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  • Writer's pictureMartin Kollmorgen

Turmoil and Progress: -5.4% in April, -0.85% YTD

“Economic progress, in capitalist society, means turmoil.” – Joseph Schumpeter

  • PERFORMANCE: Serenity Alternative Investments Fund I returned -5.39% net of fees in April vs the REIT index at -7.07%. In 2024, the fund has returned -0.85% vs -7.36% for REITs.

  • INDUSTRIAL TURMOIL: Warehouse REITs cratered in April. What does this mean for these formerly hot stocks going forward?

  • APARTMENT PROGRESS: Apartment REITs showed additional signs of acceleration in Q1. Could multi-family take up the baton in 2024?

  • ANTIFRAGILITY: Commercial real estate transactions continue to accelerate, with a wall of debt maturities coming due in 2025.

As a parent of two children under the age of three, I understand turmoil.

Temper-tantrums, flying food, toys scattered throughout the house…the chaos is ever-present.

And yet, many veteran parents tell my wife and I to enjoy the insanity while it lasts. When the turmoil is gone…many parents MISS it.

Parenting, like investing, is full of wild contradictions.

In April, turmoil came for the seemingly iron-clad Industrial (Warehouse) REITs. An investor favorite due to their above average growth, Industrial REITs returned -19% in March following a sobering report from industry leader Prologis (PLD).

Other REITs, however, showed meaningful signs of progress in April. Apartment REITs (which we wrote about last month here), returned +2.47% for the month, outpacing the REIT index by almost +10%. While Industrial REIT growth showed signs of slowing, Apartment REITs showed continued signs of acceleration.

Turmoil…and progress.

At Serenity this is all good news. We have been looking for additional reasons to get bullish on Apartments for months. In April, we found them. We have also looked for a good buying opportunity in premier Warehouse portfolios for the better part of three years. In April…these were delivered to us on a silver platter.

As we work through these new data points and evaluate the opportunities the market is providing, our portfolio improves on the margin. While we never enjoy a -5% correction, it could be an opportunity to improve our returns down the road. Our daily task is to stick with the process and take advantage of investable turmoil when it arises.

Now excuse me while I sprain my ankle on a ninja turtles monster truck.

PERFORMANCE: -5.39% in April vs REITs -7.07%

Serenity Alternative Investments Fund I returned -5.39% in April net of fees and expenses versus the MSCI US REIT Index which returned -7.07%. Year to date Serenity Alts Fund I has returned -0.85% vs the REIT index at -7.36%. On a trailing 3-year basis, Serenity Alts Fund I has returned +2.5% annually net of fees versus the REIT index at -1.1%. Over the past 5 years Serenity Alternatives Fund I has returned +11.0% annually net of fees and expenses, versus +2.7% for the REIT index.

The most profitable position in the fund in April was Hilton Worldwide Holdings (HLT), a short position that fell by -7.5% during the month. Hilton has been a short position in the portfolio as a hedge against one of our most profitable long positions in Marriot (MAR). As we have written about previously, we hedged our Marriot position months ago to take some chips off the table after strong returns in 2023. While this hedge initially went against us, in April it paid off, as Marriot and Hilton both fell. Our short position in Hilton saved our investors money in April, and we have closed a portion of this hedge as of this writing.

The least profitable position for the fund in April was Equinix (EQIX), a long position that

returned -13.8%. Equinix came under fire in March after a short-selling firm issued a detailed and yet mostly erroneous report describing accounting “abuses” at the company. This

brought the Data Center short crowd out of hibernation (after Equinix returned +25% in 2023), pushing Equinix down -25% from it’s March highs. On April 9th Equinix announced the conclusion of a third-party accounting review that found no merit to the short seller claims, and the stock jumped +11.5%. We added to our Equinix position over the past month, and it continues to be highly ranked in our model, owning THE premier Data Center portfolio in the world. We wish the short sellers the best of luck from here as EQIX continues to guide to double digit AFFO (cash flow) growth.

INDUSTRIAL TURMOIL: Is it all over for Warehouse REITs?

The grim reaper finally came for the Warehouse REITs in April, after an incredible run of success over the past 5 and 10 years. For context, Warehouse REITs, since 2019, had returned +85% (+13% annually) going into April, versus +22% (+4% annually) for the broader REIT index, +3.3% (+0.65% annually) for Apartment REITs, and -32% (-7.5% annually) for Office REITs.

That’s +9% annual excess returns relative to the broader REIT index, making Industrial the best performing major property type within REITs over this period. Comparable Serenity returns? +79.8% (+12.5% annualized net of fees) just shy of Warehouse returns but with a fully diversified portfolio.

What happened that sent Industrial REITs -18.5% lower in April? Prologis (PLD), the largest REIT by market capitalization, reported 1Q 2024 earnings, complete with the chart below.

The key here is the step lower in same-store NOI from +8.5% in 4Q 2023 to +5.7% in 1Q 2024. The company also trimmed its 2024 guidance slightly, and commented on their earnings call that warehouse tenants were taking slightly longer to make decisions amidst the current economic uncertainty.

That was enough to send PLD down about -20% in a straight line. Efficient markets strike again!

Relative to the fundamentals, this was an overreaction. Serenity’s NAV (Net Asset Value) for Prologis went UP after the results by +0.59%. Consensus NAV estimates fell by about -4%. But here lies the beauty and danger of investing in the stock market…in this instance…fundamentals barely mattered.

This is why Serenity has a multi-factor, multi-faceted process. Prologis took an entire property sector down nearly -20% not because the fundamentals got meaningfully worse, but because the property sector was extremely over-owned. These are the kinds of things you must consider as an equities portfolio manager. Because investors were so complacent and had such high expectations, the slightest crack in PLD’s armor sent investors screaming for the exits.

