BioMed Realty Trust, Inc.
Table of Contents

 
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, 2007
 
Commission file number: 1-32261
 
 
(BIOMED REALTY TRUST INC. LOGO)
 
BIOMED REALTY TRUST, INC.
(Exact name of registrant as specified in its charter)
 
     
Maryland
  20-1142292
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
17190 Bernardo Center Drive
  92128
San Diego, California   (Zip Code)
(Address of Principal Executive Offices)    
 
(858) 485-9840
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, $0.01 Par Value   New York Stock Exchange
7.375% Series A Cumulative Redeemable Preferred Stock, $0.01 Par Value   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 registrant’s 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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
                                                   (Do not check if a smaller reporting company)
 
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 65,153,088 shares of common stock held by non-affiliates of the registrant was $1,636,645,571 based upon the last reported sale price of $25.12 per share on the New York Stock Exchange on June 29, 2007, the last business day of its most recently completed second quarter.
 
The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of February 28, 2008 was 65,592,685.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement with respect to its May 21, 2008 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s 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, 2007
 

TABLE OF CONTENTS
 
                 
        Page
 
      Business     2  
      Risk Factors     8  
      Unresolved Staff Comments     25  
      Properties     25  
      Legal Proceedings     29  
      Submission of Matters to a Vote of Security Holders     29  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     30  
      Selected Financial Data     30  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     32  
      Quantitative and Qualitative Disclosures About Market Risk     50  
      Financial Statements and Supplementary Data     52  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     92  
      Controls and Procedures     92  
      Other Information     93  
 
PART III
      Directors, Executive Officers and Corporate Governance     93  
      Executive Compensation     93  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     93  
      Certain Relationships and Related Transactions, and Director Independence     93  
      Principal Accountant Fees and Services     94  
 
PART IV
      Exhibits and Financial Statement Schedules     94  
 EXHIBIT 12.1
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1


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PART I
 
Item 1.   Business
 
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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). 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:
 
  •  adverse economic or real estate developments in the life science industry or in our target markets,
 
  •  general economic conditions,
 
  •  our ability to compete effectively,
 
  •  defaults on or non-renewal of leases by tenants,
 
  •  increased interest rates and operating costs,
 
  •  our failure to obtain necessary outside financing,
 
  •  our ability to successfully complete real estate acquisitions, developments and dispositions,
 
  •  risks and uncertainties affecting property development and construction,
 
  •  our failure to successfully operate acquired properties and operations,
 
  •  our failure to maintain our status as a real estate investment trust, or REIT,
 
  •  government approvals, actions and initiatives, including the need for compliance with environmental requirements,
 
  •  financial market fluctuations, and
 
  •  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 institutions, government


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agencies and other entities involved in the life science industry. Our properties 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 incorporated in Maryland on April 30, 2004 and commenced operations on August 11, 2004, after completing our initial public offering. As of December 31, 2007, we owned or had interests in 67 properties, consisting of 103 buildings with approximately 8.5 million rentable square feet of laboratory and office space. Our operating portfolio, comprising approximately 6.6 million rentable square feet, was 93.8% leased to 112 tenants, not including approximately 1.8 million square feet that was available for redevelopment. In addition, we have properties with approximately 1.9 million rentable square feet under construction and undeveloped land that we estimate can support up to an additional 1.3 million 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 property management, leasing, development and administrative services to our properties. As of February 28, 2008, we had 113 employees.
 
Our principal offices are located at 17190 Bernardo Center Drive, 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.
 
2007 Highlights
 
During 2007, we executed 53 leasing transactions representing approximately 1.5 million square feet, including 40 new leases totaling approximately 661,000 square feet and 13 leases amended to extend their terms and totaling approximately 839,000 square feet. On January 26, 2007, we signed a new, long-term lease and amended an existing lease with Illumina, Inc. for approximately 193,000 square feet of office and laboratory space at our Towne Centre Drive property in San Diego, California. Under the new lease, Illumina will expand into a new 84,000 square foot building being constructed at the property. Once completed and occupied, Illumina will lease the new building for a 15-year term. In addition, Illumina extended its lease for the 109,270 square feet it currently occupies at Towne Centre Drive by nine years to 2023 to correspond with the new 15-year lease on the building being constructed. On November 16, 2007, we signed a new, six-year lease and amended an existing lease with Centocor, Inc. (a subsidiary of Johnson & Johnson) for approximately 374,000 square feet at our King of Prussia property in Pennsylvania. Under the new lease, Centocor will expand into an additional 43,000 square feet at the property. In addition, Centocor extended its lease for the 331,000 square feet it currently occupies by four years, to 2014, to correspond with the new six-year lease.
 
On January 18, 2007, we completed the issuance of 9,200,000 shares, including the exercise of an over-allotment option of 1,200,000 shares, of 7.375% Series A cumulative redeemable preferred stock at $25.00 per share, resulting in net proceeds of approximately $222.4 million.
 
On April 2, 2007, we promoted Karen A. Sztraicher to the position of Vice President, Finance and Treasurer and appointed Greg Lubushkin to serve as Vice President — Chief Accounting Officer.
 
On April 4, 2007, we formed two limited liability companies with Prudential Real Estate Investors (“PREI”), which we refer to as PREI I LLC and PREI II LLC. PREI I LLC and PREI II LLC subsequently acquired a portfolio of stabilized and development properties totaling approximately 470,000 rentable square feet, primarily located in Cambridge, Massachusetts, with a development parcel in Houston, Texas, and a laboratory/office building and leasehold interests in surrounding properties in New Haven, Connecticut, for a purchase price of approximately $506.7 million, excluding closing costs. The acquired properties also included an operating garage facility with 503 spaces, an operating below grade garage facility with approximately 1,400 spaces, and an additional below grade


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garage facility at one of the buildings under construction that we estimate can support up to 560 spaces upon completion.
 
On August 1, 2007, we amended our unsecured revolving line of credit, increasing the borrowing capacity from $500.0 million to $600.0 million, reducing the interest rate, and extending the maturity date to August 1, 2011. We may increase the borrowing capacity to $1.0 billion subject to certain conditions. In addition, we may extend the maturity date of the unsecured line of credit to August 1, 2012 after satisfying certain conditions and paying an extension fee based on the then current facility commitment. Also, on August 1, 2007, we amended our secured term loan, reducing the interest rate and extending the maturity date to August 1, 2012.
 
On December 12, 2007, we appointed Richard Gilchrist to our board of directors. Mr. Gilchrist is the President of the Investment Properties Group for The Irvine Company, a privately-held real estate investment company.
 
During 2007, including our investments in limited liability companies with PREI, we acquired 14 properties, consisting of 1.0 million rentable square feet of laboratory and office space, as well as approximately 700,000 rentable square feet under construction and undeveloped land, for an aggregate purchase price of approximately $653.8 million, excluding closing costs. Also during 2007, we disposed of four non-core properties representing 378,000 rentable square feet, including one undeveloped land parcel, for approximately $60.6 million, excluding closing costs.
 
In addition to our investments with PREI, we acquired the following properties during the year ended December 31, 2007 (dollars in thousands):
 
                     
        Rentable
       
Property
  Acquisition Date   Square Feet     Purchase Price  
 
Torreyana Road
  March 22, 2007     81,204     $ 33,000  
6114-6154 Nancy Ridge Drive
  May 2, 2007     112,000       50,100  
9920 Belward Campus Drive
  May 8, 2007     51,181       15,000  
Pacific Center Boulevard
  August 24, 2007     66,745       16,500  
Forbes Boulevard
  September 5, 2007     237,984       32,500  
                     
          549,114     $ 147,100  
                     
 
During 2007, we declared aggregate dividends on our common stock of $1.24 per common share and aggregate dividends on our preferred stock of $1.83352 per preferred share.
 
Subsequent Events
 
On February 13, 2008, a wholly owned entity of PREI I LLC entered into a secured construction loan facility with Wachovia Bank, National Association and certain other lenders to provide borrowings of up to approximately $245.0 million in connection with the construction of 650 East Kendall Street (Kendall B), a life sciences building located in Cambridge, Massachusetts. Proceeds from the secured construction loan were used in part to repay a portion of the secured acquisition and interim loan facility held by the PREI limited liability companies and will also be used to fund the balance of the anticipated cost to complete construction of the project. In addition, on February 19, 2008, the PREI limited liability companies extended the term of the secured acquisition and interim loan facility by one year to April 3, 2009, with no additional changes to the pricing or terms of the facility.
 
Growth Strategy
 
Our success and future growth potential are 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 large and fast growing industry.
 
Our internal growth strategy includes:
 
  •  negotiating leases with contractual rental rate increases in order to provide predictable and consistent earnings growth,


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  •  creating strong relationships with our tenants to enable us to identify and capitalize on opportunities to renew or extend existing leases or to provide expansion space,
 
  •  redeveloping currently owned non-laboratory space into higher yielding laboratory facilities, and
 
  •  developing new laboratory and office space on land we have acquired for development.
 
Our external growth strategy includes:
 
  •  acquiring well-located properties leased to high-quality life science tenants with attractive in-place yields and long-term growth potential,
 
  •  investing in properties with leasing opportunities, capitalizing on our industry relationships to enter into new leases, and
 
  •  investing in redevelopment and development projects, capitalizing on our development platform that we believe will serve as an additional catalyst for future growth.
 
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, 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, personnel and capital 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 Industry Trends
 
We expect continued growth in the life science industry due to several factors:
 
  •  the aging of the U.S. population resulting from the transition of baby boomers to senior citizens, which has increased the demand for new drugs and health care treatment alternatives,
 
  •  the existing high level of, and continuing increase in, research and development expenditures, as represented by a Pharmaceutical Research and Manufacturers of America (PhRMA) survey indicating that research and development spending by its members climbed to a record $43.0 billion in 2006 from $39.9 billion in the prior year, and when combined with non-member companies, totaled a record $55.2 billion in 2006, and
 
  •  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 through the demand for space for research, development and production by our life science industry tenants.
 
Experienced Management
 
We have created and continue to develop a premier 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 $4.0 billion in life science real estate. Through this experience, our management team has established extensive industry relationships among life science 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
 
General
 
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.
 
Environmental Matters
 
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 remediate releases or threats of releases of hazardous or toxic substances or petroleum products at such property, and may be held liable for property damage, personal injury damages and 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 in that property.
 
Federal asbestos regulations and certain state laws and regulations require building owners and those exercising control over a building’s management to identify and warn, via signs, labels or other notices, of potential hazards posed by the actual or potential presence of asbestos-containing materials, or 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 building’s 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 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 environmental laws and regulations also require removing or upgrading certain underground storage tanks and regulate the discharge of storm water, wastewater and other 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


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coverage. Licensing requirements governing use of radioactive materials by tenants may also restrict the use of or ability to transfer space in buildings we own. 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 tenant’s 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 tenant’s operations, it is possible that we, as the owner of the property, could be held accountable by governmental authorities (or other injured parties) for such violation and could be required to correct the violation and pay related fines. In certain situations, we have agreed to indemnify tenants for conditions preceding their lease term, or that do not result from their operations.
 
Prior to closing any property acquisition, we obtain environmental assessments in a manner we believe prudent in order to attempt to identify potential environmental 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 property’s 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 indicate possible contamination or where our consultants recommend such procedures.
 
While we may purchase our properties on an “as is” basis, most 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 general liability, fire and extended coverage, terrorism and loss of rental income insurance covering all of our properties under a blanket portfolio policy, with the exception of property insurance on our McKellar Court, Science Center Drive, 9911 Belward Campus Drive and Shady Grove Road locations, which is carried directly by the tenants in accordance with the terms of their respective leases, and builders’ risk policies for any projects under construction. In addition, we carry workers’ compensation coverage for injury to our employees. We believe the policy specifications and insured limits are adequate given the relative risk of loss, cost of the coverage and standard 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, as well as third-party bodily injury and property damage claims related to the release of hazardous substances. We intend to carry similar insurance with respect to future acquisitions as appropriate. A substantial portion of our properties are located in areas subject to earthquake loss, such as San Diego and San Francisco, California and Seattle, Washington. Although we presently carry earthquake insurance on our properties, the amount of earthquake insurance coverage we 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 the 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 —


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Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders” under Item 1A. below.
 
Competition
 
We face competition from various entities for investment opportunities in properties for life science tenants, including other REITs, such as health care REITs and suburban office property REITs, pension funds, insurance companies, investment funds and companies, partnerships, and developers. 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:
 
  •  our expertise in understanding the real estate needs of life science industry tenants,
 
  •  our ability to identify, acquire and develop properties with generic laboratory infrastructure that appeal to a wide range of life science industry tenants, and
 
  •  our expertise in identifying and evaluating life science industry tenants.
 
However, some 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.
 
Item 1A.   Risk Factors
 
For purposes of this section, the term “stockholders” means the holders of shares of our common stock and our preferred stock.
 
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, 2007, we had 117 tenants in 67 total properties. Two of our tenants, Human Genome Sciences and Vertex Pharmaceuticals, represented 20.3% and 13.1%, respectively, of our annualized base rent as of December 31, 2007, and 10.9% and 8.1%, 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.
 
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.


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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:
 
  •  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,
 
  •  we may be unable to obtain financing on favorable terms (or at all),
 
  •  we may spend more time or money than we budget to improve or renovate acquired properties or to develop new properties,
 
  •  we may be unable to quickly and efficiently integrate new properties, particularly if we acquire portfolios of properties, into our existing operations,
 
  •  we may fail to obtain the financial results expected from the properties we acquire or develop, making them unprofitable or less profitable than we had expected,
 
  •  market and economic conditions may result in higher than expected vacancy rates and lower than expected rental rates,
 
  •  we may fail to retain tenants that have pre-leased our properties under development if we do not complete the construction of these properties in a timely manner or to the tenants’ specifications,
 
  •  we have a limited history in conducting ground-up construction activities,
 
  •  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,
 
  •  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
 
  •  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.
 
