Alexandria Real Estate Equities Inc.’s ARE premium portfolio of Class A/A+ properties in strategic markets is well-poised to benefit from solid demand for life science assets due to the increasing need for drug research and innovation. Its buyouts and robust balance sheet augur well for long-term growth. However, the company’s significant development pipeline increases the risks related to cost overruns and lease-up concerns.
On Nov. 21, 2024, ARE announced the execution of a 10-year lease with Vaxcyte, Inc., a clinical-stage biopharmaceutical company at the San Carlos mega campus in the San Francisco Bay Area. The lease encompasses new space, along with the extension of existing space.
Last month, Alexandria reported third-quarter 2024 adjusted funds from operations (AFFO) per share of $2.37, which missed the Zacks Consensus Estimate by a penny. The figure outpaced the year-ago quarter’s AFFO per share by 4.9%.
Results reflected a rise in revenues on a year-over-year basis, aided by decent leasing activity and rental rate growth.
What’s Aiding ARE?
The soaring demand for life-science assets due to the increasing need for drug research and innovation positions the company well to capitalize on this trend. This is likely to drive healthy leasing activity and keep the occupancy and rent growth momentum steady. Also, with the implementation of artificial intelligence (AI) and machine learning (ML) tools in this industry, life science companies require significant lab footprints to generate the immense biological and chemical datasets needed to train AI-ML models effectively.
Alexandria’s Class A/A+ properties in AAA locations are experiencing high demand. As of Sept. 30, 2024, the occupancy of its operating properties in North America remained high at 94.7%. In the third quarter of 2024, the company registered rental rate escalations of 96% for its leases and rental rate growth of 5.1%. For 2024, we expect Alexandria’s same-store occupancy to be 94.9%, while rental income is expected to increase 7.6% on a year-over-year basis.
The acquisition, development and redevelopment of the new Class A/A+ properties in AAA locations will likely boost the company’s operating performance over the long term. In the first three quarters of 2024, Alexandria completed acquisitions with development/redevelopment opportunities worth $201.8 million. During the same period, it placed into service development and redevelopment projects totaling 945,118 RSF, 100% leased across multiple submarkets, which resulted in $63 million of incremental annual net operating income (NOI).
Alexandria has adequate financial flexibility to cushion and enhance its market position. The company had $5.4 billion of liquidity as of the end of the third quarter of 2024. The net debt and preferred stock to adjusted EBITDA was 5.5X and the fixed-charge coverage ratio was 4.4X on an annualized basis. Its debt maturities are well-laddered, with a weighted average remaining term of 12.6 years, as of the end of the third quarter of 2024. The company enjoys credit ratings of Baa1 and BBB+ from Moody’s and S&P Global Ratings, respectively. This renders access to the debt market at favorable costs, poising it well to bank on growth opportunities.
ARE follows the strategy of sharing growth in cash flows from operating activities with stockholders while also retaining a significant portion for reinvestment. Alexandria has increased its dividend 10 times in the last five years and the five-year annualized dividend growth rate is 5.26%. Check Alexandria’s dividend history here. Given the company’s solid operating platform, our adjusted funds from operations (AFFO) year-over-year growth projection of 6.3% in 2024, a decent financial position and a lower payout ratio compared with the industry, this dividend rate is likely to be sustainable over the long run.
What’s Hurting ARE?
Aexandria’s active development and redevelopment pipeline, although encouraging for long-term growth, exposes it to the risk of rising construction costs and lease-up concerns amid macroeconomic uncertainty.
Alexandria’s tenant roster has a substantial concentration of companies belonging to the life science and technology industries. Therefore, the company’s performance remains susceptible to any changes within these industries.
Shares of this Zacks Rank #3 (Hold) company have fallen 4.4% in the past six months against the industry's 19.2% growth.
Analysts seem bearish on this stock, with the Zacks Consensus Estimate for its fourth-quarter 2024 FFO per share being lowered marginally over the past month to $2.39.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Welltower WELL and OUTFRONT Media OUT, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Welltower’s 2024 FFO per share has been revised marginally northward over the past month to $4.26.
The Zacks Consensus Estimate for OUTFRONT Media’s current-year FFO per share has been revised marginally upward over the past month to $1.73.
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.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
