Companies with fortress-like balance sheets can weather an economic storm better than those with weaker financial profiles. A strong balance sheet gives a company the flexibility to continue paying dividends and making investments during tough times. It also allows them to borrow money at lower costs, enabling them to keep more of what they earn. That makes them safer investments than those with weaker finances.
Three stocks with superior balance sheets are Alexandria Real Estate Equities (NYSE: ARE), Camden Property Trust (NYSE: CPT), and Public Storage (NYSE: PSA). Here's a closer look at their top-tier financial profiles.
Built on a rock-solid foundation
Alexandria Real Estate Equities is a real estate investment trust (REIT) focused on owning collaborative office space for the life science, agtech, and technology sectors. It has an investment-grade credit rating, ranked in the top 10% of all publicly traded REITs. It backs that balance sheet with exceptionally strong credit metrics. These include:
- Net debt and preferred stock to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.5 times at the end of the second quarter. That's at the low end in the office REIT sector, where the average is 7.0 times.
- A low percentage of debt and preferred stock to gross assets of 28%.
- Primarily fixed-rate debt at 98.3% of the total.
- Long-dated debt maturities with a weighted average remaining debt term of 13.6 years.
- $5.5 billion of liquidity.
Those features give it a tremendous amount of financial flexibility, allowing it to pay an attractive dividend that currently yields 3% and invest heavily to expand its portfolio. It has a large pipeline of expansion projects under construction and in development. The REIT also expects to continue making high-value acquisitions. Those investments should enable Alexandria to continue growing its rental income and dividend at healthy rates in the future.
Ample liquidity to continue building
Camden Property Trust is another REIT with a top-tier financial profile. It's one of only a handful of REITs with A-rated credit. It backs that rating with strong metrics, including:
- A well-laddered debt maturity schedule with an average weighted maturity of 6.6 years.
- A low leverage ratio of 4.4 times debt to EBITDA at the end of the second quarter.
- A huge pool of unencumbered assets currently around $21 billion.
- Significant liquidity, including $72.1 million in cash and $835.7 million available under its credit facility.
That strong financial profile enabled Camden to purchase the remaining interests in two real estate investment funds for $1.1 billion in cash and the assumption of $515 million in debt. The apartment landlord also acquired two parcels of land for future development and continued funding its development pipeline. The REIT currently has $247.7 million left to spend on its current slate of apartment developments, which it can easily finance with existing liquidity.
Camden has more than $1.2 billion of additional apartment development projects in the pipeline. It has ample financial flexibility to fund these developments, which will help grow its rental income. That should enable the REIT to continue increasing its 2.8%-yielding dividend.
The strength to borrow at rock-bottom rates
Public Storage also has A-rated credit. The self-storage REIT backs that with a low leverage ratio of 4.0 times net debt and preferred equity to EBITDA. That's at the low end of its 4.0 to 5.0 times target range, giving it significant debt capacity to fund additional growth.
Public Storage's strong balance sheet allows it to borrow money at low rates. It currently has $7.5 billion of debt outstanding at a 1.7% blended interest rate. Meanwhile, its $4.4 billion of preferred equity has a blended rate of 4.5%.
The REIT also has more than $1 billion of cash on its balance sheet. That will allow it to capitalize on acquisition opportunities as they emerge and fund its $1 billion development pipeline. When adding in higher lease rates, Public Storage should be able to continue growing its rental income at a healthy pace, putting its 2.3%-yielding dividend on an even firmer long-term foundation.
Lower-risk stocks
Alexandria Real Estate Equities, Camden Property Trust, and Public Storage have fortress-like balance sheets. That's a huge asset because it enables them to access lower-cost capital and ensures they have the financial flexibility to continue investing and paying dividends regardless of market conditions. That helps lower risk, making them safer investments.
10 stocks we like better than Alexandria Real Estate Equities
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Alexandria Real Estate Equities wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 17, 2022
Matthew DiLallo has positions in Camden Property Trust and Public Storage. The Motley Fool has positions in and recommends Alexandria Real Estate Equities and Camden Property Trust. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
