Alexandria Is A BUY And The VC Arm Only Makes It Sweeter

seekingalpha04-24

ARE is one of my favorite REITs.The company reported solid Q1 results and managed to trade sideways despite a rise in yields.I explain why FFO is a poor measure for ARE and discuss their venture ...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAlexandria Is A BUY And The VC Arm Only Makes It Sweeter\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-24 23:33 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685666-alexandria-is-a-buy-and-the-vc-arm-only-makes-it-sweeter><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>ARE is one of my favorite REITs.The company reported solid Q1 results and managed to trade sideways despite a rise in yields.I explain why FFO is a poor measure for ARE and discuss their venture ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685666-alexandria-is-a-buy-and-the-vc-arm-only-makes-it-sweeter\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"VC","symbol_name":"伟世通","start_time":0,"source_url":"https://seekingalpha.com/article/4685666-alexandria-is-a-buy-and-the-vc-arm-only-makes-it-sweeter","article_id":"2429468993","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/175441534/image_175441534.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2429468993","pubTimestamp":1713972818,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"ARE is one of my favorite REITs.The company reported solid Q1 results and managed to trade sideways despite a rise in yields.I explain why FFO is a poor measure for ARE and discuss their venture capit","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VC":"伟世通","BK4585":"ETF&股票定投概念","LU0757428866.USD":"THREADNEEDLE (LUX) GLOBAL SMALLER COMPANIES \"AE\" (USD) ACC","ARE":"亚历山大房地产","ARM":"ARM Holdings Ltd","BK4223":"办公室房地产信托","BK4141":"半导体产品","BK4588":"碎股","BK7043":"互联网服务与基础架构","BK4194":"办公房地产投资信托","CFA.SI":"NikkoAM-STC Asia REIT","BK4124":"机动车零配件与设备","LU1815336091.USD":"THREADNEEDLE (LUX) GLOBAL SMALLER COMPANIES \"AUP\" (USD) INC","BUY":"USCF SummerHaven SHPEI Index Fund","SPX.AU":"Spenda Ltd"},"translate_title":"亚历山大是一个购买和风险投资部门只会让它更甜","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARE":1,"ARM":1,"BUY":1,"SPX.AU":1,"VC":1,"CFA.SI":0.9},"content_text":"ARE is one of my favorite REITs.The company reported solid Q1 results and managed to trade sideways despite a rise in yields.I explain why FFO is a poor measure for ARE and discuss their venture capital arm.   blackredDear readers, Alexandria Real Estate Equities (NYSE:ARE) has been one of my favorite REITs and represents one of my largest REIT holdings today at nearly 5% of my portfolio. Therefore, it should not come as a surprise that I have spent a lot of time researching the stock. I started coverage on the stock in March 2023 and have published a number of bullish articles since, outlining my reasons for investing in the stock. In September 2023, I dove deep into Alexandria's business model and tried to debunk the myth that their properties will be threatened by work from home the same way that traditional office space will (see the article Why The Bears Are Wrong for details). Then, in November 2023, I discussed why Alexandria was positioned to outperform even under a higher for longer scenario, which was very in front of mind at the time (see article ARE Likely To Do Well Long-Term Even If Yields Stay High for details). Most recently, I covered the stock in February of this year in an article titled Quality At A Fair Price. In that article, I showed why ARE is likely to grow its NOI by at least 5-6% per year going forward and issued a BUY rating at $120 per share with a price target of $170 per share. The bullish thesis was based on strong NOI growth, as well as my expectation that long-term yields could decline to 3.5% over the next few years. Since that article, despite a rise in long-term yields from 4.2% to 4.6%, there has been little movement in the stock price, which currently stands at $118 per share. The S&P 500 (SPX) has also been flat over the period.   SAOn Monday, Alexandria reported their Q1 2024 earnings, which confirmed a lot of the positives that I have been writing about. Therefore, today, I want to take the opportunity to (1) update you on what has been going right, (2) present an updated valuation with a focused on Alexandria's venture capital ('VC') arm which I have not discussed in detail here, and (3) explain why FFO is not the appropriate measure to value the stock. Financials  In short, ARE's most recent earnings have been pretty good.  The REIT has recorded another quarter of solid leasing with 1.14 Million sq ft of space leased, right in line with the historical average (excluding the extraordinary life science boom in 2020 and 2021). Crucially, ARE had executed these leases at significant rent spreads of 33% (19% on a cash basis) and longer than average lease terms of 8.8 years (vs portfolio average of 7.5 years). These lease terms, combined with the fact that 77% of leasing activity has come from existing tenants, show that tenants value their space, and have contributed to strong NOI growth of 4.2% YTD (marginally down from 4.6% last year).   