We recently attended the annual REITWorld conference, where we conducted 33 meetings with REIT CEOs and CFOs.  We also attended two organized dinners, three property tours, and a run around the Las Vegas strip with a REIT management team to maximize our time in Las Vegas with REIT executives.

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The key themes were: 1) a gradual improvement in the transaction market as bid-ask spreads narrow and an uptick in acquisition opportunities is on the horizon; 2) REITs gaining a cost-of-capital advantage, paving the way for more accretive external growth; and 3) subdued development activity due to high construction costs and interest rates, upholding a favorable supply-demand balance and supporting higher rent growth and earnings.  Investors appear increasingly optimistic, encouraged by stabilizing interest rates, low new supply, and well-capitalized balance sheets positioning REITs for long-term growth ahead.

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We left the conference with several actionable ideas, which we present below along with key takeaways from our meetings.

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Healthcare

Healthcare remains one of our largest overweights, and, as such, we met with management teams across the property type, including: Welltower (NYSE: WELL), American Healthcare (NYSE: AHR), Healthcare Realty (NYSE: HR), Sila Realty (NYSE: SILA), Omega Healthcare (NYSE: OHI), Strawberry Fields (NYSE: STRW), and National Health Investors (NYSE: NHI).

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Although we didn’t receive much new operational data versus 3Q earnings, Senior Housing Operating (SHOP) fundamentals continue to impress, and investor confidence of further acceleration from robust levels is increasing.  See our October 2023 REIT Outlook on the subject for more, but, as highlighted in Figure 1, growth in the 80+ population is expected to increase substantially (e.g., “silver tsunami”).  The demand wave is even more encouraging when paired with little new supply being built (held back by higher construction and financing costs).  Valuation is the biggest debate for the group, but with the growth runway elongating and REITs in the catbird’s seat for acquisitions, we see more upside.

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Our medical outpatient building (MOBs) meeting with HR proved to be one the most contentious, after CEO Todd Meredith stepped down earlier in the month.  Interim CEO Connie Moore, a highly capable veteran in REIT circles, provided a thorough explanation behind the Boards’ reasoning on the executive changes as well as the process of finding a permanent replacement.  While we are likely to haircut our numbers on some near-term uncertainty (the CEO search is expected to take 6-9 months), we believe the portfolio remains meaningfully undervalued relative to the private market and we are encouraged by the potential for a catalyst in the form of a new management team or M&A. 

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Multifamily, SFR, and MH/RV

In the multifamily sector, we met with seven REITs, including Camden Property Trust (NYSE: CPT), AvalonBay Communities (NYSE: AVB), Mid-America Apartments (NYSE: MAA), Independence Realty Trust (NYSE: IRT), UDR Inc. (NYSE: UDR), Veris Residential (NYSE: VRE), and Centerspace (NYSE: CSR). 

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The sector remains in a transitional phase, with fundamentals varying significantly across regions.  The East Coast leads the recovery, driven by stabilized demand and limited new supply, which are supporting solid rent growth and improved occupancy levels.  On the West Coast, markets like San Francisco and Seattle are gaining momentum, bolstered by return-to-office mandates, favorable election outcomes, and improving in-migration trends, all within an already constrained supply environment.  Conversely, Sun Belt markets such as Austin and Nashville, are facing challenges from elevated deliveries and concessions.  However, these markets continue to experience the strongest in-migration trends in the country, fueling record absorption levels and historically low turnover.  These factors are helping to offset near-term headwinds, positioning the Sun Belt to rebound in the second half of 2025, with demographic trends and moderating supply driving long-term growth in 2026 and 2027.

