Mission West Holding Onto Microsoft

CUPERTINO, CA-Locally headquartered Mission West Properties revealed this week that the largest tenant in its portfolio, Microsoft Corp., will be singing a long-term lease renewal by the end of the week. Redmond, WA-based Microsoft leases 515,700 sf in a five-building complex at 1065 La Avenida St. in Mountain View. The company paid more than $21 million in rent in 2003, which accounted for more than 16% of Mission West’s rental income.The renewal, which begins in 10 days, runs for 116 months (9.6 years) and represents a substantial discount to the rent paid during its original term. For the first year, the Microsoft’s rent will be between $1.60 and $1.65 per sf plus expenses. After the first year, Microsoft will reduce its square footage to 422,422 sf and its rent will rise to $2.18 per sf plus expenses. In year four, Microsoft will be able to shave another 100,000 sf from its lease obligation or add back the 100,000 it is giving back after the first year. In year seven (2011), Microsoft can cancel the entire lease “with a significant payment to Mission West,” Mission West chief executive Carl Berg told analysts during a conference call this week. Mission West owns approximately 109 properties totaling about 7.9 million sf. Vacancy in the company’s portfolio is currently about 27%. By the end of 2005, that percentage is expected to reach 33.7% if no new leases are signed or existing leases renewed. “2005 is a very bad year for renewals,” said Berg. “Many of our buildings are leased but not occupied” and the leases on those are not expected to be renewed.As a result, the company’s estimated FFO for 2005 is $0.79 to $0.80 per share, down from the $0.99 to $1.00 estimated for 2004. The estimated FFO for 2005 does not include several expected property sales that, if no exchange properties can be found, would have to be handed back to shareholders in the form of a special dividend. Mission West is shopping four buildings for which it expects to generate $69.7 million in gross sales proceeds, said Berg.