In May, the MSCI US REIT Index (RMZ) produced a total return of +0.9%. The Chilton REIT Composite performed inline with the benchmark for the month by producing a total return of +0.8% net of fees and +0.9% gross of fees. Year to date, the RMZ has produced a total return of +18.6%, which compares to the Chilton REIT Composite at +15.8% net of fees and +16.2% gross of fees.

Monthly Attribution

Positive contributors to relative performance included stock selection in the healthcare sector, an underweight allocation to the lodging sector, and an overweight allocation to the residential sector. An underweight allocation to the regional mall sector, an overweight allocation to the cell tower sector, and stock selection in the industrial sector detracted from relative performance.  

Year to Date (YTD) Attribution

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

YTD Contributors Summary

• Stock selection in the diversified sector contributed to the Composite’s relative performance. Specifically, the Composite owned CTO Realty Growth (NYSE: CTO), which has a majority of its investments in shopping centers, a sector that has seen particularly strong performance thus far in 2021.

• 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 rebound in occupancy off of March lows. 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.

• Stock selection in 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 than 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. However, a relatively nascent sub-sector of triple net REITs that focuses on gaming real estate showed their resiliency in 2020. Specifically, the Composite owned VICI Properties (NYSE: VICI), which in 2020 was able to collect 100% of rents, while further proving their ability to execute on external growth.

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 June 2021 REIT Outlook titled, “More to Net Lease REITs than Interest Rates”, we dive into net lease REITs and how their unique business strategy allows them to generate impressive earnings growth, despite some of the lowest organic cash flow growth among REIT subsectors. While on the surface they may seem to be a play on interest rates, the unique strategies and underlying properties warrant a more robust research process to determine the future performance of each REIT. We believe we have identified certain net lease REITs that provide an attractive risk-adjusted return scenario going forward that should succeed in multiple interest rate scenarios, including the base case of higher inflation in the near term.

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.