Alexandria Real Estate Equities REITARE142,56 $
Today we have a moderately speculative idea.: take real estate fund shares for R&D Alexandria Real Estate Equities (NYSE: ARE), in order to capitalize on the growth of investments in scientific research.
Growth potential and validity: 15,5% behind 16 months excluding dividends; 46% behind 4 years excluding dividends; 10% per annum during 15 years.
Why stocks can go up: because R&D space is in high demand.
How do we act: we take shares now by 142,56 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
Recently released a detailed review of ARE, so we won't repeat ourselves here.. Basic moments:
- ARE is REIT, organization, investing in real estate and paying most of its profits to shareholders as dividends.
- The company invests in buildings, mainly used for R&D as pharmaceutical, and technology companies.
- Over 99% the company's revenue comes from rent.
Arguments in favor of the company
Fell down. Shares have fallen sharply since the beginning of the year.: back in January they asked for them 210 $. Understandably, that the main reason for the fall is the high cost of the company, but there are a number of reasons, which allow us to hope, that stocks will rebound soon.
perspective. Technology and pharmaceutical companies will increase investment in R&D, for only this allows them to maintain their advantage.
Looking wider, then the entire corporate sector experiences a wide need for R&D, because it will be difficult for them to beat the margin records of recent years - and this is exactly what investors and owners expect from them. So the business will invest in new developments - to the benefit of ARE.
Stability. Over 96% company space occupied, which in itself is good. It is also important that, that this year the lease expires only for customers, giving in total no more than 3,8% proceeds.
From 2023 to 2031 inclusive, every year the company will end on average not the largest volume of contracts - 7,5% revenue per year. It's good: if a given year had a disproportionate percentage of expiring contracts, say 25%, then this could lead to an organized "tenant strike", to limit ARE's increase in rental prices.
Helps here and there, that at ARE none of the clients gives from above 4% of all rental income.
Growth point. Most of the company's tenants are wealthy companies like Apple.. If ARE management gets tense, it will be able to offer them additional services at exorbitant prices.
office pest. The capitalization of the company fluctuates around $ 22 billion, so taking into account all the points described above, it may well be bought by a large landlord, whose office business is being killed by an endless pandemic.
Real estate for R&D is almost the only type of office, where you can hope for maximum occupancy and acceptable growth rates, so it would be a very logical solution for the rentier, which is nothing, except for rent, does not want to work.
Dividends. The company pays good dividends: 4,72 $ per share per year, that gives us shameless 3,42% per annum. Taking into account the prospects of the ARE niche, shareholders have every right to wait, that the company's revenues will grow, which means, dividends will grow. But even those dividends, what already is, big enough, and we can cautiously hope for the growth of stock prices due to the influx of payout lovers.
What can get in the way
Price. If ARE were a regular company, then we would evaluate it by, how much annual revenue it costs and how many years of operation its current value will pay off. And here it can and should be considered an extremely expensive company.: P / S she has 9,38, a P / E — 47,86.
But REIT on the stock exchange is usually valued by the ratio of share price to profit from operations - and this indicator is at a level slightly lower than 39. This is also significantly higher than the “average for the hospital”. All in all, undervalued company can not be called.
Accounting. ARE has a lot of debt - over $10 billion. But the money directly at its disposal is not enough - 522.5 million. As interest rates rise, it will be harder to service such debt., which increases the risks of lower payouts and the subsequent drop in shares.
There will be no peaceful solution. That, that the company has almost all the areas occupied, and most of the contracts expire soon, also has a negative side: unlikely, that ARE will be able to dramatically increase the cost of rent at once. So income growth here will be gradual.
What's the bottom line?
We take shares now by 142,56 $. And then there are the following options:
- wait for the stock to return to the level 165 $. Here it is better to rely on 16 Months;
- expect quotes to return to 210 $. Think, we will reach this level in the next 4 of the year;
- hold shares 15 years.
Considering the importance of the dividend factor for this idea, We recommend looking at the news section on the company's website, to respond to pay cuts.
But now "SPb-Exchange" starts its work later than usual, therefore, for the time being, we are deprived of a temporary advantage over American investors.
