Alexandria Real Estate Equities, Inc.’s ARE high-quality, niche assets — life science, technology and agtech properties — in strategic markets have enabled it to enjoy high demand and occupancy. Further, with an impressive investment-grade balance sheet, the company has ample financial flexibility to sail through uncertainties and bank on growth scopes.
Alexandria reported second-quarter 2022 adjusted funds from operations (FFO) per share of $2.10, surpassing the Zacks Consensus Estimate of $2.06. The reported figure also compared favorably with the year-ago quarter’s $1.93. ARE witnessed continued healthy leasing activity and rental rate growth during the quarter. Total revenues in the quarter were $643.8 million, climbing 26.3% from the prior-year quarter’s $509.6 million.
Moreover, shares of this Zacks Rank #2 (Buy) company have rallied 13% over the past month compared with the industry's increase of 6.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Given its impressive operating fundamentals, there is room for further share-price appreciation.
Factors That Make Alexandria a Solid Pick
High-Quality Assets in Desirable Markets Driving Occupancy: ARE focuses on Class A properties concentrated in key markets, including Greater Boston, the San Francisco Bay Area, New York City, San Diego, CA; Seattle, WA; Maryland and Research Triangle. These locations are characterized by high barriers to entry and a limited supply of available spaces. This is spurring significant demand for its premium spaces and boosting the occupancy level. The occupancy of operating properties in North America remained high at 94.6%. Excluding the vacancy at recently acquired properties, the occupancy was 98.4% as of Jun 30, 2022. Such a high level of occupancy is anticipated to continue in the upcoming quarters as well and support rent growth.
High-Quality Tenants Contribute to Steady Revenues: In the second quarter of 2022, investment-grade or publicly traded large-cap tenants accounted for 50% of the annual rental revenues in effect. The weighted-average remaining lease term of all the tenants is 7.1 years, and for the company’s top 20 tenants, it is 10.2 years. Productive and efficient tenants ensure steady rental revenues for the company.
Continued Strong Internal Growth: Reflecting the robust demand for its high-quality office/laboratory space, Alexandria’s total leasing activity aggregated to 2.3 million rentable square feet (RSF) of space during the second quarter. Lease renewals and the re-leasing of space amounted to 1.1 million RSF. The leasing of development and redevelopment space was 0.9 million RSF. It registered rental rate growth of 45.4% and 33.9% (cash basis) in the reported quarter. On a year-over-year basis, the same-property NOI was up 7.5%, climbing 10.2% on a cash basis. Given its solid operating platform, this upbeat trend is likely to continue.
Solid Expansion Efforts: The acquisition, development and redevelopment of the new Class A properties in AAA locations will likely boost Alexandria’s operating performance over the long term. In the second quarter, the company completed acquisitions in its key life science cluster submarkets totaling 1.1 million RSF of future development and redevelopment opportunities for a total price of $280.1 million.
During the reported quarter, Alexandria placed into service development and redevelopment projects totaling 375,394 RSF across several submarkets. As of Jun 30, 2022, the company had 5.9 million RSF of the Class A properties undergoing construction. Moreover, the company had 9.9 million RSF of near-term and intermediate-term development and redevelopment projects and 17.2 million SF of future development projects. In the second quarter, ARE started the construction of six value-creation projects totaling 917,599 RSF.
Adequate Financial Flexibility: Alexandria has adequate financial flexibility to cushion and enhance its market position. The company had $5.5 billion of liquidity as of the end of the reported quarter. The net debt and preferred stock to adjusted EBITDA was 5.5X, and the fixed-charge coverage ratio was 5.1 for the second quarter of 2022 annualized. The company has 98.3% of its debt fixed, with no debt maturities before 2025. The weighted-average remaining term of debt as of Jun 30, 2022 was 13.6 years.
Sustainable Dividends: The company follows the strategy of sharing growth in cash flows from operating activities with stockholders while also retaining a significant portion for reinvestment. In May 2022, the company announced a 2.6% hike in its first-quarter 2022 cash dividend to $1.18 per share.
From 2013 to 2022, the company has achieved 6.8% of average annual dividend per share growth. Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and given the company’s solid operating platform, a decent financial position and lower payout ratio compared with that of the industry, this dividend rate is likely to be sustainable.
Other Stocks to Consider
Some other key picks from the REIT sector include Prologis PLD and Extra Space Storage Inc. EXR.
Prologis carries a Zacks Rank of 2 at present. Prologis’ long-term growth rate is projected at 9.8%. The Zacks Consensus Estimate for PLD’s 2022 FFO per share has been revised marginally upward in the past month.
The Zacks Consensus Estimate for Extra Space Storage’s 2022 FFO per share has moved marginally upward in the past week to $8.30. Extra Space Storage’s long-term growth rate is projected at 8.2%. EXR presently carries a Zacks Rank of 2.
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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