INVESTING AINT EASY: +1.16% in October, +12.1% YTD
Updated: 3 hours ago
“If things came easy, then everybody would be great at what they did, let’s face it.” – Mike Ditka
PERFORMANCE: Serenity Alternative Investments Fund I returned +1.16% net of fees in October vs the REIT index which returned +3.25%. Year to date (YTD) the fund has returned +12.1% vs +14.0% for the REIT index.
DATA CENTER UNWIND: The popping of the AI bubble has made its way into REIT land, pressuring Data Center REIT performance in October.
SENIOR HOUSING RE-WIND: The Senior Housing bull-market rolls-on, still one of the best-kept secrets in investing.
STORAGE STABILIZATION? Self-Storage REITs reported further evidence of firming fundamentals. Could cyclical REITs lead the next leg of a REIT bull market?
RIP to the man, the myth, the legend, coach Mike Ditka.
It’s difficult to describe to non-Chicagoans how revered “Da Coach” was in the 312-area code. Live in Chicago long enough, and you will hear 10 different Ditka stories about his legendary no-nonsense, tough as nails, but lovable personality. As a coach, he had a high standard and embodied a gritty work ethic that Chicagoans loved.
The stock market can be similarly straightforward and hard-nosed, which AI investors learned in October.
It was such a brutal month, that multiple name-brand hedge funds have closed shop in recent days, returning investor capital, and unwinding multibillion dollar portfolios in rapid fashion.
Investing success, as it turns out, does not come easy.
Through the recent market turmoil, Serenity has continued to focus on many of our non-consensus long positions, including Senior Housing, Hotel REITs, and a slowly evolving renewal of strength in some cyclical REIT sectors.
Headed into 2027, fundamentals for many REIT property types look extremely strong, with valuations that are modest by historical standards, and headwinds (competitive supply) that continue to moderate.
This is the beauty of having a diversified real estate portfolio. While Data Centers have struggled in the second half of 2026, other exposures in the Serenity book have continued to perform, and our outlook for 2027 has continued to improve.
With interest rates moderating slightly, the market has started to take notice.
PERFORMANCE: +1.16% in October, +12.1% YTD
Serenity Alternative Investments Fund I returned +1.16% in October net of 1.5% and 15% fees and expenses with +91% net exposure versus the MSCI US REIT Index which returned +3.25%. On a YTD basis, the fund has returned +12.1% versus +14.0% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +6.0% annually, net of fees and expenses versus +3.4% for the REIT index.
The most profitable position in the fund for October was Host Hotels (HST), a long position which returned +13.0% during the month. As we wrote about in our August newsletter, fundamentals for Hotel REITs have remained extremely robust over the past few months, despite high oil prices and higher interest rates. Host, along with most Hotel REITs, attracted investor capital in October, with the market now anticipating very strong earnings reports for Q3. The industry has since delivered, with multiple Hotel REITs increasing EBITDA and RevPAR guidance for 2026. We remain long Host.
The least profitable position in the fund in October was GDS Holdings (GDS), a long position which returned -29.8% for the month. GDS has been an enormously frustrating position for the fund in 2026. Despite extremely strong fundamentals, a doubling of absorption guidance in their most recent quarter, and the lowest valuation in our Data Center REIT universe, GDS has returned -37% YTD. Investor aversion to Chinese equities, and a rapid and violent reversal in Data Center sentiment have been extremely potent headwinds in 2026, both of which may take time to reverse. For this reason, Serenity has trimmed our GDS position and may hedge it further in coming months.
DATA CENTER UNWIND: Is the AI bubble popping?
Large cap Data Center REITs returned -0.4% in October, but a newer cohort of Data Center developers returned -37% during the month (as represented by the WGMI ETF). These companies represent new entrants into the Data Center development industry (APLD, WULF, CIFR, CORZ), NeoClouds like Corweweave (CRWV) and Nebius (NBIS), as well as speculative land and power companies (Fermi – FRMI).
These new Data Center players had been AI trade favorites for the first half of 2026 but have struggled since the July melt-down of Situational Awareness, a tech-focused hedge fund that garnered quite a few headlines for its leverage and concentrated bets. Since that time, the tide has gone out for new DC players, with the WGMI ETF returning +64% through June 30th, and falling -54% through the end of October (-25% YTD).
The market is sending a very harsh message to the DC development industry that many REIT executive are familiar with…
“We know you need capital, and lots of it…and we are going to make you pay through the nose for it.”
This is every REIT CFO’s nightmare, a capital market that dries up just as funding needs ramp.
This has been our main oversight in holding GDS this year, a company similarly in need of lots of capital to build out it’s portfolio over the next two years. At some point I did not heed the lesson of capital cycles past, that when the tide goes out…it goes out for everyone. I viewed GDS as somewhat insulated from the riskiest cohort of the DC universe, due to their established operating portfolio, cash flow generating capabilities, and monetizable stake in DayOne. None of this mattered when the capital tide went out, however, and the stock has been sold off along with the entire industry.
So where do we go from here? Is this just a correction, or the start of a long-term bear market for Data Centers?
To answer this question, I believe there a few very salient, seemingly contradictory key factors to consider.
The AI ecosystem will still be built out over the next 3-4 years.
The funding for this buildout will increasingly have to come from operating cash flows or equity, not from the debt market.
Many over-levered companies may not have enough cash generation in their operating businesses to survive.
Data center capacity will still increase by an order of magnitude from 2027-2029.
While the publicly traded REITs (DLR and EQIX) are the best capitalized, lowest risk players in the Data Center development space, it is still hard to imagine an environment in which DC supply increases by 25-100% over the next few years, and operating fundamentals are not impacted negatively.
