Real estate has been turned upside down by Covid-19 and technology. How a fund capitalizes.

Rick Romano has been investing in public real estate markets for nearly three decades, managing more than $ 4 billion in assets. So when he describes the current real estate environment as the most dynamic he has ever seen, that says something.

Covid-19 has sparked a mass migration from offices to remote working, but that’s not the only disruptive force in the game. The technology is reducing the retail footprint and driving demand for last-mile warehouses and data centers – and it’s revolutionizing the way real estate companies develop, market, and manage properties. But Romano, the head of global real estate stocks at PGIM, isn’t complaining.

“It has developed into a fantastic market for active stock pickers,” says Romano, 55. “For each real estate area concerned, there is a different real estate area that benefits.”

Changing demographics, regulations, and preferences – including a shift towards greener buildings – only make Romano and his co-managers Samit Parikh and Dan Cooney more interesting.

Together they manage the $ 325 million


PGIM Select real estate

Fund (ticker: SREAX), a best-idea portfolio of 47 holdings, all of which benefit from the three Rs Romano calls – reopening, recalibration and reflation. The fund, launched in 2014, has achieved an annual return of 12.5% ​​over the past five years, better than 97% of its peers.

While considering top-down trends, Romano and his team base their investment decisions on the prospects of individual securities within a global universe of approximately 200 real estate investment trusts or REITs and real estate companies. The goal is to find undervalued property stocks, but Romano says this isn’t simply a function of net asset value, or NAV – the total value of an asset minus outstanding debt.

“There are companies that should trade at a premium on their property because they are not simply a collection of their real estate assets,” he says, adding that his team includes research from PGIM’s private real estate group, which is nearly $ 200 billion managed by private real estate equity and debts worldwide. “Good management teams should be able to add value through future acquisitions, developments and the right decisions about capital allocation.”

These distinctions proved crucial in early 2020. As real estate stocks fell in value, the PGIM team focused on the hardest hit sectors. They looked for companies whose balance sheets could withstand extended periods of business closings and market pressures. That’s what made her do it


Fountain tower

(WELL), one of the largest owners of facilities for independent living, assisted living and memory maintenance. At the beginning of the pandemic, Welltower’s share price slumped more than half to $ 45.

“We knew that the assisted living sector would be negatively impacted by lower occupancy rates, but once we get a certain level of reopening there would be a lot of catching up to do,” says Romano.

His team then estimated that despite challenges, the stock was trading at a discount of 30% to its NAV. It has since bounced back to nearly $ 82 per share, but the team says Welltower can continue to create value. The company is using big data to identify new markets as an aging population and rising home equity – a major source of funding for new residents – bode well for the sector.

Total return
1 year 3 years 5 years
SREAX 30.9 18.4% 12.5%
FTSE EPRA Nareit index developed 35.3 9.5 6.7%
Top 10 holdings
Company / ticker % of assets
Well tower / WELL 6.3%
Prologis / PLD 6.3
Equity housing / EQF 4.9
Life Storage / LSI 4.4
Rexford Industrial Realty / REXR 3.9
Simon Property 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: As of September 30th. Return by October 25th; 3 and 5 year returns are annualized.

Sources: Bloomberg; PGIM

In November 2020, the fund bought another senior housing REIT,


New senior investment group,
at $ 5 a share. The team’s analysis found the stock was trading at a 45% discount and that the company would likely be acquired. Indeed, in September,


Ventas

(VTR), a healthcare facility REIT, bought it for just over $ 9 a share.

The pandemic has also put pressure on hospitality REITs and opened doors for PGIM to buy shares in companies that are well positioned to reopen. The fund increased its position in


MGM growth properties

(MGP), which stock traded at just $ 12 per share during the March 2020 sell-off. “We found it had enough dry powder to cover several years of negative cash flow,” says Romano, noting that


MGM Resorts International

(MGM) is the REIT’s largest tenant. Another gaming REIT was launched in August,


VICI properties

(VICI) announced the acquisition of MGM Growth Properties for $ 43 per share.

“Leisure travel has made an extremely strong comeback, and there is still some catching up to do in leisure and business travel,” says Romano, adding that hotel operators have overcome the labor shortage by selling fewer rooms at higher prices.

In the spring of 2021, the fund added


Pebblebrook Hotel Trust

(PEB), which specializes in upscale city hotels and resort properties. In Japan they like


Japan hotel REIT investment

(8985. Japan), as well as


Invincible investment

(8963. Japan).

Contrary to the headlines that cities are dying, apartment buildings in many urban areas are seeing an influx of new residents. At the same time, the shorter rental period of apartments compared to other commercial properties serves as protection against inflation. Because there is more leeway to increase rents in line with rising demand and to pass on higher construction costs, says Romano, whose fund counts multi-family REITs


Equity living

(EQF) and


Camden Property Trust

(CPT) on its larger holdings.

And when people move into new apartments or look for more space to work from home, this increases demand in another area – self-storage.

“The pandemic has caused a lot of disruption for people, and every time you see this shift it’s good for storage,” says Romano. The fund bought shares of


Life preservation

(LSI) in March 2020 with a 35% discount. While other industries are struggling with labor shortages, self-storage can benefit from rising prices even if costs remain constant. Meanwhile, Life Storage has invested in technology that should lead to more targeted marketing and finely tuned prices.

E-mail: [email protected]

About Paige McCarthy

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