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Here's Why Alexandria (ARE) is an Apt Portfolio Pick for Now
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Alexandria Real Estate Equities, Inc. (ARE - Free Report) has a portfolio of high-quality, niche assets — life science, technology and agtech properties — in strategic markets, which positions it well for growth.
This Pasadena, CA-based urban office real estate investment trust (REIT) has been witnessing healthy demand for its properties amid the growing need for drug research and innovation. Moreover, favorable demand-supply dynamics and strong pricing power in its core markets give the company a competitive edge.
Although shares of this Zacks Rank #2 (Buy) company have declined 6.2% over the past three months, wider than its industry's fall of 0.2%, the revision trend of the Zacks Consensus Estimate for 2024 FFO per share indicates a favorable outlook for the stock, with the estimates moving north over the past three months. Therefore, the current price level implies a solid entry point.
Image Source: Zacks Investment Research
Factors That Make Alexandria a Solid Pick
Robust Portfolio and Healthy Operating Performance: Alexandria's primary emphasis is on the development of Class A/A+ properties strategically located within AAA innovation cluster regions. These locations are characterized by high barriers to entry for new landlords, high barriers to exit for tenants and a limited supply of available space. 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. Given this backdrop, ARE is generally able to command high rents at its properties and enjoy elevated occupancy levels, aiding steady revenues.
In the first quarter of 2024, Alexandria’s total leasing activity aggregated 1.1 million RSF of space, and lease renewals and re-leasing of space amounted to 994,770 RSF.
Strong Demand for Life Science Assets: The demand for life science assets is booming due to the increasing need for drug research and innovation. The immense unmet medical need calls for constant research to tackle and solve the most persistent and major healthcare challenges, providing scope for a multiyear growth opportunity for the life science industry.
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.
Further, the product development process requires a longer time in this industry, making it less cyclical than other industries. Against this backdrop, the company’s Class A/A+ properties in AAA locations are experiencing high demand, aiding occupancy levels and rent growth. As of Mar 31, 2024, the occupancy of Alexandria’s operating properties in North America remained high at 94.6%. It registered rental rate growth of 33% during the first quarter of 2024.
Given the healthy demand for its premium assets, this upbeat trend is likely to continue in the upcoming period, driving solid organic growth. 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.
Strong Tenant Base: Alexandria caters to a diversified tenant base comprising high-quality companies ranging from multinational pharmaceutical companies, public and private biotechnology companies, manufacturers of complex medicines and top-tier investment-grade companies and institutions, as well as technology entities.
As of Mar 31, 2024, mega campuses accounted for 74% of the annual rental revenues in effect, and investment-grade or publicly traded large-cap tenants accounted for 52% of the annual rental revenues in effect. The weighted average remaining lease term of all tenants is 7.5 years, increasing from 7.4 years at the end of the prior quarter. For Alexandria’s top 20 tenants, it is 9.7 years, increasing from 9.6 years as of the end of the prior quarter. This ensures steady rental revenues over the long term.
Acquisitions & Development: In order 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 first quarter of 2024, Alexandria completed acquisitions with development/redevelopment opportunities worth $194.8 million. In the first quarter of 2024, it placed into service development and redevelopment projects totaling 343,445 RSF across multiple submarkets, which resulted in $26 million of incremental annual NOI.
The company has completed acquisitions aggregating $7 million in April 2024. Further, Alexandria’s pipeline of projects is expected to generate an annual incremental NOI of $480 million, commencing from the second quarter of 2024 through the fourth quarter of 2027, and is 63% leased.
Balance Sheet Strength: 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.
Moreover, 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. With a strong financial footing and enough financial flexibility, it is well-placed to capitalize on long-term growth opportunities.
Dividend: 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 10 times in the last five years, and its five-year annualized dividend growth rate is 5.42%. Check Alexandria’s dividend history here.
Given the company’s decent financial position and lower payout ratio compared with that of the industry, the dividend rate is likely to be sustainable in the future.
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 Innovative Industrial Properties’ 2024 FFO per share of $9.13 indicates a marginal 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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Here's Why Alexandria (ARE) is an Apt Portfolio Pick for Now
Alexandria Real Estate Equities, Inc. (ARE - Free Report) has a portfolio of high-quality, niche assets — life science, technology and agtech properties — in strategic markets, which positions it well for growth.
