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Analyzing Alexandria’s Higher Funds from Operations Payout Ratio

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Rising dividend

As mentioned in the previous article, Alexandria Real Estate Equities’ (ARE) FFO (funds from operations) increased to $4.42 per share in 2014, compared with $4.33 per share in 2013. Bolstered by a higher FFO per share, the company increased its dividend by 10.3% to $2.88 per common share in fiscal 2014. This is the highest dividend paid by the company in the past seven years. With the increase of its dividend to $2.28 in the first three quarters of 2015, Alexandria is on course to pay around $3.05 per share this fiscal year.

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Importance of dividends

REITs such as Alexandria must pay at least 90% of taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rents paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation as many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.

Rising FFO payout ratio

The FFO payout ratio is the dividend declared per common share divided by diluted FFO per common share for a given period. FFO payout ratio provides investors with relevant and useful information as it measures the portion of FFO being declared as dividends to shareholders. Alexandria’s payout ratio has increased gradually over the past five years. Its FFO payout ratio, which was 40.4% in 2010, increased to 61.8% in 2013 and 65.2% in 2014.

Peer group comparison

Among its peers, Alexandria had an FFO payout ratio on the higher side in 2014. Boston Properties (BXP) offered an FFO payout ratio of 134.6%, followed by Columbia Property Trust (CXP) at 62.2%. Boston Properties’ higher FFO payout ratio was due to a one-time special dividend in 2014. Kilroy Realty (KRC) had a lower FFO payout ratio, with 46.4%. The iShares Cohen & Steers REIT ETF (ICF) invests ~1.5% of its portfolio in Alexandria. Continue to the next part of this series for a discussion on Alexandria’s debt position.

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