Alexandria Real Estate Equities Inc.’s ARE premium portfolio of Class A/A+ properties in strategic markets is well-poised to benefit from solid demand for life science assets due to the increasing need for drug research and innovation. Its buyouts and robust balance sheet augur well for long-term growth.

However, the company’s substantial active development pipeline exposes it to the risk of rising construction costs and lease-up concerns. High interest expenses add to its woes.

What’s Aiding ARE?

Alexandria's portfolio of Class A/A+ properties is strategically located within AAA innovation cluster regions. These locations are highly appealing to life science, tech and technology companies seeking tenancy. 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.

Alexandria’s Class A/A+ properties in AAA locations are experiencing high demand driven by the booming demand for life science assets due to the increasing need for drug research and innovation. As of Dec. 31, 2024, the occupancy of its operating properties in North America remained high at 94.6%. For 2025, we expect Alexandria’s same-store occupancy to be 93.1%.

The acquisition, development and redevelopment of the new Class A/A+ properties in AAA locations are likely to boost the company’s operating performance over the long term. In 2024, Alexandria completed acquisitions with development/redevelopment opportunities worth $249.4 million. During the same period, it placed into service development and redevelopment projects totaling 1.5 million RSF, 98% occupied across multiple submarkets, which resulted in $118 million of incremental annual net operating income (NOI).

Alexandria has adequate financial flexibility to cushion and enhance its market position. The company had $5.7 billion of liquidity as of the end of the fourth quarter of 2024. The net debt and preferred stock to adjusted EBITDA was 5.2X, and the fixed-charge coverage ratio was 4.3 in the fourth quarter of 2024 on an annualized basis. Moreover, ARE enjoys credit ratings of Baa1 and BBB+ from Moody’s and S&P Global Ratings, respectively. This renders access to the debt market at favorable costs, positioning it well to bank on growth opportunities.

Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Alexandria remains committed to that. The company has increased its dividend 10 times in the last five years, and the five-year annualized dividend growth rate is 5.23%. Check Alexandria’s dividend history here. Given the company’s solid operating platform, decent financial position and lower payout ratio compared with that of the industry, this dividend rate is likely to be sustainable over the long run.

What’s Hurting ARE?

Aexandria’s active development and redevelopment pipeline, although encouraging for long-term growth, exposes it to the risk of rising construction costs and lease-up concerns amid macroeconomic uncertainty. As of Dec. 31, 2024, the company had 4.4 million RSF of Class A/A+ properties undergoing construction.

Despite the Federal Reserve announcing rate cuts late in 2024, the interest rate is still high and is a concern for Alexandria. The company has a substantial debt burden totaling $12.69 billion as of Dec. 31, 2024. Fourth-quarter 2024 interest expenses jumped significantly year over year to $55.7 million. For 2025, our estimate indicates a 4.2% year-over-year increase in the company’s interest expenses.

Over the past three months, shares of this Zacks Rank #3 (Hold) company have declined 2.4%, against the industry’s growth of 4.5%. Moreover, the Zacks Consensus Estimate for 2025 funds from operations (FFO) per share has been marginally revised southward over the past month at $9.31. It also suggests a 1.7% decrease year over year.

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Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Welltower WELL and Cousins Properties CUZ, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Welltower’s 2025 FFO per share has been raised marginally upward over the past month to $4.90.

The Zacks Consensus Estimate for Cousins Properties’ 2025 FFO per share has been revised 1.8% north over the past month to $2.79.

Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.

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This article originally published on Zacks Investment Research (zacks.com).

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