REITs have been under pressure lately as the industry continues to suffer from rising interest rates, increasing the cost of debt and making it difficult for REITs to raise new capital. Given the real estate industry’s bleak outlook, it could be wise to avoid fundamentally weak REITs, Digital Realty Trust, Inc. (DLR) and Alexandria Real Estate Equities, Inc. (ARE).
Before delving deep into the fundamentals of these REITs, let’s first take a closer look at the industry.
Rising interest rates increase REITs’ cost of debt, making it difficult to achieve profitable growth as they need to raise external debt and equity capital from investors to continue their business. The combination of high rates and weak valuations led to a shortage of REIT capital raising in the third quarter of 2022, the lowest level since 2009.
Furthermore, according to Nareit, REITs underperformed with respect to the broader market in 2022, as the FTSE Nareit All Equity REITs Index posted a total return of -24.9%.
Furthermore, the office real estate market experienced a significant decline in transactions, with only $6.5 billion in sales recorded so far this year. This figure pales in comparison to the previous year’s first-quarter data and represents a staggering 66% decrease in year-over-year activity.
Investors might steer clear of struggling REITs DLR and ARE this week to avoid further losses.
Digital Realty Trust, Inc. (DLR)
DLR delivers a range of data center, colocation, and interconnection solutions to connect companies and data. Its global platform, PlatformDIGITAL, provides a secure data meeting place and Pervasive Datacenter Architecture (PDx) methodology for managing Data Gravity challenges and driving innovation efficiently.
In terms of trailing-12-month non-GAAP P/E, DLR is trading at 89.43x, 237.8% higher than the industry average of 26.18x. Its trailing-12-month EV/EBITDA of 21.95x is 30.1% higher than the industry average of 16.84x. Also, the stock’s trailing-12-month Price/Sales multiple of 5.91 compares with the 4.43x industry average.
For the fourth quarter that ended December 31, 2022, DLR’s EBITDA decreased 67.4% year-over-year to $493.24 million. Its net income declined 99.9% from the year-ago value to $763 thousand. AFFO available to common stockholders and unitholders decreased 7.5% year-over-year to $380.22 million, while AFFO per share declined 8.5% from the prior year’s period to $1.29.
Analysts estimate DLR’s FFO to marginally decrease year-over-year to $1.66 for the first quarter that ended March 2023. Also, the company’s FFO for the ongoing quarter (ending June 2023) is expected to decline 2.8% year-over-year to $1.67. Over the past year, the REIT has slumped 35.8% to close the last trading session at $96.51.
DLR’s weak fundamentals are reflected in its POWR Ratings. It has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The REIT has an F grade for Sentiment and D for Value and Quality. It is ranked #3 out of 3 stocks in the D-rated REITs - Data Centers industry.
Click here to see the other ratings of DLR for Stability, Momentum, and Growth.
Alexandria Real Estate Equities, Inc. (ARE)
ARE develops Class A properties clustered in life science, agtech, and technology campuses that provide innovative tenants with collaborative environments. Through its venture capital platform, it also offers strategic capital to transformative life science, agrifoodtech, climate innovation, and technology companies.
In terms of trailing-12-month non-GAAP P/E, ARE is trading at 51.74x, 97.6% higher than the industry average of 26.18x. Its trailing-12-month Price/Sales of 7.82x is 76.6% higher than the industry average of 4.43x. Moreover, its trailing-12-month EV/EBITDA multiple of 22.59 compares with the 16.84x industry average.
For the fiscal fourth quarter that ended December 31, 2022, ARE’s total expenses increased 13% year-over-year to $555.53 million. Its net income declined 4.5% year-over-year to $95.27 million, and net income per share attributable to ARE’s common stockholders decreased 34% year-over-year to $0.31.
In addition, as of December 31, 2022, ARE’s total liabilities stood at $12.84 billion, compared to $11.19 billion as of December 31, 2021.
Shares of ARE have plunged 36.6% over the past year to close the last trading session at $125.24.
ARE’s bleak outlook is reflected in its overall D rating, equating to Sell in our POWR Ratings system. It has a D grade for Quality and Value. The stock is ranked #10 out of 13 stocks in the F-rated REITs - Office industry.
Click here to access ARE’s rating for Stability, Growth, Sentiment, and Momentum.
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DLR shares were trading at $94.12 per share on Thursday afternoon, down $2.39 (-2.48%). Year-to-date, DLR has declined -5.04%, versus a 8.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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