REIT Commentary | September 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 September, the MSCI US REIT Index (RMS) produced a total return of +2.9%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +2.4% both gross and net of fees. In the third quarter, the Composite produced a net total return of +6.6% and a gross total return of +6.8%, which compare to +7.7% for the RMS. Year to date, the Composite has generated total returns of +27.1% net of fees and +27.9% gross of fees, which compare to +26.8% for the RMS.

Year to date, the largest contributors to relative performance were an overweight allocation to data center/tech sector, and stock selection within the residential and lodging sectors. Detractors from relative performance included an overweight to malls, and underweight allocations to the self storage and triple net sectors.

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 allocation to the single family rental REITs, American Homes 4 Rent (NYSE: AMH) and Invitation Homes (NYSE: INVH), within the residential sector have contributed to the Composite’s relative performance. Both AMH and INVH have guided to same store revenue growth well ahead of the multifamily REITs for 2019, and 2020 looks to be more of the same. While same store expenses are still elevated, we view the relatively low margins as an opportunity to close the gap with multifamily.
  • Our allocation to Hilton Worldwide Holdings (NYSE: HLT) contributed to the Composite’s relative performance. HLT is up 30% while the average lodging REIT is up only 12% 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.
  • Stock selection in the office property type has detracted from the Composite’s relative performance. Specifically, the strategy’s allocation to several New York City-focused REITs produced results below the office sector average. In addition, the Composite’s lack of ownership of Alexandria (NYSE: ARE) also detracted from relative performance. We believe that the valuation disparity between New York and other office REITs has gone too far and is due for a correction.
  • 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 regional mall and specialty sectors, and an underweight to the self storage sector. Stock selection within the data centers/tech, office, and industrial sectors detracted from relative performance.

Market Commentary

In the October 2019 REIT Outlook titled, “The Chilton Global Real Estate Strategy,” we announce the launch of a new strategy that incorporates both international and US real estate securities. Publicly traded international real estate companies have made significant strides over the past 10 years to make themselves more “investable”. We believe the addition of an international real estate ETF to our active US REIT strategy can produce attractive risk-adjusted returns over the long term due to the low correlation between the US and international markets.

The use of a passive ETF maximizes diversification of currency, geopolitical, and economic risk while also minimizing expenses. Furthermore, the Chilton Global Real Estate Strategy uses proprietary analysis to take advantage of arbitrage opportunities between the US and international markets by shifting allocations between the two.

The strategy is off to a great start after launching on February 1, 2019, producing net and gross total returns of  +8.0% and +8.4%, respectively, through August 31. In comparison, the benchmark FTSE EPRA/NAREIT Global Index Net TR (Bloomberg: TRNHGU) produced a total return of +4.6%.

Please reach out to your appropriate Chilton contact for more information about the strategy.

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