While the COVID-19 pandemic has been difficult for office real estate investment trusts (REITs), some have performed better than others. Companies in the life sciences space have benefited from increased government spending on research and development. The most prominent life sciences office REIT is Alexandria Real Estate Equities (NYSE:ARE). Here is why it is poised to continue to grow.

A laboratory space.

Image source: Getty Images.

Alexandria is the original life sciences real estate investment trust

Alexandria Real Estate Equities was a pioneer in laboratory office properties and has a North American asset base of 63.9 million square feet of collaborative life science, agricultural technology, and technology campuses. Alexandria's properties are concentrated in knowledge centers like Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and North Carolina. In general, these areas tend to have limited available space, high barriers to entry, and rapid rental growth. 

Alexandria just inked its biggest lease ever

The boom in biotech is creating additional demand for Alexandria's specialized facilities. The company just inked its biggest lease ever to vaccine-maker Moderna, for a 462,000-square-foot facility in Cambridge, Massachusetts. This building will house the company's headquarters and its core research and development facility. While Alexandria has over 750 tenants, 55% were either investment-grade or publicly traded at the end of 2020. 

Biotech could be the next industrial revolution

On the company's third-quarter earnings conference call, Executive Chairman and Founder Joel Marcus described the sea-change that is happening in the life sciences industry:

The 21st century is really the biological century as biology is in transition from an empirical science of trial and error to really in engineering will science with much more predictable and scalable outcomes. We're witnessing the industrial revolution and biotech as we accelerate the application of new and innovative tools, we will see an acceleration and value creation products will come to market faster for less capital and with fewer failures.

If in fact biotech and life sciences will lead the U.S. economy going forward, then Alexandria is positioned perfectly. So far it appears that demand for specialized lab facilities is outstripping supply. The company is guiding for rental rate increases of 33% to 36%, which is an increase from the June 30 quarter and initial guidance at the end of 2020. Rental rate increases are based on new leases and renewals. This is extraordinary growth. 

Alexandria is not cheap, but good stocks often are not

That said, investors are paying a price for this growth. Alexandria is guiding for 2021 funds from operations (FFO) per share to come in at $9.09 per share. Funds from operations are the preferred earnings metric for REITs because earnings per share understate the true cash flow per share. This is because depreciation and amortization (D&A) are huge items for real estate companies and are non-cash charges. In other words, D&A is an accounting number, but doesn't represent a cash outlay for the company. 

At current levels, Alexandria is trading at 23 times guided 2021 FFO per share, which is on the high side for a REIT. Alexandria pays a dividend yield of 2.2%, which is on the low side for REITs generally. Two things are driving that lower yield, however: Alexandria is up 26% year to date, which will decrease the yield, and the company is plowing excess cash back into the business. On the conference call, Alexandria said that the recently added projects in its pipeline will add an incremental $615 million in revenue per year.

Investors who are looking primarily for income might want to look at a different REIT. However, investors who like growth and income, along with a long-term growth story, will find Alexandria attractive. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.