REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Alexandria Real Estate Equities Inc. (ARE) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Alexandria Real Estate Equities, Inc. is a self-administered and self-managed real estate investment (REIT). The Company is engaged in the business of providing office/laboratory and tech office space for lease to the science and technology industries. The Company has five properties in Canada, as well as eight operating properties, one development project, and several land parcels in Asia. As of December 31, 2014, the Company had 193 properties containing approximately 18.7 million rentable square feet (RSF) of office/laboratory and tech office space. As of December 31, 2014, the Company had 562 leases with a total of 441 client tenants and 87 of its 193 properties were single-tenant properties. The Company’s portfolio includes Alexandria Center at Kendall Square; Alexandria Park at 128; Alexandria Technology Center-Gateway; Alexandria Center for Life Science; ARE Nautilus; ARE Towne Centre; ARE Portola, and Alexandria Technology Center-Gaithersburg I, among others.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass all 6 of the following tests. | |||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass | |
| 2. Earnings Stability | Positive EPS for 10 years prior | Pass | |
| 3. Dividend Record | Dividend Payments for 10 years prior | Pass | |
| 4. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Fail | |
| 5. Moderate PEmg Ratio | PEmg < 20 | Fail | |
| 6. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor. | |||
| 1. Earnings Stability | Positive EPS for 5 years prior | Pass | |
| 2. Dividend Record | Currently Pays Dividend | Pass | |
| 3. Earnings Growth | EPSmg greater than 5 years ago | Fail | |
Stage 2: Determination of Intrinsic Value
| EPSmg | 1.96 |
| MG Growth Estimate | -2.02% |
| MG Value | $8.72 |
| Opinion | Overvalued |
| MG Value based on 3% Growth | $28.37 |
| MG Value based on 0% Growth | $16.63 |
| Market Implied Growth Rate | 19.32% |
| Current Price | $92.23 |
| % of Intrinsic Value | 1057.31% |
Alexandria Real Estate Equities Inc. does not satisfy the requirements of either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is only initially concerned by the lack of earnings growth over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $2.26 in 2011 to an estimated $1.96 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 19.32% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Alexandria Real Estate Equities Inc. (ARE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
| PEmg | 47.14 |
| PB Ratio | 1.72 |
| Dividend Yield | 3.22% |
| Number of Consecutive Years of Dividend Growth | 5 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Long-Term Debt | $1,721,435,000 |
| Total Assets | $8,524,891,000 |
| Intangible Assets | $0 |
| Total Liabilities | $4,702,015,000 |
| Shares Outstanding (Diluted Average) | 71,412,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $3.32 |
| Dec14 | $1.01 |
| Dec13 | $1.60 |
| Dec12 | $1.09 |
| Dec11 | $1.73 |
| Dec10 | $2.19 |
| Dec09 | $2.72 |
| Dec08 | $2.86 |
| Dec07 | $2.63 |
| Dec06 | $2.25 |
| Dec05 | $2.22 |
| Dec04 | $2.33 |
| Dec03 | $3.10 |
| Dec02 | $1.76 |
| Dec01 | $1.64 |
| Dec00 | $1.77 |
| Dec99 | $1.46 |
| Dec98 | $1.58 |
| Dec97 | -$0.35 |
| Dec96 | $0.60 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.96 |
| Dec14 | $1.36 |
| Dec13 | $1.64 |
| Dec12 | $1.82 |
| Dec11 | $2.26 |
| Dec10 | $2.53 |
| Dec09 | $2.64 |
| Dec08 | $2.56 |
| Dec07 | $2.44 |
| Dec06 | $2.34 |
| Dec05 | $2.33 |
| Dec04 | $2.29 |
| Dec03 | $2.16 |
| Dec02 | $1.68 |
| Dec01 | $1.50 |
| Dec00 | $1.29 |
| Dec99 | $0.92 |
Recommended Reading:
Other ModernGraham posts about the company
None
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.
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