New York REIT, Inc. (NYSE:NYRT) and Alexandria Real Estate Equities, Inc. (NYSE:ARE) are the two most active stocks in the REIT – Office industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. New York REIT, Inc. (NYRT) has an EBITDA margin of 27.11%, compared to an EBITDA margin of 61.41% for Alexandria Real Estate Equities, Inc. (ARE). This suggests that ARE underlying business is more profitable. NYRT’s ROI is -2.60% while ARE has a ROI of 0.60%. The interpretation is that ARE’s business generates a higher return on investment than NYRT’s.
The value of a stock is simply the present value of its future free cash flows. NYRT’s free cash flow (“FCF”) per share for the trailing twelve months was -0.08. Comparatively, ARE’s free cash flow per share was +0.41. On a percent-of-sales basis, NYRT’s free cash flow was -0.01% while ARE converted 0% of its revenues into cash flow. This means that, for a given level of sales, ARE is able to generate more free cash flow for investors.
NYRT’s debt-to-equity ratio is 0.00 versus a D/E of 0.94 for ARE. ARE is therefore the more solvent of the two companies, and has lower financial risk.
NYRT trades at a forward a P/B of 1.37, and a P/S of 7.16, compared to a forward P/E of 59.38, a P/B of 2.12, and a P/S of 10.95 for ARE. that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. NYRT is currently priced at a -22.2% to its one-year price target of $9.82. Comparatively, ARE is -6.22% relative to its price target of $127.27. This suggests that NYRT is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for NYRT and 2.30 for ARE, which implies that analysts are more bullish on the outlook for ARE.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. NYRT has a beta of 0.78 and ARE’s beta is 0.90. NYRT’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. NYRT has a short ratio of 1.26 compared to a short interest of 10.54 for ARE. This implies that the market is currently less bearish on the outlook for NYRT.
New York REIT, Inc. (NYSE:NYRT) beats Alexandria Real Estate Equities, Inc. (NYSE:ARE) on a total of 7 of the 11 factors compared between the two stocks. NYRT has lower financial risk. In terms of valuation, NYRT is the cheaper of the two stocks on book value and sales basis, NYRT is more undervalued relative to its price target. Finally, NYRT has better sentiment signals based on short interest.