REIT Commentary | June 2020

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 June, the MSCI US REIT Index (RMZ) produced a total return of +3.0%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +2.1% both gross and net of fees. Year to date, the RMZ has produced a total return of -18.5%, which compares to the Chilton REIT Composite at -8.9% net of fees and -8.5% gross of fees.

In 2020, positive contributors to relative performance included an overweight to the cell tower and data center sectors, and stock selection in the residential sector. An underweight to the self storage sector, and stock selection in the office and diversified sectors detracted from relative performance.

YTD Contributors Summary

  • Our overweight allocation to the cell tower sector contributed to the Composite’s relative performance. Cell tower REITs should be unaffected by COVID-19, and may even experience an increase in demand due to the higher need for data to work from home.
  • Stock selection in the residential sector contributed to the Composite’s relative performance. Specifically, allocations to the single family rental REITs (Invitation Homes (NYSE: INVH) and American Homes 4 Rent (NYSE: AMH)) and Camden Property Trust (NYSE: CPT) have made the Composite’s residential total returns much higher than the benchmark. Each of these names has a much higher geographic allocation to Sunbelt markets than their coastal peers. In addition, single family rental REITs are benefiting from record low turnover and solid leasing fundamentals.
  • Our overweight allocation to the data center sector contributed to the Composite’s relative performance. Data usage has increase dramatically since the beginning of the pandemic due to the widespread adoption of ‘work from home’ initiatives. We believe many solutions will remain in place even after ‘work from home’ has been relaxed across the country as companies have found it to be an effective substitute for in-person meetings.

YTD Detractors Summary

  • An underweight allocation to the self storage sector detracted from the Composite’s relative performance. The closing of universities pulled forward demand for self storage that would have otherwise had to wait until the summer. For now, this has helped to alleviate a new supply problem, though this likely means that the summer will not have as much demand as originally expected.
  • Stock selection in the office sector detracted from the Composite’s relative performance. Specifically, the Composite did not own Alexandria (NYSE: ARE), which was the best performing office REIT in the year to date period. ARE focuses on lab space leased to pharmaceutical and medical research tenants, who may be instrumental in finding and distributing a cure and/or vaccine for COVID-19.
  • Stock selection within the diversified sector detracted from the Composite’s relative performance. Specifically, the Composite’s position in Armada Hoffler (NYSE: AHH) has significantly underperformed the benchmark year to date. AHH’s underperformance can be explained by it’s small market capitalization and high risk due to an outsized development pipeline, a mezzanine debt portfolio, elevated retail exposure, and above average exposure to WeWork. We exited the position in AHH in April.

Monthly Attribution

Positive contributors to relative performance included an underweight allocation to the self storage and lodging sectors, and stock selection in the residential sector. An underweight allocation to the regional mall and triple net sectors, along with an overweight allocation to the cell tower sector detracted from relative performance.

Market Commentary

In the July 2020 REIT Outlook titled, “Essential REIT Evaluation: Industrial and Office,” we continue our theme of ‘Essential’ from the June 2020 REIT Outlook, this time exploring the industrial and office sectors. Industrial has been able to post a positive performance year to date due to its high quality balance sheets, low dividend payout ratios, and the secular trend of e-commerce that has only been accelerated by COVID. We believe that an upcoming supply and demand imbalance due to the throttling of supply during COVID will help these companies grow into their relatively high cash flow multiples, which are the highest of the sectors we have examined thus far. At the other end of the spectrum is office, which we expect to have long term issues due to the risk of work from home. However, we believe Sunbelt office could potentially be a beneficiary of a work from home trend, as well as benefiting from their lower cost of living, fewer regulations, and warmer climates. Therefore, we believe that the non-gateway office REITs should trade above their current rank as the lowest multiple sector that we have examined thus far.

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