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Equity REITs At Bargain Prices: An Asymmetric Opportunity

Chilton REIT Team profile picture
Chilton REIT Team


  • We comment on recent REIT performance and re-affirm our positive long-term outlook.
  • We attempt to present only historical factual evidence to support our assertion that REITs are attractively priced for long-term investors.
  • The most recent two recessions are the only occasions in recent history when REITs have traded at valuations this inexpensive relative to equities, investment grade bonds, and private real estate.
  • Accordingly, we believe that it is unwarranted for REITs to be trading at recession-like valuations at a time when they boast all-time high occupancy, positive rent growth, and a path to dividend growth of 4-5% per year.

A ‘correction’ is defined as a decline of 10% or more from a recent high. As of February 23, 2018, the MSCI US REIT Total Return Index (Bloomberg: RMS G) was trading 11% below its recent high on December 18, 2017. Some pundits assert that a correction can be healthy for a rising market, as it allows new investors to buy in at a lower price and thus resume positive momentum, particularly in a ‘bull market.’ However, unlike the S&P 500, REITs are nowhere near bull market territory, and are still well below the all-time high on July 31, 2016. They have been hit with the perfect storm of rising interest rates, negative funds flows, and too much emphasis placed on the fact that the real estate cycle is getting mature, as evidenced by decelerating growth rates.

With REITs already trading below the ‘bear case’ laid out in the Chilton 2018 REIT Forecast published on January 2, 2018, we felt it appropriate to comment on the year-to-date performance and re-affirm our positive outlook. Based on multiple metrics, REITs are trading at the most inexpensive valuations since the recession. While we are considered ‘REIT-dedicated’ investors and maintain a long-only portfolio (no short positions), we attempt to present only historical factual evidence to support our assertion that REITs are attractively priced for long-term investors.

Unexpected Start to 2018

Understanding that REITs have exhibited a high correlation with long-term interest rates over the past five years, the variable between the bear, base, and bull case scenarios presented in the 2018 Chilton REIT Forecast was the US 10-year (or yr) Treasury yield at the end of the year. The bear case scenario called for a total return within the range of -5% to +1%, predicated on a US 10-yr Treasury yield between 2.8% and 3.0%. As of February 23, the US 10-yr Treasury yield was 2.9%, up 50

This article was written by

Chilton REIT Team profile picture
The REIT Team of Chilton Capital Management, a Houston-based investment adviser, is headed by co-portfolio managers Bruce Garrison, CFA, and Matt Werner, CFA. Mr. Garrison has over 40 years of experience analyzing public REITs both on the buy-side and the sell-side. Mr. Werner joined Mr. Garrison on the Chilton REIT Team in 2009. The REIT Team’s strategy primarily pursues investments in publicly traded real estate investment trusts (REITs) and real estate related entities based primarily in North America. The REIT Team believes public REITs are superior vehicles for investing in real estate due to their liquidity, transparency, and total return characteristics. Investing in public securities enhances the REIT Team’s ability to diversify by geography, sector, strategy, property, and tenant while maintaining portfolio liquidity. REIT property types include apartments, regional malls, shopping centers, lodging, office, industrial, self-storage, data centers/cell towers, and a variety of health care related facilities. The REIT Team focuses on traditional methods of security analysis; primarily research, critical thought and analytical depth, which are integral to their investment process. The REIT Team’s investment approach seeks to combine its real estate industry experience with traditional methods of security selection to make sound investment decisions in real estate companies. The Chilton REIT Team manages Separately Managed Accounts (SMAs) for high net worth individuals and institutions. Additionally, the REIT Team is the sub-advisor for an open-end investment company, the West Loop Realty Fund (tickers: REIIX, REIAX, and REICX). Before investing one should carefully consider the West Loop Realty Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus and summary prospectus, a copy of which may be obtained by calling 800-207-7108. Please read the Fund’s prospectus or summary prospectus carefully before investing. The Fund may not be suitable for all investors. We encourage you to consult with appropriate financial professionals before considering an investment in the Fund. Liberty Street Advisors, Inc. is the advisor to the Fund. The Fund is part of the Liberty Street family of funds within the series of Investment Managers Series Trust. The Fund is Distributed by Foreside Fund Services, LLC. Chilton Capital Management, LLC is an independently owned and operated firm formed in 1996. Chilton provides investment advisory services for registered investment companies, private clients, family offices, endowments, foundations, retirement plans and trusts. For more information about Chilton Capital Management’s REIT Team, please visit www.chiltoncapital.com/reit/ or email info@chiltoncapital.com. Additional information about Chilton Capital Management LLC is also available on the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. The searchable IARD/CRD number for Chilton Capital Management LLC is 104592.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (16)

team Gabe profile picture
fantastic article , and great analysis on the correlations with fixed income
jgrever621 profile picture
REITs seem to be more affected by interest rates than is typical at the moment.
Personally, it is my impression that low inflation is the reason REITs are not meeting historical figures at this time.

