Alexandria Real Estate Equities, Inc.’s ARE rating has been upgraded by Moody’s Investors Service — the rating division of Moody’s Corporation MCO. Specifically, long-term issuer and senior unsecured ratings have been bumped up by a notch to Baa1 from Baa2.
The rating agency also maintained its stable outlook. This reaffirmation commensurate Moody's view of the company’s improved credit profile through significant improvement in leverage levels and fixed charge coverage ratios.
Also, the company’s preference stock shelf offering has progressed to (P)Baa2 from (P)Baa3, while senior unsecured regular bond/debenture have been bestowed a rating of Baa1, up from Baa2.
Reasons Behind Rating Upgrade
Moody's Baa1 senior unsecured rating for the company reflects the real estate investment trust’s impressive national footprint of top-quality life science assets clustered in key life-science markets, such as Boston, San Francisco Bay Area, San Diego, New York City, Maryland, Seattle, and the North Carolina Research Triangle Park.
Further, the rating agency recognized Alexandria’s investment-grade and large cap tenants, many of which are relatively independent from business cyclicality. This ensures steady rental revenues for the company. In fact, as of second-quarter 2018, 55% of the annual rental revenues in effect were derived from investment-grade or large cap tenants, whereas 78% of the annual rental revenues came from Class A properties in AAA locations.
Moreover, Moody’s favorably views Alexandria’s financial flexibility. It has acknowledged the company’s 86.5% of unencumbered assets relative to gross assets, as of the end of second-quarter 2018. This provides the company with an alternative liquidity source, as it can resort to property-specific mortgage debt issuance or disposal to repay debt, during rough times.
Notably, improvement in its fixed charge coverage ratio to 4.5x from 3.6x, and reduction in net debt/EBITDA levels to 6.1x from 7.2x in the June-end quarter from year-end 2016 were also taken into consideration.
What May Lead to Change in Ratings
Moody’s believes any substantial reduction in Alexandria’s dependence on leverage, along with a sustainable net debt/EBITDA ratio below 5.0x, will be favorable in future. Also, limiting development and re-development projects to less than 5% of gross assets, as well as consistently delivering robust operating performance, while maintaining fixed charge coverage ratio above 4.5x levels, will likely lead to ratings upgrade.
On the other hand, ratings could be downgraded in case the company’s developments exceeds its budget or any liquidity concern arises. Furthermore, net debt/EBITDA above 6.0x levels, or fixed charge coverage falling below 3.5x will also impact the company’s ratings. Also, secured debt approaching 10% of gross assets will be viewed as a negative development.
Conclusion The conferring of this credit rating to Alexandria boosts the company's creditworthiness in the market and is likely to enhance investors' confidence in the stock. In fact, such moves provide companies an opportunity to enjoy favorable costs on debts and solid access to capital, and are therefore encouraging.
Alexandria currently carries a Zacks Rank #3 (Hold). Also, its shares have gained 5.5% as against the
industry’s decline of 0.6% over the past year. Key Picks
Some better-ranked stocks from the REIT space include VICI Properties
VICI, Park Hotels and Resorts, Inc. ( PK Quick Quote PK - Free Report) and W.P. Carey Inc. WPC. All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
VICI Properties’ Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has been revised upward by a cent to $1.50 over the past 60 days. Its shares have gained 13.5% in the past six months.
Park Hotels and Resorts’ FFO per share estimates for 2018 witnessed 2% upward revision to $2.93 in two months’ time. Its shares have appreciated 25% over the past six months.
W.P.Carry’s FFO per share estimates for the current year moved up marginally in the past 30 days to $5.14. The stock has rallied 5.8% in six months’ time.
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