What's the deal with REITs? +4.34% in August, +6.1% YTD

“Grape-Nuts is a mysterious product. You open the box, pour it in the bowl, no grapes, no nuts. What’s the story?” – Jerry Seinfeld

• PERFORMANCE: Serenity Alternative Investments Fund I returned +4.34% net of fees in August vs the REIT index at +4.43%. Year to date (YTD), the fund has returned +6.1% vs 3.52% for the REIT index.

• WHAT’S WORKING? Hyper-cyclical REITs were stars in August but have lagged Healthcare REITs so far in 2025.

• WHAT ARE WE WATCHING? A wave of REIT M&A may signal a floor for the commercial real estate market.

• WHAT’S NEXT? Are cyclical or defensive REITs the next big REIT winners?

The REIT market can be a mysterious product.

REITs (Real Estate Investment Trusts) move up and down like stocks, and investors do not seem to trust them. So, no real estate, no trust. What’s the deal?

While investors may be skeptical of REITs in 2025, the sector is brimming with opportunity. In August, the REIT rally broadened in a significant way, potentially signifying the beginning of a healthier, more sustainable REIT bull market.

Remember, REITs own some of the highest quality commercial real estate assets in the world. While the sector has been mired in a growth slowdown since 2022, over long periods of time REITs have a strong track record of delivering attractive risk-adjusted returns (+8.05% annually since 2000 vs +7.91% for the S&P 500).

With valuations at very modest levels, REITs find themselves with very low expectations from investors, headed into a much more friendly operating environment in 2026. In our opinion, the risk/reward for investing in REITs right now is skewed to the upside. Absent a recession, REIT fundamentals are likely to improve over the next 12 months, and absent an abrupt reversal in Fed policy, interest rates are likely to move lower.

At Serenity, we are not perplexed by the perceived REIT mystery. Volatility in stock prices represents the opportunity to buy best-in-class REITs at a discount. We have a long list of high quality commercial real estate portfolios that are growing their cash flows and actively investing shareholder capital. And that list is growing by the day…

The REIT industry is built on the bedrock of high quality commercial real estate. Regardless of the short-term whims of the stock market…these are cash flows you can TRUST.

PERFORMANCE: +4.34% in August, +6.1% YTD

Serenity Alternative Investments Fund I returned +4.34% in August net of fees and expenses with +99.6% net exposure versus the MSCI US REIT Index which returned +4.43%. Year to date the fund has returned +6.1% versus +3.52% for the REIT index. Over the past 5 years Serenity Alternatives Fund I has returned +12.5% annually, net of fees and expenses versus +8.4% for the REIT index.

The most profitable position in the fund in August was American Healthcare REIT (AHR), a long position which returned +10.74% for the month. AHR continues to be one of the largest and best performing positions in the Serenity portfolio. With continued guidance raises, earnings beats, sector leading organic growth, and a portfolio well positioned for the next ten years of demand stemming from the silver tsunami of aging baby boomers, AHR is likely to remain a large Serenity position for years to come. AHR has returned +53% YTD in 2025 versus a +7.05% return for the REIT index.

The worst performing position in the fund in August was Piedmont Realty Trust (PDM), a short position which returned +12.04% during the month. Piedmont owns a portfolio of Office assets concentrated in the sunbelt markets. The performance of PDM in August is an excellent example of an emerging positive trend for REITs in 2025. That is, beaten down REITs are increasingly seeing significant share price rallies. This momentum in “value” REITs that were once excellent short candidates often occurs at the early phases of bull markets, as lower-quality companies begin outperforming in anticipation of even the most challenging fundamentals bottoming. This is worth noting, and Serenity has actively trimmed our short book in accordance with this new development. More thoughts on this emerging phenomenon below…

WHAT’S WORKING? A quick review of August and 2025 YTD.

August was an interesting month in REIT-land as Homebuilders, Malls, and Lodging were three of the top performing property types. Loding, in particular, has lagged the broader REIT index this year, and remains the worst performing REIT property type in 2025, despite the August rally. The conspicuous pattern from this month, however, is that much of the best performance in the REIT universe came from pro-cyclical REITs.

This stands in contrast to YTD (year to date) 2025 performance. Free-standing, Infrastructure (Cell Tower), and Health Care REITs tend to be the most defensive and high-duration components of the REIT industry and have led the charge thus far in 2025.

What does this tell us?

Market leadership within the REIT industry may be changing.

While one month does not make a sustainable trend, Lodging, Mall, and Office REITs have been by far the most challenged property types within commercial real estate over the last 5 years. They have experienced some of the most adverse fundamentals, garnered the most negative headlines, and produced some of the worst total returns within the REIT industry.

If investors are beginning to buy these companies in an anticipation of fundamentals bottoming, this would mark a significant change from “risk-off” to “risk-on” in the REIT market. The last time this occurred was in late 2020, nearly 5 years ago, just preceding the REIT boom year of 2021, in which the REIT benchmark returned +43%.

Why is this important?

Sustainable, long-term REIT bull markets are built on growth, with most REIT property types having growth as a significant component to their long-term total returns. Apartment REITs, Office REITs, Mall REITs, Warehouse REITs, Loding REITs, and Self-Storage REITs all perform best when the economy (and by extension fundamentals) are accelerating.

