A Case for Two Life-Science REITs

Tickers in this article: ARE BMR HCN HCP
NEW YORK ( TheStreet) - Real estate investment trusts in the life-sciences sector are buoyed by sustainable revenue from large drug and medical-research companies, and these companies, in turn, are sustained by new advances and drug approvals from the Food and Drug Administration.

The increase in FDA approvals has created a need for space for scientific research, a boon for life-science REITs and something investors should consider.

Alexandria Real Estate Equities and BioMed Realty Trust are the only two pure-play life-science REITs with a combined market capitalization of around $9 billion.

A few weeks ago, I wrote about Alexandria, the oldest of the life-science REITs that went public in 1997. BioMed Realty went public in 2004 and has a similar investment model with 95 properties and assets of around $5 billion.

Life-science REITs tend to own properties near big pharmaceutical companies close to major universities. Hot spots include San Francisco, Boston, and San Diego. Alexandria is focused on companies developing treatments for major diseases, including cancer, while BioMed is investing in university research and development centers.

In June, BioMed completed its acquisition of Wexford Science and Technology for $672 million. Wexford owns 11 properties in eight markets with around 1.6 million square feet of space (86% leased).

The life-science sector is a newer REIT category that is a hybrid between office and health care. Leases are stable because lab space is scarce. Larger health care REITs such as HCP Inc. and Health Care REIT own life-science properties, but Alexandria and BioMed are the only two REITs that focus on that niche.

As FDA-related approvals accelerate, Alexandria and BioMed benefit from improved credit quality as the larger drug companies have produced higher risk-adjusted returns. The Amex Biotech Index outperformed the S&P 500 in the first quarter (18% to 10%) and is up 74% since the start of 2012.

BioMed has performed the best since the end of the recession with a total return of 48.22%, compared with 16.83% for Alexandria. Both have moved back up over the last 30 days returning around 8.5% each. Total return includes stock price appreciation and dividend payouts.

BioMed has a dividend yield of 4.42%, and Alexandria's is 3.71%. Both REITs are investment-grade rated by S&P (BBB-) and they are trading at fair valuation ranges.

Of the two, I like BioMed since the shares are trading at a lower earnings multiple of around 14.3x, and I believe the Wexford deal provides BioMed with a new line of business in the university research sector where the combined company will be able to mine the new opportunities.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.