Alexandria Real Estate Equities (ARE -1.96%) is an example of a company whose stock could be a great buy for investors considering equities that are available now at fire-sale prices. It's also one that some current owners may be considering selling, or already have sold recently, but I'm not one of them.
Alexandria Real Estate Equities is a real estate investment trust (REIT) that focuses exclusively on providing specialized lab and office space for life sciences and biotech companies, universities, and agrotech, and other high-tech operators in 30 office clusters the company calls collaborative campuses.
They're located in and around Alexandria's hometown of San Diego as well as Boston, Washington, D.C., Research Triangle in North Carolina, Seattle, and San Francisco. Alexandria has more than 850 tenants in 430 properties covering some 47 million rentable square feet that's typically about 95% occupied.
These are long-term leases with escalation clauses while they last and sharp rental increases when they renew. Alexandria's tenant list is dominated by such major players as Eli Lilly -- which just inked a long-term pact to develop the new Lilly Institute for Genetic Medicine, a 334,000-square-foot, $700 million project in Boston's Seaport Innovation District -- and Moderna, which turned to Alexandria to develop the vaccine maker's new headquarters in nearby Cambridge, Massachusetts.
A unique business model that's been tested of late
Alexandria brought a unique business model to the REIT world when it started in 1994. It's worked well, providing a total return since its 1997 initial public offering that would have turned a $1,000 investment then into about $15,000 now. That's about twice the payback of the S&P 500 over those 26 years.
But then came the pandemic, which sent millions of jobs home, many probably for good. That was followed by rising interest rates and other economic woes that have further clouded the outlook for commercial real estate.
Nareit, the REIT trade group, includes 19 trusts in its office REITs sector, and they've not fared well. They're down 18% so far this year in total return, as interest rates and inflation and especially the long-term implication of working from home took its toll.
Alexandria performed even worse, down about 26% in total return year over year as of mid-May. It's feeling the drag of additional concerns over the potential effect of the Silicon Valley Bank collapse on the high-tech and start-up clients in this REIT's tenant base.
This chart illustrates the roller-coaster ride of Alexandria's share price and total return since the start of the COVID-19 pandemic in March 2020, rising as biopharma's role in fighting COVID became clear and then feeling the fallout from concern about collapsing demand for office space.
Data source: YCharts ARE Total Return Level
Why Alexandria is not like the rest
But Alexandria may be immune to much of the fallout from the glut of office space in ways the market hasn't appreciated. That's because medical labs are not the same as traditional office space. You can't easily develop new medicines at home while working online.
Indeed, Alexandria's financials have not suffered so far. Among the highlights of its first-quarter 2023 earnings report were nearly 100% rent collections, 94% occupancy, and a rental rate increase of about 48% for new and renewed leases that was the highest for a single quarter in company history.
Along with that, the company says, it expects to bring on about 6.7 million square feet of new space in the next few years -- and nearly three-fourths of it is pre-leased. Then there's a fortress balance sheet underlined by investment-grade credit ratings that rank it among the top 10% of all publicly traded U.S. REITs, more than $5 billion in liquidity to finance more development and acquisitions, and a modest debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of about 5.3.
Passive income to pay for your patience
While you're waiting for the share price to recover, you can enjoy a steady flow of income from Alexandria, which has become a bit of a dividend machine in recent years. The company has raised its payout for 12 straight years, including by an annualized 5.7% a year over the past three years. Its yield of about 4.1% is more than twice that of the S&P 500.
The chart below shows that dividend growth trajectory, along with its corresponding growth in funds from operations (FFO) per share. FFO is is a key measure of a REIT's generation of operating cash, a metric akin to earnings per share for other publicly traded equities.
Data source: YCharts ARE FFO Per Share (TTM)
I still own Alexandria stock -- and I've added to it
The main thesis for confidence in Alexandria is that lab space is needed, but not all of its properties are lab space. It's reasonable to assume that a lot of what it own is traditional office space that tenants may or may not want when it comes time to renew leases. That certainly bears watching. But overall, I consider this stock a better buy than a sell.
Alexandria Real Estate Equities is one of the larger positions in my modest retirement portfolio, and I've added to that stake recently. I certainly don't intend to sell it. For one thing, I'd take a loss on it and that simply doesn't make sense to me. I don't need the cash right now, and I'm confident that the price will recover eventually and that I, or my heirs, will benefit. Meanwhile, I'll just enjoy the passive income it produces and bide my time.
