The housing market had a rocky year in 2023, but real estate stocks proved fruitful for some investors. Or did they? Adam Johnson, BullseyeBrief.com Portfolio Manager, joins for another edition of Good Buy or Goodbye.
Johnson points towards Alexandria Real Estate Equities (ARE) as a Good Buy. He states that the company has a great focused portfolio, building very purpose-driven properties, developing only for life science companies like Big Pharma. Second, he describes the tenants as "sticky," meaning they tend to stay in those properties for a long time. In addition, because of growth in the life sciences sector and long-lasting tenants, that equates to a stable cash flow.
Johnson points out SL Green Realty Corp (SLG) as a Goodbye. He explains that the company's portfolio is too focused on New York City, rather than spread across the country. In addition, the company has an inconsistent portfolio of properties, of which he considers many to be "duds." In fact, 10 of the company's buildings are in the "Alt strategy" category, which according to Johnson means they do not know what to truly do with them.
Click here to see more Good Buy or Goodbye or you can watch this full episode of Yahoo Finance Live here.
Editor's note: This article was written by Nicholas Jacobino
Video Transcript
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JULIE HYMAN: It's a big noisy universe of stocks out there. Welcome to "Good Buy or Goodbye." And that's where we help you sift through that noise to figure out the best moves for your portfolio. Today we're focusing on real estate, which had a rocky year last year, a lot of debate about whether it indeed was a good investment and also debate about maybe it wasn't as monolithic as it looked here.
I want to bring in Adam Johnson now of Bullseye Brief. He is going to help us sift through this real estate sector today. So let's focus on real estate investment trusts. And let's kick it right off and look at your good buy, the stock you like here. It's Alexandria Real Estate here.
ADAM JOHNSON: I actually think it's a great buy, Julie, as opposed to the other.
JULIE HYMAN: A great buy.
ADAM JOHNSON: --as opposed to the other.
JULIE HYMAN: Are we going have to change the name of the segment?
ADAM JOHNSON: Great buy or get out of here. This is my great buy or good buy, as you like to say. A couple of bullet points just to give you acquainted with it-- focused. This company builds very specific purpose built real estate. They sell only, they develop only for the life sciences sector, so biotechnology companies, big biopharma companies.
It's very specialized. These companies need laboratories that's got to have the specialized HVAC, right, to get poisonous toxins out, all kinds of filtering. They like to have production spaces, so they can have all their meetings on stage. They do atriums. And this is key, Jules, they only build next to universities. So that there's already infrastructure there and a desire for it so--
JULIE HYMAN: Interesting.
ADAM JOHNSON: Focused, purpose built.
JULIE HYMAN: Let's talk about the second part. And the tenants, you say, tend to stay there. There's not a lot-- we look at other parts of real estate, people move in, people move out. In this one, not necessarily the case?
ADAM JOHNSON: No, because they are purpose built. In other words, Alexandria won't actually develop a property until it's already pre-leased by about 80%, right? So it's effectively already paid for. That's how they're able to get the loans and lock in the margin. So the tenants, once they ask Alexandria to build these properties for them, they stick around. It's very sticky.
JULIE HYMAN: OK. And then finally, you say that there is stable cash flow at this--
ADAM JOHNSON: Because of that stickiness. Yeah. And as a matter of fact, their occupancy right now, you probably find this surprising-- I certainly did until I ran the numbers-- 96%.
JULIE HYMAN: Wow.
ADAM JOHNSON: So for all the gloom and doom about real estate, 96% occupancy. And they're renewing leases at 6% increases. So I like ARE very much. I'm long and as are my clients.
JULIE HYMAN: OK. That's a good disclosure to have. We like to ask people what the risk to the potential bull case is. And here you say, could we see health care markets get crimped by regulation, for example?
ADAM JOHNSON: Potentially. Yeah, I mean, if you just-- and again, we have to think big picture here. But if, in fact, the Washington steamroller were to really go after drug pricing-- I know they always say that during election years as they are right now. But if that actually were to gather momentum, then, in theory, that would crimp profits at some of these companies. And so they might not be able to spend the money on this premium real estate.
JULIE HYMAN: The other thing I would ask just briefly before we move on to the one that you would avoid is, what kind of growth is this company seeing? In other words, because--
ADAM JOHNSON: 6%, 7%, 8% annually.
JULIE HYMAN: OK. So we're not talking about huge leaps and bounds, of course, but a steady grower.
ADAM JOHNSON: A steady grower. And what attracted to me, you know, I run the Bullseye American Ingenuity Fund. There's a lot of technology. You don't usually think of real estate as ingenious, right? But the way they target the real estate, I think, is ingenious.
