Yahoo Finance Here's Why You Should Retain Alexandria (ARE) Stock for Now
Alexandria Real Estate Equities, Inc.’s ARE portfolio of high-quality, niche assets — life science, technology and agtech 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. However, a huge development outlay raises the risks of cost overruns and lease-up concerns amid macroeconomic uncertainty and a high interest rate environment.
What’s Aiding ARE?
Alexandria owns Class A/A+ properties in the AAA innovation cluster locations of North America, with significant market presence in Greater Boston, San Francisco Bay Area, New York City, San Diego, Seattle, Maryland and the Research Triangle.
These locations are highly appealing to life science, agtech and technology companies seeking tenancy. Moreover, they are characterized by high barriers to entry for new landlords, high barriers to exit for tenants and a limited supply of available space. As a result, the company is generally able to command high rents at its properties, aiding steady revenues.
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 artificial intelligence (AI) and machine learning (ML) tools being implemented in this industry, AI-focused life science companies require significant lab footprints to generate the immense biological and chemical datasets needed to train AI-ML models effectively. This is likely to emerge as a key demand driver for Alexandria’s life science assets in the upcoming period.
Alexandria enjoys a solid tenant base of high-quality companies. These tenants mainly rely on a central lab-based infrastructure to optimize their research capabilities and workflow, making it difficult for them to switch locations frequently. This ensures steady rental revenue generation for ARE.
For 2024, we expect Alexandria’s same-store occupancy to be 95.1%. Rental income is expected to increase 7.6% on a year-over-year basis in 2024.
On the balance sheet front, ARE had $5.8 billion of liquidity as of the end of the first quarter of 2024. The net debt and preferred stock to adjusted EBITDA was 5.2X, improving from 5.3X for the three months ended Mar 31, 2023. The fixed-charge coverage was 4.7X in the first quarter of 2024 on an annualized basis. Its debt maturities are well-laddered, with a weighted average remaining term of 13.4 years as of the end of the first quarter of 2024.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and ARE has remained committed to that. In June 2024, it announced a 2.4% hike in its second-quarter 2024 cash dividend payout to $1.30 per share.
Encouragingly, Alexandria increased its dividend 11 times in the last five years, and its five-year annualized dividend growth rate is 5.41%. Check Alexandria’s dividend history here.
Given the company’s decent financial position and a lower payout ratio compared with that of the industry, the dividend rate is likely to be sustainable in the future.
While the company’s shares have declined 8.3% in the past three months compared with the industry’s fall of 3.0%, analysts seem bullish on this Zacks Rank #3 (Hold) company. The Zacks Consensus Estimate for 2024 funds from operations (FFO) per share indicates a favorable outlook for the company, with estimates moving marginally northward over the past two months.
Image Source: Zacks Investment Research
What’s Hurting ARE?
Alexandria’s substantial 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.
Further, a high interest rate environment is a concern for Alexandria. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt as of Mar 31, 2024 was approximately $12.22 billion.
For 2024, our estimate indicates a significant increase in the company’s interest expenses year over year. Moreover, with high interest rates still in place, the dividend payout might seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Lamar Advertising LAMR and Americold Realty Trust, Inc. COLD, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Americold’s 2024 FFO per share is pegged at $1.44, which suggests 13.4% year-over-year growth.
The Zacks Consensus Estimate for Lamar Advertising’s 2024 FFO per share of $8.03 indicates a 7.5% increase year over year.
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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