Alexandria (ARE) Q2 FFO Beats Estimates On Rental Rate Growth

Alexandria Real Estate Equities, Inc. (NYSE:ARE) reported first-quarter 2019 funds from operations (FFO), as adjusted of $1.73 per share, beating the Zacks Consensus Estimate by a whisker. The figure also improved from the year-ago quarter’s reported tally of $1.64.

This better-than-expected performance was backed by growth in revenues, which jumped 15% year over year to $373.9 million, outpacing the Zacks Consensus Estimate of $365.3 million.

Results reflect decent internal and external growth. The company recorded continued rental rate growth, while lease renewal and re-leasing of space activity were strong in the quarter.

Behind the Headline Numbers

Alexandria’s total leasing activity aggregated to 819,949 rentable square feet (RSF) of space during the June-end quarter. Lease renewals and re-leasing of space amounted to 587,930 RSF.

On a year-over-year basis, same-property NOI grew 4.3%. It climbed 9.5% on a cash basis. Occupancy of operating properties in North America remained high at 97.4%. The company witnessed decent rental rate growth of 32.5% in the second quarter. On a cash-basis, rental rate increased 17.8%.

As of second-quarter 2019, investment-grade or publicly traded large-cap tenants accounted for 53% of annual rental revenues in effect. Furthermore, 77% of the annual rental revenues are from Class A properties in AAA locations. Weighted-average remaining lease term of all tenants is 8.4 years. For its top 20 tenants, it is 12 years.

Notably, during the April-June quarter, the company acquired three properties and a land parcel for a total of $296.5 million. Moreover, second-quarter commencements of development projects aggregated 841,178 RSF.

Liquidity

Alexandria exited second-quarter 2019 with cash and cash equivalents of $198.9 million, down from the $261.4 million reported at the end of the previous quarter. However, the company had $3.4 billion of liquidity as of the end of the reported quarter. Also, 94% of its net operating income is unencumbered.

Outlook

Alexandria revised its guidance for adjusted FFO per share for 2019 to $6.92-$7.00 from the prior outlook of $6.90-$7. The Zacks Consensus Estimate for the same, currently pinned at $6.98, lies within the range.

The company’s 2019 guidance is backed by expectations for occupancy in North America (as of Dec 31, 2019) in the band of 97.2-97.8%, rental rate increases for lease renewals, and re-leasing of space of 27-30%, and same-property NOI growth of 1-3%.

Our Viewpoint

Alexandria’s Q2 FFO per share and revenue beat is impressive. Continued strong leasing activity and rental rate growth have helped the company excel in the first half of the year. In addition, solid external growth and strategic capital allocation to highly leased value-creation pipeline are encouraging.

Notably, the company’s properties are located in markets, characterized by high barriers to entry and exit, 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.

Alexandria currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other REITs

Cousins Properties Incorporated (NYSE:CUZ) reported second-quarter 2019 FFO per share (before TIER transaction costs) of 71 cents, missing the Zacks Consensus Estimate by a whisker. Nonetheless, the figure came in higher than the prior-year quarter’s reported tally of 60 cents. The company witnessed increase in same-property cash NOI. Nonetheless, higher interest expense as well as general and administrative expenses unfavorably impacted results.

Highwoods Properties Inc.’s (NYSE:HIW) second-quarter FFO per share of 87 cents outpaced the Zacks Consensus Estimate of 85 cents. The figure remained flat year over year. The company recorded year-over-year growth in same-property cash net NOI. Additionally, rents improved on both GAAP and cash basis.

PS Business Parks, Inc. (NYSE:PSB) delivered second-quarter FFO of $1.75 per share, which surpassed the Zacks Consensus Estimate of $1.68. The figure also came in 10.1% higher than the prior-year quarter’s $1.59. Results highlight improvement in Same-Park NOI, backed by growth in rental rates, as well as higher NOI from non-Same-Park and multi-family assets.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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