Alexandria Real Estate Equities (ARE -0.65%) is one of the highest flying real estate investment trusts (REITs) on the market. With revenue of $2.5 billion in the trailing 12 months, close to a billion dollars more than it generated as recently as 2019, it's unquestionable that the REIT provides crucial spaces for a high-growth and vastly important industry. But is the stock a buy?

Two Fool.com contributors present their cases: the bull case that the company is a fast-growth, dividend-paying, high-quality business, and the bear case that the stock is just too expensive right now. Let's get into the arguments.

Bull case: Biosciences rely on Alexandria to provide collaborative spaces

Kristi Waterworth: When it comes to stocks that are nearly guaranteed to be long-term winners, there are few as certain in my mind as Alexandria Real Estate Equities. This REIT focuses on renting space to bioscience and life science companies using a unique model that keeps both like and dissimilar tenants on the same campuses to allow for easier access to one another for collaboration. It's a brilliant model that's been working for the company and its shareholders, who have seen nonstop dividend growth since 2009.

Alexandria keeps growing because it has a great model for these types of businesses, with consistently high occupancy rates. The current occupancy rate of completed buildings is 94.3% with a weighted-average remaining lease term of 7.2 years for all tenants, 96% of which contain elevation clauses that allow for automatic rent increases at regular periods.

Of the 27 projects currently under development or redevelopment, 76% of the space is pre-leased or in lease negotiations, as is 78% of the seven projects waiting to commence construction. Previous projects coming online, as well as increases in rent on existing tenants, resulted in a 5.1% increase in net operating income between Q3 2022 and Q3 2021, across 296 properties. Average occupancy in that time also increased from 94.4% to 95.6%, despite a slump in the wider economy and other types of office spaces that continue to sit empty.

All of this has been possible without relying too much on any single tenant, which is really key when you're looking at the long run. Alexandria Real Estate Equities' largest tenant by revenue is Bristol-Myers Squibb, which brings in $69.7 million per year, representing just 3.6% of annual revenue. Even the top 20 tenants taken together only provide just over 31.1% of annual rental revenue, ensuring that Alexandria isn't too dependent on any single tenant or class of tenants.  

There's little doubt that biosciences and life sciences are going to continue to be important as the population ages. The development of new medicine, technology, and treatments is going to be invaluable to the world, making the customized spaces that Alexandria Real Estate Equities provides for these companies indispensable well into the future.

Bear case: You're going to have to pay up to invest in Alexandria

Mike Price: I won't argue that Alexandria is in a strong field and has generated a lot of value for shareholders; I want to dive into the valuation. In a market like this, where rising interest rates and general market conditions could mean a long-term bear market for real estate stocks, it's more important than ever to invest with a margin of safety.

At first glance, Alexandria trades for a premium. Its price-to-sales ratio of 9.7 and price-to-earnings ratio of almost 46 would look high in almost any industry, but there's more to the story. For REITs, the most important number is price-to-funds from operations (FFO).

REITs don't have to pay corporate income tax if they distribute 90% of their taxable income as dividends, so many REITs have balance sheets that would be gruesome in other industries, and their net income (which is weighed down by depreciation and interest expense) isn't a perfect picture of profitability.

Alexandria had adjusted FFO of $6.28 per share through the first three quarters of 2022, and earnings per share (EPS) of $2.88. FFO was up a healthy 9% over the same period in 2021 while EPS was down. It's worth noting that the company adds back losses from non-real estate activities to get to that adjusted number.

The management team projects 2022 adjusted FFO will be $8.41 per share. That means the stock currently trades for 17.7 times adjusted FFO. Let's compare that to some other office REITs: Boston Properties trades for about 10 times projected 2022 FFO and Cousins Properties trades for roughly 9 times.

It's certainly true that those two REITs aren't the same quality level as Alexandria and don't lease to the same type of sustainable tenants, but paying such a large premium versus the competition is something to think about. 

How do you decide?

Your decision depends on how you personally view valuation. Some investors won't even look at stocks unless they trade for under 10 times cash flow. Some investors don't bother with valuation, preferring to evaluate business models and growth prospects. It's up to you to decide what your personal investment strategy is and then apply that to Alexandria to make your decision.