Attacking Market Uncertainty: +0.67% in April, +17.1% TTM

“Know yourself and you will win all battles” – Sun Tzu

• PERFORMANCE: Serenity Alternative Investments Fund I returned +0.67% net of fees in April vs the REIT index at -2.6%. Over the last twelve months (TTM), the fund has returned +17.1%.

• KNOW YOURSELF: Exploring how Serenity’s CORE model is attacking uncertainty in the current environment.

• ATTACK LIKE FIRE: Serenity’s best ideas continue to deliver results.

• BE STILL AS THE MOUNTAIN: Various compelling opportunities are developing in REITs…but require patience

Maintaining Zen-like calm in the current investing climate can be extremely challenging.  

The 24-hour news cycle is optimized to confuse, disorient, and amplify investors’ sense of dread…often leading to uncertainty at best, and paralysis at worst.

In the spirit of Sun Tzu, however, Serenity remains focused on the one thing we can control: executing our battle tested process, as opposed to deciphering every political machination and macro-headline. 

This allows us to continually deploy capital into REITs that have three key characteristics: strong cash flow growth (Momentum), reasonable valuations (Value), and high-quality portfolios and management teams (Quality).

In May of 2025, this means riding the bull wave in Senior Housing, which continues unabated and is driving some of the best fundamental REIT performance ever recorded.

It also means closely monitoring and selectively investing in Data Centers, which continue to grow rapidly despite misleading macro headlines.

Lastly, it means keeping the pencil sharp on deeply discounted Lodging and Office REITs, which could prove to be an incredible bargain once the economic storm clouds pass.

In the battle for investor returns, Serenity is laser focused on what we know: implementing our proven framework for allocating capital in REITs. As we execute our process, our investors benefit from owning irreplaceable commercial real estate portfolios with secure and growing cash flows.

PERFORMANCE: +0.67% in April, +17.1% TTM

Serenity Alternative Investments Fund I returned +0.67% in April net of fees and expenses with +86% net exposure versus the MSCI US REIT Index which returned -1.56%. Year to date the fund has returned +1.5% versus -1.6% for the REIT index. On a trailing twelve-month (TTM) basis, the fund has returned +17.1%. Over the past 5 years Serenity Alternatives Fund I has returned +12.6% annually net of fees and expenses with a 1.01 Sharpe ratio, versus +9.0% for the REIT index.

The most profitable position in the fund in April was American Healthcare REIT (AHR), a long position which returned +6.53% for the month. AHR continues to be one of the funds top holdings and best ideas. With significant exposure to Seniors Housing, AHR is well positioned to benefit from one of the most powerful demographically driven commercial real estate bull markets in history. We believe AHR represents a potent combination of potential NAV growth and relatively modest valuation within the Healthcare REIT sector, and we expect the company to produce top decile growth within REITs for the next 1-3 years. We remain long and consider AHR a core holding.

The worst performing position in the fund in April was Physicians Realty Trust (DOC), a long position which returned -11.3%. DOC owns a portfolio of lab space and outpatient medical assets, and trades at a meaningful valuation discount to healthcare REIT peers and the REIT universe. While the company announced an in-line to good quarter in Q1, management made some concerning comments on the company’s earnings call, which spooked investors, and sent the stock down over -6%. We believed DOC’s discounted valuation and high portfolio quality provided a margin of safety, and that a certain amount of bad news was baked into the company’s valuation. Unfortunately, investors (us included) were not anticipating further weakness in the lab space portfolio and DOC has suffered as a result. We have trimmed our DOC position but continue to view the company as an attractively valued, high-quality healthcare real estate portfolio.

KNOW YOURSELF: Serenity’s “CORE” model in 2025…

Investing through periods of market volatility can cause even the most seasoned capital allocators stress. Human beings are not well equipped to deal with the rapid swings of a volatile stock market. Students of behavioral psychology have written tomes on this phenomenon, and an important aspect of portfolio management is the difficult task of managing one’s emotions.

This is a key reason that Serenity developed our multi-factor “CORE” REIT selection model almost 10 years ago. We knew that come hell or high water, a computer model would build an unemotional REIT portfolio, regardless of the inevitable panicky fits of the capital markets.    

