Is Alexandria Real Estate Equities Stock A Buy?

Alexandria Real Estate Equities Inc (NYSE:ARE) is a real estate investment trust (REIT) focused heavily in laboratories and office buildings for science and technology companies.

It also has a venture capital arm that invests directly in the firms it serves. The company’s investments include Bristol-Myers-Squibb (BMY), Takeda Pharmaceutical Company (TAK), Facebook (FB), Eli Lilly (LLY), Sanofi (SNY), and Uber (UBER) among others.

With a solid core strategy and upside from diversified investments, is Alexandria Real Estate Equities stock a Buy?

The company responded to the pandemic with its Alexandria Summit COVID-19 Policy Forum virtual webinar. It kept a close eye on commercial real estate and services industries that performed well during the lockdowns.

However, government-mandated foreclosure and eviction moratoriums run out in 2021. This could cause an avalanche of evictions and foreclosures that affects the real estate sector and the company’s bottom line. The question for investors is how does the company plan to navigate the coming market turbulence.

What Does Alexandria Real Estate Equities Do?

The company is a real estate trust based in California. Its main focus is on science and technology companies. This included many of the companies that experienced massive gains during the COVID-19 pandemic, like Facebook (FB) and Merck (MRK).

This put the companies in a good position to continue paying their rents while retailers and other businesses had to negotiate their way out of obligations.

This boost means the company easily rebounded from the initial crash and returned to post-coronavirus pricing. This represents a potential opportunity for investors who wish to capitalize on its success, as it plans to continue its growth trajectory.

It won’t be easy though. The real estate market it depends on faces some tough times in the coming years.

Facebook, for example, faces heat from the Federal Trade Commission (FTC) for possible antitrust violations for its social media dominance.

At worst, this could force the company to spin off products like WhatsApp and Instagram which in turn could affect this real estate trusts value.

And that’s just one company – the pharmaceutical industry’s race to a coronavirus vaccine is reaching a fast pace by year end.

These companies received generous grants from the government’s Operation Warp Speed that won’t be repeated in 2021. This puts them in a precarious position of needing to sustain revenues at a financial disadvantage.

Is ARE Stock a Buy?

REITs in general tend to outperform the general market, and the sector even outperformed the S&P 500 since 1972. This lifted Alexandria Real Estate Equities to a market cap over $22 billion by the end of 2020.

Share prices dropped to a 52-week low of $109.22 in the wake of the coronavirus crash before rising back the $150-170 range by Thanksgiving.

The company’s 37x P/E ratio signals that it may be overweight, although there’s plenty of room for growth potential should the commercial real estate market hold up in 2021.  

If the company follows its historic pattern, it stands to make a 13-percent annual return for investors. This is higher than the 12-percent gains expected from the S&P 500, although it’s not guaranteed to follow this pattern, especially in a post-coronavirus economy.

It’s possible that the fallout towards a more virtual world will, somewhat ironically, drive demand for more office space in the technology sector, which would go against the trend in other industries. Nevertheless the competitive threats and risks to ARE share price are significant as we’ll below.

Risks To Current ARE Share Price

Alexandria Real Estate Equities certainly benefitted from servicing essential businesses during the coronavirus lockdowns.

The vaccine makers it counts as tenants are likely to stay in business for the long run, and they may even increase the size of their workforce.

However, this could be countered by companies like Facebook and Uber.

Tech companies were the leaders in encouraging employees to work from home. It’s estimated that 48,000 of the company’s workers are shifted to permanent work-from-home schedules by the end of May 2020. This means Facebook will likely be reducing its overall office footprint, which will affect the REIT’s bottom line.

It needs to pick up more diverse revenue streams to counter this push to virtual work. If not, any gains it realizes in healthcare and pharmaceuticals will be cancelled out by losses in Facebook, which is one of its biggest clients.

There’s also the concern of heavy competition to address.

Can Alexandria Real Estate Equities Competitors Win?

Commercial real estate is a big business, and major companies like VOLK, CBRE, JLL, and Cushman & Wakefield are big players.

While these firms may not have the same focus on science and technology firms, there’s nothing stopping them from muscling into the market and taking share from Alexandria Real Estate Equities.

Many of these major players are also dealing with vacancies caused by businesses closed during the quarantines. They could easily offer these properties to potential Alexandria Real Estate Equities customers.

This stiff competition will be one of the biggest obstacles the company faces over the coming years.

Is Alexandria Real Estate Equities Stock A Buy?

Alexandria Real Estate Equities is an American REIT that’s focused on science and technology office buildings and laboratories. This gave it a leg up on the commercial real estate competition when the global pandemic ravaged retail and other industries. However, its science and tech industries aren’t necessarily guaranteed.

One of its biggest customers is Facebook (FB), which already moved its staff to work from home and faces heavy antitrust scrutiny. Should other companies follow suit, it could bottleneck the company’s revenues and severely limit growth potential.

Still, this REIT outperformed the S&P 500 index over the past 50 years, and it has a good chance of repeating this feat. Be sure to perform your due diligence before adding it to your portfolio to determine if it’s the right investment for you.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.