A highly promising investment in real estate
What We Love:
As a REIT Alexandria is mandated to pay a high portion of its profits as dividends to shareholders.
Alexandria has a 20 year track record of increasing dividends
Alexandria’s focus on biotech real estate properties allows them to charge higher than industry average rent
Alexandria promises strong capital gains for a REIT
Alexandria’s venture investments in biotech have a strong history and help the company grow.
What We Don’t Like:
As a REIT Alexandria offers lower capital gains than many stocks
Alexandria could face increasing competition as biotech grows
As an owner of real estate Alexandria is exposed to the chance in the downturn of what has been an incredibly hot real estate market that could lower revenue.
Real estate is one of the best and safest investments available and REITs provide an easy and low cost method of access to the average investor. Recently, REITs have been ignored in favor of high performing growth stocks, however a balanced portfolio must have both. Over the past 20 years, the FTSE Nareit All Equity REIT has outperformed the S&P by an annual average of 5.6%. One of the strongest performing and still most promising REITs has been Alexandria (NYSE: ARE), a REIT that specializes in creating biotech and research offices and campuses in the most innovative areas of the United States.
As a company, Alexandria specializes in buying and developing property specifically for biotech research and development. Alexandria doesn’t just build an office, find a renter and call it a day. The company develops an entire campus innovative companies find attractive and are willing to pay a premium for. Alexandria’s Cambridge campus is the perfect example of this. With 10.4 million square feet of rentable office space located next to MIT and Harvard, biotech research companies such as Moderna and Merck are willing to pay a premium to rent Alexandria’s spaces to research and operate near the top talent pool in the country.
Alexandria’s campus model extends beyond Cambridge. In total, the company operates 7 research campuses located in Greater Boston, San Francisco, Seattle, Maryland, New York City, and the North Carolina Research Triangle near UNC and Duke. The company has 19.9 million square feet of rentable space with another 5.3 million under development. 50% of their rentalable space is in Greater Boston and San Francisco.
Alexandria generates revenue by renting its research labs and offices to companies in need of space. Because of the specialized nature of the rental space, Alexandria is able to charge renters more per-square foot than they would otherwise be able to. This is reflected in the company’s 68% ebitda profit margin, which outperforms the industry.
Financially, the company is incredibly strong, with a debt to capital ratio of 36% and $4.1 billion in liquidity. At the same time there is low risk of renter default as 55% of revenue comes from the large cap biotech firms, the US government, and research institutions and firms. Top renters include Moderna, MIT, Facebook, and Pfizer. 94% of leases are triple net with the average lease expiration 7.6 years from now.
Catalysts for Growth
Venture Investments: On top of its property rentals, Alexandria operates a $1.6 billion venture fund dedicated to biotech investments. As a biotech investor, Alexandria has an insider perspective because a lot of biotech innovation literally occurs under its roof. This has helped the fund produce an average quarterly profit of about $50 million in dividends and selling of investments and $776 million in unrealized capital gains as of Q1 2021. The company was also the largest biotech investor in 2020 and notable investments include Moderna’s mRNA biotechnology that facilitated the production of Moderna’s COVID-19 vaccine. Alexandria’s venture investments in biotech provides the company with a unique ability to doubly profit from its renters by earning revenue from the companies they invest in as they do research and development in Alexandria’s campuses and profit from the successful research conducted in Alexandria’s labs.
New Wave of Investment in Biotech
Due to the Covid-19 pandemic there has been renewed investment in biotech companies and research institutions across the globe from both the private and public sector. The jaw dropping speed with which Alexandria’s tenants like Moderna and Pfizer were able to create Covid-19 vaccines reinforced the need for a strong and thriving biotech industry and the promise of mRNA has unlocked new opportunities and treatments previously unimaginable. The US government has also dedicated tens of billions of dollars from the multiple rounds of stimulus to go to firms conducting research on Covid-19 and other public health threats. This combination of increased investment and more research has created a surge in demand for research labs that Alexandria has capitalized on with higher leases and the expansion of its properties by 25% over the next 5 years with most already having tenants lined up. At the same time, Covid-19 has illustrated the importance of biotech firms to Wall Street and moved up the multiples of publicly traded biotech companies. Alexandria has benefited from this change in perception as a lead investor in biotech companies.
Because Alexandria is a profitable REIT, its most important measures for comparative analysis are price to earnings and dividend yield. Looking at price to earnings, Alexandria trades below its nearest peer and the industry average.
Part of the reason for this lower valuation is Alexandria’s dividend, which is lower than Boston Properties and the REIT average and is an important factor for REIT investors.
While Alexandria’s dividend currently gives the company a lower price to earnings ratio than comparable REITs, Alexandria is much less leveraged and has a higher growth rate than its peers. Because of this, Alexandria can more sustainably pay its dividend and has annually increased its dividend by roughly 7%. This is a faster dividend increase than peers and will in the long run help the company demand a higher price to earnings ratio. Therefore, on a 5 year timeframe, Alexandria appears undervalued as it currently trades at a lower P/E multiple than its peers while simultaneously increasing dividends faster and more sustainably than its competitors. Alexandria’s specialized focus and growth catalysts also offer more significant capital gains than its peers and can attract investors who usually choose not to invest in REITs because of its biotech focus. Here I predict Alexandria to rise to a P/E comparable slightly below Boston Properties by 2024, with a conservative estimate of 33 P/E.
While Alexandria does not share the exact details of its leases, increasing profit margins can be expected as 94% of leases include yearly rent escalations and are triple net leases with an average lease expiration of 7.6 years. Alexandria also has 3.3 million square feet of newly developed rentable space becoming available in the next 5 years. Looking at historical growth for guidance, Alexandria has increased earnings per share 29% on an annual basis over the past 5 years. With a current EPS of 5.76 and using historical growth rates for guidance, this gives Alexandria an EPS of 12.4 in 2024. Factoring in the predicted rise in P/E, I estimate Alexandria’s share price to be $410 in 2024.
Even with this conservative estimate, this gives investors a total return of 131% from today’s share price without dividend reinvestment.
The People's Capital Team