Market Monitor: Jeung Hyun’s Picks

Jeung Hyun, Portfolio Manager at
Adelante Capital Management

REIT Market Outlook

  1. REITs are one of the best performing asset classes since my previous appearance on NBR last year (9/14/18); the sharp decline in the 10-Yeart Treasury Note yield has been supportive.
  2. Even if rates do go up from here, REITs should benefit from an improving economy; and there is always the backstop of private equity interest.
  3. Longer term, we are probably in a low return/low interest rate environment, which is positive for REITs.
  4. For the 10 years ending 8/31/19, the total return for the Wilshire REIT Index is identical to the S&P 500 Index, 13.5% vs. 13.3%, respectively.

3 Stocks – 2/3 outperformed the index last year; keeping INVH and introducing 2 new names

Growth – COLD (2.3% dividend yield)

  1. Owner/operator of ~1.0 billion cubic feet of temperature-controlled warehouse space globally; the only publicly traded REIT in a fragmented market (consolidation/external growth opportunity).
  2. Strong food industry fundamentals drive growing demand for COLD’s warehouse space.
  3. Best-in-class IT and operating system provide competitive advantage in an operationally intensive business.

Value – ALEX (3.2% dividend yield)

  1. – 2.4 million sq. ft. of retail, 1.2 million sq. ft. of industrial and over 154 acres of commercial ground leases (e.g. irreplaceable shopping centers in the beach town of Kailua, HI).
  2. – higher median household income and lower unemployment rate than California and New York but it is difficult to build new commercial real estate there (9-15 years entitlement and permitting process).
  3. – two-day standard shipping in contiguous U.S. vs. 3-7 business days for Hawaii  -> low internet sales penetration.

New Sector – INVH (1.9% dividend yield)

  1. The largest single-family rental REIT in the US with over 80k homes in 17 markets.
  2. Attractive geographic footprint with 70% in high growth markets (Sunbelt states) and the West Coast where home prices are more expensive, and homeownership is difficult.
  3. Pace of household formation in INVH markets is more than 2x the national average but supply growth at an affordable price point remains muted.
  4. INVH has developed a best-in-class operating system using technology to drive efficiency while enhancing the resident experience.

Disclosure Adelante owns COLD, ALEX and INVH, among other securities, in separates accounts that we manage for our institutional clients.  You should not assume that investments in the securities or strategies identified and discussed were or will be profitable.  While many of the thoughts expressed are stated in a factual manner, the discussion reflects only Adelante’s beliefs about the financial markets in which it invests.  The descriptions are in summary form, are incomplete and do not include all the information necessary to evaluate an investment in any security or strategy.

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