2022 was a challenging year for healthcare-focused office real estate investment trust (REIT) Alexandria Real Estate Equities (ARE +0.77%). Despite it being a record-breaking year for the life sciences and biotech industries, the stock is down 20% this year. Low investor sentiment for the office industry, coupled with a bear market and rising interest rates, have weighed on the company despite its maintaining healthy earnings.
Could 2023 be the year it comes back? Let's take a closer look at where this premier office REIT could be headed in the coming year.
NYSE: ARE
Key Data Points
Life sciences demand may slow
The global pandemic ushered in record-breaking years of growth for the life sciences industry. The race to deliver pandemic-related new medicines and medical technologies led to increased demand for high-quality office space -- precisely what Alexandria Real Estate Equities owns and leases.
The company owns or has an interest in roughly 74.5 million square feet of healthcare-focused real estate leases to pharmaceutical, biotech, agrifood tech, life sciences, and medical operators across the country. These properties aren't your average office buildings. Most are high-tech laboratories and medical campuses that deliver the state-of-the-art spaces its nearly 1,000 tenants need to operate.
In the third quarter of 2022, Alexandria Real Estate Equities saw its rental rate grow by 27% year over year, undoubtedly due to the record activity within the space. Revenue also grew by 20.5% while its funds from operations (FFO), a key metric for REIT profitability, rose by 9% roughly.
Many experts predict demand and activity will return to more normalized levels in 2023. Venture capital funding in the life sciences and biotech space scaled back notably since its peak at the start of the pandemic, and vacancy rates in 12 life science hubs across the country are slowly ticking upward. This may not seem like good news for a company like Alexandria Real Estate Equities, but it still has a ton going for it.
Fueling growth in 2023
Alexandria has 27 new developments and redevelopment projects underway, expected to deliver in 2023 or thereafter. The majority of those are nearly 100% leased. A recession could slow down new R&D in agrifood, biotech, and life sciences space, but it doesn't mean activity will stop together.
The Government has also announced its plan to allocate $2 billion in funding toward the life sciences sector, and 96% of the REITs contracted leases include incremental increases, which will help the company maintain healthy growth even if demand falters. Around 99% of its rents were collected in October of 2022, and occupancy is near 95%, so if demand is slowing, it hasn't impacted the company yet.
It's also worth mentioning that Alexandria Real Estate Equities is in a healthy financial position. Its debt ratios are in line with the REIT average of around 5 times earnings before interest, taxes, depreciation, and amortization (EBITDA). It has two years before its next major debt maturity, over $6 billion in liquidity, and its dividends are covered by a 44% margin.
The REIT increased its dividends for the last 12 years, raising its payouts by 168%. If the market pulls back quickly, Alexandria may put off a dividend increase, but I personally think it will keep its streak going. The stock is trading around 19 times its projected full-year FFO, which isn't a huge deal, but it's well within the average range for a high-quality REIT paying a yield roughly 2 times the S&P 500 average.
There aren't many providers of high-quality office space in this niche industry. The company could see temporary slowdowns in its growth in the coming years, but long-term demand favors the continued expansion of this top-tier company. That's why investors looking for a solid income stock to buy with long-term growth opportunities should consider investing in Alexandria Real Estate Equities.
