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Here's Why You Should Retain Alexandria (ARE) Stock for Now

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Amid the growing need for drug research and innovation, Alexandria Real Estate Equities, Inc.’s (ARE - Free Report) portfolio of high-quality, niche assets in strategic markets is well-poised to benefit from the elevated demand.

ARE's primary emphasis is on the development of Class A/A+ properties strategically located within AAA innovation cluster regions. These locations are highly appealing to life science, agtech and technology companies seeking tenancy. Moreover, 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. Given this backdrop, the company is generally able to command high rents at its properties, aiding steady revenues.

In the six months ended Jun 30, 2023, Alexandria’s total leasing activity aggregated 2.5 million rentable square feet (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.

To enhance its operating platform, Alexandria has been focusing on the acquisition, development and redevelopment of new Class A properties in AAA locations. From the beginning of 2023 through Jul 24, Alexandria completed acquisitions with development/redevelopment opportunities worth $235.4 million.

Also, in the six months ended Jun 30, 2023, the company placed into service development and redevelopment projects totaling 840,587 RSF across multiple submarkets. This resulted in $81 million of incremental annual NOI.

On the balance sheet front, Alexandria had $6.3 billion of liquidity as of the end of the second quarter of 2023. Further, as of the end of the second quarter of 2023, ARE had no debt maturities before 2025, and its weighted-average remaining term was 13.4 years. With a strong financial footing and enough financial flexibility, it is well-placed to capitalize on long-term growth opportunities.

Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and ARE has remained committed to that. Alexandria has increased its dividend 10 times in the last five years, and the five-year annualized dividend growth rate is 5.79%. Check Alexandria’s dividend history here.

Given the company’s solid operating platform, our adjusted FFO year-over-year growth projection of 12.7% in 2023, a decent financial position and a lower payout ratio compared with that of the industry, this dividend rate is likely to be sustainable.

However, 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 a macroeconomic slowdown.

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. 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 8.3% in the past three months, wider than its industry’s fall of 2%.

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Stocks to Consider

Some better-ranked stocks from the REIT sector are Welltower (WELL - Free Report) , SBA Communications (SBAC - Free Report) and Americold Realty Trust (COLD - Free Report) , each carrying a Zacks Rank #2 (Buy). 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 week to $3.54.

The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.88.

The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 3.3% upward 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.

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