REIT Commentary – May 2018

The MSCI US REIT Index (RMS) had a total return of +3.9% in May, while the S&P 500 had a total return of +2.4%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +2.2%, both net and gross of fees. Year to date, the Chilton REIT Composite has produced a total return of -5.7% net of fees and -5.3% gross of fees, which compares to -3.1% for the RMS.
Year to date, the largest detractors to relative performance were an overweight allocation to shopping centers, an underweight allocation to lodging REITs, and stock selection within the office sector. Stock selection within the self storage and diversified sectors, as well as an underweight allocation to healthcare REITs, contributed to relative performance.

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.

YTD Contributors Summary

  • Owning Extra Space Storage (NYSE: EXR) within the self storage sector contributed to the Composite’s relative performance. Recently, the self storage sector has seen a significant increase in new supply, which had investors worried about the prospects for earnings growth. EXR is one of the best operators in the sector and has consistently outperformed its peers on same store revenue growth. Near term, the sector will continue to deal with increased new deliveries, which should benefit the companies, like EXR, with superior revenue management systems and marketing programs. Longer term, today’s new supply could be viewed as a pipeline for future acquisitions and management contracts, which could drive outsized cash flow growth.
  • 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 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.

Monthly Attribution

May results underperformed the benchmark due to an underweight allocation to the healthcare and lodging sectors, as well as an overweight allocation to the data center/tech sector. Contributors to relative performance included stock selection in the industrial and diversified sectors, and an overweight allocation to shopping center REITs.

Market Commentary

The Chilton REIT team recently attended NAREIT’s REIT Week conference in New York City from June 4th-7th. During the conference the REIT team met with 60 REIT management teams, other sell-side and buy-side REIT analysts, and attended multiple tours and an investor day. We came away from the conference recharged with new ideas and with increased confidence in our positive view of the sector as a whole.

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