REIT taxable income to our stockholders. To the
extent that we satisfy this distribution requirement, but
distribute less than 100% of our REIT taxable income, we will be
subject to federal corporate income tax on the undistributed
amount. |
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We will be subject to a 4% nondeductible excise tax on the
amount, if any, by which distributions we pay in any calendar
year are less than the sum of 85% of our ordinary income, 95% of
our capital gain net income and 100% of our undistributed income
from prior years. |
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If we have net income from the sale or other disposition of
foreclosure property that we hold primarily for sale
to customers in the ordinary course of business or other
non-qualifying income from foreclosure property, we must pay tax
on that income at the highest corporate rate. |
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If we sell a property in a prohibited transaction,
our gain from the sale would be subject to a 100% tax. A
prohibited transaction is, in general, a sale or
other disposition of property, other than foreclosure property,
held primarily for sale to customers in the ordinary course of
business. |
To maintain our REIT status, we may be forced to borrow funds
during unfavorable market conditions to make distributions to
our stockholders.
To qualify as a REIT, we must distribute to our stockholders
certain amounts each year based on our income as described
above. At times, we may not have sufficient funds to satisfy
these distribution requirements and may need to borrow funds to
maintain our REIT status and avoid the payment of income and
excise taxes. These borrowing needs could result from:
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differences in timing between the actual receipt of cash and
inclusion of income for federal income tax purposes, |
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the effect of non-deductible capital expenditures, |
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the creation of reserves, or |
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required debt or amortization payments. |
We may need to borrow funds at times when the then-prevailing
market conditions are not favorable for these borrowings. These
borrowings could increase our costs or reduce our equity and
adversely affect the value of our common stock.
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To maintain our REIT status, we may be forced to forego
otherwise attractive opportunities.
To qualify as a REIT, we must satisfy tests concerning, among
other things, the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our
stockholders and the ownership of our stock. We may be required
to make distributions to stockholders at times when it would be
more advantageous to reinvest cash in our business or when we do
not have funds readily available for distribution. Thus,
compliance with the REIT requirements may hinder our ability to
operate solely on the basis of maximizing profits.
The ownership limitations in our charter may restrict or
prevent stockholders from engaging in certain transfers of our
stock.
Our charter contains restrictions on the ownership and transfer
of our capital stock that are intended to assist us in complying
with the requirements imposed on REITs by the Code. The
ownership limits contained in our charter provide that, subject
to certain specified exceptions, no person or entity may own
more than 9.8% of the value of our outstanding shares of capital
stock, and no person or entity may own more than 9.8% (by number
or value, whichever is more restrictive) of the outstanding
shares of our common stock. Our charter also (1) prohibits
any person from actually or constructively owning shares of our
capital stock that would cause us to be closely held
under Section 856(h) of the Code or would otherwise cause
us to fail to qualify as a REIT and (2) voids any transfer
that would result in shares of our capital stock being owned by
fewer than 100 persons. The constructive ownership rules of the
Code are complex, and may cause shares of our capital stock
owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one
individual or entity. As a result, acquisition of less than 9.8%
of the shares of our capital stock (or the acquisition of an
interest in equity of, or in certain affiliates or subsidiaries
of, an entity that owns, actually or constructively, our capital
stock) by an individual or entity, could cause that individual
or entity, or another individual or entity, to own
constructively shares in a manner that would violate the 9.8%
ownership limits or such other limit as provided in our charter
or permitted by our board of directors. Our board of directors
may, but in no event will be required to, waive the 9.8%
ownership limit with respect to a particular stockholder if it
determines that the ownership will not jeopardize our status as
a REIT. As a condition of granting such a waiver, our board of
directors may require a ruling from the IRS or an opinion of
counsel satisfactory to our board and will obtain undertakings
or representations from the applicant with respect to preserving
our status as a REIT. Pursuant to our charter, if any purported
transfer of our capital stock or any other event would result in
any person violating the ownership limits set forth in our
charter or otherwise permitted by our board of directors, then
that number of shares in excess of the applicable limit will be
automatically transferred, pursuant to our charter, to a trust,
the beneficiary of which will be a qualified charitable
organization we select or, under certain circumstances, the
transfer of our capital stock or other event will be void and of
no force or effect.
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Risks Related to the Ownership of Our Stock |
The market price and trading volume of our common stock may
be volatile.
The market price of our common stock may be volatile. In
addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. We cannot
assure you that the market price of our common stock will not
fluctuate or decline significantly in the future.
Some of the factors that could negatively affect our share price
or result in fluctuations in the price or trading volume of our
common stock include:
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actual or anticipated variations in our quarterly operating
results or dividends, |
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changes in our funds from operations or earnings estimates, |
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publication of research reports about us or the real estate
industry, |
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increases in market interest rates that lead purchasers of our
shares to demand a higher yield, |
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changes in market valuations of similar companies, |
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adverse market reaction to any additional debt we incur or
acquisitions we make in the future, |
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additions or departures of key management personnel, |
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actions by institutional stockholders, |
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speculation in the press or investment community, |
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the realization of any of the other risk factors presented in
this report, and |
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general market and economic conditions. |
An increase in market interest rates may have an adverse
effect on the market price of our securities.
Changes in market interest rates have historically affected the
trading prices of equity securities issued by REITs. One of the
factors that will influence the price of our common stock will
be the dividend yield on our common stock (as a percentage of
the price of our common stock) relative to market interest
rates. An increase in market interest rates, which are currently
at low levels relative to historical rates, may lead prospective
purchasers of our common stock to expect a higher dividend
yield. Further, higher interest rates would likely increase our
borrowing costs and potentially decrease funds available for
distribution. Thus, higher market interest rates could harm our
financial condition and results of operations and could cause
the market price of our common stock to fall.
Broad market fluctuations could negatively impact the market
price of our common stock.
The stock market has experienced extreme price and volume
fluctuations that have affected the market price of many
companies in industries similar or related to ours and that have
been unrelated to these companies operating performance.
These broad market fluctuations could reduce the market price of
our common stock. Furthermore, our operating results and
prospects may be below the expectations of public market
analysts and investors or may be lower than those of companies
with comparable market capitalizations. Either of these factors
could lead to a material decline in the market price of our
common stock.
Our distributions to stockholders may decline at any time.
We may not continue our current level of distributions to
stockholders. Our board of directors will determine future
distributions based on a number of factors, including:
|
|
|
|
|
cash available for distribution, |
|
|
|
operating results, |
|
|
|
our financial condition, especially in relation to our
anticipated future capital needs, |
|
|
|
then current expansion plans, |
|
|
|
the distribution requirements for REITs under the Code, and |
|
|
|
other factors our board deems relevant. |
The number of shares of our common stock available for future
sale could adversely affect the market price of our common
stock.
We cannot predict whether future issuances of shares of our
common stock or the availability of shares for resale in the
open market will decrease the market price per share of our
common stock. As of February 28, 2006, we had outstanding
46,746,632 shares of our common stock, as well as units in
our operating partnership which may be exchanged for
2,863,564 shares of our common stock. In addition, as of
February 28, 2006, we had reserved an additional
1,925,868 shares of common stock for future issuance under
our incentive award plan and have a warrant outstanding to
Raymond James & Associates, Inc., issued in connection
with our initial public offering, to
purchase 270,000 shares of our common stock at
$15.00 per share, the initial public offering price.
Furthermore, in October 2005, we filed a universal shelf
registration statement on
Form S-3 with the
Securities and Exchange Commission, which was declared effective
in December 2005. The universal shelf registration statement may
permit us, from time to time, to offer and sell
24
up to $500 million of debt securities, common stock,
preferred stock, warrants and other securities. Sales of
substantial amounts of shares of our common stock in the public
market, or upon exchange of operating partnership units, or the
perception that such sales might occur, could adversely affect
the market price of our common stock.
Any of the following could have an adverse effect on the market
price of our common stock:
|
|
|
|
|
the exchange of units for common stock, |
|
|
|
the exercise of any options granted to certain directors,
executive officers and other employees under our incentive award
plan, |
|
|
|
issuances of preferred stock with liquidation or distribution
preferences, and |
|
|
|
other issuances of our common stock. |
Additionally, the existence of units, options and shares of our
common stock reserved for issuance upon exchange of units may
adversely affect the terms upon which we may be able to obtain
additional capital through the sale of equity securities. In
addition, future sales of shares of our common stock may be
dilutive to existing stockholders.
From time to time we also may issue shares of our common stock
or operating partnership units in connection with property,
portfolio or business acquisitions. We may grant additional
demand or piggyback registration rights in connection with these
issuances. Sales of substantial amounts of our common stock, or
the perception that these sales could occur, may adversely
affect the prevailing market price of our common stock or may
adversely affect the terms upon which we may be able to obtain
additional capital through the sale of equity securities.
|
|
Item 1B. |
Unresolved Staff Comments |
None.
Existing Portfolio
At December 31, 2005, our portfolio consisted of 39
properties, which included 62 buildings with an aggregate of
approximately 4.8 million rentable square feet of
laboratory and office space. We also own five undeveloped land
parcels adjacent to four of our existing properties that we
believe can support up to 706,000 rentable square feet of
laboratory and office space.
The following summarizes our existing portfolio at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent | |
|
|
|
|
|
|
|
Annualized | |
|
|
|
|
|
|
of | |
|
|
|
|
|
Percent of | |
|
Base Rent | |
|
|
Number | |
|
Rentable | |
|
Rentable | |
|
|
|
Annualized | |
|
Annualized | |
|
per Leased | |
|
|
of | |
|
Square | |
|
Square | |
|
Percent | |
|
Base Rent | |
|
Base Rent | |
|
Square Foot | |
Market |
|
Properties | |
|
Feet | |
|
Feet | |
|
Leased | |
|
Current(1) | |
|
Current | |
|
Current | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(In thousands) | |
|
|
|
|
Boston(2)
|
|
|
10 |
|
|
|
1,249,874 |
|
|
|
26.3 |
% |
|
|
97.1 |
% |
|
$ |
47,197 |
|
|
|
39.6 |
% |
|
$ |
38.89 |
|
San Francisco
|
|
|
7 |
|
|
|
955,593 |
|
|
|
20.1 |
% |
|
|
80.7 |
% |
|
|
16,596 |
|
|
|
14.0 |
% |
|
|
21.52 |
|
San Diego(3)
|
|
|
9 |
|
|
|
565,364 |
|
|
|
11.9 |
% |
|
|
87.9 |
% |
|
|
15,102 |
|
|
|
12.7 |
% |
|
|
30.39 |
|
New York/ New Jersey
|
|
|
2 |
|
|
|
823,948 |
|
|
|
17.3 |
% |
|
|
90.1 |
% |
|
|
14,710 |
|
|
|
12.4 |
% |
|
|
19.81 |
|
Pennsylvania
|
|
|
5 |
|
|
|
690,580 |
|
|
|
14.5 |
% |
|
|
92.4 |
% |
|
|
13,217 |
|
|
|
11.1 |
% |
|
|
20.72 |
|
Seattle
|
|
|
2 |
|
|
|
185,989 |
|
|
|
3.9 |
% |
|
|
100.0 |
% |
|
|
6,946 |
|
|
|
5.8 |
% |
|
|
37.34 |
|
Maryland
|
|
|
2 |
|
|
|
168,817 |
|
|
|
3.6 |
% |
|
|
100.0 |
% |
|
|
2,704 |
|
|
|
2.3 |
% |
|
|
16.02 |
|
University Related Other
|
|
|
2 |
|
|
|
115,150 |
|
|
|
2.4 |
% |
|
|
100.0 |
% |
|
|
2,448 |
|
|
|
2.1 |
% |
|
|
21.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/ Weighted Average
|
|
|
39 |
|
|
|
4,755,315 |
|
|
|
100.0 |
% |
|
|
91.1 |
% |
|
$ |
118,920 |
|
|
|
100.0 |
% |
|
$ |
27.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
(1) |
In this and other tables, annualized current base rent is the
monthly contractual rent under existing leases at
December 31, 2005, multiplied by 12 months. Includes
contractual amounts to be received pursuant to master lease
agreements with the sellers on certain properties, which are not
included in rental income for U.S. generally accepted
accounting principles, or GAAP. |
|
(2) |
Excludes parking revenue of $1,063,000 for 47 Erie Street
Parking Structure. |
|
(3) |
Includes the McKellar Court property, consisting of
72,863 square feet. We own the general partnership interest
in the unconsolidated limited partnership that owns the McKellar
Court property, which entitles us to 75% of the gains upon a
sale of the property and 21% of the operating cash flows. |
The following table sets forth information related to the
properties we owned, or had an ownership interest in, at
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Rentable | |
|
Percent | |
|
|
Square Feet | |
|
Leased | |
|
|
| |
|
| |
Boston
|
|
|
|
|
|
|
|
|
Albany Street
|
|
|
75,003 |
|
|
|
100.0 |
% |
Coolidge Avenue
|
|
|
37,400 |
|
|
|
100.0 |
% |
21 Erie Street
|
|
|
49,247 |
|
|
|
56.9 |
% |
40 Erie Street
|
|
|
100,854 |
|
|
|
100.0 |
% |
Fresh Pond Research Park
|
|
|
90,702 |
|
|
|
100.0 |
% |
Kendall Square A
|
|
|
302,919 |
|
|
|
96.7 |
% |
Kendall Square D
|
|
|
349,325 |
|
|
|
98.5 |
% |
Sidney Street
|
|
|
191,904 |
|
|
|
100.0 |
% |
Vassar Street
|
|
|
52,520 |
|
|
|
100.0 |
% |
47 Erie Street Parking Structure
|
|
|
447 Stalls |
|
|
|
100.0 |
% |
San Francisco
|
|
|
|
|
|
|
|
|
Ardentech Court
|
|
|
55,588 |
|
|
|
100.0 |
% |
Bayshore Boulevard
|
|
|
183,344 |
|
|
|
100.0 |
% |
Bridgeview Technology Park I and II
|
|
|
263,073 |
|
|
|
73.9 |
% |
Dumbarton Circle
|
|
|
44,000 |
|
|
|
100.0 |
% |
Eccles Avenue
|
|
|
152,145 |
|
|
|
100.0 |
% |
Industrial Road
|
|
|
169,490 |
|
|
|
83.6 |
% |
Kaiser Drive(1)
|
|
|
87,953 |
|
|
|
0.0 |
% |
San Diego
|
|
|
|
|
|
|
|
|
Balboa Avenue
|
|
|
35,344 |
|
|
|
100.0 |
% |
Bernardo Center Drive
|
|
|
61,286 |
|
|
|
100.0 |
% |
Faraday Avenue
|
|
|
28,704 |
|
|
|
100.0 |
% |
McKellar Court(2)
|
|
|
72,863 |
|
|
|
100.0 |
% |
Nancy Ridge Drive
|
|
|
42,138 |
|
|
|
67.4 |
% |
Bunker Hill Street
|
|
|
105,364 |
|
|
|
69.0 |
% |
Science Center Drive
|
|
|
53,740 |
|
|
|
100.0 |
% |
Towne Centre Drive
|
|
|
115,870 |
|
|
|
100.0 |
% |
Waples Street(3)
|
|
|
50,055 |
|
|
|
56.1 |
% |
New York/ New Jersey
|
|
|
|
|
|
|
|
|
Graphics Drive
|
|
|
72,300 |
|
|
|
44.3 |
% |
Landmark at Eastview(4)
|
|
|
751,648 |
|
|
|
94.5 |
% |
26
|
|
|
|
|
|
|
|
|
|
|
Rentable | |
|
Percent | |
|
|
Square Feet | |
|
Leased | |
|
|
| |
|
| |
Pennsylvania
|
|
|
|
|
|
|
|
|
Eisenhower Road
|
|
|
27,750 |
|
|
|
100.0 |
% |
George Patterson Boulevard
|
|
|
71,500 |
|
|
|
100.0 |
% |
King of Prussia(5)
|
|
|
427,109 |
|
|
|
100.0 |
% |
Phoenixville Pike
|
|
|
104,400 |
|
|
|
49.6 |
% |
1000 Uniqema Boulevard(6)
|
|
|
59,821 |
|
|
|
100.0 |
% |
Seattle
|
|
|
|
|
|
|
|
|
Elliott Avenue
|
|
|
134,989 |
|
|
|
100.0 |
% |
Monte Villa Parkway
|
|
|
51,000 |
|
|
|
100.0 |
% |
Maryland
|
|
|
|
|
|
|
|
|
Beckley Street
|
|
|
77,225 |
|
|
|
100.0 |
% |
Tributary Street
|
|
|
91,592 |
|
|
|
100.0 |
% |
University Related Other
|
|
|
|
|
|
|
|
|
Colorow Drive(7)
|
|
|
93,650 |
|
|
|
100.0 |
% |
Lucent Drive(8)
|
|
|
21,500 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
Total/ Weighted Average
|
|
|
4,755,315 |
|
|
|
91.1 |
% |
|
|
|
|
|
|
|
|
|
(1) |
The entire property was undergoing redevelopment at
December 31, 2005. |
|
(2) |
We own the general partnership interest in the limited
partnership that owns the McKellar Court property, which
entitles us to 75% of the gains upon a sale of the property and
21% of the operating cash flows. |
|
(3) |
We own 70% of the limited liability company that owns the Waples
Street property, which entitles us to 90% of the cash flow from
operations up to a 9.5% cumulative annual return, and then 75%
of such distributions thereafter. The other member of the
limited liability company has the right to put its interest to
us at fair value after completion of the initial improvements,
and can require us to issue partnership units as payment for
such interest. |
|
(4) |
We own a leasehold interest in the property through a
99-year ground lease,
which will convert into a fee simple interest upon the
completion of certain property subdivisions. |
|
(5) |
We own an 88.5% limited partnership interest and a 0.5% general
partnership interest in the limited partnership that owns this
property. |
|
(6) |
Located in New Castle, Delaware. |
|
(7) |
Located in Salt Lake City, Utah. We own a leasehold interest in
the property through a ground lease that expires in December
2043, subject to our option to renew the ground lease for one
additional ten-year period. |
|
(8) |
Located in Lebanon, New Hampshire. |
27
Tenant Information
As of December 31, 2005, our properties were leased to 87
tenants, and 93% of our annualized base rent was derived from
tenants that were public companies or government agencies or
their subsidiaries. The following table presents information
regarding our 10 largest tenants based on percentage of our
annualized base rent as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized | |
|
Percent | |
|
|
|
|
|
|
|
|
Base Rent | |
|
Annualized | |
|
|
|
|
|
|
Annualized | |
|
per Leased | |
|
Base Rent | |
|
Lease | |
|
|
Leased | |
|
Base Rent | |
|
Square Feet | |
|
Current Total | |
|
Expiration | |
Tenant |
|
Square Feet | |
|
Current | |
|
Current | |
|
Portfolio | |
|
Date(s) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
|
|
|
|
Vertex Pharmaceuticals
|
|
|
583,474 |
|
|
$ |
23,660 |
|
|
$ |
40.55 |
|
|
|
19.9 |
% |
|
|
April 2018 |
(1) |
Genzyme Corporation
|
|
|
343,000 |
|
|
|
15,399 |
|
|
|
44.89 |
|
|
|
12.9 |
% |
|
|
July 2018 |
|
Centocor, Inc. (Johnson & Johnson)
|
|
|
331,398 |
|
|
|
7,839 |
|
|
|
23.65 |
|
|
|
6.6 |
% |
|
|
March 2010 |
|
Regeneron Pharmaceuticals, Inc.
|
|
|
211,813 |
|
|
|
3,950 |
|
|
|
18.65 |
|
|
|
3.3 |
% |
|
|
December 2007(2) |
|
Illumina, Inc.
|
|
|
115,870 |
|
|
|
3,938 |
|
|
|
33.99 |
|
|
|
3.3 |
% |
|
|
August 2014 |
|
Nektar Therapeutics
|
|
|
79,917 |
|
|
|
3,812 |
|
|
|
47.70 |
|
|
|
3.2 |
% |
|
|
October 2016 |
|
Millennium Pharmaceuticals, Inc.
|
|
|
73,347 |
|
|
|
3,420 |
|
|
|
46.62 |
|
|
|
2.9 |
% |
|
|
September 2013 |
|
Chemtura Corporation
|
|
|
182,829 |
|
|
|
3,377 |
|
|
|
18.47 |
|
|
|
2.8 |
% |
|
|
December 2009 |
|
InterMune, Inc.
|
|
|
55,898 |
|
|
|
3,335 |
|
|
|
59.66 |
|
|
|
2.8 |
% |
|
|
April 2011 |
|
Chiron Corporation
|
|
|
71,153 |
|
|
|
2,944 |
|
|
|
41.38 |
|
|
|
2.5 |
% |
|
|
March 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/ Weighted Average(3)
|
|
|
2,048,699 |
|
|
$ |
71,674 |
|
|
$ |
34.99 |
|
|
|
60.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
41,532 square feet expires March 2009, 191,904 square
feet expires August 2010, 59,322 square feet expires
December 2010, and 290,716 square feet expires April 2018. |
|
(2) |
138,086 square feet expires in December 2007 and
73,727 square feet expires in December 2009. |
|
(3) |
Without regard to any lease terminations and/or renewal options. |
Lease Distribution
Our leases are typically structured for terms of five to fifteen
years, with extension options, and include a fixed rental rate
with scheduled annual escalations. The leases are generally
triple-net. Triple-net leases are those in which tenants pay not
only base rent, but also some or all real estate taxes and
operating expenses of the leased property. Tenants typically
reimburse us the full direct cost, without regard to a base year
or expense stop, for use of lighting, heating and air
conditioning, and certain capital improvements necessary to
maintain the property in its original condition. We are
generally responsible for structural repairs.
