June results underperformed the benchmark due to underweight allocations to the healthcare and self storage sectors, as well as stock selection within the diversified sector. Contributors to relative performance included an underweight allocation to the lodging sector, an overweight allocation to the data center/tech sector, and stock selection within regional mall REITs.
We came back from New York with a positive view on the sector as a whole, reassured that the negative performance in the first two months of the year was merely a bet on interest rates, and not evident of any degradation in REIT fundamentals. The strength in the economy, supported by consumer and corporate spending increases thanks to tax reform, has begun to filter through to the tenants of the REITs, most notably in the retail and residential sectors. With the recent drop in the 10 yr US Treasury yield to 2.8%, we revise our total return outlook for the year to +4-6%, assuming a steady 10 yr US Treasury yield and further dividend increases as REITs deliver cash flow results above prior guidance over the next several quarters. This would imply a +3-5% total return in the second half of the year.
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