Quiet REIT Creativity: +1.41% in June, +14.2% LTM

“The monotony and solitude of a quiet life stimulates the creative mind” – Albert Einstein

• PERFORMANCE: Serenity Alternative Investments Fund I returned +1.41% net of fees in June vs the REIT index at -0.61%. Over the last twelve months (LTM), the fund has returned +14.2%.

• QUIET: REITs are quietly putting investor capital to work in 2025 that will pay handsome dividends down the road.

• SOLITUDE: Marriot International (MAR) continues to unceremoniously create shareholder value.

• CREATIVITY: Few investors are betting on a return to normalcy in the housing market. For Serenity this spells opportunity.

REITs are not a way to get rich quickly.

They rarely have explosive upside, and they almost never capture the cultural zeitgeist.

Over short time periods, REIT returns can look more like the tortoise, and less like the hare.  

But let’s remember who eventually wins that proverbial race.

Despite the REIT market’s seeming placidity, highly skilled commercial real estate investors are putting capital to work that will enhance shareholder returns for years and decades to come. It may seem like a quiet corner of the market in 2025, but don’t be fooled. In many instances the groundwork is being laid for capital compounding that investors will look back on with envy years down the road.

In Seniors housing, REITs are dominating a rapidly growing market that will see explosive growth over the next decade. In Data Centers, REITs are putting out prodigious amounts of capital to meet ever increasing demand for digital storage and processing. Even in the much-maligned Lodging space, Marriot International continues to compound investor capital with a regularity that is impossible to ignore.

The REIT industry has stood the test of time because it is comprised of some of the best commercial real estate assets on the planet. REITs can compound their cash flow in a way that is unique within commercial real estate, ultra durable, and incredibly powerful over long periods of time.

The dollars they are investing today almost always generate additional dollars down the road, and Serenity is focused on finding the best of the best in this universe of high-quality REIT managers.

Don’t mistake the quiet solitude for inaction. REITs are actively putting investor capital to work.

PERFORMANCE: +1.41% in June, +14.2% LTM

Serenity Alternative Investments Fund I returned +1.41% in June net of fees and expenses with +94% net exposure versus the MSCI US REIT Index which returned -0.61%. Year to date the fund has returned +3.4% versus -0.09% for the REIT index. On a last twelve-month (LTM) basis, the fund has returned +14.2% vs +8.9% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +12.8% annually, net of fees and expenses versus +8.6% for the REIT index.

A quick note on performance here. Over the past 5 years Serenity Alternatives Fund I has returned +16.8% on a gross basis, and +12.8% on a net of fees basis (assuming +1.5% management and +15% performance fees). Over this period, the S&P 500 has produced one of the best performance stretches in the history of the index, returning +16.6% on an annualized basis. Few active managers have kept pace with the S&P index, and REITs have lagged the S&P significantly, at +8.6%/year.

Serenity’s gross returns, however, at +16.8%/year, are actually BETTER than the S&P 500 over the past 5 years. Despite the fact that REITs have lagged the index by a significant margin. What would happen with our returns if REITs were to outperform the S&P 500 over the next few years? Anyone’s guess. Food for thought…

The most profitable position in the fund in June was Caretrust REIT (CTRE), a long position which returned +7.56% for the month. Caretrust owns a portfolio of Skilled Nursing Facilities (SNF’s), a sub-property type within the Healthcare REIT sector. CTRE’s management team stands out in its ability to manage its exposure to this complex industry and accretively invest capital. With a low-levered balance sheet and ramping acquisition volumes, CTRE is set to deliver top-tier earnings growth within REITs at a modest valuation level. CTRE checks all the Serenity boxes, high quality portfolio, skilled management team, strong growth and reasonable valuation. The fund remains long.

The worst performing position in the fund in June was Equinix (EQIX), a long position which returned -10.5% during the month. Equinix is one of the best performing REITs of the last 20 years and owns arguably the highest quality Data Center portfolio in the world. With a long history of +10%/year AFFO growth, investors have high expectations for the company, especially considering the recent surge in demand for AI applications. In late June, however, EQIX hosted an analyst day in which they guided to lower-than-expected AFFO growth over the next few years (5-9% from 2026-2029). This sent shares down sharply, falling as much as -21% in two days. For reasons that I will elaborate on below, Serenity was a buyer of this weakness, and EQIX remains a long position in the fund.

