Is a Hold Strategy Appropriate for Alexandria (ARE) Now?

Shutterstock photo

Alexandria Real Estate Equities, Inc. ARE is expected to enjoy high demand and occupancy for its portfolio of Class A properties in AAA locations, going forward. Further, focus to expand its life-science clusters in key markets is anticipated to drive the company's performance over the long term.

In fact, in a bid to fortify its life-science cluster franchise in New York City, this life-science and technology real estate investment trust (REIT) recently acquired 219 East 42nd Street through a membership in a joint-venture entity - 219/235 East LLC - for $203 million. The strategic location of the office building in Manhattan's East Side Medical Corridor will enable the property to attract tenants.

With a solid 10-year historical occupancy rate of 95%, such accretive acquisitions are anticipated to boost leasing activity in the upcoming quarters as well.

Also, the company enjoys steady rental revenues from a dependable tenant roster. In fact, as of 1Q18, 57% of the annual rental revenues in effect were derived from investment-grade or large cap tenants.

Also, the acquisition of 219 East 42nd Street is anticipated to generate immediate significant net operating income (NOI) and strong yield from an investment grade tenant. Notably, the company's New York City portfolio is fully leased, with 70% of annual rental revenues from the region coming from investment grade tenant.  

Alexandria has a decent balance sheet and ample liquidity. Importantly, the company has improved its credit profile over the last two years by opting to forward sale equity agreements and senior notes issuance. This has also helped the company fund its capital needs for the current year. Hence, it enjoys a solid financial position.

This June, Alexandria raised its second-quarter 2018 cash dividend to 93 cents per share, marking a sequential increase of 3%. Prior to this, the company had announced a 5% sequential hike in its fourth-quarter 2017 dividends. Given the company's financial position and lower payout ratio compared to that of the industry, this dividend rate is likely to be sustainable.

In addition, shares of this Zacks Rank #3 (Hold) company have gained 3%, as against the industry 's decline of 0.8% over the past year. Moreover, the stock has seen the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share being revised marginally upward in a month's time.

Nonetheless, exposure to Canada and Asia through its subsidiaries exposes Alexandria to risks from currency fluctuations. Further, the company follows the strategy of recycling capital from real estate sales, including non-core operating assets, to finance pre-leased value-creation development and redevelopment projects. However, the near-term dilution effect of such moves on earnings is unavoidable.

Additionally, a rise in interest rates is a challenge for Alexandria as the company has exposure to long-term leased assets. Any rise in rates would increase the cost of financing acquisitions, as well as investment and development activity expenses. Furthermore, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

Some better-ranked stocks in the same industry include VICI Properties Inc VICI , Corrections Corp of America CXW and Cedar Realty Trust Inc CDR . VICI Properties flaunts a Zacks Rank of 1 (Strong Buy), while Corrections Corp of America and Cedar Realty Trust carry a Zacks Rank of 2 (Buy). You can see  the complete list of today's Zacks #1 Rank stocks here.

VICI Properties' 2018 funds from operations (FFO) per share estimates have been revised 2.8% upward over the last 60 days. Also, its shares have gained 14.9% in the past three months.

Corrections Corp of America's Zacks Consensus Estimate for current-year FFO per share moved north slightly in the last 60 days. The company's share price has risen 19.3% over the past three months.

Cedar Realty Trust's Zacks Consensus Estimate for 2018 FFO per share inched up 1.8% in the last 60 days. The company's share price has rallied 29.1% in three months' time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) - a widely used metric to gauge the performance of REITs.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Cedar Realty Trust, Inc. (CDR): Free Stock Analysis Report

Alexandria Real Estate Equities, Inc. (ARE): Free Stock Analysis Report

Corrections Corp. of America (CXW): Free Stock Analysis Report

VICI Properties Inc. (VICI): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: CDR , ARE , CXW , VICI

More from Zacks.com




Equity Research

Research Brokers before you trade

Want to trade FX?