REIT Commentary | July 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 July, the MSCI US REIT Index (RMS) produced a total return of +1.2%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of +1.2% net of fees and +1.4% gross of fees. Year to date, the Chilton REIT Composite has generated total returns of +20.7% net of fees and +21.4% gross of fees, which compare to +19.2% for the RMS.

Year to date, the largest contributors to relative performance were an overweight allocation to data center/tech sector, an underweight allocation to healthcare, and stock selection in the lodging sector. Detractors from relative performance included an overweight to malls, an underweight to self storage, and stock selection in the shopping centers sector.

YTD Contributors Summary

  • Our allocation to cell tower REITs also 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.
  • An underweight allocation to healthcare REITs has been a contributor to the Composite’s relative performance. The sector has underperformed in spite of lower interest rates due to poor tenant health and a lack of organic growth in senior housing.
  • Our allocation to Hilton Worldwide Holdings (NYSE: HLT) contributed to the Composite’s relative performance. HLT is up 35% while the average lodging REIT is down 5% due to its unit growth, which will continue to drive revenues even in a decelerating RevPAR environment.

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.
  • An underweight allocation to the self storage sector detracted from the Composite’s relative performance. We believe that the sector is benefiting from a flight to safety that is pushing valuations to levels that are not supported by earnings growth. 2019 guidance may have initially been conservative, but the pressure from new supply should eventually create a difficult environment for rent growth.
  • Our allocation to Urban Edge (NYSE: UE) detracted from the Composite’s relative performance. The company has been struggling to fill vacant boxes left by bankrupt retailers. However, UE has several letters of intent and other signed leases that will begin to pay rent later this year. In addition, the company plans to hold an investor day later this year that could help investors determine a path for cash flow that was otherwise difficult to ascertain given the lack of guidance or conference calls from management.

Monthly Attribution

Positive contributors to relative performance included stock selection within the industrial and data center/tech sectors, and an underweight to the healthcare sector. Stock selection within the shopping center sector, along with underweights to the net lease and self storage sector, detracted from relative performance.

Market Commentary

In the August 2019 REIT Outlook titled, “Mall REITs: Charting New Territory,” we discuss some of the exciting changes occurring at the mall. While the stocks seem to be selling off as failing retailers are closing stores, we believe the market is ignoring the new tenants that are taking their place. Some examples include Esports, CBD, and Coworking, which we believe will contribute positively to the mall ecosystem, driving traffic, occupancy, and rents. While valuations in the private market remain opaque, we believe that the public mall REIT prices have fallen far worse than what the fundamentals reflect. As a result, we can’t say when a catalyst will reverse the trend, but we are confident that investors will be rewarded for sticking with this out-of-favor sector.

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