Biotech Is Booming, and This Undervalued REIT Stands to Gain
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What's remarkable is While most commercial office landlords are still hunting for post‑pandemic tenants, there's a sector of the real estate industry that's breeding breakout growth: life sciences. Global bio...
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real estate
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July 25, 2025
05:36 PM
The Motley Fool
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What's remarkable is While most commercial office landlords are still hunting for post‑pandemic tenants, there's a sector of the real estate industry that's breeding breakout growth: life sciences
Global bio spending is jected to triple from roughly $1
Moreover, 7 trillion in 2025 to more than $5 trillion by 2034
All that R&D cash needs purpose‑built laboratory space, in light of current trends
That's what makes Alexandria Real Estate Equities (ARE 0
However, 17%) such a standout real estate investment trust (REIT)
What the data shows is owns the largest portfolio of labs and life-science perties in the United States and has a client base of apximately 750 high-quality tenants, including Eli Lilly, Moderna, and Bristol-Myers Squibb, given current economic conditions
With this strong tenant base, Alexandria is poised to generate returns that could replicate stem cells
Image source: Getty Images, in this volatile climate
Tenants engineered for long-term occupancy With occupancy rates of 92% and the majority of their space leased to bio, pharmaceutical, and agricultural nology (Ag), Alexandria is in a league of its own in comparison to other REITs
Given the highly specialized nature of their, laboratory tenants require customized spaces, so they sign longer leases and rarely move
Thanks to this, last quarter, ARE locked in rent increases of 18
Nevertheless, 5% on average when tenants renewed and 7 (which is quite significant), given current economic conditions
Moreover, 5% when new ones signed, a strong sign of pricing power even during a period of lower leasing demand
This analysis suggests that company also has a weighted-average remaining lease term of 7
Nevertheless, At the same time, 6 years, indicating strong tenant commitment and predictable long-term cash flow, boosting the company's overall income stability
However, With a lease portfolio this stable, you could call it genetically engineered for sizable returns
Rebuilding the balance sheet with surgical precision Instead of chasing growth for growth's sake, management has been smartly recycling capital
Moreover, During 2024, it focused on selling noncore assets to free up cash, reduce debt exposure, and reinvest funds into higher-yielding developments, an apach that imves returns while lowering long-term risk (fascinating analysis)
For 2025, it plans another $2 billion of dispositions and minority‑interest sales, roughly one third of which is already closed or under contract, given the current landscape
Moreover, Ceeds are being funneled into its high‑margin mega‑campus developments that have consistently ven fitable for ARE, further strengthening the company's financial position
Only 13 % of outstanding debt matures before 2028, and the average term is now over 12 years, which is longer than any other REIT in the S&P 500 (^GSPC 0
Nevertheless, Incubating tomorrow's rent roll Even with occupancy not at full capacity, Alexandria has roughly 4 million square feet of Class A lab jects under construction in Boston, San Diego, and the Bay Area
Much of that space is pre‑leased, and the rest should command premium rents once bio funding rebounds
Combined with contractually built-in rent escalators that will boost revenue annually even without new leases, that pipeline points to rising cash flow in the near future
Moreover, After paying dividends, the company still expects to retain roughly $475 million of operating cash this year, enough to self‑fund a good chunk of its expansion, amid market uncertainty
Potential side effects to monitor Investors should keep in mind that, while the long-term outlook for the life sciences industry is favorable, demand can be cyclical (fascinating analysis) (which is quite significant)
Conversely, If the bio funding window slams shut due to larger macroeconomic trends, leasing of ARE's new jects could slow
Rising interest rates are another wild card
Alexandria's current interest‑rate swaps shield it for now, but costs will climb when that tection rolls off
Additionally, bio companies operate on long R&D cycles
If a wave of Alexandria's tenants hit clinical trial setbacks or fail to bring ducts to market, they may downsize or go out of, reducing demand for space, in today's market environment
Management already trimmed its 2025 adjusted funds from operations (AFFO) guidance after a small dip in occupancy and higher interest expense
As AFFO is a key metric used to assess a REIT's true operating performance and its ability to support dividends, any downward revision can signal slower growth or pressure on dividend safety if trends persist, given the current landscape
This leads to the conclusion that company also missed its Q1 2025 earnings per (EPS) forecast, reporting a $0
However, Furthermore, 07 loss per versus the $0. 76 expected
While EPS isn't as relevant as FFO for REITs, the miss still raised questions timing of asset sales, operating expenses, and lease activity
Investors should watch closely to make sure management s through on its efficiency and disposition goals in upcoming quarters
A prescription for income and upside Alexandria currently trades around $71 a and yields a 7. 27% dividend, far above the 4% average REIT payout, given current economic conditions
On the other hand, More importantly, last quarter's dividend used just 57% of FFO, in today's financial world
That's considered a conservative payout ratio for a REIT, suggesting that the company isn't stretching itself to pay investors
ARE also appears to be extremely undervalued right now
On the other hand, It trades apximately 7x forward FFO, lower than many other high-quality REITs, especially those with stable tenants and strong growth spects, in today's market environment
S still trade more than 65% below their 2021 peak, meaning ARE offers both attractive yield today and potential upside tomorrow
For income seekers willing to stomach a bit of volatility, Alexandria Real Estate Equities looks a REIT worth implanting into a diversified portfolio.
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