As of December 31, 2007, five of the properties we owned or had interests in were under development, constituting approximately 1.9 million square feet. As a result of these projects, we may face increased risk with respect to our development activities.
 
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 securities, ability to satisfy our debt service obligations and ability to pay 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:
 
  •  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, public markets or other sources of funding are unavailable to support such development, a tenant’s 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 tenant’s entire business and its ability to pay rent.
 
  •  Our tenants with marketable products may be adversely affected by health care reform efforts and the reimbursement policies of government or private health care payers.
 
  •  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.
 
  •  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.
 
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:
 
  •  reinforced concrete floors,
 
  •  upgraded roof structures for greater load capacity,
 
  •  increased floor-to-ceiling clear heights,
 
  •  heavy-duty HVAC systems,
 
  •  enhanced environmental control technology,
 
  •  significantly upgraded electrical, gas and plumbing infrastructure, and
 
  •  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 tenant’s 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.


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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 consolidated properties in Boston, Maryland and California makes our business particularly vulnerable to adverse conditions affecting these markets.
 
Twelve of our properties are located in the Boston area. As of December 31, 2007, these properties represented 24.6% of our annualized base rent and 15.4% of our total rentable square footage. Five of our properties are located in Maryland. As of December 31, 2007, these properties represented 22.3% of our annualized base rent and 13.5% of our total rentable square footage. In addition, 26 of our properties are located in California, with 15 in San Diego and eleven in San Francisco. As of December 31, 2007, these properties represented 24.7% of our annualized base rent and 42.6% of our total rentable square footage. Because of this concentration in three geographic regions, we are particularly vulnerable to adverse conditions affecting Boston, Maryland and California, including general economic conditions, increased competition, a downturn in the local life science industry, real estate conditions, terrorist attacks, earthquakes and wildfires 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 or wildfires because of our properties’ concentration in California. The close proximity of our eleven properties in San Francisco to a fault line makes them more vulnerable to earthquakes than properties in many other parts of the country. In addition, the wildfires occurring in the San Diego area, most recently in 2003 and in 2007, may make the 15 properties we own in the San Diego area more vulnerable to fire damage or destruction than properties in many other parts of the country.
 
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, certain of 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 arm’s 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


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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.
 
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.
 
In addition to the 13 properties we acquired in connection with our initial public offering in August 2004, as of December 31, 2007, we had acquired or had acquired an interest in an additional 54 properties (net of property dispositions), and we expect to continue to expand. This anticipated growth will require substantial attention from our existing management team, which may divert management’s 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.
 
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 Executive Vice President, Mr. McDevitt, our Regional Executive Vice President, and Mr. Griffin, our Chief Financial Officer. Among the reasons that Messrs. Gold, Kreitzer, Wilson, McDevitt and Griffin are important to our success are that they have extensive real estate and finance experience, and strong reputations within the life science industry. 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, McDevitt and Griffin, 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


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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.
 
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.
 
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 face competition from various entities for investment opportunities in properties for life science tenants, including other REITs, such as health care REITs and suburban office property REITs, pension funds, insurance companies, investment funds and companies, partnerships, and developers. 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 or preferred 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 general liability, fire and extended coverage, terrorism and loss of rental income insurance covering all of our properties under a blanket portfolio policy, with the exception of property insurance on our McKellar Court, Science Center Drive, 9911 Belward Campus Drive and Shady Grove Road locations, which is carried directly by the tenants in accordance with the terms of their respective leases, and builders’ risk policies for any projects under construction. In addition, we carry workers’ compensation coverage for injury to our employees. We believe the policy specifications and insured limits are adequate given the relative risk of loss, cost of the coverage and standard 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, as well as third-party bodily injury and property damage claims related to the release of hazardous substances. We intend to carry similar insurance with respect to future acquisitions as appropriate. A substantial portion of our properties are located in areas subject to earthquake loss, such as San Diego and San Francisco, California and Seattle, Washington. Although we presently carry earthquake insurance on our properties, the amount of earthquake insurance coverage we 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 the 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.


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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:
 
  •  local oversupply, increased competition or reduced demand for life science office and laboratory space,
 
  •  inability to collect rent from tenants,
 
  •  vacancies or our inability to rent space on favorable terms,
 
  •  increased operating costs, including insurance premiums, utilities and real estate taxes,
 
  •  the ongoing need for capital improvements, particularly in older structures,
 
  •  unanticipated delays in the completion of our development or redevelopment projects,
 
  •  costs of complying with changes in governmental regulations, including tax laws,
 
  •  the relative illiquidity of real estate investments,
 
  •  changing submarket demographics, and
 
  •  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:
 
  •  periods of economic slowdown or recession,
 
  •  rising interest rates,
 
  •  declining demand for real estate, or
 
  •  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 or preferred 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. 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, as a REIT, we may be subject to a 100% tax on net income derived from the sale of property considered to be held primarily for sale to customers in the ordinary course of our business. We may seek to avoid this tax by complying with certain safe harbor rules that generally limit the number of properties we may sell in a given year, the aggregate expenditures made on such properties prior to their disposition, and how long we retain such properties before disposing of them. However, we can provide no assurance that we will always be able to 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.


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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 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 or preferred 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 on the current owner regardless of:
 
  •  the owner’s knowledge of the contamination,
 
  •  the timing of the contamination,
 
  •  the cause of the contamination, or
 
  •  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. In most cases, 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 to us. However, we cannot guarantee that additional contamination will not be discovered in the future or any identified contamination will not continue to pose a threat to the environment or that we will not have continued liability in connection with such prior contamination. Our 675 West Kendall and 500 Kendall Street 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 of the Elliott Avenue property would be required unless major structural changes were made to the building that resulted in the soil becoming exposed. In addition, in connection with our acquisition of certain properties through our investment in limited liability companies with PREI, PREI II LLC assumed an obligation related to the remediation of environmental conditions at off-site parcels located in Cambridge, Massachusetts. PREI II LLC has estimated the costs of the remediation to be $3.6 million, but we cannot provide any assurance that the actual remediation costs will not be higher than this estimate. 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.


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Environmental laws also:
 
  •  may require the removal or upgrade of underground storage tanks,
 
  •  regulate the discharge of storm water, wastewater and other pollutants,
 
  •  regulate air pollutant emissions,
 
  •  regulate hazardous materials generation, management and disposal, and
 
  •  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 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. Licensing requirements governing use of radioactive materials by tenants may also restrict the use of or ability to transfer space in buildings we own.
 
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 are 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,


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cash flow, per share trading price of our common stock or preferred 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 or preferred stock, our ability to satisfy our debt service obligations and our ability to pay distributions to our stockholders.
 
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:
 
  •  Required payments of principal and interest may be greater than our cash flow from operations.
 
  •  We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt.
 
  •  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.
 
  •  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).
 
  •  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.
 
  •  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 December 31, 2007, we had outstanding mortgage indebtedness of $368.8 million, excluding $10.9 million of debt premium; $250 million of borrowings under our secured term loan, secured by 14 of our properties; $2.2 million of mortgage indebtedness and $83.3 million of borrowings under a secured loan representing our proportionate share of indebtedness at our unconsolidated partnerships; $175 million of outstanding aggregate principal amount of 4.50% Exchangeable Senior Notes due 2026; $270.9 million in outstanding borrowings under our $600 million unsecured line of credit; and $425.2 million in outstanding borrowings under our $550 million secured construction loan, which is secured by our Center for Life Science | Boston property. We expect to incur additional debt in connection with future acquisitions and development. Our organizational documents do not limit the amount or percentage of debt that we may incur.


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Recent disruptions in the financial markets could affect our ability to obtain debt financing on reasonable terms and have other adverse effects on us.
 
The U.S. credit markets have recently experienced significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access additional debt financing or to refinance existing debt maturities on favorable terms (or at all), which may negatively affect our ability to make acquisitions and fund current and future development and redevelopment projects. In addition, the financial position of the lenders under our credit facilities may worsen to the point that they default on their obligations to make available to us the funds under those facilities. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. These disruptions in the financial markets may have other adverse effects on us or the economy generally, which could cause our stock price to decline.
 
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 requirement (as defined) 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, 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:
 
  •  Available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection.
 
  •  The duration of the hedge may not match the duration of the related liability.
 
  •  The party owing money in the hedging transaction may default on its obligation to pay.
 
  •  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.
 
  •  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


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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.
 
As of December 31, 2007, we had five interest rate swaps with an aggregate notional amount of $785.0 million under which, at each monthly settlement date, we either (1) receive the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pay such difference if the Strike Rate is greater than LIBOR. In addition, in connection with entering into the acquisition and construction loan secured by our Center for Life Science | Boston property, we entered into four forward starting interest rate swap agreements, which are valued on the accompanying consolidated balance sheets at the net present value of the of the expected future cash flows on the swaps. At maturity of the forward starting interest rate swaps, we will either (a) receive payment from the counterparties if the accumulated balance is an asset, or (b) make payment to the counterparties if the accumulated balance is a liability with the resulting receipt or payment deferred and amortized as an increase or decrease to interest expense over the term of the forecasted borrowing. Other than these interest rate swaps, we have not entered into any hedging transactions. The fair value of our interest rate swaps was approximately ($21.8) million at December 31, 2007 and is included in other liabilities on the accompanying consolidated financial statements.
 
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 $550 million secured construction loan, our $250 million secured term loan and our $600 million unsecured line of credit, to 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 REIT 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:
 
  •  general market conditions,
 
  •  the market’s perception of our growth potential,
 
  •  with respect to acquisition financing, the market’s perception of the value of the properties to be acquired,
 
  •  our current debt levels,
 
  •  our current and expected future earnings,
 
  •  our cash flow and cash distributions, and
 
  •  the market price per share of our common stock or preferred stock.
 
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 Organizational Structure
 
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 and the articles supplementary with respect to our preferred stock contain 9.8% ownership limits 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 or Series A preferred 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 opportunity to realize a premium over the then-prevailing market price of their shares. These MGCL provisions include:
 
  •  “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 or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding voting stock. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. 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 combinations, and
 
  •  “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


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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 liquidation preference of outstanding preferred stock, 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-venturer’s 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 certain circumstances, involve risks not present were a third party not involved. These risks include the possibility that partners or co-venturers:
 
  •  might become bankrupt or fail to fund their share of required capital contributions,
 
  •  may have economic or other business interests or goals that are inconsistent with our business interests or goals, and
 
  •  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:
 
  •  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,
 
  •  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
 
  •  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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We have investments in limited liability companies with PREI, which were formed in the second quarter of 2007. While we, as managing member, are authorized to carry out the day-to-day management of the business and affairs of the PREI limited liability companies, PREI’s prior written consent is required for certain decisions, including decisions relating to financing, budgeting and the sale or pledge of interests in the properties owned by the PREI limited liability companies.
 
In addition, each of the PREI operating agreements includes a put/call option whereby either member can cause the limited liability company to sell certain properties in which it holds leasehold interests to us at any time after the fifth anniversary and before the seventh anniversary of the acquisition date. The put/call option may be exercised at a time we do not deem favorable for financial or other reasons, including the availability of cash at such time and the impact of tax consequences resulting from any sale.
 
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 intended to allow us to qualify as a REIT for federal income tax purposes under the Internal Revenue Code of 1986, as amended, or 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.
 
If we fail to qualify as a REIT in any taxable year, we will face serious adverse tax consequences that would substantially reduce the funds available for distribution to our stockholders because:
 
  •  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,
 
  •  we could also be subject to the federal alternative minimum tax and possibly increased state and local taxes, and
 
  •  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 and our preferred stock.
 
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


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to borrow funds to maintain our REIT status or to avoid the payment of income and excise taxes. These borrowing needs could result from:
 
  •  differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes,
 
  •  the effect of non-deductible capital expenditures,
 
  •  the creation of reserves, or
 
  •  required debt or amortization payments.
 
We may need to borrow funds at times when the then-prevailing market conditions are not favorable for borrowing. These borrowings could increase our costs or reduce our equity and adversely affect the value of our common stock or preferred stock.
 
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.
 
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:
 
  •  actual or anticipated variations in our quarterly operating results or dividends,
 
  •  changes in our funds from operations or earnings estimates,
 
  •  publication of research reports about us or the real estate industry,
 
  •  increases in market interest rates that lead purchasers of our shares to demand a higher yield,
 
  •  changes in market valuations of similar companies,
 
  •  adverse market reaction to any additional debt we incur or acquisitions we make in the future,
 
  •  additions or departures of key management personnel,
 
  •  actions by institutional stockholders,
 
  •  speculation in the press or investment community,
 
  •  the realization of any of the other risk factors presented in this report, and
 
  •  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 and preferred stock will be the dividend yield on such stock (as a percentage of the price of the 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 or series A preferred stock to expect a higher dividend yield. Further, higher interest rates would


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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 and series A preferred stock to fall.
 
Broad market fluctuations could negatively impact the market price of our common stock or preferred 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 or preferred 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 or preferred 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 December 31, 2007, we had outstanding 65,571,304 shares of our common stock, as well as units in our operating partnership and long-term incentive plan (“LTIP”) units, which may be exchanged for 2,863,564 shares and 454,716 shares, respectively, of our common stock. In addition, as of December 31, 2007, we had reserved an additional 1,345,230 shares of common stock for future issuance under our incentive award plan.
 
Furthermore, under the rules adopted by the Securities and Exchange Commission in December 2005 regarding registration and offering procedures, if we meet the definition of a “well-known seasoned issuer” under Rule 405 of the Securities Act, we are permitted to file an automatic shelf registration statement that will be immediately effective upon filing. On September 15, 2006, we filed such an automatic shelf registration statement, which may permit us, from time to time, to offer and sell debt securities, common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs.
 
Any of the following could have an adverse effect on the market price of our common stock:
 
  •  sales of substantial amounts of shares of our common stock in the public market, or the perception that such sales might occur,
 
  •  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.


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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.
 
