Rick Romano, co-manager, PGIM Select Real Estate fund.
Photograph by Benedict Evans
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.”
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.
PGIM Select Real Estate
| 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.
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