Key insights
- Alexandria Real Estate Equities (ARE) faces challenges due to oversupply in the life sciences real estate sector, declining net income margins, and equity dilution. The company's EV has decreased significantly since 2021, and a recent dividend cut led to a sharp drop in share price. While earnings expectations are pessimistic, the author is monitoring for a potential positive earnings reversal, but remains cautious.
ARE is a REIT that builds office and laboratory space for life sciences-related businesses. It is clear that this sub-sector has been oversupplied for a few years.
For the next 4 quarters, estimates are for sequential quarterly declines. This follows steady sequential increases in earnings from 2015 (oldest data I have) through 2024. Adjusted earnings peaked at $2.39 Q4 2024. Reported earnings peaked at $2.43 Q1 2024.
Company EV peaked at $38.5B in 2021. Rental income continued to grow after 2021 but net income margins have fallen from 24% to single digits, impacting dividends materially.
Current EV is $24B, down 37% while the share price is down 78%. This is why you should always look at EV, not share price. 25 million shares have been issued since 2021, most of them in 2022. There is no chance the shares return to $200+ as a result. A return to the peak EV would mean a stock price of $130 - which I am in no way predicting. Just illustrating the negative effect of equity issuance on the stock price potential.
One could argue that the earnings expectations are quite pessimistic at this point. It is very hard to know as someone who only has access to public information. Management is clearly guiding analysts to these numbers.
The dividend was cut to 72c from $1.32 for December. The shares got hammered from $78 to $45 when this was announced in the September earnings report.
I am watching this one carefully for any positive earnings reversal. I am not going to pet in before I see some evidence.