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  • Martin Kollmorgen


Updated: Sep 8, 2022

PERFORMANCE – Serenity Alternative Investments Fund I returned -3.40% in September net of fees and expenses. Year to date the fund has returned +28.0% .

THE APARTMENT FRONTIER – Apartment REIT fundamentals are accelerating into hitherto unexplored territory.

DELTAS DEMISE – COVID-19 case counts are down 50% in the past month.

REIT SLUGGING PERCENTAGE – Is the market signaling the return of the cyclical trade?

“Towering genius disdains a beaten path. It seeks regions hitherto unexplored.”

Abraham Lincoln

Investing requires imagination. We search history for a detailed map of the way ahead, but the directions that we find are never fully accurate. The investing past never truly repeats itself and the market is constantly creating new narratives and breaking into regions hitherto unexplored.

The REIT market is no exception. Conventional wisdom one day is often turned on its head the next. Following the beaten path usually leads to mediocre returns. Readers of this newsletter demand more creative thinking! They are not satisfied with re-treading the REIT past. Towering genius’ never are.

This is why we explore scenarios that may seem strange at first blush. Scenarios that have no precedent in history. What if Apartment REITs experience 10-15% same store NOI growth in 2022? What if Retail Strip Center REITs have superior earnings growth to the Cell-tower REITs? What if inflation is in fact, not “transitory”?

Some of these scenarios are more likely than others, but they all mark a departure from the consensus REIT market narrative. And they can all be used to generate returns within the correct investing framework.

Is your framework ready to explore a brave new REIT world?


Serenity Alternatives Fund I returned -3.4% in September net of fees and expenses versus the FTSE NAREIT REIT index which returned -5.4%. The fund has now returned +28.0% for the year, versus the REIT benchmark at +23.1%. On a trailing 3-year basis Serenity Alternatives Fund I has generated annualized returns of +20.9% net of fees and expenses. Over the same time period, the REIT benchmark has returned +11.7% on an annualized basis. The fund’s Sharpe ratio over the past 3 years sits at 1.28, versus 0.65 for the REIT benchmark. The REIT index fell in September as COVID-19 cases peaked early in the month, and the 10y year treasury yield began moving higher during September’s second half. The positive inflection in economic sentiment and an increase in risk appetite from investors into months end induced selling in many high-duration, more defensive REITs, which have led the REIT market higher over the past few months. More cyclical REITs were the beneficiaries of this reduction in defensive exposures as a second re-opening trade became front of mind for investors. With Covid-19 cases down about 50% in the US over the past month, cyclical REITs are showing signs of life, with Lodging, Mall, and Retail names all beginning to outperform the REIT index.

From a positioning standpoint, our model and portfolio continue to overweight REITs that we believe can thrive in both a low and high-growth economy. Apartments and Self-Storage REITs in particular are inflation beneficiaries, insulating them from some of the risk-on/risk-off volatility of more cyclical or higher duration REITs.


Over the next few quarters Apartment REITs are sailing into waters heretofore uncharted. A combination of rapidly rising rents and easing year over year comps are going to combine to produce the gaudiest growth numbers many public Apartment REITs have ever reported. This puts seasoned REIT investors in a strange scenario. While these numbers will not be a surprise to experienced underwriters of the companies, how will the generalist investor react to same-store NOI growth potentially reaching into the mid-teens? First let’s dissect the drivers of the impending growth explosion. Equity Residential (EQR) included the chart below in one of their most recent investor presentations.

The bright blue line in the chart represents current rental rates, which have been on an upward trajectory since January of 2021. In late April of this year, they moved higher than year-ago levels (the dark blue line). Since that time, the gap between this year’s rents and last year’s rents has widened materially. As rents continue to increase (all recent reports suggest this trend has continued), the gap will widen even more rapidly. Even if they flatten out from here, by virtue of last year’s falling rents, year-over-year comparisons will continue to widen until November/December, when the easy comps finally bottom out.

So what does this mean? Again, Apartment REIT investors that consistently model the space are well aware of this trend and are likely to have double-digit NOI growth already incorporated into their models for the next few quarters.

The question remains, however, how quantitative investors and generalists will react when their machines and screens are suddenly populated with the strongest growth numbers ever reported by public Apartment REITs.

We can even take this mental exercise one step further, and ask the question “what prevents Apartment rents from continuing higher over the next few years?” With a strengthening labor market, inflationary pressures in housing, a large consumer savings glut, and a short slow-down in Apartment supply due to the pandemic, there are few fundamental forces that will impede rent growth for Apartment landlords over the next 18-24 months.

