The past nine months have not been fun for real estate investment trust (REIT) investors.
The Vanguard Real Estate ETF (NYSE: VNQ) is in bear market territory, down almost 20% from where it traded last fall.
That’s much worse than the 3% decline in the S&P 500 over the same period.
The rapid rise in interest rates has driven the downturn in the REIT sector.
REITs use debt to finance portions of the real estate they own. Rising interest rates mean higher interest expenses, which negatively impact earnings.
Also putting a damper on the REIT sector are the record-high commercial office vacancy rates in the U.S. In the first quarter, office vacancies hit a concerning 18.6%.
The work-from-home trend is not good for office landlords.
The concerns that investors have about the REIT sector are valid. But when an entire sector gets sold off like this, you can bet some babies get thrown out with the bathwater.
In this case, Alexandria Real Estate Equities (NYSE: ARE) is one such baby.
ARE REIT on Our Radar
Alexandria is focused on a very specific real estate niche. Its real estate is rented by pharmaceutical and healthcare companies.
Instead of regular office spaces, Alexandria owns properties that are specialized to suit the pharmaceutical and healthcare businesses that use them.
These properties are unique and not interchangeable with the regular office buildings that are currently experiencing high vacancy rates. This means that Alexandria’s tenants will not be leaving the company for cheaper office space down the street.
Alexandria’s 2023 earnings results speak to the fact that this isn’t just another plain old office REIT.
In the first quarter, 94% of Alexandria’s rental space was occupied. That rate was the same a year ago, and it is far superior to those of Alexandria’s REIT peers.
And even better, the average rental revenue that Alexandria receives from its tenants increased by a record 48% in the first quarter!
Clearly, the REIT vacancy problem is not affecting Alexandria. Not only are Alexandria’s occupancy levels high, but the rent being generated from tenants has also skyrocketed.
Rising interest rates are also not a problem for the company.
Over 96% of its debt is fixed at an average interest rate of just 3.6%, meaning rising interest rates have had virtually no impact on the business.
Plus, the average remaining term on that debt is more than 13 years. So Alexandria is locked in at excellent borrowing rates for a long time to come.
Despite being insulated from the factors that have crashed the REIT sector, Alexandria’s share price has fallen 30% over the past year.
With this sell-off, Alexandria’s shares look attractively priced. The stock is currently trading at just 65% of the company’s net asset value.
That means we’d be paying just $0.65 on the dollar against the value of the assets that Alexandria holds.
On top of that, Alexandria pays a very secure dividend, which now yields almost 4%.
A cheap price and a big dividend yield is a nice combination.
The REIT sector is down big, and this has created a very nice opportunity to own shares of this high-quality REIT at an attractive entry price.
The Value Meter rates Alexandria Real Estate as “Extremely Undervalued.”
