Rick Romano has been investing in 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’s ever seen, that’s saying something.
Covid-19 spurred a mass migration out of offices to remote work, but that isn’t the only disruptive force at play. Technology is shrinking retail footprints and driving up demand for last-mile warehouses and data centers—and it is revolutionizing how real estate companies develop, market, and manage property. But Romano, the head of global real estate securities at PGIM, isn’t complaining.
“It’s made a fantastic market for active stockpickers,” says Romano, 55. “For each area of real estate that’s being impacted, there’s another area of real estate that’s benefiting.”
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Changing demographics, regulations, and preferences—including a shift toward greener buildings—only add to the intrigue for Romano and his co-managers, Samit Parikh and Dan Cooney.
Together they manage the $325 million PGIM Select Real Estate fund (ticker: SREAX), a best-ideas portfolio of 47 holdings, all benefiting from what Romano calls the three Rs—reopening, recalibration, and reflation. The fund, launched in 2014, has returned 12.5% a year over the past five years, better than 97% of its peers.
Though they consider top-down trends, Romano and his team base their investment decisions on the prospects of individual securities within a global universe of about 200 real estate investment trusts, or REITs, and real estate operating companies. The goal is to find undervalued real estate securities, but Romano says that 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 be trading at premiums to their real estate value because these are not simply a collection of their real estate assets,” he says, adding that his team incorporates research from PGIM’s private real estate group, which manages nearly $200 billion of private real estate equity and debt globally. “Good management teams should be able to add value through future acquisitions, development and the right capital-allocation decisions.”
These distinctions proved critical in early 2020. As real estate securities were tanking in value, the PGIM team zeroed in on the hardest-hit sectors. They looked for companies whose balance sheets could withstand an extended period of business closures and market duress. That led them to Welltower (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 plummeted by more than half, to $45.
“We knew that the assisted-living sector would be negatively impacted by lower occupancy rates, but once we got to some level of reopening there would be a lot of pent-up demand,” says Romano.
His team estimated at the time that, even with challenges, the stock was trading at a 30% discount to its NAV. It has since recovered to nearly $82 a share, but the team says Welltower can continue to add value. The company uses big data to identify new markets, while an aging population and rising home equity—a key source of funding for new residents—bode well for the sector.Total Return 1-Yr 3-Year 5-Year SREAX 30.9 18.4% 12.5% FTSE EPRA Nareit Developed Index 35.3 9.5 6.7% Top 10 Holdings Company / Ticker % of Assets Welltower / WELL 6.3% Prologis / PLD 6.3 Equity Residential / EQR 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: Holdings as of September 30. Returns through October 25; three- and five-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 firm was likely to be acquired. Indeed, in September, Ventas (VTR), a healthcare facilities REIT, bought it for just over $9 a share.
The pandemic has also put pressure on hospitality REITs, opening doors for PGIM to scoop up shares in companies well-positioned for reopening. The fund added to its position in MGM Growth Properties (MGP), whose stock traded as low as $12 a share during the March 2020 selloff. “We found that it had enough dry powder to cover multiple years of negative cash flow,” says Romano, noting that MGM Resorts International (MGM) is the REIT’s biggest tenant. In August, another gaming REIT, VICI Properties (VICI), announced its acquisition of MGM Growth Properties for $43 a share.
“Leisure travel has come back extremely strong, and there’s still pent-up demand for leisure and corporate travel,” says Romano, adding that hotel operators have navigated labor shortages by selling fewer rooms at higher prices.
In the spring of 2021, the fund added Pebblebrook Hotel Trust (PEB), which specializes in upscale urban hotels and resort properties. In Japan, they like Japan Hotel REIT Investment (8985.Japan), as well as Invincible Investment (8963.Japan).
Contrary to headlines that cities are dying, apartment buildings in many urban areas have started seeing an influx of new residents. Meanwhile, the shorter lease durations of apartments versus other commercial real estate acts as an inflation hedge. That’s because there is more leeway to raise rents in response to rising demand and to pass along higher construction costs, says Romano, whose fund counts multifamily REITs Equity Residential (EQR) and Camden Property Trust (CPT) among its larger holdings.
