REIT Commentary | November 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 November, the MSCI US REIT Index (RMS) produced a total return of -1.5%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of -0.1%, both net and gross of fees. Year to date, the Composite has generated total returns of +29.2% net of fees and +30.2% gross of fees, which compare to +26.7% for the RMS.

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

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 specialty sector contributed to the Composite’s relative performance. Specifically, our allocation to Catchmark Timber Trust (NYSE: CTT) has driven outperformance versus other specialty REITs as timber prices have rebounded along with new home permits and starts. We believe that the country is dramatically undersupplied in single family housing and the demand will drive supply, which has historically increased timber prices (both lumber and sawlogs).

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.
  • 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 and specialty sectors, and an underweight to the healthcare sector. Stock selection in the industrial, residential, and shopping center sectors detracted from relative performance.

Market Commentary

In the December 2019 REIT Outlook titled, “Clearing Up REIT Misperceptions of Generalist Investors,” we address the most prevalent misconceptions that may be preventing non-dedicated (or ‘generalist’) investors from entering the space. While we are appreciative of the growth of the generalist investor from comprising only 11% of REIT equity in 2Q12 to almost 27% as of 2Q19, the average generalist mutual fund is still 58% underweight to the GICS real estate sector as of 4Q18. We believe the broad underweight of this long term attractive sector creates an opportunity for further outperformance relative to other sectors. In addition, some of the misperception also creates an environment that is rife with arbitrage opportunities for knowledgeable active managers to exploit.

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