Alexandria (ARE) Q3 FFO Meets Estimates, Rental Rate Grows

Alexandria Real Estate Equities, Inc. (NYSE:ARE) reported third-quarter 2019 funds from operations (FFO) as adjusted of $1.75 per share, in line with the Zacks Consensus Estimate. The figure improved 5.4% from the year-ago quarter’s reported tally of $1.66.

This improvement resulted from top-line growth, which jumped 14.2% year over year to $390.5 million and also outpaced the Zacks Consensus Estimate of $381.6 million.

Results reflect decent internal and external growth. The company witnessed continued strong leasing activity and rental rate growth in the quarter.

Behind the Headline Numbers

Alexandria’s total leasing activity aggregated to 1.2 rentable square feet (RSF) of space during the September-end quarter. Lease renewals and re-leasing of space amounted to 758,113 RSF.

On a year-over-year basis, same-property NOI grew 2.5%. It climbed 5.7% on a cash basis. Occupancy of operating properties in North America remained high at 96.6%. The company registered decent rental rate growth of 27.9% in the reported quarter. On a cash-basis, rental rate increased 11.2%.

As of third-quarter 2019, investment-grade or publicly-traded large-cap tenants accounted for 53% of annual rental revenues in effect. Furthermore, 78% of the annual rental revenues are from Class A properties in AAA locations. Weighted-average remaining lease term of all tenants is 8.3 years. For its top 20 tenants, it is 11.8 years.

Notably, during the July-September period, the company acquired 11 properties for a total of $459.2 million. These acquisitions include operating properties aggregating 546,389 RSF, of which 111,080 RSF are existing vacant space. Moreover, the buyouts include future development and redevelopment opportunities, totaling 537,850 RSF, positioned in multiple markets. Moreover, third-quarter commencements of development and redevelopment projects aggregated 447,998 RSF and involved three projects.

Liquidity

Alexandria exited third-quarter 2019 with cash and cash equivalents of $410.7 million, up from the $198.9 million reported at the end of the previous quarter. The company had $3.5 billion of liquidity as of the end of the reported quarter. Also, 95% of its net operating income is unencumbered.

Outlook

Alexandria revised its guidance for adjusted FFO per share for 2019 to $6.95-$6.97 from the prior outlook of $6.92-$7.00. The Zacks Consensus Estimate for the same is currently pinned at $6.97.

The company’s 2019 guidance is backed by expectations for occupancy in North America (as of Dec 31, 2019) in the band of 96.7-97.3%, 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 third-quarter revenue beat is impressive. Continued strong leasing activity and rental rate growth have helped the company excel in the quarter. 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. However, 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 Duke Realty Corporation (NYSE:DRE) , HCP Inc. (NYSE:HCP) , Apartment Investment and Management Company (NYSE:AIV) . While Duke Realty and HCP Inc. are slated to report third-quarter earnings on Oct 30, Apartment Investment has its quarterly release scheduled for Oct 31.

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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