In November, the MSCI US REIT Index (RMZ) produced a total return of -0.7%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of -1.0%, both gross and net of fees. Year to date, the RMZ has produced a total return of +31.6%, which compares to the Chilton REIT Composite at +27.9% net of fees and +28.7% gross of fees.

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Monthly Attribution

Positive contributors to relative performance included underweight allocations to the lodging and triple net sectors, along with stock selection in the industrial sector. Stock selection in the data center sector, along with an overweight allocation to the diversified sector and an underweight allocation to the regional mall sector, detracted from relative performance.  

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Year to Date (YTD) Attribution

Year to date, positive contributors to relative performance included underweight allocations to the office, lodging, and triple net sectors. Underweight allocations to the regional mall and shopping center sectors, and an overweight allocation to the cell tower sector detracted from relative performance.

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YTD Contributors Summary

• An underweight allocation to the lodging sector has contributed to the relative performance of the Composite.  The Delta and Omicron variants have caused additional waves of COVID across the country, preventing business travel from resuming, as well as restricting inbound international travel.  While the muted outbound international travel has benefited domestic leisure travel, the uncertainty around the resumption of business travel has caused investors to be more conservative in their revenue growth assumptions.  In particular, urban upscale hotels are lagging, a large overweight for most lodging REITs.

• 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.

• An underweight allocation to the shopping center sector has detracted from the Composite’s relative performance.  Similar to the performance in the regional malls, the ‘reopening trade’ has attracted significant investment, especially in the sectors that were hit the hardest in 2020.  In spite of the Delta and Omicron variants, it does not appear that stores will be closing again as society has learned to shop with the virus.  Notably, foot traffic is back above 2019 levels as of November 2021.  We believe valuation reflect an extremely rosy forecast, which carries some risk; as such we are employing retail exposure carefully.

• 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 December 2021 REIT Outlook titled, “Property Type Round-Up from REIT World”, we provide a brief summary of our top takeaways from our meetings with 31 REIT management teams at the REIT World virtual conference. Almost all of the management teams were extremely upbeat about their businesses and the prospects for 2022. Office, cold storage, and lodging were the exceptions, though each company laid out a path for a return to pre-COVID fundamentals. Inflation was an important topic that we believe will be a benefit for many of the companies in the Chilton REIT Composite, especially those with shorter lease terms and fixed rate debt.

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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.