2024 Opportunities in Real Assets
On December 12, 2023, CenterSquare Investment Management’s Eric Rothman and London-based Foresight Group’s Eric Bright discussed the rare investment opportunity in high-quality REIT securities and companies that own and operate sustainable infrastructure assets. The following are highlights.
Cromwell CenterSquare Real Estate Fund
- The Federal Reserve’s rate actions for the past 2 years have negatively impacted real estate investment trust (REIT) valuations despite the durability of their cash flows.
- As of 9/30/23, REITs traded at a 20% discount to forward net asset value. A 15% discount level has only been breached 9 times over the past 25 years and tends to be an important signal that REITs are oversold.
- REITs are more than just retail, industrials, office and apartments. The new economy sectors—data centers, cell phone towers, cold storage, life science, biotechnology, self-storage and single family rentals—now represent a majority of the overall REIT market.
- The combined weight of traditional office, regional malls and hotels in the FTSE Nareit All Equity REITs Index is only approximately 10.5%. In fact, data centers make up more of the Index than those three subsectors combined.
- 2024 Opportunity: REITs are currently trading at a mid-teen forward earnings multiple compared to its mid-20s historical range. Also, REIT dividend increases have averaged 9% with almost 90 dividend increase announcements in 2023 as of mid-December.
Cromwell Foresight Global Sustainable Infrastructure Fund
- The Fund invests in companies that own and operate infrastructure assets across three broad areas: renewable energy, core and social infrastructure and digital infrastructure.
- We believe the infrastructure sector is attractively valued, especially renewable energy and digital infrastructure given the forecasted decade-long tailwinds behind those businesses.
- Many infrastructure companies have suffered from negative sentiment driven by concern around higher interest rates, but the reaction is overdone in our opinion.
- The Fund offers diversification compared to the broader equity market as infrastructure companies have different return drivers and generally less correlation.
- 2024 Opportunity: A stable rate environment should improve sentiment. Importantly, many companies do not need ultra-low rates to operate profitably. We believe many companies offer defensive earnings growth due to their long-term contracted revenue streams.