The MSCI US REIT Index (RMS) had a total return of +3.9% in March, while the S&P 500 had a total return of -2.5%.  The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +3.0%, both gross and net of fees.  Year to date, the Chilton REIT Composite has produced a total return of -7.8% and -8.0% gross and net of fees, respectively, which compare to -8.1% for the RMS.

Year to date, the largest contributors to relative performance include stock selection within the data center/tech and diversified sectors, as well as an underweight allocation to healthcare REITs.  An overweight allocation to shopping centers and regional malls, and stock selection within the office sector detracted from relative performance.

YTD Contributors Summary

• Our allocation to tower REITs with the data center/tech sector contributed to the Composite’s relative performance. Tower REITs look to be the 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 in urban areas.  Data center REITs will continue to benefit from increased corporate data outsourcing, the growth of the ‘cloud’, and the need for speedy delivery of data.
• Owning Armada Hoffler (NYSE: AHH) contributed to our relative performance within the diversified sector. AHH owns a diversified portfolio of high-quality office, retail, and apartment properties primarily in the Mid-Atlantic region.  AHH’s accretive development pipeline should lead to outsized cash flow growth over the next couple years.
• 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.

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 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 tenants that are focused around necessities and everyday services.
• An overweight allocation to the regional mall sector detracted from the composite’s relative performance.  We continue to favor Class A mall REITs over Class B mall REITs within the sector.  Class A malls that provide consumers with unique experiences and quality tenant lineups should continue to maintain sector leading occupancy and weather any competitive threats from the internet.  Additionally, for Class A mall REITs, the possibility of getting back space from struggling tenants is viewed as an opportunity to upgrade the tenant mix at higher rents. Recently, merger and acquisition (M&A) activity has been a popular topic within the sector.  On March 26^th, Brookfield Property Partners (TN: BPY) and GGP (NYSE: GGP) announced an agreement for BPY to purchase the 65% of GGP that it does not own for a mix of cash and stock of a to-be-created REIT.  At the time of the announcement, the implied take out price was ~$21.90 per share.  The new offer was lower than many investors anticipated, which had a negative price implication for the sector.  However, we acknowledge that unique circumstances with BPY owning 35% of the company likely put GGP in a difficult situation with BPY being the only potential buyer. We continue to believe class A mall REITs are significantly undervalued in the public market.
• 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.

Monthly Attribution

March results underperformed the benchmark due to overweight allocations to the regional mall and shopping center sectors, as well as an underweight allocation to healthcare REITs.  Contributors to relative performance included stock selection among the diversified and office REITs, as well as an overweight allocation to apartments.

Market Commentary

REITs substantially outperformed the S&P 500 in March, however, the sector still has plenty of ground to make up.  M&A chatter has increased over the past few months (WFD, GGP, LHO) and, with the sector still trading at significant discounts to NAV, we believe there could be catalysts to support a closing of the gap between public and private valuations.