REIT Commentary | December 2019

The information contained herein should be considered to be current only as of the date indicated, and we do not undertake any obligation to update the information contained herein in light of later circumstances or events. This publication may contain forward looking statements and projections that are based on the current beliefs and assumptions of Chilton Capital Management and on information currently available that we believe to be reasonable, however, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements. This communication is provided for informational purposes only and does not constitute an offer or a solicitation to buy, hold, or sell an interest in any Chilton Capital Management investment or any other security.

In December, the MSCI US REIT Index (RMS) produced a total return of -0.6%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of +0.5%, both net and gross of fees. In the fourth quarter, the Chilton REIT Composite generated net and gross total returns of +2.1% and +2.3%, respectively, which compared favorably to the RMS at -0.8%. In the full year 2019, the Chilton REIT Composite generated total returns of +29.8% net of fees and +30.9% gross of fees, which compared to +25.8% for the RMS.

In 2019, positive contributors to relative performance included stock selection within the lodging sector, an overweight to the data centers/tech sector, and an underweight to the self storage sector. Stock selection in the shopping center sector, along with an underweight to the triple net sector and an overweight to the regional mall sector detracted from relative performance.

YTD Contributors Summary

  • Our allocation to cell tower REITs contributed to the Composite’s relative performance. Cell tower REITs are the primary 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 for data in urban areas.
  • Our underweight allocation to the self storage sector contributed to the Composite’s relative performance. We believe the sector has too much supply to create sustainable rent growth, which is finally showing up on REIT income statements and guidance.
  • Stock selection in the lodging sector contributed to the Composite’s relative performance. Specifically, our allocation to Hilton (NYSE: HLT) versus lodging REITs helped us to dramatically outperform the benchmark. For the year, HLT produced a total return of +55.5%, which compared to the lodging REIT weighted average of +19.1%. We believe HLT will have much higher organic growth than the lodging REIT due to its pipeline of new hotels which will produce a growing stream of management fees over the long term.

YTD Detractors Summary

  • An overweight allocation to the mall sector detracted from the Composite’s relative performance. The sector remains in a ‘penalty box’ with investors until the underlying companies can show real cash flow per share growth, from both the same store portfolio and the redevelopment pipeline.
  • Stock selection in the shopping centers sector detracted from the Composite’s relative performance. Specifically, the Composite’s largest holding in the sector, Regency Centers (NYSE: REG), has been the second lowest performer YTD. Within shopping centers, there has been a ‘junk rally’ whereby the best performers have been low quality, low multiple REITs. REG was sold from the Composite in November.
  • An underweight allocation to the triple net sector has detracted from the Composite’s relative performance. Historically, triple net REITs have been the most correlated to long term interest rates, and 2019 has followed this trend. With the 10 yr Treasury yield close to historic lows, we view the opportunity for further relative outperformance of this sector as minimal.

Monthly Attribution

Positive contributors to relative performance included stock selection within the lodging sector, an overweight to the data centers/tech sector, and an underweight to the triple net sector. Stock selection in the industrial and specialty sectors, along with an underweight to the self storage sector detracted from relative performance.

Market Commentary

In the January 2020 REIT Outlook titled, “2020 Chilton REIT Forecast”, we reflect on our 2019 projection from a year ago and provide our forecast for the year to come. The 2019 RMS total return fell squarely in the middle of our revised forecast of +22-29% from September 1, though well above our initial forecast of +12-17%. We are proud that the many positives in our 2019 forecast came true, and applaud investors that maintained or added to REITs after a disappointing 2018. For 2020, we once again are positive on REIT fundamentals, and therefore project total returns for the index of +8% to +12%. Going into the year, the biggest overweights in the Chilton REIT Composite are Data Centers/Tech, Office, and Residential, which are discussed in the Outlook.

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