REITS ARE BACK: +5.39% in February, +7.7% YTD

“Well, I’m back, Yes, I’m back” – Back in Black, ACDC

• PERFORMANCE:  Serenity Alternative Investments Fund I returned +5.39% net of fees in February vs the REIT index at +7.92%. Year to date (YTD) the fund has returned +7.7% vs +11.2% for the REIT index.

• ATTRIBUTION: Data Centers were winners in February, while commercial real estate brokerage businesses got hit by the AI trade.

• PORTFOLIO: Serenity remains long primarily Healthcare and Industrial REITs, with Data Centers and Malls rounding out our largest exposures.

• OUTLOOK: It’s been a long time since REITs topped the asset allocation charts, but REIT leadership may be back.

Don’t look now, but REITs are BACK!

With popular stock market trades from BDC’s to software companies struggling in 2026, investors have reached back into ancient history to unearth an oldie but a goodie of a defensive allocation…the REIT market.

While that previous paragraph is tongue in cheek, the multiple gap between most publicly traded equities and the REIT market has almost never been wider, suggesting that until recently, many investors had simply written off REITs.

That all may be changing.

In February REITs charged higher on the back of solid earnings reports and a flight to AI proof industries. This change in equity market flows is significant and comes at a time when growth may also be bottoming for multiple REIT property types.

Multiple expansion in the REIT market also means a lower cost of capital for the entire industry, making investments more accretive, and development more attractive. Said another way, the higher REIT stock prices go, the faster REITs can grow, which pushes prices higher, which allows for faster growth.

In REITs we call this the virtuous cycle, and we have not seen it broadly in REITs since 2021.

That year REITs were up +43%.

While 2026 is unlikely to be a repeat of 2021, improving costs of capital and potentially accelerating growth in a wide variety of REITs are common denominators. At this point in the cycle REITs have both defensive and offensive characteristics, and investors are taking notice.

REITs are back!

PERFORMANCE: +5.39% in February, +7.7% YTD

Serenity Alternative Investments Fund I returned +5.39% in February net of fees and expenses with +98% net exposure versus the MSCI US REIT Index which returned +7.92%. On a YTD basis, the fund has returned +7.7% versus +11.2% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +10.2% annually, net of fees and expenses versus +8.0% for the REIT index.

The most profitable position in the fund in February was Equinix (EQIX), a long position which returned +19.3%. Equinix owns the largest and highest quality Data Center portfolio in the world. In February, the company reported strong earnings and 2026 guidance that were well ahead of consensus estimates. Equinix is building Data Center’s faster than at any point in the company’s history, and while analysts expected this to negatively impact earnings in the short term, EQIX has surpassed expectations for revenue growth and margin expansion, guiding to +10% AFFO growth in 2026, versus expectations closer to +5% less than 1 year ago. Equinix remains one of the funds’ largest long exposures.

The worst performing position in the fund in February was Newmark Group Inc (NMRK), a long position which returned -18.5% during the month. Newmark and fellow commercial real estate brokers CBRE, JLL, CWK, COMP and others fell victims to the “AI” trade in February, as analysts predicted that AI will impact these businesses negatively over the long term. In our opinion the moves in these companies are overdone to the downside, but worth noting in how we think about long-term cash flows in these businesses. Serenity is currently evaluating our exposure to commercial real estate brokers and has already adjusted our positioning in these names (more details below).

ATTRIBUTION: Data Centers (+), CRE Brokerages (-)

The best performing property sectors in February were Specialty REITs (+12.6%) and Data Centers (+11.7%). Serenity benefitted from multiple longs in these property types, with Equinix (EQIX), Iron Mountain (IRM), and Outfront Media (OUT), all delivering high double digit returns. Data Center earnings were particularly robust in February, with EQIX and IRM both handily beating consensus expectations.

The worst performing property sectors in February were RE Services companies (-15.6%) and Office REITs (-9.1%). With a +5% allocation to the RE services companies during the month, this was the largest detractor from the funds’ returns in February. As discussed above, the AI “sell first ask questions later” trade came for the CRE brokerage firms seemingly out of nowhere, sending shares of very solid businesses rapidly lower. With no weight in the REIT indices, these companies disproportionately impacted Serenity relative to the REIT benchmark during the month. This is the double-edged sword of having a broad CRE universe within our process, historically these companies have added an excellent source of uncorrelated alpha to the Serenity portfolio, but in February, they were a significant detractor, particularly relative to the REIT benchmark.

