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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.
Shares of this Zacks Rank #2 (Buy) company have rallied 25.3% over the past six months, outperforming its industry's growth of 7.9%.
Image Source: Zacks Investment Research
Factors That Make Alexandria a Solid Pick
Solid 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 2023, Alexandria’s total leasing activity aggregated 4.3 million RSF of space. Lease renewals and re-leasing of space amounted to nearly 3.05 million 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 Dec 31, 2023, the occupancy of Alexandria’s operating properties in North America remained high at 94.6%. It registered rental rate growth of 29.4% during 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 2024, we expect Alexandria’s same-store occupancy to be 95.1%. Rental income is expected to increase 8.5% 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 Dec 31, 2023, mega campuses accounted for 75% 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 7.4 years, increasing from seven years at the end of the prior quarter. For Alexandria’s top 20 tenants, it is 9.6 years, increasing from 8.9 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 2023, Alexandria completed acquisitions with development/redevelopment opportunities worth $258.9 million. The company placed into service development and redevelopment projects totaling 2.5 million RSF across multiple submarkets, which resulted in $265 million of incremental annual NOI.
The company has completed acquisitions aggregating $103.3 million as of Jan 29, 2024. Further, Alexandria’s pipeline of projects is expected to generate an annual incremental NOI of $495 million through the fourth quarter of 2027 and is 60% leased.
Balance Sheet Strength: Alexandria maintains a robust balance sheet position with ample liquidity. It exited 2023 with $5.8 billion of liquidity. The net debt and preferred stock to adjusted EBITDA was 5.1X, improving from 5.4X for the three months ended Sep 30, 2023. The fixed-charge coverage was 4.5X in the fourth quarter of 2023 on an annualized basis. As of the end of the fourth quarter of 2023, ARE had no debt maturities before 2025, and its weighted average remaining term was 12.8 years.
Moreover, the company enjoys credit ratings of Baa1/Stable and BBB+/Stable 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: ARE is known for consistently raising its dividend rates, which remains a huge attraction for REIT investors. In December 2023, it announced a 2.4% hike in its fourth-quarter 2023 cash dividend payout to $1.27 per share. Also, Alexandria has increased its dividend 10 times in the last five years, and the five-year annualized dividend growth rate is 5.41%.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and given the company’s solid operating platform, our AFFO year-over-year growth projection of 5.7% in 2024, 3.4% in 2025 and 7.0% in 2026, a decent financial position and a lower payout ratio compared with that of the industry, this dividend rate is likely to be sustainable over the long run.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
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.
Shares of this Zacks Rank #2 (Buy) company have rallied 25.3% over the past six months, outperforming its industry's growth of 7.9%.
Image Source: Zacks Investment Research
Factors That Make Alexandria a Solid Pick
Solid 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 2023, Alexandria’s total leasing activity aggregated 4.3 million RSF of space. Lease renewals and re-leasing of space amounted to nearly 3.05 million 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 Dec 31, 2023, the occupancy of Alexandria’s operating properties in North America remained high at 94.6%. It registered rental rate growth of 29.4% during 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 2024, we expect Alexandria’s same-store occupancy to be 95.1%. Rental income is expected to increase 8.5% 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 Dec 31, 2023, mega campuses accounted for 75% 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 7.4 years, increasing from seven years at the end of the prior quarter. For Alexandria’s top 20 tenants, it is 9.6 years, increasing from 8.9 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 2023, Alexandria completed acquisitions with development/redevelopment opportunities worth $258.9 million. The company placed into service development and redevelopment projects totaling 2.5 million RSF across multiple submarkets, which resulted in $265 million of incremental annual NOI.
The company has completed acquisitions aggregating $103.3 million as of Jan 29, 2024. Further, Alexandria’s pipeline of projects is expected to generate an annual incremental NOI of $495 million through the fourth quarter of 2027 and is 60% leased.
Balance Sheet Strength: Alexandria maintains a robust balance sheet position with ample liquidity. It exited 2023 with $5.8 billion of liquidity. The net debt and preferred stock to adjusted EBITDA was 5.1X, improving from 5.4X for the three months ended Sep 30, 2023. The fixed-charge coverage was 4.5X in the fourth quarter of 2023 on an annualized basis. As of the end of the fourth quarter of 2023, ARE had no debt maturities before 2025, and its weighted average remaining term was 12.8 years.
Moreover, the company enjoys credit ratings of Baa1/Stable and BBB+/Stable 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: ARE is known for consistently raising its dividend rates, which remains a huge attraction for REIT investors. In December 2023, it announced a 2.4% hike in its fourth-quarter 2023 cash dividend payout to $1.27 per share. Also, Alexandria has increased its dividend 10 times in the last five years, and the five-year annualized dividend growth rate is 5.41%.
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and given the company’s solid operating platform, our AFFO year-over-year growth projection of 5.7% in 2024, 3.4% in 2025 and 7.0% in 2026, a decent financial position and a lower payout ratio compared with that of the industry, this dividend rate is likely to be sustainable over the long run.
Other Stocks to Consider
Some other top-ranked stocks from the broader REIT sector are Host Hotels & Resorts (HST - Free Report) and Iron Mountain (IRM - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for HST’s 2024 FFO per share is pegged at $1.97, which suggests year-over-year growth of 2.6%.
The Zacks Consensus Estimate for IRM’s 2024 FFO per share stands at $4.42, which indicates an increase of 7.3% from the year-ago quarter.
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.