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Alexandria's (ARE) Q4 FFO Up Y/Y, Rental Rate Increases

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Alexandria Real Estate Equities, Inc. ARE reported fourth-quarter 2019 funds from operations (FFO) as adjusted of $1.77 per share, up 5.4% from the year-ago quarter’s $1.68. However, the figure missed the Zacks Consensus Estimate of $1.78.

This year-over-year improvement resulted from top-line growth, which jumped 19.9% year over year to $408.1 million. Results reflect decent internal and external growth. The company witnessed continued strong leasing activity and rental rate growth during the quarter.

For full-year 2019, adjusted FFO per share came in at $6.96, higher than the prior-year tally of $6.60. Total revenues of $1.5 billion increased 15.4% year over year.

Behind the Headline Numbers

Alexandria’s total leasing activity aggregated to 1.75 million rentable square feet (RSF) of space during the December-end quarter. Lease renewals and re-leasing of space amounted to 571,650 RSF.

On a year-over-year basis, same-property NOI grew 2%. It climbed 4% on a cash basis. Occupancy of operating properties in North America remained high at 96.8%. The company registered decent rental rate growth of 37% in the reported quarter. On a cash basis, rental rate increased 21.7%.

As of fourth-quarter 2019, investment-grade or publicly-traded large-cap tenants accounted for 50% of annual rental revenues in effect. Furthermore, 76% of the annual rental revenues are from Class A properties in AAA locations. Weighted-average remaining lease term of all tenants is 8.1 years. For its top 20 tenants, it is 11.6 years.

During the October-December period, the company completed acquisitions of 23 properties for a total of $956.5 million. These acquisitions comprise 3.3 million RSF, including 2.1 million RSF of current and future value-creation opportunities.

Liquidity

Alexandria exited fourth-quarter 2019 with cash and cash equivalents of $189.7 million, down from the $410.7 million reported at the end of the previous quarter. The company had $2.4 billion of liquidity as of the end of the reported quarter.

Outlook

Alexandria issued its guidance for 2020 FFO per share in the range of $7.28-$7.48. The Zacks Consensus Estimate for the same is currently pinned at $7.38.

The company’s current-year guidance is backed by expectations for occupancy in North America (as of Dec 31, 2020) in the band of 95.4-96%, rental rate increases for lease renewals, and re-leasing of space of 28-31%, and same-property NOI growth of 1.5-3.5%.

Our Viewpoint

Alexandria’s adjusted FFO per share in the December-end quarter miss is disappointing to some extent. However, the company registered impressive top-line growth during this period, and continues to benefit from healthy leasing activity and rental rate growth. In addition, solid external growth and strategic capital allocation to highly leased value-creation pipeline look encouraging.

Notably, the company’s properties are located in markets, characterized by high barriers to entry, and a limited supply of available space, enabling it to enjoy higher occupancy rate. Adequate financial flexibility and a decent liquidity position poise the company well to pursue strategic development and redevelopment projects. Nevertheless, a significant development pipeline escalates operational risks and exposes it to rising construction costs.

Alexandria currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We now look forward to the earnings releases of other REITs like AvalonBay Communities, Inc. (AVB - Free Report) , Cousins Properties Incorporated CUZ and The Macerich Company MAC. While AvalonBay Communities and Cousins Properties are slated to report fourth-quarter earnings on Feb 5, Apartment Investment has its quarterly release scheduled for Feb 6.

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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