28
Lease Expirations
The following table presents a summary schedule of available
space at December 31, 2005 and lease expirations over the
next ten calendar years for leases in place at December 31,
2005. Additionally, we have space that is currently under a
master lease arrangement at our King of Prussia property, which
expires in 2008. The master lease at our Bayshore Boulevard
property expired in February 2006. This table assumes that none
of the tenants exercise renewal options or early termination
rights, if any, at or prior to the scheduled expirations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable | |
|
Percent of | |
|
|
|
|
|
Annualized | |
|
|
Square | |
|
Total Rentable | |
|
|
|
Percent of | |
|
Base Rent | |
|
|
Feet of | |
|
Square Feet of | |
|
Annualized | |
|
Annualized | |
|
per Leased | |
|
|
Expiring | |
|
Expiring | |
|
Base Rent | |
|
Base Rent | |
|
Square Foot | |
Year of Lease Expiration |
|
Leases | |
|
Leases | |
|
Current | |
|
Current | |
|
Current | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In thousands) | |
|
|
|
|
2006(1)
|
|
|
252,305 |
|
|
|
5.8 |
% |
|
$ |
4,818 |
|
|
|
4.1 |
% |
|
$ |
19.10 |
|
2007
|
|
|
494,332 |
|
|
|
11.4 |
% |
|
|
9,680 |
|
|
|
8.1 |
% |
|
|
19.58 |
|
2008
|
|
|
257,215 |
|
|
|
5.9 |
% |
|
|
7,450 |
|
|
|
6.3 |
% |
|
|
28.96 |
|
2009
|
|
|
410,096 |
|
|
|
9.5 |
% |
|
|
9,350 |
|
|
|
7.9 |
% |
|
|
22.80 |
|
2010
|
|
|
781,736 |
|
|
|
18.0 |
% |
|
|
19,133 |
|
|
|
16.1 |
% |
|
|
24.47 |
|
2011
|
|
|
157,277 |
|
|
|
3.6 |
% |
|
|
5,340 |
|
|
|
4.5 |
% |
|
|
33.95 |
|
2012
|
|
|
217,318 |
|
|
|
5.0 |
% |
|
|
5,458 |
|
|
|
4.6 |
% |
|
|
25.11 |
|
2013
|
|
|
222,299 |
|
|
|
5.1 |
% |
|
|
4,914 |
|
|
|
4.1 |
% |
|
|
22.11 |
|
2014
|
|
|
238,252 |
|
|
|
5.5 |
% |
|
|
6,941 |
|
|
|
5.8 |
% |
|
|
29.13 |
|
2015
|
|
|
125,240 |
|
|
|
2.9 |
% |
|
|
3,045 |
|
|
|
2.6 |
% |
|
|
24.31 |
|
Thereafter
|
|
|
1,176,253 |
|
|
|
27.3 |
% |
|
|
42,791 |
|
|
|
35.9 |
% |
|
|
36.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/ Weighted Average
|
|
|
4,332,323 |
|
|
|
100.0 |
% |
|
$ |
118,920 |
|
|
|
100.0 |
% |
|
$ |
27.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes current month to month leases. |
|
|
Item 3. |
Legal Proceedings |
We are not currently a party to any legal proceedings nor, to
our knowledge, is any legal proceeding threatened against us
that would have a material adverse effect on our financial
position, results of operations or liquidity.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
29
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock has been listed on the NYSE under the symbol
BMR since August 6, 2004. On February 28,
2006, the reported closing sale price per share for our common
stock on the NYSE was $27.68 and there were approximately 51
holders of record. The following table sets forth, for the
periods indicated, the high, low and last sale prices in dollars
on the NYSE for our common stock and the distributions we
declared per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividend | |
Period |
|
High | |
|
Low | |
|
Last | |
|
per Share | |
|
|
| |
|
| |
|
| |
|
| |
Period August 6, 2004 to September 30, 2004
|
|
$ |
18.05 |
|
|
$ |
15.75 |
|
|
$ |
17.59 |
|
|
$ |
0.1497 |
|
Fourth Quarter 2004
|
|
$ |
22.95 |
|
|
$ |
17.10 |
|
|
$ |
22.21 |
|
|
$ |
0.2700 |
|
First Quarter 2005
|
|
$ |
22.40 |
|
|
$ |
19.40 |
|
|
$ |
20.60 |
|
|
$ |
0.2700 |
|
Second Quarter 2005
|
|
$ |
24.47 |
|
|
$ |
19.39 |
|
|
$ |
23.85 |
|
|
$ |
0.2700 |
|
Third Quarter 2005
|
|
$ |
25.60 |
|
|
$ |
22.30 |
|
|
$ |
24.80 |
|
|
$ |
0.2700 |
|
Fourth Quarter 2005
|
|
$ |
26.06 |
|
|
$ |
22.25 |
|
|
$ |
24.40 |
|
|
$ |
0.2700 |
|
We intend to continue to declare quarterly distributions on our
common stock. The actual amount and timing of distributions,
however, will be at the discretion of our board of directors and
will depend upon our financial condition in addition to the
requirements of the Code, and no assurance can be given as to
the amounts or timing of future distributions. In addition, our
credit facility limits our ability to pay distributions to our
common stockholders. The limitation is based on 95% of funds
from operations or 100% of funds available for distribution plus
cash payments received under master leases on our King of
Prussia and Bayshore Boulevard properties, but not less than the
minimum necessary to enable us to meet our REIT income
distribution requirements. We do not anticipate that our ability
to pay distributions will be impaired by the terms of our credit
facility. However, there can be no assurances in that regard.
Subject to the distribution requirements applicable to REITs
under the Code, we intend, to the extent practicable, to invest
substantially all of the proceeds from sales and refinancings of
our assets in real estate-related assets and other assets. We
may, however, under certain circumstances, make a distribution
of capital or of assets. Such distributions, if any, will be
made at the discretion of our board of directors. Distributions
will be made in cash to extent that cash is available for
distribution.
|
|
Item 6. |
Selected Financial Data (not covered by Report of
Independent Registered Public Accounting Firm) |
The following sets forth selected consolidated financial and
operating information for BioMed Realty Trust, Inc. and for 201
Industrial Road, L.P., our predecessor. We have not presented
historical information for BioMed Realty Trust, Inc. prior to
August 11, 2004, the date on which we consummated our
initial public offering, because during the period from our
formation until our initial public offering, we did not have
material corporate activity. The following data should be read
in conjunction with our financial statements and notes thereto
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 7 of this report.
30
BIOMED REALTY TRUST, INC. AND BIOMED REALTY TRUST
PREDECESSOR
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
|
BioMed Realty Trust, Inc. | |
|
| |
|
|
| |
|
Period | |
|
|
|
|
|
|
Period | |
|
January 1, | |
|
|
|
|
|
|
August 11, | |
|
2004 | |
|
|
|
|
Year Ended | |
|
2004 through | |
|
through | |
|
Year Ended December 31, | |
|
|
December 31, | |
|
December 31, | |
|
August 17, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
92,650 |
|
|
$ |
19,432 |
|
|
$ |
3,339 |
|
|
$ |
6,275 |
|
|
$ |
5,869 |
|
|
$ |
4,421 |
|
|
Tenant recoveries
|
|
|
42,232 |
|
|
|
9,222 |
|
|
|
375 |
|
|
|
744 |
|
|
|
718 |
|
|
|
283 |
|
|
Other income
|
|
|
3,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
138,856 |
|
|
|
28,654 |
|
|
|
3,714 |
|
|
|
7,019 |
|
|
|
6,587 |
|
|
|
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations
|
|
|
46,373 |
|
|
|
11,619 |
|
|
|
353 |
|
|
|
830 |
|
|
|
821 |
|
|
|
323 |
|
|
Depreciation and amortization
|
|
|
39,378 |
|
|
|
7,853 |
|
|
|
600 |
|
|
|
955 |
|
|
|
955 |
|
|
|
617 |
|
|
General and administrative
|
|
|
13,278 |
|
|
|
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
99,029 |
|
|
|
22,602 |
|
|
|
953 |
|
|
|
1,785 |
|
|
|
1,776 |
|
|
|
940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
39,827 |
|
|
|
6,052 |
|
|
|
2,761 |
|
|
|
5,234 |
|
|
|
4,811 |
|
|
|
3,764 |
|
Equity in net income (loss) of unconsolidated partnership
|
|
|
119 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,333 |
|
|
|
190 |
|
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
16 |
|
Interest expense
|
|
|
(23,226 |
) |
|
|
(1,180 |
) |
|
|
(1,760 |
) |
|
|
(2,901 |
) |
|
|
(3,154 |
) |
|
|
(2,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
18,053 |
|
|
|
5,051 |
|
|
|
1,001 |
|
|
|
2,334 |
|
|
|
1,660 |
|
|
|
1,058 |
|
Minority interest in consolidated partnerships
|
|
|
267 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in operating partnership
|
|
|
(1,274 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,046 |
|
|
$ |
4,782 |
|
|
$ |
1,001 |
|
|
$ |
2,334 |
|
|
$ |
1,660 |
|
|
$ |
1,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.44 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.44 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
38,913,103 |
|
|
|
30,965,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
42,091,195 |
|
|
|
33,767,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$ |
1.08 |
|
|
$ |
0.4197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate, net
|
|
$ |
1,129,371 |
|
|
$ |
468,530 |
|
|
|
|
|
|
$ |
47,025 |
|
|
$ |
47,853 |
|
|
$ |
48,627 |
|
Total assets
|
|
|
1,337,310 |
|
|
|
581,723 |
|
|
|
|
|
|
|
50,056 |
|
|
|
50,732 |
|
|
|
50,500 |
|
Mortgage notes payable, net
|
|
|
246,233 |
|
|
|
102,236 |
|
|
|
|
|
|
|
37,208 |
|
|
|
37,743 |
|
|
|
36,879 |
|
Secured term loan
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured line of credit
|
|
|
17,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
586,162 |
|
|
|
137,639 |
|
|
|
|
|
|
|
37,597 |
|
|
|
38,560 |
|
|
|
37,962 |
|
Minority interest
|
|
|
20,673 |
|
|
|
22,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity and partners capital
|
|
|
730,475 |
|
|
|
421,817 |
|
|
|
|
|
|
|
12,459 |
|
|
|
12,169 |
|
|
|
12,538 |
|
Total liabilities and equity
|
|
|
1,337,310 |
|
|
|
581,723 |
|
|
|
|
|
|
|
50,056 |
|
|
|
50,732 |
|
|
|
50,500 |
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
54,490 |
|
|
|
14,470 |
|
|
|
|
|
|
|
2,416 |
|
|
|
1,762 |
|
|
|
1,239 |
|
|
Investing activities
|
|
|
(602,007 |
) |
|
|
(457,191 |
) |
|
|
|
|
|
|
(105 |
) |
|
|
(159 |
) |
|
|
(17,703 |
) |
|
Financing activities
|
|
|
539,960 |
|
|
|
470,433 |
|
|
|
|
|
|
|
(2,666 |
) |
|
|
(1,210 |
) |
|
|
16,569 |
|
|
|
(1) |
Balance sheet data are unaudited. |
|
(2) |
Cash flow information for 2004 is combined for BioMed Realty
Trust and the Predecessor. |
31
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
The following discussion should be read in conjunction with
the financial statements and notes thereto appearing elsewhere
in this report. We make statements in this section that are
forward-looking statements within the meaning of the federal
securities laws. For a complete discussion of forward-looking
statements, see the section above entitled Item 1.
Business Forward-Looking Statements. Certain
risk factors may cause our actual results, performance or
achievements to differ materially from those expressed or
implied by the following discussion. For a discussion of such
risk factors, see the section above entitled Item 1A.
Risk Factors.
Overview
As used herein, the terms we, us,
our or the Company refer to BioMed
Realty Trust, Inc., a Maryland corporation, and any of our
subsidiaries, including BioMed Realty, L.P., a Maryland limited
partnership (our Operating Partnership), and 201
Industrial Road, L.P. (Industrial Road or our
Predecessor). We operate as a fully integrated,
self-administered and self-managed real estate investment trust
(REIT) focused on acquiring, developing, owning,
leasing and managing laboratory and office space for the life
science industry. Our tenants primarily include biotechnology
and pharmaceutical companies, scientific research institutions,
government agencies and other entities involved in the life
science industry. Our properties and primary acquisition targets
are generally located in markets with well established
reputations as centers for scientific research, including
Boston, San Diego, San Francisco, Seattle, Maryland,
Pennsylvania and New York/ New Jersey.
We were formed on April 30, 2004 and commenced operations
on August 11, 2004, after completing our initial public
offering. Our initial public offering consisted of the sale of
27,000,000 shares of common stock at $15.00 per share,
resulting in gross proceeds of $405.0 million. On
August 16, 2004, in connection with the exercise of the
underwriters over-allotment option, we issued an
additional 4,050,000 shares of common stock and received
gross proceeds of $60.8 million. The aggregate proceeds to
us, net of underwriting discounts and commissions and offering
costs, were approximately $429.3 million. We issued a stock
warrant in connection with our initial public offering to
Raymond James & Associates, Inc., the lead underwriter,
for the right to purchase 270,000 common shares at
$15.00 per share, which equals the estimated fair value at
the date of grant. The warrant became exercisable six months
after our initial public offering and expires on August 11,
2009. From inception through August 11, 2004, neither the
Company nor our Operating Partnership had any operations.
Simultaneously with our initial public offering, we obtained a
$100.0 million revolving unsecured credit facility, which
we used to finance acquisitions and for other corporate purposes
prior to being replaced on May 31, 2005 with a
$250.0 million revolving unsecured credit facility with
KeyBank National Association and other lenders.
On January 11, 2005, we leased 61,826 rentable square
feet in phase two of our Industrial Road property, located south
of San Francisco, to Nuvelo, Inc. under a seven-year,
triple-net lease. Nektar Therapeutics, an existing tenant at the
property, had leased approximately 46,000 square feet of
this space until August 2007, which it had never occupied. We
agreed to terminate Nektars lease of its phase two space
in exchange for termination payments. Nektar continues to lease
approximately 80,000 square feet of space in phase one of
the property, which lease expires in October 2016.
On April 19, 2005, we entered into a lease amendment with
Centocor, Inc., a subsidiary of Johnson & Johnson.
Under the amendment, Centocor agreed to lease an additional
79,667 rentable square feet at our King of Prussia property
located in Radnor, Pennsylvania through March 31, 2010. The
new lease replaced the existing portion of the master lease with
an affiliate of The Rubenstein Company, the original seller of
the property, with respect to this space. Annualized base rent
of $1.3 million and certain tenant reimbursements received
under the new lease have correspondingly reduced the rent
received under the master lease.
On May 31, 2005, we completed the acquisition of a
portfolio of eight properties including one parking structure in
Cambridge, Massachusetts, and an additional property in Lebanon,
New Hampshire, from The Lyme Timber Company, an affiliate of
Lyme Properties. We refer to these properties as the Cambridge
portfolio. The Cambridge portfolio consists of ten buildings
with an aggregate of approximately 1.1 million
32
rentable square feet of laboratory and office space, which upon
acquisition was 96.8% leased with an average remaining term of
ten years, and includes the parking structure with 447 parking
spaces. The purchase price was $523.6 million, excluding
closing costs, and was funded through borrowings under three
credit facilities with KeyBank National Association and other
lenders, described below, and the assumption of approximately
$131.2 million of mortgage indebtedness.
In addition to the acquisition of the Cambridge portfolio,
during 2005, we acquired 13 properties containing approximately
978,149 rentable square feet of laboratory and office space
that was 73.4% leased at acquisition.
On June 27, 2005, we completed a follow-on common stock
offering of 15,122,500 shares at $22.50 per share,
resulting in gross proceeds of $340.3 million. The net
proceeds of $324.0 million were used to repay the
outstanding balance on our revolving credit facility, to repay
our $100.0 million unsecured term loan, to acquire
properties and for other corporate purposes.
On October 14, 2005, we filed a universal shelf
registration statement on
Form S-3 with the
Securities and Exchange Commission, which was declared effective
on December 7, 2005. The universal shelf registration
statement may permit us, from time to time, to offer and sell up
to $500 million of debt securities, common stock, preferred
stock, warrants and other securities.
From our initial public offering through December 31, 2005,
we have declared aggregate dividends on our common stock and
distributions on our operating partnership units of
$1.4997 per common share and unit, representing five full
quarterly dividends of $0.27 and a partial third quarter 2004
dividend of $0.1497 per common share and unit.
As of December 31, 2005, we owned or had interests in 39
properties, located principally in Boston, San Diego,
San Francisco, Seattle, Maryland, Pennsylvania and New
York/ New Jersey, consisting of 62 buildings with
approximately 4.8 million rentable square feet of
laboratory and office space, which was approximately 91.1%
leased to 87 tenants. Of the approximately 423,000 square
feet of unleased space, 274,677 square feet, or 64.9% of
our unleased square footage, was under redevelopment. We also
owned undeveloped land that we estimate can support up to
706,000 rentable square feet of laboratory and office space.
Industrial Road was the largest of the properties contributed in
our initial public offering and therefore has been identified as
the accounting acquirer pursuant to paragraph 17 of
Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations
(SFAS 141). As such, the historical
financial statements presented herein for Industrial Road were
prepared on a stand-alone basis up to and including the
acquisition date, August 17, 2004. Upon completion of our
initial public offering, the interest in the Predecessor
acquired from affiliates was recorded at historic cost. The
acquisitions of the unaffiliated interests in the Predecessor
and the interests in all of the other properties have been
accounted for as a purchase in accordance with SFAS 141.
Factors Which May Influence Future Operations
Our corporate strategy is to continue to focus on acquiring,
developing, owning, leasing and managing laboratory and office
space for the life science industry. As of December 31,
2005, our property portfolio was 91.1% leased to 87 tenants.
Approximately 5.8% of our leased square footage expires during
2006 and approximately 11.4% of our leased square footage
expires during 2007. Our leasing strategy for 2006 focuses on
leasing currently vacant space and negotiating renewals for
leases scheduled to expire during the year, and identifying new
tenants or existing tenants seeking additional space to occupy
the spaces for which we are unable to negotiate such renewals.
Additionally, we will seek to lease space that is currently
under a master lease arrangement at our King of Prussia
property, which expires in 2008. The master lease at our
Bayshore Boulevard property expired in February 2006. We also
intend to proceed with new developments, when prudent.
The success of our leasing and development strategy will be
dependent upon the general economic conditions in the United
States and in our target markets of Boston, San Diego,
San Francisco, Seattle,
33
Maryland, Pennsylvania, New York/ New Jersey and research parks
near or adjacent to universities. We are optimistic that market
conditions will continue to improve during 2006 as evidenced by
reduced vacancy rates for life science space in 2005. However,
this is contingent upon continued strong job growth in our
markets.
We believe that, on a portfolio basis, rental rates on leases
expiring in 2006 and 2007 are at or below market rental rates
that are currently being achieved in our markets. However, we
cannot give any assurance that leases will be renewed or that
available space will be released at rental rates equal to or
above the current contractual rental rates or at all.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP
requires management to use judgment in the application of
accounting policies, including making estimates and assumptions.
We base our estimates on historical experience and on various
other assumptions believed to be reasonable under the
circumstances. These judgments affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the reporting
periods. If our judgment or interpretation of the facts and
circumstances relating to various transactions had been
different, it is possible that different accounting policies
would have been applied resulting in a different presentation of
our financial statements. On an ongoing basis, we evaluate our
estimates and assumptions. In the event estimates or assumptions
prove to be different from actual results, adjustments are made
in subsequent periods to reflect more current information. Below
is a discussion of accounting policies that we consider critical
in that they address the most material parts of our financial
statements, require complex judgment in their application or
require estimates about matters that are inherently uncertain.
We have elected to be taxed as a REIT under the Code.
Qualification as a REIT involves the application of highly
technical and complex provisions of the Code to our operations
and financial results and the determination of various factual
matters and circumstances not entirely within our control. We
believe that our current organization and method of operation
comply with the rules and regulations promulgated under the Code
to enable us to qualify, and continue to qualify, as a REIT.
However, it is possible that we have been organized or have
operated in a manner that would not allow us to qualify as a
REIT, or that our future operations could cause us to fail to
qualify.
If we fail to qualify as a REIT in any taxable year, then we
will be required to pay federal income tax (including any
applicable alternative minimum tax) and, in most of the states,
state income tax on our taxable income at regular corporate tax
rates. Even as a REIT, we may be subject to certain state and
local taxes. If we lose our REIT status, then our net earnings
available for investment or distribution to stockholders would
be significantly reduced for each of the years involved, and we
would no longer be required to make distributions to our
stockholders.
|
|
|
Investments in Real Estate |
Investments in real estate are carried at depreciated cost.
Depreciation and amortization are recorded on a straight-line
basis over the estimated useful lives of the assets as follows:
|
|
|
Buildings and improvements
|
|
10 to 40 years |
Ground lease
|
|
Term of the related lease |
Tenant improvements
|
|
Shorter of the useful lives or the terms of the related leases |
Furniture, fixtures, and equipment
|
|
3 to 5 years |
Acquired in-place leases
|
|
Non-cancelable term of the related lease |
Acquired management agreements
|
|
Non-cancelable term of the related agreement |
Purchase accounting was applied, on a pro-rata basis where
appropriate, to the assets and liabilities of real estate
entities in which we acquired an interest or a partial interest.
The fair value of tangible assets of an
34
acquired property (which includes land, buildings, and
improvements) is determined by valuing the property as if it
were vacant, and the as-if-vacant value is then
allocated to land, buildings and improvements based on
managements determination of the relative fair value of
these assets. We determine the as-if-vacant fair value using
methods similar to those used by independent appraisers. Factors
considered by us in performing these analyses include an
estimate of the carrying costs during the expected
lease-up periods,
current market conditions and costs to execute similar leases.