This gives us a powerful tool that is NOT influenced by the twitter chasing proclivities of the human investing public. Our CORE model continually triangulates REITs with a combination of three key characteristics: Value, Momentum, and Quality.

Value in this instance means favoring REITs that trade at relative valuation discounts to peers and the broader REIT universe, based on a variety of valuation measures. Momentum uncovers cash flow, earnings, and dividend growth that are the key compounders of investor capital over time. Quality ensures that investor capital is allocated to management teams with strong track records of capital allocation, and REITs with high-quality commercial real estate portfolios.

The result is a portfolio of REITs that consistently grow their cash flows, trade at relatively modest valuations, and have high-quality commercial real estate portfolios. If tariff rates are set at +0% or +175%, we believe adhering to the tenants of our CORE model makes sense from an investing standpoint.

And the results speak for themselves. The Serenity CORE model consistently outperforms each individual component (Value, Momentum, and Quality) on a stand-alone basis, as well as the REIT index. The model is a key reason that Serenity Alternative Investments Fund I has delivered better returns than the benchmark, with lower volatility since the fund’s inception.

The Bottom Line: The power of Serenity’s CORE multi-factor REIT model is evidenced during heightened periods of uncertainty. It provides a framework for putting investor capital to work regardless of macro headlines, changes in volatility, and other exogenous forces outside of our control.

ATTACK LIKE FIRE: Seniors Housing REITs continue to be “en Fuego”

One of the CORE model’s favorite allocations in 2025 continues to be Seniors Housing REITs. For those new to the newsletter, at Serenity, we believe the current bull market in Seniors Housing is one of the most powerful REIT bull markets that may occur in our lifetimes. In our view, when all is said and done, the Seniors Housing bull market may eclipse bull runs in Warehouse (+19.4% annually from 2015-2020), Data Centers (+18% annually from 2013-2018), and Self-Storage REITs (+24.4% annually from 2010-2015). See our December 2024 newsletter.

Amidst the April volatility, Serenity was able to add select exposure to some of our favorite Seniors Housing names. Towards the end of the month, and continued here in May, these bets have been rewarded, as Seniors Housing REITs announced strong Q1 results.

The chart below is a brief visual exploration of why we are so outspoken about the power of this bull market.

This is same-store NOI growth for the Seniors Housing (SHOP) portfolio of Welltower (WELL), the largest Seniors Housing REIT. For the sake of context, average same-store NOI growth for REITs over the past 30 years is closer to +3.5%. Since 2022, Welltower's SHOP portfolio has averaged +23%!

This is a game-breaking level of organic growth that is not being replicated ANYWHERE else in commercial real estate. Even the strongest bull markets of the REIT past rarely see same-store NOI growth break higher than +10%. Welltower's SHOP assets have been above +20% for 10 out of the last 13 quarters!

American Healthcare REIT (AHR), another CORE model favorite, is seeing similar success in their Seniors Housing portfolio, growing SS NOI by +30.7% in 1Q 2025. Along with acquisitions and development activity, we believe AHR can grow its Net Asset Value (NAV) by over +20% in 2025. As REIT stock prices tend to converge to NAV over time, this represents a very low-risk total return profile, as cash-flows continue to compound higher in an extremely transparent manner.

The Bottom Line: Investors on the sidelines continue to miss out on one of the most incredible real estate investing opportunities of the last 30 years. Serenity’s CORE model is pounding the table on Seniors Housing REITs, and they make up an outsized portion of the Serenity portfolio. As the baby boomers continue to age, these companies will compound capital at an incredible rate, and Serenity investors are set to benefit.

BE STILL AS THE MOUNTAIN: Waiting on deep value opportunities…

While Seniors Housing REITs ride a demographic wave to outsized cash flow growth, a set of opportunities continues to evolve on the other side of the value spectrum in Lodging and Office REITs.

The woes of the Office market are well known. Work from home has permanently shifted many jobs out of central business districts, where most Office product is located. Inflation has driven construction costs higher, increasing capex costs for landlords as occupancy has waned. In the modern era, there is simply too much office space available relative to demand, and many buildings are suffering to the point of either foreclosure or fire sales.