Item 2.   Properties
 
Existing Portfolio
 
At December 31, 2007, our portfolio consisted of 67 properties, which included 103 buildings with an aggregate of approximately 11.7 million rentable square feet of laboratory and office space (including our construction in progress and land parcel properties). We owned eight undeveloped land parcels adjacent to our existing properties that we estimate can support up to 1.3 million rentable square feet of laboratory and office space. We also had five properties under construction representing approximately 1.9 million rentable square feet of laboratory and office space.
 
The following reflects the classification of our properties between stabilized properties (operating properties in which more than 90% of the rentable square footage is under lease), lease up properties (operating properties in which less than 90% of the rentable square footage is under lease), repositioning and redevelopment properties (properties that are currently being prepared for their intended use), construction in progress (properties that are currently under development through ground up construction), and land parcels (representing management’s estimates of rentable square footage if development of these properties was undertaken) at December 31, 2007:
 
                                                                         
    Consolidated Portfolio     Unconsolidated Partnership Portfolio     Total Portfolio  
                Percent of
                Percent of
                Percent of
 
          Rentable
    Rentable
          Rentable
    Rentable
          Rentable
    Rentable
 
          Square
    Square
          Square
    Square
          Square
    Square
 
    Properties     Feet     Feet Leased     Properties     Feet     Feet Leased     Properties     Feet     Feet Leased  
 
Stabilized properties
    40       5,472,851       99.2 %     4       257,308       100.0 %     44       5,730,159       99.2 %
Lease up properties(1)
    10       896,564       59.5 %     1       n/a       n/a       11       896,564       59.5 %
                                                                         
Total operating portfolio
    50       6,369,415       93.6 %     5       257,308       100.0 %     55       6,626,723       93.8 %
Repositioning and redevelopment properties
    7       1,828,546       17.8 %                 n/a       7       1,828,546       17.8 %
                                                                         
Total current portfolio
    57       8,197,961       76.7 %     5       257,308       100.0 %     62       8,455,269       77.4 %
Construction in progress(2)
    3       1,241,000       72.0 %     2       700,000       16.1 %     5       1,941,000       51.8 %
Land parcels
    n/a       1,293,000       n/a                   n/a             1,293,000       n/a  
                                                                         
Total Portfolio/Weighted-Average(3)
    60       10,731,961       76.1 %     7       957,308       38.6 %     67       11,689,269       73.0 %
                                                                         
 
 
(1) The unconsolidated partnership portfolio property within the lease up property category is the 301 Binney garage, which is not yet fully leased pending completion of development activities at the 301 Binney Street building.
 
(2) We are currently developing a portion of our Landmark at Eastview property. However, we have not separated this previously undeveloped portion into a separate property for legal and accounting purposes. Therefore, we still classify the Landmark at Eastview property as a stabilized property on the above schedule although it is also included in our discussion of development properties.
 
(3) Percent of rentable square feet leased excludes undeveloped land parcels.


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Our current portfolio by market at December 31, 2007 was as follows:
 
                                                                 
                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(1)     Current(2)     Current     Current        
                            (In thousands)                    
 
Boston
    12       1,297,166       15.4 %     97.3 %   $ 48,876       24.6 %   $ 38.71          
Maryland
    5       1,144,968       13.5 %     100.0 %     44,336       22.3 %     38.72          
San Francisco
    11       2,655,594       31.4 %     44.9 %     25,658       12.9 %     21.50          
San Diego
    15       945,318       11.2 %     84.3 %     23,458       11.8 %     26.97          
New York/New Jersey
    3       873,369       10.3 %     87.1 %     15,753       7.9 %     20.71          
Pennsylvania
    7       778,251       9.2 %     92.7 %     14,920       7.5 %     20.69          
Seattle
    4       253,788       3.0 %     62.0 %     5,740       3.0 %     36.46          
University Related — Other
    3       249,507       3.0 %     100.0 %     7,349       3.8 %     29.46          
                                                                 
Total Consolidated Portfolio/Weighted-Average
    60       8,197,961       97.0 %     76.7 %     186,090       93.8 %     29.60          
Unconsolidated Partnership Portfolio(3)
    7       257,308       3.0 %     100.0 %     12,283       6.2 %     47.74          
                                                                 
Total Portfolio/Weighted-Average
    67       8,455,269       100.0 %     77.4 %   $ 198,373       100.0 %   $ 30.31          
                                                                 
 
 
(1) Percentage of leasable square footage in current portfolio subject to an existing lease.
 
(2) In this and other tables, annualized current base rent is the monthly contractual rent under existing leases at December 31, 2007, 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.
 
(3) Includes a portfolio of properties in Cambridge, Massachusetts and the McKellar Court property in San Diego, California. We are a member of the unconsolidated limited liability companies that own a portfolio of properties in Cambridge, Massachusetts, and we are entitled to approximately 20% of the operating cash flows. We also 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.
 
Properties we owned, or had an ownership interest in, at December 31, 2007 were as follows:
 
                 
    Rentable
    Percent
 
   
Square Feet
    Leased  
 
Boston
               
Albany Street
    75,003       100.0 %
Center for Life Science | Boston(1)
           
Charles Street
    47,912       100.0 %
Coolidge Avenue
    37,400       100.0 %
21 Erie Street
    48,627       100.0 %
40 Erie Street
    100,854       100.0 %
47 Erie Street Parking Structure
    447 Stalls       n/a  
Fresh Pond Research Park
    90,702       78.7 %
675 West Kendall Street (Kendall A)
    302,919       96.7 %
500 Kendall Street (Kendall D)
    349,325       98.5 %
Sidney Street
    191,904       100.0 %
Vassar Street
    52,520       100.0 %


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    Rentable
    Percent
 
   
Square Feet
    Leased  
 
Maryland
               
Beckley Street
    77,225       100.0 %
9911 Belward Campus Drive
    289,912       100.0 %
9920 Belward Campus Drive
    51,181       100.0 %
Shady Grove Road(2)
    635,058       100.0 %
Tributary Street
    91,592       100.0 %
San Francisco
               
Ardentech Court(3)
    55,588       100.0 %
Ardenwood Venture(4)
    72,500       0.0 %
Bayshore Boulevard
    183,344       100.0 %
Bridgeview Technology Park I
    212,673       93.1 %
Bridgeview Technology Park II
    50,400       100.0 %
Dumbarton Circle
    44,000       100.0 %
Eccles Avenue
    152,145       100.0 %
Forbes Boulevard
    237,984       100.0 %
Industrial Road
    169,490       100.0 %
Kaiser Drive
    87,953       0.0 %
Pacific Research Center(3)
    1,389,517       7.4 %
San Diego
               
Balboa Avenue
    35,344       100.0 %
Bernardo Center Drive(5)
    61,286       100.0 %
Faraday Avenue
    28,704       100.0 %
John Hopkins Court(3)
    69,946       0.0 %
6114-6154 Nancy Ridge Drive
    112,000       100.0 %
6828 Nancy Ridge Drive
    42,138       100.0 %
Pacific Center Boulevard
    66,745       100.0 %
Road to the Cure
    67,998       43.3 %
San Diego Science Center
    105,364       73.9 %
Science Center Drive
    53,740       100.0 %
Sorrento Valley Boulevard
    54,924       86.3 %
Torreyana Road
    81,204       100.0 %
9865 Towne Centre Drive(1)
           
9885 Towne Centre Drive
    115,870       100.0 %
Waples Street(6)
    50,055       90.0 %
New York/New Jersey
               
Graphics Drive
    72,300       44.3 %
Landmark at Eastview(2)
    751,648       97.0 %
One Research Way(3)
    49,421       0.0 %
Pennsylvania
               
Eisenhower Road
    27,750       0.0 %
George Patterson Boulevard
    71,500       100.0 %
King of Prussia
    427,109       100.0 %
Phoenixville Pike
    104,400       74.2 %
Spring Mill Drive
    76,378       96.9 %
900 Uniqema Boulevard(7)
    11,293       100.0 %
1000 Uniqema Boulevard(7)
    59,821       100.0 %

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    Rentable
    Percent
 
   
Square Feet
    Leased  
 
Seattle
               
Elliott Avenue(5)
    134,989       47.3 %
Fairview Avenue(1)(8)
           
Monte Villa Parkway
    51,000       100.0 %
217th Place(5)
    67,799       62.9 %
University Related — Other
               
Lucent Drive(9)
    21,500       100.0 %
Trade Centre Avenue(10)
    78,023       100.0 %
Walnut Street(11)
    149,984       100.0 %
                 
Total Consolidated Portfolio/Weighted-Average
    8,197,961       76.7 %
                 
Unconsolidated Portfolio:
               
McKellar Court(12)
    72,863       100.0 %
320 Bent Street(13)
    184,445       100.0 %
301 Binney Street(1)(13)
           
301 Binney Garage(13)
    503 Stalls       n/a  
650 E. Kendall Street (Kendall B)(1)(13)
           
350 E. Kendall Street Garage (Kendall F)(13)
    1,409 Stalls       n/a  
Kendall Crossing Apartments(13)
    37 Apts.       n/a  
                 
Total Portfolio/Weighted-Average
    8,455,269       77.4 %
                 
 
 
(1) The entire property was under development at December 31, 2007.
 
(2) A previously undeveloped portion of the property was undergoing development at December 31, 2007.
 
(3) The entire property was undergoing redevelopment at December 31, 2007.
 
(4) We own an 87.5% membership interest in the limited liability company that owns this property.
 
(5) A portion of the property was undergoing redevelopment at December 31, 2007.
 
(6) 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.
 
(7) Located in New Castle, Delaware.
 
(8) We own a 70% membership interest in the limited liability company that owns this property.
 
(9) Located in Lebanon, New Hampshire.
 
(10) Located in Longmont, Colorado.
 
(11) Located in Boulder, Colorado.
 
(12) 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. The property is located in San Diego, California.
 
(13) We are a member of the limited liability companies that own a portfolio of properties in Cambridge, Massachusetts, which entitles us to approximately 20% of the operating cash flows.
 
Tenant Information
 
As of December 31, 2007, our consolidated and unconsolidated properties were leased to 117 tenants, and 89% of our annualized base rent was derived from tenants that were public companies or government agencies or their

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subsidiaries. The following is a summary of our ten largest tenants based on percentage of our annualized base rent as of December 31, 2007:
 
                                     
                Annualized
    Percent of
     
                Base Rent
    Annualized
     
          Annualized
    per Leased
    Base Rent -
    Lease
    Leased
    Base Rent
    Square Foot
    Current
    Expiration
Tenant
  Square Feet     Current     Current     Total Portfolio     Date(s)
          (In thousands)                  
 
Human Genome Sciences, Inc. 
    924,970     $ 40,290     $ 43.56       20.3 %   May 2026
Vertex Pharmaceuticals
    685,286       25,948       37.86       13.1 %   Multiple(1)
Genzyme Corporation
    343,000       15,457       45.06       7.8 %   July 2018
Centocor, Inc. (Johnson & Johnson)
    374,387       8,387       22.40       4.2 %   March 2014
Schering Corporation(2)
    136,067       7,609       55.92       3.8 %   August 2016
Array BioPharma, Inc. 
    228,007       6,801       29.83       3.4 %   Multiple(3)
Nektar Therapeutics
    100,040       4,533       45.32       2.3 %   October 2016
Arena Pharmaceuticals, Inc. 
    112,000       4,513       40.30       2.3 %   May 2027
Regeneron Pharmaceuticals, Inc. 
    230,911       4,355       18.86       2.2 %   Multiple(4)
Illumina, Inc. 
    109,270       4,178       38.24       2.1 %   October 2023
                                     
Total/Weighted-Average(5)
    3,243,938     $ 122,071     $ 37.63       61.5 %    
                                     
 
 
(1) 191,904 square feet expires August 2010, 100,854 square feet expires December 2010, 20,608 square feet expires May 2012, 81,204 square feet expires September 2013, and 290,716 square feet expires April 2018.
 
(2) We own 20% of the limited liability company that owns the property that this tenant occupies.
 
(3) 149,984 square feet expires July 2016 and 78,023 square feet expires August 2016.
 
(4) 203,890 square feet expires March 2009, which will be replaced with a 15-year 230,000 square foot lease at the new buildings to be constructed at the Landmark at Eastview property, and 27,021 square feet expires March 2024.
 
(5) Without regard to any lease terminations and/or renewal options.
 
Lease Distribution
 
Our leases are typically structured for terms of five to 15 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 for 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.
 
Item 3.   Legal Proceedings
 
Although we are involved in legal proceedings arising in the ordinary course of business, we are not currently a party to any legal proceedings nor, to our knowledge, is any legal proceeding threatened against us that we believe 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.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock has been listed on the New York Stock Exchange under the symbol “BMR” since August 6, 2004. On February 27, 2008, the reported closing sale price per share for our common stock on the NYSE was $21.20 and there were approximately 129 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 Common Share  
 
First Quarter 2006
  $ 29.86     $ 23.75     $ 29.64     $ 0.29  
Second Quarter 2006
  $ 29.94     $ 25.95     $ 29.94     $ 0.29  
Third Quarter 2006
  $ 31.99     $ 28.28     $ 30.34     $ 0.29  
Fourth Quarter 2006
  $ 32.41     $ 27.71     $ 28.60     $ 0.29  
First Quarter 2007
  $ 31.20     $ 25.59     $ 26.30     $ 0.31  
Second Quarter 2007
  $ 29.94     $ 24.13     $ 25.12     $ 0.31  
Third Quarter 2007
  $ 26.20     $ 21.00     $ 24.10     $ 0.31  
Fourth Quarter 2007
  $ 26.25     $ 20.89     $ 23.17     $ 0.31  
 
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 facilities limit our ability to pay distributions to our common stockholders. The limitation is based on 95% of funds from operations, 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 facilities. 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.
 
On December 7, 2007, our Operating Partnership issued 22,050 LTIP units to certain of our officers pursuant to our 2004 incentive award plan. The LTIP units are subject to vesting requirements, which lapse over a five-year period. Upon vesting, the LTIP units may be redeemed for an equal number of shares of our common stock or cash, at our election. The LTIP units were issued in reliance on the exemption provided by Rule 506 promulgated by the Securities and Exchange Commission under the Securities Act. Each officer who received an award of LTIP units is an accredited investor and had access, through employment and other relationships, to adequate information about us and our Operating Partnership.
 
