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 concerns.

In December, Alexandria announced a 1.5% sequential hike in its fourth-quarter 2024 cash dividend payment. Delighting its shareholders, the company will now pay out a dividend of $1.32 per share, up from the $1.30 paid out in the prior quarter. The increased dividend will be paid out on Jan. 15 to shareholders on record as of Dec. 31, 2024. Alexandria also remains committed to boosting shareholders’ wealth and has announced a $500 million common stock repurchase program that will run through Dec. 31, 2025.

What’s Aiding ARE?

The soaring demand for life science assets due to the increasing need for drug research and innovation positions the company well to capitalize on this trend. This is likely to drive healthy leasing activity and keep the occupancy and rent growth momentum steady. Also, with the implementation of artificial intelligence (AI) and machine learning (ML) tools in this industry, life science companies require significant lab footprints to generate the immense biological and chemical datasets needed to train AI-ML models effectively.

Alexandria’s Class A/A+ properties in AAA locations are experiencing high demand. As of Sept. 30, 2024, the occupancy of its operating properties in North America remained high at 94.7%. In the third quarter of 2024, the company registered rental rate escalations of 96% for its leases and rental rate growth of 5.1%. For 2024, we expect Alexandria’s same-store occupancy to be 94.9%, while rental income is expected to increase 7.6% on a year-over-year basis.

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 the first three quarters of 2024, Alexandria completed acquisitions with development/redevelopment opportunities worth $201.8 million. During the same period, it placed into service development and redevelopment projects totaling 945,118 RSF, 100% leased across multiple submarkets, which resulted in $63 million of incremental annual net operating income (NOI).

Alexandria has adequate financial flexibility to cushion and enhance its market position. The company had $5.4 billion of liquidity as of the end of the third quarter of 2024. The net debt and preferred stock to adjusted EBITDA was 5.5X, and the fixed-charge coverage ratio was 4.4 on an annualized basis. Its debt maturities are well-laddered, with a weighted average remaining term of 12.6 years as of the end of the third quarter of 2024. 

ARE follows the strategy of sharing growth in cash flows from operating activities with stockholders while retaining a significant portion for reinvestment. Alexandria has increased its dividend 11 times in the last five years, and the five-year annualized dividend growth rate is 5.26%. Check Alexandria’s dividend history here. 

Given the company’s solid operating platform, our adjusted funds from operations (AFFO) year-over-year growth projection of 6.3% in 2024, 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.

Alexandria’s tenant roster has a substantial concentration of companies belonging to the life science and technology industries. The company’s performance remains susceptible to any changes within these industries.

Over the past three months, shares of this Zacks Rank #3 (Hold) company have declined 17.8% compared with the industry’s fall of 11.8%. Moreover, the Zacks Consensus Estimate for 2024 funds from operations (FFO) per share has remained unrevised over the past month at $9.47. Nevertheless, it suggests a 5.6% increase year over year.

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Stocks to Consider

Some better-ranked stocks from the REIT sector are Crown Castle Inc. CCI and SL Green Realty SLG, 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 Crown Castle’s 2024 FFO per share has been raised a cent upward over the past two months to $7.00.

The Zacks Consensus Estimate for SL Green’s 2024 FFO per share has been revised 2.9% north over the past month to $7.83.

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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