Healthcare real estate investment trusts (REITs) have struggled this year. Overall, the group produced a negative 14% total return through the end of November. That's mainly due to the impact the COVID-19 outbreak has had on certain healthcare properties like senior living communities and some medical office buildings.
However, not all healthcare properties have been under pressure amid the pandemic. One property type that's becoming increasingly valuable is life science buildings. With funding for research on vaccines, therapeutics, and diagnostics likely to increase in the coming years, these properties will become more crucial. That bodes well for Alexandria Real Estate Equities (NYSE: ARE) and Ventas (NYSE: VTR), which are focusing on these properties.
Focused on these in-demand offices
Alexandria is technically an office REIT. However, 72% of its tenant mix are pharmaceutical, biotechnology, and life science product, service, and device companies, while another 9% are institutional tenants like universities, nonprofits, or the U.S. Government. Thus, it's highly focused on the healthcare sector.
That concentration has served it well this year. Many of the company's tenants have been crucial in combatting the pandemic by enhancing testing quality and capacity, advancing new and repurposed therapies, and developing preventative vaccines. With so much money getting pumped into those companies to combat the pandemic, Alexandria has collected nearly all the rent it billed during the third quarter and October. As a result, it ended the period with its lowest tenant receivables balance since 2013.
The company has also been active in expanding its portfolio as it's on track to acquire between $2.4 billion and $2.8 billion of properties this year. On top of that, it has several development projects underway. It should have no shortage of future acquisition and development opportunities given the anticipated need for new life sciences space in the coming year. Those future portfolio additions should enable Alexandria to continue growing its cash flow and dividend, which it has already increased by 6% in 2020.
Increasing its exposure to these properties
Ventas is a diversified healthcare REIT. The company gets 47% of its annualized NOI from seniors housing, 22% from medical office and outpatient buildings, 8% from university-based research and innovation (R&I) real estate, 7% from health systems, and 9% from post-acute- care facilities.
However, one of the REIT's top priorities is to grow its R&I portfolio. That's because the life science real estate market is on track to expand from $140 billion to $170 billion over the next five years. The company currently has 39 properties with 7 million square feet of space and has another four facilities with 1.4 million square feet under construction. In addition to that, it recently used one of its real estate funds to acquire $1 billion of trophy life sciences properties in San Francisco. That portfolio should continue to expand as the REIT captures additional opportunities in the sector. Add that to the eventual rebound of its seniors' housing assets, and it has lots of upside potential, making it an attractive healthcare-focused REIT to buy these days.
Healthy growth ahead for this property type
The life sciences sector should get a boost from the pandemic as governments and companies will likely pump billions of dollars into additional R&D in the coming years to stave off the next one. As a result, the sector will need a lot more space. That's good news for companies focused on life science properties, like Alexandria Real Estate Equities and Ventas, as it suggests they should have plenty of opportunities to grow shareholder value in the coming years.