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Other notable topics included the improving transaction market, with acquisitions expected to accelerate in 2025 as the bid-ask spread continues to narrow.  Additionally, both AVB and MAA plan to ramp up development starts to $1.5 billion and $1.0 billion in 2025, respectively, capitalizing on a favorable development environment.  This comes at a time when multifamily development starts have largely “fallen off a cliff,” as shown in Figure 2, suggesting that apartment completions in 2026-2028 could approach the low levels last seen after the Global Financial Crisis.  The resulting reduction in new supply is expected to drive outsized rent growth, creating a compelling opportunity for REITs with capacity to develop and deliver properties during this advantageous window.

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In the single-family rental (SFR) sector, we had productive meetings with both American Homes 4 Rent (NYSE: AMH) and Invitation Homes (NYSE: INVH).  Fundamentals in the SFR sector remain solid as elevated mortgage rates, the ‘lock-in’ effect, and an ongoing nationwide housing shortage have led to a more meaningful disparity between the cost of home ownership and in-place rents, resulting in greater demand for rental properties.  While new lease rate growth has softened in some markets due to seasonal factors and pockets of build-to-rent (BTR) supply, renewals still account for ~80% of leasing activity, allowing both SFR REITs to capitalize on these trends.  With AMH strategically leveraging its development platform and INVH its third-party management program and home-builder relationships, the sector is well-positioned for sustained growth for the foreseeable future.

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Lastly, we met with Sun Communities (NYSE: SUI) and Equity Lifestyle Properties (NYSE: ELS), both leaders in manufactured housing (MH), RV parks, and marinas.  While revenue growth in the transient RV segment continues to normalize from pre-pandemic highs, demand across the MH and annual RV verticals remains robust, with rent growth projected to hold steady at 5.0% – 5.5% in 2025.  Additionally, the marina portfolios of SUI and ELS serve as complementary drivers of growth as transient activity stabilizes.  Overall, the sector’s defensive characteristics and predictable cash flow make it an attractive option for investors, particularly in uncertain economic environments.

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Self-Storage

We met with Public Storage (NYSE: PSA), Extra Space Storage (NYSE: EXR), and CubeSmart (NYSE: CUBE).  The self-storage sector appears to be gradually stabilizing after a challenging 2024, characterized by declining move-in rates and softer overall demand.  While EXR is optimistic about a return to positive move-in rate growth by early 2025, significant uncertainty lingers around one of the sector’s key demand drivers: home sale activity.  Mortgage rates have risen sharply in recent months, climbing over 70 bps back to 6.8% as of November 30, 2024.  In turn, earlier investor optimism for a swift rebound in home sales next year has been tempered, introducing further unpredictability into the sector’s near-term trajectory.

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Housing mobility remains constrained, but the good news is that it is unlikely to deteriorate further.  Rental activity is holding steady, while reduced vacates are driving occupancy higher and exceeding typical seasonal trends, with EXR reporting a strong 94.3% occupancy rate going into the seasonally low leasing period.  Additionally, minimal new supply is expected to come online over the next few years as shown in Figure 3, alleviating competitive pressures and supporting improved pricing power for operators.  External growth opportunities are also increasing as the bid-ask spread narrows, enabling well-capitalized companies to act on attractive acquisitions.  While uncertainty persists, the sector’s adaptability provides a strong foundation for recovery, with well-positioned operators poised to capture incremental growth as market conditions normalize.

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Shopping Centers and Malls

Amidst continued leasing demand, and punctuated by a recent take-private announcement, the open-air retail group emerged REITWorld as one of the darlings.  Our team met with InvenTrust Properties (NYSE: IVT), Brixmor (NYSE: BRX), Regency Centers (NYSE: REG), Curbline Properties (NYSE: CURB), and Whitestone (NYSE: WSR).  On top of these, we joined a bus tour around the Las Vegas Metro with Kite Realty (NYSE: KRG), and caught up with mall owner Simon Property Group (NYSE: SPG).  From an operational perspective, not much has changed since June’s NAREIT.  Leasing remains healthy, the supply outlook has not picked up, and bad debt is holding at historic lows.  Retailers are anxious to add new locations in an environment of limited opportunities resulting in record occupancy rates (Figure 4 highlights same store occupancy among Shopping Center REITs).  Most REITs in this sector are poised for external growth to augment what should be a nice ramp in same store net operating income (SSNOI) above historical averages for the foreseeable future.  Not surprisingly, generalist investors are showing more interest thanks to the attention brought upon the sector due to Blackstone’s (NYSE: BX) take-private announcement of ROIC (NYSE: ROIC) at a valuation well-above where higher quality peers are trading.

