Commentary - March 2025CenterSquare Real Estate Fund

Portfolio Manager Eric Rothman summarizes his thoughts on REITs’ outperformance compared to the overall market in the first few months of the year and what could drive a continued rally. He also discusses the Fund’s potential advantages.

Would you please discuss REITs’ outperformance over the S&P 500 Index in the first few months of 2025?

In the wake of the tariff talks through the first quarter as well as the announcement of the White House’s tariff plan, REITs have performed better than broader U.S. equities. Year-to-date through April 4, 2025 (two days after the tariff rate announcement), the FTSE Nareit All Equity REITs Index outperformed the S&P 500 Index by 900 basis points.

Investors gravitated to defensive sectors in Q1 and early April given the uncertain environment. Listed real estate (i.e. REITs) were stand-outs due to their durable income from long-duration leases, high quality assets, historically consistent cash flow growth, and attractive dividend yields. At the property level, REITs have averaged about 3% net operating income growth over the past 25 years. REITs’ dividends have been well-covered and growing. In fact, year-to-date through March 31, 2025, there have been 20 dividend increase announcements with an average increase of 6.7%, on track with prior years.

A slowing economy and an uncertain business environment would normally prompt the Federal Reserve to cut interest rates. This would be a positive for interest-rate sensitive stocks including REITs. We would expect the Fed to act in such a scenario, but caution that its flexibility to act proactively could be limited if inflation resurfaces.

What sub-sectors of REITs performed well in the first quarter and which ones lagged?

Not surprisingly, the areas of REITs that performed the best were those that can perform well in a slowing economic and declining rate environment. Sectors with less sensitivity to the economy, including cell phone towers, health care and net-lease REITs were the best performers during the period. Conversely, the areas of publicly traded real estate that fared less favorably include hotels, offices and data centers, which are often more sensitive to the economic situation.

Notably, the decline in many mega-cap technology-oriented stocks has negatively affected data center REITs. News of DeepSeek’s less expensive and better artificial intelligence (AI) technology had investors questioning the necessity of spending billions of dollars on building new data centers. Despite the negative sentiment, we believe, over time, leasing levels will grow along with rental rates, which should alleviate fears.

How could REITs’ outperformance continue in 2025?

The current environment looks positive for REITs given the following:

  1. Defensive positioning. Investors could potentially continue to invest in defensive sectors including real estate if uncertainty continues.
  2. REITs’ rising earnings growth potential. We believe the earnings growth rate bottomed in 2024. After lapping a post-COVID surge in growth and the accumulated impact of higher interest rates, future REIT earnings growth should trend back to normal historical levels. The consensus earnings growth rate for 2025 is higher than it was in 2024, and it is expected to further accelerate in 2026.
  3. The “Goldilocks” interest rate zone. The 10-year U.S. Treasury yield has remained above 4% since last fall and could remain at this level for the foreseeable future. Historically when the U.S. 10-year Treasury yields have been in the 4-5% range, REITs have historically outperformed broader
    U.S. equities.

What potential advantages does the Cromwell CenterSquare Real Estate Fund offer to investors?

The Fund offers investors access to an institutional REIT manager in a mutual fund format. With 35 years of real estate investment experience, roughly 100 employees, and over 150 institutional relationships (state and corporate retirement plans, endowments, sovereign wealth funds, etc.), CenterSquare is at the forefront of real estate investment. We believe this experience has benefited shareholders.

Less Risk Relative to Morningstar Peers

Standard Deviation as of 3/31/25

  3 YR 5 YR 10 YR
Fund (MRESX) 20.65 19.30 17.48
Morningstar Real Estate Category Average 20.89 19.73 18.38

Source: Morningstar. Past performance does not guarantee future results.