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
BioMed Realty Trust
-- 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.
Moore of KeyBanc Capital Markets thinks BioMed is a better play than Alexandria because of the company's cheap valuation and stronger earnings growth rate. BioMed's one-year PEG ratio is 0.89, compared with 1.57 for office REITs in general, Moore said.
With BioMed's acquisition pipeline standing at $500 million, Moore expects the company's FFO growth rate to be 15.6% over the next year, compared with 9% at Alexandria. Both rates are significantly better than the 7% to 8% earnings growth rate the REIT industry as a whole is expected to average over the next year.
Moore rates BioMed a buy with a $27 price target. BioMed's stock price remained unchanged at $24 Thursday. "The industry they're in is clearly an industry that has got a lot of legs to it ... that gives me confidence they are not a flash in the pan," Moore said.
KeyBanc has an investment-banking relationship with BioMed. J.P Morgan has provided non-investment-banking services to Alexandria and expects to do investment banking for the company within the next three months.