And as people move to new apartments or seek more space to work from home, that strengthens demand in another area—self-storage.
“The pandemic created a lot of disruption for people, and anytime you see that dislocation, it’s good for storage,” says Romano. The fund bought shares of Life Storage (LSI) in March 2020 at a 35% discount. Whereas other industries are contending with labor shortages, self-storage can reap the benefits of rising prices even as its costs stay steady. Meanwhile, Life Storage has invested in technology that should translate to more targeted marketing and fine-tuned pricing.
As the Brazilian government slashes the Ministry of Science, Technology and Innovation (MCTI) budget, the country's economy minister Paulo Guedes has criticized the department's incumbent and his management of taxpayer money.
During a meeting with the Science and Technology Commission at the Lower House of the Congress aimed at reversing recent MCTI budget cuts, Guedes slammed minister Marcos Pontes and his prioritization in terms of budget use. According to a report on the meeting by Brazilian newspaper Folha de São Paulo, the economy minister said he has always supported investment in science, but public funds ended up going towards rockets.
At that point, Guedes used the word "dumb" to describe the MCTI minister, which up until then was described as "the astronaut". In the same context, he complained that incompetence is rife in the administration of public resources and that execution is lacking across many government departments.
The controversy emerges amid pressure from science and technology organizations seeking to revert a 600 million reais ($108 million) cut from the MCTI's budget. The spending reduction, announced earlier this month, will see the science and technology settlement distributed across other departments such as housing and education.
The move represents a 99% reduction in the MCTI budget for science and technology projects. With the decision, the department was left with 7.2 million reais ($1.3 million) to spend on those initiatives in 2022.
Brazil has a history of reducing budgets for science and technology, and the MCTI has seen its resources dwindle consistently in the last decade. However, the difference in funding over recent years is stark: in 2015, the country's spending in science and tech was 1.4 billion reais ($250 million). Next year, the department will have a budget of 89.8 million reais ($16.2 million).
According to local reports, one of the motives behind the decision is the low levels of commitment of resources from the National Science and Technology Development Fund: by the end of September, only 40% of the resources of the fund -- around 370 million reais ($66.8 million) -- had been used.
Caught by surprise with the announcement of the cuts, Pontes criticized the move publicly, describing the cuts as "mistaken and illogical".
The new cuts impacted research projects and grants already provided by the National Council for Scientific and Technological Development (CNPq). In an appeal to the president of the Senate, Rodrigo Pacheco, a group of science and technology entities called on politicians to reverse the decision.
The group described the move as "a hard blow for science and innovation, which harms national development" and that the "survival of science and innovation in Brazil is at stake". Further protests against the department's budget cuts are taking place today (27).
The latest budgetary reductions follow a resource cut for the MCTI, announced in May. The reductions announced at the time saw the ministry undergoing the most severe cut in the country's public spending for 2021.
Shares of Seagate Technology Holdings PLC STX, +1.90% sank 0.05% to $88.03 Wednesday, on what proved to be an all-around dismal trading session for the stock market, with the S&P 500 Index SPX, +0.78% falling 0.51% to 4,551.68 and Dow Jones Industrial Average DJIA, +0.41% falling 0.74% to 35,490.69. This was the stock's second consecutive day of losses. Seagate Technology Holdings PLC closed $18.19 below its 52-week high ($106.22), which the company reached on May 17th.
The stock demonstrated a mixed performance when compared to some of its competitors Wednesday, as Microsoft Corp. MSFT, +0.12% rose 4.21% to $323.17, HP Inc. HPQ, +1.28% fell 1.46% to $29.70, and Western Digital Corp. WDC, +2.24% fell 1.49% to $55.48. Trading volume (2.2 M) remained 113,080 below its 50-day average volume of 2.3 M.