Perfectly Wretched REITs: -1.41% in October, +4.6% YTD

“Anita: How are you?

Cruella De Vil: Miserable, darling, as usual, perfectly wretched.” – 101 Dalmatians

• PERFORMANCE:  Serenity Alternative Investments Fund I returned -1.41% net of fees in October vs the REIT index at -1.56%. Year to date (YTD), the fund has returned +4.6% vs +3.09% for the REIT index.

• WRETCHED REITS - Continued negative headlines have driven REITs to steeply discounted valuations.

• A MISERABLE DECADE – Lodging REITs have been dogs for about 10 years…but 2026 looks increasingly interesting.

• THE HAPPY ENDING – Prologis announced a positive inflection in the Warehouse market…could this signal a turning point?

Some people are happy being miserable.

The infamous Cruella De-Ville of Disney’s 101 Dalmatians is an iconic personification of this ideal.

The mad-eyed fur enthusiast with a penchant for canine coats would fit in perfectly with the doom and gloom investment villains of modern-day X and YouTube.

But while bad news gets clicks in our current era, remember that pessimism is not a good long-term investment strategy. Said another way…the villains usually lose.

Which is why a recent uptick in Warehouse market activity is so noteworthy within the REIT market. After years of negative headlines, Q3 brought a welcome inflection in Warehouse absorption, with the CEO of Prologis (PLD) remarking that:

“We can look at our own leasing activity and there's a clear turning point in demand. There's a clear move higher.” – Tim Arndt – Prologis Q3 2025 Earnings Call

This comes on the heels of a spate of bad news in 2025 for most cyclical REIT property types that has pushed REIT valuations to near all-time lows relative to the broader stock market.  

So, to contextualize…the news has been miserable, darling, perfectly wretched for the better part of 2.5 years in REITs. Investors have reacted accordingly, keeping REIT valuations muted while the S&P heads toward all-time highs.

But the tide might be turning. If the Warehouse market is an early indicator, we may be in for a sea change in the REIT market in 2026. As always, Serenity is watching with a vigilant eye. Just ask our first 100 newsletters…and tune in next month for # 102!

PERFORMANCE: -1.41% in October, +4.6% YTD

Serenity Alternative Investments Fund I returned -1.41% in October net of fees and expenses with +99% net exposure versus the MSCI US REIT Index which returned -1.56%. Year to date the fund has returned +4.6% versus +3.09% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +13.5% annually, net of fees and expenses versus +9.5% for the REIT index.

The most profitable position in the fund in October was American Healthcare REIT (AHR), a long position which returned +7.88%. AHR has been the largest long position in the Serenity portfolio for quite some time and is the second-best performing REIT in the Serenity universe year-to-date in 2025 (+62%). The company beat and raised their earnings guidance in Q3 and continues to benefit from the “silver tsunami” of aging baby boomers. AHR continues to exhibit strong organic growth and is expanding its external growth pipeline through acquisitions and development. We believe they are on track to deliver mid teen’s Net Asset Value (NAV) growth over the next few years. Serenity remains long.

The worst performing position in the fund in October was Applied Digital (APLD), a short position which returned +51% during the month. APLD is one of the “new” players in the Data Center industry, with a pipeline of AI Data Centers under construction in North Dakota. While we believe APLD has an excellent business and has shown impressive leasing results, the company’s stock price has increased almost 10x since April of this year to $32 as of this writing and hit almost $40 last month. Serenity’s NAV estimate for APLD is closer to $14.50, which includes full leasing of their entire Data Center pipeline. In this instance we believe hype has far outpaced reality, and while we were certainly early on our short, we remain confident in our underwriting of the portfolio. APLD is a small position which we are risk-managing closely and represents one of a handful of bets Serenity is making against sky-high valuations in the AI data center industry.

WRETCHED REITS: REIT valuations are hitting new lows…

The REIT industry in recent years has been plagued by a slow but steady chorus of negative or disappointing headlines. Whether it’s the destruction of asset values in Office REITs, or the continual disappointment in Multi-family fundamentals, there are a broad swath of REITs that have been all but abandoned by investors.

