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Writer's pictureMartin Kollmorgen

BRIGHT LIGHTS IN CRE: +3.27% in November, +22.0% YTD

“Two hundred fifty strands of lights, 100 individual bulbs per strand, for a grand total of 25,000 imported Italian twinkle lights!”

–Clark Griswold, National Lampoons Christmas Vacation (1989)


  • PERFORMANCE:  Serenity Alternative Investments Fund I returned +3.27% net of fees in November vs the REIT index at +4.38%. In 2024, the fund has returned +22.0% vs +17.4% for REITs.

  • VISIBLE FROM SPACE: The bull market in Seniors Housing is burning so bright that it is re-writing REIT bull market records.

  • A FLICKERING BULB: Warehouse REITs have hit a soft patch but could re-accelerate in 2025.

  • ALL SYSTEMS GO: Data Center leasing shows no signs of stopping.


For 24 months in 2022 and 2023 the commercial real estate market was remarkably dim.


Interest rates increased, new supply pressured asking rents, bankruptcies percolated, and most investors spent more time in CRE triage than putting new capital to work.


But in 2024 things began to brighten up.


Supply headwinds peaked and began to moderate. Growth in many property types accelerated. Interest rates… <gasp>… stopped going up.


And with a wellspring of investing uncertainty, the presidential election, finally in the rearview mirror, the picture is undeniably brighter for commercial real estate today than it has been since early 2021.


The REIT sector in 2024 is lighting up like the Griswold’s house.


Headed into 2025 there are a few key points of illumination worth discussing. The Seniors Housing sub-sector within Healthcare REITs continues to shine. Warehouse valuations have become increasingly attractive, with the potential for bottoming fundamentals in 2025. Data Centers continue to break leasing records.


These key trends are set to power the Serenity portfolio in the near to medium term. While it’s impossible to say what the next leg of the REIT bull market looks like, our portfolio and process are prepared for what’s to come. It’s been a long time since we had a “normal” market for REITs, but don’t forget what that looked like last time…


From 2010-2015 REITs returned +17% annually for 5 straight years.


That’s some serious portfolio illumination.


PERFORMANCE: +3.27% in November +22.0% YTD


Serenity Alternative Investments Fund I returned +3.27% in November net of fees and expenses with +90% net exposure versus the MSCI US REIT Index which returned +4.38%. Year to date Serenity Alts Fund I has returned +22.0% with only +73% net exposure vs the REIT index at +17.4%. Over the past 5 years Serenity Alternatives Fund I has returned +13.8% annually net of fees and expenses with a 1.11 Sharpe ratio, versus +5.8% for the REIT index.


One of the most profitable positions in the fund in November was American Healthcare Realty (AHR), a long position which returned +12.1% during the month. AHR continues to be one of the largest weights in the Serenity long book based on the company’s incredibly strong fundamentals and potential for a multi-year cycle of mid-teens earnings growth. AHR trades at an AFFO (cash flow) multiple slightly higher than the REIT average, but with expected earnings growth in the 98th percentile of Serenity’s REIT universe.


The least profitable position for the fund in November was Innovative Industrial Properties (IIPR), a long position that returned -15.6% during the month. IIPR was a very profitable long position in 2024 that we had trimmed coming into the month on lowered odds of the SAFE banking act passing. They announced a lackluster Q3 early in the month and Serenity has since sold our remaining shares. While IIPR’s valuation is still attractive, the company continues to have tenant issues, and their acquisition pipeline has shown little momentum. In our view there are currently better opportunities for capital deployment elsewhere in REITs. 


VISIBLE FROM SPACE: White hot Seniors Housing is the next great CRE bull trend


Over the last fifteen years, I have had the good fortune to closely cover three distinct, property-specific REIT bull markets; one in Self-Storage, one in Industrial (Warehouse), and one in Data Centers. Specifically, from 2010-2015 Self-Storage REITs returned +24.4% annually versus +10.7% for REITs. From 2013-2018, Data Center REITs returned +18% annually versus +9.3% for REITs. From 2015-2020, Industrial REITs returned +19.4% annually vs +7.07% for REITs.


To put this into context, when you compound capital at +20% for 5 consecutive years, a $100,000 investment turns into $248,832. That’s 2.5x your money in only half of a decade. Those kinds of returns can make your portfolio the brightest bulb in the bunch.


And the current bull market in Seniors Housing is burning brighter than all three of the examples above. For some context let’s take a look at the numbers.


