Biomed Realty Trust Inc (BMR): Massive REIT In The Making

With the announcement that it intends to acquire the biotechnology REIT Wexford Science & Technology, Biomed Realty Trust Inc (NYSE:BMR) has cleared the way for one of the industry’s largest combinations in recent memory. BioMed is already a leader in the fast-growing life science sub-sector of the real estate investment trust space and looks poised to break out in the wake of this deal.

Biomed Realty Trust Inc (NYSE:BMR)Although Wexford is not a publicly traded firm and is under no obligation to report specific revenue and sales figures, the value of this combination has been pegged at about $640 million. The all-cash deal will include a payment of approximately $550 million for Wexford’s functional properties and another $90 million for the spaces that the firm is currently developing. It is important to note that the deal’s successful completion hinges on a few customary closing conditions; however, most observers believe that it will ultimately conclude without encountering any major obstacles. This could happen as early as the end of the second quarter of 2013.

Deal Structure

Under the terms of the deal, Biomed Realty Trust Inc (NYSE:BMR) will issue cash payments to Wexford’s private shareholders in the aggregate amount of $640 million. The company will absorb about 1 million square feet of under-construction space in Wexford’s property portfolio, as well as the smaller firm’s existing holdings.

As of the fourth quarter of 2012, Wexford had leased just under 70 percent of its available office space. Obviously, BioMed will need to work to increase this occupancy rate; however BioMed will benefit from the many small tenants that Wexford brings to the table.  After the deal, less than half of the company’s space will be reserved for its 10 largest tenants.

What is BioMed?

Biomed Realty Trust Inc (NYSE:BMR) is a REIT that focuses its attention on the life sciences and biotechnology sectors. The company partially or wholly owns and operates a number of prestigious complexes. BioMed is also the owner/operator of various private medical properties in Boston, Baltimore, Chicago, and North Carolina’s Research Triangle, among other key areas. In 2012, the company had an EBITDA of about $313 million on gross revenues of $516.8 million.

With a market capitalization of more than $22 billion, HCP, Inc. (NYSE:HCP) is several times larger than BioMed.  HCP focuses on a number of different sectors of the healthcare real estate market and operates a continent-spanning portfolio of properties. Its physical holdings include long-term care facilities, clinics, skilled nursing facilities, assisted-living complexes and medical science campuses. Unlike BioMed, HCP, Inc. (NYSE:HCP)issues various credit vehicles like mezzanine loans and structured loans to its healthcare clients.

Biomed Realty Trust Inc (NYSE:BMR) also has several smaller competitors. Among these moderately sized firms, Alexandria Real Estate Equities Inc (NYSE:ARE) stands out as particularly noteworthy. Alexandria Real Estate Equities Inc (NYSE:ARE) poses a major competitive threat to BioMed in the life sciences and medical research sub-sectors. Its holdings include private medical campuses that it leases to pharmaceutical companies and device manufacturers, as well as university-attached medical systems.

The industry could change due to a strengthened BioMed.  With the addition of Wexford and additional cash discussed below, BioMed could continue to grow revenue and be a harder competitor for other REITs.  Currently, HCP, Inc. (NYSE:HCP) has a ROA of almost 4%, while both BioMed and Alexandria Real Estate Equities Inc (NYSE:ARE) have a ROA of about 1.6%.  With returns from Wexford and cost synergies between the REITs, BioMed could improve on its return in the future.  All three REITs had revenue gains of over 10% in the last year, and with the continuing real estate recovery these gains are likely to continue.

Long-Term Outlook and Possible Plays

Biomed Realty Trust Inc (NYSE:BMR) is financing part of this deal with the proceeds from a secondary public offering. Under the terms of the offering, BioMed will issued about 15 million shares of its common stock at a price of $21.40 per share, which should yield approximately $321 million in cash for the company. While BioMed has not specified the exact amount that it will put towards Wexford’s cash price, it has explicitly stated that it would use some of the offering’s proceeds to pay down unrelated debts that have languished on its books.

While this move is not particularly surprising, it may give investors pause. Since the company is a REIT, BioMed’s capital structure cannot be accurately compared to that of a typical health firm. In general, REITs do not attract outside worry or attention for making secondary public offerings. On the other hand, BioMed does admit that it requires the offering’s proceeds to fund “everyday corporate operations” and “general expenses.” This may indicate that the company’s balance sheet is struggling and highlight the need for investors perform their own due diligence before reaching such a conclusion.

In sum, this deal promises to turn Biomed Realty Trust Inc (NYSE:BMR) into one of the United States’ most powerful life sciences REITs. While the transaction has not yet been completed, investors should assume that it will go through as planned. Those who believe that the life sciences industry will continue to build momentum in the coming years may wish to initiate long positions in BioMed or attempt to get in on its secondary public offering. By contrast, those who feel uncomfortable at the thought of an additional offering may wish to avoid the stock. Either way, BioMed bears watching at these levels.

The article Massive REIT In The Making originally appeared on and is written by Mike Thiessen.

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