Information about our equity compensation plans is incorporated by reference in Item 12 of Part III of this Annual Report on Form 10-K.
 
Item 6.   Selected Financial Data
 
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report.


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BIOMED REALTY TRUST, INC. AND BIOMED REALTY TRUST, INC. PREDECESSOR
(Dollars in thousands, except per share data)
 
                                                 
    BioMed Realty Trust, Inc.     Predecessor  
                      Period
    Period
       
                      August 11,
    January 1,
       
                      2004 through
    2004 through
       
    Year Ended December 31,     December 31,
    August 17,
       
    2007     2006     2005     2004     2004     2003  
 
Statements of Income:
                                               
Revenues:
                                               
Total revenues
  $ 266,109     $ 218,735     $ 138,784     $ 28,654     $ 3,714     $ 7,019  
                                                 
Expenses:
                                               
Rental operations and real estate taxes
    71,142       60,999       46,358       11,619       353       830  
Depreciation and amortization
    72,202       65,063       39,378       7,853       600       955  
General and administrative
    21,870       18,085       13,278       3,130              
                                                 
Total expenses
    165,214       144,147       99,014       22,602       953       1,785  
                                                 
Income from operations
    100,895       74,588       39,770       6,052       2,761       5,234  
Equity in net (loss)/income of unconsolidated partnerships
    (893 )     83       119       (11 )            
Interest income
    990       1,102       1,333       190             1  
Interest expense
    (27,654 )     (40,672 )     (23,226 )     (1,180 )     (1,760 )     (2,901 )
                                                 
Income from continuing operations before minority interests
    73,338       35,101       17,996       5,051       1,001       2,334  
Minority interests in continuing operations of consolidated partnerships
    (45 )     137       267       145              
Minority interests in continuing operations of operating partnership
    (2,412 )     (1,670 )     (1,271 )     (414 )            
                                                 
Income from continuing operations
    70,881       33,568       16,992       4,782       1,001       2,334  
Income from discontinued operations before gain on sale of assets and minority interests
    639       1,542       57                    
Gain on sale of real estate assets
    1,087                                
Minority interests attributable to discontinued operations
    (74 )     (77 )     (3 )                  
                                                 
Income from discontinued operations
    1,652       1,465       54                    
                                                 
Net income
    72,533       35,033       17,046       4,782       1,001       2,334  
Preferred stock dividends
    (16,868 )                              
                                                 
Net income available to common stockholders
  $ 55,665     $ 35,033     $ 17,046     $ 4,782     $ 1,001     $ 2,334  
                                                 
Income from continuing operations per share available to common stockholders:
                                               
Basic earnings per share
  $ 0.83     $ 0.60     $ 0.44     $ 0.15              
Diluted earnings per share
  $ 0.83     $ 0.60     $ 0.43     $ 0.15              
Net income per share available to common stockholders:
                                               
Basic earnings per share
  $ 0.85     $ 0.63     $ 0.44     $ 0.15              
Diluted earnings per share
  $ 0.85     $ 0.62     $ 0.44     $ 0.15              
Weighted-average common shares outstanding:
                                               
Basic
    65,302,794       55,928,595       38,913,103       30,965,178              
Diluted
    68,269,985       59,018,004       42,091,195       33,767,575              
Cash dividends declared per common share
  $ 1.24     $ 1.16     $ 1.08     $ 0.4197              
Cash dividends declared per preferred share
  $ 1.83                                
Balance Sheet Data (at period end):
                                               
Investments in real estate, net
  $ 2,805,983     $ 2,457,538     $ 1,129,371     $ 468,530           $ 47,025  
Total assets
    3,057,268       2,692,642       1,337,310       581,723             50,056  
Total indebtedness
    1,500,787       1,343,356       513,233       102,236             37,208  
Total liabilities
    1,653,052       1,458,610       586,162       137,639             37,597  
Minority interests
    17,280       19,319       20,673       22,267              
Stockholders’ equity and partners’ capital
    1,386,936       1,214,713       730,475       421,817             12,459  
Other Data:
                                               
Cash flows from/(used in):(1)
                                               
Operating activities
    114,843       101,535       54,762       14,497             2,416  
Investing activities
    (409,300 )     (1,339,463 )     (601,805 )     (457,218 )           (105 )
Financing activities
    282,273       1,243,280       539,486       470,433             (2,666 )
 
 
(1) Cash flow information for 2004 is combined for BioMed Realty Trust, Inc. and our predecessor.


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Item 7.   Management’s 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”). 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 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 completed our initial public offering on August 11, 2004.
 
At December 31, 2007, our portfolio consisted of 67 properties, which included 103 buildings with an aggregate of approximately 11.7 million rentable square feet of laboratory and office space (including our construction in progress and land parcel properties). We owned eight undeveloped land parcels adjacent to our existing properties that we estimate can support up to 1.3 million rentable square feet of laboratory and office space. We also had five properties under construction representing approximately 1.9 million rentable square feet of laboratory and office space.
 
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, 2007, our operating portfolio was 93.8% leased to 112 tenants. Leases representing approximately 5.6% of our rentable square footage expire during 2008 and leases representing approximately 5.6% of our rentable square footage expire during 2009. Our leasing strategy for 2008 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. We also intend to proceed with additional new developments, as real estate market conditions permit.
 
Redevelopment/Development Properties
 
We are actively engaged in the redevelopment and development of certain properties in our portfolio. We believe that these activities will ultimately result in a return on our additional investment once the redevelopment and development activities have been completed and the properties are leased. However, redevelopment and development activities involve inherent risks and assumptions relating to our ability to fully lease the properties. Our expectation is that these properties will be fully leased upon completion of the construction activities. However, our ability to fully lease the properties may be adversely affected by changing market conditions, including periods of economic slowdown or recession, rising interest rates, declining demand for life science office and laboratory space, local oversupply of real estate assets, or competition from others, which may diminish our opportunities for leasing the property on favorable terms or at all. In addition, we may fail to retain tenants that have pre-leased our properties, or may face significant monetary penalties, if we do not complete the construction of these properties in a timely manner or to the tenants’ specifications. Further, our competitors with greater resources may have more flexibility that we do in their ability to offer rental concessions to attract tenants to their properties, which could put pressure on our ability to attract tenants at rental rates that will provide an expected return on our additional


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investment in these properties. As a result, we may be unable to fully lease some of our redevelopment/development properties in a timely manner upon the completion of major construction activities.
 
We also rely on external sources of debt and equity funding to provide capital for our redevelopment and development projects. Although we believe that we currently have sufficient borrowing capacity and will be able to obtain additional funding as necessary, we may be unable to obtain financing on favorable terms (or at all) or we may be forced to seek alternative sources of potentially less attractive financing, which may require us to adjust our business and construction plans accordingly. Further, we may spend more time or money than anticipated to redevelop or develop our properties due to delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations or other unanticipated delays in the construction.
 
The following summarizes our consolidated properties under repositioning or redevelopment at December 31, 2007:
 
                         
    Total Property
    Percent
    Estimated
 
    Rentable
    Leased or
    In-Service
 
Property
  Square Feet     Pre-Leased     Date(1)  
 
Ardentech Court
    55,588       100.0 %     Q1 2008  
Bernardo Center Drive(2)
    61,286       100.0 %     Q1 2008  
Elliott Avenue(3)
    134,989       47.3 %     Q4 2009  
John Hopkins Court
    69,946       0.0 %     Q3 2008  
One Research Way
    49,421       0.0 %     Q2 2008  
Pacific Research Center
    1,389,517       7.4 %     Q2 2009  
217th Place
    67,799       62.9 %     Q3 2008  
                         
Total/Weighted-Average
    1,828,546       17.8 %        
                         
 
 
(1) Our estimate of the time in which redevelopment will be substantially complete. A project is considered substantially complete and held available for its intended use upon the completion of tenant improvements, but no later than one year from the cessation of major construction activities. We currently estimate that we will invest up to an additional $185.0 million before the redevelopment on these properties is substantially complete.
 
(2) Includes 51,980 square feet leased to our Operating Partnership for use as our corporate headquarters. No revenue will be recognized with respect to this related party lease.
 
(3) We anticipate that the property will be vacant upon the expiration of the remaining lease in the first quarter of 2008.
 
The following summarizes our consolidated properties under development at December 31, 2007:
 
                                         
    Estimated
                Estimated
    Estimated
 
    Rentable
    Percent
    Investment
    Total
    In-Service
 
Property
  Square Feet     Pre-Leased     to Date     Investment     Date(1)  
                (Dollars in thousands)        
 
Center for Life Science | Boston
    703,000       81.1 %   $ 664,000     $ 730,000       Q1 2009  
Fairview Avenue(2)
    94,000       17.9 %     20,700       44,000       Q1 2009  
Landmark at Eastview(3)
    360,000       63.8 %     42,000       145,000       Q2 2009  
9865 Towne Centre Drive
    84,000       100.0 %     13,800       30,000       Q3 2008  
                                         
Total/Weighted-Average
    1,241,000       72.0 %   $ 740,500     $ 949,000          
                                         
 
 
(1) Our estimate of the time in which development will be substantially complete. A project is considered substantially complete and held available for its intended use upon the completion of tenant improvements, but no later than one year from the cessation of major construction activities.
 
(2) We own a 70% membership interest in the limited liability company that owns this property.
 
(3) We are currently developing a portion of our Landmark at Eastview property. However, we have not separated this previously undeveloped portion into a separate property for legal and accounting purposes. Therefore, we still classify the Landmark at Eastview property as a stabilized property although it is also included in our discussion of development properties.


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Lease Expirations
 
The following is a summary of lease expirations over the next ten calendar years for leases in place at December 31, 2007. 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)              
 
2008(1)
    358,248       5.6 %   $ 8,195       4.2 %   $ 22.87  
2009
    366,332       5.6 %     6,987       3.5 %     19.07  
2010
    753,846       11.5 %     16,979       8.6 %     22.52  
2011
    360,856       5.5 %     12,519       6.3 %     34.69  
2012
    407,964       6.2 %     9,116       4.6 %     22.34  
2013
    507,067       7.7 %     9,930       5.0 %     19.58  
2014
    562,771       8.6 %     12,211       6.2 %     21.70  
2015
    84,157       1.3 %     2,671       1.3 %     31.73  
2016
    603,067       9.2 %     22,295       11.2 %     36.97  
2017
    147,266       2.3 %     2,424       1.2 %     16.46  
Thereafter
    2,392,453       36.5 %     95,047       47.9 %     39.73  
                                         
Total Portfolio/Weighted-Average
    6,544,027       100.0 %   $ 198,374       100.0 %   $ 30.31  
                                         
 
 
(1) Includes current month-to-month leases.
 
The success of our leasing and development strategy will be dependent upon the general economic conditions and more specifically real estate market conditions and life science industry trends in the United States and in our target markets of Boston, San Diego, San Francisco, Seattle, Maryland, Pennsylvania, New York/New Jersey and research parks near or adjacent to universities. 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.


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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   15-40 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
 
Our estimates of useful lives have a direct impact on our net income. If expected useful lives of our investments in real estate were shortened, we would depreciate the assets over a shorter time period, resulting in an increase to depreciation expense and a corresponding decrease to net income on an annual basis.
 
Management must make significant assumptions in determining the value of assets and liabilities acquired. The use of different assumptions in the allocation of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. 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 management’s determination of the relative fair value of these assets. 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.
 
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 considerations 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 and insurance); and (c) the value associated with lost rental revenue from existing leases during the assumed lease-up period. 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.
 
Costs incurred in connection with the acquisition, development or construction of properties and improvements are capitalized. 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 direct costs incurred during the period of development. We capitalize costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. We consider a construction project as substantially complete 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 any remaining portion under construction. Capitalized costs associated with unsuccessful acquisitions are charged to expense when an acquisition is no longer considered probable.
 
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 asset’s useful life or increase its operating efficiency.


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When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in long-lived assets. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Although our strategy is to hold our properties over the long-term, if our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair-value less costs to sell, and such loss could be material. If we determine that impairment has occurred, the affected assets must be reduced to their fair-value.
 
Revenue Recognition
 
We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In determining what constitutes the leased asset, we evaluate whether we or the lessee is the owner, for accounting purposes, of the tenant improvements. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If we conclude we are not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded under the lease are treated as lease incentives which reduce revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct improvements. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the nature of the leased asset and when revenue recognition under a lease begins. We consider a number of different factors to evaluate whether we or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:
 
  •  whether the lease stipulates how and on what a tenant improvement allowance may be spent;
 
  •  whether the tenant or landlord retain legal title to the improvements;
 
  •  the uniqueness of the improvements;
 
  •  the expected economic life of the tenant improvements relative to the length of the lease;
 
  •  the responsible party for construction cost overruns; and
 
  •  who constructs or directs the construction of the improvements.
 
The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making that determination we consider all of the above factors. However, no one factor is determinative in reaching a conclusion.
 
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. Existing leases at acquired properties are reviewed at the time of acquisition to determine if contractual rents are above or below current market rents for the acquired property. An identifiable lease intangible asset or liability is recorded based on the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) our estimate of the fair market lease rates for the corresponding in-


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place leases at acquisition, measured over a period equal to the remaining non-cancelable term of the leases and any fixed rate renewal periods (based on our assessment of the likelihood that the renewal periods will be exercised). 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.
 
Substantially all rental operations expenses, consisting of real estate taxes, insurance and common area maintenance costs are recoverable from tenants under the terms of our lease agreements. Amounts recovered are dependent on several factors, including occupancy and lease terms. Tenant recovery revenue is recognized in the period the expenses are incurred. The reimbursements are recognized and presented in accordance with Emerging Issues Tax Force Issue (“EITF”) No. 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.
 