In estimating carrying costs, we include real estate taxes,
insurance and other operating expenses and estimates of lost
rental revenue during the expected
lease-up periods based
on current market demand.
In allocating fair value to the identified intangible assets and
liabilities of an acquired property, above-market and
below-market in-place leases are recorded based on the present
value (using a discount rate which reflects the risks associated
with the leases acquired) of the difference between (a) the
contractual amounts to be paid pursuant to the in-place leases
and (b) our estimate of the fair market lease rates for the
corresponding in-place leases at acquisition, measured over a
period equal to the remaining non-cancelable term of the leases.
The capitalized above-market lease values are amortized as a
reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market
lease values are amortized as an increase to rental income over
the remaining non-cancelable terms of the respective leases. If
a tenant vacates its space prior to the contractual termination
of the lease and no rental payments are being made on the lease,
any unamortized balance of the related intangible will be
written off.
The aggregate value of other acquired intangible assets,
consisting of acquired in-place leases and acquired management
agreements, are recorded based on a variety of components
including, but not necessarily limited to: (a) the value
associated with avoiding the cost of originating the acquired
in-place leases (i.e. the market cost to execute a lease,
including leasing commissions and legal fees, if any);
(b) the value associated with lost revenue related to
tenant reimbursable operating costs estimated to be incurred
during the assumed
lease-up period (i.e.
real estate taxes, insurance and other operating expenses);
(c) the value associated with lost rental revenue from
existing leases during the assumed
lease-up period; and
(d) the value associated with avoided tenant improvement
costs or other inducements to secure a tenant lease. The fair
value assigned to the acquired management agreements are
recorded at the present value (using a discount rate which
reflects the risks associated with the management agreements
acquired) of the acquired management agreements with certain
tenants of the acquired properties. The values of in-place
leases and management agreements are amortized to expense over
the remaining non-cancelable period of the respective leases or
agreements. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts related to that lease would
be written off.
A variety of costs are incurred in the acquisition, development,
construction, improvements and leasing of properties. After
determination is made to capitalize a cost, it is allocated to
the specific component of a project that is benefited.
Determination of when a development project is substantially
complete and capitalization must cease involves a degree of
judgment. Our capitalization policy on development properties is
guided by SFAS No. 34, Capitalization of Interest
Cost and SFAS No. 67, Accounting for Costs and
the Initial Rental Operations of Real Estate Properties. The
costs of land and buildings under development include
specifically identifiable costs. The capitalized costs include
pre-construction costs essential to the development of the
property, development costs, construction costs, interest costs,
real estate taxes, salaries and related costs, and other costs
incurred during the period of development. We consider a
construction project as substantially completed and held
available for occupancy upon the completion of tenant
improvements, but no later than one year from cessation of major
construction activity. We cease capitalization on the portion
substantially completed and occupied or held available for
occupancy, and capitalize only those costs associated with the
portion under construction. Capitalized costs associated with
unsuccessful acquisitions are charged to expense when an
acquisition is abandoned.
Repair and maintenance costs are charged to expense as incurred
and significant replacements and betterments are capitalized.
Repairs and maintenance costs include all costs that do not
extend the useful life of an asset or increase its operating
efficiency. Significant replacement and betterments represent
costs that extend an assets useful life or increase its
operating efficiency.
35
We compute depreciation and amortization on our properties using
the straight-line method based on estimated useful asset lives.
All leases are classified as operating leases and minimum rents
are recognized on a straight-line basis over the term of the
related lease. The excess of rents recognized over amounts
contractually due pursuant to the underlying leases is included
in accrued straight-line rents on the accompanying consolidated
balance sheets and contractually due but unpaid rents are
included in accounts receivable. Recoveries from tenants,
consisting of amounts due from tenants for real estate taxes,
insurance and common area maintenance costs are recognized as
revenue in the period the expenses are incurred. The
reimbursements are recognized and presented in accordance with
EITF, 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent (EITF 99-19).
EITF 99-19 requires that these reimbursements be recorded
gross, as we are generally the primary obligor with respect to
purchasing goods and services from third-party suppliers, have
discretion in selecting the supplier and bear the credit risk.
Lease termination fees are recognized when the related leases
are canceled, collectibility is assured, and we have no
continuing obligation to provide space to the former tenants.
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of tenants to make required
rent and tenant recovery payments or defaults. We also maintain
an allowance for accrued straight-line rents and amounts due
from lease terminations.
Payments received under master lease agreements entered into
with the sellers of the Bayshore and King of Prussia properties
to lease space that was not producing rent at the time of the
acquisition are recorded as a reduction to buildings and
improvements rather than as rental income in accordance with
EITF 85-27, Recognition of Receipts from Made-Up Rental
Shortfalls.
|
|
|
Investments in Partnerships |
We evaluate our investments in limited liability companies and
partnerships under Financial Accounting Standards Board
(FASB) Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities
(FIN 46), an interpretation of Accounting
Research Bulletin No. 51 Consolidated Financial
Statements (ARB 51). FIN 46 provides
guidance on the identification of entities for which control is
achieved through means other than voting rights (variable
interest entities or VIEs) and the
determination of which business enterprise should consolidate
the VIE (the primary beneficiary). Generally,
FIN 46 applies when either (1) the equity investors
(if any) lack one or more of the essential characteristics of a
controlling financial interest, (2) the equity investment
at risk is insufficient to finance that entitys activities
without additional subordinated financial support or
(3) the equity investors have voting rights that are not
proportionate to their economic interests and the activities of
the entity involve or are conducted on behalf of an investor
with a disproportionately small voting interest.
In June 2005, the FASB ratified the consensus in EITF Issue
No. 04-5, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights
(EITF 04-5),
which provides guidance in determining whether a general partner
controls a limited partnership.
EITF 04-5 states
that the general partner in a limited partnership is presumed to
control that limited partnership. The presumption may be
overcome if the limited partners have either (1) the
substantive ability to dissolve the limited partnership or
otherwise remove the general partner without cause or
(2) substantive participating rights, which provide the
limited partners with the ability to effectively participate in
significant decisions that would be expected to be made in the
ordinary course of the limited partnerships business and
thereby preclude the general partner from exercising unilateral
control over the partnership. If the criteria in
EITF 04-5 are met,
the consolidation of existing limited liability companies and
partnerships accounted for under the equity method may be
required. Our adoption of
EITF 04-5 is
expected to have no effect on net income or stockholders
equity. EITF 04-5
is effective June 30, 2005 for new or modified limited
partnership arrangements and effective January 1, 2006 for
existing limited partnership arrangements.
36
Results of Operations
The following is a comparison, for the years ended
December 31, 2005 and 2004 and for the years ended
December 31, 2004 and 2003, of the consolidated operating
results of BioMed Realty Trust, Inc., the operating results of
201 Industrial Road, L.P., our predecessor, and the combined
operating results of Bernardo Center Drive, Science Center Drive
and Balboa Avenue. We refer to Bernardo Center Drive, Science
Center Drive and Balboa Avenue as the Combined Contribution
Properties. As part of our formation transactions, our
predecessor was contributed to us in exchange for
1,461,451 units in our Operating Partnership, and the
Combined Contribution Properties, which were under common
management with our predecessor, were contributed to us in
exchange for 1,153,708 units in our Operating Partnership.
Our predecessor is considered for accounting purposes to be our
acquirer. As such, the historical financial statements presented
herein for our predecessor were prepared on a stand-alone basis.
The financial statements of the Combined Contribution Properties
are presented herein on an historical combined basis. Management
does not consider the financial condition and operating results
of our predecessor on a stand-alone basis to be indicative of
the historical operating results of our company taken as a
whole. Therefore, the following discussion relates to the
combined historical financial condition and operating results of
our predecessor and the Combined Contribution Properties, over
which our management has provided continuous common management
throughout the applicable reporting periods. Subsequent to the
dates they were contributed to us, the financial information for
each of our predecessor and the Combined Contribution Properties
is included in the financial information for BioMed Realty
Trust, which commenced operations on August 11, 2004.
Management believes this presentation provides a more meaningful
discussion of the financial condition and operating results of
BioMed Realty Trust, our predecessor and the Combined
Contribution Properties. In order to present these results on a
meaningful combined basis, the historical combined financial
information for all periods presented includes combining entries
to reflect the partners capital of our predecessor which
was not owned by management.
The following tables set forth the basis for presenting the
historical financial information (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
|
|
| |
|
|
|
|
|
|
Combined | |
|
|
|
|
|
|
|
|
Contribution | |
|
|
|
|
BioMed Realty Trust, Inc. | |
|
Predecessor | |
|
Properties | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
Period | |
|
Period | |
|
Period | |
|
Year Ended | |
|
Combined | |
|
|
|
|
August 11, | |
|
January 1, | |
|
January 1, | |
|
December 31, | |
|
Year Ended | |
|
|
Year Ended | |
|
2004 through | |
|
2004 through | |
|
2004 through | |
|
2004 | |
|
December 31, | |
|
|
December 31, | |
|
December 31, | |
|
August 17, | |
|
the Date of | |
|
Combining | |
|
2004 | |
|
|
2005 | |
|
2004 | |
|
2004 | |
|
Contribution | |
|
Entries | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Years Ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
92,650 |
|
|
$ |
19,432 |
|
|
$ |
3,339 |
|
|
$ |
2,831 |
|
|
|
|
|
|
$ |
25,602 |
|
|
Tenant recoveries
|
|
|
42,232 |
|
|
|
9,222 |
|
|
|
375 |
|
|
|
479 |
|
|
|
|
|
|
|
10,076 |
|
|
Other income
|
|
|
3,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
138,856 |
|
|
|
28,654 |
|
|
|
3,714 |
|
|
|
3,310 |
|
|
|
|
|
|
|
35,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations
|
|
|
46,373 |
|
|
|
11,619 |
|
|
|
353 |
|
|
|
353 |
|
|
|
|
|
|
|
12,325 |
|
|
Depreciation and amortization
|
|
|
39,378 |
|
|
|
7,853 |
|
|
|
600 |
|
|
|
543 |
|
|
|
|
|
|
|
8,996 |
|
|
General and administrative
|
|
|
13,278 |
|
|
|
3,130 |
|
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
3,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
99,029 |
|
|
|
22,602 |
|
|
|
953 |
|
|
|
993 |
|
|
|
|
|
|
|
24,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
39,827 |
|
|
|
6,052 |
|
|
|
2,761 |
|
|
|
2,317 |
|
|
|
|
|
|
|
11,130 |
|
Equity in net income/(loss) of unconsolidated partnership
|
|
|
119 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Interest income
|
|
|
1,333 |
|
|
|
190 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
200 |
|
Interest expense
|
|
|
(23,226 |
) |
|
|
(1,180 |
) |
|
|
(1,760 |
) |
|
|
(1,594 |
) |
|
|
|
|
|
|
(4,534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
18,053 |
|
|
|
5,051 |
|
|
|
1,001 |
|
|
|
733 |
|
|
|
|
|
|
|
6,785 |
|
Minority interests
|
|
|
(1,007 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
(223 |
) |
|
|
(582 |
) |
|
|
(1,074 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,046 |
|
|
$ |
4,782 |
|
|
$ |
1,001 |
|
|
$ |
510 |
|
|
$ |
(582 |
) |
|
$ |
5,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined | |
|
|
|
|
|
|
|
|
Contribution | |
|
Combining | |
|
|
|
|
Predecessor | |
|
Properties | |
|
Entries | |
|
Total | |
Year Ended December 31, 2003: |
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
6,275 |
|
|
$ |
4,189 |
|
|
|
|
|
|
$ |
10,464 |
|
|
Tenant recoveries
|
|
|
744 |
|
|
|
743 |
|
|
|
|
|
|
|
1,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
7,019 |
|
|
|
4,932 |
|
|
|
|
|
|
|
11,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations
|
|
|
830 |
|
|
|
633 |
|
|
|
|
|
|
|
1,463 |
|
|
Depreciation and amortization
|
|
|
955 |
|
|
|
854 |
|
|
|
|
|
|
|
1,809 |
|
|
General and administrative
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,785 |
|
|
|
1,642 |
|
|
|
|
|
|
|
3,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,234 |
|
|
|
3,290 |
|
|
|
|
|
|
|
8,524 |
|
|
Interest income
|
|
|
1 |
|
|
|
33 |
|
|
|
|
|
|
|
34 |
|
|
Interest expense
|
|
|
(2,901 |
) |
|
|
(2,449 |
) |
|
|
|
|
|
|
(5,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
2,334 |
|
|
|
874 |
|
|
|
|
|
|
|
3,208 |
|
|
Minority interests
|
|
|
|
|
|
|
(297 |
) |
|
|
(1,367 |
) |
|
|
(1,664 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,334 |
|
|
$ |
577 |
|
|
$ |
(1,367 |
) |
|
$ |
1,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Year Ended December 31, 2005 to the
Year Ended December 31, 2004 |
Our results of operations for the years ended December 31,
2005 and 2004 include the accounts of our predecessor through
the date of its contribution to us. Our predecessor is the
largest of the properties contributed in our initial public
offering and therefore has been identified as the accounting
acquirer pursuant to paragraph 17 of
SFAS No. 141, Business Combinations. As such,
the historical financial statements presented herein for our
predecessor were prepared on a stand-alone basis. The financial
information for the Combined Contribution Properties also is
included through the date of contribution for each property.
Subsequent to the dates they were contributed to us, the
financial information for each of our predecessor and the
Combined Contribution Properties is included in the financial
information for BioMed Realty Trust, which commenced operations
on August 11, 2004.
Rental Revenues. Rental revenues increased
$67.1 million to $92.7 million for the year ended
December 31, 2005 compared to $25.6 million for the
year ended December 31, 2004. The increase was primarily
due to the inclusion of rental revenues for the properties
acquired in connection with our initial public offering as well
as additional property acquisitions subsequent to our initial
public offering. Rental revenues for the additional properties
acquired during 2004 and 2005 is net of amortization recorded
for acquired above market leases and acquired lease obligations
related to below market leases, both related to purchase
accounting entries recorded upon acquisition of the interests in
these properties.
Tenant Recoveries. Revenues from tenant reimbursements
increased $32.1 million to $42.2 million for the year
ended December 31, 2005 compared to $10.1 million for
the year ended December 31, 2004. The increase was
primarily due to the inclusion of tenant reimbursements for the
properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial public offering.
Other Income. Other income for the year ended
December 31, 2005 is comprised primarily of a gain on early
termination of the Nektar Therapeutics lease at our Industrial
Road property of $3.5 million.
Rental Operations Expenses. Rental operations expenses
increased $34.1 million to $46.4 million for the year
ended December 31, 2005 compared to $12.3 million for
the year ended December 31, 2004. The increase was
primarily due to the inclusion of rental operations expenses for
the properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial
38
public offering. These expenses include insurance, property
taxes and other operating expenses, most of which were recovered
from the tenants.
Depreciation and Amortization Expense. Depreciation and
amortization expense increased $30.4 million to
$39.4 million for the year ended December 31, 2005
compared to $9.0 million for the year ended
December 31, 2004. The increase was primarily due to the
inclusion of depreciation and amortization expense for the
properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial public offering.
General and Administrative Expenses. General and
administrative expenses increased $10.1 million to
$13.3 million for the year ended December 31, 2005
compared to $3.2 million for the year ended
December 31, 2004. The increase was primarily due to the
hiring of personnel after our initial public offering, the
addition of expenses relating to operating as a public company,
the compensation expense related to restricted stock awards
during the year ended December 31, 2005, and higher
consulting and professional fees associated with corporate
governance and Sarbanes-Oxley Section 404 implementation.
The year ended December 31, 2005 included a $619,000
increase to general and administrative expense resulting from a
correction of the expensing of restricted stock grants awarded
to our executive officers and other employees at the time of our
initial public offering in August 2004 that occurred in the
periods prior to the year ended December 31, 2005.
Interest Income. Interest income increased
$1.1 million to $1.3 million for the year ended
December 31, 2005 from $200,000 for the year ended
December 31, 2004. This is primarily due to interest earned
on funds held by us following the consummation of our initial
public offering and our follow-on offering in June 2005.
Interest Expense. Interest expense increased
$18.7 million to $23.2 million for the year ended
December 31, 2005 compared to $4.5 million for the
year ended December 31, 2004. The increase in interest is a
result of more overall debt outstanding during 2005 and the
write off of $2.0 million of loan fees related to the early
repayment and termination of our unsecured credit facility and
our $100.0 million unsecured term loan facility, partially
offset by a reduction of interest expense in 2005 due to the
accretion of debt premium of $1.8 million.
Minority Interests. Minority interests decreased $100,000
to $1.0 million for the year ended December 31, 2005,
compared to $1.1 million for the year ended
December 31, 2004. The minority interest allocation for
2005 and 2004 are not comparable due to the initial public
offering. The 2004 allocation includes the allocation to the
limited partner unit holders of our operating partnership,
offset by the allocation to the limited partner of our
consolidated partnership, King of Prussia, for the period from
August 11, 2004 through December 31, 2004, and the
percentage allocation to non-controlling interests of the
Combined Contribution Properties and for our predecessor for the
period January 1, 2004 through date of contribution of the
properties. The 2005 allocation includes the allocation to the
limited partner unit holders of our operating partnership,
offset by the allocation to the limited partners of our
consolidated partnership, King of Prussia, for the year ended
December 31, 2005.
|
|
|
Comparison of the Year Ended December 31, 2004 to the
Year Ended December 31, 2003 |
Our results of operations for the years ended December 31,
2004 and 2003 include the accounts of our predecessor through
the date of its contribution to us. Our predecessor was the
largest of the properties contributed in our initial public
offering and therefore has been identified as the accounting
acquirer pursuant to paragraph 17 of
SFAS No. 141, Business Combinations. As such,
the historical financial statements presented herein for our
predecessor were prepared on a stand-alone basis. The financial
information for the Combined Contribution Properties also is
included through the date of contribution for each property.
Subsequent to the dates they were contributed to us, the
financial information for each of our predecessor and the
Combined Contribution Properties is included in the financial
information for BioMed Realty Trust, which commenced operations
on August 11, 2004.
Rental Revenues. Rental revenues increased
$15.1 million to $25.6 million for the year ended
December 31, 2004 compared to $10.5 million for the
year ended December 31, 2003. The increase was
39
primarily due to the inclusion of rental revenues for the
properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial public offering. Rental revenues for the
additional properties acquired during 2004 is net of
amortization of the value recorded for acquired above market
leases and includes amortization of acquired lease obligations
related to below market leases, both related to purchase
accounting entries recorded upon acquisition of the interests in
these properties.
Tenant Recoveries. Revenues from tenant reimbursements
increased $8.6 million to $10.1 million for the year
ended December 31, 2004 compared to $1.5 million for
the year ended December 31, 2003. The increase was
primarily due to the inclusion of tenant reimbursements for the
properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial public offering.
Rental Operations Expenses. Rental operations expenses
increased $10.8 million to $12.3 million for the year
ended December 31, 2004 compared to $1.5 million for
the year ended December 31, 2003. The increase was
primarily due to the inclusion of rental property operations
expenses for the properties acquired in connection with our
initial public offering as well as additional property
acquisitions subsequent to our initial public offering. These
expenses include insurance, property taxes and other operating
expenses, most of which were recovered from the tenants.
Depreciation and Amortization Expense. Depreciation and
amortization expense increased $7.2 million to
$9.0 million for the year ended December 31, 2004
compared to $1.8 million for the year ended
December 31, 2003. The increase was primarily due to the
inclusion of depreciation and amortization expense for the
properties acquired in connection with our initial public
offering as well as additional property acquisitions subsequent
to our initial public offering.
General and Administrative Expenses. General and
administrative expenses increased $3.0 million to
$3.2 million for the year ended December 31, 2004
compared to $155,000 for the year ended December 31, 2003.
The increase was primarily due to our initial public offering,
the hiring of new personnel after our initial public offering,
the addition of expenses relating to operating as a public
company, and the compensation expense related to restricted
stock awards accrued during the period from August 11, 2004
to December 31, 2004.
Interest Income. Interest income increased to $200,000
for the year ended December 31, 2004 from $34,000 for the
year ended December 31, 2003. This is primarily due to
interest earned on funds held by us following the consummation
of our initial public offering.
Interest Expense. Interest expense decreased to
$4.5 million for the year ended December 31, 2004 from
$5.4 million for the year ended December 31, 2003. The
decrease in interest is a result of the payoff of notes related
to the Bernardo Center Drive and Balboa Avenue properties in
connection with our initial public offering. In addition,
interest expense was reduced in 2004 due to the accretion of
debt premium, which decreased interest expense by $307,000.
Minority Interests. Minority interests decreased to
$1.1 million for the year ended December 31, 2004 from
$1.7 million for the year ended December 31, 2003. The
minority interest allocation for 2004 and 2003 are not
comparable due to the initial public offering. The 2003
allocation was a result of the percentage allocation to
non-controlling interests of the Combined Contribution
Properties and for our predecessor. The 2004 allocation includes
the allocation to the limited partner unit holders of our
operating partnership, offset by the allocation to the limited
partner of our consolidated partnership, King of Prussia, for
the period from August 11, 2004 through December 31,
2004, and the percentage allocation to non-controlling interests
of the Combined Contribution Properties and for our predecessor
for the period January 1, 2004 through date of contribution
of the properties.
40
Cash Flows
The following summary discussion of our cash flows is based on
the consolidated statements of cash flows in Item 8.
