As part of the fight against the COVID-19 pandemic, the life sciences industry has received increased government spending on treatments and vaccine development. One of the biggest beneficiaries was not a healthcare company, but a real estate investment trust (REIT) that develops space for these companies.
Alexandria Real Estate Equities (ARE -1.92%) is the leader in this sector, and it believes that the life sciences space is in the beginning stages of a long boom. Here's why.
The pandemic fight has resulted in a big boost for the company
Alexandria Real Estate Equities is a REIT that caters to healthcare tenants. It builds urban cluster campuses in Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, the Washington area, and North Carolina. These are generally Class A properties, which means they are the newest buildings that offer the best amenities.
Healthcare tenants require sophisticated lab space, and most office REITs don't have the requisite experience or track record building these properties. Alexandria has been in this business since 1994 and was the first to concentrate on life sciences properties.
Last year was a boom year for the company, as it leased 9.5 million square feet, more than doubling what it did in 2020. This is expected to create over $6 billion in base rents over the life of the leases. When you consider that total revenue last year was $2.1 billion, this is going to significantly boost the top line over the next several years.
Alexandria is seeing strong rental growth as renewal rates were bumped up 38%. This number represents the difference between the rate on an expiring lease and the rate on the new lease. Mark-to-market -- in other words, the difference between what properties earn and what they would earn if released at current market conditions -- is 31%. While Alexandria is seeing inflation on construction costs, revenue is keeping up.
Are we entering a golden age of biotech?
Alexandria founder and executive chairman Joel Marcus believes that these are the "early days of the golden age of biotechnology and biology." On the third-quarter earnings call in October, Marcus said: "The biotech boom and historic life-science demand driven by the strong industry fundamentals is evident. 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."
He added that we're witnessing "the industrial revolution" in biotech.
Last year, Alexandria earned $7.76 per share in adjusted funds from operations (AFFO). Funds from operations are the way REITs typically measure earnings. Since REITs have a lot of depreciation charges, earnings per share based on generally accepted accounting principles (GAAP) tend to understate the cash earnings of a company.
In 2022, the company guided for FFO per share to come in between $8.26 and $8.46. At the midpoint of guidance, Alexandria is trading at a little over 22 times 2022 FFO per share. This is about right for a REIT, and it has little competition in its sandbox.
Alexandria raised its dividend twice last year, and currently has a yield of 2.5%. This is on the small side for a REIT, but it is reinvesting heavily in its business. Investors looking for a more conservative way to play the life sciences space should take a look at Alexandria Real Estate Equities.