Bottom of the Barrel: Reviewing the REITs

This week, the REITs float to the top of the barrel.

Because many of you are inquiring about the real estate investment trusts in my small-cap basket, this week's Bottom of the Barrel reviews the sector's three names highlighted over the past year. As noted in a recent column on value REITs, public real estate markets face many challenges. So it's no surprise that the Barrel's small-cap REITs are encountering similar hurdles. But for two names in the portfolio, investors have some reasons for optimism.

Alexandria: Health Can Be Expensive

Alexandria Real Estate (ARE Quote) focuses on laboratory offices primarily for the biotech industry. When I first mentioned this company in February, its stock was trading at $40.25. Today's price of $42.60 has provided investors a nice return and, combined with 4.7% yield, has made a good investment.

As the office market struggles, can Alexandria continue to outperform? The answer is a qualified yes.

One area of the office market that hasn't felt as much of the occupancy and rent-rate pinch is the medical technology space. Although Alexandria's occupancy rate fell to 95.2% from 96.7% in the third quarter, the company fared much better than many mainstream office landlords. It also posted an increase in net operating income of 3.3% for the third quarter, while many mainstream office companies struggled to find any growth at all.

More important, management is confident that growth will continue. They currently see 2002 funds from operations, or FFO, a REIT's measure of operating success, at $3.92 a share, translating into a current multiple of about 10.9 times FFO. In 2003 the company thinks it can post FFO of about $4.30, putting the forward multiple below 10, about equal to the growth rate.

That multiple seems about right, given economic uncertainties. But the dividend appears safe, and this could be one of the few REITs to see a modest boost in the coming year. On the basis of a $2 dividend, Alexandria only pays out 55% of its funds available for distribution, estimated at about $3.60 for 2003.