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Industrial

Our team heard from management at Prologis (NYSE: PLD) and Americold (NYSE: COLD).  Unchanged from recent quarters, the timing of a fundamental recovery was the focal point in our industrial meetings.  In general, 4Q24 leasing updates trended in line with expectations, but with tenants continuing to slow walk negotiations, investors appear cautious on a pronounced demand recovery emerging in early 2025.  Shown in Figure 5, after reducing industrial exposure during late 2023 and early 2024, we have maintained an underweight position.  While we believe the long-term outlook is attractive, we are waiting for a clearer line of sight into the demand recovery before increasing exposure.

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Turning to Cold Storage, 3Q earning results clearly disappointed investors hoping for a recovery in physical occupancy, translating to negative stock performance (COLD declined 17% between 11/05/2024 and 11/14/2024).  While acknowledging the occupancy challenges, management highlighted the impact of operational efficiencies on the business next year.  All in, they anticipate top line revenues growing ~3% in 2025 and SSNOI increasing 4-5% due to margin improvement.  This outlook, albeit a slight decline from our earlier estimates, suggests the recent pullback in the stock price is overdone.

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Office

We met with the management teams of BXP (NYSE: BXP), Highwoods Properties (NYSE: HIW), and COPT Defense Properties (NYSE: CDP).  Office landlords continue to fight secular headwinds (e.g., work from home); however, the positive leasing momentum nationwide that was demonstrated during 3Q earnings is still playing out amidst the ongoing flight to quality and increasing mandates by corporations to a five day work week in the office. 

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On the East Coast, NYC is a clear leader in the return to office push (RTO), while Boston is following a similar but less robust trajectory.  Conversely, DC was highly debated in the lens of potential changes from DOGE (Department of Government Efficiency).  While scant on specifics, office landlords agreed that a return to office push for federal employees (currently at record lows with most government buildings sitting near empty in DC) would more than offset any job reductions.  The Sunbelt is also catching up as the region benefits from corporate relocations and migration.  The West Coast is still under the most pressure, but is starting to see some green shoots from several well publicized RTO mandates.  For example, Salesforce Tower, the largest office building in San Francisco, has seen employees in office 3+ times per week increase 25-30% in the past six months.

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Surprisingly, we started to see some office REITs switch to offense earlier in the month with CUZ’s equity raise to help fund a Charlotte acquisition, and this was very much a theme across office names with strong balance sheets.  Management teams are highly cognizant of quality and are, almost exclusively, uninterested in diluting current portfolio quality regardless of price.  Even with stringent thresholds and return criteria, we expect more office deals to cross the finish line and the well-positioned REITs to benefit.  Overall, we came away with an improved long-term outlook for office.  However, we remain concerned on some remaining occupancy slippage and the heavy cost of capital expenditures needed to attract and retain tenants.  Thus, we have maintained our underweight positioning.

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Triple Net

We met with Realty Income (NYSE: O) and Getty Realty (NYSE: GTY).  Realty Income, the largest triple net REIT, continues to leverage its unmatched scale and long-term lease structures to drive consistent performance.  Most recently, O expanded its investment capabilities through its evergreen open-ended private fund, designed to attract institutional capital, collect asset management fees, diversify its revenue streams, and become less reliant on public equity going forward.  Additionally, Realty Income sees virtually no tenants as a concern at the moment as it successfully renewed 100% of Walgreens leases that expired in 2024 and recaptured 91% of all Red Lobster and Regal Cinema properties, only losing 7 of 216 properties total.