And I would also add that the stock was trading, oh, about six weeks ago, at a 10-year valuation low. You don't often see a high-quality company trade that low.
JULIE HYMAN: OK. So let's talk about the company that you want to avoid. And it is in the dreaded office space--
ADAM JOHNSON: Wouldn't touch it, not with a 10-foot pole.
JULIE HYMAN: SL Green here, that's your goodbye. So let's run through it here. Concentrated in NYC, if I'm not mistaken, this is one of the, if not the largest REITs in New York City.
ADAM JOHNSON: Oh, it's the largest one, hands down. They own 59 properties here in New York City. That's part of the problem, Julie. I mean, this is the tip of the spear. If you talk about the problems with commercial real estate and office space and the fact that at least here in New York only about 53% of workers are back in the building, right?
JULIE HYMAN: We know that anecdotally certainly.
ADAM JOHNSON: Yeah, yeah. So concentrated in New York, that's a big problem.
JULIE HYMAN: OK. Let's talk about problem number two for you, inconsistent property mix. What does that mean?
ADAM JOHNSON: So on the one hand, SL Green has got some beautiful properties here. In fact, if you know One Vanderbilt right next to Grand Central, arguably, probably, the prettiest most impressive new building in New York City. The problem is that's only one, and they're long 59 buildings. And they've got some real duds, like the old Bear Stearns, 245 Park Avenue. A bunch of buildings, big blocky, clumsy concrete buildings on Third Avenue, what do you do with them? That's the problem. So it's an inconsistent property mix.
JULIE HYMAN: OK. And then thing number three here, 10 and 50 are an alt strategy.
ADAM JOHNSON: Yeah. Watch out. You remember back in 2008, Citibank had good bank, bad bank. They put all the bad assets in the bad bank. Well, they put 10 of their 50 buildings, 59 buildings in the alternate strategy portfolio. In other words, we don't know what to do with them. We can't sell them. We can't lease them. They're just sitting there. Do we repurpose them? Do we knock them down, develop, redevelop? So that's a concern that alt strategy group.
JULIE HYMAN: OK. So the risk to this downside case is everybody comes back.
ADAM JOHNSON: Yeah, everything's great. You know, right come back in, the water is fine. I mean, you look at the Wall Street bank CEOs, and they've all said you got to get back in, David Solomon at Goldman on and on. Jamie Dimon at JP Morgan, get back in the office. And actually, I'm a believer in that. Mentoring happens in the office. It doesn't happen when kids are at home, not working with peers or with seniors to show them the way it's done.
So if everybody comes back to work, OK, I guess I'll agree to be just fine. But it doesn't seem to be going that way.
JULIE HYMAN: It doesn't feel that way. And then we've got sort of a bonus chart, looking at these two companies and really comparing them here. When we talk about REITs occupancy is really important here, right, what percentage is the occupancy? And there's definitely a clear divide between these two guys.
ADAM JOHNSON: Oh, a clear divide. And by the way, hats off to your producers for making this chart, because this says it all, right? Occupancy at Alexandria Real Estate, 96%, versus SL Green, 89%. You know, you were saying earlier, you're surprised it's as high as 89. It sounds like it ought to be 78. But it's 89, fine.
Amount of debt, less than 20% of ARE's debt comes due in the next four years, whereas more than 60% of SL Green's debt comes due, so they've got this debt problem. They're going to have to refinance. And obviously, rates are higher. And, by the way, half of the debt at SL Green is floating rate.
JULIE HYMAN: Oh, dear.
ADAM JOHNSON: So they get squeezed on both fronts. And then you just look at sentiment, the way the Street is looking at these stocks. 12 buys on ARE, no holds, only one sell. And that's a recent one versus 4, 7, and 7. So the Street doesn't like-- I don't like SL Green, the Street doesn't like SL Green. And you got to respect that kind of sentiment.
I tend to be a contrarian, but not when it comes to SL Green. This is one where I agree with the Street, I agree with the market's view. And I don't want to touch it. But ARE, another story.
JULIE HYMAN: OK. Adam, I'm going to recap, if I can, what we have talked about today. So you're saying by Alexandria Real Estate based on that focused portfolio, the loyal customer base, positive cash flow. On the other side, you say avoid SL Green at all costs based on its not-so-diverse portfolio of buildings here in New York City, high debt, low occupancy. Adam Johnson, what a pleasure to see you--
JULIE HYMAN: Great being with you, Julie Hyman.
JULIE HYMAN: --and be on TV with you once again.
