In August 2023, the MSCI US REIT Index (RMZ) produced a total return of -3.0%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of -2.0% gross and net of fees. Year to date, the Chilton REIT Composite has outperformed the RMZ by producing a total return of +7.8% gross of fees and +7.4% net of fees, which compares to the RMZ total return of +5.2%.

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Monthly Attribution

Positive contributors to relative performance for the month of August included an underweight to the regional mall sector, and stock selection within the industrial and data center sectors.  Conversely, an underweight to the specialty sector, stock selection within the residential sector, and an overweight to the diversified sector detracted from relative performance.

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Year to Date (YTD) Attribution

Year to date, positive contributors to relative performance included an underweight to the triple net and office sectors, and stock selection within the industrial sector.  An overweight to the cell tower sector, an underweight to the specialty sector, and an overweight to the shopping center sector detracted from relative performance.

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YTD Contributors Summary

• An underweight allocation to the office sector contributed to the Composite’s performance.  Office stocks have come under pressure as recession fears and hybrid work policies post pandemic have impacted the outlook for leasing demand.  Further, debt market volatility has increased financing concerns, particularly in office.

• An underweight to the triple net sector also contributed to relative performance.  During periods of rising interest rates, the sector’s long lease structure presents a headwind to increasing rents at the same pace as other property types.  Additionally, external growth is more challenging due to higher spreads to the cost of capital.

• Stock selection within the industrial sector has also contributed to the Composite’s performance.  Primarily, our composite has held meaningful overweight positions in Americold (NYSE: COLD), Plymouth Industrial (NYSE: PLYM), and EastGroup Properties (NYSE: EGP), which have contributed to outperformance.

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YTD Detractors Summary

• An overweight allocation to the cell tower sector has detracted from the Composite’s performance.  Given the long lease terms typical in cell towers, the group has been impacted from the specter of rising rates this year.  Looking past near term headwinds, we believe the non-cyclical nature of the group should drive higher earnings growth over the long term.

• An underweight allocation to the specialty sector also detracted from the Composite’s relative performance.  In particular, Iron Mountain (NYSE: IRM) has performed well thus far in 2023, weighing on Composite performance.

• An overweight to the shopping center sector also detracted from the Composite’s performance.  Given elevated fears around problem tenants (most notably Bed Bath and Beyond), we saw shopping center names with elevated exposure underperform.  Specifically, our exposure to Site Centers (SITC) weighed on Composite performance.

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Market Commentary

In the September 2023 REIT Outlook titled, “Warren Buffett Should Buy the Cell Tower REITs,” we discuss the underperformance of cell tower REITs and detail why we believe today’s outlook is attractive. Specifically, we expect readers will be surprised to learn that cell towers have actually underperformed office REITs since 12/31/21. This differential arrives despite office utilization barely at 50% of 2019 levels compared to cell phone data usage growing 25% annually over the past three years. With “Mr. Market” (a Benjamin Graham original) pricing the cell tower REITs at cash flow multiples that have not been seen in over 15 years (as far back as cell tower companies were reporting AFFO, or adjusted funds from operations), we sincerely believe that Mr. Buffett and team should take a hard look at investing in cell tower REITs. In our view, the price declines over the past 21 months are unwarranted, and eventually the positive attributes of the cell tower REITs will garner a premium earnings multiple.  To quote Mr. Buffett again (who was paraphrasing Benjamin Graham), “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

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Additional Disclosures

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 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. MSCI US REIT Index performance is presented as a benchmark for reference only and does not imply any portfolio will achieve similar returns, volatility or any characteristics similar to any actual portfolio.  The composition of a benchmark index may not reflect the manner in which any is constructed in relation to expected or achieved returns, investment holdings, sectors, correlations, concentrations or tracking error targets, all of which are subject to change over time.