Based on current figures, there is some reason to hold an opinion that infation is beginning to accelerate, and will become a huge factor. This is why the FED is raising rates (well, partly).

Also there is another damper on the economy, the sale of boinds owned by the FED.
How these bonds affect REITs is unknown, but they are doing something, probably making bond pricing lower (lower price to attract buyers).

Think we will see REITs continue to sink through summer as rates increase, and then stablilze before starting a steady rise. This requires AFFO to continue to grow, which it shows everty intenetion of doing.

Again, the effect of bond sales is unknown, and would love to see an opinion of just what such sales are doing to the bond market.

Going to be an interesting summer, but one thing is clear:

For the dividend investor, times are GOOD, and could bet BETTER.
A helpful analysis but a backward looking analysis. It does not consider the change in the fundamentals that is taking place as the growth of the internet reduces the need for retail property.
While I like the real estate segment, the huge flaw in this backward looking argument is that the world is changing faster than any time in modern history from a macro-trend perspective:

1. Companies are requiring much less office space as most move to “hoteling” (sharing) and giving up individual offices. My own company as an example has approx doubled over the past 5 years in people but we are moving to a space with half the square footage based on the above.

2. The age of big box retail, with some exceptions, is over and will never come back.

3. Air B&B and virtual reality/iPads/telepres... is changing the travel industry... for example we have begun inviting people to attend meetings starting this year as “virtual robots” who can literally move around a cocktail hour as an iPad on wheels with a camera and never leave home.
Tiki Bar Capital profile picture
All those trends are real, but they won't disrupt the competition to oblivion. I think it's a mistake to extrapolate from our shifting world that REITs will go down the drain.
Excellent! Now Following.
Thanks for your analysis. Good points.
Ihookem the newbie here. I find it very strange that houses are going for such a premium that many , at least in S.E . Wisconsin are not even needing a realtor to list a property cause people are actually lining up to buy a house. For that reason, buyers are going over the high asking price. Why then are REIT's going for an avr. of a 19% discount ? Although, I realize commercial vs residential is very different and our high home prices may be regional, ( you can hardly give land and homes away in Upper Michigan) it does not make sense that there is such a discount on such high div. REIT's. It is just plain oversold . I am sure this is the real deal right now. I always though high div. stocks did not go up like growth stocks but today REIT's beat the S&P. I understand it's not always the case but I have seen this many times as of lately. Even the S&P downturn, REITS lost only about 60% of the S&P. They are just plain oversold on fear and hype of short term interest rates rising to what , 1.5%- 2%? . .. ... . And . ... .. and if inflation does really become a factor, it may hurt prices and rent prices for a while but a REIT is a commodity. Trumps steel tariff supposedly raises a car $100 in price. Imagine what a buildings worth would raise ? Suddenly that building would cost a whole lot more to build, raising the price of the commodity. . ... .. and if inflation did take off , give it 10 yrs and the price and value of that building skyrockets the next cycle when rates come back down. I think we have some real opportunities to buy REIT's . Just sit back and collect the divies. Let someone else collect the rents and do the maintenence for me. Glad I never got the bid on those house I wanted to buy to fix up and rent out. The divies just pop up every month & quarter on my Fidelity account. On my way to put some wood in the wood boiler now and then head for bed. Very little worry about collecting my REIT rents.
po4tside profile picture
Agree this analysis is well done. Looking to get back into BDC/REITS and some accidental high yielders.
This analysis is strong and convincingly argued.
I think most have the current situation wrong. Most believe increasing interest rates negatively affect REITs/BDCs. Actually, the opposite is true. In a modestly increasing interest rate environment REITs/BDCs actually improve. Do your DD and see for yourself. Why so many have it wrong is beyond me. That fact, along with the Trump tax cuts and oversold REIT/BDC market NOW make for a unique investment period. I am taking advantage of it by being fully invested. I am not a financial advisor. Always do your own DD. JMHO. Good investing to you.
socalquest profile picture
Tell that to SA writer Adam Aloisi:


REITs: Beware Bullish Assumptions And Questionable Premises

larrhall profile picture
This article seems to make more historical/statistical sense than Adam's piece.
Interesting article. I believe it is NOW the best time to invest in REITs and BDCs in a number of years. I am fully invested specifically in high yield monthly pay dividend stocks. PARTLY due to the Trump tax cuts and the current oversold nature of most all REITs/BDCs. I am fully invested to take advantage.
socalquest profile picture
Don't get burn for a long time. Maybe as long as 10 years.
Biological profile picture
A well articulated and sensible, fact-based thesis. Although anything can always go lower, at these levels, the risk/reward is looking extremely reasonable and increasingly irresistible (it is like the old commercial: "Don't squeeze the Charming."). And if thesis turns out right, you get an income stream of, say, 5%-6% with some similar amount of capital gains which presents a low teens return, per annum, for some time to come. If so, you'll double your money in less than a decade.
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