I alluded to this possibility in our 2024 outlook (you can view that video here) in January. At the 15:35 mark I said…

“Warehouse is probably the most heavily owned property type in the entire REIT space…so it will be the first place to get sold in order to fund new growth trades…if growth broadens out, I expect these names, despite their good growth, to underperform significantly.”

This is the untold story of the April Industrial REIT carnage that I foreshadowed in January. Fundamentals did not get significantly worse…they moderated marginally. Other REIT property sectors, however, saw fundamentals improve…something we have seen little of over the past two years. So where did all the Industrial REIT investors go? You guessed it…

APARTMENT PROGRESS: Keep that positive data rolling in...

As the old REIT saying goes…one property sectors garbage month is another property sectors…treasure…never mind. You know what I mean.

In April Apartment REITs were one of the clear beneficiaries of the turmoil that visited Industrial REITs during the month (+2.4% in a -7% tape). Regular readers do not need to be reminded of our evolving stance on Apartments. Non-regular readers can get up to speed here and here. New readers can allude to the following sentence. Serenity continues to get more bullish on Apartment REITs and is anticipating a multi-year bull market for these companies in 2025 and 2026.

During 1Q 2024 earnings season we received a variety of important data points. UDR included the following table in their May investor presentation.

The key here is “effective blended lease rate growth”. This metric leads same-store revenue growth, and effectively signals the “rate of change” for Apartment pricing power. When Apartment REIT pricing power accelerates, the companies tend to perform very well. When it decelerates, the opposite tends to happen. This is the first sign of acceleration in blended lease spreads since 2022.

Avalon Bay (AVB) reported a similar phenomenon (see graphic to the right). Increasing momentum in effective rents. And this is occurring despite an extremely large wave of supply that is currently being delivered across the US.

The message was uniform across the multi-family REITs in Q1. The two-year growth slowdown these companies have experienced is ending.

This begs the question, “why is the Serenity portfolio not +30% long Apartment REITs?”

As we alluded to above, Serenity has a multi-factor, multi-faceted process that governs our decision making. While Apartment REITs look great through our fundamental lens, our proprietary “CORE” REIT model is not yet fully on board. While Apartment REITs are moving up the ranks, they have yet to crack the top decile, and consensus earnings estimates are not yet improving. The model by design samples a wide range of data points, and simply needs to see more positive data. 

Time context is important here. We expect growth to accelerate over quarters and years for these companies. That leaves plenty of time for our multi-factor model to adjust either positively or negatively. When the model tells us to load up, we will not hesitate. Until then we have a well-diversified basket of REIT bets to hold us over. As always…we will keep our readers updated.

ANTIFRAGILE: Is there anyone that benefits from CRE turmoil?

Another area of the commercial real estate market where Serenity has capital deployed has a somewhat strange bull case. Almost everyone in the industry has seen some version of the chart below pop up in the last few years. The main point? That significant debt maturities are hitting the commercial real estate market in 2024 and 2025.

Now CRE tourists view this chart as a negative, expecting this level of re-financing activity to coincide with some sort of commercial real estate catastrophe as lenders are forced to foreclose on properties en masse. But there is no evidence this is occurring. Instead, lenders continue to work with landlords to come up with creative solutions even in distressed scenarios.

The real result is an elevated level of re-financing, and a likely increase in transaction volumes as these maturities are settled or worked out. Enter the commercial real estate brokers Newmark (NMRK) and CBRE (CBRE).

With two of the largest national brokerage platforms, Newmark and CBRE are both primed to benefit from a thawing of the CRE transaction market, and an uptick in refinancing activity over the next 1-2 years. Essentially ANY type of commercial real estate activity is good for these companies, and with spreads compressing and interest rates holding relatively steady since October of 2023, activity has indeed picked up.

In Q4 of 2023 and Q1 of this year Newmark saw commercial mortgage origination revenues increase +45% and +38% YoY respectively. Leasing and investment sales revenues were both up nearly +20% in Q4, and while they took a step back in Q1, are likely to accelerate through the rest of the year.

Both CBRE and NMRK have moved into the top ranks of the Serenity “CORE” multi-factor model, and both have a very solid fundamental acceleration case that should play out over the rest of 2024. Remember, the commercial real estate transaction market was almost frozen in 2023 as rates increased and seller expectations remained elevated. Thanks to the Fed’s dovish turn late last year, landlords now have much more confidence and transactions have accelerated significantly off a low base. Heck, even Office leasing has picked up meaningfully in 2024.

The Serenity portfolio is long both CBRE and NMRK as we continue to bet on the return to a more normal transaction market.


The process of moving from bear to bull market is never smooth, as evidenced by the performance of the REIT market in April. There are always obstacles to navigate and landmines to avoid. Even companies with strong growth profiles, bullet proof balance sheets, and strong management teams (Prologis) are not immune to the whims of the stock market.

It is these moments of turmoil, however, in which some of the best investing decisions are made. Do you have the fortitude to load up on that high quality company after a bad quarter? Do you have the patience to wait for the data to confirm before you buy the new breakout trend? Do you have the discipline to ruthlessly clean out your portfolio as the economic data changes?

Serenity has a time-tested process, and we are sticking to it. It will not get us wins every month, but over time I am confident that we will continue to grind out alpha. +11.0% returns net of fees over the last 5 years versus +2.7% for the REIT index…that’s the current scoreboard. And our best days may be ahead...

Don’t step on a Lego,

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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