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.

In May, the MSCI US REIT Index (RMZ) produced a total return of +0.2%. The Chilton REIT Composite outperformed the benchmark for the month by producing a total return of +3.1% both gross and net of fees. Year to date, the RMZ has produced a total return of -20.8%, which compares to the Chilton REIT Composite at -10.8% net of fees and -10.4% gross of fees.

In 2020, positive contributors to relative performance included an overweight to the cell tower and data center sectors, and an underweight to the healthcare sector. An underweight to the self storage sector, and stock selection in the office and diversified sectors detracted from relative performance.

YTD Contributors Summary

• Our overweight allocation to the cell tower sector contributed to the Composite’s relative performance. Cell tower REITs should be unaffected by COVID-19, and may even experience an increase in demand due to the higher need for data to work from home.
• Our underweight allocation to the healthcare sector contributed to the Composite’s relative performance. Previously thought of as a ‘safe sector’ during previous recessions, healthcare has been one of the worst performers due to the potential negative effects of COVID-19 on senior housing demand.  In particular, the virus has the highest mortality rate among the elderly, which comprises both current and future residents of senior housing.  At the same time, new supply had already oversaturated the senior housing sector.
• Our overweight allocation to the data center sector contributed to the Composite’s relative performance. Data usage has increase dramatically since the beginning of the pandemic due to the widespread adoption of ‘work from home’ initiatives.  We believe many solutions will remain in place even after ‘work from home’ has been relaxed across the country as companies have found it to be an effective substitute for in-person meetings.

YTD Detractors Summary

• An underweight allocation to the self storage sector detracted from the Composite’s relative performance. The closing of universities pulled forward demand for self storage that would have otherwise had to wait until the summer.  For now, this has helped to alleviate a new supply problem, though this likely means that the summer will not have as much demand as originally expected.
• Stock selection in the office sector detracted from the Composite’s relative performance. Specifically, the Composite did not own Alexandria (NYSE: ARE), which was the best performing office REIT in the year to date period.  ARE focuses on lab space leased to pharmaceutical and medical research tenants, who may be instrumental in finding and distributing a cure and/or vaccine for COVID-19.
• Stock selection within the diversified sector detracted from the Composite’s relative performance. Specifically, the Composite’s position in Armada Hoffler (NYSE: AHH) has significantly underperformed the benchmark year to date.  AHH’s underperformance can be explained by it’s small market capitalization and high risk due to an outsized development pipeline, a mezzanine debt portfolio, elevated retail exposure, and above average exposure to WeWork.  We exited the position in AHH in April.

Monthly Attribution

Positive contributors to relative performance included an overweight to the cell tower sector, and stock selection in both the residential and data center sectors. An underweight allocation to healthcare and self storage sectors, along with stock selection in the shopping centers sector detracted from relative performance.

Market Commentary

In the June 2020 REIT Outlook titled, “Essential REIT Evaluation: Healthcare and Residential,” we begin a series of outlooks where we will be concentrating on the theme of ‘essential’. We outline a series of questions that need to be asked about every sector and company to determine how essential it is, and thus how it should be valued. Both the healthcare and residential sectors have long term necessity and therefore bare little long term risk. However, depending on the segments within each (single family versus apartments, or senior housing versus skilled nursing facilities), there are varying degrees of short term risk. We identify one segment that we believe the market is not pricing correctly thus far, based on lower risk and more discounted valuation. As a reminder, due to the liquid nature of REITs, we have the luxury of changing the portfolio as our analysis finds anomalies of market mispricing.