Alexandria Real Estate Equities, (ARE 1.30%) finds itself riding the baby boomer bubble like few others. One-third of the U.S. population (about 100 million people) started retiring three years ago and 10,000 people in the U.S. turn 60 years of age every day. Alexandria is a REIT that specializes in buildings for life science tenants (pharmaceuticals, medical research, biotech, medical devices and the like).
Source: Company Q4 2013 Earnings Report, www.are.com.
Occupancy of Alexandria's North American facilities has climbed to 95.9 percent at the end of 2013, up from 94.6 percent a year earlier.
As demand for such facilities has increased, so has the value of Alexandria's common stock. Now with a market cap exceeding $5 billion, the 20 year old company's common stock has jumped by 15 percent since January 1. That kind of value growth, while impressive, is clearly unsustainable which is why in a February 5 report, Zacks Equity Research issued a Sell warning to investors stating Alexandria's shares are overbought.
Alexandria preferred stock
While the explosive growth of Alexandria's common stock value represents principal risk to today's buyers, investors looking for a lower-risk route to participate in Alexandria's success may want to consider the company's preferred stock.
Alexandria's series E preferred (ARE-E | prospectus) pays a 6.45 percent annual dividend (coupon) and is currently priced at $23.77. This $1.23 discount to the security's $25 par value provides today's buyer with a current yield of nearly 7% percent which compares favorably to the common stock's 3.7 percent yield.
ARE-E offers a Moody's investment grade rating of Baa3 and cumulative dividends (meaning that if Alexandria misses a dividend payment to you, they still owe you the money; their obligation to you accumulates).
Risk versus reward
Using the Moody's rating scale as a proxy for investment risk and current yield as a measure of reward, this chart illustrates how ARE-E is positioned within the U.S. preferred stock marketplace.
Source: CDx3 Notification Service database, www.PreferredStockInvesting.com.
Each diamond on this chart is a U.S.-traded preferred stock. The criteria used to include securities for the chart are provided in the footnote.
Notice how ARE-E stacks up against its other Baa3-rated peers. ARE-E's current yield compares favorably to the average return of 6.53 percent at the Baa3 level.
What's next?
After a 15 percent value increase in just two months, the notion that a downward correction is due for Alexandria's common stock seems reasonable. Given that risk to principal, the company's far less volatile preferred stock may be a safer bet for risk-averse investors. And the 6.8 percent current yield far outstrips the common's 3.7 percent performance.
But with a coupon of 6.45 percent, today's buyers may be holding ARE-E shares for several years. The security does not become callable until March 15, 2017 and rates would have to fall before it started to make sense for Alexandria to redeem these shares (shareholders will receive $25 per share in cash in the event that the company's does so).
While Alexandria's series E preferred stock offers less principal risk and a higher current yield when compared to the company's common shares, today's buyers are likely to find themselves holding their ARE-E shares for several years. For many, the 6.8 percent current yield that they earn in the meantime would be pretty easy to warm up to.
