Kelvin Cheng/iStock Editorial via Getty Images
Kelvin Cheng/iStock Editorial via Getty Images
Alexandria Real Estate Equities, Inc. (NYSE:ARE) is a quality real estate investment trust that trades at an undemanding valuation while delivering compelling business growth and offering a solid income yield. At current prices, the REIT is an attractive income and value play.
Alexandria Real Estate Equities is oftentimes categorized as an office real estate investment trust, but the company isn't comparable to the likes of Boston Properties (BXP) and other regular office REITs.
Instead, Alexandria Real Estate's properties mainly consist of life science buildings such as laboratories. These are more resilient compared to traditional office space -- working from home is possible for many people employed in an office, but few people who are employed in laboratories can work from home. Experiments, tests, and so on have to be done at laboratories, meaning demand for Alexandria Real Estate's properties remained high even during the pandemic and beyond when the working-from-home trend proved harmful for many other (more traditional) office property owners.
Alexandria Real Estate's properties are located in the major markets for life sciences and related industries, such as Boston, New York City, San Diego, Seattle, and the San Francisco Bay Area.
Alexandria Real Estate's properties have a total floor space of more than 73 million square feet, as of the end of 2023, with 42 million square feet being operated while the remainder consists of properties in construction (around 5.5 million square feet) or being part of future development projects.
Alexandria Real Estate focuses on class A and class A+ properties while employing a clustering approach -- its properties are located close to each other, forming campus-like areas where many different tenants can come together.
The majority of Alexandria Real Estate's tenants do either have an investment grade rating or are otherwise large publicly traded companies, according to its most recent earnings report. The default risk for these tenants isn't high, and since Alexandria Real Estate's tenant base is also well-diversified without a too-high concentration on a single tenant, the REIT has a relatively low-risk portfolio. The fact that the life science industry is essential and resilient to all kinds of macro crises -- trade troubles, recessions, and so on -- also helps reduce risks for Alexandria Real Estate when it comes to tenant issues.
The facts that Alexandria Real Estate's properties are well-located and that its tenants benefit from industry tailwinds explain why the company has a high occupancy rate of 95% across its portfolio -- higher than many other, more traditional, office REITs.
Alexandria Real Estate also has a small venture capital arm that invests in life science companies and (agricultural) tech companies, although one can argue whether this smaller business on top of the more important real estate business is generating a lot of value. On one hand, Alexandria Real Estate has above-average access to biotech companies and other life science players due to the existing business relations due to them being tenants. But on the other hand, one could also argue that a real estate investment trust should focus on its core business and deploy capital in new properties instead of being a minor venture capital player -- especially since most REIT shareholders aren't too interested in the venture capital side of the business. Overall, I am relatively neutral towards the venture capital business, seeing it as neither particularly positive nor as a major negative, but some might see it in a more favorable -- or unfavorable -- light.
When the company reported its most recent quarterly earnings results, for the fiscal fourth quarter of 2023, investors and analysts were pleasantly surprised -- the company generated significantly higher revenues compared to what was expected.
Revenues came in at $760 million for the quarter, which was up by an attractive 13% compared to the previous year's period. This was slightly better than the growth rate during the first three quarters of 2023, when revenues were up by 11% compared to the previous year's period, suggesting that momentum is on Alexandria Real Estate's side.
This revenue growth is driven by several contributing factors, both when it comes to the most recent quarterly results, but also when it comes to the company's business growth in general.
Alexandria Real Estate has been able to grow its rents per square foot over time. Even at existing locations, rents keep growing, as the specialized space remains in high demand, and since many of Alexandria Real Estate's tenants keep investing for growth -- the healthcare industry has been growing at an above-average rate for many years, after all. Over the last year, we saw this, too, as renewal rents were up by a very attractive 29%, with cash basis rents rising by a somewhat weaker but still pretty nice 16%. If this trend of rising rents at existing properties continues -- and I don't see why this should change in the future -- then Alexandria Real Estate will have a nice long-term growth driver that is especially valuable since the REIT does not have to buy or acquire new properties to generate this growth.
Of course, like most REITs, Alexandria Real Estate still buys and acquires additional properties on top of that to further boost its business growth, but the growing rents from its existing properties make for a nice growth tailwind that is independent of new construction and acquisitions.
Profitability has grown nicely over the years as well, with funds from operations rising from $8.42 to $8.97 per share over the last year. Alexandria Real Estate issues shares regularly, like most other REITs, which results in some dilution. But since profits grow faster than the company's share count, FFO per share still keeps climbing, rising by 7% over the last year -- a compelling result, considering REITs are generally lower-growth vehicles. Also, Alexandria Real Estate is feeling some headwinds from rising interest rates, which makes the high-single-digit FFO per share growth rate look even better.
The majority of the REIT's debt is fixed-rate, and the company has done a good job locking in low interest rates for a relatively long period of time, as just 20% of debt matures over the next five years, with the weighted average remaining term of debt being close to 13 years. This helps explain why Alexandria Real Estate was able to deliver nice profit growth despite interest rates working against REITs -- Alexandria Real Estate felt a below-average negative impact due to how the management team positioned the company when interest rates were low.
For the current year, analysts are forecasting funds from operations per share of around $9.50, which would be up by a little more than 5% compared to last year. Based on a share price in the high $120s, ARE is trading at around 13x FFO right now. While there are some REITs that are trading at lower valuations, many of those have major headwinds. REITs that are suffering a lot from higher interest rates, REITs that are suffering from weak occupancy rates, REITs with high leverage or low-grade properties, and REITs with huge tenant issues are trading at lower valuations. But these things don't hold true for Alexandria Real Estate, and a 13x earnings multiple seems far from high for a quality REIT with strong properties and appealing growth.
Based on current prices, Alexandria Real Estate offers a dividend yield of 4%, which is relatively on par with the broader REIT industry yield -- the Vanguard Real Estate Investment Trust (VNQ) yields 4.1% right now. Alexandria Real Estate has a history of increasing its dividend over time, with 13 years of annual dividend increases in a row. Over the last five years, the REIT has increased its dividend by around 6% per year on average, which should be sustainable, assuming the company grows its FFO per share by around 5% to 7% per year going forward.
Between a 4% current dividend yield and a 6% annual dividend growth rate, total returns in the 10% range could be achievable. For a lower-risk income investment, that's a pretty nice return potential, I believe.
While no investment is risk-free and while issues such as tenant troubles might emerge in the future, Alexandria Real Estate looks like a low-risk pick: High-grade properties, a strong balance sheet, tenant diversification, and a target industry that is resilient to macro shocks make for a sleep-well-at-night business model.
Add solid business and FFO per share growth, a nice dividend yield, regular dividend increases, and an undemanding valuation, and Alexandria Real Estate looks like a good income and total return pick at current prices -- although shares were an even better buy a couple of months ago.