Thinking Of Buying Alexandria Real Estate Equities? Here Are The Properties And Tenants You'd Add To Your Portfolio

When investors buy real estate investment trusts (REITs), they aren't just buying real estate companies; they are also buying the large block of tenants that comprise the leasing portfolio within the REIT.

Before you buy any REIT, consider the stability and solvency of its tenant base. Consider these questions: Are any tenants facing bankruptcy or closing a number of locations? Are the tenants high quality? Are the tenants diversified, not only geographically but also by industry? And finally, what is the percentage of each tenant's annualized base rent (ABR) in the total tenant portfolio?

Take a look at an office REIT in a specialty niche that has lost much of its value since 2022 because it's been lumped in unfairly with other office REITs:

Alexandria Real Estate Equities Inc. ARE

Alexandria Real Estate Equities is a Pasadena, California-based REIT with a portfolio of 850 tenants in 430 properties devoted to life science, agtech and advanced technology companies in what its website calls "top innovation clusters." These areas include cities like Boston, New York, Seattle and San Francisco. Mega campuses make up 75% of its annual rental revenue.

Despite news about tech workers leaving California and other office REITs having increasing delinquencies and lower occupancy, Alexandria Real Estate continues to have high occupancy rates. Its total occupancy rate is over 95%, including in the San Francisco area which has a 95.5% occupancy rate.

Tenants

Alexandria's pipeline of properties is already 100% leased through 2023 and 94% leased through the end of 2024. The weighted average lease term (WALT) remaining for its top 20 tenants is 9.4 years and for all tenants, the WALT is 7.2 years. In the second quarter, it collected 99.9% of rental revenue. The tenant quality is higher grade with many of them publicly traded on Wall Street.

Because of the unique nature of its tenants, the high-class offices are different from those found in typical office buildings. They must be customized to suit the needs of the biotech and agtech companies. This creates longer lease terms, higher rents and a greater demand for its spaces. 

Below is a chart of the top 20 tenants from the company website. Many of the tenants have higher investment-grade credit ratings. No tenant exceeds 3.5% of the aggregate annual rental revenue.

Alexandria Real Estate's largest tenants include: 

Bristol-Myers Squibb Co. BMY is a New York City-based global biopharmaceutical company that works to discover, develop and deliver innovative new medicines. Its prescription drugs are used to reduce the risk of stroke and for a number of different forms of cancer.

The company, originally called Bristol-Myers Co., was founded in 1887 and became a publicly traded company in 1933. It has a $121.25 billion market cap. The 52-week range is $57.61 to $81.44. Bristol-Myers Squibb is Alexandria Real Estate's largest tenant and comprises 3.5% of its aggregate annual rental revenue.

Moderna Inc. MRNA is a Cambridge, Massachusetts-based biotechnology company that uses mRNA science to create and commercialize messenger RNA for a new generation of medicines and vaccines. Moderna was founded in 2010 and went public in 2018. It has 48 pipeline products and 35 ongoing clinical trials. It has a $39.31 billion market cap and a 52-week range of $95.02 to $217.25. Moderna is the second-largest tenant with a 2.6% aggregate annual rental revenue.  

Eli Lilly and Co. LLY is an Indianapolis-based healthcare company with a worldwide presence. It develops and manufactures pharmaceuticals for diabetes, cancer, arthritis, depression, schizophrenia and other illnesses. 

Eli Lilly is the third-largest tenant and comprises 2.5% of Alexandria Real Estate's aggregate annual rental revenue. Eli Lilly has a $509.895 billion market cap and a 52-week range of $309.20 to $601.84.  

Alphabet Inc. GOOGL is a Mountain View, California-based multinational technology conglomerate. It was created in October 2015 by a restructuring within Google to become the parent company of Google. Alphabet is the world's third-largest technology company by annual revenue and one of the five FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks that comprise the Nasdaq-100. It offers numerous internet-related products and services, apps, cloud software and wearable devices.

