In March, the MSCI US REIT Index (RMZ) produced a total return of +4.4%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of +6.1%, both net and gross of fees. Year to date, the RMZ has produced a total return of +8.8%, which compares to the Chilton REIT Composite at +6.3% net of fees and +6.5% gross of fees.

Monthly Attribution

Positive contributors to relative performance included stock selection in the industrial sector, an overweight to the cell tower sector, and an underweight to the lodging sector. An underweight allocation to the self storage sector, along with stock selection in the shopping center and specialty sectors, detracted from relative performance.  

Year to Date (YTD) Attribution

Year to date, positive contributors to relative performance included underweight allocations to the triple net and data center sectors, along with stock selection in the healthcare sector. An underweight allocation to the regional mall and shopping center sector, as well as an overweight allocation to the cell tower sector detracted from relative performance.

YTD Contributors Summary

• An underweight allocation to the triple net sector contributed to the Composite’s relative performance. Due to its long term leases, the sector tends to exhibit qualities more similar to fixed income that most other REIT sectors. With rising interest rates and the potential for inflation as a result of unprecedented government stimulus, we believe investors are favoring sectors that can lease up vacant space and/or re-lease space at higher rents in the near term.

• An underweight allocation to the data center sector contributed to the Composite’s relative performance. The sector has continued to lag as the ‘reopening’ trade has boosted values for underperformers in 2020 such as regional malls, shopping centers, and lodging. The victims have been the 2020 outperformers, which included data centers and cell towers, as we discuss later.

• Stock selection in the healthcare sector contributed to the Composite’s relative performance. The senior housing subsector has been the best performer within the healthcare sector year to date. Senior housing communities were among the first to get access to the vaccine, beginning in December 2020. As such, while occupancy continued to decline to start 2021, the vaccination rates climbed dramatically, resulting in a bottoming of occupancy in February. We believe this sets the stage for a multi-year run for recovery in rents and occupancy, coupled with higher margins as COVID expenses dissipate.

YTD Detractors Summary

• An underweight allocation to the regional mall sector detracted from the Composite’s relative performance. The V-shaped recovery brought on by the massive fiscal stimulus and the positive vaccine news in 2020 has only continued to propel regional mall REITs upward. The ‘reversion to the mean’ trade has made malls the best place to invest recently, in spite of the many fundamental issues that remain a question mark. We believe the valuations have pushed up prices too far, too soon, and will have to come down as earnings stabilize at a lower level.

• An underweight allocation to the shopping center sector detracted from the Composite’s relative performance. Similar to regional malls, shopping centers were a significant underperformer in 2020 but have rebounded in 2021, many beyond pre-COVID valuations. We believe that the open-air grocery-anchored center will be relevant long term, but the valuations are not justified by future earnings growth.

• An overweight allocation to the cell tower sector detracted from the Composite’s relative performance. Similar to the data center sector, cell towers were used as a source of funds to buy regional malls, shopping centers, and lodging as the news of the vaccine solidified a view of economic recovery. We believe that investors will once again reward cell tower REITs for their highly predictable cash flow growth at a premium multiple.

Market Commentary

In the April 2021 REIT Outlook titled, “Takeaways from the 2021 Citi REIT CEO Conference,” we provide the most important findings from our virtual visits with almost 40 REITs in March. The access to REIT CEOs and CFOs was instructive in helping us to frame the next few years of earnings and dividend growth, along with key insights into asset values. The meetings spanned across most of the REIT property types, and included companies we own and ones we are interested in owning in the near future. Importantly, almost all of the business updates were positive, and most of it has been directly attributable to the successful distribution of the COVID-19 vaccine domestically, which has allowed businesses and consumers to spend with confidence, which is driving rents, occupancy, and asset prices. We came away with a positive near term view on REIT fundamentals, and believe that investors can confidently allocate to REITs as a ‘reopening trade’ with inflation protection.

Chilton REIT Team Update

We are proud to announce that Kevin Egan has joined the team as a Senior Analyst as of March 29. Kevin’s background includes 5 years covering REITs at Goldman Sachs and Morgan Stanley, where he covered triple net, healthcare, and self storage REITs.

Previous editions of the Chilton Capital REIT Outlook are available at www.chiltoncapital.com/category/library/reit-outlook/.

An investment cannot be made directly in an index. The funds consist of securities which vary significantly from those in the benchmark indexes listed above and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of such indexes may be of limited use.

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 investment or any other security.