Founded in 1981, Boston-based AEW Capital Management is one of the leading real estate funds on the Street today. For the last 15 years, the fund has been headed by Jeffrey Furber, who joined AEW in 1997 after serving as the Managing Director of Winthrop Financial Associates. At the end of 2015, the fund managed approximately $34 billion of investors’ money and its U.S. equity portfolio was worth $4.77 billion. Although AEW Capital Management’s US equity portfolio represents only a fraction of its total assets under management, its stock picks in the real estate sector have been performing really well this year. Our analysis of the fund’s 13F holdings in companies worth at least $1 billion showed that the 43 long positions held by AEW Capital Management delivered a weighted average return of 6.2% during the first quarter, compared to the near flat returns generated by the broader market during the same period. Since the fund’s stock selection is working, in this article, we are going to take a look at five of its major holdings that have performed really well this year.
We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).
Let’s start with Welltower Inc (NYSE:HCN), in which AEW Capital Management increased its stake by 48% to 3.77 million shares during the fourth quarter. With ownership of 2.08 million shares of Welltower Inc (NYSE:HCN), Jim Simons‘ Renaissance Technologies trailed AEW Capital Management as the largest shareholder of the company among funds tracked by us at the end of December. Shares of the Ohio-based real estate investment trust (REIT) suffered a 15% decline in mid-February after HCP, Inc. (NYSE:HCP), another REIT, issued soft guidance for fiscal 2016. However, they recovered quickly after the company reported its own quarterly numbers and ended the first quarter with gains of 3.3%. The REIT currently pays a quarterly dividend of $0.86 per share, which translates into an attractive annual dividend yield of nearly 5%. According to analysts who track REITs, Welltower Inc (NYSE:HCN) is a great long-term holding, but its stock is currently fairly valued and has an immediate risk to the downside and hence investors should wait for a correction before buying the stock.
Amid an over 10% rise of Prologis Inc (NYSE:PLD)‘s stock during the fourth quarter, AEW Capital Management, raised its position in the company by 9% to 6.38 million shares. During the same period, billionaire David E. Shaw‘s firm, D. E. Shaw & Co., reduced its holding in the company by 71% to 256,001 shares. Shares of Prologis Inc (NYSE:PLD) went through a V-shaped move during the first quarter, ending it up by almost 4%. Although the stock currently trades at nearly 17 times its 2016 projected funds from operations (FFO) multiple, analysts believe that it is undervalued and has a 20% upside potential through multiple expansion alone. The company has been consistently hiking its dividend for the past 13 years and boasts of a five year dividend growth rate of 3.8%. It currently pays a quarterly dividend of $0.42, which based on its current stock price translates into an annual dividend yield of 3.82%. On March 16, analysts at Credit Suisse reiterated their ‘Outperform’ rating and $48 price target on the stock.
AEW Capital Management has held a stake in AvalonBay Communities Inc (NYSE:AVB) for more than 15 years. During the October-December period, the fund raised its holding in the REIT by 5% to 1.58 million shares. Another fund that increased its stake in the REIT during the same period was Phill Gross and Robert Atchinson‘s Adage Capital Management, which brought its holding up by 3% to 207,282 shares. Though AvalonBay Communities Inc (NYSE:AVB) ended the first quarter up by 4%, it has given up those gains this month and currently trades flat for the year. On March 1, the REIT reiterated that it expects rental revenue for Established Communities for the first quarter of 2016 to increase between 5.4% and 5.6% over the prior year period. AvalonBay Communities Inc (NYSE:AVB) is expected to report its first quarter numbers by the end of this month and analysts project it to report EPS of $2.03 on revenue of $484.29 million. For the same quarter of the previous financial year the REIT had reported EPS of $1.88 on revenue of $439.76 million.
Moving on to AEW Capital Management’s second-largest equity holding at the beginning of 2016, Public Storage (NYSE:PSA). The fund increased its holding in the REIT by 4% to 1.38 million shares during the fourth quarter worth $342.44 million, as of December 31. Among the stocks discussed in this article, Public Storage (NYSE:PSA) was the best performer during the first quarter, ending the quarter with gains of over 12%. Moreover, it has also been one of the best performing REIT in the past one year, appreciating 40.5% in value during that time. While those gains are great for investors who have held the stock for a long time, they might have reduced the appeal of the stock for potential investors because they have brought down Public Storage (NYSE:PSA)’s annual dividend yield to 2.5% currently. One of the main reasons that Public Storage has managed to outperform most of its peers for past several quarters is because the management of the REIT has a strong aversion to debt. According to its last quarterly results, its debt to equity stood at only 3.7%. Most analysts currently have a favorable outlook on the stock due to the low debt on the REIT’s balance sheet and the expected growth in the self-storage industry.
Real estate behemoth Simon Property Group Inc (NYSE:SPG) has been AEW Capital Management’s largest equity holding for the past many quarters. Like all the other stocks mentioned in this article, the fund also increased its stake in Simon Property Group Inc (NYSE:SPG) during the fourth quarter, by 4% to nearly 3.22 million shares. Notable investors that reduced their stakes in the company during that period included billionaire Israel Englander‘s Millenium Management, which brought its holding down by 32% to 420,719 shares. After continuously trading between the $180-$200 levels for many months, shares of Simon Property Group Inc (NYSE:SPG) managed to break above the $200 mark for the first time convincingly during the first quarter of this year and ended the quarter with gains of 7.77%. Simon Property Group is also expected to report its first quarter numbers by the end of this month and the consensus among analysts includes EPS of $2.54 on revenue of $1.29 billion for the quarter versus EPS of $2.28 on revenue of $1.22 billion the company reported for the same quarter last year. The stock currently sports an average rating of ‘Buy’ and an average price target of $225.