While we have confidence in the long-term business prospects of CBRE and NMRK, the recent spate of selling and accompanying revision lower of some analyst estimates has moved the scores of these companies lower in the Serenity CORE model.

Simultaneously, certain Free Standing and Specialty REITs have moved up in the model, presenting an opportunity to shift our portfolio exposures in a more defensive direction. As the war in Iran has dragged on and Oil prices have remained elevated, we have allocated some capital away from these CRE brokerage exposures, into more defensive REIT names.

PORTFOLIO: Lodging (offense) or Free Standing Retail (defense)?

The Serenity portfolio remains mostly concentrated in Healthcare (Seniors Housing) and Industrial (Warehouse) REITs at +22% and +18% respectively. Seniors Housing remains the strongest and potentially most durable bull market in commercial real estate, and Serenity is long multiple REITs with Seniors Housing exposure. With expected earnings growth of +13.7% in 2026, and average AFFO multiples of +26.4x, we believe Seniors Housing remains an excellent destination for investor capital.

The Warehouse REITs similarly continue to create value for investors, with development, leasing, and other portfolio activity headed higher in 2026 after a slow 2023-2025. While earnings growth is not quite as attractive as Seniors Housing at +8.4% for 2026, the Warehouse REITs only trade at +22.6x AFFO, indicating slightly better value for slightly less attractive growth.

The balance of the Serenity portfolio is comprised of exposures to Mall REITs, Data Center REITs, specialty REITs such as OUT and IRM, and some Shopping Center REITs.

With the war in Iran continuing to impact oil prices, our overweight to the Lodging sector is under review, as Lodging tends to be the most economically sensitive of all the REIT industries. Prior to the recent surge in Oil prices, the Lodging REITs were poised for their best year arguably since 2015, with RevPAR growth accelerating and multiple positive tailwinds in the pipeline. As economic growth slows, however, Lodging is most likely the first REIT exposure that will be impacted. For this reason, we may trim our Lodging exposure in favor of…

Free Standing Retail, which tends to be one of the most defensive exposures in the REIT industry. Free Standing Retail (Net Lease) has the highest duration of the REIT property types, tends to pay outsized dividends, trades at low valuations, but does not typically deliver much growth. These REITs work well in a growth-slowing environment, as other property types with higher multiples are often sold into these more defensive names.  

For this reason, the longer Oil prices remain elevated and travel is limited, the more likely we are to shift the Serenity portfolio in a defensive direction. This means less Lodging exposure, and more exposure to Free Standing Retail.

OUTLOOK: Don’t forget, REITs were formerly perennial market leaders.

It may seem like ancient history, but it was truly not that long ago that REITs were a perennially market leading asset class. If we re-wind to 2016, REITs had just finished a six-year stretch in which they outperformed most other asset classes in 5/6 years. In fact, from the end of 2009 to the end of 2015, REITs returned +125%, or +14.5% annually.

Based on recent performance, it may be hard to believe that REITs were so dominant, but during this period, REITs offered investors a defensive/offensive combination that was impossible to ignore. When growth slowed and interest rates fell, Net Lease REITs, Healthcare REITs, and Cell Tower REITs saw huge inflows of capital, with dividends much higher than 10-year yields.

Conversely, when growth accelerated, Apartment REITs, Self-Storage REITs, Mall REITs, and Warehouse REITs offered investors exposure to cyclical growth that was well above inflation.

As interest rates and inflation have fallen back to more normal levels in recent years, a similar outlook is beginning to come together for REITs. Defensive REITs offer a premium to treasuries, with attractive valuations that could move much higher in a search for yield.

Cyclical REITs as well are poised for growth to accelerate if the economy can find a sustainable growth path in 2026 or 2027.

This combination is becoming increasingly evident to investors. REITs can work on offense AND defense in a way that was not true from 2022-2025. Could 2026 be the year REITs return to dominance?

BACK ON THE TRACK

With the aftereffects of the pandemic and 50-year highs in inflation beginning to fade into the rear-view, REITs may be poised to reclaim their rightful place as a leading asset class.

Investors are embracing the sector’s both offensive and defensive characteristics.

In February, this made REIT performance stand out.

Look at REITs now,

REITs are making their play,

Don’t try to push your luck, just get out of REITs way!

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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