Biotech REITs Under the Microscope

As the biotechnology industry grows, so does its need for modern office and lab space. That is why some investors are betting that REITs catering to biotechs will continue to remain bright spots in an overall foggy REIT industry.

The only two REITs that focus on owning life science buildings -- Alexandria Real Estate Equities(ARE Quote) and BioMed Realty Trust(BMR Quote) -- are both favorites among analysts and investors of late.

"Biotechnology is a growing industry, and the real estate companies that service this sector are likely to see substantial growth over the coming years," Richard Moore, an analyst with KeyBanc Capital Markets, told clients in a research note Thursday.

Alexandria, which was selected Wednesday to develop New York City's massive new biotech hub, saw its stock jump over 5% on Thursday to $80.10 after a bullish analyst upgrade. J.P. Morgan's Anthony Paolone raised his rating on Alexandria to overweight, citing the company's strong development pipeline.

Construction on the massive East River Science Park in New York City won't begin until 2006, so the development won't help Alexandria's earnings for some time. But the company's investment pipeline now totals over $1 billion, by Paolone's account, and that will fuel earnings growth over the next few years.

Paolone projects Alexandria's FFO, or funds from operations (a common REIT performance metric), to grow 6% to 8% over the next few years. This compares favorably with general office REITs, whose FFO growth rates are expected to be 3% to 5% in 2005 and 2006, he wrote in his report.

In the meantime, BioMed Realty Trust, whose stock has jumped 50% since its summer IPO in 2004, released strong earnings on Thursday. The company, which is run by former executives from Alexandria, reported FFO per share of 29 cents, dragged down by a 6-cent charge for loan fee amortization. Ignoring this item, the company would have beaten consensus analyst estimates by 3 cents.