Here’s Why Alexandria Real Estate Outperformed Its Peers During the COVID-19 Pandemic
Office Real Estate Investment Trusts (REITs) have been under pressure for a year. The coronavirus pandemic has even caused some investors to question the concept of the Office REIT. If companies can work from home without much disruption, why will companies spend so much on expensive urban office space in the future?
The question has created headwinds for some Office REIT operators. While many office REITs have seen a sharp drop in income over the past 12 months, one office REIT seems to be bucking this trend.
What’s his secret?
Alexandria is focused on the life science industry
Alexandria real estate stocks (NYSE: ARE) is an office REIT focused on the life sciences. The company owns urban office properties with an area of 52.6 million square meters, which are grouped into “innovation clusters”. The company’s presence is concentrated in Boston, San Francisco, San Diego, Seattle and parts of Maryland. The properties are generally Class A properties, meaning they are the most modern, built with the highest quality materials, and have the best of amenities. The company’s customer base includes Bristol Myers-Squibb, Takeda Pharmaceutical, Illumina, Modern, and Sanofi.
Life sciences companies were considered “essential companies” during the COVID-19 pandemic and were open year-round. In addition, an increase in government funding has been a great source of support for Alexandria’s tenant base. This has created a dynamic that has continued this year. On the results conference call, Joel Marcus, founder of Alexandria, said that “the speed and continued demand for laboratory space in Alexandria in our cluster markets is greater than we have ever seen”.
Alexandria increases its asset base
In 2020, Alexandria increased its asset base by 27% to over 50 million square feet. This continued into the first quarter of 2021 when the company rented an additional 1.7 million square feet, making it the second-best quarter in the last five years. Given that the government is proposing to increase budgets for the National Institute of Health, the Center for Disease Control and Prevention, and Health and Social Services by 20%, Alexandria renters should see more funds on their way.
In contrast to other Office REITs such as SL Green Realty (NYSE: SLG)Alexandria plans to increase rents by 5 to 6% annually as rents come down. In fact, the incremental increase between the fourth quarter of 2020 and the first quarter of 2021 was around 3.5%. So if you annualize you will see double digit percentage growth.
Alexandria is one of the few office REITs that grew in 2020
Alexandria predicts Funds from Operations (FFO) will range between $ 7.68 and $ 7.78 per share in 2021. This is an increase from $ 7.60 to $ 7.80 that the company expected in late 2020. REITs typically use operational funds to quantify profits, as depreciation tends to underestimate earnings. Last year, Alexandria earned $ 7.30 in FFO per share, so the company is forecasting about 6% growth. Note that Alexandria increased its FFO per share by 5% in 2020, unlike many office REITs which reported declines.
A dividend hike could come
At current levels, Alexandria is trading at 23 times the expected FFO of 2021 per share, which is on the high side for a REIT, although top-tier companies generally trade with premium multipliers. The stock pays a quarterly dividend of $ 1.09 per share, which translates to a dividend yield of 2.4%. This is definitely low value for a REIT, but Alexandria is investing heavily in growth. The payout ratio (basically the dividend divided by the FFO per share) is below 60%, which indicates that a dividend hike is likely in sight.
Going forward, Alexandria’s growth could fall below that of its non-life science comparisons as the company has tougher comparisons than its competitors, which have declined in 2020 for many companies, this is less the case for life science companies, who need specialized laboratory space and a more collaborative environment. While there are longer-term concerns for the entire industry, Alexandria will be more immune to these than most.
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