Market Commentary | March 11, 2022

United States Inflation Rate

Bureau of Labor Statistics data released this morning showed that the annual inflation rate in the US accelerated to 7.9%, the highest rate in more than 40 years.  This follows Federal Reserve Chairman Jay Powell’s assertion that in March the Fed Funds rate will be raised 25bps, the first of what are anticipated to be many rate hikes this year. Powell’s comments came on the heels of Russia’s February 24th invasion of Ukraine, which, besides being terrible in so many ways, is proving to be its own engine of inflation.

Dislocation

In our January communication I stated that “If the markets get choppy, we will know which issues to buy”. Choppy understates the anxiety-fueled waves of volatility we have witnessed in financial markets so far this year. I maintain we will know what to buy and am pleasantly surprised by emerging opportunities born of the extremes of market dislocation.

REITs

REITs, as a whole, delivered higher than forecast 4th quarter earnings, raised earnings guidance for 2022, and, often, raised their dividends substantially.  Our holdings were among the top performers, but investor response to the strong results has been less than uniformly rational.  A handful of issues are up double digits against a down market, the majority are down 5-12%, and a few are down as much as 30% with no correlation to earnings performance or intrinsic value.  This is the circumstance that enthuses us in today’s environment.

Opportunity

For more than two decades we have analyzed the whole REIT universe of almost 200 companies. Over most of that span there has been a subset of high-quality, blue-chip companies that we admired but perceived as fully valued or overvalued. Circumstances in  2022’s first months of trading may have priced these down to an attractive point of entry.

As examples, we describe the following:

Alexandria Real Estate (ARE):

In our new, post-pandemic world, pharma, biotech, and life-science technology companies are awash in fresh capital to fund their development of solutions to life and health issues we face in our present and future. Development of these solutions requires access to lab and manufacturing facilities built to the most precise technical standards. Top tech companies understand that achieving this access requires the expertise that only ARE can produce.

Alexandria capped a very successful 2021 with sales of their developed properties at unprecedentedly high prices for astounding gains on sale.  As follow-on, they forecast that they could recycle those profits into new tech development in America’s major life science hubs. During the first few months of 2022, ARE has announced significant new leases with Eli Lilly, Bristol Meyers, and Intellia Therapeutics, among others, even before they break ground on the projects.  We anticipate the new developments will all be fully leased before completion and carry market values north of 150% of cost.

This is what Alexandria has always done. The difference in early 2022 is that ARE’s share price is down 15% YTD in an environment that supports long-term growth. We have purchased ARE and will continue to accumulate shares.

American Tower (AMT)

With a $106 Billion market cap, AMT ranks as one of the world’s largest companies and the largest REIT. AMT provides cell tower access to wireless communications and data transmission on five continents. With their recent acquisition of CoreSite (CORE) they have designs on communications delivery in 5G, cloud, and edge computing.

In recent years AMT has routinely traded at 30x forward FFO/share earnings.  Down 25% YTD in 2022, it currently trades at 23x FFO. American Tower is essential to roll out of the 5G infrastructure. It has raised its dividend for each of 41 consecutive quarters and will do so again later this month. We have bought AMT and will continue to accumulate shares as the price remains attractive.

Equity LifeStyle Properties (ELS)

For years, 2MC has been enthused about the development and delivery of affordable housing in America.  In recent years the value/growth proposition in the sector has been UMH Properties (UMH) which delivered an astounding 90% return to us in 2021. UMH is still growing earnings in the mid-teens, but its peers have become interested in the market pricing turmoil.

Equity LifeStyle is a sector pioneer that started with traditional manufactured housing assets and has progressively evolved to 55+ housing, RV resorts, and marinas. Their current acquisition/development list targets waterfront communities in the south east, Pacific coast, and Great Lakes markets.

In February ELS reported record earnings, raised 2022 earnings guidance and hiked their dividend by 13.9%.  Their shares are down 16% YTD and trade at a discount to NAV. We are buying ELS and will continue to accumulate shares as the price remains attractive.

Investors will struggle to maintain composure in an environment of rampant inflation, rising interest rates, market volatility and the conflicts of war. Within that, we will rely on our extensive research to find value and opportunity.

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

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