As can be seen from the chart above, REITs have only been cheaper relative to the broader equity market during the great financial crisis and the global pandemic.

For REIT investors, this is truly a wretched milestone.

And it’s hard to call this performance irrational. Cyclical REITs in particular (Apartments, Self-Storage, Warehouse, Office, Lodging) have serially disappointed investors since 2022, as fundamentals have slowly but steadily corrected from their post-pandemic explosion higher in 2021. The chart below shows the growth rate of Apartment REIT same-store revenues over the past few years. The bottom line? Continued deceleration/malaise.

So what is the bull case for REITs in 2025? History would suggest that periods of below-average growth are common in REITs, but never permanent. Growth similarly slowed for Apartments in 2016 and 2017, then re-accelerated in 2018. In 2004, following the dot-com crash and subsequent recession, Apartment growth went from near 0%, to +6% over a two-year period. And spoiler alert, Apartment REITs performed incredibly well (+57% total return on average during 2004/2005).

This suggests that it may only be a matter of time before REIT fundamentals begin to improve, and the sector begins to attract more investor eyeballs. And there are a few identifiable catalysts heading into 2026 that investors should keep their eyes on (more on this in a minute…)

The Bottom Line: REIT valuations are bumping up against all-time lows relative to the broader equity market due to continued growth deceleration in cyclical REITs. If growth can inflect higher, however, the potential for outsized returns in the REIT industry is very high.

A MISERABLE DECADE: Lodging REITs look like dogs <see what I did there?>…but what about 2026?

If there is one sub-sector within REITs that deserves to be a bit cranky, it is the Lodging REITs (Hotels). Over the past 10 years, Host Hotels (HST) has returned +55% (+4.4% annually). This compares to the REIT index at +84%, Simon Property Group (SPG – A Mall REIT) at +56%, Equinix (EQIX – A Data Center REIT) at +238%, Welltower (WELL – A Seniors Housing REIT) at +368%, and Prologis (PLD – A Warehouse REIT) at +304%.

Host is actually one of the better performing Lodging REITs, and it has underperformed even the Mall sector, which investors at one point thought was dead, over the last 10 years. Not…great.

Because of the lack of momentum in RevPAR (revenue per available room – the Hotel industry’s key metric), the Lodging REITs currently trade at massive discounts to the private market value of their portfolios (NAV). To be precise, on a simple average basis, Lodging REITs trade at a -31% discount to NAV as of this writing. Said another way, a portfolio of Hotels available on the open market that would fetch $100 today, would trade at $70 in the public markets.

Unfortunately, it’s not as easy as buying Hotel REITs at a deep discount and selling them at the market. Value buyers of Hotels have been consistently disappointed for the better part of a decade, as discounts have persisted, and NAV’s have trended lower. This has occurred to the point that many REIT investors basically ignore the Lodging sector or perennially underweight it.

BUT….

Are you ready for the telegraphed Serenity mid-newsletter twist?

What if in 2026 for Hotels…<gasp>…this time it’s different?

I know I know, famous last words in the investing industry. But check out these comments from Pebblebrook (PEB) on their 3Q conference call.

“The other significant tailwind for 2026 is that the holiday calendar next year is meaningfully more favorable than 2025. For example, for all you sweethearts out there, take note, Valentine's Day falls on a Saturday next year versus a Friday this year. And it also falls over the President's Day weekend, creating the potential for a much stronger leisure weekend with less mid-week disruption…

The hotel industry will also benefit from a uniquely active major events calendar next year. Numerous cities will be boosted from the World Cup being hosted in the US, and for many activities surrounding America's 250th anniversary celebration.”

This is only a snippet from a longer discussion of tailwinds the Lodging industry has in 2026 versus 2025. Other examples include easy comps due to the government shutdown and tariff announcements in 2025, a litany of positive holiday shifts, and the return to growth of previously underperforming markets in San Francisco and Chicago.

