In December, the MSCI US REIT Index (RMZ) produced a total return of -5.1%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of -5.5% gross of fees and -5.5% net of fees. For the full year of 2022, the Chilton REIT Composite underperformed the RMZ by producing a total return of -24.8% gross of fees and -25.3% net of fees, which compares to the RMZ total return of -24.5%.

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Monthly Attribution

Positive contributors to relative performance for the month of December included an underweight to the lodging sector, an underweight to the office sector, and an overweight to the cell tower sector. Conversely, an underweight to the triple net sector, stock selection within the residential sector, and an underweight to the regional mall sector detracted from relative performance.

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2022 Attribution

Positive contributors to relative performance for the full year 2022 included stock selection within the healthcare sector, an underweight to the office sector, and an underweight to the data center sector. Conversely, an underweight to the triple net sector, an overweight to the cell tower sector, and an underweight to the lodging sector detracted from relative performance.

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2022 Contributors Summary

• Stock selection within the healthcare sector has contributed to the relative performance of the Composite.  While the Omicron variant exasperated labor issues at the start of the year, senior housing fundamentals have continued to show improvement.

• An underweight allocation to the office sector has contributed to the Composite’s performance.  Due to the macro backdrop surrounding and pressures from continued work from home (WFH) we have maintained an underweight to the office sector.

• An underweight allocation to the data centers has contributed to the relative performance of the Composite.  The sector has underperformed amidst the backdrop of rising rates and inflation.  However, we have begun adding to our exposure through Digital Realty Trust (NYSE: DLR) as we see upside potential moving forward.

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2022 Detractors Summary

• An underweight allocation to the triple net sector has detracted from the Composite’s performance. The long lease sector of triple net has held up better than we would’ve thought in this rising interest rate environment.  We believe these stocks will mostly need to re-rate at a lower multiple given their inability to raise dividends at the same pace as other sectors such as residential, self storage, and industrial.

• An underweight allocation to the lodging sector has detracted from the Composite’s relative performance.  Lodging has been a lone bright spot in 2022 as leisure travel continues to surprise to the upside.  We believe the potential of a recession in 2023 or 2024 could hold back valuation until the economic situation becomes clear.

• An overweight allocation to the cell tower sector has also detracted from relative performance. Given the long lease terms typical in the cell tower business, the group has been impacted from the specter of rising rates this year.  Notwithstanding pressure from higher rates, cash flow growth for cell tower REITs should be among the highest versus other sectors over the next several years, which we believe will provide a floor for valuations.

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Market Commentary

In the January 2023 REIT Outlook titled, “2023 Chilton REIT Forecast,” we provide a look-back at what ultimately became the second worst year in REIT history on a total return basis, discuss our economic outlook and overall REIT forecast for 2023, as well as address the risks, both upside and downside, that could arise as the year progresses forward. While our composite performed roughly in line with the index, our strategy of allocating to high growth and fortress balance sheets didn’t produce the outperformance that we thought it would. However, we expect 2023 to be the year when the ‘chickens come to roost’ and strong fundamentals to outperform. We look forward to another year serving our clients, and thank you all for your confidence.

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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.

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Past performance is not indicative of future results.  Investment returns and principal value will fluctuate so that an investor’s account, when redeemed, may be worth more or less than their original cost.  Current performance may be lower or higher than the performance data quoted.