Financial Statements and Supplementary Data and is not
meant to be an all inclusive discussion of the changes in our
cash flows for the periods presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
|
|
BioMed | |
|
|
|
|
|
|
Realty Trust, | |
|
Predecessor and | |
|
|
BioMed | |
|
Inc. and | |
|
Combined | |
|
|
Realty Trust, | |
|
Predecessor | |
|
Contribution | |
|
|
Inc. 2005 | |
|
2004 | |
|
Properties 2003 | |
|
|
| |
|
| |
|
| |
Net cash provided by operating activities
|
|
$ |
54,490 |
|
|
$ |
14,470 |
|
|
$ |
4,383 |
|
Net cash used in investing activities
|
|
|
(602,007 |
) |
|
|
(457,191 |
) |
|
|
(105 |
) |
Net cash provided by (used in) financing activities
|
|
|
539,960 |
|
|
|
470,433 |
|
|
|
(4,563 |
) |
Ending cash balance
|
|
|
20,312 |
|
|
|
27,869 |
|
|
|
355 |
|
Our statements of cash flows and those of our predecessor have
been combined for the year ended December 31, 2004. The
statements of cash flows of our predecessor have been combined
with those of the Combined Contribution Properties for the year
ended December 31, 2003 because management does not
consider the cash flows of our predecessor on a stand-alone
basis to be indicative of the historical cash flows of our
company taken as a whole.
|
|
|
Comparison of the Year Ended December 31, 2005 to the
Year Ended December 31, 2004 |
Net cash provided by operating activities increased
$40.0 million to $54.5 million for the year ended
December 31, 2005 compared to $14.5 million for the
year ended December 31, 2004. The increase was primarily
due to the increase in operating income before depreciation and
amortization, non-cash compensation expense related to the
vesting of restricted common stock, non-cash write off of
intangible assets due to lease termination and loan repayment,
and changes in other operating assets and liabilities.
Net cash used in investing activities increased
$144.8 million to $602.0 million for the year ended
December 31, 2005 compared to $457.2 million for the
year ended December 31, 2004. The increase was primarily
due to amounts paid to acquire interests in real estate
properties partially offset by a decrease in funds received from
prior owners for security deposits and funds held in escrow for
acquisitions.
Net cash provided by financing activities increased
$69.6 million to $540.0 million for the year ended
December 31, 2005 compared to $470.4 million for the
year ended December 31, 2004. The increase was primarily
due to secured term loan proceeds offset by principal payments
on mortgage loans, payments of dividends and distributions, and
lower proceeds from common stock offerings.
Cash and cash equivalents were $20.3 million and
$27.9 million at December 31, 2005 and 2004,
respectively.
|
|
|
Comparison of the Year Ended December 31, 2004 to the
Year Ended December 31, 2003 |
Net cash provided by operating activities increased
$10.1 million to $14.5 million for the year ended
December 31, 2004 compared to $4.4 million for the
year ended December 31, 2003. The increase was primarily
due to the acquisition of properties acquired in connection with
our initial public offering.
Net cash used in investing activities increased
$457.1 million to $457.2 million for the year ended
December 31, 2004 compared to $105,000 for the year ended
December 31, 2003. The increase was primarily due to
$458.2 million paid to acquire properties, funds held in
escrow for acquisitions, and the repayment of related party
payables, partially offset by funds received from prior owners
for security deposits and receipts of master lease payments.
Net cash provided by financing activities increased
$475.0 million to $470.4 million for the year ended
December 31, 2004 compared to net cash used of
$4.6 million for the year ended December 31, 2003. The
increase was primarily due to the net proceeds received from the
initial public offering of our common stock
41
on August 11, 2004 and the exercise of the
underwriters over-allotment option on August 16,
2004, offset by the payment of offering costs, principal
payments on mortgage notes payable, the payment of loan costs,
distributions to owners of the predecessor, and dividends paid
to stockholders.
Cash and cash equivalents were $27.9 million and $355,000
at December 31, 2004 and 2003, respectively.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds
to pay for operating expenses and other expenditures directly
associated with our properties, including:
|
|
|
|
|
interest expense and scheduled principal payments on outstanding
mortgage indebtedness, |
|
|
|
general and administrative expenses, |
|
|
|
future distributions expected to be paid to our
stockholders, and |
|
|
|
capital expenditures, tenant improvements and leasing
commissions. |
We expect to satisfy our short-term liquidity requirements
through our existing working capital and cash provided by our
operations. Our rental revenue, provided by our triple-net
leases, and minimal unreimbursed operating expenses generally
provide cash inflows to meet our debt service obligations, pay
general and administrative expenses, and fund regular
distributions.
Our long-term liquidity requirements consist primarily of funds
to pay for scheduled debt maturities, renovations, expansions
and other non-recurring capital expenditures that need to be
made periodically and the costs associated with acquisitions of
properties that we pursue. We expect to satisfy our long-term
liquidity requirements through our existing working capital,
cash provided by operations, long-term secured and unsecured
indebtedness, the issuance of additional equity or debt
securities and the use of net proceeds from the disposition of
non-strategic assets. We also expect to use funds available
under our unsecured revolving credit facility to finance
acquisition and development activities and capital expenditures
on an interim basis.
In October 2005, we filed a universal shelf registration
statement on
Form S-3 with the
Securities and Exchange Commission, which was declared effective
in December 2005. The universal shelf registration statement may
permit us, from time to time, to offer and sell up to
$500 million of debt securities, common stock, preferred
stock, warrants and other securities. However, there can be no
assurance that we will be able to complete any such offerings of
securities.
Our total market capitalization at December 31, 2005 was
approximately $1.7 billion based on the market closing
price of our common stock at December 31, 2005 of
$24.40 per share (assuming the conversion of 2,863,564
operating partnership units into common stock) and our debt
outstanding was approximately $513.2 million (exclusive of
accounts payable and accrued expenses). As a result, our debt to
total market capitalization ratio was approximately 29.8% at
December 31, 2005. Our board of directors adopted a policy
of limiting our indebtedness to approximately 60% of our total
market capitalization. However, our board of directors may from
time to time modify our debt policy in light of current economic
or market conditions including, but not limited to, the relative
costs of debt and equity capital, market conditions for debt and
equity securities and fluctuations in the market price of our
common stock. Accordingly, we may increase or decrease our debt
to market capitalization ratio beyond the limit described above.
On August 11, 2004, we entered into a $100.0 million
revolving unsecured loan agreement, which bore interest at LIBOR
plus 1.20%, or higher depending on our leverage ratio, or a
reference rate, and was scheduled to expire on August 11,
2007. This credit facility was fully repaid and terminated on
May 31, 2005 with funds drawn on our new credit facilities
as discussed below.
On May 31, 2005, we entered into three credit facilities
with KeyBank National Association and other lenders under which
we initially borrowed $485.0 million of a total of
$600.0 million available under these facilities. The credit
facilities include an unsecured revolving credit facility of
$250.0 million, under which we initially borrowed
$135.0 million, an unsecured term loan of
$100.0 million and a secured term loan of
$250.0 million. We borrowed the full amounts under the
unsecured term loan and secured term loan. The
42
unsecured revolving credit facility has a maturity date of
May 30, 2008 and bears interest at a floating rate equal
to, at our option, either (1) reserve adjusted LIBOR plus a
spread which ranges from 120 to 200 basis points, depending
on our leverage, or (2) the higher of (a) the prime
rate then in effect plus a spread which ranges from 0 to
50 basis points and (b) the federal funds rate then in
effect plus a spread which ranges from 50 to 100 basis
points, in each case, depending on our leverage. We may extend
the maturity date of the unsecured credit facility to
May 30, 2009 after satisfying certain conditions and paying
an extension fee, and we may increase the amount of the
revolving credit facility to $400.0 million upon satisfying
certain conditions. The secured term loan, which has a maturity
date of May 30, 2010, is secured by 13 of our properties
and bears interest at a floating rate equal to, at our option,
either (1) reserve adjusted LIBOR plus 225 basis
points or (2) the higher of (a) the prime rate then in
effect plus 50 basis points and (b) the federal funds
rate then in effect plus 100 basis points. The secured term
loan is also secured by our interest in any distributions from
these properties and a pledge of the equity interests in a
subsidiary owning one of these properties. We may not prepay the
secured term loan prior to May 31, 2006. We entered into an
interest rate swap agreement in connection with the closing of
the credit facilities, which will have the effect of fixing the
interest rate on the secured term loan at 6.4%. The
$100.0 million unsecured term loan facility was fully
repaid with the proceeds from our follow-on common stock
offering and terminated on June 27, 2005. At
December 31, 2005, we had $17.0 million in outstanding
borrowings on our unsecured revolving credit facility and
$250.0 million in outstanding borrowings on our secured
term loan.
The terms of the credit agreements include certain restrictions
and covenants, which limit, among other things, the payment of
dividends, and the incurrence of additional indebtedness and
liens. The terms also require compliance with financial ratios
relating to the minimum amounts of net worth, fixed charge
coverage, unsecured debt service coverage, interest coverage,
the maximum amount of secured, variable-rate and recourse
indebtedness, leverage ratio, and certain investment
limitations. The dividend restriction referred to above provides
that, except to enable us to continue to qualify as a REIT for
federal income tax purposes, we will not for any fiscal quarter
ended on or prior to September 30, 2005 or during any four
consecutive quarters thereafter, make distributions with respect
to common stock or other equity interests in an aggregate amount
in excess of 95% of funds from operations, as defined, for such
period, subject to other adjustments or make distributions in
excess of 100% of funds available for distribution, as defined,
for such period, subject to other adjustments. Management
believes that it was in compliance with the covenants as of
December 31, 2005.
A summary of our outstanding consolidated mortgage notes payable
as of December 31, 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance | |
|
|
|
|
|
|
Effective | |
|
December 31, | |
|
|
|
|
Stated Fixed | |
|
Interest | |
|
| |
|
|
|
|
Interest Rate | |
|
Rate | |
|
2005 | |
|
2004 | |
|
Maturity Date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Ardentech Court
|
|
|
7.25 |
% |
|
|
5.06 |
% |
|
$ |
4,746 |
|
|
$ |
4,828 |
|
|
|
July 1, 2012 |
|
Bayshore Boulevard
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
16,107 |
|
|
|
16,438 |
|
|
|
January 1, 2010 |
|
Bridgeview Technology Park I
|
|
|
8.07 |
% |
|
|
5.04 |
% |
|
|
11,732 |
|
|
|
11,825 |
|
|
|
January 1, 2011 |
|
Eisenhower Road
|
|
|
5.80 |
% |
|
|
4.63 |
% |
|
|
2,211 |
|
|
|
2,252 |
|
|
|
May 5, 2008 |
|
Elliott Avenue
|
|
|
7.38 |
% |
|
|
4.63 |
% |
|
|
16,526 |
|
|
|
16,996 |
|
|
|
November 24, 2007 |
|
40 Erie Street
|
|
|
7.34 |
% |
|
|
4.90 |
% |
|
|
19,575 |
|
|
|
|
|
|
|
August 1, 2008 |
|
Kendall Square D
|
|
|
6.38 |
% |
|
|
5.45 |
% |
|
|
72,395 |
|
|
|
|
|
|
|
December 1, 2018 |
|
Lucent Drive
|
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
5,899 |
|
|
|
|
|
|
|
January 21, 2015 |
|
Monte Villa Parkway
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
9,805 |
|
|
|
10,007 |
|
|
|
January 1, 2010 |
|
Nancy Ridge Drive
|
|
|
7.15 |
% |
|
|
5.38 |
% |
|
|
6,952 |
|
|
|
|
|
|
|
September 1, 2012 |
|
Science Center Drive
|
|
|
7.65 |
% |
|
|
5.04 |
% |
|
|
11,577 |
|
|
|
11,699 |
|
|
|
July 1, 2011 |
|
Sidney Street
|
|
|
7.23 |
% |
|
|
5.11 |
% |
|
|
31,426 |
|
|
|
|
|
|
|
June 1, 2012 |
|
Towne Centre Drive
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
22,396 |
|
|
|
22,856 |
|
|
|
January 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,347 |
|
|
|
96,901 |
|
|
|
|
|
Unamortized premium
|
|
|
|
|
|
|
|
|
|
|
14,886 |
|
|
|
5,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
246,233 |
|
|
$ |
102,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Premiums were recorded upon assumption of the notes at the time
of the related acquisition to account for above-market interest
rates. Amortization of these premiums is recorded as a reduction
to interest expense over the remaining term of the respective
note.
As of December 31, 2005, principal payments due for our
consolidated indebtedness (mortgage notes payable, secured term
loan, and unsecured line of credit) were as follows (in
thousands):
|
|
|
|
|
2006
|
|
$ |
5,382 |
|
2007
|
|
|
21,213 |
|
2008
|
|
|
40,985 |
|
2009
|
|
|
4,618 |
|
2010
|
|
|
297,006 |
|
Thereafter
|
|
|
129,143 |
|
|
|
|
|
|
|
$ |
498,347 |
|
|
|
|
|
As noted above, we have entered into a derivative contract known
as an interest rate swap in order to hedge the risk of increase
in interest rates on our $250.0 million secured term loan.
We record all derivatives on the balance sheet at fair value.
The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes
in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives used to hedge the
exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow
hedges.
Our objective in using derivatives is to add stability to
interest expense and to manage our exposure to interest rate
movements or other identified risks. To accomplish this
objective, we primarily use interest rate swaps as part of our
cash flow hedging strategy. Interest rate swaps designated as
cash flow hedges involve the receipt of variable-rate amounts in
exchange for fixed-rate payments over the life of the agreements
without exchange of the underlying principal amount. During
2005, one such derivative has been used to hedge the variable
cash flows associated with existing variable-rate debt. We
formally documented the hedging relationship and account for our
interest rate swap agreement as a cash flow hedge.
As of December 31, 2005, no derivatives were designated as
fair value hedges or hedges of net investments in foreign
operations. Additionally, we do not use derivatives for trading
or speculative purposes and currently do not have any
derivatives that are not designated as hedges. As of
December 31, 2005, our one interest rate swap had a
notional amount of $250.0 million, whereby we pay a fixed
rate of 6.4% and receive the difference between the fixed rate
and the one-month LIBOR rate plus 225 basis points. This
agreement expires on June 1, 2010, and no initial
investment was made to enter into this agreement. At
December 31, 2005, the interest rate swap agreement had a
fair value of $5.9 million which is included in other
assets. The change in net unrealized gains of $5.9 million
in 2005 for derivatives designated as cash flow hedges is
separately disclosed in the consolidated statement of
stockholders equity as accumulated other comprehensive
income. An immaterial amount of hedge ineffectiveness on cash
flow hedges due to mismatches in maturity dates of the swap and
debt was recognized in other expense during 2005.
44
The following table provides information with respect to our
contractual obligations at December 31, 2005, including the
maturities and scheduled principal repayments, but excluding
related debt premiums and interest payments of our mortgage
debt. We were not subject to any material capital lease
obligations or unconditional purchase obligations as of
December 31, 2005.
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Mortgage notes payable(1)
|
|
$ |
5,382 |
|
|
$ |
21,213 |
|
|
$ |
40,985 |
|
|
$ |
4,618 |
|
|
$ |
297,006 |
|
|
$ |
129,143 |
|
|
$ |
498,347 |
|
Share of mortgage debt of unconsolidated partnership
|
|
|
25 |
|
|
|
27 |
|
|
|
29 |
|
|
|
32 |
|
|
|
2,142 |
|
|
|
|
|
|
|
2,255 |
|
Tenant obligations(2)
|
|
|
2,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,631 |
|
Construction projects
|
|
|
30,211 |
|
|
|
2,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
38,249 |
|
|
$ |
23,902 |
|
|
$ |
41,014 |
|
|
$ |
4,650 |
|
|
$ |
299,148 |
|
|
$ |
129,143 |
|
|
$ |
536,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Balance excludes $14.9 million of unamortized debt premium. |
|
(2) |
Committed tenant-related obligations based on executed leases as
of December 31, 2005. |
Funds from Operations
We present funds from operations, or FFO, because we consider it
an important supplemental measure of our operating performance
and believe it is frequently used by securities analysts,
investors and other interested parties in the evaluation of
REITs, many of which present FFO when reporting their results.
FFO is intended to exclude GAAP historical cost depreciation and
amortization of real estate and related assets, which assumes
that the value of real estate assets diminishes ratably over
time. Historically, however, real estate values have risen or
fallen with market conditions. Because FFO excludes depreciation
and amortization unique to real estate, gains and losses from
property dispositions and extraordinary items, it provides a
performance measure that, when compared year over year, reflects
the impact to operations from trends in occupancy rates, rental
rates, operating costs, development activities and interest
costs, providing perspective not immediately apparent from net
income. We compute FFO in accordance with standards established
by the Board of Governors of the National Association of Real
Estate Investment Trusts, or NAREIT, in its March 1995 White
Paper (as amended in November 1999 and April 2002). As defined
by NAREIT, FFO represents net income (computed in accordance
with GAAP), excluding gains (or losses) from sales of property,
plus real estate related depreciation and amortization
(excluding amortization of loan origination costs) and after
adjustments for unconsolidated partnerships and joint ventures.
Our computation may differ from the methodology for calculating
FFO utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, FFO does not represent
amounts available for managements discretionary use
because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. FFO should
not be considered as an alternative to net income (loss)
(computed in accordance with GAAP) as an indicator of our
financial performance or to cash flow from operating activities
(computed in accordance with GAAP) as an indicator of our
liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to pay dividends or make
distributions.
45
The following table provides the calculation of our FFO and a
reconciliation to net income for the year ended
December 31, 2005 and for the period from August 11,
2004 through December 31, 2004 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
August 11, 2004 | |
|
|
December 31, | |
|
to December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net income
|
|
$ |
17,046 |
|
|
$ |
4,782 |
|
Adjustments
|
|
|
|
|
|
|
|
|
|
Minority interests in operating partnership
|
|
|
1,274 |
|
|
|
414 |
|
|
Depreciation and amortization real estate assets
|
|
|
39,428 |
|
|
|
7,903 |
|
|
|
|
|
|
|
|
Funds from operations
|
|
$ |
57,748 |
|
|
$ |
13,099 |
|
|
|
|
|
|
|
|
Funds from operations per share diluted
|
|
$ |
1.37 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding diluted
|
|
|
42,091,195 |
|
|
|
33,767,575 |
|
|
|
|
|
|
|
|
Off Balance Sheet Arrangements
As of December 31, 2005, we had an investment in McKellar
Court, L.P., which owns a single tenant occupied property
located in San Diego. McKellar Court is a variable interest
entity (VIE) as defined in FIN 46; however, we
are not the primary beneficiary. The limited partner is also the
only tenant in the property and will bear a disproportionate
amount of any losses. We, as the general partner, will receive
21% of the operating cash flows and 75% of the gains upon sale
of the property. We account for our general partner interest
using the equity method. Significant accounting policies used by
the unconsolidated partnership that owns this property are
similar to those used by us. At December 31, 2005, our
share of the debt related to this investment was equal to
approximately $2.3 million. The debt has a maturity date of
January 1, 2010 and bears interest at 8.56%. The assets and
liabilities of McKellar Court were $17.1 million and
$11.0 million, respectively, at December 31, 2005, and
were $17.2 million and $11.2 million, respectively, at
December 31, 2004. Our equity in net income (loss) of
McKellar Court was $119,000 and ($11,000) for the years ended
December 31, 2005 and 2004, respectively.
We have been determined to be the primary beneficiary in two
other VIEs, which we consolidate and are further described in
Note 9 to the consolidated financial statements.
Cash Distribution Policy
We elected to be taxed as a REIT under the Code commencing with
our taxable year ended December 31, 2004. To qualify as a
REIT, we must meet a number of organizational and operational
requirements, including the requirement that we distribute
currently at least 90% of our ordinary taxable income to our
stockholders. It is our intention to comply with these
requirements and maintain our REIT status. As a REIT, we
generally will not be subject to corporate federal, state or
local income taxes on taxable income we distribute currently (in
accordance with the Code and applicable regulations) to our
stockholders. If we fail to qualify as a REIT in any taxable
year, we will be subject to federal, state and local income
taxes at regular corporate rates and may not be able to qualify
as a REIT for subsequent tax years. Even if we qualify for
federal taxation as a REIT, we may be subject to certain state
and local taxes on our income and to federal income and excise
taxes on our undistributed taxable income, i.e., taxable
income not distributed in the amounts and in the time frames
prescribed by the Code and applicable regulations thereunder.
From our initial public offering through December 31, 2005,
we have declared aggregate dividends on our common stock and
distributions on our operating partnership units of
$1.4997 per common share and unit, representing five full
quarterly dividends of $0.27 and a partial third quarter 2004
dividend of $0.1497 per common share and unit.
46
Inflation
Some of our leases contain provisions designed to mitigate the
adverse impact of inflation. These provisions generally increase
rental rates during the terms of the leases either at fixed
rates or indexed escalations (based on the Consumer Price Index
or other measures). We may be adversely impacted by inflation on
the leases that do not contain indexed escalation provisions. In
addition, most of our leases require the tenant to pay an
allocable share of operating expenses, including common area
maintenance costs, real estate taxes and insurance. This may
reduce our exposure to increases in costs and operating expenses
resulting from inflation, assuming our properties remain leased
and tenants fulfill their obligations to reimburse us for such
expenses.
Our revolving loan agreement bears interest at a variable rate,
which will be influenced by changes in short-term interest
rates, and will be sensitive to inflation.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Our future income, cash flows and fair values relevant to
financial instruments depend upon prevailing market interest
rates. Market risk is the exposure to loss resulting from
changes in interest rates, foreign currency exchange rates,
commodity prices and equity prices. The primary market risk to
which we believe we are exposed is interest rate risk. Many
factors, including governmental monetary and tax policies,
domestic and international economic and political considerations
and other factors that are beyond our control contribute to
interest rate risk.
