TIAA CREF Real Estate Securities had a strong quarter, outperforming its benchmark by over 30 bps. The team has been able to outperform significantly this year, due in part to its ability to underweight regional malls within the retail sector. They are now beginning to pair back the underweight given the attractive valuations within the sector but will focus on A-tier malls with longer term growth potential.
Market Overview:
– REITs are entering their eighth straight year of a bull market
– Benchmark sector returns were mixed during the quarter
o Industrials, data centers, and free standing retail led the way
o Health care was down over 6% while regional malls continue to struggle due to additional weakness with brick and mortar retail
– REITs are currently trading in line with their corresponding underlying commercial property values
o The team sees real estate returns being driven by market supply/demand dynamics and net operating income growth at the property level
– As we are in the later stages of the commercial real estate cycle, the Fund’s positioning has shifted to reflect relative value opportunities within sectors
Performance Overview:
– TIREX outpaced its benchmark during Q3 by over 30 bps
– The top contributing sectors included residential and specialized REITs while the largest detracting sectors included retail and office REITs
– Positive stock selection drove the fund’s outperformance in a low-volatility quarter
o Largest relative contributor was multi-family holding Monogram Residential Trust
o Rexford Industrial REIT continued its strong run by outpacing earnings expectations and reaching a two year high
– Performance was also helped by an underweight to infrastructure REIT Uniti Group
o Fears of financial health of its largest lessees sparked significant selloff
– Relative detractors during the quarter included stakes in office holdings SL Green Realty and Kilroy Realty
Market Outlook:
– The team continues to favor high quality companies with strong growth profiles, good balance sheets, and superior assets
o Major focus on companies with footprints in the strongest metropolitan statistical areas
– Maintain an emphasis on data centers which remain attractive given their limited supply and robust secular growth trends
– Recently trimmed its industrial overweight as the sector’s valuations have risen
o Remain constructive on the sector due to online shopping trends that benefit distribution hubs
– Have begun to reduce the underweight to regional malls
o Heading into the year, the team was underweight due to online retail competition
o This position has helped the fund avoid damage done by persistent negative headlines heralding the demise of brick and mortar retail
o The goal is to trim the underweight while focusing on higher quality A-tier mall operators better positioned in the long run
– As a whole, the fund favors data centers, industrials and manufactured housing at the expense of health care, retail, diversified, and specialty REITs