QUIET: REITs may not garner many headlines, but are quietly deploying capital

One of the unique attributes of the publicly traded REITs is that when you invest in a REIT, you are not only buying a stream of existing cash flows, you are in many cases also investing alongside a management team that can buy or build NEW real estate assets. This ability to invest capital externally makes REITs different than most closed-end commercial real estate funds and is a key component in many REIT strategies that have compounded investor capital at incredible rates historically.

Said another way, the ability to build and buy new real estate has historically driven incredible success stories in the REIT industry.

Let’s take Equinix as a quick example. Since 2003 Equinix has returned +25.9% annually to shareholders, versus +11.2% for the S&P 500 and +8.27% for REITs. That’s a +17,833.8% return over 22 years. Over the past 10 years, the company has grown its AFFO per share (cash flow) at +9.98%/year, from +$14.63 in 2015 to +$37.87 in 2025; growth that is easily in the top 10% of all REITs.  

EQIX 1Q 2025 Investor Presentation

Most of this growth has come from Data Center development. As one of the first Data Center companies (EQIX was founded in 1998), EQIX has been building Data Centers at mission critical points within the internet’s infrastructure for almost 30 years. The company’s yield on stabilized Data Center investments is +26% as per their Q1 2025 presentation. This is how the company can grow at such a rapid rate. When you can build Data Centers with 20+% stabilized yields, and fund that development with debt at +4% (EQIX issued $750m in bonds at +4% in May of 2025), your cash flow is going to grow rapidly. 

Let’s add a bit more depth to the example above. Excluding capital spending on new Data Centers, Equinix generated $1.6 billion in excess cash flow in 2024. Assume that EQIX uses this excess cash to develop new data centers, and that they can achieve a +15% return on this $1.6 billion (remember historically they hit +26% on stabilized assets). This would create $240 million in new stabilized Net Operating Income (NOI) for the company. If we then apply a real estate multiple (a +6% cap rate) to this NOI, the asset value of these newly developed assets is arguably $4 billion. We can assume it takes 3 years to reach stabilization and use a present value calculation to determine the “value creation” of this new development discounted back to the present at $2.8 billion.

Said another way, by simply deploying the $1.6 billion in excess cash flow the company generates into new Data Centers, it creates $2.8 billion in Net Asset Value (in today’s dollars), which is growth of +3.6% relative to EQIX’s current NAV of +$79.3 billion. So Equinix grows the value of its real estate portfolio by +3.6% a year simply by reinvesting its excess cash flow.

And EQIX spends much more than $1.6 billion per year. In fact, in their recent investor day, EQIX increased their yearly capex guidance to $4-5 billion per year. The “value creation” on this additional spend is lower than on their free cash flow (i.e. they need to finance this extra new development using either debt or equity), but it is still meaningfully positive. Again, when you can achieve +15-20% stabilized yields, and finance that development using +4% debt and a +5.5% cost of equity, the enterprise value benefits are enormous.

This is one of the key reasons we have been long-term holders of EQIX shares and are likely to remain so. From the perspective of Serenity, every dollar we commit to EQIX is invested by the company at 15-20% yields and compounds the NAV of EQIX at close to +10%/year. Despite 30 years of incredible growth, this remains one of the best growth stories in the entire REIT industry.

This is also why we find the recent sell-off in EQIX shares to be extremely short-sighted. Yes, the companies increased capex guidance will dilute earnings growth slightly over the next 1-2 years. This spending, however, accelerates EQIX’s NAV growth in the future. Simply put, if you believe EQIX achieves positive returns in excess of their cost of capital, then deploying MORE capital should be a good thing.

With the market focused on short-term earnings dilution, Serenity is more than happy to scoop up shares at a significant discount. EQIX’s largest peer, DLR, now trades at a cash flow multiple 5 turns higher than EQIX, despite a 10-year cash flow CAGR of +5% (half that of EQIX).

The Bottom Line: Equinix has a near 30-year history of successfully deploying capital into Data Center development and achieving extremely attractive returns (+26% historically). With arguably the most irreplaceable portfolio of Data Centers in the world and a powerful value creation engine, Serenity has been a long-term holder of EQIX shares and will remain so despite short term earnings dilution. As the company ramps up capital spending to meet AI demand, Serenity clients will benefit from continued growth in the EQIX portfolio.

SOLITUDE: Marriot remains an un-hyped capital compounder

Another example of long-term value creation in the real estate space is Marriot International (MAR). While Marriot is a familiar brand name, the power of the company’s business model is less well known. Even most REIT investors don’t appreciate the Marriot story, since it isn’t a REIT.

Marriot, however, shares one key characteristic with the titans of growth in the REIT industry. That is…it compounds its cash flow over time by astutely re-investing in a shareholder friendly manner.