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On the other hand, Getty Realty, a much smaller REIT, specializes in convenience stores, car washes, automotive retail properties, and quick service restaurants (QSRs).  While GTY’s portfolio tilts heaviest towards convenience stores (63%) at the moment, its goal is to have a more ‘balanced’ portfolio over the next 3-5 years.  For example, GTY’s auto service (6%) and car wash (21%) tenants are a growing facet to the portfolio in the past five years.  Lastly, GTY believes it can produce 2.5% to 3.0% of annual AFFO growth without any transactions going forward; if transactions were to be included, AFFO growth would be closer to 5.0%.

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Data Centers and Cell Towers

We did not meet with any of the infrastructure REITs at NAREIT, but the 3Q24 earnings season had several positive surprises.  Most notably, Digital Realty Trust (NYSE: DLR) announced $521 million in annualized bookings with its 3Q24 earnings call, more than doubling its previous all-time record set in 1Q24 and approximately three times the amount booked in 2Q24.  The stock traded up over 9.5% on the day of the report, finally surpassing its 12/31/2021 all-time high.  The strength was driven by all aspects of the business, including AI, cloud, and colocation (<1 megawatt leases).  Equinix (NASDAQ: EQIX) similarly reported record leasing, and announced a $15 billion joint venture with GIC (the sovereign wealth fund of Singapore) and the Canada Pension Plan Investments Board.  Commentary from both companies gives us confidence that we are in the early stages of record demand growth, only limited by power availability, which is driving rent growth and expanding development margins.

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Cell towers had a less eventful 3Q24 earnings season, as all three are grappling with demand from carriers that is either decelerating or bouncing around the bottom (albeit positive).  The ‘new’ news was a $975 million acquisition by SBA Communications (NASDAQ: SBAC) for 7,000 towers in Central America at an attractive multiple.  During 3Q24, American Tower (NYSE: AMT) divested its India portfolio at a loss, reducing exposure to this volatile earnings stream and using proceeds to pay down debt.  We believe that 2025 will be another year of muted organic revenue growth before re-accelerating in 2026.  However, all three cell tower REITs are at or below their stated leverage levels, which could lead to additional significant transactions even if the equity markets do not cooperate.  

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Conclusion

Although not much has changed in REITland over the past few months, following several days of management meetings and property tours, the tone amongst investors was certainly more upbeat.  In particular, investors are excited about REITs finally obtaining a cost of capital advantage versus private investors and the prospect for an uptick in accretive external growth.  While we are not seeing much outright distress in the private markets, we heard, nearly unanimously, about more rational sellers and a closing the bid-ask spread.  Outside of acquisitions, industry wide development activity remains well below normal, with persistently high construction costs and interest rates making it difficult for new projects to be approved.  We expect this dynamic to result in a favorable supply/demand balance, which should position landlords to push higher rents (and witness higher earnings).  Overall, we are convinced that public equity REITs are poised for growth with interest rates stabilizing, higher rents ahead, low new supply, and balance sheets that can support significant asset growth.

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Matthew R. Werner, CFA

mwerner@chiltoncapital.com

(713) 243- 3234

Bruce G. Garrison, CFA

bgarrison@chiltoncapital.com

(713) 243-3233

Thomas P. Murphy, CFA

tmurphy@chiltoncapital.com

(713) 243-3211

Isaac A. Shrand, CFA

ishrand@chiltoncapital.com

(713) 243-3219

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RMS: 3,203 (11.30.2024) vs. 2,727 (12.31.2023) vs. 3,177 (12.31.2021) vs. 1,433 (3.23.2020)

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An investment cannot be made directly in an index. The funds consist of securities which vary significantly from those in the benchmark indexes listed above and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of such indexes may be of limited use.)

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 investment or any other security. Past performance does not guarantee future results.

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