On Wednesday, JPMorgan adjusted its stance on Alexandria Real Estate Equities Inc. (NYSE: NYSE:ARE), downgrading the stock from Overweight to Neutral and lowering the price target to $121 from $133. The change in rating follows a revision of the company’s financial model, leading to lowered earnings estimates for the upcoming years.
The firm pointed out that their forecast for Alexandria Real Estate's future funds from operations (FFO) per share has been reduced, marking a second consecutive quarter of downward revisions. The new FFO/share estimates stand at $9.46 for 2024, a slight decrease from the previous $9.47 estimate. For 2025, the estimate has seen a more significant drop from $9.67 to $9.35, which implies a year-over-year decrease of 1.1%. The estimate for 2026 has also been adjusted to $9.60 from the earlier $9.82, suggesting a 2.7% year-over-year increase.
These revised estimates are closely aligned with other market expectations. The midpoint of the company’s own guidance for 2024 is at $9.47, with a range of $9.41 to $9.53. Additionally, Bloomberg consensus aligns with JPMorgan’s 2024 estimate of $9.47 and sets the 2025 and 2026 consensus at $9.33 and $9.70, respectively.
The downward revision for 2025 is attributed primarily to softer core growth assumptions. The company is expected to face challenges due to a number of lease expirations, potentially leading to periods of downtime as spaces are backfilled or redeveloped. Furthermore, a decrease in development contribution and an increase in ground rent expenses are anticipated. However, these negative factors are partially mitigated by a forecasted 4% year-over-year decline in general and administrative expenses, dropping from $179 million in 2024 to $172 million in 2025.
In other recent news, Alexandria Real Estate Equities demonstrated a strong third-quarter performance in 2024. The company reported a 48% increase in leasing activity, amounting to 1.5 million rentable square feet. The Funds From Operations (FFO) per share rose to $2.37, marking a 4.9% increase from the previous year, while total revenues and net operating income (NOI) increased by 10.9% and 12.5%, respectively.
However, Deutsche Bank (ETR:DBKGn) recently downgraded Alexandria Real Estate Equities from Buy to Hold and reduced the price target for the company's stock to $112 from $135. This adjustment followed the company's third-quarter results for 2024, which aligned with consensus expectations, and the unchanged fiscal year 2024 funds from operations (FFO) per share guidance at $9.47. The bank expressed increased caution regarding the earnings growth outlook for Alexandria Real Estate into 2025, primarily due to anticipated tenant move-outs and the company's planned $1.2 billion in dispositions as part of its asset recycling program.
In addition, Jefferies adjusted its outlook on Alexandria, reducing the price target on the company's shares to $114 from the previous $120, while maintaining a Hold rating. This adjustment was based on a disciplined funding environment and a significant uptick in biotech funding, particularly in West Coast markets. Despite potential challenges, Alexandria remains optimistic about its future, projecting rental rate growth between 11% to 19% for 2024.
InvestingPro Insights
To complement JPMorgan's analysis of Alexandria Real Estate Equities Inc. (NYSE: ARE), recent data from InvestingPro offers additional context. Despite the downgrade, ARE maintains a strong position in the Health Care REITs industry, with InvestingPro Tips highlighting its status as a prominent player. The company's commitment to shareholder returns is evident, having raised its dividend for 13 consecutive years and maintained payments for 28 years.
Current financial metrics reveal a mixed picture. ARE's P/E ratio stands at 67.98, which aligns with JPMorgan's cautious stance, as it suggests the stock is trading at a high earnings multiple. This valuation metric could be a factor in the downgrade from Overweight to Neutral. However, the company's revenue growth remains solid, with a 10.21% increase over the last twelve months as of Q3 2024, reaching $3.09 billion.
For investors seeking a deeper understanding of ARE's financial health and growth prospects, InvestingPro offers 8 additional tips, which could provide valuable insights in light of JPMorgan's revised outlook. These tips may help investors navigate the challenges and opportunities highlighted in the analyst's report, particularly regarding future FFO projections and potential lease expiration impacts.
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