A stable credit opportunity in the more turbulent office REIT segment
admin | May 21, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
While Office REITs are facing considerably more pandemic-related pressures than other REIT subgroups, Alexandria Real Estate (ARE) is among the top credits in the segment and offers relative stability. The company is among the few REIT credits capable of issuing in the long-end of the curve and is actually the only office REIT with 30-year US dollar debt currently outstanding. The ARE 51s are attractively priced and offer one of the more conservative credit profiles in the broader REIT sector.
Graph 1. ARE vs Office REIT peers
Source: Amherst Pierpont, Bloomberg/TRACE Indications
Graph 2. ARE 51s vs broader high-quality REITs
Source: Amherst Pierpont, Bloomberg/TRACE Indications
ARE 3.0% 05/18/51 @ +104/30YR, G+105, 3.39%, $92.69
Issuer: Alexandria Real Estate Equities Inc. (ARE)
Amount outstanding: $850 million
- ARE is an urban office operator with a specialty focus in technology and life science campuses, which helps mitigate the near-term risks and longer-term fallout of the ongoing pandemic. The company is among the largest Office operators with just over $24 billion in gross real estate assets and 360 individual properties as of the first quarter of 2021.
- ARE’s key locations include the attractive markets of Boston (36%), San Francisco (26%), and San Diego (16%), with additional exposures in Seattle, New York, and Maryland. The company boasts a high-quality tenant base with over 55% of annual rental revenue from investment grade publicly traded large-cap tenants as of the first quarter of 2021. The largest segments of ARE’s tenant base include public biotechnology companies at 25% and multinational pharmaceutical companies accounting for 20%. The weighted average lease term for all tenants is currently 7.6 years, with a 10.9-year term for its 20 largest tenants.
- Total occupancy remained relatively consistent over the course of the past year, demonstrating greater resolve than the broader peer group amidst the global pandemic. Occupancy stood at 94.5% as of the first quarter of 2021, relatively unchanged from YE2020 at 94.6%. That level is down comparatively modestly from 96.8% as of YE2019, and a peak in the low 97% range.
- ARE reported first quarter 2021 funds from operations (FFO) per share of $1.91, topping the consensus estimate of $1.85. Top-line revenue increased 9% YoY to $480 million, roughly in-line with consensus expectations. Rent collections remain high, at an estimated 99.4% of billings collected as of last month. The company reported that from the end of first quarter 2020 through year-end 99.8% of rents were collected or recovered.
The company’s liquidity profile is very solid, with over $4 billion in estimated available liquidity. As of the first quarter of 2021, ARE maintains just under $500 million in cash on the balance sheet. The company also has their entire $3 billion credit facility available to them through 2026. The next public debt maturity is not until 2025 with $600 million due that year, plus an additional $350 million loan maturity. The remainder of their maturity schedule remains very balanced year-to-year. ARE also has plenty of capacity to issue secured debt as a means of raising emergency capital with just $575 million in secured debt outstanding as of the first quarter of 2021 versus roughly $25 billion in total assets and $21 billion in net real estate property.
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