| 2023 | 2024 | ||||||
| Price: | 128.00 | EPS | 8.98 | 9.47 | |||
| Shares Out. (in M): | 174 | P/E | 14.2 | 13.5 | |||
| Market Cap (in $M): | 22,219 | P/FCF | 17.7 | 16.8 | |||
| Net Debt (in $M): | 10,800 | EBIT | 2,006 | 2,218 | |||
| TEV (in $M): | 34,967 | TEV/EBIT | 17.4 | 15.76 | |||
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- REIT
Description
Buy Alexandria Real Estate (ARE) - baby thrown out with the bathwater, life science holding fundamentals holding up quite well, much better than traditional office, cheap
I like Alexandria Real Estate (ticker ARE) - as an outright long and as a pair trade vs. other REITs (e.g. KRC short for example).
Summary
- Alexandria owns and leases life science buildings, which has been holding up well fundamentally, much better than regular office. They’ve been around for 30 years and has had a great track record of consistent growth. 419 properties, 41.5mm sq ft. It’s the most pure play life science REIT too
- their tenants are usually pharma, healthcare, and biotech companies and universities. 22% devices, 18% mega pharma, 14% large biotech, 11% academic/govt/medical, 10% SMID biotech, 9% private biotech, 8% large cap tech.
- Boston is 36% of rent, Bay Area 22%, San Digeo 16%. 5-6% each in Seattle, Raleigh, NYC, Maryland each. < i.e. the big life science areas in the US
- They have a diversified and high quality tenant base (aside from clinical biotechs): Bristol is 3.6% of rent, Moderna 2.6%, LLY 2.5%, Takeda 1.9%, Google 1.8%, Illumnia 1.8%, Harvard 1.6%, etc.
- biotech funding has been stabilizing lately too, which is helpful and an indicator for general life science demand
- their real estate operating metrics have been solid, e.g. rents are still pretty solid, 18% embedded market-to-market re-leasing spreads (i.e. locked in growth), low tenant improvement allowances and leasing concessions
Rents been pretty strong on a relative and absolute basis
Vacancies: up recently due to supply. The 2020-2021 period was very hot for biotech post the COVID / low rate / VC boom
- their leases have 3% average annual rent escalators, which provides built in rev growth. 92-93% are triple net leases, and also require tenants to pay the capex
- Upside: I think in a year, there’s around 35-40% total return upside, ~25% from multiple expansion (14x P/FFO to 18x), ~7.5% from higher earnings, and the 4% div yield
- They recently gave 2024 guidance, so there shouldn't be any major financial surprises
- Also, with the Fed and other central banks embarking on a rate cutting cycle, you want to own REITs and rate sensitive stuff now.
Property picture:
Fun Fact: my wedding ceremony was at an Alexandria center event & meeting space. https://www.apella.com/home/
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Valuation: absolutely and relatively cheap
- P/FFO 14x 2023, 13.5x 2024, 13x 2025. This is at the low end of its historical range of around low teens on the low end, and 25x on the high end. 10 yr average 18x
- div yield 4%, well covered at 62%
- implied cap rate ~6.25%
- of course, some of the valuation weakness is due to the decline in all REITs
- stock is down around 42% from highs, at recent lows it was down 60% from highs
P/NTM FFO since 2006
Fundamentals:
- ARE is still growing / holding up quite well; unlike some other parts of real estate where rents, FFO, and/or occupancy are falling / stalling. This deserves a much higher multiple IMO
- they've put up pretty steady 7.4% FFO/growth over the last decade, and the dividend has been growing at 6% CAGR. 3.8% div yield (at a 62% payout ratio)
- At a recent analyst day, they guided 2024 FFO to be up 5.5% YoY, inline. They also reiterated 2023 guidance. So there shouldn't be much risk in #s for a while
- rent spreads +5-13% YoY in 2024. Embedded mark-to-market rent spreads are +18%, which gives them cushion for further growth as leases come up for renewal < again, this is far better than other REIT property types where re-leasing is flat or falling (like regular office)
- they guided to flattish occupancy in 2024 around 95%, which is a healthy level, amid the slowdown and supply
- lease terms are also holding up well, which is another good sign and shows tenants want to lock in space for the longer term, vs. regular office where lease terms are shrinking
- occupancy stable recently at 95%, which they think is conservative. It has been around 95% occupancy since 2020, so it's not deteriorating and is still at pretty healthy levels < this is also better than other ‘bad’ property types
Recent occupancy has been pressured from some acquisitions and lease ups. SS occupancy has been fine.