At December 31, 2005, our debt consisted of 13 fixed-rate
notes with a carrying value of $246.2 million (including
$14.9 million of premium) and a weighted-average interest
rate of 5.05%, our revolving credit facility with an outstanding
balance of $17.0 million at a weighted average interest
rate of 5.72% and our secured term loan with an outstanding
balance of $250.0 million. We have entered into an interest
rate swap agreement, which has the effect of fixing the interest
rate on the secured term loan at 6.4%. To determine fair value,
the fixed-rate debt is discounted at a rate based on an estimate
of current lending rates, assuming the debt is outstanding
through maturity and considering the notes collateral. At
December 31, 2005, the fair value of the fixed-rate debt
was estimated to be $240.5 million compared to the net
carrying value of $246.2 million (including
$14.9 million of premium). We do not believe that the
interest rate risk represented by our fixed rate debt was
material as of December 31, 2005 in relation to total
assets of $1.3 billion and equity market capitalization of
$1.2 billion of our common stock and operating units. At
December 31, 2005, the fair value of the debt of our
investment in unconsolidated partnership approximated the
carrying value.
Based on our revolving credit facility balance at
December 31, 2005, a 1% change in interest rates would
change our interest costs by $170,000 per year. This amount
was determined by considering the impact of hypothetical
interest rates on our financial instruments. This analysis does
not consider the effect of any change in overall economic
activity that could occur in that environment. Further, in the
event of a change of the magnitude discussed above, we may take
actions to further mitigate our exposure to the change. However,
due to the uncertainty of the specific actions that would be
taken and their possible effects, this analysis assume no
changes in our financial structure.
In order to modify and manage the interest rate characteristics
of our outstanding debt and to limit the effects of interest
rate risks on our operations, we may utilize a variety of
financial instruments, including interest rate swaps, caps and
treasury locks in order to mitigate our interest rate risk on a
related financial instrument. The use of these types of
instruments to hedge our exposure to changes in interest rates
carries additional risks, including counterparty credit risk,
the enforceability of hedging contracts and the risk that
unanticipated and significant changes in interest rates will
cause a significant loss of basis in the contract. To limit
counterparty credit risk we will seek to enter into such
agreements with major financial institutions with high credit
ratings. There can be no assurance that we will be able to
adequately protect against the foregoing risks and will
ultimately realize an economic benefit that exceeds the related
amounts incurred in connection with engaging in such hedging
activities. We do not enter into such contracts for speculative
or trading purposes.
47
|
|
Item 8. |
Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
49 |
|
|
|
|
52 |
|
|
|
|
53 |
|
|
|
|
54 |
|
|
|
|
55 |
|
|
|
|
56 |
|
|
|
|
58 |
|
|
|
|
81 |
|
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
BioMed Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheets of
BioMed Realty Trust, Inc. and subsidiaries as of
December 31, 2005 and 2004, the related consolidated
statements of income, stockholders equity, and
comprehensive income of BioMed Realty Trust, Inc. and
subsidiaries for the year ended December 31, 2005 and for
the period from August 11, 2004 (commencement of
operations) through December 31, 2004, the related
statements of income and owners equity of Inhale 201
Industrial Road, L.P., as defined in note 1, for the period
from January 1, 2004 through August 17, 2004 and the
year ended December 31, 2003, the related consolidated
statement of cash flows of BioMed Realty Trust, Inc. and
subsidiaries for the year ended December 31, 2005, the
related consolidated and combined statement of cash flows of
BioMed Realty Trust, Inc. and subsidiaries and Inhale 201
Industrial Road, L.P. for the year ended December 31, 2004,
and the related statement of cash flows of Inhale 201 Industrial
Road, L.P. for the year ended December 31, 2003. In
connection with our audits of the consolidated and combined
financial statements, we have also audited the accompanying
financial statement schedule III of BioMed Realty
Trust, Inc. and subsidiaries as of December 31, 2005.
These consolidated and combined financial statements are the
responsibility of BioMed Realty Trust, Inc.s management.
Our responsibility is to express an opinion on these
consolidated and combined financial statements and the
accompanying financial statement schedule III based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated and combined financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of BioMed Realty
Trust, Inc. and subsidiaries as of December 31, 2005 and
2004, the consolidated results of operations of BioMed Realty
Trust, Inc. and subsidiaries for the year ended
December 31, 2005 and for the period from August 11,
2004 through December 31, 2004, the results of operations
of Inhale 201 Industrial Road, L.P. for the period from
January 1, 2004 through August 17, 2004 and the year
ended December 31, 2003, the consolidated cash flows of
BioMed Realty Trust, Inc. and subsidiaries for the year ended
December 31, 2005, the consolidated and combined cash flows
of BioMed Realty Trust, Inc. and subsidiaries and Inhale 201
Industrial Road, L.P. for the year ended December 31, 2004,
and the cash flows of Inhale 201 Industrial Road, L.P. for the
year ended December 31, 2003 in conformity with
U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule III, when
considered in relation to the basic consolidated and combined
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of BioMed Realty Trust, Inc.s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 14, 2006 expressed an unqualified
opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.
San Diego, California
March 14, 2006
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
BioMed Realty Trust, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that BioMed Realty Trust, Inc. and
subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). BioMed Realty Trust, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that BioMed Realty
Trust, Inc. and subsidiaries maintained effective internal
control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on criteria
established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, BioMed Realty
Trust, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of BioMed Realty Trust, Inc. and
subsidiaries as of December 31, 2005 and 2004, the related
consolidated statements of income, stockholders equity,
and comprehensive income of BioMed Realty Trust, Inc. and
subsidiaries for the year ended December 31, 2005 and for
the period from August 11, 2004 (commencement of
operations) through December 31, 2004, the related
statements of income and owners equity of Inhale 201
Industrial Road, L.P., as defined in note 1, for the period
from January 1, 2004 through August 17, 2004 and the
year ended December 31, 2003, the related
50
consolidated statement of cash flows of BioMed Realty Trust,
Inc. and subsidiaries for the year ended December 31, 2005,
the related consolidated and combined statement of cash flows of
BioMed Realty Trust, Inc. and subsidiaries and Inhale 201
Industrial Road, L.P. for the year ended December 31, 2004,
and the related statement of cash flows of Inhale 201 Industrial
Road, L.P. for the year ended December 31, 2003, and our
report dated March 14, 2006 expressed an unqualified
opinion on those consolidated and combined financial statements
and the accompanying financial statement schedule III.
San Diego, California
March 14, 2006
51
BIOMED REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
ASSETS |
Investments in real estate, net
|
|
$ |
1,129,371 |
|
|
$ |
468,530 |
|
Investment in unconsolidated partnership
|
|
|
2,483 |
|
|
|
2,470 |
|
Cash and cash equivalents
|
|
|
20,312 |
|
|
|
27,869 |
|
Restricted cash
|
|
|
5,487 |
|
|
|
2,470 |
|
Accounts receivable, net
|
|
|
9,873 |
|
|
|
1,837 |
|
Accrued straight-line rents, net
|
|
|
8,731 |
|
|
|
3,306 |
|
Acquired above market leases, net
|
|
|
8,817 |
|
|
|
8,006 |
|
Deferred leasing costs, net
|
|
|
136,640 |
|
|
|
61,503 |
|
Deferred loan costs, net
|
|
|
4,855 |
|
|
|
1,700 |
|
Prepaid expenses
|
|
|
2,164 |
|
|
|
1,531 |
|
Other assets
|
|
|
8,577 |
|
|
|
2,501 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,337,310 |
|
|
$ |
581,723 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Mortgage notes payable, net
|
|
$ |
246,233 |
|
|
$ |
102,236 |
|
Secured term loan
|
|
|
250,000 |
|
|
|
|
|
Unsecured line of credit
|
|
|
17,000 |
|
|
|
|
|
Security deposits
|
|
|
6,905 |
|
|
|
4,831 |
|
Due to affiliates
|
|
|
|
|
|
|
53 |
|
Dividends and distributions payable
|
|
|
13,365 |
|
|
|
9,249 |
|
Accounts payable, accrued expenses and other liabilities
|
|
|
23,012 |
|
|
|
7,529 |
|
Acquired below market leases, net
|
|
|
29,647 |
|
|
|
13,741 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
586,162 |
|
|
|
137,639 |
|
Minority interests
|
|
|
20,673 |
|
|
|
22,267 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 15,000,000 shares
authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 100,000,000 shares
authorized, 46,634,432 and 31,386,333 shares issued and
outstanding at December 31, 2005 and December 31,
2004, respectively
|
|
|
466 |
|
|
|
314 |
|
|
Additional paid-in capital
|
|
|
760,749 |
|
|
|
434,075 |
|
|
Deferred compensation
|
|
|
(3,158 |
) |
|
|
(4,182 |
) |
|
Accumulated other comprehensive income
|
|
|
5,922 |
|
|
|
|
|
|
Dividends in excess of earnings
|
|
|
(33,504 |
) |
|
|
(8,390 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
730,475 |
|
|
|
421,817 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
1,337,310 |
|
|
$ |
581,723 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INHALE 201 INDUSTRIAL ROAD, | |
|
|
BIOMED REALTY TRUST, INC. | |
|
L.P. (PREDECESSOR) | |
|
|
| |
|
| |
|
|
|
|
Period | |
|
Period | |
|
|
|
|
|
|
August 11, 2004 | |
|
January 1, 2004 | |
|
|
|
|
Year Ended | |
|
through | |
|
through | |
|
Year Ended | |
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
August 17, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
92,650 |
|
|
$ |
19,432 |
|
|
$ |
3,339 |
|
|
$ |
6,275 |
|
|
Tenant recoveries
|
|
|
42,232 |
|
|
|
9,222 |
|
|
|
375 |
|
|
|
744 |
|
|
Other income
|
|
|
3,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
138,856 |
|
|
|
28,654 |
|
|
|
3,714 |
|
|
|
7,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operations
|
|
|
34,505 |
|
|
|
9,236 |
|
|
|
131 |
|
|
|
408 |
|
|
Real estate taxes
|
|
|
11,868 |
|
|
|
2,383 |
|
|
|
222 |
|
|
|
422 |
|
|
Depreciation and amortization
|
|
|
39,378 |
|
|
|
7,853 |
|
|
|
600 |
|
|
|
955 |
|
|
General and administrative
|
|
|
13,278 |
|
|
|
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
99,029 |
|
|
|
22,602 |
|
|
|
953 |
|
|
|
1,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
39,827 |
|
|
|
6,052 |
|
|
|
2,761 |
|
|
|
5,234 |
|
|
Equity in net income (loss) of unconsolidated partnership
|
|
|
119 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,333 |
|
|
|
190 |
|
|
|
|
|
|
|
1 |
|
|
Interest expense
|
|
|
(23,226 |
) |
|
|
(1,180 |
) |
|
|
(1,760 |
) |
|
|
(2,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests
|
|
|
18,053 |
|
|
|
5,051 |
|
|
|
1,001 |
|
|
|
2,334 |
|
|
Minority interest in consolidated partnerships
|
|
|
267 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
Minority interests in operating partnership
|
|
|
(1,274 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,046 |
|
|
$ |
4,782 |
|
|
$ |
1,001 |
|
|
$ |
2,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.44 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.44 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,913,103 |
|
|
|
30,965,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
42,091,195 |
|
|
|
33,767,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
STATEMENTS OF OWNERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
|
|
Additional | |
|
|
|
Other | |
|
Dividends in | |
|
|
|
|
|
|
Number of | |
|
Common | |
|
Paid-In | |
|
Deferred | |
|
Comprehensive | |
|
Excess of | |
|
Owners | |
|
|
|
|
Shares | |
|
Stock | |
|
Capital | |
|
Compensation | |
|
Income | |
|
Earnings | |
|
Equity | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,169 |
|
|
$ |
12,169 |
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,044 |
) |
|
|
(2,044 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,334 |
|
|
|
2,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,459 |
|
|
|
12,459 |
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,215 |
) |
|
|
(1,215 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001 |
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 11, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,245 |
|
|
|
12,245 |
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buyout of owners equity of Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,245 |
) |
|
|
(12,245 |
) |
|
Net proceeds from sale of common stock
|
|
|
31,050,000 |
|
|
|
311 |
|
|
|
429,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429,335 |
|
|
Issuance of unvested restricted common stock
|
|
|
336,333 |
|
|
|
3 |
|
|
|
5,051 |
|
|
|
(5,054 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
872 |
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,172 |
) |
|
|
|
|
|
|
(13,172 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,782 |
|
|
|
|
|
|
|
4,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
31,386,333 |
|
|
|
314 |
|
|
|
434,075 |
|
|
|
(4,182 |
) |
|
|
|
|
|
|
(8,390 |
) |
|
|
|
|
|
|
421,817 |
|
|
Net proceeds from sale of common stock
|
|
|
15,122,500 |
|
|
|
151 |
|
|
|
323,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,020 |
|
|
Net issuances of unvested restricted common stock
|
|
|
125,599 |
|
|
|
1 |
|
|
|
2,805 |
|
|
|
(2,806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,830 |
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,160 |
) |
|
|
|
|
|
|
(42,160 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,046 |
|
|
|
|
|
|
|
17,046 |
|
|
Unrealized gain on cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,922 |
|
|
|
|
|
|
|
|
|
|
|
5,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
46,634,432 |
|
|
$ |
466 |
|
|
$ |
760,749 |
|
|
$ |
(3,158 |
) |
|
$ |
5,922 |
|
|
$ |
(33,504 |
) |
|
$ |
|
|
|
$ |
730,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
BIOMED REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
Balance at August 11, 2004
|
|
$ |
|
|
Net income
|
|
|
4,782 |
|
|
|
|
|
Balance at December 31, 2004
|
|
|
4,782 |
|
Net income
|
|
|
17,046 |
|
Unrealized gain on cash flow hedge
|
|
|
5,922 |
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
22,968 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioMed Realty | |
|
|
|
|
|
|
Trust, Inc. and | |
|
|
|
|
|
|
Inhale 201 | |
|
Inhale 201 | |
|
|
BioMed Realty | |
|
Industrial Road, | |
|
Industrial Road, | |
|
|
Trust, Inc. | |
|
L.P. (Predecessor) | |
|
L.P. (Predecessor) | |
|
|
| |
|
| |
|
| |
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
17,046 |
|
|
$ |
5,783 |
|
|
$ |
2,334 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,378 |
|
|
|
8,453 |
|
|
|
955 |
|
|
|
Minority interest in consolidated partnerships
|
|
|
(267 |
) |
|
|
(145 |
) |
|
|
|
|
|
|
Minority interests in operating partnership
|
|
|
1,274 |
|
|
|
414 |
|
|
|
|
|
|
|
Bad debt expense
|
|
|
257 |
|
|
|
158 |
|
|
|
|
|
|
|
Revenue reduction attributable to acquired above market leases
|
|
|
1,424 |
|
|
|
538 |
|
|
|
|
|
|
|
Revenue recognized related to acquired below market leases
|
|
|
(3,332 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
Write off of capitalized costs for terminated leases
|
|
|
1,078 |
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to restricted common stock
|
|
|
3,830 |
|
|
|
872 |
|
|
|
|
|
|
|
Amortization of loan fees and costs
|
|
|
1,002 |
|
|
|
216 |
|
|
|
73 |
|
|
|
Write off of deferred loan costs due to repayment and
extinguishment of debt
|
|
|
2,002 |
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt premium
|
|
|
(1,761 |
) |
|
|
(307 |
) |
|
|
|
|
|
|
(Income)/loss from unconsolidated partnership
|
|
|
(119 |
) |
|
|
11 |
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(3,017 |
) |
|
|
(2,470 |
) |
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,293 |
) |
|
|
(1,987 |
) |
|
|
|
|
|
|
|
Accrued straight-line rents
|
|
|
(5,595 |
) |
|
|
(887 |
) |
|
|
(648 |
) |
|
|
|
Deferred leasing costs
|
|
|
(1,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(633 |
) |
|
|
(1,531 |
) |
|
|
|
|
|
|
|
Other assets
|
|
|
821 |
|
|
|
(201 |
) |
|
|
133 |
|
|
|
|
Due to affiliates
|
|
|
(53 |
) |
|
|
53 |
|
|
|
|
|
|
|
|
Security deposits
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
10,113 |
|
|
|
5,751 |
|
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
54,490 |
|
|
|
14,470 |
|
|
|
2,416 |
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of interests in and additions to investments in real
estate and related intangible assets
|
|
|
(604,782 |
) |
|
|
(458,165 |
) |
|
|
(105 |
) |
|
|
Minority interest investment in consolidated partnerships
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
Distributions received from unconsolidated partnership
|
|
|
106 |
|
|
|
27 |
|
|
|
|
|
|
|
Receipts of master lease payments (reduction to investments in
real estate)
|
|
|
2,025 |
|
|
|
1,327 |
|
|
|
|
|
|
|
Security deposits received from prior owners of real estate
|
|
|
1,074 |
|
|
|
4,831 |
|
|
|
|
|
|
|
Redemption of operating partnership units for cash
|
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
|
Funds held in escrow for acquisitions (other assets)
|
|
|
(200 |
) |
|
|
(1,700 |
) |
|
|
|
|
|
|
Additions to non-real estate assets
|
|
|
(651 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
Repayment of related party payables
|
|
|
|
|
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(602,007 |
) |
|
|
(457,191 |
) |
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioMed Realty | |
|
|
|
|
|
|
Trust, Inc. and | |
|
|
|
|
|
|
Inhale 201 | |
|
Inhale 201 | |
|
|
BioMed Realty | |
|
Industrial Road, | |
|
Industrial Road, | |
|
|
Trust, Inc. | |
|
L.P. (Predecessor) | |
|
L.P. (Predecessor) | |
|
|
| |
|
| |
|
| |
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
| |
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from common stock offering
|
|
|
340,256 |
|
|
|
465,753 |
|
|
|
|
|
|
|
Payment of offering costs
|
|
|
(16,236 |
) |
|
|
(36,415 |
) |
|
|
|
|
|
|
Payment of loan costs
|
|
|
(6,159 |
) |
|
|
(1,701 |
) |
|
|
(87 |
) |
|
|
Line of credit proceeds
|
|
|
244,175 |
|
|
|
33,900 |
|
|
|
|
|
|
|
Line of credit repayments
|
|
|
(227,175 |
) |
|
|
(33,900 |
) |
|
|
|
|
|
|
Secured term loan proceeds
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
Unsecured term loan proceeds
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
Unsecured term loan payments
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable
|
|
|
|
|
|
|
49,300 |
|
|
|
227 |
|
|
|
Principal payments on mortgage notes payable
|
|
|
(3,759 |
) |
|
|
(234 |
) |
|
|
(762 |
) |
|
|
Distributions to operating partnership unit holders
|
|
|
(3,098 |
) |
|
|
(357 |
) |
|
|
|
|
|
|
Dividends paid
|
|
|
(38,044 |
) |
|
|
(4,698 |
) |
|
|
|
|
|
|
Distributions to owners of Predecessor
|
|
|
|
|
|
|
(1,215 |
) |
|
|
(2,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
539,960 |
|
|
|
470,433 |
|
|
|
(2,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,557 |
) |
|
|
27,712 |
|
|
|
(355 |
) |
Cash and cash equivalents at beginning of year
|
|
|
27,869 |
|
|
|
157 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
20,312 |
|
|
$ |
27,869 |
|
|
$ |
157 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest (net of amounts capitalized of $708, $0
and $0, respectively)
|
|
$ |
20,291 |
|
|
$ |
3,040 |
|
|
$ |
2,600 |
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual for dividends declared
|
|
|
12,592 |
|
|
|
8,474 |
|
|
|
|
|
|
|
Accrual for distributions declared for operating partnership
unit holders
|
|
|
773 |
|
|
|
775 |
|
|
|
|
|
|
|
Restricted stock awards, net
|
|
|
2,806 |
|
|
|
5,054 |
|
|
|
|
|
|
|
Mortgage loans assumed (includes premium of $11,312, $5,642 and
$0, respectively)
|
|
|
149,517 |
|
|
|
53,477 |
|
|
|
|
|
|
|
Accrued construction and tenant improvement costs
|
|
|
4,777 |
|
|
|
29 |
|
|
|
|
|
|
|
Accrued additions to non-real estate assets
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
Accrued deferred leasing costs
|
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
Historic cost basis of assets transferred from Predecessor
(including $2,189 of accrued straight-line rents as of
August 17, 2004)
|
|
|
|
|
|
|
48,569 |
|
|
|
|
|
|
|
Operating partnership units issued for interests in certain
contributed properties
|
|
|
|
|
|
|
21,810 |
|
|
|
|
|
|
|
Investment in unconsolidated partnership acquired by issuing
operating partnership units
|
|
|
|
|
|
|
2,508 |
|
|
|
|
|
|
|
Distributions in excess of equity balance to owners of
Predecessor
|
|
|
|
|
|
|
5,131 |
|
|
|
|
|
|
|
Accrual for offering costs
|
|
|
|
|
|
|
(423 |
) |
|
|
|
|
See accompanying notes to consolidated financial statements.
57
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Organization and Description of Business |
As used herein, the terms we, us,
our or the Company refer to BioMed
Realty Trust, Inc., a Maryland corporation, and any of our
subsidiaries, including BioMed Realty, L.P., a Maryland limited
partnership (our Operating Partnership), and 201
Industrial Road, L.P. (Industrial Road or our
Predecessor). We operate as a fully integrated,
self-administered and self-managed real estate investment trust
(REIT) focused on acquiring, developing, owning,
leasing and managing laboratory and office space for the life
science industry. The Companys tenants primarily include
biotechnology and pharmaceutical companies, scientific research
institutions, government agencies and other entities involved in
the life science industry. The Companys properties and
primary acquisition targets are generally located in markets
with well established reputations as centers for scientific
research, including Boston, San Diego, San Francisco,
Seattle, Maryland, Pennsylvania and New York/ New Jersey.
