Demand for life sciences propels Alexandria real estate
As part of the fight against the COVID-19 pandemic, the life sciences industry has benefited from increased government spending on treatments and vaccine development. One of the main beneficiaries was not a healthcare company, but a real estate investment trust (REIT) that develops spaces for these businesses.
Alexandria Real Estate Stocks (NYSE:ARE) is the leader in this sector, and it believes that the life sciences space is at the start of a long boom. Here’s why.
The fight against the pandemic has given the company a big boost
Alexandria Real Estate Equities is a REIT that caters to healthcare tenants. It is building city campuses in Boston, the San Francisco Bay Area, New York, San Diego, Seattle, the Washington area, and North Carolina. These are generally Class A properties, which means that the newer buildings offer the best amenities.
Healthcare tenants need sophisticated lab space, and most office REITs don’t have the experience or track record to build these properties. Alexandria has been in this business since 1994 and pioneered a focus on life science properties.
Last year was a banner year for the company as it leased 9.5 million square feet, more than double what it did in 2020. This is expected to create more than $6 billion in base rents over the term of the leases. Considering that last year’s total revenue was $2.1 billion, this will greatly increase the revenue in the next few years.
Alexandria is experiencing strong rental growth, with renewal rates up 38%. This number represents the difference between the rate of an expiring lease and the rate of the new lease. Market value – in other words, the difference between what the properties earn and what they would earn if listed at current market conditions – is 31%. While Alexandria is experiencing construction cost inflation, revenues are holding up.
Are we entering a golden age of biotechnology?
Alexandria founder and executive chairman Joel Marcus believes these are the “beginnings of the golden age of biotechnology and biology.” On the third quarter earnings call in October, Marcus said, “The biotechnology boom and historic demand for life sciences driven by strong industry fundamentals are evident. The 21st century is truly the biological century, as biology is transitioning from an empirical science of trial and error to truly engineering science, with much more predictable and scalable outcomes.”
He added that we are witnessing “the industrial revolution” in biotechnology.
Last year, Alexandria earned $7.76 per share in adjusted funds from operations (AFFO). Funds from operations is how REITs typically measure earnings. Because REITs have a lot of depreciation expense, earnings per share based on generally accepted accounting principles (GAAP) tends to underestimate a company’s cash earnings.
In 2022, the company has forecast FFO per share to be between $8.26 and $8.46. Amid the forecast, Alexandria is trading at just over 22 times FFO 2022 per share. That’s about right for a REIT, and it has little competition in its sandbox.
Alexandria increased its dividend twice last year and is currently yielding 2.5%. It’s a small side for a REIT, but it reinvests heavily in its business. Investors looking for a more conservative way to play in the life sciences space should take a look at Alexandria Real Estate Equities.
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