Investing in real estate is a proven way to build wealth over time and generations, and through all kinds of markets. Meanwhile, investing in real estate dividend stocks adds the attraction of income without the stress of directly managing properties or dealing with tenants.
A good stock to consider is Alexandria Real Estate Equities (ARE -0.70%), a real estate investment trust (REIT) that provides mission-critical office and lab space to more than 1,000 tenants in a collection of collaborative campuses in and around its hometown of San Diego as well as North Carolina's Research Triangle, the Boston area, San Francisco, Seattle, and around Washington, D.C.
Guilt by association: Alexandria stock takes a sector hit
The market has not been kind to Alexandria Real Estate recently as rising interest rates and concerns about tech industry layoffs have helped drive its share price down by about 18% so far this year, while the greater market as represented by the S&P 500 (^GSPC -0.88%) is up about 5%.
Indeed, office space is a commercial real estate sector that has been particularly hard hit by the work-from-home movement that resulted from the pandemic. But the kind of space that Alexandria provides makes it particularly difficult to compete against this different kind of office REIT.
ARE total return level data by YCharts.
Past performance pointing to a promising future?
Alexandria's recent performance might make potential investors wary and current shareholders queasy. But that would be overlooking the past performance of this landlord to some of the world's leading developers of disease treatments.
It has turned a $1,000 investment in its 1997 initial public offering into nearly $15,000, twice the total return of the S&P 500 over the same 26 years, as illustrated by the chart above.
And there's reason for optimism about a turnaround. The company reported near-record leasing activity in 2022 that included rent increases of 31% for its renewals during the year.
Renewals account for only about 4.5 million square feet of the company's 75 million square feet of rental space, but that whole portfolio is 95% occupied by a tenant base that has been paying more than 99% of its rent overall.
Escalation clauses in the rest of the portfolio provide about a 3% annual rent increase, which together with the new leases grew net operating income (NOI) by a company-record 9.6% in 2022. Adding to the rent rolls will be the tenants in the company's 7.6 million square feet of new space that's coming on line through 2025 and already is three-quarters leased.
A rock-solid balance sheet buttresses growing payouts
While REITs are certainly susceptible to higher borrowing costs from rising interest rates, Alexandria has a rock-solid balance sheet with nearly all of its debt in fixed-rate obligations with an average remaining term of 13.2 years and no maturities until 2025. The company said in its year-end release that it has an investment-grade credit rating that places it among the top 10% of the country's more than 200 publicly traded REITs.
Funds from operations (FFO) per share, the REIT equivalent of earnings per share, also remains a strong point for Alexandria. After jumping by 8.5% to $8.42 in 2022, the company is now projecting $8.86 to $9.06 in FFO per share, which would be about a 6.2% increase at the midpoint.
That's a slowdown, but not enough for the kind of alarm that has driven this stock's price down so sharply. And the dividends just keep coming. Alexandria recently declared a dividend of $1.21 per share for the first quarter of 2023, bringing the 12-month payout to $4.84 per share, a 5% increase over the previous 12 months.
ARE dividend data by YCharts. TTM = trailing 12 months.
Less stress and steady dividends from this real estate stock
The stock currently has about a 4% yield, marking a high point that's somewhat dubious given that its falling share price has driven up the yield. But the consistently rising dividend and FFO -- and a payout ratio of about 58% based on that growing cash flow -- point to this REIT's ability and inclination to continue boosting its return to shareholders.
A consensus target price from analysts with 45% upside from current trading levels also is worth noting. Altogether, Alexandria Real Estate Equities stock merits consideration from those looking for less stress and reliable returns from the real estate portion of their portfolios.