The Company was incorporated in Maryland on April 30, 2004.
On August 11, 2004, the Company commenced operations after
completing its initial public offering (the
Offering) of 27,000,000 shares of its common
stock, par value $.01 per share. The Offering price was
$15.00 per share resulting in gross proceeds of
$405.0 million. On August 16, 2004, in connection with
the exercise of the underwriters over-allotment option,
the Company issued an additional 4,050,000 shares of common
stock and received gross proceeds of $60.8 million. The
aggregate proceeds to the Company, net of underwriting discounts
and commissions and Offering costs, were approximately
$429.3 million. The Company issued a stock warrant in
connection with the Offering to the lead underwriter for the
right to purchase 270,000 common shares at $15.00 per
share, which equals the estimated fair value at the date of
grant. The warrant became exercisable six months after the
Offering date and expires on August 11, 2009. From
inception through August 11, 2004, neither the Company nor
its Operating Partnership had any operations. Simultaneously
with the Offering, the Company obtained a $100.0 million
revolving unsecured credit facility (Note 5), which was
used to finance acquisitions and for other corporate purposes
prior to being replaced on May 31, 2005 with a
$250.0 million revolving unsecured credit facility with
KeyBank National Association and other lenders (Note 5).
On June 27, 2005, the Company completed a follow-on common
stock offering of 15,122,500 shares at $22.50 per
share, resulting in gross proceeds of $340.3 million. The
net proceeds of $324.0 million were used to repay the
outstanding balance on the Companys revolving credit
facility (Note 5), to repay its $100.0 million
unsecured term loan (Note 5), to acquire properties and for
other corporate purposes.
As of December 31, 2005, the Company owned or had interests
in 39 properties, located principally in Boston, San Diego,
San Francisco, Seattle, Maryland, Pennsylvania and New
York/ New Jersey, consisting of 62 buildings with approximately
4.8 million rentable square feet of laboratory and office
space, which was approximately 91.1% leased to 87 tenants. Of
the approximately 423,000 square feet of unleased space,
274,677 square feet, or 64.9% of our unleased square
footage, was under redevelopment. The Company also owned
undeveloped land that we estimate can support up to
706,000 rentable square feet of laboratory and office space.
Industrial Road was the largest of the properties contributed in
the Offering and therefore was identified as the accounting
acquirer pursuant to paragraph 17 of Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations (SFAS 141). As
such, the historical financial statements presented herein for
Industrial Road were prepared on a stand-alone basis up to and
including the acquisition date, August 17, 2004. Upon
completion of the Offering, the interest in the Predecessor
acquired from affiliates was recorded at historic cost. The
acquisitions of the unaffiliated interests in the Predecessor
and the interests in all of the other properties have been
accounted for as a purchase in accordance with SFAS 141.
58
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2. |
Basis of Presentation and Summary of Significant Accounting
Policies |
|
|
|
Principles of Consolidation |
The consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, partnerships and
limited liability companies it controls, and variable interest
entities for which the Company has determined itself to be the
primary beneficiary. All material intercompany transactions and
balances have been eliminated. The Company consolidates entities
the Company controls and records a minority interest for the
portions not owned by the Company. Control is determined, where
applicable, by the sufficiency of equity invested and the rights
of the equity holders, and by the ownership of a majority of the
voting interests, with consideration given to the existence of
approval or veto rights granted to the minority shareholder. If
the minority shareholder holds substantive participation rights,
it overcomes the presumption of control by the majority voting
interest holder. In contrast, if the minority shareholder simply
holds protective rights (such as consent rights over certain
actions), it does not overcome the presumption of control by the
majority voting interest holder. With respect to the
partnerships and limited liability companies, the Company
determines control through a consideration of each partys
financial interests in profits and losses and the ability to
participate in major decisions such as the acquisition, sale or
refinancing of principal assets.
|
|
|
Investments in Partnerships |
The Company evaluates its investments in limited liability
companies and partnerships under Financial Accounting Standards
Board (FASB) Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest
Entities (FIN 46) an interpretation of
Accounting Research Bulletin No. 51 Consolidated
Financial Statements (ARB 51). FIN 46
provides guidance on the identification of entities for which
control is achieved through means other than voting rights
(variable interest entities or VIEs) and
the determination of which business enterprise should
consolidate the VIE (the primary beneficiary).
Generally, FIN 46 applies when either (1) the equity
investors (if any) lack one or more of the essential
characteristics of a controlling financial interest,
(2) the equity investment at risk is insufficient to
finance that entitys activities without additional
subordinated financial support or (3) the equity investors
have voting rights that are not proportionate to their economic
interests and the activities of the entity involve or are
conducted on behalf of an investor with a disproportionately
small voting interest.
In June 2005, the FASB ratified the consensus in EITF Issue
No. 04-5, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights
(EITF 04-5),
which provides guidance in determining whether a general partner
controls a limited partnership.
EITF 04-5 states
that the general partner in a limited partnership is presumed to
control that limited partnership. The presumption may be
overcome if the limited partners have either (1) the
substantive ability to dissolve the limited partnership or
otherwise remove the general partner without cause or
(2) substantive participating rights, which provide the
limited partners with the ability to effectively participate in
significant decisions that would be expected to be made in the
ordinary course of the limited partnerships business and
thereby preclude the general partner from exercising unilateral
control over the partnership. If the criteria in
EITF 04-5 are met,
the consolidation of existing limited liability companies and
partnerships accounted for under the equity method may be
required. Our adoption of
EITF 04-5 is
expected to have no effect on net income or stockholders
equity. EITF 04-5
is effective June 30, 2005 for new or modified limited
partnership arrangements and effective January 1, 2006 for
existing limited partnership arrangements.
On a periodic basis, management assesses whether there are any
indicators that the value of the Companys investments in
partnerships may be impaired. An investment is impaired only if
managements estimate of the value of the investment is
less than the carrying value of the investment. To the extent
impairment has occurred, the loss shall be measured as the
excess of the carrying amount of the investment
59
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over the value of the investment. Management does not believe
that the value of any of the Companys investments in
partnerships are impaired.
|
|
|
Investments in Real Estate |
Investments in real estate are carried at depreciated cost.
Depreciation and amortization are recorded on a straight-line
basis over the estimated useful lives of the assets as follows:
|
|
|
Buildings and improvements
|
|
10 to 40 years |
Ground lease
|
|
Term of the related lease |
Tenant improvements
|
|
Shorter of the useful lives or the terms of the related leases |
Furniture, fixtures, and equipment (other assets)
|
|
3 to 5 years |
Acquired in-place leases
|
|
Non-cancelable term of the related lease |
Acquired management agreements
|
|
Non-cancelable term of the related agreement |
Investments in real estate, net consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
146,421 |
|
|
$ |
68,762 |
|
Ground lease
|
|
|
14,210 |
|
|
|
14,210 |
|
Buildings and improvements
|
|
|
962,482 |
|
|
|
388,755 |
|
Construction in progress
|
|
|
8,582 |
|
|
|
42 |
|
Tenant improvements
|
|
|
19,580 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
1,151,275 |
|
|
|
471,799 |
|
Accumulated depreciation
|
|
|
(21,904 |
) |
|
|
(3,269 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,129,371 |
|
|
$ |
468,530 |
|
|
|
|
|
|
|
|
Purchase accounting was applied, on a pro-rata basis where
appropriate, to the assets and liabilities of real estate
properties in which we acquired an interest or a partial
interest. The fair value of tangible assets of an acquired
property (which includes land, buildings, and improvements) is
determined by valuing the property as if it were vacant, and the
as-if-vacant value is then allocated to land,
buildings and improvements based on managements
determination of the relative fair value of these assets. We
determine the as-if-vacant fair value using methods similar to
those used by independent appraisers. Factors considered by us
in performing these analyses include an estimate of the carrying
costs during the expected
lease-up periods,
current market conditions and costs to execute similar leases.
In estimating carrying costs, we include real estate taxes,
insurance and other operating expenses and estimates of lost
rental revenue during the expected
lease-up periods based
on current market demand.
In allocating fair value to the identified intangible assets and
liabilities of an acquired property, above-market and
below-market in-place leases are recorded based on the present
value (using a discount rate which reflects the risks associated
with the leases acquired) of the difference between (a) the
contractual amounts to be paid pursuant to the in-place leases
and (b) our estimate of the fair market lease rates for the
corresponding in-place leases at acquisition, measured over a
period equal to the remaining non-cancelable term of the leases.
The capitalized above-market lease values are amortized as a
reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market
lease values are amortized as an increase to rental income over
the remaining non-cancelable terms of the respective
60
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
leases. If a tenant vacates its space prior to the contractual
termination of the lease and no rental payments are being made
on the lease, any unamortized balance of the related intangible
will be written off.
The balance of acquired above market leases was comprised as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Acquired above market leases
|
|
$ |
10,879 |
|
|
$ |
8,544 |
|
Accumulated amortization
|
|
|
(2,062 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
$ |
8,817 |
|
|
$ |
8,006 |
|
|
|
|
|
|
|
|
The balance of acquired below market leases was comprised as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Acquired below market leases
|
|
$ |
33,230 |
|
|
$ |
13,992 |
|
Accumulated amortization
|
|
|
(3,583 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
$ |
29,647 |
|
|
$ |
13,741 |
|
|
|
|
|
|
|
|
The table below presents the estimated amortization during the
next five years related to the acquired above and below market
leases for properties owned at December 31, 2005 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired above market leases
|
|
$ |
(2,249 |
) |
|
$ |
(2,104 |
) |
|
$ |
(1,167 |
) |
|
$ |
(1,166 |
) |
|
$ |
(1,112 |
) |
|
$ |
(1,019 |
) |
|
$ |
(8,817 |
) |
|
Acquired below market leases
|
|
|
4,665 |
|
|
|
4,651 |
|
|
|
4,635 |
|
|
|
4,613 |
|
|
|
3,506 |
|
|
|
7,577 |
|
|
|
29,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental revenues increase
|
|
$ |
2,416 |
|
|
$ |
2,547 |
|
|
$ |
3,468 |
|
|
$ |
3,447 |
|
|
$ |
2,394 |
|
|
$ |
6,558 |
|
|
$ |
20,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate value of other acquired intangible assets
consisting of acquired in-place leases and acquired management
agreements (see deferred leasing costs below) are recorded based
on a variety of components including, but not necessarily
limited to: (a) the value associated with avoiding the cost
of originating the acquired in-place leases (i.e. the market
cost to execute a lease, including leasing commissions and legal
fees, if any); (b) the value associated with lost revenue
related to tenant reimbursable operating costs estimated to be
incurred during the assumed
lease-up period (i.e.
real estate taxes, insurance and other operating expenses);
(c) the value associated with lost rental revenue from
existing leases during the assumed
lease-up period; and
(d) the value associated with avoided tenant improvement
costs or other inducements to secure a tenant lease. The fair
value assigned to the acquired management agreements are
recorded at the present value (using a discount rate which
reflects the risks associated with the management agreements
acquired) of the acquired management agreements with certain
tenants of the acquired properties. The values of in-place
leases and management agreements are amortized to expense over
the remaining non-cancelable period of the respective leases or
agreements. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts related to that lease would
be written off.
A variety of costs are incurred in the acquisition, development,
construction, improvements and leasing of properties. After
determination is made to capitalize a cost, it is allocated to
the specific component of a project that is benefited.
Determination of when a development project is substantially
complete and capitalization must cease involves a degree of
judgment. The Companys capitalization policy on
development properties is guided by SFAS No. 34,
Capitalization of Interest Cost and
SFAS No. 67, Accounting for Costs and the Initial
Rental Operations of Real Estate Properties. The costs of
land and buildings under
61
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development include specifically identifiable costs. The
capitalized costs include pre-construction costs essential to
the development of the property, development costs, construction
costs, interest costs, real estate taxes, salaries and related
costs and other costs incurred during the period of development.
The Company considers a construction project as substantially
completed and held available for occupancy upon the completion
of tenant improvements, but no later than one year from
cessation of major construction activity. The Company ceases
capitalization on the portion substantially completed and
occupied or held available for occupancy, and capitalizes only
those costs associated with the portion under construction.
Interest costs capitalized for the years ended December 31,
2005, 2004, and 2003 were $708,000, $0, and $0, respectively.
Capitalized costs associated with unsuccessful acquisitions are
charged to expense when an acquisition is abandoned.
Repair and maintenance costs are charged to expense as incurred
and significant replacements and betterments are capitalized.
Repairs and maintenance costs include all costs that do not
extend the useful life of an asset or increase its operating
efficiency. Significant replacement and betterments represent
costs that extend an assets useful life or increase its
operating efficiency.
|
|
|
Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed |
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows, undiscounted and without interest,
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents consist of highly liquid investments
with original maturities of three months or less. We maintain
our cash at insured financial institutions. The combined account
balances at each institution periodically exceed FDIC insurance
coverage, and, as a result, there is a concentration of credit
risk related to amounts in excess of FDIC limits. We believe
that the risk is not significant.
Restricted cash primarily consists of cash deposits for real
estate taxes, insurance and capital expenditures as required by
certain mortgage notes payable.
The statements of cash flows of the Company and the Predecessor
have been combined for the year ended December 31, 2004 to
make them comparable to the same period in 2005 for the Company
and in 2003 for the Predecessor.
Leasing commissions and other direct costs associated with
obtaining new or renewal leases are recorded at cost and
amortized on a straight-line basis over the terms of the
respective leases. Deferred leasing costs also include the net
carrying value of acquired in-place leases and acquired
management agreements, which are discussed above in investments
in real estate.
62
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The balance of deferred leasing costs at December 31, 2005
was comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Accumulated | |
|
|
|
|
December 31, 2005 | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
Acquired in-place leases
|
|
$ |
149,312 |
|
|
$ |
(22,577 |
) |
|
$ |
126,735 |
|
Acquired management agreements
|
|
|
10,717 |
|
|
|
(2,505 |
) |
|
|
8,212 |
|
Deferred leasing and other direct costs
|
|
|
2,026 |
|
|
|
(333 |
) |
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
162,055 |
|
|
$ |
(25,415 |
) |
|
$ |
136,640 |
|
|
|
|
|
|
|
|
|
|
|
The balance of deferred leasing costs at December 31, 2004
was comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
Accumulated | |
|
|
|
|
December 31, 2004 | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
Acquired in-place leases
|
|
$ |
57,663 |
|
|
$ |
(4,001 |
) |
|
$ |
53,662 |
|
Acquired management agreements
|
|
|
8,151 |
|
|
|
(576 |
) |
|
|
7,575 |
|
Deferred leasing and other direct costs
|
|
|
361 |
|
|
|
(95 |
) |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,175 |
|
|
$ |
(4,672 |
) |
|
$ |
61,503 |
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense for deferred leasing costs as
of December 31, 2005 were as follows (in thousands):
|
|
|
|
|
2006
|
|
$ |
24,500 |
|
2007
|
|
|
22,637 |
|
2008
|
|
|
19,453 |
|
2009
|
|
|
18,262 |
|
2010
|
|
|
10,833 |
|
Thereafter
|
|
|
40,955 |
|
|
|
|
|
|
|
$ |
136,640 |
|
|
|
|
|
External costs associated with obtaining long-term financing are
capitalized and amortized to interest expense over the terms of
the related loans using the effective-interest method.
Unamortized financing costs are charged to expense upon the
early repayment or significant modification of the financing.
Fully amortized deferred loan costs are removed from the books
upon maturity of the debt. The balance includes
$3.2 million and $162,000 of accumulated amortization at
December 31, 2005 and 2004, respectively. Loan costs of
$2.0 million were fully amortized during the year ended
December 31, 2005 due to the full repayment and termination
of the credit facility and unsecured term loan facility
(Note 5).
All leases are classified as operating leases and minimum rents
are recognized on a straight-line basis over the term of the
related lease. The impact of the straight-line rent adjustment
increased revenue for the Company by $5,595,000 and $1,125,000
for the year ended December 31, 2005 and for the period
August 11, 2004 through December 31, 2004,
respectively. The impact of the straight-line rent adjustment
decreased revenue for the Predecessor by $238,000 for the period
January 1, 2004 through August 17, 2004 and increased
revenue by $648,000 for the year ended December 31, 2003.
Additionally, the impact of the amortization of acquired above
market leases and acquired below market leases increased rental
revenues by
63
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1,808,000 for the year ended December 31, 2005. This
includes a $100,000 decrease to revenue due to the write off of
an above market lease that was terminated at our Industrial Road
property. The impact of the amortization of acquired above
market leases and acquired below market leases decreased rental
revenues by $287,000 for the year ended December 31, 2004.
The excess of rents recognized over amounts contractually due
pursuant to the underlying leases are included in accrued
straight-line rents on the accompanying consolidated balance
sheets and contractually due but unpaid rents are included in
accounts receivable.
Recoveries from tenants, consisting of amounts due from tenants
for real estate taxes, insurance and common area maintenance
costs are recognized as revenue in the period the expenses are
incurred. The reimbursements are recognized and presented in
accordance with EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent
(EITF 99-19). EITF 99-19 requires that
these reimbursements be recorded gross, as the Company is
generally the primary obligor with respect to purchasing goods
and services from third-party suppliers, has discretion in
selecting the supplier and bears the credit risk.
Lease termination fees are recognized when the related leases
are canceled, collectibility is assured, and we have no
continuing obligation to provide space to former tenants. A gain
on early termination of lease of $3.6 million for the year
ended December 31, 2005 is included in other income on the
consolidated statements of income and was primarily due to the
early termination of a portion of the Nektar Therapeutics lease
at our Industrial Road property. Accordingly, the related lease
commissions and other related intangible assets have been fully
amortized.
Payments received under master lease agreements entered into
with the sellers of the Bayshore and King of Prussia properties
to lease space that was not producing rent at the time of the
acquisition are recorded as a reduction to buildings and
improvements rather than as rental income in accordance with
EITF 85-27, Recognition of Receipts from Made-Up Rental
Shortfalls. Receipts under the master lease agreements
totaled $2,025,000, $1,327,000, and $0 for the years ended
December 31, 2005, 2004, and 2003, respectively. The master
lease at Bayshore expired in February 2006. The master lease at
King of Prussia will expire in June 2008 or sooner under the
terms of the agreement if the vacant space is leased by a new
tenant.
|
|
|
Allowance for Doubtful Accounts |
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of tenants to make required
rent and tenant recovery payments or defaults. We also maintain
an allowance for accrued straight-line rents and amounts due
from lease terminations. The computation of this allowance is
based on the tenants payment history and current credit
status. Bad debt expense included in rental operations expenses
was $257,000, $158,000, and $0 for the years ended
December 31, 2005, 2004, and 2003, respectively. The
Companys allowance for doubtful accounts was $611,000,
$158,000, and $0 as of December 31, 2005, 2004, and 2003,
respectively. Included in the allowance for doubtful accounts
was $196,000 related to master lease receipts not expected to be
collected as of December 31, 2005.
The Company follows SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) as
amended by SFAS No. 148. SFAS 123 requires that
compensation expense be recorded for the fair-value of
restricted stock granted to employees and non-employee
directors. The fair-value is recorded based on the market value
of the common stock on the grant date as deferred compensation
and is amortized to general and administrative expenses over the
respective vesting periods. To the extent restricted stock is
forfeited prior to vesting, the corresponding previously
recognized expense is reversed as an offset to general and
administrative expense.
64
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Underwriting commissions and offering costs are reflected as a
reduction to additional
paid-in-capital.
The Company has elected to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended, commencing with our taxable year ended
December 31, 2004. We believe we have qualified and
continue to qualify as a REIT. A REIT is generally not subject
to federal income tax on that portion of its taxable income that
is distributed to its stockholders, provided that at least 90%
of taxable income is distributed. Accordingly, no provision has
been made for federal income taxes in the accompanying
consolidated financial statements. REITs are subject to a number
of organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax (including any applicable
alternative minimum tax) and, in most of the states, state
income tax on its taxable income at regular corporate tax rates.
The Company is subject to certain state and local taxes.
The Company has formed a taxable REIT subsidiary (a
TRS). In general, a TRS may perform non-customary
services for tenants, hold assets that we cannot hold directly
and generally engage in any real estate or non-real estate
related business. A TRS is subject to corporate federal income
taxes on its taxable income at regular corporate tax rates
(except for the operation or management of health care
facilities or lodging facilities or the providing of any person,
under a franchise, license or otherwise, rights to any brand
name under which any lodging facility or health care facility is
operated). For the periods presented in the accompanying
consolidated statements of income there is no tax provision for
the TRS as the TRS had no substantial operations during 2005 or
2004.
The Predecessor was a partnership. Under applicable federal and
state income tax rules, the allocated share of net income/loss
from partnerships is reportable in the income tax returns of the
partners and members. Accordingly, no income tax provision is
included in the accompanying consolidated financial statements
for the period from January 1, 2004 through August 17,
2004 and for the year ended December 31, 2003.
|
|
|
Dividends and Distributions |
Earnings and profits, which determine the taxability of
dividends and distributions to stockholders, will differ from
income reported for financial reporting purposes due to the
difference for federal income tax purposes in the treatment of
revenue recognition, compensation expense, and in the estimated
useful lives of real estate assets used to compute depreciation.
The Company pays distributions quarterly to stockholders. Total
common distributions were $0.4197 per common share, of
which $0.283673 is treated as ordinary income for federal income
tax purposes for the year ended December 31, 2004. The
remaining common distribution of $0.136027 was reported for
federal income tax purposes in the year ending December 31,
2005. Total common distributions were $1.08 per common
share, of which $1.010305 is treated as ordinary income for
federal income tax purposes for the year ended December 31,
2005, including the $0.136027 remaining from 2004. The remaining
common distribution of $0.205722 will be reported for federal
income tax purposes in the year ending December 31, 2006.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reporting
of revenue and expenses during the reporting period to prepare
these
65
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consolidated financial statements in conformity with
U.S. generally accepted accounting principles. The Company
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
and reported amounts of revenue and expenses that are not
readily apparent from other sources. Actual results could differ
from those estimates under different assumptions or conditions.
