REIT Focus: Alexandria Real Estate Equities, Inc.

Jan.17.12 | About: Alexandria Real (ARE)

This month’s REIT Focus is on Alexandria Real Estate Equities, Inc. (NYSE:ARE). ARE is a self-administered and self managed Maryland real estate investment trust that focuses on the ownership, management, operation, development and acquisition of properties containing life science laboratory space. Client tenants include institutional (universities and independent not-for-profit institutions), pharmaceutical, bio-technology, medical device, product, service and translational entities and government agencies. The three largest tenants are Novartis (453,000 sq. ft), Roche Holding, Ltd (387,813 sq. ft.) and the U.S. Government (378,526 sq. ft.). ARE owns 171 properties containing 14.9 million sq. ft. with 13.6 million sq. ft. of operating buildings, 747,248 sq. ft. in active redevelopment and 531,486 sq. ft. of new development. ARE’s properties are primarily located in CA, MA, D.C., NY, WA, China and India. ARE was founded in 1994 and is based in Pasadena, CA.

As of 9/30/11, the average occupancy and monthly rental rate were, 94.69% and $34.39 respectively. As of 1/13/12, ARE had 61.95 million shares outstanding, a stock price of $70/sh. and a market capitalization of approximately $4.31 billion.

Select financial data for ARE as of the 9/30/11 10Q for the period 1/1-9/30/11 is as follows (in thousands where applicable):

Real Estate Assets, Gross


Total Assets


Unsecured and Other Debt


Stockholders’ Equity




Net Income


Earnings Per Share


Cash Flow from Operations


Unsecured Credit Facility ($686 million available)


Market Capitalization


Debt to:

Market Capitalization (equity value only)




Real Estate Assets Per Square Foot


Dividend Yield ($1.96/sh)


NOI and Value Calculation:

Revenues Per Above Annualized


Less: Rental and Operating Expenses


Projected NOI Annualized


Projected Cap Rate


Projected Value of Portfolio


Less: Total Debt & Preferred Stock


Projected Value of Company Equity


Shares Outstanding


Projected Value Per Share


Market Price Per Share (1/14/12)


Click to enlarge

As shown above, our value for ARE is $35 per share versus a market price of $70 per share. A portion of the value difference can be attributed to annualizing the September 30th income and expenses and no incremental value given for goodwill and management. The market however, is valuing the company at a cap rate of approximately 4.9% which we believe is way too rich for life science investment properties. Our cap rate of 7% is in line with the average cap rate for office properties of 6.91%, as per the PWC Real Estate Investor Survey for the third quarter of 2011.

One item that caught our eye in reviewing the third quarter 10Q is that, ARE (like Ashford Hospitality Trust, see the 11/15/11 VOM) has invested approximately $88.78 million is the equity of public life science companies ($5.08 million) and private life science companies ($83.7 million). These amounts are not considered immaterial for a company with a nine month net income of $99 million. It is interesting as to why a public REIT is speculating in the stock and private equity markets versus investing those funds in its core business or returning them to shareholders as a dividend or stock repurchase. If ARE wants to hedge the leasing and industry concentration risk of its portfolio, it should be shorting the equities of life science companies rather than going long on them.

ARE is considered a well managed REIT with a first class portfolio that specializes in properties leased to life science type tenants, which is a subset of the general office market. We believe that the market price of the company’s stock at $70/sh. is too expensive for investment even though it currently yields 2.9%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.