Here's Why You Should Hold Alexandria (ARE) Now

Alexandria Real Estate Equities, Inc. (NYSE:ARE) is experiencing high demand for its Class A properties in upscale locations, which is boosting its occupancy. Also, strong internal and external growth, robust cash flow and solid balance sheet are its strengths. However, disposition of non-core assets has a dilutive impact on its earnings. Further, a rise in the rate of interest and foreign currency fluctuations are the concerns before it.

Late January, Alexandria reported fourth-quarter 2017 adjusted funds from operations (FFO) of $1.53 per share, which missed the Zacks Consensus Estimate by a penny. Nonetheless, the figure came in higher than the prior-year quarter tally. The company also witnessed encouraging year-over-year growth in revenues, with full-year 2017 revenues exceeding $1 billion for the first time.

Alexandria focuses on Class A properties concentrated in urban campuses, primarily for the 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 Dec 31, 2017, 55% of the annual rental revenues were derived from investment-grade tenants, whereas 80% of the annual rental revenues came from Class A properties in AAA locations.

Additionally, the company continues to execute and deliver strong internal growth. During fourth-quarter 2017, same-property cash net operating income (NOI) growth was solid at 4.5%. The quarter saw rental-rate growth of about 24.8% and on a cash basis, it was up 10.4%. In addition, robust external growth, in the form of development and redevelopment of new Class A properties in AAA locations, is likely to boost the company’s operating performance.

Nonetheless, Alexandria follows the strategy of recycling capital from high-value assets and the sale of non-core operating assets and non-strategic land parcels to finance pre-leased value-creation development and redevelopment projects. In fact, the company continues to look for opportunities to dispose non-core assets throughout 2018. The near-term dilution effect of such moves on earnings is unavoidable.

Further, the rise in interest rates is a challenge for Alexandria as the company has an 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. Moreover, the dividend payout itself might become less attractive than the yields on fixed income and money market accounts.

Alexandria currently carries a Zacks Rank #3 (Hold). In the past three months, shares of the company have outperformed the industry. While the stock has declined 1.9%, the industry has lost 10% during this period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks from the real estate space include CBRE Group, Inc. (NYSE:CBG) , FirstService Corp. (NASDAQ:FSV) and HFF, Inc. (NYSE:HF) . All three carry a Zacks Rank of 2 (Buy).

CBRE Group’s Zacks Consensus Estimates for 2018 earnings per share have been revised 6.4% upward to $2.98 over the past month. Its share price has risen 9.1% in three months’ time.

FirstService Corporation’s earnings per share estimates for the current year have inched up 11.8% to $2.65 in a month’s time. Its shares have gained 4.2% over the past three months.

HFF’s earnings per share estimates for 2018 have been revised upward 10.9% to $2.35 over the past month. The stock has gained 4.7% during the past three months.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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