The theme here should start to look familiar. Lodging REITs have delivered disappointing results lately, investors have bailed, valuations have plummeted, but the future has identifiable positive catalysts. If this script sounds similar, it’s because the same narrative is in play for Apartment REITs, Self-Storage REITs, Warehouse REITs, and even Office REITs.

The Bottom Line: Lodging REITs have been left for dead after years of underperformance, trading at wide discounts to NAV. 2026, however could see a plethora of tailwinds for the industry, as favorable holiday shifts, easy comps, and renewed growth in San Francisco and Chicago should all have positive impacts. As with many cyclical REIT sectors, it remains a show-me story, but in the event positive fundamentals appear, Lodging returns could be extremely strong in 2026.

THE HAPPY ENDING: Warehouse demand is improving…

Now for the good news.

A golden ticket of hope has emerged in the last month for REITs and it came from the Warehouse industry.

As we alluded to above, Prologis (PLD), the largest warehouse REIT and one of the largest real estate companies on the planet, announced their Q3 earnings on October 15^th. The stock closed that day up +6.3%. This was partly due to their results, and partly due to the aforementioned commentary on their conference call.

To repeat (and paraphrase), PLD indicated that demand had increased meaningfully in Q3, after stalling in Q1 and Q2 of this year. In their estimation, firms are no longer delaying decision making due to tariff headlines or election uncertainty. Effectively, they are back in decision making mode after an uncertain start to 2025 and are actively leasing Warehouse space.

And PLD was not the only Warehouse REIT to deliver this message. Rexford Industrial (REXR) posted their first quarterly occupancy gain in the last 5 quarters in Q3. Like PLD they delivered a much more upbeat message on their conference call, and analysts have subsequently revised their 2026 estimates for the company meaningfully higher.

Within the Serenity process, Rexford has consistently ranked within the bottom 20% of REITs for the better part of the last two years. In the last few months, the company has jumped almost 100 ranks and is now positioned in the top 20% of the REIT universe. This means that underlying fundamental data is backing up REXR’s claims of a recovering market, and analysts are taking note.

The chart below contextualizes the recent activity in Warehouse REITs. After peaking in early 2022, Warehouse REIT NAV’s (the blue line) have been down/sideways for more than 2 years. That is until PLD reported their Q3 results, and NAV’s increased for the sector across the board (the uptick on the far right of the chart).

Again, the pattern here is familiar. Warehouse REITs saw growth peak in 2021/2022, and have delivered in-line or disappointing results since. Valuations have gone sideways or moved lower, and the sector has not delivered the types of returns it did from 2016-2021.

BUT…in this case we may have seen the first signs of demand revival. It will take more than one quarter of results to sound the all-clear, but Q3 was encouraging, and the Serenity process is adding exposure to Warehouse REITs as the data has clearly improved.

The Bottom Line: Warehouse REITs saw early signs of demand revival in Q3, pushing NAV’s higher and analyst estimates for 2026 upwards. If other REIT sectors can follow-suit in 2026, the REIT market could deliver stronger growth, and superior returns relative to 2025.

101 SERENITY NEWSLETTERS

Investing in the stock market will always have periods of misery and wretchedness. It is not long ago (2022) that the REIT index was -25% for the year (Serenity was only down -8.4%)!

The longer arc of history, however, is that REIT fundamentals move in cycles, with periods of slow or negative growth inexorably giving way to sunnier days of accelerating growth and rising stock prices.

As we look forward with hope towards 2026, Serenity’s portfolio is positioned for success regardless of the changing economic landscape. Our long positions in Seniors Housing and Data Center REITs continue to deliver excellent NAV growth, while we look for more wide ranging opportunities in Apartment, Storage, Lodging, and other REIT sectors.

Hopefully the emergence of Warehouse demand is just the beginning for cyclical REITs. If that is the case, there are about 101 REITs that would be on our buy list.

Just don’t tell Cruella…

Martin D Kollmorgen, CFA

CEO and Chief Investment Officer

Serenity Alternative Investments

MdKollmorgen@SerenityAlts.com

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

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