Will Rating Reaffirmation Boost Confidence in Alexandria (ARE)?
Investors seeking stability and growth in the REIT sector should take a closer look at Alexandria Real Estate Equities ARE. The company's recent reaffirmation of its strong BBB+ credit rating with a positive outlook by S&P Global Ratings underscores its financial strength, creditworthiness and position as a preeminent player in the life science real estate industry.
However, reflecting broader market concerns, shares of ARE were down 1.92% during yesterday’s trading session.
Alexandria boasts a significant liquidity of $6.3 billion as of Jun 30, 2023, which provides valuable flexibility for executing its unique life science real estate platform. With no debt maturities until 2025 and 99.2% of debt at fixed rates, Alexandria's balance sheet is a testament to its financial prudence.
Moreover, the weighted-average remaining debt term of 13.4 years as of Jun 30, 2023 is one of the longest among all U.S. REITs. This extended debt profile ensures stability and minimizes refinancing risks, further bolstering Alexandria's appeal to investors seeking long-term security.
The reaffirmed BBB+ credit rating reflects the scale and quality of Alexandria's Labspace assets, which are strategically aggregated into mega campuses concentrated in high-barrier-to-entry markets. These assets are in high demand due to the robust, long-term fundamentals of the life science sector.
The company's credit rating is also supported by a diverse and high-quality client base of ARE, which drives growing revenues, stable cash flows and strong margins. Alexandria's triple-net lease structure, with annual rent escalations covering 96% of its leases, ensures steady income streams and mitigates risks associated with variable expenses.
Alexandria’s Class A/A+ properties in AAA locations are experiencing high demand, aiding occupancy levels and rent growth. In the six months ended Jun 30, 2023, Alexandria’s total leasing activity aggregated 2.5 million RSF of space, of which 82% was generated from existing tenants. Lease renewals and re-leasing of space amounted to nearly 2.2 million RSF.
As of Jun 30, 2023, the occupancy of Alexandria’s operating properties in North America remained high at 93.6%. It registered rental rate growth of 35.1% during the six months ended Jun 30, 2023.
Given the healthy demand for its premium assets, this upbeat trend is likely to continue in the upcoming period, driving solid organic growth. For 2023, we expect Alexandria’s same-store occupancy to be 94.8%. Rental income is expected to grow 9.7% and 10.2% on a year-over-year basis in 2023 and 2024, respectively.
However, given the persistent macroeconomic uncertainty, the company’s huge development pipeline exposes it to the risk of cost overruns and lease-up concerns. High interest rates add to its woes. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. Moreover, with high interest rates in place, the dividend payout might seem less attractive than the yields on fixed-income and money-market accounts.
Shares of this Zacks Rank #3 (Hold) company have declined 15.4% in the past six months, wider than its industry’s fall of 10.1%.
Image Source: Zacks Investment Research
Stocks to Consider
Some better-ranked stocks from the REIT sector are Welltower WELL and Americold Realty Trust 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 Welltower’s 2023 FFO per share has been raised marginally over the past month to $3.55.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised marginally over the past month to $1.26.
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.
Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.
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Alexandria Real Estate Equities, Inc. (ARE) : Free Stock Analysis Report
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