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  • Martin Kollmorgen


Updated: Sep 8, 2022

PERFORMANCE – Serenity Alternatives Fund I returned +0.99% in May net of fees and expenses versus the FTSE NAREIT REIT index at +0.82%. Year to date the fund has returned +23.9% versus the REIT index at +18.2%.

ECONOMIC ACCELERATION – Has our 9-month-old call for a new economic cycle run its course?

CHANGING WINDS IN RETAIL – Stronger than expected fundamentals may be reversing the narrative for Retail REITs.

BRIXMOR – Could BRX become a GARP investor darling?

“Mitch: Are you telling me that you bet on the fight in Rocky III, and that you bet against Rocky?

Dr. Farthing: Hindsight is twenty-twenty, my friend”

Dirty Work

Nothing in investing hits as hard as the economic cycle. Recessions and recoveries can make or break an investing career. While avoiding a recessionary draw-down can make you a hero to your clients, conversely, losing money fighting an economic expansion can just as quickly tarnish your investing reputation.

The cycle is undefeated, and investing against economic momentum is like betting on a fight in a Rocky movie, and betting against Rocky. You may be right for a bit, but eventually you are going to go down in a flurry of jabs, hooks, and crosses.

After an excellent 9-month period of re-opening fueled growth, is this cycle over? Have we reached the peak? Should we bust out the growth slowing playbook?

Not so fast. Cycles are measured in years, not months. During the last recovery, value factors outperformed within the REIT market from 2009 until 2015. It took years for most REITs to reach pre-crisis occupancy levels, and rental rate growth accelerated steadily for almost a 10-year period. As of Q1 of 2021, most REITs are still at NOI levels below those of 2019, indicating there is still a long runway for future NOI expansion.

The point here is to be careful with the narratives that are influencing your portfolio decisions. The rate of change of growth is certainly going to ebb and flow as this new cycle progresses, but assuming a risk-off posture, in the early part of the cycle, can be just as ill-timed as adding risk as the economy rolls over. We don’t need to blindly buy high-beta REITs at any price, but abandoning what has worked, just because it has worked, is not a sound investing process either.

As we move through the economic recovery of 2021 and into a new positive cycle for economic growth, our portfolio will continue to reflect the environment we see as most probable over the next 6-12 months. That is a continued recovery in the labor market, increased capacity utilization, and continued strength in consumer spending. These cyclical tailwinds continue to bode well for low-duration REITs such as Hotels, Apartments, and Self-storage, even if these property sectors periodically consolidate and under-perform their higher duration REIT peers.

To those positioned for the opposite of economic strength we wish you the best. Just don’t bet the mortgage on this cycle ending after 9-months. You may find yourself on the losing end of an economic boxing match.

PERFORMANCE: +0.99% IN MAY, +23.9% YTD

Serenity Alternatives Fund I returned +0.99% in May net of fees and expenses versus the FTSE NAREIT REIT index at +0.82%. The fund has now returned +23.9% for the year, versus the REIT benchmark at +18.2%.

On a trailing 3-year basis Serenity Alternatives Fund I has returned +19.1% on an annualized basis net of fees and expenses. Over the same time period, the REIT benchmark has returned 12.5% on an annualized basis. The fund’s Sharpe ratio over the past 3 years sits at 1.17, versus 0.69 for the REIT benchmark.

The best performing position in the fund in May was Macerich (MAC), one of our smaller positions that returned +15.4%. Macerich is a Mall REIT. The consensus opinion is that there are few reasons to own a struggling Retail REIT with a well-known list of challenges. It’s important to remember, however, that the vast majority of our allocations to Hotel, Office, and Retail REITs were out of consensus only 6-8 months ago. Since we started buying those names in September of 2020, the fund has returned +40.9% net of fees.

It is also important not to fall in love with a thematic trade after riding it to impressive results. For this reason, we remain laser-focused on fundamentals, evaluating our allocations based on valuation, momentum, and quality characteristics, all the while contextualizing them within the macro-economic regime.

