Flaherty calls the Slough portfolio "pure gold" for its state-of-the-art construction of existing buildings, location in high-demand markets, development opportunities and high occupancy levels. He says 80% of the portfolio consists of buildings that are either stabilized or in lease-up, with those properties showing an 82% occupancy level, projected to advance to 89% by next year. The deal had a 6.3% cap rate based on 2008 net operating income, with the latter forecast to grow 14% a year through 2010.

The projections, Flaherty emphasizes, take into account only existing buildings, including two uncompleted build-to-suits that are fully pre-leased. He says additional income increases are possible from potential turnover on 17% of existing space leased at below-market rents; but he terms such increases "gravy," stressing they were not factored into official calculations. He says once existing buildings reach stabilization in 2010, their NOI is projected to continue growing at 3% to 5% per year. According to the HCPI exec, returns from the Slough portfolio will be 125 to 150 basis points higher than returns from senior residences and 75 basis points above those from medical office buildings.

Market data indicate the San Diego and San Francisco life science markets are currently very strong. Gary London, president of London Group Realty Advisors Inc. in San Diego, tells IPJ life science vacancies in his market are running approximately 2% to 3% compared to about 7% for industrial in general. He also mentions that the city's Torrey Pines area, the heart of the region's life science cluster, sports an unusually high level of amenities and is surrounded by some the most expensive residential real estate in the nation. R. Randolph Scott, executive vice president and partner in the Palo Alto, CA office of Cornish & Carey Commercial, estimates vacancies in the San Francisco area biotech market at about 5% and falling, with rents averaging about $60 a sf annually.

HCPI does not intend to limit life science growth to the above markets. While Flaherty acknowledges the portfolio purchase "immediately established critical mass in California's two premier bioscience markets," he says the company plans to acquire and develop space in other biotech clusters as well, with Boston a particular target. A recent report from Boston brokerage Richards Barry Joyce & Partners reveals laboratory rents in the East Cambridge, MA submarket exceed downtown Boston office rents, pushing developers to convert office space to labs to meet demand. According to the report, the vacancy rate for life science space in Boston proper has dropped to 1.5%. But biotech is strong elsewhere as well. A report from Industrial Info Resources of Sugar Land, TX shows $1 billion of biopharma construction starts for June alone.

The Slough transaction was achieved with a fully committed $3-billion bridge facility, which Flaherty says the company intends to quickly reduce through disposition and joint ventures. He notes the dispositions are not likely to include any of the Slough properties but did not rule out seeking joint venture partners for the Slough buildings and development projects. He also says HCPI has no other outstanding credit. In regard to development, the REIT plans to keep most of the Slough USA staff and appointed Slough Estates USA president and CEO Marshall Lees executive vice president of HCPI's newly formed life science group.