REITS DON’T GET NO RESPECT: +3.08% in July, +19.2% YTD

“My psychiatrist told me I was crazy and I said I want a second opinion. He said okay, you’re ugly too.” – Rodney Dangerfield

• PERFORMANCE:  Serenity Alternative Investments Fund I returned +3.08% net of fees in July vs the REIT index which returned +2.28%. Year to date (YTD) the fund has returned +19.2% vs +20.3% for the REIT index.

• REITS DON’T GET NO RESPECT: Despite recent gains, REITs still trade at a historical earnings multiple discount to broader equities (the S&P 500).

• NAV TAILWINDS: The rate of change (growth) of Net Asset Values (NAVs) in REITs has inflected higher. Extra Space Storage (EXR) is a prime example of why.

• REIT BULL MARKETS: How does the current REIT bull market stack up vs history?

I’m no Rodney Dangerfield but here is a finance joke.

Two economists are walking down the street. They walk right past a $100 bill laying on the sidewalk.

A few minutes later, one economist turns to the other and says, “Hey, did we just walk past a $100 bill?”

The other economist responds, “No, if there were a $100 bill lying on the ground, someone would have already picked it up!”

BOOM. Finance humor.

Unfortunately, this joke hits close to home. Investors are often guilty of exactly this sort of behavior with their capital. They see a good deal and think…it’s too good to be true. “I know the fundamentals are moving the right direction, but all the good news must be priced in!”

Not so fast. This human behavioral bias ignores the economic reality of the market. Bull markets in asset classes or industries usually last more than 3, 6, or even 12 months. In fact, most REIT bull markets last well over 5 years, and achieve returns closer to +150-200% than the current +59% move REITs have experienced since 2023.

And I get it, it’s hard to buy REITs when the sector is up +20% year to date. But keep in mind that REITs have underperformed the S&P 500 by almost +48% over the past 5 years, and trade at a massive discount to the broader equity market. REIT’s still don’t get no respect!

Oh, and by the way…Net Asset Values (NAV’s) are increasing at their fastest rate since 2021.

In our view, REITs continue to look attractive, with strong fundamental momentum, a valuation discount to broader equities, and accelerating growth in a variety of REIT property sectors. While there is no harm in waiting for a pullback to deploy capital, it’s important to maintain the proper context. If you had redeemed your capital from Serenity after 2019 (a year in which the fund returned +33% net of fees), you missed a +70% move over the next two years!

PERFORMANCE: +3.08% in July, +19.2% YTD

Serenity Alternative Investments Fund I returned +3.08% in July net of fees and expenses with +92% net exposure versus the MSCI US REIT Index which returned +2.28%. On a YTD basis, the fund has returned +19.2% versus +20.3% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +8.9% annually, net of fees and expenses versus +5.3% for the REIT index.

The most profitable position in the fund in July was Host Hotels (HST), a long position which returned +7.42%. Host is one of the largest and best managed Hotel REITs in the Serenity universe and benefitted from continued RevPAR acceleration driven by the World Cup in July. As we expected, Hotel REITs have announced incredibly strong earnings so far in Q2 on the back of better travel demand both from the World Cup and broader US economic momentum. All the main customer segments have shown strength in 2026, with business transient, leisure, and group cohorts all accelerating relative to 2025. While we are watching RevPAR closely for signs of a slowdown, so far they have not appeared, and our CORE REIT model continues to rank Hotels as one of the strongest sectors in the REIT universe. We remain long Host.

The worst performing position in the fund in July was Iron Mountain (IRM), a long position which returned -0.48%. Iron Mountain has had an incredibly strong 2026 (+48% YTD) but took a slight step back in July as the broader Data Center complex sold off. As we wrote last month, investors are becoming increasingly concerned about the potential for overbuilding in the Data Center industry. While we agree that this could be problematic over the next few years, we think Iron Mountain is one of the best positioned portfolios within the Data Center sector. The company has a well-diversified tenant base, high occupancy and pre-leasing in their Data Center portfolio, and very little exposure to high-risk tenants such as the neo-clouds or AI companies. We remain long Iron Mountain but are likely to hedge some of our Data Center exposure using our short book in the coming months/quarters.