ARE IRGoing forward, NOI will continue to be driven by (1) positive cash rent spreads, which management expects at 5-13% in 2024, (2) high 3% average built-in rent escalators, and (3) an extensive pipeline of new development projects that are expected to add an incremental $480 Million in NOI (to the existing NOI of $1.9 Billion). I also want to point out that these projects are already highly pre-leased, with those scheduled for completion this year being nearly fully leased at 98%. Combined, the three aforementioned growth drivers have the potential of increasing NOI by 4-5% per year.   ARE IRThis growth will be underpinned by a great balance sheet with a reasonable net debt to EBITDA of 5.2x, 98% of debt fixed-rate and one of the longest weighted averages remaining terms in the sector of 13.4 years. The result is very predictable interest expense, which is unlikely to meaningfully eat into ARE's profits even if interest rates stay elevated for a prolonged period of time.   ARE IRValuation Price to FFO is the preferred valuation measure of most REIT analysts on Seeking Alpha. And while I do sometimes look it myself, there are two things that skew the measure we should be aware of. Firstly, P/FFO fails to take into account changes in interest rates. This can be especially dangerous when looking at a relatively short-term historical average (e.g. 10 years) because interest rates were very low for the majority of that period. Since there is a clear negative correlation between rates and valuations, valuing an investment based on criteria that does not account for a change in rates is clearly not ideal. More importantly, specific to Alexandria, P/FFO is a poor measure because Alexandria's FFO includes unrealized gains and losses from the VC arm. This may be news to some of you, but unlike other REITs, Alexandria actually has an opportunistic venture capital arm which aims to invest mostly in high-growth early-stage biotech firms. The problem is that the very nature of VC investing is that earnings are very unpredictable. Moreover, under GAAP accounting, ARE has to report unrealized gains and losses on their investments as part of FFO. The result is that their FFO tends to be overstated in good years and understated in bad ones. The way I see it, the only correct way to value ARE is to look at the implied cap rate of their core rental business and add a premium for the VC arm. So, let's do exactly that. Their core business generates annualized NOI of $1.9 Billion. With $11.5 Billion in net debt and a market cap of $20.7 Billion, it's easy to calculate the implied cap rate of 5.9%. That's 130 bps above the 10-year treasury yield which stands at 4.6% today, a spread which I consider relatively tight, but justified by the high quality of ARE's properties and a superb balance sheet with extremely low interest-rate risk. My base case is that the long-term yields will fall over the course of this and next year and could reach at least 4% by the end of 2025. In that case, using a slightly more conservative spread of 150 bps, and assuming 4-5% annual NOI growth in line with history and consensus, I get a price target for the core business of $147 per share. Now, let's add a premium for the VC arm. VC realized gains are lumpy and cyclical. We're talking $215 Million in 2021, $80 Million in 2022 and just $6 Million in 2023. Averaging the last three years yields average annual realized gains of $100 Million. And since we're talking about VC growth investments here, I think it's justified to value these at 30x earnings for an aggregate value of $3 Billion (or $17 per share). Adding this to the value of the core rental business yields an overall price target of $165 per share, up 39% from today. Risks As bright as ARE's prospects seem, there are several risks to consider here. ARE's balance sheet is strong, but that doesn't make the stock immune to interest rate changes. As with all stocks and especially REITs, the valuation is highly dependent on interest rates. Therefore, a further increase in interest rates and yields would most likely result in poor performance. Moreover, specific to Alexandria, demand could be threatened by AI in the long-run. The argument here is that AI could replace a large portion of the Life Science work force as AI takes over experiments such as drug discovery could. I see this as a potential threat, but strong leasing gives me the confidence to invest. After all, no one knows the space better that tenants themselves, and if they're willing to commit to longer leases and higher rents, they probably don't anticipate downsizing any time soon. Bottom Line  ARE has been a major investment of mine for a while, and with time my understanding and the amount of information I am able to share with you has grown. The company has reported very good results during the first quarter and the stock has traded flat since my last article, despite a 40 bps rise in yields. I recognize that the stock is unlikely to reach my price target before yields decline to at least 4%, but I am, as confident as ever, that ARE deserves a BUY rating.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429468993"}