And this is (in my view) the safest way to invest in the Data Center build out.
For the riskier players, there are real blow-up risks. Many of these new DC developers have effectively financed 100% of their portfolio buildouts with debt or very expensive equity, leaving them highly levered with little margin for error. One delay in delivery, one bankrupt tenant, and the equity value of some of these entities might vanish completely.
That is the harsh reality for highly levered real estate developers. How many levered home-builders survived the 2006-2009 real estate bust? Not many. It will unfortunately probably be similar this time around.
For our part at Serenity, we have meaningfully reduced our Data Center exposure over the last 2 months, and our longs in the space are now concentrated in the highest quality, safest Data Center portfolios on the planet. We are likely to add to our short book as well, to actively hedge highly levered DC developer risk out of our portfolio.
The Bottom Line: The market has slammed the breaks on the Data Center construction wave, pushing costs of capital much higher for developers. While this has caused a painful re-adjustment in the stock prices of highly levered Data Center developers, we have yet to see the impact of a massive supply wave that will still deliver in 2027 and 2028. This may get worse before it gets better, and Serenity has adjusted our Data Center holdings accordingly.
SENIOR HOUSING RE-WIND: Strong fundamentals, limited supply.
On the other side of the REIT universe lies a great example of why I do not subscribe to the efficient market hypothesis. The sentiment gap between the AI/Data Center trade and the Senior Housing industry has become colossal. One of these trades has attracted more investor capital than any infrastructure build-out in our country’s history, based on a technology we do not fully understand, and business models that have been around for less than 5 years.
The other is the Senior Housing trade, a demographic driven bull market that has been in the making for over 80 years but is represented by a group of companies that nobody outside of the REIT industry knows. Senior Housing is currently attracting almost no capital outside of REITs, creating a dearth of newly built Senior Housing supply, precisely at the time we need it most.
The contrast here is amazing to me. Investors love technology, they love the bright and shiny newfangled gadget, and they get way less excited about boring old nursing homes.
Understandable, but not efficient, in my estimation.
Serenity, however, is happy to take the other side of the trade, as Senior Housing REITs dominate this emerging industry, building larger moats by the day, and compounding their invested capital at double digit rates. Over the next 3 years, basically 0 competitive supply will be built in Senior Housing. Data Center capacity, over the same time period, is likely to more than double.
Serenity remains long Senior Housing, but has trimmed our Data Center exposure
significantly, as discussed above. Supply is the great swing factor in commercial real estate bull markets and can turn even the best demand environment upside down, which we expect will happen over the next few years in the Data Center space.
Meanwhile, in Senior Housing, the industry reported one of the strongest quarters in REIT history from an operating fundamentals perspective in Q3. The table below displays same-store NOI growth for a selection of Senior Housing REITs over the last 4 quarters.
AHR and JAN are two of Serenity’s largest holdings, and each saw same-store NOI in their SHOP portfolios accelerate in 3Q 2026. They are also two of the most acquisitive companies in the REIT universe, pulling multiple simultaneous growth levers going into 2027.
Welltower (WELL) similarly continues to gobble up SHOP assets by the billions, while building a technology moat within the industry rivaled only by the Self-storage REITs (more on these in a minute).
The Bottom Line: The Senior Housing industry is experiencing demand that is just as strong, and arguably more sustainable than that of the Data Center industry, yet it has attracted far less capital, with virtually 0 new supply set to hit the market over the next 3-5 years. This creates a more durable runway for fundamentals, and Serenity remains long Senior Housing REITs.
STORAGE STABILIZATION: Fundamentals firming for cyclical REITs?
Trends also continue to be encouraging for Self-Storage REITs and selective other cyclical REIT property types. In their third quarter earning releases, Self-Storage REITs confirmed their second consecutive quarter of marked revenue and NOI acceleration, citing a better operating environment, less supply pressure, and continued expense discipline.
This was a boon for the stocks last month (+14.9%), which has carried over into November.
This is significant because bull markets in cyclical REITs tend to last years, and compound upon themselves positively in what REIT investors refer to as the “virtuous cycle”. That is, growth accelerates, stock prices increase (cost of capital goes down), acquisitions become more accretive, which pushes growth and stock prices up further, which makes acquisitions and development more accretive, etc etc.
This self-sustaining loop pushes up Net Asset Values and tends to lead to double digit returns over 3-5 year periods for entire industries. That is exactly what we are on the lookout for at Serenity, and Self-storage may be in the early days of a renewed virtuous trend.
The Bottom Line: Self-Storage fundamentals continue to improve, reinforcing the view that Storage is on the verge of a new bull market. If mortgage rates come down in 2027, this could further fuel growth for the Self-Storage REITs. Serenity has increased Self-Storage exposure and is likely to add in the future as this new trend continues.
DITKA VS GOD IN A GOLF MATCH…
It was only a month ago that interest rates going to the moon was the sole discussion point in the investing media. Now those concerns are all but forgotten, as the melt-down in tech equities takes center stage. What the topic du jour for the investing media will be next month, Ditka only knows.
For our part, at Serenity we continue to focus on deploying capital into companies that invest it wisely, grow sustainably, and act in the best interest of shareholders. Right now, that means significant exposure to Senior Housing, continued longs in the Hotel REIT space, and a growing allocation to Self-Storage.
REITs have seen solid performance in 2026, despite significant macro headwinds. Imaging what they could do in 2027 if these trend reverse…
Bears 457, Packers -5,
Martin D Kollmorgen, CFA
CEO and Chief Investment Officer
Serenity Alternative Investments
*All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments
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