Sometimes a great company is stuck in a sector with lousy sentiment. Investors might jump at the chance to get the stock at a great price, only to be run over by investors who hate the sector in general. This is the case in the office real estate investment trust (REIT) sector. Alexandria Real Estate Equities (ARE +1.42%) is a great stock sitting in the discount bin.
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Alexandria Real Estate Equities is an office REIT that focuses primarily on life sciences companies and tech companies. It has a long track record of developing collaborative life sciences, agtech, and technology campuses in major urban areas, including San Francisco, Boston, and San Diego among others. As of the end of September, it has an asset base of 74.5 million square feet. Alexandria's tenant base runs the gamut of pharmaceutical companies, biotech firms, technology companies, government agencies, and academic institutions.
NYSE: ARE
Key Data Points
Working from home has been a headache for office REITs
The biggest knock on office REITs over the past several years has been the issue of working from home. The COVID-19 pandemic proved that work from home is a legitimate way to do things, and it offers the benefit of making many employees happy, along with allowing management to save money on office space. Indeed, many start-ups are fully remote to begin with.
Alexandria's tenants are not necessarily in the best place for fully remote work, however. Alexandria's tenants (especially in the life sciences space) require laboratory spaces, and this type of work simply isn't all that conducive to a remote environment. In addition, the regulatory and health requirements for lab spaces are exacting, and tenants tend to go with companies that have a long track record of developing these sorts of properties.
Alexandria has held up better than most office REITs
The COVID-19 pandemic did affect occupancy for Alexandria, however. At the end of 2019, Alexandria's occupancy rate was 96.8%, and by the end of September, it had fallen to 94.3%. It was 94% at the end of 2021, so occupancy is moving back up, which is encouraging. Some other office REITs are looking at occupancy rates in the low 90s.
Most of the tech layoffs are in companies that are not Alexandria tenants. Meta Platforms used to be a major tenant; however, Alexandria sold the building, so Meta's layoffs (and any potential downsizing of space) won't affect Alexandria directly. No single company accounts for more than 3% of Alexandria's rents, and the top three tenants aree Bristol Myers Squibb (BMY +2.13%), Moderna (MRNA 1.76%) and Eli Lilly (LLY +2.57%). As the U.S. population ages, healthcare spending should increase, which is a tailwind for the entire life sciences sector.
Alexandria is trading at a historically high dividend yield
On the company's third-quarter earnings conference call, it guided for 2022 funds from operations (FFO) per share to come in between $8.40 and $8.42 per share. REITs tend to use funds from operations instead of earnings per share under generally accepted accounting principles. This is because REITs have a lot of depreciation and amortization, which is a non-cash expense. For example, Alexandria's earnings per share guidance is $5.70 to $5.72, much lower than its FFO guidance.
Using the midpoint of Alexandria's FFO guidance, the company is trading at a multiple of 17.6 times 2022 FFO per share, which is a cheap multiple given its leadership position in its space. Alexandria recently increased its dividend. That gives it a dividend yield of 3.4%, which is close to its high.
Great company, but lousy sentiment
Alexandria is a great company in a great space. However, the headwind for the stock will be negative investor sentiment for REITs in general and office REITs in particular. Since REITs use a lot of debt, rising interest rates negatively affect earnings. We have also seen some dividend cuts in the office REIT sector, which doesn't help sentiment. Patient investors can pick up a great REIT with a decent yield, but it is important to understand the headwinds for the stock. The next year could be difficult for the office REIT space until we see vacancy rates begin to fall.
