BioMed Realty Appears Ripe For Takeover

BioMed Realty Trust (BMR) has retained Morgan Stanley to explore the potential sale of the $7.5 billion (based on total capitalization) Life Science REIT. According to Bloomberg one likely buyer is the Blackstone Group, LP.

That’s not alarming, considering the fact that I suggested that BioMed could become a takeover target when I wrote on the company over a year ago:

I consider BioMed a target. I have no inside knowledge to support that argument other than the fact that Ventas does not own a Life Science property and BioMed appears to be an enviable operation today, especially given the more recent decline in price.

I wrote that article in January 2014 and since that time shares in BioMed have declined by around 7 percent. What is surprising though is that BioMed has improved substantially over the last year and a half.

As one of only two “pure play” Life Science REITs BMR has become a safer bet based on its Moody’s credit upgrade in April, raising from Baa3 to Baa2 on the unsecured debt and from Ba1 to Baa3 on the preferred stock. The ratings outlook was revised to stable.

Moody's said (in April) that the Baa2 ratings upgrade recognizes the company's high-quality pool of laboratory/office assets typically concentrated in the core life science markets. The ratings change also acknowledges BioMed's improving credit profile, notably fixed-charge coverage, secured debt and unencumbered assets, as well as Moody's expectation that BioMed will continue to follow a conservative business strategy focused on high-quality biomedical properties.

Moody's noted that the ratings reflect the company's modest overall leverage and adequate liquidity with manageable near-term maturities and a growing unencumbered asset pool. Source: SNL Financial

Overall there appears to be no deterioration in BioMed’s fundamentals and one analyst, Paul Morgan with Vanaccord Genuity, raised his opinion of BioMed today from “hold” to “buy” and increased his target price target from $21 to $23. The analyst wrote in a research report:

Last night [Sept 22], Bloomberg reported that BioMed has engaged Morgan Stanley to advice in a potential takeout, naming Blackstone Group as one of the interested M&A suitors. With BMR down 10% since Q2 earnings, we see sufficient upside to our prior $21 PT to warrant an upgrade in the absence of an M&A deal.

We expect the takeout reports, however, to crystallize the valuation discussion for BMR on the company's discounts to NAV and to peers, diluting the focus on the nearer-term earnings issues of asset sales and lease terminations that had us on the sidelines previously.

Another analyst, John Kim with BMO Research, stated in a research report today that “the discounted valuation (12.7% discount to forward NAV) reflects poor sentiment on the company. We think this stems from its volatile earnings (largely termination fees and BioMed Ventures), its history of aggregating assets without recycling capital, and a lower- quality portfolio than its closest peer Alexandria Realty (ARE).

While volatile earnings are discounted in a public REIT, we believe termination fees are an essential defensive mechanism of office leases, and we estimate BioMed Venture has delivered a 62% ROIC. On dispositions, BMR has sold just a modest $460 million since 2005, but we estimate it has sold at a solid return (28% ROC) and BMR is targeting another $125-150 million in 2016.”

Kim and BMO initiated coverage on BioMed earlier this month with an Outperform rating and as one of the firm’s top office REIT picks. Kim went on to explain that more “M&A in the REIT space is likely since REITs are down 8.8% year to date.

I agree with Kim’s assessment and I still believe BioMed’s suitor could also be a public company, namely Ventas, Inc. (VTR).

Ventas is the only “big 3” Health Care REITs that has not entered the Life Science sector. HCP, Inc. has around 14 percent invested in Life Science and Health Care REIT (HCN) sold off a 49 percent interest in seven life science buildings located at Massachusetts Institute of Technology’s University Park (a mixed-use life science campus, in Cambridge, MA).

Forest City Enterprises, Inc. (NYSE:FCEA and FCEB) redeemed HCN’s interest for $573.5 million, including HCN’s pro rata share of property-level debt of $174 million.

Ventas recently announced two transformation deals though: (1) a spin-off of its local and regional skilled nursing properties to Care Capital Properties (CCP), and (2) an investment in Ardent Hospitals – a new leg to the Ventas stool that is expected to generate scalable earnings for the dominant healthcare REIT.

From a cost of capital perspective the timing may not be perfect for Ventas since the company has had to increase leverage modestly (to provide CCP a cleaner balance sheet) and also because of the company’s discounted equity valuation (12.9x P/FFO).

Clearly there’s value in the Life Science sector as evidenced by Alexandria’s current valuation (17.2x P/FFO) and year-over-year return of ~21 percent. Although Mr. Market may not be feelin’ the love with BioMed, according to Bloomberg, Blackstone does.

The author owns  shares in CCP, HCP, and VTR.

Sources: SNL Financial.

Brad Thomas is the Editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, Trump: It’s ALL Business, about U.S. presidential candidate Donald J. Trump.