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 One of their favorite targets is Pasadena, California-based
Alexandria Real Estate Equities Inc, which owns the largest
collection of high-end lab space in such research clusters as San
Diego, San Francisco and Cambridge, Massachusetts. A total of 64
mutual funds and hedge funds have reported adding shares of the
company to their portfolios in the current quarter, a 56 percent
jump from the quarter ending in September, according to Morningstar
data.
Those buys come on the heels of a steep decline in biotech stocks
generally because of concerns that legislation could bring caps to
drug prices. Shares of Alexandria fell by as much as 10 percent
during the sell-off, while the broader Nasdaq biotechnology index
tumbled as much as 24 percent before hitting a low at the end of
September.
Fund managers say that they pounced on shares of a company they see
as uniquely positioned to benefit from an aging U.S. population that
will spur the development of new drugs. U.S.-based life science
firms have added approximately 80,000 employees since 2011,
according to real estate research firm JLL. That has helped push
rents for lab spaces up by 7.4 percent over the last year in Boston,
the nation's most expensive market for life science firms, while San
Francisco rose 16.9 percent and San Diego is up 15.5 percent.
And investors who go long on lab space instead of the biotech
companies that use it don't have to worry about which drugs will
emerge as winners and which won't.
"They own the best real estate in the best healthcare-focused
markets in the country," said Jeffrey Kolitch, whose $1.8 billion
Baron Real Estate fund is the top-performing real estate fund over
the last five years, according to Morningstar. Kolitch, who has
owned shares of the company since 2008, added to his position this
fall, according to a September quarterly filing. He would not say at
exactly what price he added shares.
With its fortunes directly tied to the health of tenants including
Biogen, Novartis, Eli Lilly and Roche, Alexandria has long traded in
tandem with the pharmaceutical and biotech industries.
At the same time, the shares are benefiting from the acquisition of
BioMed Realty Trust - its chief competitor among life-sciences
focused REITs - by private equity group Blackstone for $4.8 billion
on Oct. 8. Blackstone paid a 24 percent premium for BioMed's assets,
which Kolitch estimates were in less desirable locations than
Alexandria's and suggests that Alexandria would fetch a higher
valuation.
To be sure, the company's strong connection to the biotech sector
cuts both ways. Shares of Alexandria are down 3.5 percent over the
last three months, compared with a 3.2 percent gain for the REIT
sector as a whole, largely due to its connection to tenants such as
Gilead Sciences, whose shares were down at one point as much as 22
percent for the year before rebounding.
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And it's no bargain. Shares of Alexandria, which reports its next
quarterly results on Nov 3, trade at a trailing price-to-earnings
ratio of 119, about double the average U.S. REIT. Its short interest
- a measure of how many investors are betting that it will fall - is
a low 1.9 percent, according to Thomson Reuters data and it is
paying a 3.4 percent dividend.
PUSH INTO TECH
Some analysts say that they are cautious about the company's
expansion plans as it increasingly moves away from its profitable
core business of lab space and into traditional office space leased
by tech startups.
Alexandria announced last year that it had formed a joint venture
with car-booking service Uber Technologies [UBER.UL] to build its
new headquarters in San Francisco's Mission Bay neighborhood. In
August, Alexandria announced that it had leased a 150,000 building
to Pinterest in San Francisco's South of Market neighborhood.
Overall, the company has about 3.1 million of square footage leased
in the San Francisco region.
"When you talk to brokers in San Francisco, you're hearing that over
the last six to nine months companies are taking space that they
don't need today so they can expand in the future," said David
Rodgers, an analyst at Robert W. Baird & Co., who downgraded
Alexandria to "neutral" in September, according to Thomson Reuters
data. "We're not calling the end of the tech boom yet, but there's a
lot of planning based on the growth plans of tech companies who may
not need it."
Anthony Paolone, an analyst at JP Morgan Securities, upgraded his
rating on the company to "overweight," however, based in part on the
company's holding of real estate in the tech centers of San
Francisco and Seattle. He estimates that 83 percent of the company's
$2.7 billion in developments have already been pre-leased, and that
the stock trades at a discount of approximately 10 percent to what
its underlying real estate is worth.
"While you are getting later in the cycle, we are comfortable that
these are folks that are going to show up and pay rent. It's
Pinterest, Uber, Bayer. We're not experts in those spaces but they
seem to us like good potential tenants," he said.
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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