90% Of Redevelopment Pipeline Will Be Leased, Signaling Strong Future Opportunities

Key Takeaways

• Alexandria's megacampus strategy and land sales aim to enhance liquidity, boost rental revenue, and improve earnings from key locations.
  
• Cost-saving measures and strong demand for redevelopment projects are set to enhance margins and drive future revenue growth.
  
• Environmental risks, slow biotech leasing, tenant dependence, execution risks on projects, and macro conditions could hinder Alexandria's future revenue and earnings growth.

Catalysts

Alexandria Real Estate Equities, Inc. (NYSE: ARE), an S&P 500 company, is a best-in-class, mission-driven life science REIT making a positive and lasting impact on the world.

• Alexandria's pending 2025 dispositions amount to $540 million, with a significant portion involving land sales, expected to free up capital, improve liquidity, and potentially impact earnings.
  
• The company's megacampus strategy aims to increase rental revenue from 77% of total revenues, enhancing earnings from prime locations and tenant relationships.
  
• In response to the challenging market landscape, Alexandria plans on executing G&A cost-saving measures projected to result in a $32 million reduction, which will improve net margins.
  
• The company is seeing diversified demand for its redevelopment and development pipeline, with nearly 90% of its pipeline for the current year already leased or under signed letters of intent, setting the stage for future revenue growth.
  
• Anticipated improvements in the life science sector, driven by changes in the regulatory environment, increased FDA approvals, and heightened M&A activity, are expected to boost the company's leasing demand, positively impacting future earnings.

Alexandria Real Estate Equities Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alexandria Real Estate Equities's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $426.0 million (and earnings per share of $4.28) by about January 2028, up from $309.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.9x on those 2028 earnings, down from 54.9x today. This future PE is lower than the current PE for the US Health Care REITs industry at 41.4x.
• Analysts expect the number of shares outstanding to decline by 17.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Alexandria Real Estate Equities Future Earnings Per Share Growth

Risks

• The impact of California wildfires on Alexandria’s team and operations, paired with inadequate preparation by local authorities, suggests ongoing environmental risks, which could increase operating expenses and impact net margins.
  
• Hallie Kuhn mentions that the public biotech segment was the slowest in terms of leasing, which introduces risk of volatility and may affect future revenue streams if this segment does not strengthen.
  
• The high dependence on existing tenant relationships for a significant portion of leasing may limit expansion opportunities and diversify tenant risks, potentially affecting revenue growth.
  
• There is execution risk in leasing up projects delivering in 2027 and beyond, which are currently only 15% leased or under negotiation, potentially impacting future earnings if these projects experience delays.
  
• Macro conditions like high interest rates are expected to weigh on all industries, including life sciences, potentially affecting earnings and slowing down the leasing momentum needed for Alexandria’s development pipeline.

Valuation

• The analysts have a consensus price target of $119.5 for Alexandria Real Estate Equities based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $144.0, and the most bearish reporting a price target of just $104.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $426.0 million, and it would be trading on a PE ratio of 34.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $97.25, the analyst's price target of $119.5 is 18.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.