This Pasadena, CA-based urban office real estate investment trust (REIT) has been witnessing healthy demand for its properties amid the growing need for drug research and innovation. Moreover, favorable demand-supply dynamics and strong pricing power in its core markets give the company a competitive edge.
Although shares of this Zacks Rank #2 (Buy) company have declined 6.2% over the past three months, wider than its industry's fall of 0.2%, the revision trend of the Zacks Consensus Estimate for 2024 FFO per share indicates a favorable outlook for the stock, with the estimates moving north over the past three months. Therefore, the current price level implies a solid entry point.
Image Source: Zacks Investment Research
Factors That Make Alexandria a Solid Pick
Robust Portfolio and Healthy Operating Performance: Alexandria's primary emphasis is on the development of Class A/A+ properties strategically located within AAA innovation cluster regions. These locations are characterized by high barriers to entry for new landlords, high barriers to exit for tenants and a limited supply of available space. 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. Given this backdrop, ARE is generally able to command high rents at its properties and enjoy elevated occupancy levels, aiding steady revenues.
In the first quarter of 2024, Alexandria’s total leasing activity aggregated 1.1 million RSF of space, and lease renewals and re-leasing of space amounted to 994,770 RSF.
Strong Demand for Life Science Assets: The demand for life science assets is booming due to the increasing need for drug research and innovation. The immense unmet medical need calls for constant research to tackle and solve the most persistent and major healthcare challenges, providing scope for a multiyear growth opportunity for the life science industry.
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.
Further, the product development process requires a longer time in this industry, making it less cyclical than other industries. Against this backdrop, the company’s Class A/A+ properties in AAA locations are experiencing high demand, aiding occupancy levels and rent growth. As of Mar 31, 2024, the occupancy of Alexandria’s operating properties in North America remained high at 94.6%. It registered rental rate growth of 33% during the first quarter of 2024.
Given the healthy demand for its premium assets, this upbeat trend is likely to continue in the upcoming period, driving solid organic growth. 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.
Strong Tenant Base: Alexandria caters to a diversified tenant base comprising high-quality companies ranging from multinational pharmaceutical companies, public and private biotechnology companies, manufacturers of complex medicines and top-tier investment-grade companies and institutions, as well as technology entities.
As of Mar 31, 2024, mega campuses accounted for 74% of the annual rental revenues in effect, and investment-grade or publicly traded large-cap tenants accounted for 52% of the annual rental revenues in effect. The weighted average remaining lease term of all tenants is 7.5 years, increasing from 7.4 years at the end of the prior quarter. For Alexandria’s top 20 tenants, it is 9.7 years, increasing from 9.6 years as of the end of the prior quarter. This ensures steady rental revenues over the long term.
Acquisitions & Development: In order 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 first quarter of 2024, Alexandria completed acquisitions with development/redevelopment opportunities worth $194.8 million. In the first quarter of 2024, it placed into service development and redevelopment projects totaling 343,445 RSF across multiple submarkets, which resulted in $26 million of incremental annual NOI.
The company has completed acquisitions aggregating $7 million in April 2024. Further, Alexandria’s pipeline of projects is expected to generate an annual incremental NOI of $480 million, commencing from the second quarter of 2024 through the fourth quarter of 2027, and is 63% leased.
Balance Sheet Strength: 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.
Moreover, 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. With a strong financial footing and enough financial flexibility, it is well-placed to capitalize on long-term growth opportunities.
Dividend: 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 10 times in the last five years, and its five-year annualized dividend growth rate is 5.42%. Check Alexandria’s dividend history here.
Given the company’s decent financial position and lower payout ratio compared with that of the industry, the dividend rate is likely to be sustainable in the future.
Other Stocks to Consider
Some other top-ranked stocks from the broader REIT sector are Americold Realty Trust, Inc. (COLD - Free Report) and Innovative Industrial Properties, Inc. (IIPR - Free Report) , each carrying a Zacks Rank #2 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 Innovative Industrial Properties’ 2024 FFO per share of $9.13 indicates a marginal 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.