De-Escalate with REITs: -0.49% in March, +10% TTM
- Martin Kollmorgen
- 3 minutes ago
- 14 min read
“Boy, that escalated quickly…I mean, that really got out of hand fast” – Ron Burgundy (Anchorman)
PERFORMANCE: Serenity Alternative Investments Fund I returned -0.49% net of fees in March vs the REIT index at -3.54%. YTD the fund has returned +0.9% vs +1.07% for REITs.
TARIFFS: Do REITs have exposure to tariffs?
A FLASHING “BUY” SIGNAL: Volatility has pushed the REIT market to a historically significant valuation discount…
STAY CLASSY: Buying high-quality, deeply discounted blue-chip REIT portfolios can help de-escalate portfolio uncertainty.
While the month of April is only 15 days old, volatility in the capital markets has escalated…quickly.
Tariffs, a VIX over 50 (the highest volatility in 5 years), and financial deleveraging have all combined to form a potent cocktail of the dreaded U word… “uncertainty”.
This is a difficult environment for making decisions.
But for some of us, this is why we play the game. Volatility breeds opportunity, and there is no better example than the REIT market in 2025.
In April, deep discounts in certain blue-chip REITs have appeared due to the Trump administrations proposed tariffs. Prologis, the premier warehouse portfolio in the world, is currently cheaper than it has been in 13 years. Alexandria (ARE), the highest quality lab-space portfolio in the US, sports a +10% cash flow yield. Casino REITs VICI and GLPI, which both collected 100% of their rent during the global pandemic (when their properties were closed), have sold off to the point where they pay +6% dividend yields.
In all these cases, it’s difficult to imagine a world in which two years from now, these deep valuation discounts don’t look preposterous. Competitive supply for most REITs remains on the decline, balance sheets are healthy, and growth expectations are very modest. Said another way, very little must go RIGHT for these names to deliver very strong returns to investors over the next 18-24 months.
Are we confident the worst is over for the global economy? Of course not. But predicting the direction of that massively complex system is a gargantuan task. We are better off asking a much simpler question.
Should we buy high quality, irreplaceable, commercial real estate portfolios when they trade at significant valuation discounts?
To that I would propose a resounding “yes”.
PERFORMANCE: -0.49% in March, +10.0% TTM
Serenity Alternative Investments Fund I returned -0.49% in March net of fees and expenses with +67% net exposure versus the MSCI US REIT Index which returned -3.54%. Year to date the fund has returned +0.9% versus +1.07% for the REIT index. On a trailing twelve-month (TTM) basis, the fund has returned +10.0%. Over the past 5 years Serenity Alternatives Fund I has returned +13.2% annually net of fees and expenses with a 1.03 Sharpe ratio, versus +11.3% for the REIT index.
The most profitable position in the fund in March was CareTrust REIT (CTRE), a long position which returned +11.8%. CareTrust is a skilled nursing (SNF) REIT with a low levered balance sheet that has accelerated its acquisitions plans over the past 6 months. Due to the volatility of the SNF business, SNF REITs like CTRE tend to trade at lower valuation multiples than most of the REIT universe. This makes them a particular bargain when earnings accelerate higher, which is currently happening for CTRE. At a +14.2x cash flow (AFFO) multiple and +17% expected cash flow growth for 2025, we view CTRE as an attractively valued strong earnings growth story with a well-regarded management team. Exactly the type of opportunity the Serenity process is built to find.
The worst performing position in the fund in March was GDS Holdings (GDS), a long position which returned -33.4%. GDS was the best performer in the fund last month as the stock went from $20 to $40 over the course of 20 trading days. We trimmed our position on this strength, and the stock came back to reality a bit in March, closing the month at $25. We continue to monitor GDS, as the company has strong fundamentals and was forming plans to spin out its non-China Data Center business, which would be extremely interesting. The current trade situation with China, however, gives us a bit of pause. If US/China relations can begin to thaw over the next 6 months we are likely to increase our position as GDS still trades at a significant discount to peers with accelerating growth.
Tariffs: Are REITs at risk?
The Trump administration’s tariff agenda is very clearly top of mind for investors in April, with significant ramifications for many parts of the economy.
