This High-Yield Office REIT Is Unharmed By The Work-From-Home Trend

Visitor Contribution by Tom Hutchinson, Chief Analyst, Cabot Dividend Investor

Shares will inevitably development greater over time as they’ve persistently all through the a long time. However the market is usually a curler coaster within the close to time period. The S&P 500 was up final 12 months, however the market indexes are barely greater than they have been at the start of 2022.

Positive, there may be cause for optimism going ahead. Inflation is manner down, rates of interest have possible peaked, and the economic system continues to be stable. We could also be getting previous this Fed fee mountain climbing cycle with out the same old financial ache. It’s a brand new bull market and the S&P is on the cusp of latest all-time highs.

However a lot uncertainty stays. Every time inflation has risen above 5% for a sustained interval prior to now, it has taken not less than a decade to eliminate. Inflation might reignite and make the Fed hawkish once more except the economic system rolls over. One other danger is that the recession that by no means got here could also be just a bit additional down the street.

Then there are the wars occurring within the Ukraine and Gaza. Issues might escalate and spook the market at any time. Plus, it’s a Presidential election 12 months.

Something is feasible. However dividends will roll in it doesn’t matter what occurs. Over time, dividend-paying shares have vastly outperformed non-dividend-payers. Firms that persistently develop dividends have carried out better of all. And the outperformance comes with much less volatility than the general market.

For this reason Positive Dividend maintains a database of over 270 particular person securities (shares, REITs, MLPs, and many others.) with 5%+ dividend yields.

Dividends have accounted for greater than 40% of S&P 500 complete returns over the previous century. It’s additionally price noting that throughout the highest inflationary a long time of the previous century (the Forties and Nineteen Seventies), dividends’ contribution to S&P complete returns was 67% and 78%, respectively.

Firms that persistently pay and develop dividends are usually probably the most steady and dependable shares. Constant dividends should be backed up by constant revenues and earnings. Firms that may present such stability over a few years are likely to have dependable companies with nice niches.

These are nice shares to personal in any setting but additionally are likely to have much less draw back throughout bear markets.

I consider the market will find yourself delivering constructive returns in 2024. However you by no means know. It’s price it for each conservative and aggressive buyers to have not less than some illustration of robust dividend-paying shares of their portfolios. It makes the experience smoother and extra predictable and will assist allow you to experience out the following downturn to be properly invested for the following upturn.

Right here’s a high-yielding workplace REIT to think about.

Excessive-Yield Workplace REIT: Alexandria Actual Property Equities (ARE)

Alexandria Actual Property Equities (ARE) is a U.S.-based Actual Property Funding Belief (REIT) specializing in workplace buildings and laboratories leased to tenants primarily engaged within the life science and expertise sectors. It has over 800 tenants primarily in places which can be clusters for innovation in better Boston, the San Francisco Bay space, New York Metropolis, San Diego, Seattle, and Washington, D.C.

The primarily state-of-the-art laboratory properties are largely clustered in city life science, agricultural expertise, and expertise campuses within the U.S. Properties are leased to tenants underneath long-term triple internet leases with automated lease escalations. Triple internet leases account for almost all of revenues.

Tenants pay for every little thing, together with insurance coverage, taxes, utilities, and upkeep. These leases present an enormous benefit by eliminating sudden and variable bills and offering a way more predictable income stream.

These properties have excessive demand that ought to proceed to develop for a few years to come back. Alexandra’s tenants are main pharmaceutical, biotech, life science, and expertise firms. The largest tenants embrace Bristol-Myers Squibb (BMY), Moderna (MRNA), and Eli Lilly (LLY).

For a few years, ARE delivered the efficiency one would count on from a high-quality REIT working in a rising area. It carried out on par with the S&P 500 throughout a bull market with much less volatility and blew away the returns of the REIT index in each measurable interval for ten years. However issues turned ugly in 2022. Over the previous two calendar years, ARE plummeted 40%.

The autumn in worth isn’t due to inner or basic causes. Revenues, earnings, and occupancy charges have remained stable. Revenues are up 10.9% within the first 9 months of 2023 and earnings have grown within the excessive single digits. It’s the macro setting that has battered this inventory.

REITs have been one of many worst-performing market sectors over the past two calendar years due to rising rates of interest. Greater rates of interest make different income-generating investments within the fixed-income area extra aggressive. The upper charges additionally enhance the price of funding for REITs that have to borrow cash to increase as a result of they’re required to pay out the majority of earnings in dividends.

The inflation and rising rates of interest setting induced the Vanguard Actual Property Index Fund (VNQ) to fall 25% over the past two years. However ARE fell much more due to one other difficulty. Alexandria is technically labeled as an workplace REIT, and workplace area is in disaster. After the pandemic, many staff proceed to work from home and are usually not returning to the workplace. In a number of main cities, workplace occupancy charges stay as little as 60%.

The work-from-home development is anticipated to proceed, and staff are usually not anticipated to return to places of work at anyplace close to pre-pandemic ranges. There’s presently far more workplace area obtainable than demand. Traders perceive this and are avoiding workplace REITs just like the plague. In an unforgiving market, ARE has been subjected to the double whammy of rising rates of interest and the crash of workplace properties.

However the issue doesn’t apply to Alexandria’s properties. The market has been blind to the excellence and has thrown the infant out with the bathwater. Positive, if all you want is a cubicle and a pc you possibly can do business from home. However laboratories can’t be duplicated at house. And the associated places of work present a stage of innovation and collaboration that wants individuals to be there. That’s why Alexandria’s properties have a 93.7% occupancy fee that’s anticipated to develop within the quarters forward.

Proper now, ARE presents each an inexpensive worth and constructive momentum. Whereas it’s up almost 30% from the October low, you haven’t missed the boat. The inventory continues to be 47% beneath the all-time excessive and has greater earnings now.

In case you are eager about discovering high-quality dividend progress shares and/or different high-yield securities and earnings securities, the next Positive Dividend sources might be helpful:

Excessive-Yield Particular person Safety Analysis

Different Positive Dividend Assets