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 elevated demand. Its focus on acquisitions and solid balance-sheet strength augur well.
Alexandria’s Class A properties are situated in the AAA innovation cluster locations of North America, with a significant market presence in Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland and Research Triangle. The advantageous locations of its properties have been driving demand, resulting in high occupancy levels.
Alexandria has also been experiencing healthy leasing activity on the solid demand for its high-quality office/laboratory space. This has been aiding the company’s rental rate growth. Its total leasing activity aggregated 1.7 million RSF of space in the third quarter. For the third quarter, rental rate growth on lease renewals and re-leasing of space was 27.1% and 22.6% (cash basis).
Alexandria caters to a tenant base of more than 1,000 diversified high-quality companies ranging from multinational pharmaceutical, public and private biotechnology companies, life science products like enabling research tools and manufacturers of complex medicines to top-tier investment-grade companies and institutions. These ensure steady rental revenues for ARE.
Further, to enhance its operating platform, Alexandria has been focusing on the acquisition, development and redevelopment of new Class A properties in AAA locations.
In the third quarter, Alexandria completed acquisitions in its key life-science cluster submarkets totaling 1.2 million RSF of value-creation opportunities for a total price of $316.7 million. Also, ARE placed into service development and redevelopment projects totaling 332,961 RSF across multiple submarkets, which resulted in $30 million of incremental net operating income.
Moreover, an encouraging development pipeline, with 5.6 million RSF of Class A properties undergoing construction as of Sep 30, 2022, bodes well for the company’s long-term growth.
Alexandria has adequate financial flexibility to enhance its market position and capitalize on long-term growth opportunities. The company had $6.4 billion of liquidity as of the end of the third quarter. It has no debt maturities prior to 2025. The weighted-average remaining term of debt as of Sep 30, 2022 was 13.2 years.
ARE is known for consistently raising its dividend rates. In May 2022, the company announced a 2.6% hike in its first-quarter 2022 cash dividend to $1.18 per share. Also, Alexandria increased its dividend 10 times in the last five years.
Over the last five years, the company has achieved average annual dividend per share growth of 6.5%. Based on Alexandria’s strong operating platform, robust financial position and lower payout ratio compared with the industry, the dividend rate is likely to be sustainable in the near term.
However, Alexandria’s huge capital deployment for development and redevelopment activities exposes the company to the risks associated with rising construction costs and lease-up concerns.
Further, rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. Moreover, the dividend payout might become less attractive than yields on fixed income and money market accounts.
This Zacks Rank #3 (Hold) stock has risen 6.3% so far in the quarter, underperforming the industry’s growth of 7.4%.
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Stocks to Consider
Some better-ranked stocks from the REIT sector are VICI Properties Inc. VICI and Lamar Advertising Company LAMR, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
While the Zacks Consensus Estimate for VICI Properties’ current-year FFO per share has remained unchanged in the past month at $1.91, the same for 2023 has moved marginally north to $2.07.
The Zacks Consensus Estimate for Lamar Advertising Company’s ongoing year’s FFO per share has been raised 1.4% over the past month to $7.34.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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