What's In Store For Alexandria (ARE) This Earnings Season?

Alexandria Real Estate Equities (NYSE:ARE) is scheduled to report first-quarter results on Apr 30, after the market closes. Revenues and funds from operations (FFO) per share are expected to grow sequentially.

Last quarter, this Pasadena, CA-based urban office real estate investment trust (REIT), which primarily focuses on collaborative life science and technology campuses, missed the Zacks Consensus Estimate by a whisker. The company witnessed a year-over-year rise in expenses related to rental operations and interest expenses.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions, met in another and missed in the other, coming up with an average positive surprise of around 0.3%. The graph below depicts this surprise history:

Alexandria Real Estate Equities, Inc. Price and EPS Surprise

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

The fundamentals of the office real estate market remained moderate in the first quarter. In fact, going by numbers, per a study by the commercial real estate services’ firm CBRE Group Inc. (NYSE:CBRE), although new supply for the quarter exceeded the 10-million-square-foot mark, totaling 12.3 million square feet of space, 70% of these deliveries were pre-leased. Encouragingly, around half of the total space, currently under construction, has already been pre-leased at higher rates. This underscores high demand for premier office space in major office markets.

This operating environment remains favorable for Alexandria, which focuses on Class A properties concentrated in urban campuses, primarily for the life science and technology entities. Its properties are located in markets with high barriers to entry and exit. This adds to the productivity and efficiency of tenants. We anticipate this to help the company generate steady revenues from its properties in the to-be-reported quarter.

Further, in the past three months, shares of the company have lost 4.5%, while the industry incurred a loss of 7.1%.

However, per the study, high level of new supply in the Jan-Mar quarter has resulted in an uptick in overall vacancy rates by 20 basis points (bps). Further, in contrast to the recent peak rates witnessed by the industry, rent growth was sluggish in the quarter, merely inching up 0.7% sequentially. Further, the industry is witnessing a shift from downtown markets toward sub-urban areas, as evident in the high annual growth rates in the sub-urban office spaces.

We expect this changing landscape to impact the company’s performance in the soon-to-be-reported quarter. Sluggish rental growth will likely limit its operating margins and high vacancies might add to its concerns.

In addition to the above, Alexandria’s strategy to sell non-core operating assets and non-strategic land parcels is expected to have affected its bottom-line growth in the quarter.

Hence, there is lack of any solid catalyst prior to the first-quarter earnings release. As such, the Zacks Consensus Estimate of funds from operations (FFO) per share for the first quarter fell by a cent to $1.59 over the past month, reflecting bearish analyst sentiment.

Earnings Whispers

Our proven model does not conclusively show that Alexandria is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

(You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.)

Zacks ESP: Alexandria’s Earnings ESP is 0.00%.

Zacks Rank: The company carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of the earnings beat.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Taubman Centers, Inc. (NYSE:TCO) , slated to release earnings on Apr 26, has an Earnings ESP of +0.47% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Simon Property Group, Inc. (NYSE:SPG) , scheduled to report quarterly numbers on Apr 27, has an Earnings ESP of +0.50% and a Zacks Rank #3.

RLJ Lodging Trust (NYSE:RLJ) , set to release first-quarter results on May 14, has an Earnings ESP of +2.68% and a Zacks Rank #3.

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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