There's currently a lot of uncertainty about the future of office buildings since many employees don't want to return to the office full time. Because of that, many investors are avoiding real estate investment trusts (REITs) that focus on owning office buildings.
That's causing them to overlook Alexandria Real Estate Equities (ARE 1.85%), which isn't your average office REIT. It focuses on owning collaborative life science, agriculture technology (agtech), and technology campuses in innovation clusters of major cities. Because of that, demand for its space is strong. That puts its already rock-solid dividend on an even firmer foundation. Here's a closer look at why income investors won't want to miss this REIT.
In-demand office space
Alexandria currently has 41.9 million square feet of operating properties in key innovation markets, including Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and the Research Triangle in North Carolina. Occupancy across its portfolio stood at an impressive 98.4% at the end of the second quarter after excluding recently acquired properties.
The REIT leases space at its properties under long-term agreements that currently have a weighted average remaining lease term of 7.1 years. Those leases will provide steadily rising income, driven by annual lease escalation clauses that average 3% per year across 97% of its portfolio.
Meanwhile, expiring leases are a source of growth for Alexandria, not uncertainty like other office REITs. The company signed nearly 2 million square feet of renewal leases this year at rental rates 39% above expiring lease rates on the same space. Those two factors helped drive 10.2% same property net operating income (NOI) growth in the second quarter, the third-highest growth rate in the company's history.
Alexandria has two other growth drivers: development projects and acquisitions. The REIT currently has 5.4 million square feet of space under development to support the rising demand for collaborative space. Meanwhile, it has another 10.4 million square feet of near-term development and redevelopment projects in the pipeline and enough land to support another 16.5 million square feet of future developments.
The company also has a long history of acquiring stabilized and value-add properties. It plans to invest $2.6 billion to $2.8 billion in acquisitions this year. These investments will enable the REIT to grow its funds from operations per share at an even faster rate than NOI.
A rock-solid financial foundation
Alexandria can easily finance its continued expansion thanks to its strong financial profile. The REIT has a conservative dividend payout ratio, enabling it to retain a significant amount of cash to finance growth. It expects to produce over $1 billion in cash flow this year and retain about $300 million after paying its 2.9%-yielding dividend.
Meanwhile, Alexandria has one of the strongest balance sheets in the REIT sector. It has investment-grade credit ratings that rank it in the top 10% of all publicly traded U.S. REITs. The company backs that with conservative leverage ratios, long-term fixed-rate debt, and ample liquidity. That gives it an enormous amount of financial flexibility to pay its dividend while continuing to expand its portfolio.
The company's growing portfolio should enable it to keep increasing the dividend. Alexandria has expanded its dividend at a 6.8% average annual rate over the past decade. It's steadily retaining more cash while growing the payout, putting it on an even firmer foundation.
A surefire way to collect passive income from real estate
Alexandria is easy to overlook, given the current struggles in the office sector. That's causing investors to miss out on its rock-solid dividend. With collaborative properties in high demand, the REIT should be able to continue growing at an attractive rate in the coming years, enabling it to keep boosting the dividend. That makes it an excellent option for those seeking to collect a steadily rising dividend income stream.
