Alexandria Real Estate Equities (NYSE: ARE) is one of the oldest and largest office real estate investment trusts (REITs) in the market. However, the company isn't like most other office REITs -- it focuses on a specific type of office property that gives it a unique advantage, especially in turbulent times. In this article, we'll take a closer look at Alexandria's portfolio, its investment strategy, recent developments, and how the stock has performed throughout nearly a quarter-century on the public markets.
Alexandria Real Estate Equities company profile
Alexandria Real Estate Equities is an office REIT, and one of the largest of any kind in the market. As of April 2021, Alexandria had a market capitalization of about $23.4 billion. The company's portfolio consists of 31.9 million rentable square feet of office properties, most of which are located in urban areas. Top markets include Boston, San Francisco, New York City, Seattle, and San Diego, just to name a few. The company was founded in 1994 and has spent nearly three decades building itself into a leader in the urban office real estate market.
One of the key differentiators is the types of office properties in the portfolio. Specifically, Alexandria focuses on life science, technology, and agricultural technology (agtech) office campuses. In fact, the company is named after Alexandria, Egypt, which was the scientific capital of the ancient world. Life science in particular is a promising office submarket -- healthcare innovation has never been greater than it is now, and companies need space to develop vaccines, pharmaceuticals, therapeutics, and medical devices.
Alexandria's properties are triple net leased to tenants, which essentially means that the tenants sign long-term leases with gradual rent increases built in and the tenants cover property taxes, insurance, and maintenance costs. In short, all Alexandria has to do is get a high-quality tenant in place and collect years of predictable and growing income.
Alexandria's preferred mechanism of growth is through development, which has the potential for tremendous shareholder value creation when done well. Think of it this way: Let's say you could buy a particular life science office property for $10 million and it would produce $500,000 in annual income after expenses, for an initial yield of 5% on your cost.
On the other hand, let's say you could build the same property for $7 million. Now, the $500,000 in annual income gives you a much more attractive 7.1% yield on cost. And not only that, but you have created $3 million in instant equity upon the property's completion, as it would be worth $10 million if you were to sell it.
At the end of 2020, Alexandria had a massive pipeline of development with 3.3 million square feet of new properties under construction and another 7.1 million square feet of development or redevelopment projects scheduled for the near future. And the company has 7.4 million additional square feet of future development in the works as well.
Alexandria has a top-notch management team and was founder-led for the first two decades of its publicly traded history. Founder Joel Marcus started Alexandria with $19 million in start-up capital and built it into an S&P 500 company. Marcus stepped down as CEO in 2018 but still serves as the company's executive chairman. The company is currently led by two co-CEOs. Co-CEO Stephen Richardson has been with the company for two decades and was previously COO, and co-CEO Peter Moglia has been with the company for 22 years and has also served as the company's chief investment officer since 2009 (a role he currently shares with one other person).
Alexandria Real Estate Equities news
Most office REITs plunged at the start of the COVID-19 pandemic as remote work became the standard practice with no end in sight. And while Alexandria certainly wasn't immune to the declines, its business was significantly less affected than many of its office REIT peers.
Specifically, with a life science focus, Alexandria's tenants were far more likely to be considered "essential" office workers. After all, vaccines and other pharmaceuticals can't exactly be developed entirely via Zoom (NASDAQ: ZM) meetings. As Alexandria said in its second-quarter earnings release, "over 80 of our life science tenants are advancing solutions for COVID-19."
Just to name a few, Pfizer (NYSE: PFE), Moderna (NASDAQ: MRNA), Johnson & Johnson (NYSE: JNJ), and Novavax (NASDAQ: NVAX) are among Alexandria's tenants that worked tirelessly on vaccines. Other tenants such as Eli Lilly (NYSE: LLY), Gilead Sciences (NASDAQ: GILD), and Adaptive Biotechnologies (NASDAQ: ADPT) continue to work on treatments to help combat the pandemic.
Rent collection was simply not a concern for Alexandria. In the third quarter of 2020, for example, the company collected virtually all (99.7%) of its contractual rent. Even in the second quarter (when REITs were generally the most affected), the company reported rent collection of more than 99%.
In fact, unlike most of its office REIT peers, Alexandria's funds from operations (FFO) actually increased year over year in the first half of 2020. What's more, many office REITs cut or suspended their dividends. For example, Empire State Realty Trust (NYSE: ESRT) still hasn't reinstated its dividend as of April 2021. On the other hand, not only did Alexandria not cut its dividend but the company actually increased the payout during the pandemic.
Alexandria Real Estate Equities stock price
Alexandria Real Estate Equities wasn't quite as affected by the COVID-19 pandemic as many other real estate stocks -- especially those with office-focused investment strategies. However, it hasn't exactly been a standout performer, as the market is largely in wait-and-see mode when it comes to the role physical offices will play in the post-pandemic world. Since the beginning of 2000, Alexandria has delivered a total return of about 9% through April 6, 2021, compared with a 29% total return for the S&P 500.
That said, it's not fair to gauge the performance of any real estate stock over a period of little more than a year, especially during an unprecedented global pandemic.
Fortunately, Alexandria was founded in 1994 and went public in May 1997, so we have a roughly 24-year track record of stock performance to look at. Here's how it compares with the S&P 500 over certain intervals: