Real estate has been disrupted by Covid-19 and technology. How a fund has capitalized.
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Rick Romano has been investing in the public real estate markets for nearly three decades and oversees more than $ 4 billion in assets. So when he describes the current real estate environment as the most dynamic he has ever seen, that means something.
Covid-19 has caused a massive migration of offices to remote work, but it’s not the only disruptive force at play. Technology is reducing business footprints and increasing demand for last mile warehouses and data centers , and it is revolutionizing the way real estate companies develop, market and manage properties. But Romano, the head of global real estate securities at PGIM, is not complaining.
âIt has become a fantastic market for active stock pickers,â says Romano, 55. âFor each real estate area affected, there is another real estate area that benefits.â
Changing demographics, regulations and preferences, including a move towards greener buildings, only add to the intrigue of Romano and his co-directors, Samit Parikh and Dan Cooney.
Together they manage the $ 325 million
PGIM Select Real Estate
(symbol: SREAX), a portfolio of best ideas of 47 positions, all benefiting from what Romano calls the three Rs: reopening, recalibration and reflation. The fund, launched in 2014, has achieved a return of 12.5% ââper annum over the past five years, better than 97% of its peers.
Although they consider top-down trends, Romano and his team base their investment decisions on the outlook for individual securities within a global universe of approximately 200 real estate investment trusts, or REITs, and operating companies. real estate. The goal is to find undervalued real estate securities, but Romano says it’s not just a function of net asset value, or NAV, the total value of an asset minus outstanding debt.
“There are companies that should trade at premiums over their real estate value because it is not just a collection of their real estate assets,” he says, adding that his team incorporates the research of the PGIM’s private real estate group, which manages nearly $ 200 billion. global private real estate equity and debt. âGood management teams should be able to add value through future acquisitions, developments and good capital allocation decisions. ”
These distinctions proved crucial in early 2020. As the value of real estate securities declined, the PGIM team focused on the hardest hit sectors. They looked for companies whose balance sheets could withstand an extended period of business closures and market stress. This led them to
Well tower
(WELL), one of the largest owners of independent living, assisted living and memory care facilities. At the start of the pandemic, Welltower’s stock price fell by more than half, to $ 45.
âWe knew the assisted living industry would be negatively affected by lower occupancy rates, but once we hit a certain level of reopening there would be a lot of pent-up demand,â said Romano.
His team estimated at the time that, even with challenges, the stock was trading at a 30% discount to its net asset value. It has since recovered to nearly $ 82 a share, but the team says Welltower can continue to add value. The company is using big data to identify new markets, as an aging population and growing home equity, a key source of funding for new residents, bodes well for the industry.
Total return | |||
---|---|---|---|
1 year | 3 years | 5 years | |
SREAX | 30.9 | 18.4% | 12.5% |
FTSE EPRA Nareit Developed Index | 35.3 | 9.5 | 6.7% |
Top 10 holdings | |||
Company / Teleprinter | % actives | ||
Well tower / WELLS | 6.3% | ||
Prologis / PLD | 6.3 | ||
Residential Equity / EQR | 4.9 | ||
Lifetime Storage / LSI | 4.4 | ||
Rexford Industrial Realty / REXR | 3.9 | ||
Simon Real Estate Group / SPG | 3.9 | ||
Camden Property Trust / CPT | 3.7 | ||
American Homes 4 Rent / AMH | 3.5 | ||
Essex Property Trust / ESS | 3.5 | ||
Segro / SEGXF | 3.4 | ||
Total | 43.8% |
Note: Assets as of September 30. Returns until October 25; the three- and five-year returns are annualized.
Sources: Bloomberg; PGIM
In November 2020, the fund acquired another senior housing REIT,
New main investment group, at $ 5 per share. The team’s analysis revealed that the stock was trading at a 45% haircut and the company was likely to be acquired. Indeed, in September,
Ventas
(VTR), a healthcare REIT, bought it for just over $ 9 a share.
The pandemic has also put pressure on hotel REITs, opening the doors for PGIM to grab shares in companies well positioned for reopening. The fund strengthened its position in
MGM Growth Properties
(MGP), whose stock traded as low as $ 12 per share during the March 2020 sell-off. âWe found that it contained enough dry powder to cover several years of negative cash flow. », Explains Romano, noting that
MGM Resorts International
(MGM) is the REIT’s largest tenant. In August, another gaming REIT,
VICI Properties
(VICI), announced its acquisition of MGM Growth Properties for $ 43 per share.
“Leisure travel has come back extremely strong and the demand for leisure and corporate travel is still suppressed,” says Romano, adding that hoteliers have overcome labor shortages by selling fewer rooms at the hotel. higher prices.
In spring 2021, the fund added
Pebblebrook Hotel Trust
(PEB), which specializes in upscale city hotels and resort properties. In Japan, they like
Hotel REIT investment in Japan
(8985.Japon), as well as
Invincible investment
(8963. Japan).
Unlike the headlines that cities are dying, apartment buildings in many urban areas have started to see an influx of new residents. Meanwhile, the shorter lease terms of apartments compared to other commercial real estate acts as a hedge against inflation. That’s because there’s more leeway to raise rents in response to growing demand and to pass on higher construction costs, says Romano, whose fund has multi-family REITs.
Residential Equity
(EQR) and
Camden Real Estate Trust
(CPT) among its largest holdings.
And as people move to new apartments or search for more space to work from home, it’s driving demand in another area: self-storage.
âThe pandemic has created a lot of disruption for people, and every time you see this dislocation, it’s good for storage,â says Romano. The fund bought shares of
Life storage
(LSI) in March 2020 with a 35% discount. As other industries grapple with labor shortages, self-storage can reap the benefits of rising prices even if its costs remain stable. Meanwhile, Life Storage has invested in technology that should translate into more targeted marketing and refined pricing.
E-mail: [email protected]
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