Alexandria Real Estate Equities, Inc.’s ( ARE Quick Quote ARE - Free Report) portfolio of Class A properties concentrated in AAA urban locations is driving its demand and occupancy. Nonetheless, the company’s external growth strategy, represented by an active development and redevelopment pipeline, raises operational risks.
Primarily, Alexandria focuses on premium properties for life-science and technology entities in high barriers to entry and exit locations. Further, these locations are characterized by limited supply of available space. This highly dynamic setting adds to the productivity and efficiency of tenants, ensuring 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. In addition, it enjoys a solid 10-year historical occupancy rate of 95%.
Also, this S&P 500 investment-grade REIT has adequate financial flexibility to cushion and enhance its market position. Importantly, Alexandria has improved its credit profile over the last two years. The company had $2.9 billion of liquidity as of the June-end quarter. Moreover, it has a well-laddered debt maturity schedule.
Furthermore, recently, the company’s long-term issuer and senior unsecured ratings was bumped up by a notch to Baa1 from Baa2 by Moody’s Investors Service — the rating division of Moody’s Corporation
MCO. 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. (Read more: Alexandria's Rating Bumped Up by Moody's, Outlook Stable)
Additionally, shares of Alexandria have gained 6.7%, as against the
industry’s decline of 0.9% over the past year. Given the progress on fundamentals, the stock is likely to perform well in the upcoming period.
Alexandria focuses on external growth through the development and redevelopment of new Class A properties in AAA locations. It has 3.5 million RSF targeted for delivery by 2020. Although this will likely boost the company’s operating performance, it increases operational risks and exposes Alexandria to the risk of rising construction costs and lease-up concern at the same time.
Also, it has exposure to Canada and Asia through its subsidiaries, and is thus exposed to currency-fluctuation risks. Moreover, uneasiness in certain global economies remains a concern for the company.
Lastly, rising interest rates is a challenge for Alexandria as the company has exposure to long-term leased assets. Any rise in rates would increase the cost of financing acquisitions, as well as investment and development activity expenses. The dividend payout might also become less attractive than the yields on fixed income and money market accounts.
Some better-ranked stocks from the REIT space are VICI Properties
VICI, Park Hotels and Resorts, Inc. PK 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 13.9% in the past six months.
Park Hotels and Resorts’ FFO per share estimates for 2018 have witnessed 2% upward revision to $2.93 in two months’ time. Its shares have appreciated 25.9% over the past six months.
W.P.Carry’s FFO per share estimates for the current year have moved up marginally in the past 30 days to $5.43. The stock has rallied 7.9% in six months’ time.
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