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 may also maintain an allowance for accrued straight-line rents and amounts due from lease terminations based on our assessment of the collectibility of the balance.
 
Payments received under master lease agreements entered into with the sellers of 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 46R”), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46R provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities”) and the determination of which business enterprise should consolidate the variable interest entity (the “primary beneficiary”). Generally, FIN 46R 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 entity’s 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.
 
If FIN 46R does not apply, we consider 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 partnership’s 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 the partnership or limited liability company is required.


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Except for investments that are consolidated in accordance with FIN 46R or EITF 04-5, we account for investments in entities over which we exercise significant influence, but do not control, under the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. Under the equity method of accounting, our net equity in the investment is reflected in the consolidated balance sheets and our share of net income or loss is included in our consolidated statements of income.
 
On a periodic basis, we assess whether there are any indicators that the carrying value of our investments in partnerships or limited liability companies may be impaired on a more than temporary basis. An investment is impaired only if our estimate of the fair-value of the investment is less than the carrying value of the investment on a more than temporary basis. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying value of the investment over the fair-value of the investment.
 
Derivative 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 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. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction.
 
Our objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, we 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 2007 and 2006, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and future variability in the interest related cash flows from forecasted issuances of debt. We formally document the hedging relationships for all derivative instruments, account for all of our interest rate swap agreements as cash flow hedges, and do not use derivatives for trading or speculative purposes.


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Results of Operations
 
The following is a comparison, for the years ended December 31, 2007 and 2006 and for the years ended December 31, 2006 and 2005, of the consolidated operating results of BioMed Realty Trust, Inc.
 
Comparison of the Year Ended December 31, 2007 to the Year Ended December 31, 2006
 
The following table sets forth the basis for presenting the historical financial information for same properties (all properties except redevelopment and new properties and discontinued operations), redevelopment/development properties (properties that were under redevelopment or development during either of the years ended December 31, 2007 or 2006), and new properties (properties that were not owned for each of the full years ended December 31, 2007 and 2006 and were not under redevelopment/development), in thousands:
 
                                                 
          Redevelopment/Development
       
    Same Properties     Properties     New Properties  
    2007     2006     2007     2006     2007     2006  
 
Rental
  $ 109,485     $ 107,367     $  16,957     $  21,944     $  69,554     $  35,176  
Tenant recoveries
    48,992       46,798       6,837       5,317       5,906       2,045  
Other income
    1,194       84       7,184       4              
                                                 
Total revenues
  $ 159,671     $ 154,249     $ 30,978     $ 27,265     $ 75,460     $ 37,221  
                                                 
Rental operations
  $ 42,457     $ 37,356     $ 5,236     $ 2,596     $ 3,096     $ 671  
Real estate taxes
    13,417       15,288       2,896       3,494       4,040       1,594  
Depreciation and amortization
    43,465       44,233       10,446       11,929       18,291       8,901  
                                                 
Total expenses
  $ 99,339     $ 96,877     $ 18,578     $ 18,019     $ 25,427     $ 11,166  
                                                 
 
Rental Revenues.  Rental revenues increased $31.5 million to $196.0 million for the year ended December 31, 2007 compared to $164.5 million for the year ended December 31, 2006. The increase was primarily due to acquisitions in 2006 and 2007, partially offset by properties that generated revenues during 2006 and subsequently entered into redevelopment. Same property rental revenues increased $2.1 million, or 2.0%, for the year ended December 31, 2007 compared to the same period in 2006. The increase in same property rental revenues was primarily a result of a full year of rental revenues in 2007 for new leases at our 21 Erie Street, Industrial Road, Landmark at Eastview, and 6828 Nancy Ridge Drive properties, partially offset by the loss of rental revenues related to higher vacancy rates at certain properties.
 
Tenant Recoveries.  Revenues from tenant reimbursements increased $7.6 million to $61.7 million for the year ended December 31, 2007 compared to $54.1 million for the year ended December 31, 2006. The increase was primarily due to acquisitions during 2006 and 2007 and redevelopment properties that were placed in service in 2007. Same property tenant recoveries increased $2.2 million, or 4.7%, for the year ended December 31, 2007 compared to the same period in 2006 primarily as a result of tenant recoveries for new leases in 2007, partially offset by a decrease in real estate tax expense at certain properties.
 
Other Income.  Other income was $8.4 million for the year ended December 31, 2007 compared to $88,000 for the year ended December 31, 2006. Other income for the year ended December 31, 2007 included $7.7 million of gains on early termination of leases and $739,000 of development fees earned from the PREI limited liability companies.
 
Rental Operations Expense.  Rental operations expense increased $10.2 million to $50.8 million for the year ended December 31, 2007 compared to $40.6 million for the year ended December 31, 2006. The increase was primarily due to the inclusion of rental operations expense for acquired and redevelopment properties (net of amounts capitalized) during 2006 and 2007 and an increase in same property rental operations expense of $5.1 million, or 13.7%, for the year ended December 31, 2007 compared to 2006. The increase in same property rental operations expense is primarily due to the hiring of additional property management personnel and related expansion of our operations in 2006 and 2007 and increased operating expenses at certain properties.


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Real Estate Tax Expense.  Real estate tax expense was $20.4 million for the years ended December 31, 2007 and 2006. Real estate tax expense increased as a result of the inclusion of property taxes for the properties acquired in 2006 and 2007, but was offset by a decrease in same property real estate tax expense of $1.9 million, or 12.2%, for the year ended December 31, 2007 compared to the same period in 2006. The decrease in same property real estate tax expense is primarily due to the capitalization of property taxes in connection with properties that were operating in 2006 and subsequently entered into redevelopment, the development of new buildings on a portion of our Landmark at Eastview property, and a reassessment of property taxes due to successful appeals at certain of our properties.
 
Depreciation and Amortization Expense.  Depreciation and amortization expense increased $7.1 million to $72.2 million for the year ended December 31, 2007 compared to $65.1 million for the year ended December 31, 2006. The increase was primarily due to the inclusion of depreciation and amortization expense for properties acquired in 2006 and 2007 and the acceleration of depreciation on assets related to an early lease termination in the amount of $1.6 million, which is included as a redevelopment property. The increase was partially offset by the cessation of depreciation on certain properties, or portions thereof, currently under redevelopment, which is expected to continue into 2008, and the full amortization of acquired intangible assets in 2007 and 2006 at certain properties.
 
General and Administrative Expenses.  General and administrative expenses increased $3.8 million to $21.9 million for the year ended December 31, 2007 compared to $18.1 million for the year ended December 31, 2006. The increase was primarily due to growth in the corporate infrastructure necessary to support our expanded property portfolio and an increase in stock compensation costs resulting from increased stock awards to employees and the vesting of restricted stock from previous years during 2007.
 
Equity in Net (Loss)/Income of Unconsolidated Partnerships.  Equity in net (loss)/income of unconsolidated partnerships decreased $976,000 to a loss of ($893,000) for the year ended December 31, 2007 compared to income of $83,000 for the year ended December 31, 2006. The decrease was primarily due to our proportionate share of the losses generated by the PREI limited liability companies since formation in April 2007, offset by our allocation of the net income in the McKellar Court partnership for the year ended December 31, 2007.
 
Interest Expense.  Interest cost incurred for the year ended December 31, 2007 totaled $84.4 million compared to $48.3 million for the year ended December 31, 2006. Total interest cost incurred increased primarily as a result of higher borrowings for development and redevelopment activities, partially offset by decreases in borrowings for working capital purposes and decreases in the average interest rate on our outstanding borrowings. During the year ended December 31, 2007, we capitalized $56.7 million of interest compared to $7.6 million for the year ended December 31, 2006. The increase in capitalized interest reflects our increased development and redevelopment activities. Capitalized interest for the year ended December 31, 2007 was primarily comprised of amounts relating to our Center for Life Science | Boston development and Pacific Research Center redevelopment projects, which were acquired on November 17, 2006 and July 11, 2006, respectively. We expect to continue to capitalize significant interest costs on these properties, and other properties currently under development or redevelopment, through the end of 2008, including the construction of new buildings at our Fairview Avenue, Landmark at Eastview, and Towne Centre Drive properties. Net of capitalized interest and the accretion of debt premium, interest expense decreased $13.0 million to $27.7 million for the year ended December 31, 2007 compared to $40.7 million for the year ended December 31, 2006.
 
Minority Interests.  Minority interests increased $908,000 to ($2.5) million for the year ended December 31, 2007 compared to ($1.6) million for year ended December 31, 2006. The increase in minority interests was related to an increase in income before minority interests allocable to minority interests in our Operating Partnership and income in minority interests in our consolidated partnerships for the year ended December 31, 2007 compared to net losses in our consolidated partnerships for the year ended December 31, 2006.
 
Discontinued Operations.  In May 2007, we completed the sale of our Colorow property and recognized a gain upon closing of approximately $1.1 million. The results of operations and gain on sale of the property have been reported as discontinued operations in the consolidated statements of income for all periods presented. Income from discontinued operations was approximately $1.7 million for the year ended December 31, 2007 (representing the results of operations through the date of sale in May and the gain on sale of $1.1 million) compared to income of $1.5 million from discontinued operations for the year ended December 31, 2006.


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Comparison of the Year Ended December 31, 2006 to the Year Ended December 31, 2005
 
The following table sets forth the basis for presenting the historical information for same properties (all properties except redevelopment and new properties and discontinued operations), redevelopment/development properties (properties that were under redevelopment or development during either of the years ended December 31, 2006 or 2005), and new properties (properties that were not owned for each of the full years ended December 31, 2006 and 2005 and were not under redevelopment/development), in thousands:
 
                                                 
          Redevelopment/Development
       
    Same Properties     Properties     New Properties  
    2006     2005     2006     2005     2006     2005  
 
Rental
  $  58,087     $  58,092     $ 7,959     $       33     $ 98,441     $  34,465  
Tenant recoveries
    29,448       31,963       2,358       4       22,354       10,253  
Other income
    23       3,712                   65       262  
                                                 
Total revenues
  $ 87,558     $ 93,767     $  10,317     $ 37     $ 120,860     $ 44,980  
                                                 
Rental operations
  $ 27,973     $ 29,410     $ 615     $ 5     $ 12,035     $ 5,081  
Real estate taxes
    6,970       6,520       1,970             11,436       5,342  
Depreciation and amortization
    26,198       25,132       3,740             35,125       14,246  
                                                 
Total expenses
  $ 61,141     $ 61,062     $ 6,325     $ 5     $ 58,596     $ 24,669  
                                                 
 
Rental Revenues.  Rental revenues increased $71.9 million to $164.5 million for the year ended December 31, 2006 compared to $92.6 million for the year ended December 31, 2005. The increase was primarily due to acquisitions in 2005 and 2006 and redevelopment properties that were generating revenue during part of 2006. Same property rental revenues for the years ended December 31, 2006 and 2005 were $58.1 million.
 
Tenant Recoveries.  Revenues from tenant reimbursements increased $12.0 million to $54.2 million for the year ended December 31, 2006 compared to $42.2 million for the year ended December 31, 2005. The increase was primarily due to acquisitions in 2005 and 2006, partially offset by a decrease of same property tenant recoveries of approximately $2.5 million, or 7.9%, for the year ended December 31, 2006 compared to the same period in 2005. The same property decrease is primarily the result of lower utility expenses at certain properties.
 
Other Income.  Other income of $4.0 million for the year ended December 31, 2005 is comprised primarily of a gain on early termination of a lease of $3.5 million.
 
Rental Operations Expense.  Rental operations expense increased $6.1 million to $40.6 million for the year ended December 31, 2006 compared to $34.5 million for the year ended December 31, 2005. The increase was primarily due to acquisitions in 2005 and 2006 and redevelopment properties that were in our operating portfolio during part of 2006. Same property rental operations expense decreased approximately $1.4 million, or 4.9%, for the year ended December 31, 2006 compared to the same period in 2005 primarily due to lower utility expenses at certain properties.
 
Real Estate Tax Expense.  Real estate tax expense increased $8.5 million to $20.4 million for the year ended December 31, 2006 compared to $11.9 million for the year ended December 31, 2005. Real estate tax expense increased primarily due to acquisitions in 2005 and 2006. Same property real estate tax expense increased $450,000, or 6.9%, for the year ended December 31, 2006 compared to the same period in 2005, primarily due to a reassessment of the property taxes at certain properties.
 
Depreciation and Amortization Expense.  Depreciation and amortization expense increased $25.7 million to $65.1 million for the year ended December 31, 2006 compared to $39.4 million for the year ended December 31, 2005. The increase was primarily due to acquisitions in 2005 and 2006. In addition, same property depreciation and amortization expense increased approximately $1.1 million for the year ended December 31, 2006 compared to the same period in 2005, primarily as the result of the accelerated amortization of the net remaining balance of intangible assets totaling $947,000 due to the early termination of a lease and increased amortization for tenant improvements placed in service during 2006 and 2005.


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General and Administrative Expenses.  General and administrative expenses increased $4.8 million to $18.1 million for the year ended December 31, 2006 compared to $13.3 million for the year ended December 31, 2005. The increase was primarily due to an increase in employees resulting in increased personnel and infrastructure costs. The year ended December 31, 2005 included a $619,000 increase to general and administrative expenses resulting from an adjustment to stock compensation expense related to 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.
 
Equity in Net (Loss)/Income of Unconsolidated Partnerships.  Equity in net (loss)/income of unconsolidated partnerships decreased $36,000 to net income of $83,000 for the year ended December 31, 2006 compared to net income of $119,000 for the year ended December 31, 2005.
 
