REIT Commentary | March 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 March, the MSCI US REIT Index (RMS) produced a total return of -21.6%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of -12.9%, both net and gross of fees. Year to date, the RMS has produced a total return of -27.0%, which compares to the Chilton REIT Composite at -18.4% net of fees and -18.3% gross of fees.

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

YTD Contributors Summary

  • Our overweight allocation to the data center sector as well as the cell tower sector contributed to the Composite’s relative performance. Cell tower and data center REITs should be unaffected by COVID-19, and may even experience an increase in demand due to the increased need for data to work from home.
  • Our underweight allocation to the healthcare sector contributed to the Composite’s relative performance. Previously thought of as a ‘safe sector’ during previous recessions, healthcare has been one of the worst performers due to the potential negative effects of COVID-19 on senior housing demand. In particular, the virus has the highest mortality rate among the elderly, which comprises both current and future residents of senior housing. At the same time, new supply had already oversaturated the senior housing sector.
  • Our underweight allocation to the shopping center sector contributed to the Composite’s relative performance. The ‘stay at home’ orders around the country have caused restaurants (for dine-in) and all ‘non-essential’ brick and mortar businesses to close until further notice. Many of the tenants will not be able to pay rent without being able to have an open storefront. Furthermore, the fallout from a sharp recession will likely cause bankruptcies months after the virus has been contained.

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.
  • An underweight allocation to the specialty sector detracted from the Composite’s relative performance. Both the timber REIT and the gaming REIT in the Composite underperformed the benchmark. The single family construction market could potentially grind to a halt due to the effects of COVID-19 and the ensuing recession, historically a driver for timber prices and volume. However, timber REITs can elect to sell pulp instead, which is needed for cardboard boxes and toilet paper, among other things. Gaming REITs have been hit due to all of the casinos being forced to close. However, the leases are structured as triple net to the REITs, so they are entitled to the rent, regardless of whether the casino is open. Even if rent were to be forgiven or deferred, each company is well capitalized and could continue to pay the dividend without rent for a substantial period.

Monthly Attribution

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

 Market Commentary

In the April 2020 REIT Outlook titled, “Be Safe, Buy REITs,” we put the recent pullback into perspective versus the 2008-2009 recession. In 2020, REIT balance sheets are healthier than they have ever been, but near term cash flows could be more at risk due primarily to rent deferrals across most core property sectors. In our opinion, the market reaction thus far has been too negative despite the uncertainty surrounding the economy and COVID-19. We believe the market is not giving REITs enough credit for their balance sheets, which will give them ample liquidity to survive a reasonable decline in cash flow. By several measures, REITs are more inexpensive today than they were in 2009, despite having much lower risk of bankruptcy. Therefore, we believe there is a unique opportunity to buy high quality commercial real estate at an unwarranted discount.

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