Timeshare resorts developer. Manufacturer of outdoor, non-wood building products for the home. A casino operator serving locals on the outskirts of Las Vegas, not tourists on the famous Strip. According to Jeffrey Colich, portfolio manager at Baron Real Estate Fund, these are not the kind of holdings found in traditional real estate funds that typically focus on real estate investment funds. But they are part of his fund, and he says they help differentiate his product from the competition and help the fund achieve the best-in-class performance over three, five, and 10-year periods.
“We advocate a broader, more balanced and holistic approach to real estate investment than many of our peers,” says Kolich, who has led Baron for almost 12 years. “The product I manage is not a REIT. This is a real estate fund. We study, analyze and invest in REITs, and we are very optimistic about the prospects for REITs this year. But we don’t limit our real estate investments to REITs only. ”
The companies in his portfolio should receive most of their income from commercial or residential real estate. They also need to have quality balance sheets and management teams that are “excellent allocators” of capital. In general, he chooses companies that he believes are the best in their class and will grow faster than their competitors.
One example is Red Rock Resorts Inc. “They own six casinos in what is arguably the best gambling market in the US, not the Las Vegas Strip, but the local Las Vegas market,” says Colich.
The Las Vegas local market includes casinos operating along the Boulder Highway on the outskirts of the city, as well as in Henderson, North Las Vegas and unincorporated areas of Clark County. According to the Nevada Independent, local gaming revenue grew 16.6% in the first half of this year, while Strip casino gaming revenue declined 11.3%.
“We are thinking [Red Rock Resorts] will grow faster than most REITs, owns higher quality real estate than many of the REITs we are considering, and has a higher organic and external growth rate, ”says Kolich. “And we see a path that we think we can double our investments over the next five years.”
Another company he is highlighting is Marriott Vacations Worldwide Corp., a timeshare resort real estate developer. This should not be confused with hotel operator Marriott International Inc., a company that Baron Real Estate Fund does not own because of its uncertain prospects for a business recovery.
“Time will tell about hotels,” says Kolich. “Two-thirds of most hotel revenues come from business travelers.”
Instead, he is more optimistic about recovering on vacation travel. “We are more focused on the real estate timesharing business, where 100% of the business is with tourists,” he says.
And then there is Azek Company Inc., a manufacturer of non-wood exterior construction products such as flooring, railings, trimmings, and other products. Kolich says that 95% of Azek’s cash flow comes from the US residential housing market, and he believes the company has a compelling multi-year strategic growth plan that should lead to significant gains in stock prices over the next few years.
In the second half of 2020, Kolić structured his fund to take advantage of three attractive investment themes. And he is sticking to that plan for the second half of this year.
The first topic focuses on the beneficiaries of recovery from COVID-19. He expects the release of deferred consumer and commercial demand – coupled with a rebound in cash flows – will increase the number of the hardest-hit real estate segments as more people receive vaccines and the economy resumes normal operations.