In each previous REIT property sector bull run, three key elements combined to produce above trend Net Asset Value (NAV) growth within these specific property types, which in turn pushed the stock prices much higher. These elements are 1) elevated same-store NOI growth, 2) significant acquisition and development activity, and 3) access to attractively priced capital.


During Self-Storage’s bull run (remember each of these took place over 5 years), SS NOI growth averaged +6.33%. Acquisitions as a percent of gross book value averaged +2.39%, and development as a percent of gross book averaged +0.3%. Implied cap rates for the Self-Storage REITs fell from +6.5% in early 2010 to +5.3% at the end of 2014. This translated to +25% annualized NAV/share growth for the property sector on average, almost perfectly in-line with the industries’ total returns over this period (+24.4%).


During the Industrial REIT bull market, SS NOI growth averaged +4.57%. Acquisitions as a percent of book value averaged +2.36%. Development as a percentage of gross book averaged +10.6% and implied cap rates fell from +5.18% to +4.13%. This translated to NAV growth of +13% on average for this period, a bit lower than the sector’s total return at +19.4%/year.


Now let’s compare this to current statistics in the SHOP (Seniors Housing) REITs.


Welltower (WELL) has guided to +12.25% SS NOI growth at the midpoint for 2024. The company through three quarters has closed on +$6 billion in acquisitions (+10% of GBV), has an active development pipeline, and has recently funded external growth with +3.25% exchangeable notes and sports an implied cap rate in the mid +3% range.


American Healthcare Realty (AHR) has guided to total portfolio same-store NOI growth of +16%, acquired more than +$300m of assets in the quarter (~8% of GBV), and sports an implied cap rate near +6.5%.


Both companies are growing their SS NOI well in excess of all three historical REIT bull markets we mentioned above. On the external growth front, they are VERY active, as there are few other buyers of Seniors Housing currently in the market. And lastly, on the cost of capital side, WELL is extremely well positioned to accretively fund external growth, while AHR could see significant cap rate compression simply by continuing on its current trajectory.


This has translated to +17.3% NAV/share growth for Welltower over the past year, and +43% NAV/share growth for AHR since its IPO in February of 2024. This is the underlying portfolio strength that has driven Healthcare REITs higher in 2024 and is likely to do so in 2025 and beyond.


And this may just be the beginning. The number of baby boomers over 80 years old is set to ACCELERATE from here, while Seniors Housing supply is falling. This should cement current trends in place for at least the next two years.


At Serenity, our expectation is for 15-25% annual NAV growth in both WELL and AHR for 2025 and 2026, and our total return expectations are similar.


The Bottom Line: Seniors Housing REITs are currently operating through a bull market potentially more powerful than historical bull runs by Self-Storage, Data Centers, and Warehouse REITs. These companies have strong same-store NOI growth, healthy acquisition pipelines, and attractive costs of capital. Serenity expects double digit NAV/share gains in 2025 and 2026 and has significant long positions within this REIT sub-sector.


THE FLICKERING BULB: Are Warehouse REITs dying?


Nobody is immune to the CRE cycle.


Warehouse REITs are the latest testament to this fact.


Despite their popularity, since the end of 2022, Warehouse REITs rank 15th out of 19 REIT property sectors in terms of performance at +4.8%. In 8th place at +34.2% over the same period? Office REITs.


That is not a typo. Office REITs have significantly outperformed Warehouse REITs over the last 2 years.


Expectations were simply much too high for Warehouse REITs after their incredible bull run from 2015-2022. I discussed the dangerous nature of how crowded the Warehouse trade was here in 2023. Note this incredibly non-consensus quote from that newsletter.


“If Office REITs outperform Warehouse REITs over the next 3 years, nobody should be surprised. Nobody is positioned for it, which perversely makes it more likely to happen.”


The cycle simply remains undefeated, and in 2023, it came for the Warehouse REITs.


As a quick exploration into what happened and where we go from here, we can explore the experience of a former all-star Serenity long idea in Rexford Industrial (REXR).

As is clear in the chart, Rexford had a phenomenal run from 2015-2022, returning +19.5% annually and growing NAV from just over $15 to over $70 in 2022. Since then, however, the stock has fallen nearly -50%, and the company’s consensus NAV is down to +$53. The culprit? Falling occupancy levels and slowly moderating rent spreads. Put simply, REXR’s growth peaked in 1Q 2022 and has moderated ever since. As of their most recent quarter, occupancy stood at +93%, down -1.1% from a year ago, and over -3% from it’s peak of +96.3% in 1Q 2022. Occupancy tends to be a key leading indicator in commercial real estate, and investors are waiting for occupancy to stabilize before getting more bullish on Rexford.


