Philo
Alexandria Real Estate Equities, Inc. (NYSE:ARE) is a well-managed real estate investment trust focused on life sciences real estate.
The trust has enjoyed steady growth in funds under management in its core businesses over the years and has strong portfolio metrics that support a favourable outlook for passive income investors.
Alexandria Real Estate Equities pays out just over 50% of its operating funds as dividends, and its stock is moderately valued.
Because Life Sciences Trust also benefits from the tailwind of secular, secular R&D spending in the pharmaceutical industry, I believe investors will continue to see growing dividends from Alexandria Real Estate Equities going forward.
My rating history
I first covered Alexandria Real Estate Equities in June 2023 and classified it as a buy stock because the real estate investment trust was unfairly lumped into the office REIT group.
Investors were very interested in the office market at the time, and to some extent still are, so life sciences REITs offered a compelling value proposition at the time.
The trust continues to receive stable operating funds and is seeing increased FFO and dividends. The trust increased its dividend by 2.3% last month and the portfolio is well padded.
Stable portfolio, consistent FFO growth
Alexandria Real Estate Equities is a real estate investment trust that leases real estate primarily to life science and biotechnology companies, many of which are large multinational corporations.
The trust owned a real estate portfolio valued at $37.5 billion and leased the properties to investment-grade companies and large tenants, primarily in the pharmaceutical industry, such as Amgen, Merck, Roche and Pfizer.
Alexandria Real Estate Equities' portfolio experienced strong leasing conditions, with occupancy in the first quarter of 2024 at 95.1%, the highest occupancy rate since 2019.
Alexandria Real Estate Equities has consistently collected past due rent in full (99.9% rent collection rate in Q1 2024) and grown operating income thanks to its portfolio of high-quality tenants. The trust has delivered 7% annualized FFO growth since 2014 and has aggressive forecasts.
Alexandria Real Estate Equities' operating profit growth is being driven by the pharmaceutical industry, particularly research and development spending. Big drug companies such as Merck, Moderna and GlaxoSmithKline invest billions of dollars each year in developing new medicines.
As pharmaceutical companies pour billions of dollars into research and development, Alexandria Real Estate Equities is well positioned to grab a share of that with its lab-focused real estate portfolio.
Dividend coverage and growth are strong
Alexandria Real Estate Equities earned adjusted operating income of $2.35 per share in the first quarter, representing 7.3% growth over the prior year. The FFO earned represents a dividend payout ratio of 54%.
So, the life sciences REIT pays out just over half of its operating funds (same for trailing 12-month dividend payout ratio), and Alexandria Real Estate Equities increased its dividend twice last year.
The most recent 2.40% dividend hike was announced in June, when the trust increased the dividend to $1.30 per share, bringing the total to $5.20 per year. Based on the new dividend payment of $1.30 per share per quarter, the headline dividend yield is 4.2%.
FFO Multiple
Alexandria Real Estate Equities' adjusted funds from operations are $9.40 per share for the first quarter of 2024. The trust expects funds from operations to be between $9.41 and $9.53 per share, which equates to an FFO multiple of 13.2x at the current share price of $124.83.
Given the quality of underlying cash flows, primarily from publicly traded investment grade tenants, I believe ARE can be sold at an FFO multiple of 15.0x or higher, which equates to an effective value of $142.To me, the justification for a long position is primarily the fact that this trust is growing its dividend.
Why the investment thesis doesn't live up to my expectations
Alexandria Real Estate Equities, as I have revealed, is a life sciences-focused real estate investment trust that has been unfairly lumped in with the beleaguered office sector over the past year or so.
There are some issues in the sector, including hybrid work patterns weighing on real estate performance. For example, Blackstone Mortgage Trust (BXMT), a large mortgage trustee with significant investments in the office market, has a loan portfolio with quality and performance issues in 1Q24, which is why I issued a downgrade.
The weak outlook for the office market may continue to impact other real estate sectors and trusts that are not active in the office market, such as Alexandria Real Estate Equities. However, the trust sees its dividend as fairly safe, as it funds it with operating funds.
My conclusion
Alexandria Real Estate Equities is a well-managed real estate investment trust focused on life science real estate that benefits from the pharmaceutical industry's long-term secular research and development spending drivers.
Alexandria Real Estate Equities has a track record of growing its fund operations over the long term, with its portfolio experiencing strong occupancy rates and generating a significant percentage of its cash flow from investment grade tenants in the pharmaceutical and biotechnology industries.
To round out the value proposition, the trust pays out just over half of its funds from operations, making it a solid example of shareholder friendliness. Last year, Alexandria Real Estate Equities raised its dividend twice, and last month it increased the dividend by 2.3%. The headline dividend yield of 4.2% is sustainable, and given the FFO and dividend trends, the stock is not prohibitively expensive. It's a buy.