Occupancy, Rents Decline for Mission West

CUPERTINO, CA-There was little good news revealed during a mid-year conference call held Thursday by Mission West Properties, a locally based R&D REIT whose 110 properties (7.9 million sf) are concentrated here in the Silicon Valley. Principal accounting office Wayne Pham told analysts that occupancy fell slightly to 63% in the second quarter compared to 2005 while rental revenue declined 11.1%. Same-store NOI was down 10.7% and operating expenses rose 4.4%, he said.

The 37% vacancy rate in Mission West’s portfolio is well above average in the Silicon Valley. Citing preliminary second quarter numbers from CPS/Corfac International, company president Ray Marino said the R&D vacancy rate in the Silicon Valley stands at 21%.

Through the first six months of 2006, Mission West’s occupancy is down 11.7% and rental revenue is down 9.2% compared to 2005, Pham said. Company chairman Carl Berg predicted the company’s occupancy will be down to 61% by the end of 2007.

“We continue to work very diligently on all of our (lease) renewals and most of our tenants continue to need less space than they currently have with us,” said president Ray Marino. In addition, its new and renewal tenants are paying significantly less than its other tenants.

The company landed six new tenants and inked one renewal lease during the second quarter, Marino said. The new leases totaled 147,000 sf and the renewal lease totaled 120,000 sf. The weighted average base rental rate on the leases was approximately $1.02. By comparison, the average weighted rental rate of its existing tenants is closer to $1.60 per sf.

The company made one acquisition during the quarter, paying $2.61 million for a 42,100-sf building on a long-term ground lease at 1875 Charlston Rd. in Mountain View, CA. The first year cash return for this acquisition is 17%. The seller was an entity controlled by Berg; the transaction was completed in accordance with the Berg Land Holdings Option Agreement.

Upcoming dispositions will include 2033-2243 Samaritan Dr. in San Jose, a three-building 235,122-sf property that is about 20% leased, according to the company’s latest annual report. Berg says the property will sell later this year, possibly in September, for $43 million.

“We had a lawsuit on that (property), we won, they appealed, we believe just to keep from paying legal fees,” he said. “It will close sometime this year without a problem.”

Looking further out, McCandless Technology Park, the company’s 14-building, 706,000-sf development in Milpitas, CA, that is about 50% leased, is expected to sell in early 2008 for $90 million, Berg said.

Mission West’s Funds From Operations for the quarter was $16.95 million, or $0.16 per diluted common share, compared to $21.14 million, or $0.20 per diluted common share for the same 2005 period. Through the first half of 2006, FFO was $51.48 million, or $0.49 per diluted share, compared to $41.44 million, or $0.40 per diluted share in the first half of 2005, thanks in part to a significant amount of termination fees and security deposit forfeitures from lease terminations.