REITs don’t get no respect! S&P vs REIT Earnings multiples.

After a great start to 2026, with REITs returning +20% YTD, it makes sense to pause and reassess our outlook for the sector. Are REITs now too expensive? Has the recent REIT bull market run its course?

These are complex questions, so let’s examine some of the data.

The first chart below shows TTM (trailing twelve month) earnings multiples for REITs, the S&P 500, and the Nasdaq 100. If we start with REITs, the sector’s current earnings (FFO in the case of REITs) multiple is +17.2x. Relative to history, this is slightly elevated, with the median multiple of the last 20 years being closer to +14.6x. However, it is far from the peak values near +20x that we saw during 2021, and not outside of the norm for REIT bull markets.

What is much more noticeable from this chart, however, is the large premium that the broader equity market commands relative to REITs, and how wide the multiple spread has become between REITs and the S&P 500.

If we go back 20 years, the average multiple gap between REITs and the S&P 500 is +4.85x, meaning the S&P has typically traded at an earnings multiple about 5 points higher than REITs. Currently, that gap is +10.1x, a +1.12 standard deviation based on the last 20 years of data.

This gap has narrowed from nearly +13x earlier this year, but a +10x multiple discount for REITs relative to broader equities is still extremely wide.

This is important because returns in the stock market are often driven by capital flows. In the early 2000’s for instance, REITs benefitted tremendously from capital flows out of technology stocks (post the tech bubble), into REITs, as investors searched for cashflow certainty. Similarly, for investors searching for value relative to very expensive tech stocks in today’s market, REITs look like an attractive option.

REITs are also not historically expensive relative to private market real estate values. The following chart shows an equal weighted version of the REIT universe relative to Net Asset Value (NAV), with 0 in this chart indicating that REITs trade right on top of private market values. As of this writing, REITs trade at a +5% premium to NAV, indicating they are slightly more expensive than private real estate.

This is well within the normal range for REIT bull markets. If we examine the period from 2009-2018, REITs regularly traded at slight premiums to NAV, while delivering excellent annualized returns over this period (+12.1% annually 2009-2018).

Let’s step back and summarize.

Are REITs wildly cheap right now? No. They trade at a slight premium to NAV and an earnings multiple that is elevated historically.

But relative to the broader stock market, they are very cheap, and relative to the private real estate market, they are fairly priced but have much stronger growth.

Which brings us to the other side of the coin in the REIT bull market calculus.

NAV GROWTH: The key REIT bull ingredient!

While valuation is an important indicator of current sentiment, growth is often the tail that wags the proverbial REIT dog. And while earnings growth is important, NAV (Net Asset Value) growth is in reality much more predictive. Simply put, when NAV’s go up, usually, so do REITs.

The chart of REIT NAVs below tells the story. The red arrows illustrate the driving data point behind our bearish call on REITs from 2022 to 2023, and our bullish turn in early 2024, which persists into today.

You can see in this chart the driving force behind REIT bull markets in 2021 and from 2024-2026. If we pulled back further, the same pattern would emerge for the 2010-2015 REIT bull market. That is, NAV estimates that move up and to the right (have a positive rate of change), drive outsized positive returns for the REIT industry.

In 2026, YoY NAV growth for REITs just hit +11.4%, its highest level since 2022, and an acceleration from about +1% early this year. Said another way, the slope of the blue line below is steeper than it has been since the tail end of the last REIT bull market (2022).

Source: S&P Capital IQ, Serenity Alternative Investment Management

This means that REIT success in 2026 has mostly been a function of accelerating growth. This is also why REITs current +5% premium to NAV needs to be contextualized. At the current growth rate for NAV (+10%), REITs trade at a -5% discount to NAV on a one-year forward basis.

The bottoms up data tells a similar story. A good example is Extra Space Storage (EXR), a self-storage REIT that has struggled mightily along with many cyclical REITs since 2022.