Lodging REITs have not fared much better. Hotels have been mired in lack-luster RevPAR growth for the better part of 15 years. Simultaneously labor costs have increased due to inflation, eating into landlord margins. Previously high-flying Hotel markets like Chicago and San Francisco have struggled to re-gain business travelers and convention activity in the post-COVID era.

All this negativity, predictably, has created deeply discounted valuations in Office and Lodging REITs.

BUT….

What if return to Office mandates begin to accelerate Office leasing demand for the first time since 2020?

What if we return to a +4% growth economy sometime in the next 3-5 years and business travel accelerates off a very low base?

What if San Francisco gets its act together and reverts to “gasp” a premier destination again?

The three scenarios above may sound far-fetched based on the data we have available TODAY. But if any of these scenarios plays out over the next 1-3 years…Office and Lodging REITs are significantly underpriced.

Let’s look at the numbers.

Lodging REITs currently trade at an equally-weight -45% discount to their consensus Net Asset Value (NAV) estimates. On average, the group trades at an 11x 2025 EBITDA multiple, and 8.2x 2025 estimated cash flows. Said another way, the Lodging REITs on average have cash-flow yields of around +12%.

Now here is an important piece of math. From a total return perspective, if Lodging REITs were able to close the NAV gap (by trading higher up to consensus NAV estimates), they would return +82% on average. That is how deeply discounted these names are in May of 2025.

In Office the story is similar. Office REITs trade at an equally weighted -43% discount to their consensus NAV estimates. That would again be a +75% return if the companies simply converged to NAV.

It is also important to keep in mind that Office REITs own the top 10% of the Office market in terms of quality. Office REIT portfolios are still +86.2% occupied as of 4Q 2024 (up from +85.9% in 3Q) according to NAREIT. Office leasing has also picked up in 2025. The quote below is taken from CBRE’s 1Q earnings call.

“And as a result, because there hasn't been much new office space created over the last years … for obvious reasons, the office space that's out there is in big demand and the choppiness that we're now seeing in people's confidence about the economy is really not impacting their enthusiasm for leasing office space”- Robert E. Sulentic - CBRE

As return to office mandates gain steam, federal employees return to work, and new Office supply rapidly heads to 0, the supply/demand dynamic for high quality Office buildings may actually be shifting back in landlords' favor. This has already happened in force in New York, and other major coastal metros may be soon to follow.

This dynamic is worth monitoring closely, and Serenity has a sharp pencil ready for both Office and Lodging REITs. While we are not diving in with two feet yet, valuations are very low, expectations are very low, and that combination can prove to be an explosive cocktail in the presence of good news. 

The Bottom Line: The struggles of Office and Lodging REITs are well known and manifest in significant valuation discounts relative to the private market value of these company’s assets. With low valuations and low expectations, incremental positive news could generate significantly positive total returns at any point within the next few years. Serenity is monitoring these names closely and would look to add sizable positions in the event that fundamentals begin to accelerate to the upside.

MOVE AS SWIFT AS THE WIND

In today’s market, there is a fine line between patience and tardiness. Those who sat out the tariff turmoil or sold into the chaos have already been penalized by a rapid snap-back in many corners of the equity market.

At Serenity we were poised, and we struck at significant discounts that appeared rapidly in high quality REITs. Positions we established in EGP, PLD, SHO, and KRC have returned +22%, +14%, +16%, and +13% in just over 1 month.

Our large holdings in Seniors Housing REITs continue to generate sector leading results, our Data Center Exposures are recovering rapidly, Apartment REITs are poised to potentially break out over the next year, and we have our eye on deeply discounted Lodging and Office REITs.

The opportunity set is robust amongst some of the highest quality commercial real estate portfolios in the world, and Serenity is active and executing.

Find opportunities in chaos,

Martin D Kollmorgen, CFA

CEO and Chief Investment Officer

Serenity Alternative Investments

Office: (630) 730-5745

MdKollmorgen@SerenityAlts.com

*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments

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