Fortunately for us, REITs have little to no direct exposure to tariffs. REITs don’t import anything, they have no “input” costs (apart from interest rates), and most REIT property sectors have extremely high gross margins (70%+).
REIT tenants, however, in certain cases are exposed to tariffs. This can impact REITs in the form of slower leasing activity, or in the case of significant distress, potential lease terminations or bankruptcies.
The Industrial (Warehouse) REITs have seen some of the largest tariff impact so far, as investors expect leasing to slow due to decreased international trade. While certain port markets could certainly see slower throughput traffic, it is important to keep in mind that most Industrial REITs have extremely well-diversified portfolios. This means diverse geographically, and diverse from a tenant perspective.
Prologis (PLD) for instance, only has 5 tenants that make up more than +1% of their total rent roll. These are Amazon (+4.9%), Home Depot (+1.8%), Fedex (+1.3%), DHL (+1.1%), and Geodis (+1.1%). Could leasing slow for these companies, lowering Prologis’ same-store revenue growth? Absolutely. But is there a significant risk of any of these companies going bankrupt because of tariffs? I don’t believe so.
The key question then becomes, “how much of a slowdown is currently priced into PLD shares?” With the company trading at a +19.5x forward 1-year cash flow (AFFO) multiple (the company’s lowest valuation in 13 years), I would argue that a significant slowdown is currently baked into investor expectations.
REITs also may be impacted by tariffs if they cause a broader slowdown in consumer spending or CEO confidence. There is evidence that this may be occurring as we speak, which is negative for cyclical and consumer focused REITs (Malls, Shopping Centers, Apartments).
This is a much bigger threat to REITs in our view, with the magnitude of the tariff impact on growth yet to be seen. For this reason, Serenity is NOT adding exposure to Mall REITs, is being extremely selective in our exposure to Shopping Center Retail REITs and is exercising patience with our long-term bullishness on Apartments.
The Bottom Line: Tariffs have little direct impact on REIT cash flows but can cause secondary impacts to REIT tenants and the broader consumer that may spread into REIT portfolios. Serenity is monitoring growth closely, and has limited exposure to highly consumer sensitive REITs, in favor of less cyclical REIT portfolios.
REIT Discounts: History says “Buy REITs”
While the risk appetite for most investors has reversed significantly over the past two weeks, Serenity’s bullishness on the REIT market has not dimmed significantly, and in some cases, is brighter.
Tariffs, as discussed above, really don’t impact REITs in a direct and significant way, and the flexibility of our fund allows us to hedge risks to the consumer using our short book.
More importantly, REITs in the last week traded to valuation levels that are historically a screaming “buy.”
The chart above displays historical equal weighted premium/discount to NAV for the REIT market in the blue line, with forward 1-year returns for REITs in the orange bars. What should jump out is that some of the best forward-looking returns for REITs occur while REITs trade at their largest discounts to NAV.
In fact, the average forward one-year returns in this chart are +9.37%, in line with average REIT returns over the past 20 years. When REITs trade at a discount larger than -20%? The average return during those periods jumps to +26%.
Using this historical context REITs are a screaming “buy” at a discount to NAV greater than -20%. On 4/9/2025, this value reached -27%.
The Bottom Line: Tariff turmoil pushed REITs to a historical “buy” point in April, with the equal weighted premium/discount to NAV for REITs hitting -27%. Serentiy has added long exposure to select REITs during the selloff, with expectations that significantly discounted valuations in certain blue-chip REITs will not persist for long periods of time.
Stay Classy: 2 Blue-Chip REITs Serenity is buying
With macroeconomic uncertainty high, but REIT valuations compelling, how do we triangulate opportunities that are truly attractive? Investors primary fear (and deservedly so) is buying cheap REITs that then…just get cheaper. So how do we avoid value traps while taking advantage of a historical valuation dislocation?
Serenity’s process is uniquely designed to do exactly this. We are constantly vigilant for opportunities where the market’s short-term focus looks irrational over a longer-term time horizon. In the current environment, this means buying high quality REIT portfolios, run by experienced and well-regarded management teams, trading at significantly discounted valuations.
