As the market reassesses the value of office properties, investors have been shying away from many commercial real estate stocks. But there are some healthier places that might be worth a second look. Greg Kuhl, portfolio manager at Janus Henderson, said he likes the prospect of Alexandria Real Estate Equities, an exclusive owner of life sciences centers. Although his stock has come under pressure, Kuhl expects the accelerating pace of innovation in health care to stoke demand for lab space in the coming years. According to Kuhl, the Food and Drug Administration has been working to speed up the drug approval process, and this has helped drive investment in research and development. “They tell us that 2023 is on track to be the same, or perhaps the best year ever, in terms of new drug approvals,” Kuhl said, “so that’s positive from an innovation and speed of innovation perspective.” innovation”. An aging population will also have more medical needs, which will need to be addressed, he said. Market Dynamics Alexandria enjoys very high occupancy levels of around 95%, and Kuhl anticipates that many of the leases in his portfolio are priced approximately 20% below market rates. That will provide the company with growth potential as leases expire and are renewed. The dynamics also give investors some protection should market rental rates dip a bit, Kuhl said, adding that there have been no signs yet of that being the case. ARE YTD Mountain Alexandria recently hit a 52-week low of $110.64. Still, there is a risk that rents will come under pressure as new supply is generated in the industry. Strong demand over the past five to seven years has inspired developers to build new centers, he said. Some are being built from scratch, but others were traditional office spaces being converted into life science centers. Kuhl said the conversions are generally not as desirable as the spaces that were first developed as laboratories. “There are some features that are difficult for a real R&D life sciences user to replicate that you can’t really do in a conversion,” he said. Research facilities typically require a lot of specialized equipment, including ventilation and electrical systems, and floors are often built to carry heavier loads, he explained. “But once they’re up and running, we think the ongoing maintenance expense and re-lease expense are lower than a traditional office,” he said, making the business much more profitable. Typically, when office tenants move out of a building, owners are asked to reconfigure the space to meet the needs of the new tenant. “That happens every time an office is turned upside down,” he said. But the lab space is a bit different, he continued, saying it’s “much more expendable” and specialized needs tend to be handled by tenants. While Alexandria has been an active developer, many of its projects already have tenants, according to Kuhl. Biotech Funding Gap In recent research notes, Mizuho analyst Vikram Malhotra said shares of both Alexandria and competitor Healthpeak have been hit by concerns that biotech companies, especially that were made public in 2020 and 2021, hit a funding cliff in the coming years. months, leading to companies going bankrupt or having to be acquired. Either outcome could affect the demand for lab space and be difficult for owners. In April, Mizuho did an analysis of both companies’ tenant lists to see what kind of cash trail the companies have. After that job, Malhotra set buy ratings on both stocks, saying any credit risk in the space is “manageable.” PEAK YTD mountain Healthpeak shares are trading near the lower end of their 52-week range. According to his research, about 84% of Alexandria’s square footage is leased by public health care companies that have more than eight-quarters of the available funding, while 3% is leased to those with less than four-fourths parts of the funds. For Healthpeak, 72% of its square footage is leased to public health care company tenants with more than eight quarters funding and only 6% of its space is leased to companies with less than four quarters funding, said. Malhotra said he sees lab REITs as a “lower beta way to play in the volatile life sciences environment.” His $145 price target on Alexandria implies a 25% upside from Monday’s close. However, analysts’ average price target is even higher, at $164, according to FactSet. Alexandria shares are down 19% year-to-date, underperforming the iShares Biotechnology (IBB) ETF and the S&P 500, which have lost 1.7% and gained about 12% in so far this year, respectively. As for Healthpeak, Malhotra has a $25 price target, which is 22% above where the shares closed on Monday. Healthpeak shares are down 16% year to date. Other stocks with exposure to the sector include Ventas, Boston Properties and Kilroy Realty. But each of these companies is more broadly diversified and has exposure to other types of commercial real estate. Kilroy, for example, had focused on properties in tech hubs, but now has a growing portfolio in life sciences. As for Kuhl, in the short term, he said it will be difficult for Alexandria to find a catalyst to move its shares. However, in time, he hopes the story will prove itself. “We think that in the longer term, this is heavily discounted, but it will take time to test it in the market,” he said.