There is even a world in which inflation continues to accelerate, the Federal reserve remains accommodative, and Apartment REITs see continued high single digit rent growth without seeing increases in their funding costs. “Yield suppression” is not a policy that the fed is currently discussing, but in a world of Modern Monetary Theory, it is not a low probability outcome years down the line.

The bottom line here is this, Apartment fundamentals continue to accelerate, and we remain bullish on the Apartment REITs. While we are not counting on sustained levels of rent growth ad infinitum, we are not ruling out a scenario in which rent growth is higher for longer. As always we will keep our eyes to the data, which at this point continue to point up and to the right.


In the thematic corner of the REIT universe, it has now been more than six months since the “re-opening” trade ruled the roost. In the intervening period the 10y yield has fallen, COVID cases have risen, economic growth has slowed, and inflation has continued to creep higher. This anti-cyclical cocktail has left re-opening REITs waiting at the bus station, while high duration, secular growth defensive names have moved higher rapidly. The obvious culprit to this early-cycle slow-down is the delta variant of COVID-19 that has spread through the country over the past 3-4 months. As cases increased, mask mandates returned, travel began to slow, companies delayed returns to the office, and consumer confidence began to fade.

All of this supported the defensive positioning of the market and encouraged the market bears. At the current juncture, however, a new trend has clearly re-asserted itself, and it is NOT the same trend of even 1.5 months ago. Since September 1st, the 7-day average of COVID cases in the US has fallen by 47%, from over 160,000 new cases a day to 85,000 currently. 68% of the adult population is fully vaccinated, 13% of the population has contracted the virus itself, and treatment options continue to improve. While we are certainly not fully out of the pandemic woods, much of the country is fully open and experiencing declining case counts. Will this cause a surge in economic activity akin to the original reopening of early 2021? Doubtful. But the economy remains a long way from being fully “normal”, and if cases continue to drop, mobility will continue to increase, economic activity will pick back up, and our world will slowly begin to trend back towards its normal level of economic capacity. In fact, there is evidence that this is already occurring. Hotel traffic has already bounced off its August/September lows, as has air travel. Restaurant foot traffic has picked up, and most importantly, the market has firmly adopted a more risk-on mood. How do we know this….?


One of the benefits of having a quantitative framework within an investing process is that it allows you to build tools that are powerful and insightful with relative ease. One such tool we have recently examined (shout out to our dear friend JK for the recommendation) has an analog in professional baseball. Slugging percentage. According to Wikipedia, Slugging percentage “is a measure of the batting productivity of a hitter…Unlike batting average, slugging percentage gives more weight to extra-base hits.” Using a bit of creative thinking, we can apply a similar concept to REIT property sectors. Namely, by measuring the percentage of time the property sector out-performs its peers, along with the magnitude of the out-performance, we can calculate a more nuanced measure of relative performance than pure total return or a simple batting average.

Examining slugging percentages over different durations illuminates some interesting nuggets that may not be visible using simple performance statistics. Office and Apartment REITs, for instance, have the best slugging percentages over a 20-day time horizon, followed by Malls and Shopping Centers.

Similarly, over a 60-day time horizon, Malls and Shopping Centers have the highest slugging percentages of the main REIT property sectors. These are not widely owned property types. Remember, Malls are dead and the US is badly over-retailed. That remains the conventional wisdom. The market, however, seems to have a more favorable view of these under-owned sectors based on this measure of slugging percentage.

Now a single data point does not tell the whole story, but when you couple the fact that COVID case counts are falling with the fact that re-opening sectors have begun to out-perform peers, a clear picture begins to emerge; one that looks more like the early part of 2021 than the middle of this year. As data points of this nature have begun to accumulate, we have added cyclical exposure to the portfolio selectively. This means adding Office, Mall, Strip Center, and Lodging REITs to the portfolio in a measured and calculated way. While the risk/reward in these names is not as compelling as it was at this time last year, these REITs still, by and large, trade at much more attractive valuations than their peers in the Warehouse, Data Center, and Cell-tower sectors. As growth broadens, value stocks tend to outperform, and our portfolio is increasingly positioned to benefit from a re-inflection in economic growth.


One thing I have learned about myself through the adventure of managing a REIT investment fund is that I have an instinctual revulsion to treading the beaten path in REITs. I am no towering genius, but our best calls in the fund have always been against the consensus and against the grain. While we watch the herd to see where other investors may be offsides, our process has been built to point in the highest slugging percentage direction, regardless of the direction of others. Disdain the beaten path and find Serenity.

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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