Interest Expense.  Interest cost incurred for the year ended December 31, 2006 totaled $48.3 million compared to $23.9 million for the year ended December 31, 2005. Total interest cost incurred increased primarily as a result of higher borrowings, partially offset by a reduction of interest expense in 2006 due to the accretion of debt premium of $2.1 million. During the year ended December 31, 2006, we capitalized $7.6 million of interest compared to $704,000 for the year ended December 31, 2005. The increase in capitalized interest reflects our increased development and redevelopment activities. Capitalized interest for the year ended December 31, 2006 was primarily comprised of amounts relating to our Center for Life Science | Boston development and Pacific Research Center redevelopment projects, which were acquired on November 17, 2006 and July 11, 2006, respectively. Net of capitalized interest and the accretion of debt premium, interest expense increased $17.5 million to $40.7 million for the year ended December 31, 2006 compared to $23.2 million for the year ended December 31, 2005.
 
Minority Interests.  Minority interests increased $545,000 to ($1.5) million for the year ended December 31, 2006, compared to ($1.0) million for the year ended December 31, 2005. The increase in minority interests was primarily related to an increase in income before minority interests allocable to minority interests in our Operating Partnership.
 
Discontinued Operations.  In May 2007, we completed the sale of our Colorow property and have accordingly reflected the property as discontinued operations in the consolidated statements of income for all periods presented. Income from discontinued operations increased $1.4 million to $1.5 million for the year ended December 31, 2006, compared to $54,000 for the year ended December 31, 2005 due to the inclusion of the Colorow property for a full year in 2006 (originally acquired December 22, 2005).
 
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,  
    2007     2006     2005  
 
Net cash provided by operating activities
  $ 114,843     $ 101,535     $ 54,762  
Net cash used in investing activities
    (409,300 )     (1,339,463 )     (601,805 )
Net cash provided by financing activities
    282,273       1,243,280       539,486  
Ending cash and cash equivalents balance
    13,479       25,664       20,312  
 
Comparison of the Year Ended December 31, 2007 to the Year Ended December 31, 2006
 
Net cash provided by operating activities increased $13.3 million to $114.8 million for the year ended December 31, 2007 compared to $101.5 million for the year ended December 31, 2006. The increase was primarily due to the increases in operating income before depreciation and amortization, partially offset by changes in operating assets and liabilities.


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Net cash used in investing activities decreased $930.2 million to $409.3 million for the year ended December 31, 2007 compared to $1.3 billion for the year ended December 31, 2006. The decrease reflects a decrease in the cash used to acquire investments in real estate and related intangible assets (reflecting reduced acquisition activity) and cash received as proceeds from the sale of a property, partially offset by cash used for the purchases of interests in unconsolidated partnerships and funds held in escrow for acquisitions at December 31, 2007.
 
Net cash provided by financing activities decreased $961.0 million to $282.3 million for the year ended December 31, 2007 compared to $1.2 billion for the year ended December 31, 2006. The decrease reflects reduced financing requirements due to reduced acquisition activity, partially offset by an increase in dividends paid to common and preferred stockholders. Cash generated from the sale of preferred stock during the year ended December 31, 2007 was used principally to pay down the unsecured line of credit. In addition, cash from financing activities was provided by our unsecured line of credit and our secured construction loan during the year ended December 31, 2007.
 
Comparison of the Year Ended December 31, 2006 to the Year Ended December 31, 2005
 
Net cash provided by operating activities increased $46.8 million to $101.5 million for the year ended December 31, 2006 compared to $54.8 million for the year ended December 31, 2005. 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, add back of the revenue reduction related to the amortization of above-market lease intangible assets, and changes in other operating assets and liabilities.
 
Net cash used in investing activities increased $737.7 million to $1.3 billion for the year ended December 31, 2006 compared to $601.8 million for the year ended December 31, 2005. The increase was primarily due to amounts paid to acquire interests in real estate properties and non-real estate assets, partially offset by a decrease in the receipt of master lease payments.
 
Net cash provided by financing activities increased $703.8 million to $1.2 billion for the year ended December 31, 2006 compared to $539.5 million for the year ended December 31, 2005. The increase was primarily due to an increase in the proceeds from common stock offerings, line of credit borrowings, exchangeable notes offering, construction line draws, and the issuance of mortgage notes payable, offset by principal payments on mortgage loans, payments on the line of credit, payment of loan costs, and payments of dividends and distributions.
 
Liquidity and Capital Resources
 
Our short-term liquidity requirements consist primarily of funds to pay for future distributions expected to be paid to our stockholders, operating expenses and other expenditures directly associated with our properties, interest expense and scheduled principal payments on outstanding mortgage indebtedness, general and administrative expenses, 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 revenues, provided by our leases, 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, construction obligations, renovations, expansions, capital commitments 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 line of credit and our secured construction loan to finance acquisition and development activities and capital expenditures on development projects on an interim basis.
 
Under the rules adopted by the Securities and Exchange Commission in December 2005 regarding registration and offering procedures, if we meet the definition of a “well-known seasoned issuer” under Rule 405 of the Securities Act, we are permitted to file an automatic shelf registration statement that will be immediately effective


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upon filing. On September 15, 2006, we filed such an automatic shelf registration statement, which may permit us, from time to time, to offer and sell debt securities, common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs.
 
On January 18, 2007, we completed the issuance of 9,200,000 shares, including the exercise of an over-allotment option of 1,200,000 shares, of 7.375% Series A cumulative redeemable preferred stock at $25.00 per share. The net proceeds of approximately $222.4 million were primarily used to repay outstanding borrowings on our unsecured line of credit.
 
Our total capitalization at December 31, 2007 was approximately $3.3 billion and was comprised of the following:
 
                         
          Aggregate
       
          Principal
       
    Shares/Units
    Amount or
       
    at December 31,
    Dollar Value
    Percent of Total
 
    2007     Equivalent     Capitalization  
    (In thousands)  
 
Debt:
                       
Mortgage notes payable(1)
          $ 379,680       11.4 %
Secured construction loan
            425,160       12.8 %
Secured term loan
            250,000       7.5 %
Exchangeable notes
            175,000       5.3 %
Unsecured line of credit
            270,947       8.1 %
                         
Total debt
            1,500,787       45.1 %
Equity:
                       
Common shares outstanding(2)
    65,571,304       1,519,287       45.7 %
7.375% Series A Preferred shares outstanding(3)
    9,200,000       230,000       6.9 %
Operating partnership units outstanding(4)
    2,863,564       66,349       2.0 %
LTIP units outstanding(4)
    454,716       10,536       0.3 %
                         
Total equity
            1,826,172       54.9 %
                         
Total capitalization
          $ 3,326,959       100.0 %
                         
 
 
(1) Amount includes debt premiums of $10.9 million recorded upon the assumption of the outstanding indebtedness in connection with our purchase of the corresponding properties.
 
(2) Based on the market closing price of our common stock of $23.17 per share on the last trading day of the year (December 31, 2007).
 
(3) Based on the liquidation preference of $25.00 per share for our 7.375% Series A preferred stock.
 
(4) Our partnership and LTIP units are each individually convertible into one share of common stock at the market closing price of our common stock of $23.17 per share on the last trading day of the year (December 31, 2007).
 
As a result, our debt to total capitalization ratio was approximately 45.1% at December 31, 2007 (excluding our proportionate share of indebtedness from our unconsolidated partnerships). Our board of directors adopted a policy of limiting our indebtedness to approximately 60% of our total 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 total capitalization ratio beyond the limit described above.
 
On August 1, 2007, our Operating Partnership entered into a second amended and restated unsecured credit agreement and a first amended and restated secured term loan agreement with KeyBank National Association (“KeyBank”), as administrative agent, and certain other lenders.


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The second amended and restated unsecured credit agreement increased the borrowing capacity on our unsecured line of credit from $500.0 million to $600.0 million and extends the maturity date to August 1, 2011. Subject to the administrative agent’s reasonable discretion, we may increase the borrowing capacity of the unsecured line of credit to $1.0 billion upon satisfying certain conditions. In addition, we may, in our sole discretion, extend the maturity date of the unsecured line of credit to August 1, 2012 after satisfying certain conditions and paying an extension fee based on the then current facility commitment. The unsecured line of credit bears interest at a floating rate equal to, at our option, either (1) reserve adjusted LIBOR plus a spread which ranges from 100 to 155 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 25 basis points, or (b) the federal funds rate then in effect plus a spread which ranges from 50 to 75 basis points, in each case, depending on our leverage. In September 2007, we entered into three interest rate swap agreements, which were intended to have the effect of initially fixing the interest rate on $205.0 million of the unsecured line of credit at a weighted-average rate of 5.9% through September 2008. We have deferred the loan costs associated with the subsequent amendments to the unsecured line of credit, which are being amortized to expense with the unamortized loan costs from the original unsecured line of credit over the remaining term. At December 31, 2007, we had $270.9 million in outstanding borrowings on our unsecured line of credit, with a weighted-average interest rate of 6.3% on the unhedged portion of the outstanding debt.
 
The first amended and restated secured term loan agreement amended the terms of our $250.0 million secured term loan, which is secured by the Company’s interests in 14 of our properties, to, among other things, reduce the borrowing rate, extend the maturity date of the loan to August 1, 2012 and provide greater flexibility with respect to covenants. The amended secured term loan bears interest at a floating rate equal to, at our option, either (1) reserve-adjusted LIBOR plus 165 basis points or (2) the higher of (a) the prime rate then in effect plus 25 basis points and (b) the federal funds rate then in effect plus 75 basis points. The secured term loan is also secured by our interest in any distributions from these properties, a pledge of the equity interests in a subsidiary owning one of these properties, and a pledge of the equity interests in a subsidiary owning an interest in another of these properties. We entered into an interest rate swap agreement in connection with the initial closing of the secured term loan, which has the effect of fixing the interest rate on the secured term loan at 5.8% until the interest rate swap expires in 2010. At December 31, 2007, we had $250.0 million in outstanding borrowings on our secured term loan.
 
The terms of the credit agreements for the unsecured line of credit and secured term loan 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, the maximum amount of secured, and secured 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 make distributions with respect to common stock or other equity interests in an aggregate amount for the preceding four fiscal quarters in excess of 95% of funds from operations, as defined, for such period, subject to other adjustments. We believe that we were in compliance with the covenants as of December 31, 2007.


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A summary of our outstanding consolidated mortgage notes payable as of December 31, 2007 is as follows (in thousands):
 
                                     
          Effective
    Principal Balance
     
    Stated Fixed
    Interest
    December 31,      
    Interest Rate     Rate     2007     2006     Maturity Date
 
Ardentech Court
    7.25 %     5.06 %   $ 4,564     $ 4,658     July 1, 2012
Bayshore Boulevard
    4.55 %     4.55 %     15,335       15,730     January 1, 2010
Bridgeview Technology Park I
    8.07 %     5.04 %     11,508       11,625     January 1, 2011
Eisenhower Road
    5.80 %     4.63 %     2,113       2,164     May 5, 2008
Elliott Avenue
    7.38 %     4.63 %           16,020     November 24, 2007
40 Erie Street
    7.34 %     4.90 %     17,625       18,676     August 1, 2008
500 Kendall Street (Kendall D)
    6.38 %     5.45 %     69,437       70,963     December 1, 2018
Lucent Drive
    5.50 %     5.50 %     5,543       5,733     January 21, 2015
Monte Villa Parkway
    4.55 %     4.55 %     9,336       9,576     January 1, 2010
6828 Nancy Ridge Drive
    7.15 %     5.38 %     6,785       6,872     September 1, 2012
Road to the Cure
    6.70 %     5.78 %     15,427       15,657     January 31, 2014
Science Center Drive
    7.65 %     5.04 %     11,301       11,444     July 1, 2011
Shady Grove Road
    5.97 %     5.97 %     147,000       147,000     September 1, 2016
Sidney Street
    7.23 %     5.11 %     29,986       30,732     June 1, 2012
9885 Towne Centre Drive
    4.55 %     4.55 %     21,323       21,872     January 1, 2010
900 Uniqema Boulevard
    8.61 %     5.61 %     1,509       1,648     May 1, 2015
                                     
                      368,792       390,370      
Unamortized premiums
                    10,888       13,466      
                                     
                    $ 379,680     $ 403,836      
                                     
 
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, 2007, principal payments due for our indebtedness (mortgage notes payable excluding debt premium of $10.9 million, secured term loan, secured construction loan, the exchangeable notes, and unsecured line of credit, excluding our proportionate share of the indebtedness of our unconsolidated partnerships) were as follows (in thousands):
 
         
2008
  $ 24,454  
2009
    430,186  
2010
    47,446  
2011
    297,167  
2012
    291,421  
Thereafter
    399,225  
         
    $ 1,489,899  
         
 
As noted above, we have entered into derivative contracts known as interest rate swaps in order to hedge the risk of increase in interest rates on our $250.0 million secured term loan, our $600.0 million unsecured line of credit, and our $550.0 million secured construction loan. In addition, in connection with entering into the acquisition and construction loan secured by our Center for Life Science | Boston property, we entered into four forward starting swap agreements, which have the effect of fixing the interest rate on the long-term debt that we expect to enter into upon completing the construction of the project in 2008. 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


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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 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. We assess the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction.
 
Our objective in using derivatives is to add stability to interest expense and to manage its 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 2007 and 2006, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and future variability in the interest related cash flows from forecasted issuances of debt. We formally document the hedging relationships for all derivative instruments, account for all of our interest rate swap agreements as cash flow hedges, and do not use derivatives for trading or speculative purposes.
 
As of December 31, 2007, we had four forward starting swaps hedging a forecasted debt issuance, with a total notional value of $450.0 million. The forward starting swaps are valued on the accompanying consolidated balance sheets at the net present value of the expected future cash flows on the swaps. At maturity, we will either (a) receive payment from the counterparties if the accumulated balance is an asset, or (b) make payment to the counterparties if the accumulated balance is a liability, with the resulting receipt or payment deferred and amortized as an increase or decrease to interest expense over the term of the resultant subsequent borrowing. No initial net investment was made to enter into these agreements.
 
