The MSCI US REIT Index (RMS) had a total return of +1.4% in April, while the S&P 500 had a total return of +0.4%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +0.3% and +0.5%, net of fees and gross of fees, respectively. Year to date, the Chilton REIT Composite has produced a total return of -7.8% net of fees and -7.4% gross of fees, which compare to -6.8% for the RMS.

Year to date, the largest contributors to relative performance include stock selection within the data center/tech and diversified sectors, as well as an underweight allocation to healthcare REITs. An overweight allocation to shopping centers, an underweight allocation to lodging REITs, and stock selection within the office sector detracted from relative performance.

YTD Contributors Summary

• Our allocation to tower REITs with the data center/tech sector contributed to the Composite’s relative performance. Tower REITs look to be the beneficiaries of carriers deploying recently acquired spectrum, the rapid increase in mobile data usage, and the expansion of small cell sites which are helping carriers meet insatiable demand in urban areas. Data center REITs will continue to benefit from increased corporate data outsourcing, the growth of the ‘cloud’, and the need for speedy delivery of data.
• Owning JBG Smith (NYSE: JBGS) contributed to our relative performance within the diversified sector. JBGS owns a diversified portfolio of high-quality office, retail, and apartment properties in Washington, D.C. JBGS is the largest landlord in the Crystal City submarket, owning 8.6M square feet. Crystal City is adjacent to the Pentagon and Regan National Airport and is only a few miles from central D.C. Crystal City is a large redevelopment opportunity for the company and has made Amazon’s (NASDAQ: AMZN) list of 20 locations to compete for its second headquarters.
• An underweight allocation to the healthcare sector (0% allocation) contributed to the Composite’s relative performance. Healthcare REITs continue to be the most correlated to interest rates due to its similarity to fixed income. We favor sectors with more attractive growth profiles.

YTD Detractors Summary

• An overweight allocation to the shopping center sector detracted from the composite’s relative performance. Shopping center REITs are currently trading at significant discounts to Net Asset Value (NAV) as headlines regarding competition from e-commerce (Amazon) and store closures (Toys R Us) continue to weigh on the stock prices. In spite of the headlines, most of the shopping center REITs have continued to report positive leasing spreads. The companies have also taken advantage of the current price dislocation by selling assets in the private market at a premium to implied public market prices. Within the sector, we favor REITs with exposure to high-quality grocery-anchored centers that should be less sensitive to e-commerce competition due to their focus on necessities and everyday services.
• An underweight allocation to the lodging sector detracted from the composite’s relative performance. Lodging REIT valuations have been stretched as the stock prices have climbed higher than earnings over the past few years. However, the lodging REIT sector is one of the most levered property types to the economy due to the sector’s short-term leases (one day), and indicators of future demand are looking up.
• Owning Empire State Realty Trust (NYSE: ESRT) within the office sector detracted from our relative performance. Companies with exposure to New York City have underperformed due to supply concerns and a lack of new leasing. However, we believe our holdings within the office sector are poised to deliver strong earnings growth in 2019 and beyond due to development/redevelopment that is not properly reflected in their stock prices.

Monthly Attribution

April results underperformed the benchmark due to stock selection in the data center/tech sector, an overweight allocation to shopping centers, as well as an underweight allocation to lodging REITs. Contributors to relative performance included stock selection in the self storage sector, as well as underweight allocations to the healthcare and single tenant sectors.

Market Commentary

REIT earnings season is underway, and so far, fundamentals have remained positive across the sector despite the sector continuing to trade at a discount to NAV. M&A has remained a trending topic as DCT Industrial Trust (NYSE: DCT) announced an agreement to be acquired by Prologis (NYSE: PLD) on April 29, 2018. This is in addition to other recent M&A activity and chatter over the past few months (WFD, GGP, LHO). We believe M&A will continue to be a catalyst to close the gap between public and private valuations as long as the NAV discounts persist.