Management considers those estimates and assumptions that are
most important to the portrayal of the Companys financial
condition and results of operations, in that they require
managements most subjective judgments, to form the basis
for the accounting policies used by the Company. These estimates
and assumptions of items such as market rents, time required to
lease vacant spaces, lease terms for incoming tenants and credit
worthiness of tenants in determining the as-if-vacant value,
in-place lease value and above and below market rents value are
utilized in allocating purchase price to tangible and identified
intangible assets upon acquisition of a property. These
accounting policies also include managements estimates of
useful lives in calculating depreciation expense on its
properties and the ultimate recoverability (or impairment) of
each property. If the useful lives of buildings and improvements
are different from 10 to 40 years, it could result in
changes to the future results of operations of the Company.
Future adverse changes in market conditions or poor operating
results of our properties could result in losses or an inability
to recover the carrying value of the properties that may not be
reflected in the properties current carrying value,
thereby possibly requiring an impairment charge in the future.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
In connection with our Offering, we acquired interests in six
properties through our Operating Partnership that were
previously owned by limited partnerships and a limited liability
company in which certain officers of the Company or entities
affiliated with them owned interests, and private investors and
tenants who are not affiliated with them owned interests.
Persons and entities owning the interests in four of the limited
partnerships and the limited liability company, certain
officers, some of their spouses and parents, and other
individuals and entities not affiliated with us or our
management, contributed to us all of their interests in these
entities. In exchange for these interests, we issued an
aggregate of 2,870,564 limited partnership units in our
operating partnership and made cash payments in the aggregate
amount of $20.5 million. Certain officers of the Company
(including some of their spouses) received an aggregate of
2,673,172 limited partnership units having a value of
$40.1 million based on the initial public offering price of
our common stock of $15.00 per share.
Minority interests on the consolidated balance sheets relate
primarily to the limited partnership units in the Operating
Partnership (Units) that are not owned by the
Company, which at December 31, 2005 and 2004 amounted to
5.83% and 8.46%, respectively, of Units outstanding. In
conjunction with the formation of the Company, certain persons
and entities contributing interests in properties to the
Operating Partnership received Units. Limited partners who were
issued Units in the formation transactions have the right,
commencing on October 1, 2005, to require the Operating
Partnership to redeem part or all of their Units. The Company
may elect to acquire those Units in exchange for shares of the
Companys common stock on a one-for-one basis, subject to
adjustment in the event of stock splits, stock dividends,
issuance of stock rights, specified extraordinary distributions
and similar events, or pay cash based upon the fair market value
of an equivalent number of shares of the Companys common
stock at the time of redemption. In December 2005, a
non-managing partner of the operating partnership tendered 7,000
limited partnership units in exchange for
66
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$173,320, or $24.76 per share. Minority interests also
include the 11% interest of a limited partner in the limited
partnership that owns the King of Prussia property, the 10%
interest of a member in the limited liability company that owns
the Waples property, and the 10% interest of a member in the
limited liability company formed to acquire the Fairview
property, which are consolidated entities of the Company.
|
|
4. |
Mortgage Notes Payable |
A summary of our outstanding consolidated mortgage notes payable
was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated | |
|
|
|
Principal Balance | |
|
|
|
|
Fixed | |
|
Effective | |
|
December 31, | |
|
|
|
|
Interest | |
|
Interest | |
|
| |
|
|
|
|
Rate | |
|
Rate | |
|
2005 | |
|
2004 | |
|
Maturity Date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Ardentech Court
|
|
|
7.25 |
% |
|
|
5.06 |
% |
|
$ |
4,746 |
|
|
$ |
4,828 |
|
|
|
July 1, 2012 |
|
Bayshore Boulevard
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
16,107 |
|
|
|
16,438 |
|
|
|
January 1, 2010 |
|
Bridgeview Technology Park I
|
|
|
8.07 |
% |
|
|
5.04 |
% |
|
|
11,732 |
|
|
|
11,825 |
|
|
|
January 1, 2011 |
|
Eisenhower Road
|
|
|
5.80 |
% |
|
|
4.63 |
% |
|
|
2,211 |
|
|
|
2,252 |
|
|
|
May 5, 2008 |
|
Elliott Avenue
|
|
|
7.38 |
% |
|
|
4.63 |
% |
|
|
16,526 |
|
|
|
16,996 |
|
|
|
November 24, 2007 |
|
40 Erie Street
|
|
|
7.34 |
% |
|
|
4.90 |
% |
|
|
19,575 |
|
|
|
|
|
|
|
August 1, 2008 |
|
Kendall Square D
|
|
|
6.38 |
% |
|
|
5.45 |
% |
|
|
72,395 |
|
|
|
|
|
|
|
December 1, 2018 |
|
Lucent Drive
|
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
5,899 |
|
|
|
|
|
|
|
January 21, 2015 |
|
Monte Villa Parkway
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
9,805 |
|
|
|
10,007 |
|
|
|
January 1, 2010 |
|
Nancy Ridge Drive
|
|
|
7.15 |
% |
|
|
5.38 |
% |
|
|
6,952 |
|
|
|
|
|
|
|
September 1, 2012 |
|
Science Center Drive
|
|
|
7.65 |
% |
|
|
5.04 |
% |
|
|
11,577 |
|
|
|
11,699 |
|
|
|
July 1, 2011 |
|
Sidney Street
|
|
|
7.23 |
% |
|
|
5.11 |
% |
|
|
31,426 |
|
|
|
|
|
|
|
June 1, 2012 |
|
Towne Centre Drive
|
|
|
4.55 |
% |
|
|
4.55 |
% |
|
|
22,396 |
|
|
|
22,856 |
|
|
|
January 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231,347 |
|
|
|
96,901 |
|
|
|
|
|
Unamortized premium
|
|
|
|
|
|
|
|
|
|
|
14,886 |
|
|
|
5,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
246,233 |
|
|
$ |
102,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net carrying value of properties (investments in real
estate) secured by our mortgage notes payable was
$460.5 million and $174.7 million at December 31,
2005 and 2004, respectively.
The outstanding mortgage notes payable due to affiliates as of
December 31, 2003 was repaid on August 17, 2004.
Mortgage debt aggregating $77.0 million secured by the King
of Prussia property was repaid in August 2004 concurrent with
the purchase of the property.
Premiums were recorded upon assumption of the mortgage notes
payable at the time of acquisition to account for above-market
interest rates. Amortization of these premiums is recorded as a
reduction to interest expense over the remaining term of the
respective note using a method that approximates the
effective-interest method.
On August 11, 2004, the Company entered into a
$100.0 million revolving unsecured loan agreement, which
bore interest at LIBOR plus 1.20%, or higher depending on the
leverage ratio of the Company, or a reference rate, and was
scheduled to expire on August 11, 2007. This credit
facility was fully repaid and
67
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
terminated on May 31, 2005 with funds drawn on our new
credit facilities as discussed below. Accordingly, the related
unamortized loan costs of $901,000 were fully amortized in the
three months ended June 30, 2005.
On May 31, 2005, the Company entered into three credit
facilities with KeyBank National Association and other lenders
under which the Company initially borrowed $485.0 million
of a total of $600.0 million available under these
facilities. The credit facilities include an unsecured revolving
credit facility of $250.0 million, under which the Company
initially borrowed $135.0 million, an unsecured term loan
of $100.0 million and a secured term loan of
$250.0 million. The Company borrowed the full amounts under
the unsecured term loan and secured term loan. The unsecured
revolving credit facility has a maturity date of May 30,
2008 and bears interest at a floating rate equal to, at our
option, either (1) reserve adjusted LIBOR plus a spread
which ranges from 120 to 200 basis points, depending on our
leverage, or (2) the higher of (a) the prime rate then
in effect plus a spread which ranges from 0 to 50 basis
points and (b) the federal funds rate then in effect plus a
spread which ranges from 50 to 100 basis points, in each
case, depending on our leverage. The Company may extend the
maturity date of the unsecured credit facility to May 30,
2009 after satisfying certain conditions and paying an extension
fee, and the Company may increase the amount of the revolving
credit facility to $400.0 million upon satisfying certain
conditions. The secured term loan, which has a maturity date of
May 30, 2010, is secured by 13 of our properties and bears
interest at a floating rate equal to, at our option, either
(1) reserve adjusted LIBOR plus 225 basis points or
(2) the higher of (a) the prime rate then in effect
plus 50 basis points and (b) the federal funds rate
then in effect plus 100 basis points. The secured term loan
is also secured by our interest in any distributions from these
properties and a pledge of the equity interests in a subsidiary
owning one of these properties. The Company may not prepay the
secured term loan prior to May 31, 2006. The Company
entered into an interest rate swap agreement in connection with
the closing of the credit facilities, which will have the effect
of fixing the interest rate on the secured term loan at 6.4%.
The $100.0 million unsecured term loan facility was fully
repaid with the proceeds from our follow-on common stock
offering (Note 1) and terminated on June 27,
2005. Accordingly, related loan costs of $1.1 million were
fully amortized in the three months ended June 30, 2005. At
December 31, 2005, the Company had $17.0 million in
outstanding borrowings on its unsecured revolving credit
facility and $250.0 million in outstanding borrowings on
its secured term loan.
The terms of the credit agreements include certain restrictions
and covenants, which limit, among other things, the payment of
dividends, and the incurrence of additional indebtedness and
liens. The terms also require compliance with financial ratios
relating to the minimum amounts of net worth, fixed charge
coverage, unsecured debt service coverage, interest coverage,
the maximum amount of secured, variable-rate and recourse
indebtedness, leverage ratio, and certain investment
limitations. The dividend restriction referred to above provides
that, except to enable the Company to continue to qualify as a
REIT for federal income tax purposes, the Company will not for
any fiscal quarter ended on or prior to September 30, 2005
or during any four consecutive quarters thereafter, make
distributions with respect to common stock or other equity
interests in an aggregate amount in excess of 95% of funds from
operations, as defined, for such period, subject to other
adjustments or make distributions in excess of 100% of funds
available for distribution, as defined, for such period, subject
to other adjustments. Management believes that it was in
compliance with the covenants as of December 31, 2005.
68
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, principal payments due for our
consolidated indebtedness (mortgage notes payable, secured term
loan, and unsecured line of credit) were as follows (in
thousands):
|
|
|
|
|
2006
|
|
$ |
5,382 |
|
2007
|
|
|
21,213 |
|
2008
|
|
|
40,985 |
|
2009
|
|
|
4,618 |
|
2010
|
|
|
297,006 |
|
Thereafter
|
|
|
129,143 |
|
|
|
|
|
|
|
$ |
498,347 |
|
|
|
|
|
Earnings per share (EPS) is calculated based on the
weighted number of shares of our common stock outstanding during
the period. The effect of the outstanding Units, vesting of
unvested restricted stock that has been granted or has been
committed to be granted, and the assumed exercise of the stock
warrant, using the treasury method, were dilutive and included
in the calculation of diluted weighted-average shares for the
year ended December 31, 2005 and for the period from
August 11, 2004 through December 31, 2004.
The following table sets forth information related to the
computations of basic and diluted EPS in accordance with
SFAS No. 128, Earnings per Share (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period August 11, | |
|
|
Year Ended | |
|
2004 through | |
|
|
December 31, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
Net income attributable to common shares
|
|
$ |
17,046 |
|
|
$ |
4,782 |
|
|
Minority interests in operating partnership
|
|
|
1,274 |
|
|
|
414 |
|
|
|
|
|
|
|
|
Adjusted net income attributable to common shares
|
|
$ |
18,320 |
|
|
$ |
5,196 |
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,913,103 |
|
|
|
30,965,178 |
|
|
Incremental shares from assumed conversion/exercise:
|
|
|
|
|
|
|
|
|
|
|
Stock warrant
|
|
|
92,488 |
|
|
|
51,681 |
|
|
|
Vesting of restricted stock
|
|
|
215,078 |
|
|
|
90,173 |
|
|
|
Operating partnership units
|
|
|
2,870,526 |
|
|
|
2,660,543 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
42,091,195 |
|
|
|
33,767,575 |
|
|
|
|
|
|
|
|
Earnings per share basic and diluted
|
|
$ |
0.44 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
7. |
Fair Value of Financial Instruments |
SFAS No. 107, Disclosure about Fair Value of
Financial Instruments, requires us to disclose fair value
information about all financial instruments, whether or not
recognized in the balance sheets, for which it is practicable to
estimate fair value. Our disclosures of estimated fair value of
financial instruments at December 31, 2005 and 2004,
respectively, were determined using available market information
and appropriate valuation methods. Considerable judgment is
necessary to interpret market data and develop estimated fair
value. The use of different market assumptions or estimation
methods may have a material effect on the estimated fair value
amounts.
69
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying amounts for cash and cash equivalents, restricted
cash, accounts receivable, accrued straight-line rents, security
deposits, accounts payable and accrued expenses approximate fair
value due to the short-term nature of these instruments.
We calculate the fair value of our mortgage notes payable based
on a currently available market rate assuming the loans are
outstanding through maturity and considering the collateral. In
determining the current market rate for fixed rate debt, a
market spread is added to the quoted yields on federal
government treasury securities with similar maturity dates to
debt.
The fair market value of variable rate debt approximates book
value because the interest rate is based on LIBOR plus a spread,
which approximates a market interest rate. In accordance with
SFAS No. 133, Accounting for Derivative Investment
and Hedging Activities, the carrying value of interest rate
swaps, as well as the underlying hedged liability, if
applicable, are reflected at their fair value. We rely on
quotations from a third party to determine these fair values.
At December 31, 2005, the aggregate fair value of our
mortgage notes payable, unsecured line of credit and secured
term loan was estimated to be $507.5 million compared to
the carrying value of $513.2 million. At December 31,
2004, the aggregate fair value of our mortgage notes payable was
estimated to be $101.2 million compared to the carrying
value of $102.2 million. As of December 31, 2004, the
fair value of the due to affiliates approximated the carrying
value. As of December 31, 2005 and 2004, the fair value of
the debt in the unconsolidated partnership approximated its
carrying value.
The Company has adopted the BioMed Realty Trust, Inc. and BioMed
Realty, L.P. 2004 Incentive Award Plan (the Plan).
The Plan provides for the grant to directors, employees and
consultants of the Company, and the Operating Partnership (and
their respective subsidiaries) of stock options, restricted
stock, stock appreciation rights, dividend equivalents, and
other incentive awards. The Company has reserved
2,500,000 shares of common stock for issuance pursuant to
the Plan, subject to adjustments as set forth in the Plan.
During 2005, the Company granted 129,674 shares of
restricted stock under the Plan. For the year ended
December 31, 2005, $1.3 million of stock-based
compensation expense was recognized in general and
administrative expense related to these grants. Compensation
expense related to the 2005 grants to be recognized in future
periods is $1.5 million at December 31, 2005.
Upon consummation of the Offering, the Company granted
8,000 shares of restricted stock with an aggregate value of
$120,000 to four independent directors of the Board, which
vested one year from the date of grant. After the Offering, the
Company also granted 328,333 shares of restricted stock
with an aggregate value of $4.9 million to certain officers
and key employees pursuant to the Plan. The restricted shares
generally vest in three equal installments on January 1,
2005, January 1, 2006 and January 1, 2007.
Participants are entitled to cash dividends and may vote such
awarded shares, but the sale or transfer of such shares is
limited during the restricted period. Compensation expense for
the portion of these restricted stock grants that vested during
2005 and 2004 of $2.5 million and $872,000, respectively,
has been recognized in general and administrative expense.
Compensation expense related to these grants to be recognized in
future periods is $1.7 million at December 31, 2005.
In accordance with SFAS 123, the Company recorded deferred
compensation of approximately $2.8 million and
$5.1 million during 2005 and 2004, respectively for the
grants described above based upon the market value for these
shares on the dates of the award, and the related compensation
charges are being amortized to expense on a straight-line basis
over the respective service periods.
70
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The year ended December 31, 2005 included a $619,000
increase to general and administrative expense resulting from a
correction to the expensing of restricted stock grants awarded
to the Companys executive officers and other employees at
the time of the Companys initial public offering in August
2004. Of this amount, $823,000 relates to the year ended
December 31, 2004, which was partially offset by a decrease
of $204,000 for the six months ended June 30, 2005. We do
not believe that the correction to this expensing of restricted
stock grants is material to the first and second quarters of
2005 or to our 2004 consolidated financial statements.
|
|
9. |
Investments in Partnerships |
The accompanying consolidated financial statements include an
investment in an unconsolidated entity in which the Company does
not own a controlling interest. As of December 31, 2005 and
2004, we had an investment in McKellar Court, L.P.
(McKellar Court). The acquisition of the investment
in McKellar Court closed on September 30, 2004. McKellar
Court is a variable interest entity as defined in FIN 46;
however, the Company is not the primary beneficiary. The limited
partner is also the only tenant in the property and is to bear a
disproportionate amount of any losses. The Company, as the
general partner, is to receive 21% of the operating cash flows
and 75% of the gains upon sale of the property. We account for
our general partner interest using the equity method.
Significant accounting policies used by the unconsolidated
partnership that owns this property are similar to those used by
the Company. The assets and liabilities of McKellar Court were
$17.1 million and $11.0 million, respectively at
December 31, 2005, and were $17.2 million and
$11.2 million, respectively, at December 31, 2004. The
Companys share of unconsolidated mortgage debt was
$2.3 million at December 31, 2005 and 2004. The
Companys equity in net income (loss) of McKellar Court was
$119,000 and ($11,000) for the years ended December 31,
2005 and 2004, respectively.
The accompanying consolidated financial statements include
investments in two variable interest entities in which the
Company is considered to be the primary beneficiary under
FIN 46. As of December 31, 2005, we had a 90% interest
in the entity that owns the Waples property and a 90% interest
in the entity that will own the Fairview undeveloped land when
acquired. These entities are consolidated in the accompanying
consolidated financial statements. Equity interests in these
partnerships not owned by us are classified as minority interest
on the consolidated balance sheet as of December 31, 2005.
|
|
10. |
Derivative Financial Instruments |
We record all derivatives on the balance sheet at fair value.
The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes
in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk,
are considered fair value hedges. Derivatives used to hedge the
exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow
hedges.
For derivatives designated as fair value hedges, changes in the
fair value of the derivative and the hedged item related to the
hedged risk are recognized in earnings. For derivatives
designated as cash flow hedges, the effective portion of changes
in the fair value of the derivative is initially reported in
other comprehensive income (outside of earnings) and
subsequently reclassified to earnings when the hedged
transaction affects earnings, and the ineffective portion of
changes in the fair value of the derivative is recognized
directly in earnings. The Company assesses the effectiveness of
each hedging relationship by comparing the changes in fair value
or cash flows of the derivative hedging instrument with the
changes in fair value or cash flows of the designated hedged
item or transaction. For derivatives not designated as hedges,
changes in fair value are recognized in earnings.
71
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our objective in using derivatives is to add stability to
interest expense and to manage our exposure to interest rate
movements. To accomplish this objective, we primarily use
interest rate swaps as part of our cash flow hedging strategy.
Interest rate swaps designated as cash flow hedges involve the
receipt of variable-rate amounts in exchange for fixed-rate
payments over the life of the agreements without exchange of the
underlying principal amount. During 2005, one such derivative
has been used to hedge the variable cash flows associated with
existing variable-rate debt. We formally documented the hedging
relationship and account for our interest rate swap agreement as
a cash flow hedge.
As of December 31, 2005, no derivatives were designated as
fair value hedges or hedges of net investments in foreign
operations. Additionally, the Company does not use derivatives
for trading or speculative purposes. As of December 31,
2005, our one interest rate swap had a notional amount of
$250.0 million, whereby we pay a fixed rate of 6.4% and
receive the difference between the fixed rate and the one-month
LIBOR rate plus 225 basis points. This agreement expires on
June 1, 2010, and no initial investment was made to enter
into this agreement. At December 31, 2005, the interest
rate swap agreement had a fair value of $5.9 million which
is included in other assets. The change in net unrealized gains
of $5.9 million in 2005 for derivatives designated as cash
flow hedges is separately disclosed in the consolidated
statement of stockholders equity as accumulated other
comprehensive income. An immaterial amount of hedge
ineffectiveness on our cash flow hedge due to mismatches in
maturity dates of the swap and debt was recognized in other
expense during 2005.
Amounts reported in accumulated other comprehensive income
related to derivatives will be reclassified to interest expense
as interest payments are received on the Companys
variable-rate debt. The change in net unrealized gains/losses on
cash flow hedges reflects recognition of $681,000 of net
realized losses from accumulated other comprehensive income to
interest expense during 2005. During 2006, the Company estimates
that $1.4 million will be recognized as a reduction in
interest expense.
The limited partner in the King of Prussia limited partnership
has a put option that would require the Company to purchase the
limited partners interest in the property beginning
August 21, 2007 through November 11, 2007 for
$1.8 million less any distributions paid to the limited
partner. If the put option is not exercised, then the Company
has a call option beginning in May 11, 2008 through
August 11, 2008 to purchase the limited partners
interest for $1.9 million less any distributions paid to
the limited partner. If the Company does not exercise the
option, then the limited partnership will continue in existence
under the terms of the partnership agreement. The net fair value
of the put and call options was $317,000 and $286,000 at
December 31, 2005 and 2004, respectively, and is recorded
as a net accrued liability included in accounts payable and
accrued expenses on the consolidated balance sheets. In
addition, the Company has recorded net change in fair value of
the put and call options of $31,000 and $20,000 for the year
ended December 31, 2005 and for the period from
August 11, 2004 through December 31, 2004,
respectively, which is recorded as a charge to income on the
consolidated statements of income.
