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I think real estate investment trusts (REITs) are some of the best passive income investments around. And one in particular stands out to me after Pfizer’s recent deal with the US government.
Alexandra Real Estate Equities (NYSE:ARE) is a REIT that leases lab space to pharmaceutical companies. It’s been hit by the recent downturn in the sector, but I think it’s well worth a look right now.
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Pfizer’s deal
The US government has been hostile to pharmaceutical firms. So to avoid the threat of a 100% tariff on imported drugs, Pfizer has agreed to reduce its prices and invest in US manufacturing.
The response from the stock market has been positive. And one of the stocks that received the biggest boost is Danaher, which supplies equipment across the industry.
By contrast, shares in Alexandria Real Estate are down slightly. And there’s definitely a risk that a big investment in US manufacturing might create extra competition.
I think though, that the firm stands to benefit from the pharmaceutical sector as a whole being in a stronger position. So I’m looking at the 6.5% dividend yield as a potential opportunity.
Rental income
The downside to Pfizer’s deal is that it means lower selling prices for pharmaceutical companies. But Alexandria Real Estate’s largely protected from this. From the firm’s perspective, what matters is that it can attract enough tenants to occupy its properties and that they’re in a position to pay their rents. That’s pretty much it.
A good illustration of this is the situation with Moderna. The firm has struggled since the end of the pandemic, but this hasn’t been a problem for Alexandria Real Estate.
Rent collection metrics have been consistently high, despite Moderna being one of the firm’s largest tenants. And this has resulted in consistent dividend growth for investors.
Where are we now?
Alexandria Real Estate currently has 90% of its properties occupied, which is below its long-term average. That’s why investors will want to be aware of the threat of further supply coming online.
The average lease has around 7.5 years left, which isn’t that long. But among the top 20 tenants – which account for over a third of its total rental income – the figure is closer to 10 years.
Earlier this year, the firm had to issue debt at 5.5% to replace maturing bonds that had a 3.45% interest rate. That’s not ideal, but the path forward looks much clearer on this front.
Only 9% of the company’s loans are set to expire before 2027 and the prospect of falling interest rates should help with this. So the current position looks much more stable than it did in January.
A dividend opportunity?
Alexandria Real Estate has focused on generating reliable rental income from high-quality tenants. And that’s a strategy that has worked well for passive income investors.
While Pfizer’s deal with the US government might create additional competition, I think it should also stabliise the pharmaceutical sector. That’s why I view it as a positive for the company.
Over the long term, I expect the stock could be a great source of passive income. And the 6.5% dividend yield is unusually high and worth considering seriously as a potentially attractive entry point.