What does this look like historically? Since 1998, MAR has returned +11.9% annually, versus +8.5% for the S&P 500 and +9.56% for REITs. Over the last 10 years, the company has delivered +12.45% annual EPS growth and grown their cash flow at about the same rate.

Marriot does this using two levers. The first is simply organic “flag” growth. Marriot does not own hotels, they simply operate them, and each year they add roughly +5% more Marriot rooms to their portfolio.

The second lever is share buybacks. On a yearly basis, Marriot buys back about +6% of the outstanding shares of the company using free cash flow. From an investor’s standpoint, that means existing shareholders effectively own +6% more of the company’s earnings each year, which grow by about +5% organically as we discussed above. See where the +11-12% EPS growth comes from?

The Bottom Line: While it might not be a sexy cloud computing company, Marriot has historically compounded earnings and cash flow growth at a very attractive clip. Investors (Serenity included) benefit from steady +5% organic rooms growth, and reliable +6% buybacks, which combine to create strong historical EPS growth. Marriot is another example of a quiet, yet high-quality, commercial real estate business that compounds investor capital over time.  

CREATIVITY: Is the housing market starting to get interesting?

While Blue-chip CRE companies like EQIX and MAR make up the bedrock of the Serenity portfolio, the fund also reserves 10-15% of its capital for creative (aka more speculative) ideas. Out-of-consensus ideas can be a great compliment to the stalwart capital compounders that make up the portfolio’s core.  

One idea that has been percolating in the Serenity think tank recently involves the US housing market. As many people know, the existing home sales market in the US has been moribund for the past 2 years. With mortgage rates going from +3% in 2021 to above +7% in late 2023, it is no surprise that the demand for housing has fallen to 30-year lows. Buying a house is currently more expensive relative to income than at any time since I have been alive.

Housing brokerage, by extension, has been an incredibly tough business over the past few years. Two of the largest companies in this space Re/Max Holdings (RMAX) and Anywhere Real Estate (HOUS), are down -69% and -47% over the past 5 years.

There is accumulating evidence, however, that the housing market is beginning to heal. Mortgage rates have fallen to +6.73% and have remained below 7% for the majority of 2025. MBA mortgage applications have quietly ticked up over the past six months, finally showing some momentum after hitting 30-year lows. And very importantly, the supply of existing homes for sale has ramped meaningfully, up +16.2% YoY according to Redfin.

These are all positive signs for an existing homes market that has been incredibly slow. Demand is increasing off of a low base, supply is increasing (as more people either need to or feel comfortable selling their homes), and price growth has slowed meaningfully, and gone negative in many US markets.

An increase in home transactions would be incredibly beneficial to the brokerage businesses that have been in the doghouse since 2021. RMAX has a historical median P/E ratio of 16x going back to 2013. Today the company trades at +6.3x. In 2019, the company earned $2.18 and is expected to earn $1.33 in 2025. If Re/Max returned to a 2019 level of earnings and multiple, the stock price would be $35 (16 x $2.18). It currently trades at $8.16.

Again, this is a speculative, and I would argue out-of-consensus idea, but the fact of the

matter is that not much has to go right in order for these stocks to perform well off of both depressed fundamentals and valuations. Suffice it to say Serenity is circling the wagons on the housing brokers.

The Bottom Line: The existing home sales market has been incredibly slow since 2021 but is beginning to show signs of healing. Housing brokerage businesses like Re/Max (RMAX) are very cheap on depressed earnings, and a return to a more normal housing market would benefit them disproportionately.  

THE MOST POWERFUL FORCE IN THE UNIVERSE

Albert Einsten once described compound interest as the most powerful force in the universe. At Serenity, our mission is simple, to protect and grow client capital by investing in REITs and CRE companies that compound investor capital. We are merely trying to take advantage of the power of compounding within high-quality commercial real estate.

This makes my day to day straightforward. Look for companies that are putting investor dollars to work prudently, who’s portfolios will be worth more 5 years from now than today. While this takes experience, analytical rigor, and in our case some code-writing elbow grease, the end goal remains uncomplicated. Put capital to work where it can compound over time.

Equinix (EQIX) has been doing it successfully for almost 30 years. Marriot International has been doing it successfully even longer than that. And the Seniors Housing REITs are the new kids on the capital compounding block. Each opportunity is unique and yet similar. These companies invest capital today that will make their portfolios worth more tomorrow, and worth much more 5 and 10 years from now.

REITs may be quiet, but they are far from idle.

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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