In October, the MSCI US REIT Index (RMZ) produced a total return of +7.7%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of +6.2% net of fees and +6.3% gross of fees.  Year to date, the RMZ has produced a total return of +32.5%, which compares to the Chilton REIT Composite at +29.2% net of fees and +30.1% gross of fees.

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Monthly Attribution

Positive contributors to relative performance included an underweight allocations to the office, lodging, and shopping centers sectors. Stock selection in the industrial sector, along with an overweight allocation to the cell tower and diversified sectors, detracted from relative performance.  

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Year to Date (YTD) Attribution

Year to date, positive contributors to relative performance included stock selection in the healthcare sector, as well as an underweight allocation to the office and triple net sectors.  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.

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YTD Contributors Summary

• 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.

• An underweight allocation to the triple net sector has contributed to the relative performance of the Composite.  While triple net REIT performance has been strong due to interest rates remaining low, some of the largest triple net REITs have lagged the RMZ’s even stronger performance due to their long lease terms, which can restrict growth during times of high economic growth. 

• An underweight allocation to the office sector has contributed to the relative performance of the Composite.  While the cash flows of office REITs have held up fairly well, the inability to drive positive leasing spreads or add significant occupancy has dampened the ability to increase dividends.  We believe uncertainty about the return to the office will be an overhang for the sector for the near term, and are finding better upside elsewhere.

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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.

• Stock selection in the industrial sector has detracted from the Composite’s relative performance.  Specifically, Americold (NYSE: COLD) has produced a year to date total return of -20%, underperforming both the RMZ and all other industrial REITs.  As the only cold storage REIT, it is uniquely exposed to the rising labor costs and supply chain issues that currently plague the food industry.  The company has had to lower guidance multiple times in 2021 as a result, and stabilization is not expected until the back half of 2022.  In response, the company recently parted ways with the CEO and has begun a CEO search to find someone that could potentially better navigate these unprecedented times.  While the near term fundamentals are not ideal, we believe the long term story is still intact and the current valuation provides an attractive risk/reward profile.

• An overweight allocation to cell towers has detracted from the Composite’s performance.  While the total return of the Composite’s cell towers has been impressive at +22%, it has lagged the RMZ even more impressive year to date performance.  We believe that it should continue to produce steady growth from new leasing due to 5G and a potentially new tenant, Dish Network. 

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Market Commentary

In the November 2021 REIT Outlook titled, “Retail REITs: Revisited and Reconsidered”, we provide a follow up to the retail REIT publication we wrote a year ago, just before the Pfizer BioNTech COVID-19 vaccine announcement. Looking back, we properly assessed the risks, but perhaps underestimated the strength of the US consumer, especially when armed with extremely dovish fiscal and monetary policy. We did not miss the ‘reopening’ trade completely, and remain cautious on valuations for shopping center and regional mall REITs. However, we have warmed to the resurgence of foot traffic at shopping centers, and recently made an investment into the first pure-play shopping center REIT to be in the portfolio in over 18 months.

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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.