In September, the MSCI US REIT Index (RMZ) produced a total return of -5.5%. The Chilton REIT Composite underperformed the benchmark for the month by producing a total return of -6.1%, gross and net of fees. In the third quarter, the RMZ produced a total return of +1.0%, which compared to the Chilton REIT Composite at +0.8% net of fees and +1.0% gross of fees. Year to date, the RMZ has produced a total return of +23.0%, which compares to the Chilton REIT Composite at +21.7% net of fees and +22.3% gross of fees.

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Monthly Attribution

Positive contributors to relative performance included an overweight allocation to the diversified sector, an underweight allocation to the triple net sector, and stock selection in the healthcare sector. Stock selection in the industrial sector, along with an overweight allocation to the cell tower sector and an underweight allocation to the lodging sector, 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 diversified and healthcare sectors, as well as an underweight allocation to the office sector.  An underweight allocation to the regional mall and shopping center sectors, as well as an overweight allocation to the cell tower 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.

• Stock selection in the diversified sector has contributed to the relative performance of the Composite.  The addition of diversified REITs with exposure to the shopping center, lodging, coastal multifamily, and office sectors has allowed the Composite to participate in the reopening trade, albeit with less risk due to discounted valuations.  In particular, Alexander and Baldwin (NYSE: ALEX) has led the pack with a total return of +39.9% year to date through September 30, 2021.  This compares favorably to many shopping center REITs, while it has less risk due to the lack of a threat from e-commerce in its Hawaii-centric portfolio.

• 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 detracted from the Composite’s relative performance.  Similar to regional malls, shopping centers were a significant underperformer in 2020 but have rebounded in 2021, many beyond pre-COVID valuations.  We believe that the open-air grocery-anchored center will be relevant long term, but the valuations are not justified by future earnings growth.

• 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 +24%, it has lagged the RMZ, though the gap is closing.  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 October 2021 REIT Outlook titled, “Uneven COVID Response Worldwide Creates Opportunity in Global REITs”, we provide a refresher on the Chilton Global Real Estate Strategy, which now has a 32 month track record. The outperformance versus the benchmark is attributable to the three-pronged alpha-production method that we believe is repeatable going forward. The Chilton Global Real Estate Strategy is an appropriate solution for investors seeking to diversify and gain exposure to international markets, creating lower volatility. 

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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.