SS NOI +3-5% YoY in 2024. They’ve grown SS NOI at 6.6% CAGR over the last 10 years
Balance sheet: clean
- 99% debt fixed, term 13 years average, 3.7% rate. BBB+/Baa1, 5x net debt+preferred to EBITDA. No debt maturing before 2025
- ARE has a pretty clean balance sheet compared to other REITs
- $5.9bn of liquidity, $600mm cash, $22.2bn mkt cap, $11.7bn debt
- they have plenty of liquidity and sources of capital to complete future development
Biotech/pharma industry: solid and inflecting higher
- the biotech/pharma industry is bouncing back now too. Of course there was a big bump during COVID
- now, there’s another step change in drug development and innovation with GLP1s (weight loss, diabetes, obesity drugs), and there are many advances in neuro (launches in Alzheimer’s). Radiopharma is also blossoming and hot
- this new surge in drug launches and innovation will drive profits and investments in biopharma, VC funding & takeouts, and hence life science space needs
- VC funding is stabilizing / improving
- ARE tenant collections are at 99.9%
Hair / Bear case:
- they do have some office space component to their buildings, but the office space goes hand in hand with the lab space. ~60% of their space is lab, and 40% is office / meeting space that goes along with the lab space. Unlike other jobs, life science people have to go into the office / labs to get work done obviously
- and there's a lot of supply of new life science space coming online too, which is a concern. But ARE is very well pre-leased, and the supply hasn't impacted their financials much. They continue to grow and all metrics are still quite healthy
- still will pressure near term industry fundamentals, but it’s a short term issue. By 2025, people will be looking at a better supply/demand environment.
- ARE's deliveries are very well pre-leased. 2024 deliveries are 92% pre-leased. Although only 20% of 2025 leasing is done. However, historically they’ve been able to pre-lease their new deliveries at 90%+ upon delivery
- overall, for the industry supply growth is around MSD % of overall sq footage in 2024, but 2024 is the peak in new supply and things get better beyond
- also, they are somewhat sensitive to biotech funding. But biotech funding has stabilized lately
- short interest: 3.4% of the float is shorted, so it doesn't have the same short squeeze potential as others, although it has traded with similar volatility to office REITs in general and can be up HSD % when crowded REIT shorts are squeezing. There is a short base in here (and one vocal short seller - Land and Buildings - who has published a few bear points on it lately).
- Famous REIT activist investor Jonathan Litt published a short thesis on ARE on Jun 16, 2023 which sent the stock down 6%, and he’s followed up a few times. I think he and shorts are out of ammo now though, so another short attack that takes down the stock is unlikely.
https://twitter.com/JonLitt/status/1729135209419841989
- His thesis is basically that life science has similarities to office, which I think is obviously different. The proof is in the results, as office occupancy and returns and leasing have been weak; on the other hand, life science occupancy, returns, and leasing metrics have been relatively strong. Anyway, he's also caused the stock to go down recently, and published a few reports and been on TV. So he likely doesn't have any extra ammunition
He utilized cell phone data, saying that people aren’t going into the buildings as much. However, I don’t think that’s truly representative of the necessity of these life science buildings. Yes employees don’t need to go in as much, but they still need their lab space and equipment to get things done (unlike tech or finance employees that can work from anywhere).
Charts
Stock chart 1 yr
5 yr
Since 1997
Short interest since 2019 - it's at the higher end of the range
Links
Supplemental https://www.are.com/fs/2023q3.pdf
https://www.clarionpartners.com/insights/us-life-sciences-outlook-2023
https://www.cushmanwakefield.com/en/united-states/insights/life-science-report
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Continued positive financials / growth, and fundamentals staying healthy
Lease of new buildings over the next few years
Supply coming down in 2025, leading to a recovery in operating metrics
Rates lower
Biotech / pharma funding picking up
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