Times are hard in the stock market, and it's hard to say when they'll get better. But bear in mind that this kind of beatdown is also prime time for identifying good candidates to buy for the inevitable turnaround.
One that I'm keen on is Alexandria Real Estate Equities (ARE -1.96%). This real estate investment trust (REIT) owns essential medical research and lab campuses across the U.S. It's the kind of space this is that really helps make it a smart buy for the long run.
Alexandria caters to the life sciences industry and other tech-heavy clients at what it calls innovation clusters in its hometown of San Diego, as well as the Seattle, San Francisco, Boston, New York City, and Washington, D.C., markets, and North Carolina's Research Triangle.
The companies do the kind of work that can't be done at home. And more than a thousand tenants occupy these specialized spaces, including a long list of the nation's leading biopharma companies, along with a sprinkling of major tech players such as Alphabet's Google. As of second-quarter 2022, Bristol Myers Squibb is its largest tenant, accounting for 3.5% of ARE's annual rental revenue. Eli Lilly and Company and Moderna are tied for second at 2.5% each.
Expanding a portfolio already proven productive
The company is in the process of adding about 7.8 million rentable square feet (RSF) to its current portfolio of about 74 million RSF, which in turn is projected to add more than $665 million in new annual revenue beginning later this year.
That would be after reporting just under $1.3 billion in total revenue for the first half of this year, which itself is up about 27% year over year. Alexandria also reported that its net operating income (NOI) from same-store properties was up 8.6% in the first six months of 2022 over the same period last year.
A dip in FFO but guidance for more growth in this key metric
But amid all this good news is something the company didn't highlight in its 2Q results: its funds from operations (FFO) were down about 8.6% year-over-year and its FFO per share just under 14%.
There can be a lot of reasons for that dip, including approximately $2 billion in sales of existing properties so far this year for the first measure cited above and the dilutive effect of equity issues for the second. Meanwhile, Alexandria's 2Q announcement did note a nearly 20% jump in year-over-year FFO, from $282.3 million to $338.8 million. That was good for $2.10 a share in FFO, and at the same time the company raised its 2022 guidance by three cents a share to $8.41.
Management also said in its Q2 earnings report that its FFO payout ratio of about 56% based on cash flow "allows us to continue to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment."
All this seemingly forward progress adds to this office REIT's appeal as a smart buy.
ARE Total Return Level data by YCharts
A smart buy at a bargain price for total return and dividend income
The chart above shows Alexandria's total return compared to the S&P 500 and CRSP US REIT Index over the past 10 years. But that doesn't tell the whole story. ARE is a dividend stock with a current yield of about 3.4% that's twice that of the S&P 500 and follows 11 consecutive years of payout bumps.
But it's not a particularly cheap stock by REIT standards. Even after falling about 38% year to date, ARE stock is still trading at about 16 times FFO per share. That's much higher than the 9X for this metric for Boston Properties, a big office REIT that's moving heavily into life sciences space, and about on par with Realty Income, the widely held retail REIT that's now trading for about 15.8X FFO to share price and with mobile infrastructure REIT American Tower (AMT -0.26%) at 16.1X at this writing.
That said, it's definitely in a dip. This trust's stock closed at all-time high of $220.10 last Dec. 30, a far cry from the $139 or so per share it was trading for at the time of this writing.
Given its long-term record and the growing income it's locking in with new properties already heavily leased and record-level higher rents it's been able to negotiate with new leases to existing tenants, I think the signs point up for this REIT. I own this stock and I think adding to it now is a smart buy.
