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A "Unique REIT" Eyes Tech and Science Centers
02/14/2019 5:00 am EST
Alexandria Real Estate Equities (ARE), which carries our highest investment ranking of 5- STARS, or Strong Buy, is a premier office REIT that offers investors a secular growth tenant base with the defensive characteristics of a high-quality REIT, suggests analyst Kenneth Leon in CFRA Research's The Outlook.
We view ARE as a unique REIT that falls into the category of an office REIT, but it is actually very different than most office companies.
Formed in 1994, the company developed clusters of life science properties in the most desirable locations as evident by their dominance in the markets today. ARE strives to partner with the biopharma industry and serve them with great properties that generate strong cash flows from these tenants.
The company is an urban office REIT uniquely focused on collaborative life science and technology campuses in Class A innovation cluster locations like Cambridge, MA; San Francisco, CA; San Diego, CA; and New York City.
We believe ARE’s properties represent highly desirable locations for tenancy by life science and technology entities, because of their locations close to concentrations of specialized skills, knowledge, institutions, universities and related businesses.
As of September 30, 2018, approximately 97% of ARE’s total leases are structured as triple net leases, requiring tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses and operating expenses in addition to base rent. Also, about 96% of the leases have an annual rent escalation clause that are either fixed at 3% to 3.5% or indexed based on a consumer price index or other index.
Another key component of ARE's long-term business model is the redevelopment of existing office, warehouse or shell space as generic office/laboratory space, including the conversion of single tenancy space to multi-tenancy spaces or multi-tenancy spaces to single tenancy space that can be leased at higher rates, as well as ground-up development projects.
ARE is accumulating a large land bank for future development projects, which include select properties located in international markets. We are positive on management’s focus on the credit quality of its tenants with a dedicated research team.
We estimate funds from operations (FFO) of $6.90 in 2010 and $7.35 in 2020. Our outlook assumes stable occupancy levels and rental rates with contributions from new development projects. Our 12-month target price at $145 is based on applying a forward P/FFO of 21.0x our 2019 FFO estimate, a premium to office REITS at 16.4x, given ARE's profile related to the life science industry. ARE has a 2.92% dividend yield.
Risks to our recommendation and target price include a decline in economic activity that depresses demand for life science and laboratory facilities, an inability to find attractive acquisition candidates, and higher interest rates.
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