Jefferies Downgrades BioMed Realty & Reduces PT - Here's Why

On April 9, Jefferies analyst Omotayo Okusanya published a detailed research note explaining why the firm is lowering its rating on life science REIT BioMed Realty Trust

from Buy to Hold. In a broad sense, BioMed could be considered an office REIT, however, its bio-med/life science facilities are highly specialized, often including labs and R&D space for: pharmaceutical, education, medical and government agency tenants. Intraday Trading - Jefferies Downgrade

During the past 52-weeks, shares of BioMed have traded in a range of $18.75 to $24.82; and are currently down over 4 percent during Thursday trading at mid-day. Tale Of The Tape - Life Science REITs Past Year

The only other life science pure-play REIT is $6.9 billion cap Alexandria Real Estate

, which currently pays a dividend yield of 3.1 percent. BioMed currently has a market cap of $4.5 billion, and is paying a yield of 4.7 percent. Jefferies - BioMed Realty: Downgrade Buy to Hold, Lowers PT $26 to $23  The Jefferies revised BioMed base case price target of $23 was derived from a dividend discount model (DDM); one-year forward portfolio NAV was estimated at $23.20 using a cap-rate of 6.9 percent.  Notably, Jefferies has lowered its 2015/2016 base case adjusted FFO estimates from $1.47/$1.54 to $1.41/$1.49 per share.  Occupancy is projected to increase 120 bps to 92.8 percent 2015, up 120 bps 2016; with renewal spreads of plus 5 percent.  Acquisitions projected at 6.5 percent cap-rate. Jefferies - BioMed Base Case Rationale  Large Lease Terminations: BMR recently terminated 313,000 SF of Vertex space in Cambridge; 105,000 SF of space at its Pacific Research Center.  Potential HSGI Purchase: Tenant HGSI, (a GlaxoSmithKline company), bought a $322.5 million property from BioMed in Q4 2014, and has a purchase option on an adjacent facility, Shady Grove in 2016.  Move-Out Announced: Sanofi, the fifth largest BMR tenant, has announced its intention to vacate 343,000 SF of its Genzyme space, and relocate to an Alexandria Realty facility in 2018. A potential silver lining for BioMed is that demand for life science space appears to be strong in most markets; however, Jefferies believes the re-lease and reconfiguration of the space will have negative short-term impacts on FFO.

Jefferies - BioMed Upside Case  The Jefferies BioMed upside scenario price target of $28 was derived from a dividend discount model (DDM); one-year forward portfolio NAV estimate of $26.40 using a cap-rate of 6.4 percent.  Jefferies 2015/2016 upside case adjusted FFO estimates of $1.44/$1.58 per share.  Occupancy is projected to increase 240 bps to 94 percent 2015, up 120 bps 2016; with renewal spreads of plus 8 percent.  Acquisitions projected at a 7 percent cap rate. Jefferies - BioMed Downside Case  The Jefferies BioMed downside scenario price target of $18 was derived from a dividend discount model (DDM); one-year forward portfolio NAV estimate of $20.80 using a cap-rate of 7.2 percent.  Jefferies 2015/2016 upside case adjusted FFO estimates of $1.37/$1.39 per share.  Occupancy is projected to increase 20 bps to 91.8 percent 2015, down 50 bps 2016; with renewal spreads of plus 2 percent.  Acquisitions projected at a 6 percent cap rate. Jefferies - Bottom Line BioMed Realty currently owns ~118 facilities containing 17 million rentable square feet. Mr. Okusanya believes that the best long-term solution for BioMed would be to grow the scale of its portfolio to a scale where the vacancies caused by lease terminations and tenant purchase options are not as significant to earnings moving forward. He noted that BioMed has a robust $900 million development pipeline of ~2 million SF, and that the company also has a land bank capable of supporting an additional 6.7 million SF of development. However, there will be equity and debt raise required to fund these projects which could be a near-term drag on earnings. Notably, there also has been significant C-Suite turnover recently, which could be a near-term concern for some investors as well.