In the meantime, REXR’s valuation has fallen meaningfully, with the company currently trading at +19.4x 2025 AFFO estimates. This is down from a multiple over 40x in 2022 and is now below the 25th percentile of the company’s entire valuation history. Said another way, REXR has not been this cheap since 2015.


To summarize, REXR was a once high-flying stock that has seen growth inflect lower and it’s valuation plummet. As of this writing the company is extremely cheap relative to it’s history, but still has 1) falling occupancy and 2) moderating same-store growth as of the most recent quarter. Where do we go from here?


Based on commentary from both Rexford and competitor Prologis (PLD), there is a real possibility that occupancy in Rexford’s portfolio bottoms and begins to tick higher in 2025. With a portfolio of infill Industrial assets concentrated around Los Angeles, it may only be a matter of time before fundamentals stabilize and resume their previous upward trend.


The same can be said for many of the Warehouse REIT portfolios. PLD has gone so far as to suggest the market will almost certainly bottom in 2025 as supply pressures abate and some certainty re-enters the tenant decision making process following the election.


If this occurs, the Warehouse names (REXR particularly) look VERY cheap. As always, Serenity will wait for more data to confirm a bottoming trend but suffice it to say the pencil is sharp and we are watching these names vigilantly.


The Bottom Line: Warehouse REITs have struggled since 2022 as growth has slowed and valuations have re-set lower. There are reasons to be optimistic in 2025, however, based on recent company commentary. If occupancies can bottom, Warehouse REITs could be poised for an excellent year in 2025, and potentially beyond.


ALL SYSTEMS GO: Data Center leasing continues to impress…

The last bright light within CRE to discuss headed into 2025 is one that consistently makes it into these pages. Data Center leasing momentum.


Take a listen to these quotes from Data Center REIT earnings calls from Q3 of this year.


From Digital Realty (DLR):


“First, a new leasing volume of $521 million at our share shattered our prior record and even our own expectations for the realm of possibility in a quarter. In fact, 3Q leasing was more than a full year's worth by previous standards as activity in the quarter exceeded the leasing completed in all of 2023, pushing our backlog of signed but not commenced leases up to nearly $816 million. While greater than a megawatt leasing was the primary driver, our 0 to 1 megawatt plus interconnection segment also posted record bookings in the quarter.”


From Iron Mountain (IRM):


“You are correct that in light of the strong growth we continue to see in leasing, we will be continuing to invest significantly in data center growth capital. And in fact, we'll probably be somewhere in the vicinity of a couple of hundred million dollars more growth capital than we were previously expecting earlier in the year in light of the signings. And as you probably saw in our supplemental, we are advancing pretty heavily in some of the construction of all the pre-leased assets.”


From Equinix (EQIX):


“We want to very clearly articulate that for us, this is about being balanced in our approach to the opportunity and that whilst training workloads have dominated the total kilowatts leased at this particular point -- moment in time, we see significant opportunity as customers move through the stages of AI adoption at a much more accelerated pace than they move through the stages of cloud adoption. And we are actually talking to our customers, not just about AI projects, but about AI-enabled strategies.”


The Bottom Line: Data Center REITs continue to benefit from secular growth drivers such as AI and continued migration to cloud computing. With the largest global platforms in the market and the best balance sheets in the industry, EQIX, DLR, and IRM are uniquely positioned to benefit from these trends for years to come.


YOU SERIOUS CLARK?


After two years of dropping mostly coal into REIT investors’ stockings, Santa is back to his old generous self in 2024, and the outlook for 2025 continues to brighten.


Senior Housing REITs are leading a bull charge like nothing ever seen in the REIT space.


Warehouse REITs are poised for a potential revival after a two-year growth lull.


Data Centers continue to benefit from the inexorable trend towards a more digital economy.


The Serenity portfolio is full of goodies this year, and our process continues to shop with a discerning eye. We have big plans for 2025, so keep an eye on these pages for some potentially exciting developments.


From our small team here at Serenity to all our friends and investors out there, we wish you the best and merriest end to 2024 and an incredible 2025.


Merry Christmas and Happy Holidays,


Martin D Kollmorgen, CFA CEO and Chief Investment Officer Serenity Alternative Investments Office: (630) 730-5745 MdKollmorgen@SerenityAlts.com


*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments

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