As of December 31, 2007, we also had five interest rate swaps with an aggregate notional amount of $785.0 million under which at each monthly settlement date we either (1) receive the difference between the Strike Rate and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pay such difference if the Strike Rate is greater than LIBOR. One interest rate swap with a notional amount of $250.0 million hedges our secured term loan. Each of the remaining four interest rate swaps hedges the first interest payments, due on the date that is on or closest after each swap’s settlement date, associated with the amount of LIBOR-based debt equal to each swap’s notional amount. Three of these interest rate swaps have an aggregate notional amount of $205.0 million and are initially intended to hedge interest payments associated with our unsecured line of credit. The remaining interest rate swap has a notional amount of $330.0 million and is initially intended to hedge interest payments associated with our secured construction loan. No initial investment was made to enter into the interest rate swap agreements.
 
For the years ended December 31, 2007, 2006, and 2005 an immaterial amount of hedge ineffectiveness on cash flow hedges due to mismatches in maturity dates of the interest rate swap and debt was recognized in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our hedged debt. The change in net unrealized gains on cash flow hedges includes a reclassification of net unrealized gains/losses from accumulated other comprehensive income as a reduction to interest expense of $3.1 million and $2.3 million, and an increase of $681,000 for the years ended December 31, 2007, 2006, and 2005, respectively. During 2008, we estimate that an additional $3.5 million will be reclassified as an increase to interest expense.


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The following provides information with respect to our contractual obligations at December 31, 2007, including the maturities and scheduled principal repayments, but excluding related debt premiums. We were not subject to any material capital lease obligations or unconditional purchase obligations as of December 31, 2007.
 
                                         
Obligation
  2008     2009-2010     2011-2012     Thereafter     Total  
    (In thousands)  
 
Mortgage notes payable(1)
  $ 24,454     $ 52,472     $ 67,641     $ 224,225     $ 368,792  
Secured term loan
                250,000             250,000  
Secured construction loan(2)
          425,160                   425,160  
Exchangeable senior notes
                      175,000       175,000  
Unsecured line of credit(3)
                270,947             270,947  
Share of debt of unconsolidated partnerships(4)
    83,314       2,174                   85,488  
Interest payments on debt obligations(5)
    97,037       151,402       87,833       161,463       497,735  
Construction projects
    77,166                         77,166  
Tenant obligations(6)
    84,257       31,248       866             116,371  
Lease commissions
    6,792       962                   7,754  
                                         
Total
  $ 373,020     $ 663,418     $ 677,287     $ 560,688     $ 2,274,413  
                                         
 
 
(1) Balance excludes $10.9 million of unamortized debt premium.
 
(2) The secured construction loan matures on November 16, 2009, but we may extend the maturity date to November 16, 2010 after satisfying certain conditions and paying an additional fee.
 
(3) The unsecured line of credit matures on August 1, 2011, but we may extend the maturity date of the unsecured line of credit to August 1, 2012 after satisfying certain conditions and paying an extension fee based on the then current facility commitment.
 
(4) The maturity date of the secured acquisition and interim loan held by the PREI limited liability companies was extended by one year to April 3, 2009 in February 2008.
 
(5) Interest payments reflect cash payments that are based on the interest rates in effect and debt balances outstanding on December 31, 2007, excluding the effect of the interest rate swaps on the underlying debt.
 
(6) Committed tenant-related obligations based on executed leases as of December 31, 2007.
 
Funds from Operations
 
We present funds from operations, or FFO, available to common shares and partnership and LTIP units 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


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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 management’s 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.
 
Our FFO available to common shares and partnership and LTIP units and a reconciliation to net income for the years ended December 31, 2007 and 2006 (in thousands, except share data) was as follows:
 
                         
    Year Ended December 31,        
    2007     2006        
 
Net income available to common stockholders
  $ 55,665     $ 35,033          
Adjustments:
                       
Minority interests in operating partnership
    2,486       1,747          
Gain on sale of real estate assets
    (1,087 )              
Depreciation and amortization — unconsolidated partnerships
    1,139       80          
Depreciation and amortization — consolidated entities-discontinued operations
    228       550          
Depreciation and amortization — consolidated entities-continuing operations
    72,202       65,060          
Depreciation and amortization — allocable to minority interest of consolidated joint ventures
    (285 )              
                         
Funds from operations available to common shares and partnership and LTIP units
  $ 130,348     $ 102,470          
                         
Funds from operations per share — diluted
  $ 1.91     $ 1.74          
                         
Weighted-average common shares outstanding — diluted
    68,269,985       59,018,004          
                         
 
Off Balance Sheet Arrangements
 
As of December 31, 2007, we had investments in the following unconsolidated partnerships: (1) McKellar Court limited partnership, which owns a single tenant occupied property located in San Diego; and (2) two limited liability companies with PREI, which own a portfolio of properties primarily located in Cambridge, Massachusetts (see Note 10 in the accompanying consolidated financial statements).
 
The McKellar Court partnership is a variable interest entity as defined in FIN 46R; however, we are not the primary beneficiary. The limited partner at McKellar Court is 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. The assets of the McKellar Court partnership were $16.5 million and $16.7 million and the liabilities were $10.8 million and $10.9 million at December 31, 2007 and 2006, respectively. Our equity in net income of the McKellar Court partnership was $86,000, $83,000 and $119,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
 
PREI II LLC is a variable interest entity as defined in FIN 46R; however, we are not the primary beneficiary. PREI will bear the majority of any losses incurred. PREI I LLC does not qualify as a variable interest entity as defined in FIN 46R. In addition, consolidation under EITF 04-5 is not required as we do not control the limited liability companies. In connection with the formation PREI limited liability companies in April 2007, we contributed 20% of the initial capital. However, the amount of cash flow distributions that we may receive may be more or less based on the nature of the circumstances underlying the cash distributions due to provisions in the operating agreements governing the distribution of funds to each member and the occurrence of extraordinary cash flow events. We account for our member interests using the equity method for both limited liability companies.


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The assets of the PREI limited liability companies were $540.3 million and the liabilities were $450.1 million at December 31, 2007. Our equity in net loss of the PREI limited liability companies was $988,000 for the year ended December 31, 2007.
 
We are the primary beneficiary in three other variable interest entities, which we consolidate and which are reflected in our consolidated financial statements.
 
Our proportionate share of outstanding debt related to our unconsolidated partnerships is summarized below (dollars in thousands):
 
                                     
                Principal Amount(1)      
    Ownership
    Interest
    December 31,
    December 31,
     
Name
  Percentage     Rate(2)     2007     2006     Maturity Date
 
PREI I LLC and PREI II LLC(3)
    20 %     6.04     $ 83,285     $     April 3, 2008
McKellar Court partnership(4)
    21 %     4.63 %     2,203       2,230     January 1, 2010
                                     
Total
                  $ 85,488     $ 2,230      
                                     
 
 
(1) Amount represents our proportionate share of the total outstanding indebtedness for each of the unconsolidated partnerships.
 
(2) Effective or weighted-average interest rate of the outstanding indebtedness as of December 31, 2007.
 
(3) Amount represents our proportionate share of the total draws outstanding under a secured acquisition and interim loan facility, which bears interest at a LIBOR-indexed variable rate. The secured acquisition and interim loan facility was utilized by both PREI I LLC and PREI II LLC to acquire a portfolio of properties (initial borrowings of approximately $427.0 million) on April 4, 2007 (see Note 10 in the accompanying consolidated financial statements). The remaining balance will be utilized to fund future construction costs at certain properties currently under development. On February 19, 2008, the maturity date was extended to April 3, 2009.
 
(4) Amount represents our proportionate share of the principal balance outstanding on a mortgage note payable, which is secured by the McKellar Court property (excluding $186,000 of unamortized debt premium).
 
In connection with the acquisition of certain properties by PREI II LLC in April 2007, it assumed an obligation related to the remediation of environmental conditions at off-site parcels located in Cambridge, Massachusetts. PREI II LLC has estimated the cost of the remediation to be $3.6 million, which was recognized at the time of acquisition as an increase to the assets acquired and the recognition of a corresponding liability.
 
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.
 
Portions of our unsecured line of credit and secured construction loan bear 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.


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As of December 31, 2007, our consolidated debt consisted of the following (dollars in thousands):
 
                         
                Effective
 
                Interest
 
          Percent of
    Rate at
 
    Principal Balance     Total Debt     12/31/07  
 
Fixed interest rate(1)
  $ 554,680       37.0 %     5.16 %
Variable interest rate(2)
    946,107       63.0 %     5.92 %
                         
Total/weighted-average effective interest rate
  $ 1,500,787       100.0 %     5.64 %
                         
 
 
(1) Includes 15 mortgage notes payable secured by certain of our properties (including $10.9 million of unamortized premium) and our exchangeable senior notes.
 
(2) Includes our unsecured line of credit, secured term loan, and secured construction loan, which bear interest based on a LIBOR-indexed variable interest rate, plus a credit spread. However, we have entered into four interest rate swaps, which were intended to have the effect of initially fixing the interest rates on $205.0 million of our unsecured line of credit and $330.0 million of our secured construction loan at 5.9% and 6.1%, respectively. We have entered into an interest rate swap agreement that effectively fixes the interest rate on the entire $250.0 million outstanding balance of the secured term loan at a rate of 5.8% until the interest rate swap expires in 2010. We have also entered into four forward starting swap agreements, which will have the effect of fixing the interest rate on $450.0 million of forecasted debt issuance (after retirement of the secured construction loan) at approximately 5.2%.
 
To determine the fair-value of our outstanding indebtedness (including our proportionate share of indebtedness of our unconsolidated partnerships), 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, 2007, the fair-value of the fixed-rate debt was estimated to be $547.1 million compared to the net carrying value of $557.1 million (includes $11.1 million of premium with our proportionate share of the debt premium related to our McKellar Court partnership). We do not believe that the interest rate risk represented by our fixed-rate debt was material as of December 31, 2007 in relation to total assets of $3.1 billion and equity market capitalization of $1.8 billion of our common stock, operating partnership and LTIP units, and preferred stock. At December 31, 2007, the fair-value of the debt of our investment in unconsolidated partnerships approximated the carrying value.
 
Based on the outstanding balances of our unsecured line of credit, secured construction loan, and secured term loan and our proportionate share of the outstanding balance for the PREI limited liability companies’ secured acquisition loan at December 31, 2007, a 1% change in interest rates would change our interest costs by approximately $2.4 million 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 assumes 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.


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Item 8.   Financial Statements and Supplementary Data
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
    53  
    55  
    56  
    57  
    58  
    59  
    61  
    89  


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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 (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule III of the Company. We also have audited the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s 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 company’s 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 company’s 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.


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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Additionally, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
KPMG LLP
 
San Diego, California
February 28, 2008


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
                 
    December 31,  
    2007     2006  
 
ASSETS
Investments in real estate, net
  $ 2,805,983     $ 2,457,538  
Investment in unconsolidated partnerships
    22,588       2,436  
Cash and cash equivalents
    13,479       25,664  
Restricted cash
    8,867       6,426  
Accounts receivable, net
    4,457       5,985  
Accrued straight-line rents, net
    36,415       20,446  
Acquired above-market leases, net
    5,745       7,551  
Deferred leasing costs, net
    116,491       129,322  
Deferred loan costs, net
    15,567       17,608  
Other assets
    27,676       19,666  
                 
Total assets
  $ 3,057,268     $ 2,692,642  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Mortgage notes payable, net
  $ 379,680     $ 403,836  
Secured construction loan
    425,160       286,355  
Secured term loan
    250,000       250,000  
Exchangeable senior notes
    175,000       175,000  
Unsecured line of credit
    270,947       228,165  
Security deposits
    7,090       7,704  
Dividends and distributions payable
    25,596       19,847  
Accounts payable, accrued expenses and other liabilities
    95,871       62,602  
Acquired below-market leases, net
    23,708       25,101  
                 
Total liabilities
    1,653,052       1,458,610  
Minority interests
    17,280       19,319  
Stockholders’ equity:
               
Preferred stock, $.01 par value, 15,000,000 shares authorized: 7.375% Series A cumulative redeemable preferred stock, $230,000,000 liquidation preference ($25.00 per share), 9,200,000 shares issued and outstanding at December 31, 2007
    222,413        
Common stock, $.01 par value, 100,000,000 shares authorized, 65,571,304 and 65,425,598 shares issued and outstanding at December 31, 2007 and 2006, respectively
    656       654  
Additional paid-in capital
    1,277,770       1,272,243  
Accumulated other comprehensive (loss)/income
    (21,762 )     8,417  
Dividends in excess of earnings
    (92,141 )     (66,601 )
                 
Total stockholders’ equity
    1,386,936       1,214,713  
                 
Total liabilities and stockholders’ equity
  $ 3,057,268     $ 2,692,642  
                 
 
See accompanying notes to consolidated financial statements.


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Revenues:
                       
Rental
  $ 195,996     $ 164,487     $ 92,590  
Tenant recoveries
    61,735       54,160       42,220  
Other income
    8,378       88       3,974  
                         
Total revenues
    266,109       218,735       138,784  
                         
Expenses:
                       
Rental operations
    50,789       40,623       34,496  
Real estate taxes
    20,353       20,376       11,862  
Depreciation and amortization
    72,202       65,063       39,378  
General and administrative
    21,870       18,085       13,278  
                         
Total expenses
    165,214       144,147       99,014  
                         
Income from operations
    100,895       74,588       39,770  
Equity in net (loss)/income of unconsolidated partnerships
    (893 )     83       119  
Interest income
    990       1,102       1,333  
Interest expense
    (27,654 )     (40,672 )     (23,226 )
                         
Income from continuing operations before minority interests
    73,338       35,101       17,996  
Minority interests in continuing operations of consolidated partnerships
    (45 )     137       267  
Minority interests in continuing operations of operating partnership
    (2,412 )     (1,670 )     (1,271 )
                         
Income from continuing operations
    70,881       33,568       16,992  
                         
Income from discontinued operations before gain on sale of assets and minority interests
    639       1,542       57  
Gain on sale of real estate assets
    1,087              
Minority interests attributable to discontinued operations
    (74 )     (77 )     (3 )
                         
Income from discontinued operations
    1,652       1,465       54  
                         
Net income
    72,533       35,033       17,046  
Preferred stock dividends
    (16,868 )            
                         
Net income available to common stockholders
  $ 55,665     $ 35,033     $ 17,046  
                         
Income from continuing operations per share available to common stockholders:
                       
Basic earnings per share
  $ 0.83     $ 0.60     $ 0.44  
                         
Diluted earnings per share
  $ 0.83     $ 0.60     $ 0.43  
                         
Income from discontinued operations per share:
                       
Basic earnings per share
  $ 0.02     $ 0.03     $  
                         
Diluted earnings per share
  $ 0.02     $ 0.02     $ 0.01  
                         
Net income per share available to common stockholders:
                       
Basic earnings per share
  $ 0.85     $ 0.63     $ 0.44  
                         
Diluted earnings per share
  $ 0.85     $ 0.62     $ 0.44  
                         
Weighted-average common shares outstanding:
                       
Basic
    65,302,794       55,928,595       38,913,103  
                         
Diluted
    68,269,985       59,018,004       42,091,195  
                         
 
See accompanying notes to consolidated financial statements.