Macerich’s attractiveness within our framework relies mostly on its valuation. At 12x 2022 AFFO (cash flow), MAC is one of the least expensive REITs in the entire REIT universe. MAC also trades at a 24% discount to its consensus NAV (which is up 70% over the past six months). These levels make MAC one of the only REITs left in the universe with a valuation that could be described as “distressed.” And this valuation can be justified by citing Macerich’s higher-than-peer leverage, occupancy losses year over year, and the perceived continuation of the “retail apocalypse.” At many points in the economic cycle, we would be loath to take on a list of challenges this long.

At the beginning of a new cycle, however, it often pays to invest in companies perceived by consensus as “distressed.” The reason for this is that an accelerating economy often does not discriminate as to whom receives its benefits. On Macerichs’ first-quarter conference call, they confidently asserted that occupancy had bottomed. They were extremely positive on leasing volumes and sales levels, experiencing levels in many markets on-par with 2019 in these two metrics. Add to this the fact that California and New York are set to open over the next few months (about 50% of MAC’s portfolio is in these two states), and it is increasingly clear that the bottom is in for Macerich’s fundamentals. NOI from here should increase as the company leases space, leverage metrics should improve as the company drives EBITDA higher and sells assets, and Macerich has the ever-present potential suitor of Simon Property Group, a mall-REIT peer with a much better cost of capital that has attempted to buy the company in the past.

MAC certainly falls into the “speculative” bucket within our portfolio. The company’s issues are well known, and we manage our position with a short leash. That being said, taking a flyer on an extremely cheap Retail REIT into one of the most explosive economic recoveries ever experienced may not be as “speculative” as many investors think.


As investors reflect on Q1 earnings reports, one of the most surprising take-aways from this earnings season was the strength exhibited by Retail REIT portfolios. As a sector many investors had left for dead after years of under-performance, Retail REITs have skyrocketed back into the discussion as fundamental strength has taken the broader investing community by surprise. Over the past 9-months, Retail REITs (Malls and Shopping Centers) have returned +86% on average, versus the REIT index at +24%. Retail REIT investors can thank much-improved leasing velocity for the recovery in many retail names. On multiple conference calls, Retail REIT CEO’s referenced leasing velocity that was on-par with levels from 2019, a rebound that was not expected to occur for at least multiple quarters, and possibly even multiple years. Per Brian Finnegan of Brixmor Property Group (BRX)… “So, if you look at the productivity that we had during the first quarter, it was in line with the first quarter of 2019, where we had one of our most productive small shop years as a company.” From Don Wood at Federal Realty (FRT)… “Perhaps the greatest indication of a bright future is the continuation of exceptionally strong leasing volumes, including first-quarter deals for over 0.5 million square feet of comparable space, 35% more deals than last year’s largely pre-COVID first quarter for 9% more GLA, actually 24% more GLA than the average of our first quarter production over the last five years.” From Jim Thompson at Regency Centers (REG)… “Our new leasing volume in the first quarter was higher compared to Q1 2020 and in fact was the highest first-quarter new leasing volume we’ve seen in the last five years due to greater economic optimism, as well as some likely pent-up demand from 2020.” It’s important to remember as well, that the economy was only open for about a month during the first quarter of this year, and only in certain portions of the country. Summarized another way, many Retail REITs leased space at a pre-covid pace in Q1, a quarter which included PEAK Covid cases in the US, and in which the economy that was only marginally open. This would explain the rapid movement higher in sell-side price targets for Retail REITs over the last three months. Shopping Center REIT price targets have moved 19.3% higher over three months, trailing only Timber REITs (+21.4%) within REIT property sectors. Regional Mall REIT price targets have moved 12.6% higher over that same time period, slightly above the REIT simple average of +11%. So is there any juice left? Despite the recent revisions higher, Shopping Center REITs still have some of the lowest 2022 EBITDA growth estimates in the REIT universe at +3.6%, versus the median for REITs of +9.2%. If EBITDA estimates move higher after Q2 earnings reports for the Retail REITs, the sector’s momentum is likely to continue. At 18.8x 2022 AFFO, Retail REITs are no longer extremely cheap, but still have room to run from a fundamental standpoint.