From 2022 to year end 2025 EXR returned -9.29% annually. No bueno (that’s a technical term). In 2022 the company’s NAV peaked at +$198. It now sits at $151. The chart below illustrates why. Same-store revenue and NOI growth for EXR have been stuck near +0% for the better part of 3 years.

Compare this with the 2010-2018 period, in which EXR averaged +6% same-store revenue growth and +8% NOI growth. Just as a quick math exercise, what happens to NAV when your NOI grows organically by +8%? Well, it goes up by at least +8%. And your stock price likely follows.

When same-store NOI and earnings growth is +0%? Then there is no NAV growth, or maybe even negative NAV growth as cap-rates must be adjusted higher due to lower growth.

This makes the little red arrow on the bottom right of this EXR chart so significant. After years mired at near-0% growth, EXR has seen revenue and NOI growth accelerate over the last 2 quarters. When growth goes from +0% to +1%, your NAV starts to increase again, and as that growth accelerates, stock price gains are usually not far behind.

EXR’s consensus NAV has increased +4.5% over the past 6 months because of this inflection, and I would expect this trend to persist as long as fundamentals continue to accelerate.

And EXR is only one example amongst many cyclical REITs (Warehouse, Apartments, Self-storage, etc), that are beginning to show signs of growth acceleration. Add them to the companies already growing NAV rapidly (Data Centers, Seniors Housing), and REIT NAV growth looks poised to remain strong for the next few quarters, and potentially the next few years.

THE BULL MARKET BOTTOM LINE… LET IT RIDE

Let’s back up and quickly summarize.

REITs are up +20% year to date, as NAV growth has accelerated from +1% YoY to +11% YoY.

REITs trade at an equal weighted +5% premium to NAV, well within historical ranges for REIT bull markets.

REITs trade at a +17.2x FFO multiple, above historical averages, but 1.12 standard deviations below their historical average relative to the S&P 500 (which trades at +27x).

There are few signs of frothy behavior in the broad REIT market and a plethora of individual REITs that have reasonable earnings multiples and extremely strong earnings growth (AHR, IRM, CTRE, HST).

And lastly, this REIT bull market is well inside of historical bull runs from a total return and life-span perspective. The chart above shows the timing and magnitude of historical REIT bull markets, including the current bull which started in late 2023.

It’s interesting that this bull run looks the most like the 1999-2004 bull in which investors sold technology stocks to buy REITs. Anyone else getting a sense of Déjà vu? The moral of the story here is that this bull may have room to run, both from a time and total return perspective, if history is any indication.

CUT YOUR LOSERS, ADD TO YOUR WINNERS

The usual caveats are in order here, as past performance is no indication of future results, but historically speaking, this REIT bull market looks far from tapped out. There is always the risk of macro headwinds derailing REIT growth momentum, or interest rates accelerating to a point that they actually dent REIT growth, but Serenity does not see those risks as elevated at the current moment.

The bottom line here is that NAV growth has accelerated, and REITs still trade at a significant discount to the broader equity market. At Serenity, we remain bullish, and until we see signs of NAV growth plateauing or decelerating, are likely to remain so.

Show REITs some respect!

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

DISCLAIMER: This document is being furnished by Serenity Alternative Investment Management, LLC (“Manager”), the investment manager of the private investment fund, Serenity Alternative Investments Fund I, LP (the “Fund”), solely for use in connection with consideration of an investment in the Fund by prospective investors. The statements herein are based on information available on the date hereof and are intended only as a summary.  The Manager has been in operation since 2016 and the Fund commenced operations on January 14th.  The information provided by the Manager is available only to those investors qualifying to invest in the Fund.  By accepting this document and/or attachments, you agree that you or the entity that you represent meet all investor qualifications in the jurisdiction(s) where you are subject to the statutory regulations related to the investment in the type of fund described in this document. This document may not be reproduced or distributed to anyone other than the identified recipient’s professional advisers without the prior written consent of the Manager.  The recipient, by accepting delivery of this document agrees to return it and all related documents to the Manager if the recipient does not subscribe for an interest in the Fund.  All information contained herein is confidential. This document is subject to revision at any time and the Manager is not obligated to inform you of any changes made. No statement herein supersedes any statement to the contrary in the Fund’s confidential offering documents.

