TIREX – Q1 2018 Commentary
During the first quarter, the TIAA CREF Real Estate Securities Fund outperformed its benchmark despite the negative return for the quarter. The team remains focused on higher-quality growth oriented REITs with superior supply/demand dynamics. As of month end, the 30-day SEC yield on TIREX is 2.56%.
Market Overview:
– After notching nine straight years of gains, REITs got off to a negative start in 2018
o Asset class fell 2.95% in January
– Although fundamentals have remained strong late into the current investment cycle evidence of flattening property values and higher rate expectations led investors to other opportunities
– Rising rate environments generally coincide with inflation and many rent contracts are actually tied to inflation
o Strengthening economy should be a tailwind for real estate
– While REITs begin to sell off similar to bonds during rising rate environments, they are increasing cash flow vehicles while bonds pay out fixed rates
– The fund’s long term focus remains unchanged
o Seek higher quality growth oriented REITs with supply/demand dynamics
Performance Overview:
– The TIAA-CREF Real Estate Securities Fund outperformed its benchmark in the first quarter of 2018
o This marks the fifth consecutive quarter and sixth of the last seven in which the fund has outperformed its benchmark
– Fund’s first quarter outperformance was driven largely by security selection in diversified and industrial sectors
o The largest single contributor was avoiding diversified REIT colony NorthStar
– Two other key contributors were an overweight in Rexford Industrial Realty and an overweight in data centers
– Partially offsetting these positive contributors was a position in QTS Realty Trust, a data center REIT that announced an organizational restructuring during the quarter
– Also detracting was an underweight in American Tower which was up during the quarter
Market Outlook:
– REITs are currently trading at a discount relative to their underlying commercial property values
o Team expects real estate returns to be driven by market supply/demand dynamics and net operating income growth
– At this point in the commercial real estate cycle, the fund is emphasizing relative value opportunities within sectors and among individual REITs with outsized growth opportunities
– The largest sector overweight, manufactured housing, benefits from ongoing demand for affordable housing and limited supply growth
o Continue to find attractive REITs in single family rentals
– Reduced data centers but still investing in companies with footprints in Europe and Asia
o These regions are earlier in the cycle than their U.S. counterparts and remain attractive given the robust secular growth trends
– Office overweight has increased due to a niche-focused investment in medical lab office REITs
o Complements core office holdings
Performance Review:
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109
PLEASE NOTE!
We moved! Please note our new location above!