With many of the more cyclical REIT sectors struggling over the past 3 years as growth has slowed from 2022 highs, a re-inflection higher would make a large portion of the REIT index an incredibly attractive destination for capital. Hotel and Office REITs in particular in some cases trade at up to -50% discounts to Net Asset Value (NAV), and could skyrocket higher with a sustained improvement in fundamentals.  

This is what Serenity is ever vigilant for. Changes in underlying fundamentals and the opportunity to invest in companies with accelerating growth at attractive valuations.

The Bottom Line: In August, hyper-cyclical REITs outperformed their defensive peers, potentially signaling a change in leadership at the property sector level within the REIT universe. If this leadership holds, it would suggest a new much broader and healthier REIT market trend could be forming on the back of sustainable long-term growth acceleration.

WHAT ARE WE WATCHING? Yesterday’s “short” ideas have stopped working…

While hyper-cyclical REITs finally rallied as a group in August, there have been subtle signs of a change in the tide of REIT leadership for much of 2025. If we examine YTD performance at the individual REIT level, the top 4 performing REITs in 2025 are DHC (+68%), AHR(+52%), PGRE(+45%), and JBGS(+42%).

REIT veterans will recognize that this is a strange list. DHC is one of the lowest quality healthcare companies with one of the worst corporate governance structures in the REIT industry. PGRE is a New York Office portfolio that has returned -38% since 2019. JBGS is a Washington DC focused Office REIT that has returned   -32% over the same period.

While AHR is a high-quality name (and top weight in the Serenity portfolio) the other three REITs have been some of the best SHORT ideas in the REIT universe over the past 5 years.

Low quality companies have seen some explosive moves to the upside in 2025.

And the list above is not exhaustive. Cohen and Steers, probably the single largest investor in the REIT industry (94 billion in AUM according to Google) recently bought over $350 million in shares of Hudson Pacific (HPP), a west coast focused Office portfolio that had fallen from $25 in 2021 to ~$2.00 in 2025.

Sixth Street, a real estate investment firm, in August placed a $24.10 offer to buy Plymouth Industrial REIT (PLYM), a 64% premium to its closing price.

For a long/short REIT investor, these are significant developments. When the best shorts of the past few years begin to move in the other direction, you had best take notice. At Serenity, we have adjusted our short book significantly this year, removing highly shorted companies and avoiding REITs that could be categorized as “deep value” that could rapidly re-rate higher.

Again, when things begin to improve for the lowest-quality REITs, it may be a signal that the worst days for the industry are rapidly fading.

Now the interesting move is beginning to think about these beaten down companies as longs if we are truly at the start of a sustainable growth acceleration. We continue to monitor this situation closely, and if pro-growth data continues to accumulate, our portfolio will take on more exposure to “deep value” REITs.

The Bottom Line: Many REITs that have been excellent shorts over the last 5 years have reversed performance in 2025, and some are leading the industry in YTD returns. We believe this may be a signal that leadership within the REIT industry is set to change, potentially setting the stage for a continued rally in deep value or hyper-cyclical REITs.

WHAT’S NEXT? Should we load up the boat on the riskiest REITs?

As we have discussed, sub-sector and stock level performance within the REIT index are sending an interesting signal here in 2025. Emerging leadership from Lodging, Mall, and Office REITs marks a sea-change in the dynamics of the REIT market if it can hold.

For this reason, we have added exposure to hyper-cyclicals selectively in the portfolio, while maintaining our weight in Healthcare and Net Lease REITs which are much more defensive. In our view this represents a well-diversified portfolio that has the potential to outperform the REIT index regardless of broader changes in the economy.

We are maintaining some caution in our outlook, however, as the labor market has shown increasing cracks in the most recent jobs reports. This is something we monitor closely, as continued deterioration in the labor market would certainly impact cyclical REITs negatively.

From a high level we are hopeful that a sustainable hyper-cyclical rally is on the horizon but also prepared for the possibility of a recession. As the data changes to support either of these outcomes, our portfolio exposures will change with it.

In the meantime, we have exposure to the huge bull market in Seniors Housing, continued weighting in high-quality Data Centers, exposure to some of the top-quality Warehouse portfolios in the US, and a list of higher-beta names we are ready to buy when the time is right.

The Bottom Line: Despite accumulating evidence of a hyper-cyclical bull market in REITs, we are remaining cautious in the short term, with significant exposure to Healthcare REITs and other high-duration REITs. If pro-growth data continues to manifest, our portfolio will organically shift towards more cyclical exposures.

10 YEARS TO CALL YOURSELF A BEGINNER

Another Seinfeld quote I love is this. “Being a good husband is like being a stand-up comic. You need 10 years before you can call yourself a beginner.”

The same can likely be said for being a portfolio manager. Experience is required to pick up on subtle shifts in the market landscape, one of which may be occurring as we speak in the REIT industry.

As market leadership has changed, our portfolio has shifted, and if hyper-cyclical REITs show signs of accelerating fundamentals, our portfolio will shift towards these high-beta exposures.

In the meantime, we are content to ride with our continued exposure to extremely high quality commercial real estate portfolios and management teams.

Some of these REITs ain’t no joke…

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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