The information contained herein does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product.  Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum and only in those jurisdictions where permitted by law.  Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries and/or states of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it.  Before making an investment, prospective investors are advised to thoroughly and carefully review the offering memorandum with their financial, legal and tax advisers to determine whether an investment such as this is suitable for them.

There is no guarantee that the investment objectives of the Fund will be achieved.  There is no secondary market for interests and none is expected to develop. You should not make an investment unless you have a long term holding objective and are prepared to lose all or a substantial portion of your investment.  An investment in the Fund is speculative and involves a high degree of risk.  Opportunities for withdrawal and transferability of interests are restricted. As a result, investors may not have access to capital except according to the terms of withdrawal specified within the confidential offering memorandum and other related documents. The fees and expenses that will be charged by the Fund and/or its Manager may be higher than the fees and expenses of other investment alternatives and may offset profits.

With respect to the present document and/or its attachments, the Manager makes no warranty or representation, whether express or implied, and assumes no legal liability for the accuracy, completeness or usefulness of any information disclosed. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such. Performance information and/or results, unless otherwise indicated, are un-audited and their appearance in this document reflects the estimated returns net of all expenses and fees.  Investment return and the principal value of an investment will fluctuate and may be quite volatile.  In addition to exposure to adverse market conditions, investments may also be exposed to changes in regulations, change in providers of capital and other service providers. 

The Manager does not accept any responsibility or liability whatsoever caused by any action taken in reliance upon this document and/or its attachments.  The private investment fund described herein has not been registered under the Investment Company Act of 1940, as amended, and the interests therein have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), or in any state or foreign securities laws.  These interests will be offered and sold only to “Accredited Investors” as such term is defined under federal securities laws.  The Manager assumes that by acceptance of this document and/or attachments that the recipient understands the risks involved – including the loss of some or all of any investment that the recipient or the entity that he/she represents. An investment in the Fund is not suitable for all investors.

This material is for informational purposes only.  Any opinions expressed herein represent current opinions only and while the information contained herein is from sources believed reliable there is no representation that it is accurate or complete and it should not be relied upon as such. The Manager accepts no liability for loss arising from the use of this material. Federal and state securities laws, however, impose liabilities under certain circumstances on persons who act in good faith and nothing herein shall in any way constitute a waiver or limitation of any rights that a client may have under federal or state securities laws.

The performance representations contained herein are not representations that such performance will continue in the future or that any investment scenario or performance will even be similar to such description.  Any investment described herein is an example only and is not a representation that the same or even similar investment scenarios will arise in the future or that investments made will be profitable.  No representation is being made that any investment will or is likely to achieve profits or losses similar to those shown.  In fact, there are frequently sharp differences between prior performance results and actual Fund results. 

References to the past performance of other private investment funds or the Manager are for informational purposes only.  Other investments may not be selected to represent an appropriate benchmark.  The Fund’s strategy is not designed to mimic these investments and an individual may not be able to invest directly in each of the indices or funds shown.  The Fund’s holdings may vary significantly from these referenced investments. The historical performance data listed is for informational purposes only and should not be construed as an indicator of future performance of the Fund or any other fund managed by the Manager. The performance listed herein is unaudited, net of all fees. YTD returns for all indices are calculated using closing prices as of Jan 14th, the first day of the funds operation. Data is subject to revision.  

Certain information contained in this material constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology.  Such statements are not guarantees of future performance or activities. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund described herein may differ materially from those reflected or contemplated in such forward-looking statements.      

Our investment program involves substantial risk, including the loss of principal, and no assurance can be given that our investment objectives will be achieved.  Among other things, certain investment techniques as described herein can, in certain circumstances, maximize the adverse impact to which the Fund’s investment portfolio may be subject. The Fund may use varying degrees of leverage and the use of leverage can lead to large losses as well as large gains. Investment guidelines and objectives may vary depending on market conditions.