Alexandria Real Estate: Bargain-Buy Office REIT Deserving Of Another Look

seekingalpha04-23

Alexandria Real Estate Equities investors have underperformed in 2024 as long-term yields staged a resurgence.The market has priced in fewer expected rate cuts, leading to a de-rating of ARE.ARE's ...

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(NYSE:ARE) investors have struggled to replicate the market-beating performance in late 2023, as ARE met with stiff selling resistance after it topped out in December 2023. Interestingly, ARE's relative underperformance over the past few months coincided with the resurgence in long-term bond yields, as seen in the recovery of the United States 10-Year Bond Yield (US10Y). Observant real estate investors should have assessed the 10Y bottomed out in December at the 3.78% level but have recovered nearly above the 4.7% level last week. I upgraded ARE to Strong Buy in early December, as I attempted to help ARE investors capitalize on a potentially more dovish Fed. Although that thesis worked out well initially, the resurgence in yields affected buying sentiments subsequently. As a result, I believe the market has astutely priced in a more hawkish Fed than initially anticipated, as the number of expected rate cuts dwindled to one or two from an optimistic projection of six cuts at the start of 2024. Consequently, I believe it's justified for ARE investors to de-rate the stock in response to the resilience in long-term yields. Since ARE is structured as an office REIT, income investors have likely reassessed its appeal relative to the prevailing yields. ARE is valued at a forward dividend yield of 4.3%, markedly higher than its 10Y average of 3.2%. However, it pales in comparison to the \"risk-free\" rates, suggesting that ARE's buying momentum could struggle to gain sustained traction if yields continue to surge higher. Moreover, investor sentiments over office REITs remain uncertain. However, I believe ARE investors are aware that we shouldn't consider commercial REITs \"homogeneous.\" While office REITs have faced downward pressure over the past two years, it's increasingly likely that they bottomed out late last year. Moreover, the recent results from the banking sector suggest lenders have remained well-capitalized, allocating healthy reserve levels against unanticipated charges. Moreover, ARE delivered a solid first-quarter earnings release this week, suggesting its life sciences-focused thesis has remained robust. Alexandria Real Estate posted an FFO per share (as adjusted) of $2.35, outperforming consensus estimates. In addition, ARE narrowed its 2024 FFO (as adjusted) guidance range while retaining the midpoint of its outlook. Accordingly, ARE expects a midpoint metric of $9.47, just slightly below analysts' estimates of $9.48, representing YoY growth of 5.6%. There could be concerns over the growth momentum of Alexandria Real Estate's same property NOI growth cadence. While the occupancy rate has maintained its resilience at 94.6% in Q1, ARE posted a same-property NOI growth of just 1% YoY. Despite that, the company's solid FFO per share guidance suggests the REIT expects to generate accretion through 2024. Accordingly, Alexandria Real Estate Equities indicated it expects an annualized $480M increase in net operating income from future placements through 2027, augmenting the continued growth of its dividend payout. Still, Analysts are seemingly less confident that ARE will continue to generate 5% YoY dividend growth from 2024, with an estimated increase of just 3.8% in 2024, down from last year's 5.1% uptick. Coupled with the inherent occupancy headwinds in office REITs as a whole and a potentially more hawkish Fed, ARE would likely continue to consolidate in the near term. However, I assessed ARE's price action as increasingly constructive, suggesting the market has already baked in significant downside bias in its battered valuation. ARE is valued at a forward FFO per share of 12.4x, well below its 10Y average of 18.7x. ARE price chart (weekly, medium-term, adjusted for dividends) (TradingView) ARE's price action lends credence to significantly improved buying sentiments, suggesting its October 2023 lows should hold robustly. ARE has made higher lows well above the $90 level as it reached peak pessimism. Dip-buyers also returned confidently in February 2024 and this week after a momentary pullback in April. Its trend bias has also shifted from a downtrend momentum toward an uptrend one, auguring well for a continuation of ARE's recovery. With its solid execution and guidance underpinned by a pessimistic valuation, ARE's bullish price action looks well-supported by fundamental factors. While near-term downside volatility impacting office REITs is unavoidable, I believe ARE's life sciences-focused thesis has been well-received by income investors. Rating: Maintain Strong Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. I Want To Hear From You  Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429111400"}