Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Alexandria Real Estate Outperformed Its Peers During the COVID-19 Pandemic

By Brent Nyitray, CFA - May 4, 2021 at 8:55AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It comes down to the market it serves.

Office real estate investment trusts (REITs) have been under pressure for the past year. The coronavirus pandemic has caused some investors to even question the concept of the office REIT. After all, if companies can work from home without much of a disruption, why will companies spend so much on expensive urban office space in the future?

The question has created headwinds for some office REIT operators. But while many office REITs saw big declines in income over the past 12 months, one office REIT appears to be bucking this trend.

What is its secret?

Alexandria focuses on the life sciences industry

Alexandria Real Estate Equities (ARE 1.87%) is an office REIT with a focus on the life sciences sector. The company owns 52.6 million square feet of urban office properties, which are clustered together as "innovation clusters." The company's footprint is concentrated in Boston, San Francisco, San Diego, Seattle, and parts of Maryland. The properties are generally Class A properties, which means they are the most modern, built with highest quality materials, and offer the best amenities. The company's client base includes Bristol Myers-Squibb, Takeda Pharmaceutical, Illumina, Moderna, and Sanofi

Picture of a scientist

Image source: Getty Images.

Life Sciences businesses were considered "essential businesses" during the COVID-19 pandemic and were open for the entire year. In addition, increased government funding was a big source of support for Alexandria's tenant base. This has created momentum that continues into this year. On the earnings conference call, Joel Marcus, the founder of Alexandria, said that the "velocity and continuing demand for Alexandria lab space across our cluster markets is as strong as we've ever experienced."

Alexandria is increasing its asset base

During 2020, Alexandria increased its asset base by 27% to over 50 million square feet. That continued into the first quarter of 2021 when the company leased an additional 1.7 million square feet, which represented the second-best quarter in its last five years. Given that the government is proposing a 20% increase in the budgets for the National Institute of Health, the Center for Disease Control and Prevention, and Health & Human Services, Alexandria's tenants should see more funding head their way. 

Unlike other office REITs like SL Green Realty (SLG -0.49%), which are seeing rents fall, Alexandria is planning for 5%-to-6% annual increases in rent. In fact, the incremental increase between the fourth quarter of 2020 and the first quarter of 2021 was about 3.5%, so if you annualize that you are looking at double-digit percentage growth.

Alexandria is one of the few office REITs that grew in 2020 

Alexandria is guiding for 2021 funds from operations (FFO) to come in between $7.68 and $7.78 per share, which is an increase from the $7.60 to $7.80 the company guided for at the end of 2020. REITs tend to use funds from operations to quantify earnings, given that depreciation tends to understate earnings. Last year, Alexandria earned $7.30 in FFO per share, so the company is forecasting about 6% growth. Note that Alexandria grew FFO per share by 5% in 2020, as opposed to many office REITs, which reported declines. 

A dividend hike could be coming

At current levels, Alexandria is trading at 23 times expected 2021 FFO per share, which is on the high side for a REIT, although top-quality companies generally trade at premium multiples. The stock pays a quarterly dividend of $1.09 per share, which works out to a dividend yield of 2.4%. This is definitely on the low side for a REIT, but Alexandria is investing heavily in growth. The payout ratio (basically the dividend divided by FFO per share) is below 60%, which indicates that a dividend hike is probably in the cards. 

Going forward, Alexandria's growth might drop below that of its non-life sciences comparables given that the company has harder comparisons than competitors that saw drop-offs in 2020. Another thing for investors to consider, though: While work-from-home is viable for many corporations, it is less so for life sciences companies, which need special lab spaces and a more collaborative environment. While there are longer-term concerns for the entire industry, Alexandria will be more immune to them than most. 

Brent Nyitray, CFA has no positions in the stocks mentioned. The Motley Fool owns shares of and recommends Bristol Myers Squibb and Illumina. The Motley Fool recommends Alexandria Real Estate Equities and Moderna Inc. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alexandria Real Estate Equities, Inc. Stock Quote
Alexandria Real Estate Equities, Inc.
ARE
$170.09 (1.87%) $3.12
SL Green Realty Corp. Stock Quote
SL Green Realty Corp.
SLG
$50.77 (-0.49%) $0.25

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.