Real estate investment trusts (REITs) have done an excellent job creating outsized wealth for their investors over the years. From 1972 through the end of last year, REITs generated an average annual total return of 13.3%, which outperformed the S&P 500's 12.1% total return. Those higher long-term returns mean REITs have turned small initial investments into big-time paydays at a faster pace than the S&P 500.
One REIT that has done a phenomenal job creating wealth for its shareholders over the years is Alexandria Real Estate Equities (NYSE: ARE). Overall, the office REIT generated an average annual total return of 13.3% since its IPO in 1997, easily beating the S&P 500's 8.2% total return during that time frame. Because of that, it has turned a relatively small initial investment into a massive nest egg.
Here's a look at whether the REIT has what it would take to turn long-term investors into millionaires.
The math to $1 million
It's quite possible to turn a relatively small initial investment into a $1 million nest egg, given a high enough return and holding period. For example, $1,000 invested in the S&P 500 could grow into $1 million in about 75 years, assuming the market continues producing total returns of around 10%. Increase the initial investment and rate of return, and an investor can reach $1 million even quicker. For example, $10,000 invested in a stock generating a 13.3% average annual total return would grow into $1 million in 35 years.
Alexandria Real Estate Equity's millionaire-making potential
Alexandria Real Estate Equity became public in 1997, raising $155 million from investors. An investor who bought $10,000 in stock at the IPO would have now earned a total return of more than $185,000 after including dividends. For comparison's sake, a similar investment in the S&P 500 would have generated a nearly $64,000 return after adding dividends.
Given the miracle of compound interest, that same investor would only need to hold for seven more years to see their initial $10,000 investment in Alexandria grow into $1 million, assuming it maintains its historical 13.3% total return pace. Meanwhile, those who invest that amount today would need to see the company produce at that same rate for 35 years.
On the one hand, sustaining an above-average total return over such a long period won't be easy. That's because the office sector is facing some significant headwinds due to COVID-19, which has accelerated remote work. Some tech-focused office tenants plan to allow more of their employees to permanently work from home, which could negatively impact office space demand and weigh on occupancy and rental rates.
That's somewhat of a concern for Alexandria, since it owns some office clusters leased to technology companies. For example, Facebook (NASDAQ: FB), which made headlines this year on its plans to allow more of its employees to work from home, is Alexandria's third-largest tenant at 3% of its revenue last year. Overall, technology companies make up about 14% of its tenant base.
However, Alexandria's primary focus is the life science sector, which includes biotechnology and pharmaceutical companies, life science product, service, and device makers, and institutions (academic, medical, nonprofit, and government). That group combines to make up 81% of its tenant mix. That's worth noting since these companies are unlikely to shift to working remotely because many of their activities require in-person work and collaboration. In fact, according to Alexandria, more than 80 of its tenants are working on therapies and testing for COVID-19.
Indeed, instead of negatively impacting demand, the COVID-19 outbreak could drive additional need for office space in the life sciences sector in the coming years. That's because governments and the private sector will likely increase their investments in advancing solutions to combat future pandemics by researching new therapies, vaccines, and testing solutions. That should enable Alexandria to continue raising rental rates at its existing life sciences clusters and develop new ones.
Meanwhile, the company has one of the top balance sheets in the office REIT sector, which gives it the financial flexibility to invest in development projects and make value-enhancing acquisitions. Those investments should enable the REIT to steadily grow its portfolio, FFO, and dividend, key to producing above-average total returns.
Focused on the right types of office buildings
Alexandria Real Estate Equities is well on its way to turning a long-term investor who bought $10,000 of its shares at the IPO into a millionaire. That's because the company should be able to continue producing strong total returns, given its focus on building and buying office clusters leased to life sciences tenants. Thus, it's also not beyond the realm of possibilities the REIT could turn investors who buy today into millionaires -- assuming they're willing to hold on for a few decades.