A message from our Al Frank Value Division:
Are you looking for a new stock pick? Check out this inexpensive, income-producing life sciences pick.
What is BioMed Realty Trust? A mid-cap real estate investment trust (REIT) that leases, develops, constructs, redevelops, acquires, finances and owns space utilized by the life science community (with over 18 million square feet of rentable space.
Shares of BioMed have dropped fairly sharply this year as selling in the REIT space overall, seemingly driven by rising U.S. interest rates, has taken its toll. Additionally, BMR shares were pressured earlier this year on news that the company was undergoing a management shakeup, as well as news that it would lose tenant Genzyme, currently occupying 343,000 square feet, to rival Alexandria Real Estate in 2018.
While we do not see interest rate risk abating anytime soon, and acknowledge that if the biotech space falls on tougher times, as far as ease of raising capital, BMR’s operating environment will stiffen. With that said, it’s definitely not all bad news for BioMed, and we think the 2015 sell off is overdone, which has created an attractive entry point or additional share purchase opportunity.
Results from the firm’s first quarter indicate that BMR continues to make headway. While analysts were looking for BioMed to report funds from operations (FFO) of $0.37 per share for Q1, the company delivered $0.41. Additionally, the firm reported revenue of $178 million for the period, outpacing expectations of $169 million.
While the Genzyme news is definitely a loss, we believe that the remaining three years on the lease provides more than adequate time for BioMed to re-tenant the space (potentially with even better terms). Additionally, in June, BMR announced that biotech company Illumina had signed a 20-year lease for a new 155,000 square foot space in the Cambridge area of the U.K.
While BMR could face operating headwinds, including competition, potential consolidation within the life science space, potential increases in construction/redevelopment costs and weakening in capital formation by its clients, we believe that the stock is an attractive investment for those looking to add REIT exposure to their financial holdings as well as those looking for a unique way to access the healthcare space, especially the often more volatile and pricey biotech segment.
Our positive outlook is supported by the belief that BMR will benefit from rent growth in key markets, realize value creation from new and redeveloped space, and will benefit from continued ease of capital access for its prospective and current clients. We also like the firm’s continued efforts to increase its all-important academic research space as well as the internal realignment that included shifts within management personnel to help sharpen its core business focus.
Finally, we believe the leasing side of the business will continue to benefit from favorable demographic trends as well as innovation and growth in precision medicine and digital health initiatives within the life sciences industry. We are quite comfortable with BioMed’s financial footing and like the company’s attractive 5.3% dividend yield.
Look for our next blog post to learn why we like BMR.
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Written by John Buckingham