In December 2024, the Chilton REIT Strategy celebrated its 20th year since being founded by Bruce Garrison in January 2005. Over this period, the strategy produced an annualized total return of +9.3% gross of fees (+8.5% net of fees), which compared to the MSCI US REIT Index (Bloomberg: RMZ) at +7.0% and the Vanguard Real Estate ETF (Bloomberg: VNQ) at +6.6%. This period covers bull markets, bear markets, the birth of new property types, and multiple economic regime changes. While the price target methodology has evolved over the 20 years, the basic tenets underlying what makes a great REIT investment remain the same.
Mr. Garrison’s background spanning over 50 years in the industry on both the buy side and sell side have created the foundation upon which the Chilton research process resides. The REIT landscape has undergone a profound transformation since he started his REIT journey in 1972. Today’s successful equity REITs bear little resemblance to their predecessors, evolving into sophisticated and diverse enterprises involved in property types that were unimaginable when REIT legislation was first passed in 1960 – and even at the dawn of the modern REIT era in 1991. While the period between 1972 and 1991 is often overlooked, the hard lessons learned during those years laid the groundwork for the more resilient and innovative REITs that emerged in the 1990’s. Subsequent economic cycles, particularly the 2008-09 financial crisis, solidified REITs as a durable asset class prepared to thrive in the decades ahead.
Today’s REITs are no longer passive investment vehicles; instead, they operate as dynamic companies with multiple levers for sustained dividend growth. Despite significant evolution, the core principles of success have remained remarkably consistent. Below, we outline ‘The Ten Commandments of REIT Investing’ – a set of guiding principles for REIT management teams, bankers, boards of directors, and investors to ensure long-term success, premium valuation, and steady dividend growth.
Today, public REITs are facing stiff competition for investor’s money from private equity alternatives. It is safe to assume that few, if any, follow some of the Ten Commandments of REIT Investing. Investors in these private alternatives have demonstrated short term memory loss as to what happened in the GFC for such investments. Those that bought from 2010-2020 have likely enjoyed excellent returns, goosed by declining interest rates, high leverage, and falling cap rates. However, we believe public REITs will be on a more level playing field with their private counterparts going forward, and many will have a clear advantage.
With superior balance sheets, we believe public REITs are in the perfect position to illustrate superior total returns going forward. Though some private participants have proactively marked down their portfolios (and some forced to do so due to debt maturities), there is still a reckoning to come from investments made in the peak years of 2021 and 2022. Lenders have been willing to work with these borrowers, but it has certainly dampened their flexibility. In contrast, public REITs are sporting a record low net debt/EBITDA, and have options for borrowing secured or unsecured – usually at lower rates. As such, we believe public REITs’ superior access to capital will be a differentiator in this higher interest rate environment. Examples include acquisitions and development, but also include maintaining properties and attracting/retaining tenants.
In summary, the lessons of the past 50 years have prepared REITs to navigate the next 50. Their disciplined approach to financial management, focus on sustainable growth, and commitment to transparency provide a solid foundation for enduring success. By following the Ten Commandments of REIT Investing, REIT management teams can build REITs that will endure the economic and real estate cycles to come over the next 50 years, and REIT investors using such principles can construct a portfolio that outperform a passive ETF that is forced to own an index that may include REITs following a different path.
Bruce G. Garrison, CFA
bgarrison@chiltoncapital.com
(713) 243-3233
Matthew R. Werner, CFA
mwerner@chiltoncapital.com
(713) 243- 3234
Thomas P. Murphy, CFA
tmurphy@chiltoncapital.com
(713) 243-3211
Isaac A. Shrand, CFA
ishrand@chiltoncapital.com
(713) 243-3219
RMS: 2,997 (1.31.2025) vs. 2,966 (12.31.2024) vs. 3,177 (12.31.2021) vs. 1,433 (3.23.2020)
An investment cannot be made directly in an index. The funds consist of securities which vary significantly from those in the benchmark indexes listed above and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of such indexes may be of limited use.)
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