The other member in the Waples limited liability company has a
put option that would require the Company to purchase the
members interest in the property at any time after
completion of the initial tenant improvements at the property.
If the put option is not exercised, then the Company has a call
option to purchase the limited partners interest after the
second anniversary of the limited liability company agreement,
January 25, 2007, but only while the Waples property is
stabilized. If neither option is exercised, then the limited
partnership will continue in existence under the terms of the
partnership agreement. The agreement provides that the put and
call option prices will be based on the fair value of the
project at that time.
The other member in the Fairview limited liability company has a
put option that would require the Company to purchase the
members interest in the property at any time after the
first anniversary and before the fifth anniversary of the
project completion date.
72
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has a call option to purchase the limited
partners interest at any time after the first anniversary
and before the fifth anniversary of the project completion date.
If neither option is exercised, then the limited partnership
will continue in existence under the terms of the partnership
agreement. The agreement provides that the put and call option
prices will be based on an intrinsic value of the project at
that time. At December 31, 2005, the net fair value of the
put and call options were $0 as the Fairview property had not
yet been acquired.
The Companys segments are based on its methods of internal
reporting which generally classifies operations by geographic
area. The Companys segments by geographic area are Boston,
San Francisco, San Diego, Seattle, New York/ New
Jersey, Pennsylvania, Maryland, and University related/other.
The rental operations expenses at the Corporate
segment consists primarily of the corporate level management of
the properties.
Net Operating Income is not a measure of operating results or
cash flows from operating activities as measured by
U.S. generally accepted accounting principles, is not
indicative of cash available to fund cash needs and should not
be considered an alternative to cash flows as a measure of
liquidity. Not all companies calculate Net Operating Income in
the same manner. The Company considers Net Operating Income to
be an appropriate supplemental measure to net income because it
helps both investors and management to understand the core
operations of the Companys properties. Net Operating
Income is derived by deducting rental operations expenses from
total revenues.
The Predecessor operated in one geographic area
San Francisco.
Information by geographic area (dollars in thousands):
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | |
|
|
|
|
|
University | |
|
|
|
|
|
|
|
|
San | |
|
|
|
|
|
and | |
|
|
|
|
|
Related/ | |
|
|
|
|
|
|
Boston | |
|
Francisco | |
|
San Diego | |
|
Seattle | |
|
New Jersey | |
|
Pennsylvania | |
|
Maryland | |
|
Other | |
|
Corporate | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Rental revenues and tenant recoveries
|
|
$ |
39,672 |
|
|
$ |
15,863 |
|
|
$ |
16,183 |
|
|
$ |
8,711 |
|
|
$ |
35,138 |
|
|
$ |
14,826 |
|
|
$ |
4,081 |
|
|
$ |
434 |
|
|
$ |
(26 |
) |
|
$ |
134,882 |
|
Rental operations and real estate tax expenses
|
|
|
9,255 |
|
|
|
2,333 |
|
|
|
3,665 |
|
|
|
1,087 |
|
|
|
24,154 |
|
|
|
6,447 |
|
|
|
401 |
|
|
|
57 |
|
|
|
(1,026 |
) |
|
|
46,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
30,417 |
|
|
|
13,530 |
|
|
|
12,518 |
|
|
|
7,624 |
|
|
|
10,984 |
|
|
|
8,379 |
|
|
|
3,680 |
|
|
|
377 |
|
|
|
1,000 |
|
|
|
88,509 |
|
Equity in net income of unconsolidated partnership
|
|
|
|
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119 |
|
Other income
|
|
|
1 |
|
|
|
3,501 |
|
|
|
463 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
3,974 |
|
Interest income
|
|
|
53 |
|
|
|
140 |
|
|
|
25 |
|
|
|
6 |
|
|
|
18 |
|
|
|
32 |
|
|
|
3 |
|
|
|
1 |
|
|
|
1,055 |
|
|
|
1,333 |
|
Depreciation and amortization
|
|
|
(12,135 |
) |
|
|
(5,937 |
) |
|
|
(6,562 |
) |
|
|
(3,184 |
) |
|
|
(6,458 |
) |
|
|
(4,249 |
) |
|
|
(704 |
) |
|
|
(149 |
) |
|
|
|
|
|
|
(39,378 |
) |
General and administrative
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,274 |
) |
|
|
(13,278 |
) |
Interest expense
|
|
|
(4,135 |
) |
|
|
(1,360 |
) |
|
|
(1,740 |
) |
|
|
(1,348 |
) |
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
(191 |
) |
|
|
(14,342 |
) |
|
|
(23,226 |
) |
Minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
(1,274 |
) |
|
|
(1,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
14,201 |
|
|
$ |
9,874 |
|
|
$ |
4,819 |
|
|
$ |
3,099 |
|
|
$ |
4,544 |
|
|
$ |
4,319 |
|
|
|
2,979 |
|
|
|
38 |
|
|
$ |
(26,827 |
) |
|
$ |
17,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated partnership
|
|
|
|
|
|
|
|
|
|
$ |
2,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
575,492 |
|
|
$ |
211,334 |
|
|
$ |
157,776 |
|
|
$ |
68,332 |
|
|
$ |
107,846 |
|
|
$ |
136,271 |
|
|
$ |
32,024 |
|
|
$ |
26,485 |
|
|
$ |
21,750 |
|
|
$ |
1,337,310 |
|
73
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | |
|
|
|
|
|
University | |
|
|
|
|
|
|
|
|
San | |
|
|
|
|
|
and | |
|
|
|
|
|
Related/ | |
|
|
|
|
|
|
Boston | |
|
Francisco | |
|
San Diego | |
|
Seattle | |
|
New Jersey | |
|
Pennsylvania | |
|
Maryland | |
|
Other | |
|
Corporate | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
% of total revenues
|
|
|
29.4 |
% |
|
|
11.8 |
% |
|
|
12.0 |
% |
|
|
6.5 |
% |
|
|
26.1 |
% |
|
|
11.0 |
% |
|
|
3.0 |
% |
|
|
0.3 |
% |
|
|
(0.1 |
)% |
|
|
100.0 |
% |
% of total rental operations expense
|
|
|
20.0 |
% |
|
|
5.0 |
% |
|
|
7.9 |
% |
|
|
2.3 |
% |
|
|
52.1 |
% |
|
|
13.9 |
% |
|
|
0.9 |
% |
|
|
0.1 |
% |
|
|
(2.2 |
)% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total net operating income
|
|
|
34.4 |
% |
|
|
15.3 |
% |
|
|
14.1 |
% |
|
|
8.6 |
% |
|
|
12.4 |
% |
|
|
9.5 |
% |
|
|
4.2 |
% |
|
|
0.4 |
% |
|
|
1.1 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period from August 11, 2004 through
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | |
|
|
|
|
|
|
|
|
|
|
San | |
|
|
|
|
|
and | |
|
|
|
|
|
|
|
|
|
|
Francisco | |
|
San Diego | |
|
Seattle | |
|
New Jersey | |
|
Pennsylvania | |
|
Maryland | |
|
Corporate | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Rental revenues and tenant recoveries
|
|
$ |
5,165 |
|
|
$ |
4,621 |
|
|
$ |
2,975 |
|
|
$ |
11,167 |
|
|
$ |
4,565 |
|
|
$ |
161 |
|
|
$ |
|
|
|
$ |
28,654 |
|
Rental operations and real estate tax expenses
|
|
|
732 |
|
|
|
820 |
|
|
|
421 |
|
|
|
7,194 |
|
|
|
2,197 |
|
|
|
17 |
|
|
|
238 |
|
|
|
11,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
4,433 |
|
|
|
3,801 |
|
|
|
2,554 |
|
|
|
3,973 |
|
|
|
2,368 |
|
|
|
144 |
|
|
|
(238 |
) |
|
|
17,035 |
|
Equity in net loss of unconsolidated partnership
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Interest income
|
|
|
2 |
|
|
|
16 |
|
|
|
6 |
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
149 |
|
|
|
190 |
|
Depreciation and amortization
|
|
|
(1,326 |
) |
|
|
(1,689 |
) |
|
|
(1,193 |
) |
|
|
(2,279 |
) |
|
|
(1,337 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
(7,853 |
) |
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,130 |
) |
|
|
(3,130 |
) |
Interest expense
|
|
|
(269 |
) |
|
|
(200 |
) |
|
|
(301 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
(367 |
) |
|
|
(1,180 |
) |
Minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
|
|
|
|
(414 |
) |
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,840 |
|
|
$ |
1,917 |
|
|
$ |
1,066 |
|
|
$ |
1,710 |
|
|
$ |
1,134 |
|
|
|
115 |
|
|
$ |
(4,000 |
) |
|
$ |
4,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated partnership
|
|
|
|
|
|
$ |
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
131,852 |
|
|
$ |
129,908 |
|
|
$ |
70,630 |
|
|
$ |
101,794 |
|
|
$ |
93,358 |
|
|
$ |
31,833 |
|
|
$ |
22,348 |
|
|
$ |
581,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York | |
|
|
|
|
|
|
|
|
|
|
San | |
|
|
|
|
|
and | |
|
|
|
|
|
|
|
|
|
|
Francisco | |
|
San Diego | |
|
Seattle | |
|
New Jersey | |
|
Pennsylvania | |
|
Maryland | |
|
Corporate | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
% of total revenues
|
|
|
18.0 |
% |
|
|
16.1 |
% |
|
|
10.4 |
% |
|
|
39.0 |
% |
|
|
15.9 |
% |
|
|
0.6 |
% |
|
|
0.0 |
% |
|
|
100.0 |
% |
% of total rental operations expense
|
|
|
6.3 |
% |
|
|
7.1 |
% |
|
|
3.6 |
% |
|
|
61.9 |
% |
|
|
18.9 |
% |
|
|
0.1 |
% |
|
|
2.1 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total net operating income
|
|
|
26.0 |
% |
|
|
22.3 |
% |
|
|
15.0 |
% |
|
|
23.3 |
% |
|
|
13.9 |
% |
|
|
0.8 |
% |
|
|
(1.3 |
)% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total future minimum lease receipts under noncancelable
operating tenant leases in effect at December 31, 2005 were
as follows (in thousands):
|
|
|
|
|
2006
|
|
$ |
114,148 |
|
2007
|
|
|
112,051 |
|
2008
|
|
|
100,824 |
|
2009
|
|
|
98,421 |
|
2010
|
|
|
81,650 |
|
Thereafter
|
|
|
431,698 |
|
|
|
|
|
|
|
$ |
938,792 |
|
|
|
|
|
The geographic concentration of future minimum lease receipts
under noncancelable operating tenant leases in effect at
December 31, 2005 to be received was as follows (in
thousands):
|
|
|
|
|
Location |
|
|
|
|
|
Boston
|
|
$ |
480,027 |
|
San Francisco
|
|
|
134,962 |
|
San Diego
|
|
|
91,155 |
|
Seattle
|
|
|
30,787 |
|
New York/ New Jersey
|
|
|
54,264 |
|
Pennsylvania
|
|
|
60,371 |
|
Maryland
|
|
|
46,088 |
|
University Related/ Other
|
|
|
41,138 |
|
|
|
|
|
|
|
$ |
938,792 |
|
|
|
|
|
|
|
13. |
Commitments and Contingencies |
The Company has a leasehold interest in the Landmark at Eastview
property through a
99-year ground lease.
Following the sellers completion of certain property
subdivisions, the ground lease will terminate and a fee simple
interest in the property will be transferred to the Company for
no additional consideration. Under the terms of the ground
lease, the Company has established an escrow deposit to be used
by the seller to complete certain improvements required in
connection with completing the property subdivisions. The amount
is included in other assets on the consolidated balance sheets
and had remaining balances of $788,000 and $1.25 million as
of December 31, 2005, and December 31, 2004,
respectively.
75
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have a ground lease obligation on the Colorow Drive property
expiring December 2043. The minimum commitment under this lease
as of December 31, 2005 was as follows (in thousands):
|
|
|
|
|
2006
|
|
$ |
185 |
|
2007
|
|
|
185 |
|
2008
|
|
|
187 |
|
2009
|
|
|
214 |
|
2010
|
|
|
214 |
|
Thereafter
|
|
|
11,758 |
|
|
|
|
|
|
|
$ |
12,743 |
|
|
|
|
|
|
|
|
Concentration of Credit Risk |
Life science entities comprise the vast majority of the
Companys tenant base. Because of the dependence on a
single industry, adverse conditions affecting that industry will
more adversely affect our business. Two of our tenants, Vertex
Pharmaceuticals and Genzyme Corporation, comprised 15.8% and
10.5%, or $14.7 million and $9.7 million,
respectively, of rental revenues for the year ended
December 31, 2005. These tenants are located in our Boston
market. Two of our tenants, Centocor, Inc. (a Johnson &
Johnson subsidiary) and Nektar Therapeutics comprised 13.0% and
11.5%, or $2.5 million and $2.2 million, respectively,
of rental revenues for the period from August 11, 2004 to
December 31, 2004. These tenants are located in our
Pennsylvania and San Francisco markets. The inability of
these tenants to make lease payments could materially adversely
affect our business.
We generally do not require collateral or other security from
our tenants, other than security deposits or letters of credit.
As of December 31, 2005, we had approximately
$35.5 million outstanding in capital commitments related to
tenant improvements, renovation costs and general
property-related capital expenditures, with approximately
$32.8 million expected to be paid in 2006 and the remaining
amount, approximately $2.7 million, expected to be paid in
2007.
The Company carries insurance coverage on its properties of
types and in amounts that it believes are in line with coverage
customarily obtained by owners of similar properties. However,
certain types of losses (such as from earthquakes and floods)
may be either uninsurable or not economically insurable.
Further, certain of the properties are located in areas that are
subject to earthquake activity and floods. Should a property
sustain damage as a result of an earthquake or flood, the
Company may incur losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should an
uninsured loss occur, the Company could lose some or all of its
capital investment, cash flow and anticipated profits related to
one or more properties.
The Company follows a policy of monitoring its properties for
the presence of hazardous or toxic substances. The Company is
not aware of any environmental liability with respect to the
properties that would have a material adverse effect on the
Companys business, assets or results of operations. There
can be no assurance that such a material environmental liability
does not exist. The existence of any such material
76
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
environmental liability could have an adverse effect on the
Companys results of operations and cash flow. The Company
carries environmental remediation insurance for its properties.
This insurance, subject to certain exclusions and deductibles,
covers the cost to remediate environmental damage caused by
future spills or the historic presence of previously
undiscovered hazardous substances.
|
|
|
Tax Indemnification Agreements and Minimum Debt
Requirements |
As a result of the contribution of properties to the Operating
Partnership, the Company has indemnified the contributors of the
properties against adverse tax consequences if it directly or
indirectly sells, exchanges or otherwise disposes of the
properties in a taxable transaction before the tenth anniversary
of the completion of the Offering. The Company also has agreed
to use its reasonable best efforts to maintain at least
$8.0 million of debt, some of which must be property
specific, for a period of ten years following the date of the
Offering to enable certain contributors to guarantee the debt in
order to defer potential taxable gain they may incur if the
Operating Partnership repays the existing debt.
|
|
14. |
Property Acquisitions |
We acquired the following properties during the year ended
December 31, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Leasing | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Above | |
|
| |
|
Below | |
|
Mortgage | |
|
Mortgage | |
|
|
|
|
Acquisition | |
|
Investment in | |
|
Market | |
|
In-Place | |
|
Management | |
|
Market | |
|
Note | |
|
Note | |
|
Total Cash | |
Property |
|
Date | |
|
Real Estate | |
|
Lease | |
|
Lease | |
|
Fee | |
|
Lease | |
|
Assumed | |
|
Premium | |
|
Consideration | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Albany Street
|
|
|
5/31/2005 |
|
|
$ |
33,235 |
|
|
$ |
620 |
|
|
$ |
4,232 |
|
|
$ |
363 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38,450 |
|
Bridgeview Technology Park II
|
|
|
3/16/2005 |
|
|
|
14,588 |
|
|
|
|
|
|
|
2,166 |
|
|
|
242 |
|
|
|
(778 |
) |
|
|
|
|
|
|
|
|
|
|
16,218 |
|
Colorow Drive
|
|
|
12/22/2005 |
|
|
|
19,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,369 |
|
Coolidge Avenue
|
|
|
4/5/2005 |
|
|
|
9,862 |
|
|
|
|
|
|
|
977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,839 |
|
Dumbarton Circle
|
|
|
5/27/2005 |
|
|
|
7,819 |
|
|
|
|
|
|
|
1,012 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,958 |
|
Eccles Avenue
|
|
|
12/1/2005 |
|
|
|
21,856 |
|
|
|
1,826 |
|
|
|
2,235 |
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,032 |
|
21 Erie Street
|
|
|
5/31/2005 |
|
|
|
21,738 |
|
|
|
|
|
|
|
1,301 |
|
|
|
264 |
|
|
|
(1,170 |
) |
|
|
|
|
|
|
|
|
|
|
22,133 |
|
40 Erie Street
|
|
|
5/31/2005 |
|
|
|
41,371 |
|
|
|
|
|
|
|
5,441 |
|
|
|
289 |
|
|
|
|
|
|
|
(20,192 |
) |
|
|
1,338 |
|
|
|
28,247 |
|
Faraday Avenue
|
|
|
9/19/2005 |
|
|
|
8,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,560 |
|
Fresh Pond Research Park
|
|
|
4/5/2005 |
|
|
|
21,822 |
|
|
|
|
|
|
|
1,617 |
|
|
|
|
|
|
|
(2,637 |
) |
|
|
|
|
|
|
|
|
|
|
20,802 |
|
George Patterson Boulevard
|
|
|
10/28/2005 |
|
|
|
13,001 |
|
|
|
|
|
|
|
1,976 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,188 |
|
Graphics Drive
|
|
|
3/17/2005 |
|
|
|
7,377 |
|
|
|
|
|
|
|
400 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,787 |
|
Kaiser Drive
|
|
|
8/25/2005 |
|
|
|
9,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,523 |
|
Kendall Square D
|
|
|
5/31/2005 |
|
|
|
169,880 |
|
|
|
|
|
|
|
28,072 |
|
|
|
|
|
|
|
|
|
|
|
(73,189 |
) |
|
|
5,520 |
|
|
|
130,283 |
|
Lucent Drive
|
|
|
5/31/2005 |
|
|
|
6,153 |
|
|
|
|
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
(6,014 |
) |
|
|
|
|
|
|
1,134 |
|
Nancy Ridge Drive
|
|
|
4/21/2005 |
|
|
|
12,407 |
|
|
|
|
|
|
|
1,158 |
|
|
|
95 |
|
|
|
|
|
|
|
(7,001 |
) |
|
|
768 |
|
|
|
7,427 |
|
Phoenixville Pike
|
|
|
4/5/2005 |
|
|
|
12,083 |
|
|
|
|
|
|
|
1,121 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,247 |
|
Sidney Street
|
|
|
5/31/2005 |
|
|
|
58,068 |
|
|
|
|
|
|
|
10,031 |
|
|
|
644 |
|
|
|
(14,032 |
) |
|
|
(31,809 |
) |
|
|
3,686 |
|
|
|
26,588 |
|
1000 Uniqema Boulevard
|
|
|
9/30/2005 |
|
|
|
14,568 |
|
|
|
|
|
|
|
1,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,303 |
|
Vassar Street
|
|
|
5/31/2005 |
|
|
|
15,881 |
|
|
|
|
|
|
|
2,434 |
|
|
|
163 |
|
|
|
(621 |
) |
|
|
|
|
|
|
|
|
|
|
17,857 |
|
Waples Street
|
|
|
3/1/2005 |
|
|
|
5,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,377 |
|
Kendall Square A
|
|
|
5/31/2005 |
|
|
|
126,104 |
|
|
|
|
|
|
|
24,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
650,642 |
|
|
$ |
2,446 |
|
|
$ |
91,649 |
|
|
$ |
2,566 |
|
|
$ |
(19,238 |
) |
|
$ |
(138,205 |
) |
|
$ |
11,312 |
|
|
$ |
601,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average intangible amortization life (in months)
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
122 |
|
|
|
85 |
|
|
|
70 |
|
|
|
|
|
|
|
118 |
|
|
|
|
|
77
BIOMED REALTY TRUST, INC. AND
INHALE 201 INDUSTRIAL ROAD, L.P. (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We acquired the following properties during the year ended
December 31, 2004 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Leasing | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs | |
|
|
|
|
|
|
|
|
|
|
|
|
Investment | |
|
Above | |
|
| |
|
Below | |
|
Mortgage | |
|
Mortgage | |
|
|
|
|
Acquisition | |
|
in Real | |
|
Market | |
|
In-Place | |
|
Management | |
|
Market | |
|
Note | |
|
Note | |
|
Total Cash | |
Property |
|
Date | |
|
Estate | |
|
Lease | |
|
Lease | |
|
Fee | |
|
Lease | |
|
Assumed | |
|
Premium | |
|
Consideration(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ardentech Court
|
|
|
11/18/2004 |
|
|
$ |
8,114 |
|
|
$ |
|
|
|
$ |
3,556 |
|
|
$ |
116 |
|
|
$ |
(600 |
) |
|
$ |
(4,835 |
) |
|
$ |
622 |
|
|
$ |
6,973 |
|
Balboa Avenue(1)
|
|
|
8/13/2004 |
|
|
|
10,809 |
|
|
|
|
|
|
|
1,026 |
|
|
|
65 |
|
|
|
(317 |
) |
|
|
|
|
|
|
|
|
|
|
11,583 |
|
Bayshore Boulevard
|
|
|
8/17/2004 |
|
|
|
26,798 |
|
|
|
6,047 |
|
|
&n |