Because the market reassesses the worth of office properties, investors have been steering clear of many industrial real estate stocks. But there are some healthier spots that could possibly be price a re-examination. Greg Kuhl, a portfolio manager at Janus Henderson, said he likes the outlook for Alexandria Real Estate Equities , a pure-play owner of life sciences centers. Although its stock has been under pressure, Kuhl expects the accelerating pace of health care innovation to stoke demand for laboratory space in years to come back. In accordance with Kuhl, the U.S. Food and Drug Administration has been working to hurry up the drug approval process, and this has helped drive research and development investment. “We’re told that 2023 is on the right track to be equal to, or possibly one of the best 12 months ever, when it comes to recent medicines being approved,” Kuhl said, “in order that’s a positive from the innovation perspective and the speed of innovation.” An aging population also may have more medical needs, which is able to should be served, he said. The market dynamics Alexandria Real Estate Equities enjoys very high occupancy levels of about 95%, and Kuhl anticipates most of the leases in its portfolio are priced about 20% below market rates. That can provide the corporate with upside potential as leases mature and renew. The dynamic also provides investors with some cushion should market rental rates come down a bit, Kuhl said, adding there have not been any signs of that being the case yet. ARE YTD mountain Alexandria recently hit a 52-week low of $110.64. Still, there may be a risk rents could possibly be under pressure as recent supply comes online within the industry. Strong demand during the last five to seven years inspired developers to construct recent centers, he said. Some are being built from the bottom up, but others were traditional office spaces being converted into life sciences centers. Kuhl said the conversions normally aren’t as desirable as spaces first developed as labs. “There are some characteristics which might be hard to copy for an actual R & D life science user that you could’t really do in a conversion,” he said. Research facilities typically require a number of specialized equipment, including ventilation systems and electric, and floors often are built to hold heavier loads, he explained. “But once they’re up and running, the continued maintenance expense and the expense of re-tenanting, we predict, is lower than traditional office,” he said, which makes for a rather more profitable business. Typically, when office tenants move out of a constructing, landlords are asked to reconfigure the space to suit the needs of the brand new tenant. “That happens each time an office turns over,” he said. But lab space is a bit different, he continued, saying it’s “rather more fungible” and the specialized needs are inclined to be handled by the tenants. While Alexandria Real Estate Equities has been an energetic developer, a lot of its projects have already got tenants in place, based on Kuhl. Biotech funding cliff In recent research notes, Mizuho analyst Vikram Malhotra said the stocks of each Alexandria Real Estate Equities and its competitor Healthpeak have been hurt by concerns biotech corporations, especially people who went public in 2020 and 2021, might be hitting a funding cliff in the approaching months, which is able to result in corporations either going bankrupt or needing to be acquired. Either final result could knock the demand for lab space and prove difficult for landlords. In April, Mizuho did an evaluation of each corporations’ tenant rosters to see what type of money runway the businesses have. Following that work, Malhotra set buy rankings on each stocks, saying any credit risks within the space are “manageable.” PEAK YTD mountain Healthpeak share are trading near the lower end of its 52-week range. In accordance with his research, about 84% of Alexandria Real Estate Equities’ square footage is leased by public health care corporations which have greater than eight quarters of funding in hand, while 3% is leased to people who have lower than 4 quarters of funds. For Healthpeak, 72% of its square footage is leased to tenants which might be public health care corporations with greater than eight quarters of funding and only 6% of its space is leased to ones with lower than 4 quarters of funds, he said. Malhotra said he sees lab REITs as a “lower-beta solution to play the volatile Life Sciences environment.” His $145 price goal on Alexandria Real Estate Equities implies 25% upside from Monday’s close. Nonetheless, the common analyst price goal is even higher, $164, based on FactSet. Alexandria Real Estate Equities’ shares are down 19% thus far this 12 months, underperforming each the iShares Biotechnology ETF (IBB) and the S & P 500 , which have lost 1.7% and gained about 12% 12 months thus far, respectively. As for Healthpeak, Malhotra has a $25 price goal, which is 22% above where the stock closed Monday. Healthpeak’s shares are down about 16% 12 months thus far. Other stocks with exposure to the sector include Ventas , Boston Properties and Kilroy Realty . But each of those corporations are more broadly diversified and have exposure to other forms of industrial real estate. Kilroy, for instance, had been focused on properties within the tech hubs, but it surely now has a growing life sciences portfolio. As for Kuhl, within the short term, he said it can be difficult for Alexandria Real Estate Equities to seek out a catalyst to maneuver its stock. Nonetheless, over time, he expects the story to be proven out. “We do think on a longer-term basis, that is deeply discounted, but it will take time to prove to the market,” he said.
We’re downgrading it, considering next move
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