By: Dividend Sensei
Equity REITs, meaning REITs that own rental properties, have historically been a great way for investors to compound both their income and wealth over time. In fact, since 1972 equity REITs have outperformed all the major market indexes.
But of course there are lots of different REITs you can buy (over 100) so choosing the right one can be a challenge. Let’s take a look at why Alexandria Real Estate Equities (ARE) is one of the best and fastest growing REITs that you’ve never heard of. That’s because its talented management team has carved out a highly profitable niche that allows it to provide safe and fast growing dividends to investors, while also delivering market smashing total returns.
In fact, since its 1997 IPO Alexandria Real Estate has proven itself more than capable of making long-term investors rich:
- Total Return Since 1997: 1,260% (13.2% annualized return)
- S&P 500 Total Return Since 1997: 403% (8% annualized return)
More importantly Alexandria’s business model and competitive advantages are likely to mean it continues to generate fast dividend growth and market beating returns for the next decade and beyond.
Alexandria Real Estate Equities: One Of The Fastest Growing REITs You’ve Never Heard Of
Alexandria Real Estate was launched in 1994 owning just four collaborative life science and technology campuses (biotech and tech research facilities) and IPOd in 1997. Over those 24 years the REIT has managed to grow its research lab asset base to 287 properties totalling 21.5 million rentable square feet, with another 3.2 million square feet of space under construction.
The REIT’s research campuses are located in the heart of America’s largest and fastest growing tech research hubs. These campuses are thriving because of their proximity to world class universities and medical centers, which attract tech firms from all over the world. That includes the REIT’s top 20 tenants (83% of which have an investment grade credit rating) which include:
- Illumina, Inc.
- Takeda Pharmaceutical Company Ltd.
- Bristol-Myers Squibb Company
- Eli Lilly and Company
- Celgene Corporation
- Novartis AG
- Uber Technologies, Inc.
- New York University
- bluebird bio, Inc.
- Moderna Therapeutics, Inc.
- Stripe, Inc.
- Amgen Inc.
- Massachusetts Institute of Technology
- United States Government
- Facebook, Inc.
- FibroGen, Inc.
- Biogen Inc.
- Pinterest, Inc.
The tenant base is also highly diversified with even the largest tenant representing just 3.5% of rent. The top 20 account for just 43.5% of revenue and just 18% of rent is from public sources (government or universities). This minimizes risks from government budget cuts.
The REIT operates almost entirely (97% of rent) under a triple net lease model in which its tenants pay for maintenance, property taxes, and insurance. Alexandria is the landlord that enjoys highly profitable and stable rent, which is under long-term leases, with annual rental escalators indexed to inflation. It’s average remaining lease is for 8.6 years and its top 20 tenants on average have 12.8 year leases remaining. Thanks to the high quality and prime locations of its research campuses Alexandria’s occupancy rate is 97.1%. And over the last 10 years, which includes the worst recession since WWII, the REIT’s occupancy has averaged 96%. This not only gives it highly stable cash flow but also strong pricing power to raise rents when leases expire.
For example, in the first half of 2018 Alexandria’s average lease spread (how much it raises rent on renewed or new leases) was 13.8%. That’s up from 12.0% and 12.7% in 2016 and 2017, respectively. This highlights the financial health of its tenant base as well as the fact that tech R&D spending budgets are rising quickly. Best of all rents in all its key markets are expected to rise by 50% to 200% between 2017 and 2022, indicating that Alexandria is likely to see continued strong rental increases in the future. And due to its low cost business model Alexandria converted 51% of its revenue in the first half of 2018 into funds from operation or FFO. This is its equivalent of free cash flow and what funds the dividend.
FFO/share grew by 9.7% in the first half of the year driven by large scale investment in new properties and organic developments (construction and improvement of existing assets). For context over the past four years Alexandria’s FFO/share has grown at an 8.3% annualized rate which means that one of the fastest growth rates in all of REITdom is accelerating. That allowed management to hike its dividend by 8.3% in the first two quarters of the year, which makes Alexandria’s dividend one of the fastest growing in the REIT sector.
The key to this REIT’s investment thesis is the enormous long-term growth runway it has. For example in 2018 alone management plans to invest just over $1 billion into new properties and organic construction/development projects. Better yet, the REIT has a development/growth pipeline that it estimates will allow it to grow its asset base by 8% to 12% annually over the long-term. Alexandria has several competitive advantages that will allow it to execute on this ambitious growth plan. The first is its experienced management team, which consists of 37 executives. On average they have been with the REIT for 18 years and have 23 years of industry experience.
The second is ample supply of low cost capital to continue acquiring and expanding its Class A research facility asset base. Today the REIT’s liquidity stands at $2.9 billion which is roughly enough to fund three years of its rapid growth. Best of all thanks to the large amounts of retained cash flow the REIT uses to fund its growth (44% in the first half of 2018) the REIT’s profitability on those investments is among the best in the sector.
- Cash cost of capital: 2.6%
- Cash yield on invested capital: 6.8%
- Gross investment spread: 4.2%
For context most REITs managed just 2% to 3% gross investment spreads which shows that despite targeting grade A facilities, Alexandria is able to invest shareholder capital at very high margins. That is what helps fuel its impressive cash flow and dividend growth. It’s that dividend growth that will drive the REIT’s market beating returns long into the future.