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Alexandria Real Estate Bets on Innovation Clusters
09/18/2019 5:00 am EST
Alexandria Real Estate (ARE) is an urban office REIT focused on serving the life science industry. It specializes in laboratories and research centers for biotechnology and technology in innovation clusters throughout the country, notes Tom Hutchinson, editor of Cabot Dividend Investor.
The properties are rented by primarily high quality tenants and the cash flow is well supported by long term, triple net lease contracts.
These public and private research facilities are clustered in areas where medical and technological research spending is most concentrated including the greater Boston area, San Francisco, San Diego, NYC, Seattle and Maryland.
These areas enjoy robust funding from charities, governments and private companies and demand for facilities is high. The mix of tenants includes public biotech (27%), multinational pharmaceutical (25%), life science (17%), institutional (10%), technology (10%) and private biotech (7%).
I like this better than other REITs for several reasons. Healthcare REITs have underperformed other REITs recently because several property types, most notably senior living facilities, have gotten overbuilt.
Other properties that depend on reimbursements from the government face legislative risk. But quality research labs in areas where research spending remains robust have not been overbuilt and demand remains strong. The properties are also popular with both political parties and they face little legislative risk.
Office REITs are more cyclical and contend with the issue of more people working from home. Research labs are unique and far less cyclical. And Alexandria is one of the few REITs focused on such properties.
Most of Alexandria’s tenants are high quality, investment grade rated companies. Not only are the facilities defensive but the lease terms are as well. The average remaining lease term is 8.3 years and 12 years for the top 20 tenants. Earnings predictability is the key to paying a consistent and growing dividend and generating high returns in any economy.
The REIT pays a modest 2.74% yield at the current price, but it is well supported and likely to grow. Alexandria has just a 60.5% payout ratio, very low for a REIT which pays no corporate income taxes provided the bulk of earnings are paid out to shareholders.
This REIT has been a stellar and consistent performer in all kinds of markets. Over the past year when the S&P 500 returned just 1.24%, ARE returned 19.33%. It also returned an average of 15.76% over the last five years and 13.43% over the past three, significantly outperforming both the overall market and the REIT index.
Going forward, ARE has the best tailwinds possible, megatrends. The reliable and growing dividend along with the highly defensive nature of the business should make it a winner in the current environment.
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