An excellent illustration of why investors should be cognizant of the Retail REITs is that with growth returning, the sector has some of the most attractive valuations per unit of growth in the entire REIT universe. The methodology of combining growth and value into an investing thesis is often referred to as GARP investing (growth at a reasonable price). It is a popular style due to its simplicity from a theoretical perspective as well as its ability to be implemented in a fairly straightforward fashion. All an investor needs is a preferred valuation multiple and a preferred growth metric. Let’s look at FFO multiples and 2022 consensus FFO growth. Below is a table of six REITs from various property sectors that are widely owned in REIT portfolios.

It doesn’t take a rocket scientist to determine that BRX has the lowest multiple in the group while sporting one off the best earnings growth rates. And the difference is not insignificant. At 13.2x 2022 FFO, BRX trades at a 40% discount to this diversified large-cap bucket of REITs.

Now, how durable is 7.6% earnings growth? Investors are likely betting that over the intermediate-term, BRX reverts to a lower growth rate. Consensus estimates for 2023 FFO growth are lower at +4.4%, while AMT (cell towers), DRE (warehouses), BXP (offices), and VTR (health care) have assumed growth rates that are higher.

But does this really explain a 9 turn multiple difference? Could investors be under-rating BRX’s ability to grow earnings over the next 5-10 years? There are reasons for optimism. First of all, BRX’s NAV is moving higher for the first time since early 2016. Said another way, this is the first time in over 5 years that analysts have consistently moved their estimates up in the name. There are also reasons to be optimistic regarding second quarter leasing based on recent commentary from the company at NAREIT, and our recent meeting with management. With about $40m in leasing NOI signed but not occupied, BRX already has nearly 5% growth fully booked over the next 12 months. And again, growth does not have to blow the doors off in order for BRX to perform well. At 13.2x 2022 FFO versus 17.4x for Shopping Center REIT peers, BRX is cheap both within its property type and relative to the broader REIT average (17.9x 2022 FFO). At the end of the day it should be no surprise that Brixmor has climbed into the top quintile of our model. With strong NAV and price momentum, a relative value discount to peers as well as the REIT universe, and a strong balance sheet and management team, BRX is exactly the type of opportunity our framework is built to discover. As the recovery evolves, we will keep a weather eye on leasing velocity and fundamentals, knowing full well the state of retail prior to the pandemic. But until fundamentals clearly inflect lower, we believe BRX has a place in the portfolio.


I’m not sure if it was fortunate or unfortunate that I began my career amidst the worst financial crisis in 100 years in 2008. The fortunate part was that I learned a resounding lesson early in my career that I carry with me to this day. Do not fight the cycle. I will never forget watching as my smartest and best-educated clients got their clocks cleaned by macro-economic forces in spite of their intelligence and experience. Even as the data turned south, many held on for dear life, assuming a rapid economic rebound. Little did they know, they were betting on the fight in Rocky III, and they were betting against Rocky. As 2009 progressed and the world emerged from the worst recession in 100 years, I made a promise to myself that I would not make the same mistakes. That began a now decade plus of education in macro-economic dynamics, and how to apply macro data when constructing a portfolio. The result is that our fund returned +19% net of fees in 2020 while the REIT index closed the year negative after falling over 40% at one point. But this is a new day. This is a new cycle. We are no longer slowly backsliding towards a recession, we are accelerating into a new period of growth at a faster rate than we have ever seen before. Cycle-deniers beware, this fight might actually already be over. Onward and upward,

Martin D Kollmorgen, CFA CEO and Chief Investment Officer Serenity Alternative Investments Office: (630) 730-5745

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

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