The stock market has had a rough go of it this year, as rising interest rates and Russia invasion of Ukraine conspiring to damp investor sentiment. While stock market sell-offs are rarely fun, they do provide opportunities to pick up quality stocks at reduced prices.
Real estate investment trusts (REITs) have been beaten up based on the prospect of higher interest rates. That said, some REITs shouldn't be looked at as just a dividend yield play; some have a great growth runway ahead of them. One such REIT is Alexandria Real Estate Equities (ARE -0.70%), which is down about 13% year to date.
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Alexandria is the premier life sciences office REIT
Alexandria Real Estate Equities develops office properties geared toward the life sciences sector. It builds urban cluster campuses in biotech-heavy cities like San Diego, Boston, San Francisco, and Seattle. The company has a total portfolio of 67 million square feet, of which 38.8 million square feet is leased and the rest is in various stages of development.
While office REITs have been under a dark cloud amid the increase in the number of people working remotely, healthcare and biotech companies with specialized spaces require many employees to be on site. Alexandria's clients need state-of-the-art laboratory spaces, and the REIT has limited competition.
Its main tenants are pharmaceutical and biotech companies, medical-device companies, and academia and government researchers. Its biggest tenants include pharmaceutical giants Bristol-Myers Squibb, Moderna, and Eli Lilly. Investment-grade and publicly traded companies accounted for 88% of rent last year, so Alexandria's client base is extremely stable.
Alexandria projected 2022 adjusted funds from operations (AFFO) -- a crucial metric for REIT profitability -- to be between $8.26 and $8.46 a share. REITs generally use funds from operations as a way to describe earnings because it excludes many noncash charges (like depreciation) that depress earnings per share. Based on current prices, Alexandria is trading at 23 times forecast AFFO per share for 2022.
Alexandria has a healthy pipeline of new properties
Last year, the company added 9.5 million square feet of space last year, a record. On the fourth-quarter earnings conference call, management estimated that this additional space would translate into $6 billion in contractual rents. Last year, Alexandria generated $2.1 billion in revenue, so this incremental revenue will be a meaningful increase in future revenue.
Finally, as leases expire, they are being reset at market rates. As of the fourth quarter, Alexandria estimated that their lease mark-to-market rate was 31%, which implies faster growth even without the additional square footage under development.
Alexandria increased its dividend twice last year and has a yield of 2.4%. This is on the small side for a REIT, but Alexandria has been plowing cash back into the business and developing more properties. These investments should translate into higher earnings.
Alexandria's focus on life sciences sets it apart from other office REITs, and its client base of pharmaceutical and biotech companies is less sensitive to economic shocks than more cyclical industries. Therefore, Alexandria provides a great combination of growth and stability.
