Video - June 23REIT Insights with Portfolio Manager Eric Rothman


Christian Kansler:

Hi, I'm Christian Kansler, Director of Advisor Sales for the Cromwell Funds. We have today Eric Rothman, Portfolio Manager of the Cromwell CenterSquare Real Estate Fund. Eric has over 20 years of REIT and real estate investment experience and has been managing the Fund since 2006.

Now, the Cromwell CenterSquare Real Estate Fund invests in high-quality public equity REITs, diversified across the real estate spectrum and primarily in Class A properties.

Eric, there's a misconception, though, that the real estate market consists mainly of office buildings. Can you talk about what we're calling the “new REITs on the block”?

Eric Rothman:

Yeah, absolutely. Commercial real estate is a whole lot more than just office and hotels.

And in fact, of the REIT market, traditional offices only about three percentage points of the total Index. So significantly less than what most people expect. Regional malls and hotels are each another 3%. So those three categories—malls, office and hotels—surprised as many people to learn, are less than 10% of the total overall REIT Index.

And that is because there's so much more out there in the REIT space. Particularly what's happened in the last 10-15 years, there's been a real resurgence of nontraditional real estate types that are powering the new economy, specifically logistics and e-commerce, fulfillment warehouses, data centers—the physical home of the Internet—single family for rent, which wasn't even a category pre-GFC (Great Financial Crisis), self-storage, health care assets. It's so much beyond just those kind of traditional 4 food groups of the real estate market.

And, in fact, today there's kind of non-traditional new economy real estate is the majority of the real estate investment market for REITs.


CenterSquare invests in public and private real estate assets across its business, which, of course, provides you deep insight into the pricing disparity between public and private real estate. Would you please share your thoughts on some of the major differences between investing in private funds versus REITs?


One of the key differences and advantages of the REIT market is that the stocks are priced every day. There's immediate liquidity. You have a daily net asset value. And we know from minute to minute, quite literally what the value of your position is.

Private real estate markets are priced a little bit differently. They're using appraisals that have occurred over the last 12 to 18 months, and they may not necessarily reflect the real current values of what you can sell those assets for. They're pretty good approximation. But in the best of times, they're a lagging indicator because they are based on this information that can be 12 to sometimes 18 months old rather than what's actually occurring in the market today.

And so, we're at this point today where the difference between the private market values, we’re still looking backwards, and the REIT market values, where we're priced every day.

There is a valid case for investing in both public and private real estate, but from time to time, one can be much more attractive than the other. And I would say that today our view is that the public real estate markets are representing very deep value relative to where we believe private market valuations are and, more importantly, are going.

So already presupposing a higher interest rate environment that we sit in today, as well as the potential for recession and potentially a little bit lower income in the event of a recession in the forward market. REITs are at about a 15% discount to where private market valuations we think will be in a year.

That is a very substantial discount and one that frankly, we don't observe all that often. If we were to go back over the last 25, 26 years of the history of the modern REIT era, the discount to net asset value in excess of 15% has only been reached a handful of times.

We did a quick analysis of this very recently and what we found is in the ensuing one year after the REIT market has hit this 15% discount and again, this is on a forward basis, the REIT market tends to outperform, in the ensuing one year of about 30 percentage points and over three years of about 62 percentage points.

Today our view is that the market broadly is a very good value relative to the private market as well as relative to traditional stocks.


Thanks, Eric, for providing these insights. It's helpful information from an expert in real estate. For more information on the Cromwell CenterSquare Real Estate Fund, please visit our website. Thanks for watching.

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