The office sector continues to battle brutal headwinds as many employees work remotely, at least part of the time. That's reducing the need for office space, causing vacancy rates to rise and rental rates to fall.

However, some industries need physical space. That includes the $5 trillion (and growing) life science industry. Life science companies require specialized lab space to support their highly collaborative (and in-person) teams.

That's proving to be a boon for Alexandria Real Estate Equities (ARE -1.29%), the only pure-play publicly traded office real estate investment trust (REIT) focused on laboratory space. The company's in-demand properties remain highly valued, enabling it to cash in on non-core assets to grow its core portfolio and 4.5%-yielding dividend. 

Cashing in to create more value

Alexandria Real Estate Equities recently completed the sale of some non-core lab space assets in the Boston market. It sold five non-core, non-mega campus properties with 428,663 of rentable square feet (RSF) in the Boston area to TPG Real Estate Partners, an affiliate of private equity firm TPG Capital.

The company sold the portfolio for $365 million, or a weighted average capitalization rate of 5.2%. That's a strong value at a time when rising interest rates are pushing up cap rates, especially for office properties. It implies a $187.2 million gain for Alexandria and a value-creation margin of 80%. 

The company acquired two properties in 2001 and completed their development the following year. Meanwhile, it purchased another in 2014 and the final two in 2017, which it immediately redeveloped into high-quality lab space. The company's development and redevelopment investments helped drive the significant value creation of those properties over its holding period. 

Alexandria Real Estate Equities also recently recapitalized a property in San Diego. The company and its former joint venture partner sold a 70% interest in the property to another buyer, valuing it at $160.5 million and an even stronger 4.5% cap rate.

Alexandria will receive $32.5 million for selling a 20.1% interest in the property. It will retain a 30% stake and operating control. The REIT will net a $15.6 million gain and a value-creation margin of 88%.

The lab owner plans to recycle this capital to help fund its development pipeline. The company currently has 6.7 million RSF of properties under development. They will supply the REIT with over $610 million of annual incremental net operating income as it finishes construction and starts collecting rents on already signed leases (it has pre-leased 72% of this space) through the first quarter of 2026. That provides the REIT with lots of visibility into future earnings growth. 

A value-creating machine

Alexandria Real Estate Equities has an exceptional track record of creating value for its shareholders. Since its initial public offering in 1997, the REIT has delivered a 1,144% total shareholder return (which assumes dividend reinvestment). That has surpassed the total shareholder returns of the Nasdaq Composite (998%), MSCI U.S. REIT index (706%), and the S&P 500 (683%) during that period. 

The company's growing dividend has helped drive those strong total returns. While Alexandria reset its dividend during the financial crisis, it rebuilt its payout over the years, pushing it well past its prior peak. The REIT grew its dividend at a 5.4% compound annual rate over the last five years and by a total of 210% from its initial level in 1997.

More dividend growth seems likely. Alexandria has a low dividend payout ratio of 55% of its funds from operations, which enables it to retain substantial cash to help fund new developments. It also has an elite balance sheet, with a credit rating in the top 10% of all publicly traded REITs and no debt maturities until 2025.

That gives it additional financial flexibility to fund developments. It further enhances its funding capacity with its capital recycling strategy. The company's financial flexibility and growing income should enable it to continue increasing its dividend.

That flexibility will also allow the REIT to continue moving forward with new development projects to support the growth of the life science industry. Life science companies are investing $450 billion to $500 billion annually in research and development to create new and better treatments and cures for the various diseases that plague humanity. This investment spending will continue driving the need for specialized lab space. 

Alexandria's strategy is paying big dividends

Alexandria's focus on the massive and growing life science sector continues to pay dividends. The REIT's properties remain highly valued and sought after by other investors, which enables it to cash in on their value to help fund new value-creating investments.

Those investments position it to continue growing its income and dividend in the future. The REIT's attractive and growing dividend makes it an excellent stock for passive-income seekers to buy.