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
                                                         
                            Accumulated
             
    Series A
                Additional
    Other
    Dividends in
       
    Preferred
    Common Stock     Paid-In
    Comprehensive
    Excess of
       
    Stock     Shares     Amount     Capital     (Loss)/Income     Earnings     Total  
 
Balance at December 31, 2004
  $       31,386,333     $ 314     $ 429,893     $     $ (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       (1 )                  
Vesting of share-based awards
                      3,830                   3,830  
Common stock 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       757,591       5,922       (33,504 )     730,475  
Net proceeds from sale of common stock
          18,428,750       184       506,587                   506,771  
Net proceeds from exercise of warrant
          270,000       3       4,047                   4,050  
Net issuances of unvested restricted common stock
          92,416       1       (1 )                  
Vesting of share-based awards
                      4,019                   4,019  
Common stock dividends
                                  (68,130 )     (68,130 )
Net income
                                  35,033       35,033  
Unrealized gain on cash flow hedges
                            2,495             2,495  
                                                         
Balance at December 31, 2006
          65,425,598       654       1,272,243       8,417       (66,601 )     1,214,713  
Net proceeds from sale of preferred stock
    222,413                                     222,413  
Net issuances of unvested restricted common stock
          145,706       2       (2 )                  
Vesting of share-based awards
                      5,529                   5,529  
Common stock dividends
                                  (81,205 )     (81,205 )
Net income
                                  72,533       72,533  
Preferred stock dividends
                                  (16,868 )     (16,868 )
Unrealized loss on cash flow hedges
                            (30,179 )           (30,179 )
                                                         
Balance at December 31, 2007
  $ 222,413       65,571,304     $ 656     $ 1,277,770     $ (21,762 )   $ (92,141 )   $ 1,386,936  
                                                         
 
See accompanying notes to consolidated financial statements.


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Net income
  $ 72,533     $ 35,033     $ 17,046  
Preferred stock dividends
    (16,868 )            
                         
Net income available to common stockholders
    55,665     $ 35,033       17,046  
Other comprehensive income:
                       
Unrealized (loss)/gain on cash flow hedges
    (30,179 )     2,495       5,922  
                         
Comprehensive income
  $ 25,486     $ 37,528     $ 22,968  
                         
 
See accompanying notes to consolidated financial statements.


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Operating activities:
                       
Net income
  $ 72,533     $ 35,033     $ 17,046  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Gain on sale of real estate assets
    (1,087 )            
Depreciation and amortization
    72,429       65,610       39,378  
Minority interests in consolidated partnerships
    45       (137 )     (267 )
Minority interests in operating partnership
    2,486       1,747       1,274  
Allowance for doubtful accounts
    232       193       257  
Revenue reduction attributable to acquired above-market leases
    2,451       2,471       1,524  
Revenue recognized related to acquired below-market leases
    (5,859 )     (4,811 )     (3,332 )
Compensation expense related to restricted common stock and LTIP units
    6,229       4,019       3,830  
Amortization of deferred loan costs
    3,195       1,925       1,002  
Write off of deferred loan costs due to repayment and extinguishment of debt
                2,002  
Amortization of debt premium on mortgage notes payable
    (827 )     (2,148 )     (1,761 )
Loss/(income) from unconsolidated partnerships
    893       (83 )     (119 )
Distributions received from unconsolidated partnerships
    357       130       106  
Distributions to minority interest in consolidated partnerships
    (108 )            
Changes in operating assets and liabilities:
                       
Restricted cash
    (2,441 )     (939 )     (3,017 )
Accounts receivable
    1,296       3,695       (8,293 )
Accrued straight-line rents
    (15,969 )     (11,715 )     (5,425 )
Deferred leasing costs
    (9,664 )     (3,070 )     (1,196 )
Other assets
    (2,231 )     (3,620 )     187  
Due to affiliates
                (53 )
Security deposits
    (587 )     79       1,000  
Accounts payable, accrued expenses and other liabilities
    (8,530 )     13,156       10,619  
                         
Net cash provided by operating activities
    114,843       101,535       54,762  
                         
Investing activities:
                       
Purchases of interests in and additions to investments in real estate and related intangible assets
    (394,504 )     (1,340,204 )     (604,462 )
Purchases of interests in unconsolidated partnerships
    (21,402 )            
Proceeds from sale of real estate assets, net of selling costs
    19,389              
Minority interest investment in consolidated partnerships
    205       449       594  
Receipts of master lease payments
    928       726       2,025  
Security deposits received from prior owners of rental properties
          720       1,074  
Redemption of operating partnership units for cash
                (173 )
Funds held in escrow for acquisitions
    (12,900 )           (200 )
Additions to non-real estate assets
    (1,017 )     (1,154 )     (663 )
                         
Net cash used in investing activities
    (409,301 )     (1,339,463 )     (601,805 )
                         


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BIOMED REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Financing activities:
                       
Proceeds from common stock offering
          528,783       340,257  
Proceeds from exercise of stock warrant
          4,050        
Proceeds from preferred stock offering
    230,000              
Payment of common stock offering costs
          (21,989 )     (16,678 )
Payment of preferred stock offering costs
    (7,587 )            
Payment of deferred loan costs
    (3,856 )     (14,675 )     (6,192 )
Unsecured line of credit proceeds
    286,237       620,476       244,175  
Unsecured line of credit repayments
    (243,455 )     (409,311 )     (227,175 )
Secured term loan proceeds
                250,000  
Unsecured term loan proceeds
                100,000  
Unsecured term loan payments
                (100,000 )
Secured bridge loan proceeds
          150,000        
Secured bridge loan payments
          (150,000 )      
Exchangeable senior notes proceeds
          175,000        
Secured construction loan proceeds
    138,805       286,355        
Mortgage notes proceeds
          147,000        
Principal payments on mortgage notes payable
    (21,579 )     (5,401 )     (3,759 )
Tenant improvement loan
          (2,000 )      
Tenant improvement loan repayments
    122       53        
Distributions to operating partnership unit holders
    (3,936 )     (3,312 )     (3,098 )
Dividends paid to common stockholders
    (79,851 )     (61,749 )     (38,044 )
Dividends paid to preferred stockholders
    (12,627 )            
                         
Net cash provided by financing activities
    282,273       1,243,280       539,486  
                         
Net (decrease)/increase in cash and cash equivalents
    (12,185 )     5,352       (7,557 )
Cash and cash equivalents at beginning of year
    25,664       20,312       27,869  
                         
Cash and cash equivalents at end of year
  $ 13,479     $ 25,664     $ 20,312  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for interest (net of amounts capitalized of $56,699, $7,614, and $708, respectively)
  $ 25,154     $ 33,965     $ 20,291  
Supplemental disclosure of non-cash investing and financing activities:
                       
Accrual for common stock dividends declared
    20,326       18,973       12,591  
Accrual for preferred stock dividends declared
    4,241              
Accrual for distributions declared for operating partnership unit and LTIP unit holders
    1,029       874       773  
Mortgage loans assumed (includes premium of $0, $1,037, and $11,312, respectively)
          18,460       149,517  
Accrued additions to real estate and related intangible assets
    46,783       29,680       4,812  
 
See accompanying notes to consolidated financial statements.


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BIOMED REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Organization and Description of Business
 
BioMed Realty Trust, Inc., a Maryland corporation (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 Company operates 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 principally through its subsidiary, BioMed Realty, L.P., a Maryland limited partnership (its “Operating Partnership”). The Company’s tenants primarily include biotechnology and pharmaceutical companies, scientific research institutions, government agencies and other entities involved in the life science industry. The Company’s properties 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.
 
As of December 31, 2007, the Company owned or had interests in 67 properties, located principally in Boston, San Diego, San Francisco, Seattle, Maryland, Pennsylvania and New York/New Jersey, consisting of 103 buildings with an operating portfolio of approximately 6.6 million rentable square feet of laboratory and office space, which was approximately 93.8% leased to 112 tenants. Approximately 1.8 million square feet was available for redevelopment. In addition, the Company had properties constituting approximately 1.9 million rentable square feet under construction and undeveloped land that the Company estimates can support up to an additional 1.3 million rentable square feet of laboratory and office space.
 
Information with respect to the number of properties, square footage, and the percent of rentable square feet leased to tenants is unaudited.
 
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 participating 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.
 
Investments in Partnerships
 
The Company evaluates its investments in limited liability companies and partnerships under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46R provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities”) and the determination of which business enterprise should consolidate the variable interest entity (the “primary beneficiary”). Generally, FIN 46R 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 entity’s 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.
 
If FIN 46R does not apply, the Company considers 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


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BIOMED REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 partnership’s 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 the partnership or limited liability company is required.
 
Except for investments that are consolidated in accordance with FIN 46R or EITF 04-5, the Company accounts for investments in entities over which it exercises significant influence, but does not control, under the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for equity in earnings and cash contributions and distributions. Under the equity method of accounting, the Company’s net equity in the investment is reflected in the consolidated balance sheets and its share of net income or loss is included in the Company’s consolidated statements of income.
 
On a periodic basis, management assesses whether there are any indicators that the carrying value of the Company’s investments in partnerships or limited liability companies may be impaired on a more than temporary basis. An investment is impaired only if management’s estimate of the fair-value of the investment is less than the carrying value of the investment on a more than temporary basis. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying value of the investment over the fair-value of the investment. Management does not believe that the value of any of the Company’s investments in partnerships or limited liability companies was impaired as of and through December 31, 2007.
 
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
  15-40 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,  
    2007     2006  
 
Land
  $ 313,685     $ 270,286  
Ground lease(1)
          14,210  
Land under development
    103,743       85,362  
Buildings and improvements
    1,675,530       1,598,384  
Construction in progress
    750,460       497,971  
Tenant improvements
    67,009       51,904  
                 
      2,910,427       2,518,117  
Accumulated depreciation
    (104,444 )     (60,579 )
                 
    $ 2,805,983     $ 2,457,538  
                 


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BIOMED REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
(1) During 2007, the Company acquired a fee simple interest in the land at its Landmark at Eastview property. The balance of $14.2 million was subsequently reclassified from ground lease to land.
 
Purchase accounting was applied, on a pro-rata basis where appropriate, to the assets and liabilities of real estate properties in which the Company 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 management’s determination of the relative fair-value of these assets. Factors considered by the Company 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, the Company includes 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.
 
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 considerations 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 and insurance); and (c) the value associated with lost rental revenue from existing leases during the assumed lease-up period. 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.
 
Costs incurred in connection with the acquisition, development or construction of properties and improvements are capitalized. 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 direct costs incurred during the period of development. The Company capitalizes costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. Determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. The Company considers a construction project as substantially complete 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 any remaining portion under construction. Interest costs capitalized for the years ended December 31, 2007, 2006, and 2005 were $56.7 million, $7.6 million, and $708,000, respectively. Capitalized costs associated with unsuccessful acquisitions are charged to expense when an acquisition is no longer considered probable.
 
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 asset’s 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. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected


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BIOMED REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of its investments in long-lived assets. These assessments have a direct impact on the Company’s net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Although the Company’s strategy is to hold its properties over the long-term, if the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair-value less costs to sell, and such loss could be material. If the Company determines that impairment has occurred, the affected assets must be reduced to their fair-value. As of and through December 31, 2007, no assets have been identified as impaired and no such impairment losses have been recognized.
 
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. The Company believes that the risk is not significant.
 
Restricted Cash
 
Restricted cash primarily consists of cash deposits for real estate taxes, insurance and capital expenditures as required by certain mortgage notes payable.
 
Deferred Leasing Costs
 
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, with remaining terms ranging from two months to sixteen years as of December 31, 2007. Deferred leasing costs also include the net carrying value of acquired in-place leases and acquired management agreements.
 
Deferred leasing costs, net at December 31, 2007 consisted of the following (in thousands):
 
                         
    Balance at
    Accumulated
       
    December 31, 2007     Amortization     Net  
 
Acquired in-place leases
  $ 167,664     $ (71,412 )   $ 96,252  
Acquired management agreements
    12,921       (6,603 )     6,318  
Deferred leasing and other direct costs
    15,541       (1,620 )     13,921  
                         
    $ 196,126     $ (79,635 )   $ 116,491  
                         
 
Deferred leasing costs, net at December 31, 2006 consisted of the following (in thousands):
 
                         
    Balance at
    Accumulated
       
    December 31, 2006     Amortization     Net  
 
Acquired in-place leases
  $ 162,935     $ (47,066 )   $ 115,869  
Acquired management agreements
    12,601       (4,574 )     8,027  
Deferred leasing and other direct costs
    6,122       (696 )     5,426  
                         
    $ 181,658     $ (52,336 )   $ 129,322  
                         


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BIOMED REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The estimated amortization expense during the next five years for deferred leasing costs at December 31, 2007 was as follows (in thousands):
 
                 
2008
          $ 23,760  
2009
            20,680  
2010
            14,093  
2011
            10,618  
2012
            9,578  
Thereafter
            37,762  
                 
            $ 116,491