Let’s start with Prologis (PLD), the largest US REIT and premier global warehouse portfolio in the world. Prologis owns 1.3 billion square feet of industrial (warehouse) real estate encompassing 5,866 buildings spread over 4 continents. They are a prolific warehouse developer, have compounded their cash flow (AFFO) at +9.7% annually over the past 10 years, and consistently sport occupancy levels above +95%.
The median valuation for Prologis since 2012 is +25.3x AFFO, with a peak of over +40x in 2021, and a low of +17.9x in late 2015. The company currently trades at +19.5x and briefly touched +17x last week.
Said another way, one of the largest, fastest growing, most irreplaceable commercial real estate portfolios on the planet earth, is currently trading at the 0.1 percentile of its historical valuation range going back 13 years.
Within the Serenity framework, this is an opportunity. Is leasing likely to slow for PLD in the short term as tariff uncertainty weighs on tenant decisions? Sure. Could guidance come down a bit for 2025? Yes. Is a significant amount of bad news already baked into Prologis shares at a +0.1 percentile valuation relative to history? Absolutely.
There is no guarantee Prologis shares don’t get cheaper from here, particularly if tariffs spark a recession. But the balance of probability is that over a multi-year horizon, buying a premier CRE portfolio with a seasoned and well-respected management team at a decade low valuation level is going to be a good decision. For this reason, we have added Prologis on the long side in the last week, at a basis that we think is historically attractive.
Alexandria (ARE) is another interesting example of a high quality commercial real estate portfolio trading at a rock bottom valuation. The chart below shows ARE’s historical price/AFFO multiple going back over a decade. While Prologis is trading at the low end of its historical valuation range, Alexandria has broken through previous lows and hit the infamous +10x AFFO valuation level. This deep discount to most REIT peers is usually reserved for structurally impaired property types or REITs with broken corporate governance.
A multi-year lab-space (ARE’s primary property type) bear market is the main culprit for the company’s valuation woes. Yet, despite cyclical headwinds, the ARE portfolio is still +94.6% leased, the company has historically grown its cash flow at +5.85% over the last 10 years, +92% of its revenue comes from publicly traded tenants and the company has very little debt maturing over the next two years. Additionally, ARE owns arguably the highest quality Lab-space portfolio in the country, consisting of some of the premier biotech campuses in the US, many of which were developed (by ARE) within the last 10 years.
Said another way, ARE is a premier portfolio of lab space assets that have been newly developed, is +94.6% leased, has few debt maturities, and is trading like a regional mall portfolio at the depths of the pandemic.
Could the new tariff regime have negative impacts on the biotech and pharmaceutical industries? Certainly. Is this likely to trigger the bankruptcy of multiple large publicly traded bio-pharma companies that are ARE’s tenants? I highly doubt it. And yet, ARE is priced as if its portfolio is closer to +85% occupied than +95% occupied.
This is the result of a stock market that shoots first and asks questions later. ARE is an extremely high quality CRE portfolio trading at a near fire-sale price. Serenity has added some long exposure to ARE at these extremely depressed levels.
The Bottom Line: Tariff headlines and record volatility have created opportunities to buy very high quality commercial real estate portfolios at attractive valuations. Prologis (PLD) and Alexandria (ARE) are two opportunities Serenity has identified as deeply discounted blue-chip portfolios. We believe years from now we will look back in amazement that these portfolios became this cheap.
THE MARKETS’ GLASS CASE OF EMOTION
For active stock pickers, the modern investing environment is awash in opportunities. Sentiment changes so rapidly that it has never (in my career) been more rewarding to simply keep a cool head.
Amidst the tariff induced, news team battle-like chaos, opportunities to buy extremely high quality commercial real estate portfolios have begun to appear, and Serenity is not hesitating to take advantage. We are not sounding the all-clear from a macro-economic perspective, but we are opportunistically deploying capital with a long-term time horizon. Our short book allows us to actively manage risk, with an eye on a brighter future for the irreplaceable CRE portfolios we are accumulating.
Any questions, or for a deeper dive or more details on how we are deploying capital right now, don’t hesitate to reach out.
News team, ASSEMBLE!
Martin D Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
Office: (630) 730-5745
*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments
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