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Here’s Why Hold Strategy is Apt for Alexandria (ARE) Now


Alexandria Real Estate Equities, Inc.’s ARE robust fundamentals of the life-science industry have enabled the company’s Class A properties in AAA locations to enjoy high occupancy. Also, the company’s effort to improve credit profile is encouraging. It has an adequate capital buffer, which will likely cushion its position during any adverse situation. However, the company’s global footprint makes its profitability vulnerable to currency fluctuations. Further, near-term dilution effects from the sale of assets remain a concern for the company.

Recently, this urban office real estate investment trust (REIT) reported first-quarter 2018 adjusted funds from operations (FFO) of $1.62 per share, which surpassed the Zacks Consensus Estimate of $1.59. Results reflected solid internal and external growth. Further, the company experienced an increase in rental rate and net operating income (NOI).

Notably, Alexandria focuses on Class A properties concentrated in urban campuses, primarily for life science and technology entities. These locations are characterized by high barriers to entry and exit, and a limited supply of available space. This highly dynamic setting adds to the productivity and efficiency of the tenants, which, in turn, ensures steady rental revenues for the company. In fact, as of first-quarter 2018, 57% of the annual rental revenues in effect were derived from investment-grade or large-cap tenants, whereas 79% of the annual rental revenues came in from Class A properties in AAA locations.

Further, the company continues to execute and deliver strong internal growth. During first-quarter 2018, same-property cash NOI growth was solid at 14.6%. Leasing activity for the quarter was also decent at around 1.5 million rentable square feet (RSF). The company carried out lease renewals and re-leasing of space at rental-rate growth of 19.0%, on a cash basis.

In addition, robust external growth, in forms of development and redevelopment of new Class A properties in AAA locations, is likely to boost the company’s operating performance. In fact, during first-quarter 2018, the company placed into service 91,155 RSF at its development project at 100 Binney Street in Cambridge submarket, which is fully leased to four high-quality biotechnology entities, and 27,315 RSF at its redevelopment project at 266 and 275 Second Avenue in Route 128 submarket leased to Visterra, Inc. Further, during the aforementioned period, Alexandria commenced development projects, aggregating 651,951 RSF.

Moreover, Alexandria has an adequate financial flexibility to cushion and enhance its market position. The company had $2.3 billion of liquidity as of first-quarter 2018. Also, it has a well-laddered debt-maturity schedule. Importantly, Alexandria improved its credit profile over the past two years.

Nonetheless, Alexandria has exposure to Canada and Asia through its subsidiaries, which exposes it to risks from currency fluctuations. Further, the company follows the strategy of recycling capital from real estate sales, including non-core operating assets to finance pre-leased value-creation development and redevelopment projects. However, the near-term dilution effect of such moves on earnings is unavoidable.

Moreover, a rise in 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. Furthermore, the dividend payout itself might become less attractive than the yields on fixed income and money market accounts.

Amid these, in the past six months, this Zacks Rank #3 (Hold) company has outperformed the industry it belongs to. During that time frame, shares of Alexandria have depreciated 2.9%, narrower than the 6.4% decline incurred by its industry. Further, the stock has seen the Zacks Consensus Estimate for 2018 FFO per share being revised marginally upward in a month’s time. Given its progress on fundamentals, the stock is likely to see a favorable trend in price.

Stocks Worth a Look

A few better-ranked stocks from the same space include Arbor Realty Trust ABR, Prologis, Inc. PLD and Host Hotels & Resorts, Inc. HST. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share rose 14.4% to $1.03 over the past month. Its shares have returned 8.2% in the past three months.

Prologis’ FFO per share estimates for the current year moved up 2.1% to $2.97 in a month’s time. Its shares have gained 2.3% over the past three months.

Host Hotels & Resorts’ FFO per share estimates for 2018 witnessed rise of 3% and moved to $1.71 over the past month. The stock has gained 1.6% during the past three months.

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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