Understanding Alexandria Real Estate and Why its a Better Buy than You Think

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Experts from WideAlpha (www.widealpha.com) via SeekingAlpha on how Alexandria Real Estate may not look like an undervalued stock when you first see it, or judge it by many metrics, yet when you begin to truly understand and conceptualize their specific business model, you may find it to be a far better buy than you at first think…

Alexandria Real Estate (ARE) is biotech‘s (IBB) biggest landlord. The company owns, develops, and operates buildings in some of the key technology campuses in the U.S. The company is named after the Egyptian city of Alexandria, which was considered the scientific capital of the ancient world.

Being a real estate company focused on the life science industry has brought Alexandria many advantages. Their tenants tend to be companies with above-average growth and profitability, which means that they are likely to keep renewing leases even when rents are increased. The buildings also tend to have special requirements for the laboratories, making it more difficult for companies to explore moving out to cheaper offices.

The buildings Alexandria owns are also in technology clusters close to important universities and research centers, making this office space considerably more valuable. Their buildings are mostly located in technology hubs in Boston, New York, San Francisco, San Diego, Seattle, and Maryland.

The high-quality real estate and locations have attracted some extremely high-quality tenants, which are willing to pay top dollar for the space. While most are companies in the life science industry, there are also a few well-known technology names like Uber (UBER) and Stripe (STRIP).

Source: Company’s annual report for 2017

This real estate strategy of focusing on biotech and life sciences in prime locations in the best technology hubs, together with superb management, delivered surprisingly good returns that outperformed the likes of Walmart (WMT), Microsoft (MSFT), and Berkshire Hathaway (BRK)

Source: Company’s annual report for 2017

This was not just an initial big jump. Even just considering the last ten years, the company still managed to outperform Walmart and Berkshire Hathaway, with only Microsoft delivering higher returns.

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We think it is quite impressive that a real estate company managed to deliver these returns. It also shows how their strategy of focusing on key urban innovation clusters created a difficult to replicate competitive advantage.

This is reflected in several operating metrics and the grades received from rating agencies. S&P Global has them as BBB / Positive, and Moody’s as Baa1 / Stable.

Their historical occupancy has also been remarkably strong, averaging more than 95% over the last 10 years, which is significantly higher than most office REITs.

Source: Company’s annual report for 2017

Additionally, the company has a favourable lease structure where tenants are responsible for most expenses and rents have embedded rent escalations. When leases have expired, the company has also been able to renew at significantly higher prices.

Source: Company’s annual report for 2017

The balance sheet looks quite healthy with significant liquidity and a conservative net debt to EBITDA of ~5.5x, especially considering the quality of the assets and tenants backing those earnings.

Source: Company’s annual report for 2017

Alexandria also has a small percentage of its assets invested in biotech companies, some of them their tenants. This gives exposure to some young and highly innovative biotech companies, many of which are still private.

Source: Company’s annual report for 2017

It is equally great to see that the company has a strong commitment to the environment, sustainability, philanthropy, and corporate responsibility. In fact, it has been recognized with multiple awards in relation to this dedication to make a lasting positive impact.Source: Company’s annual report for 2017

Below we link to a video where Joel Marcus, company Founder and Executive Chairman, talks about why real estate is a good hedge against inflation, and why Alexandria is particularly well positioned.

Valuation

Alexandria recently reported its third quarter results, and it’s on track to deliver FFO of ~$6.5 USD per share for the year. At recent prices, this puts P/FFO at a ~19x multiple. It is difficult to argue this is cheap, especially with many decent REITs trading at multiples 20-40% lower.

Source: Alexandria Real Estate Equities, Inc. Third Quarter Ended September 30, 2018, Financial and Operating Results

As for the price to book value, it is currently around the middle of its historical range.

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Takeaway

Alexandria is a best-in-class real estate company that should be in most investors’ radars. While it is not “pound the table” cheap, it is reasonably valued, and it has an excellent track record of value creation.

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At current prices its dividend is yielding ~3%, and its recent dividend growth is ~7%. Considering its strong same property NOI and the projects under development, it is reasonable to assume the dividend can continue growing at a similar rate for a long time. It is therefore not unreasonable to expect 7-10% returns for the next few years from current prices.

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