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Big Growth and Big Income in Real Estate... SafelyBy Rob Fannon, editor Phase 1 InvestorMonday, November 26, 2007 Along the I-270 corridor of Rockville, Maryland sits one of the most impressive spreads of commercial real estate in America.
The interconnected buildings boast sweeping glass curtain walls... The main entrance welcomes visitors to an atrium flooded with natural light and lush greenery. The lavish 1 million-square-foot, $600 million campus earned its architect, Davis Carter Scott, an award from the National Association of Industrial and Office Properties.
This opulent headquarters was built by Human Genome Sciences in 2001. Yet the extravagence showcases everything that went wrong during the biotech bubble that began in the last 1990s. Human Genome Sciences rose to prominence on a wave of investor money and the showmanship of CEO Bill Haseltine.
Haseltine wowed investors by promising technology that "speeds up drug discovery a hundredfold, easily." His company would discover everything from "the fountain of youth" to new "cellular therapies," nothing short of an "untapped gold mine."
By the time he stepped down from the top post at HGS in 2004, Haseltine had raised more than $2.2 billion, including a record $1 billion round of financing. The result of all that fundraising? Zilch. Some 15 years later, the company is still burning through mountains of cash with little to show for it. HGS's share price is the same as it was 10 years ago.
Yet, there's one tangible asset still in place – that beautiful 55-acre headquarters. Thing is, Human Genome doesn't own it anymore...
In 2006, HGS was forced to sell it in order to raise cash for operations. The $425 million price tag was much less than the original construction costs. Plus, the 20-year lease-back terms were "triple-net," meaning HGS is responsible for all property expenses, including utilities, taxes, and insurance. For 70 cents on the dollar, the facility sold to a business that specializes in R&D real estate... a health care REIT.
Health care REITs traditionally focus on long-term care facilities, medical office buildings, and hospitals. Only recently have these firms diversified into R&D real estate, like the Human Genome campus. The reasons why are clear...
The number of publicly traded biotech firms is rising 10% year-over-over. Presently, there are 329 public biotechs, with an additional 1,000 or more private firms scattered throughout the world. More than 40% of industry spending is in the U.S. Like kids out of college, most of these startups are in the financial position to rent their labs, not buy.
According to the Pharmaceutical Research and Manufacturers of America (PhRMA), biopharmaceutical research spending topped a record $55 billion last year. As the U.S. population continues to age and Big Pharma struggles with expiring patents and diminishing revenues, biotech drug development will continue to expand. And here's the bottom line: This rapidly growing sector needs lab space at almost any price.
Even better for health care REITs that move into R&D real estate, their monthly rent checks don't depend on cumbersome and convoluted insurance company regulations or government programs (like Medicare and Medicaid).
As I explained in my last essay, owning medical office buildings, hospitals, and long-term care facilities is a recession-proof, inflation-proof business with government-guaranteed demand. Owning R&D real estate has all the same benefits... and comes with huge growth potential.
If you're serious about long-term safe and growing dividends, look for health care REITs that are ready to supply what the booming biotech sector needs most.
Good investing,
Rob Fannon
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