Co-Founders Larry Page and Sergey Brin were replaced by Sundar Pichai near the end of 2019. It has a market capitalization of $1.656 trillion, and its 52-week range is $83.34 to $139.16. Alphabet is the fifth-largest tenant and comprises 1.8% of the aggregate annual rental revenue.

Dividend

On Sept. 5, Alexandria Real Estate Equities declared a $1.24 per share quarterly dividend, which was in line with its previous quarterly dividend. The new dividend is payable Oct. 13 for shareholders of record Sept. 29. The yield on the $4.96 annual dividend is presently 4.95%, and the payout ratio is a modest 55.35%.

Dividend growth has been solid. Over the past five years, Alexandria Real Estate has raised the quarterly dividend nine times, increasing it by 27.8%. There have been no dividend suspensions or cuts.

Miscellaneous factors

Alexandria Real Estate has a 52-week range of $97.06 to $172.65, so at a recent closing price of $100.10, it was much closer to the 52-week lows than highs. The market cap is $17.32 billion. Its five-year beta is 0.96, making it slightly less volatile than the average S&P 500 stock.

While it has $11.57 billion in debt, most of its debt is fixed and with rates well below 4%, with debt going out over 13 years and no debt maturing before 2025.

In comparison to its peers in the office-REIT subsector, Alexandria Real Estate has the largest market cap, the best five- and 10-year total returns, the best three- and five-year dividend growth, the best revenue growth and the least amount of short interest.

Its recent price/funds from operations (P/FFO) of 11.7 is just about half of the 20-22x P/FFO where Alexandria Real Estate once traded. It's clearly undervalued right now.

Recent News

On July 24, Alexandria Real Estate posted its second-quarter operating results. FFO of $2.24 was up from $2.10 in the second quarter of 2022 and beat the estimates by $0.04. Revenue of $713.9 million beat the estimates of $694.54 million and was 10.9% ahead of revenue of $643.76 million in the second quarter of 2022. Alexandria Real Estate also announced full-year 2023 FFO of $2.72-$2.78. Analyst estimates were for $3.09, so the Street was disappointed with the results.

On Aug. 17, Alexandria Real Estate announced that President and Chief Financial Officer (CFO) Dean Shigenaga submitted his resignation, and the board of directors elected Marc Binda as the new CFO and treasurer effective on Sept. 15. Binda previously was executive vice president of finance.

On Oct. 3, Alexandria Real Estate announced it has accelerated delivery of a 462,100-square-foot Class A+ property in Cambridge to Moderna. Construction on the property is now set to be completed in November and will come in under budget.

Analyst Ratings

On Oct. 3, Wedbush initiated coverage on Alexandria Real Estate with an Outperform rating and announced a price target of $120. From a recent closing price of $97.19, that represents a potential increase of 23.4%. On Aug. 17, Evercore ISI Group analyst Steve Sakwa maintained an Outperform rating on Alexandria Real Estate and lowered the price target from $137 to $135.  

Summary 

Alexandria Real Estate is a REIT on sale. Its share price is less than half what it was at the beginning of 2022, but its business model positively differentiates it from other office REITs such as Boston Properties Inc. BXP or SL Green Realty Corp. SLG. Most of its tenants are big pharma, an area of the economy that continues to excel. Clinical research studies and biotechnology labs cannot be operated at workers' homes.

In August, Alphabet, one of Alexandria Real Estate's leading nonmedical tenants, began tracking office attendance as part of employee performance reviews to get workers to return to the office. Alphabet recently initiated a $99 per night Summer Special in its Bay View, California, campus for an on-campus hotel to persuade workers to maintain their commitment to work in the office at least three days per week.

Office occupancy rates have not been and should not be a problem for Alexandria Real Estate Equities, but it's been lumped in with all the others in that sector.

At some point, Wall Street should begin to differentiate REITs, rather than selling them all off like they're all the same. When that happens, Mr. Market will take note of the low debt, revenue and dividend growth, yield and the other factors that have made this a great stock to own over the years. Alexandria Real Estate Equities could easily become a market leader when REITs come back into favor.

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