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Performance
The TCW Global Real Estate Fund, I Share Class, (MUTF:TGREX, the “Fund”) generated a return of -0.59% (net of fees) during the quarter, outperforming the S&P Global REIT Index (SREITGUN) loss of -1.18%. Our underweight exposure to Industrial REITs contributed positively while the overweight in Diversified Real Estate Activities contributed negatively to relative performance.
Investment Environment
U.S. stocks advanced 4.3% (S&P 500 Total Return Index) during the second quarter of the year, for a year-to-date gain of 15.3%. Market breadth remains stubbornly deficient; only 24% of stocks outperformed the S&P 500 (SP500, SPX) in the first half of 2024, led by the Magnificent 7, which now make up ~35% of the index.
Since quarter end, June data showed that CPI fell month-over-month for the first time since the Covid-19 pandemic, and importantly, came in below estimates, prompting further hope that interest rate cuts would be coming later this year. Other measures like the labor and housing markets, which had remained impressively resilient through the Federal Reserve’s (Fed’s) interest rate hike-cycle, have begun to show some signs of softness. These have been further highlighted by consumer sentiment and expectations coming in below estimates in July, with both measures reaching a low point in 2024. Despite these signs of a modest economic slowdown, the outlook for corporate profits remains robust, with net margins on track to rise next year and exceed their best level on record in 16 years (approximately 14%, per Bloomberg, 7/16/24). Remarkably, consensus earnings growth expectations have risen to the 11% level for this year, accelerating to a 15% growth pace in 2025 (per UBS, 7/16/24).
Against this backdrop, the performance of Global REIT indices were mixed. The RMZ (MSCI U.S. REIT Index) was up +0.1% for the quarter (-0.2% YTD). In Japan, the TSE REIT Index was down -3.0% for the quarter (-2.4% YTD), underperforming the Nikkei 225 (NKY:IND), which was down -1.9% for the quarter (+19.3% YTD). Globally, the S&P Global REIT Index lost -1.2% (-3.1% YTD) vs. a gain of +3.1% (+12.5% YTD) for the S&P Global 1200.
Sector Weightings
During Q2-24, the top performing sectors in the S&P Global REIT Index were Health Care REITs (+10.36%) and Multi-Family Residential REITs (+8.57%). The worst performing sectors were Hotel & Resort REITs (-10.74%) and Industrial REITs (-7.37%). Our portfolio was most overweight in Telecom Tower REITs and Multi-Family Residential REITs, and most underweight in Retail REITs and Diversified REITs. From a sector allocation standpoint, our Fund benefitted most from its underweight to Industrial REITs and its underweight in Office REITs. The Fund’s overweight to Diversified Real Estate Activities and its overweight to Homebuilding detracted the most from performance.
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The performance data presented represents past performance and is no guarantee of future results. Returns assume all income items are reinvested. Current performance may be lower or higher than the performance data presented. Performance data current to the most recent month end is available on the Fund’s website at TCW.com. Investment returns and principal value will fluctuate with market conditions. The value of an investment in the Fund, when redeemed, may be worth more or less than its original purchase cost. You should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. A Fund’s Prospectus and Summary Prospectus contain this and other information about the Fund. To receive a Prospectus, please call 800-386-3829 or you may download the Prospectus from the Fund’s website at TCW.com. Please read it carefully. |
Security Selection*
Our best performing securities for the quarter were NexPoint Residential Trust (NXRT; 3.20%**; Multi-Family Residential REITs) and Ventas (VTR; 2.01%**; Health Care REITs).
NXRT is an apartment REIT with a focus on higher growth geographies such as the Sunbelt. The multi-family sector has been under pressure lately due to outsized supply expected to be delivered during the year. Rents are already under pressure, especially in the regions where NXRT operates. As a consequence, guidance for same store net operating income growth has been muted. We view the multi-family sector as attractive for a number of reasons. First, due to shorter lease terms, there is a greater ability to pass through rent increases in an inflationary environment. This makes multi-family one of the most inflation protected asset classes. Second, the cost of development has sky-rocketed since the pandemic, making it more difficult to add new supply without rents moving up substantially. While supply delivery is historically high today due to projects put into motion during the low-rate era, permits and starts have plummeted over the prior six months, setting up a favorable supply delivery environment for the Sunbelt beyond 2025. Third, owning a home has become much more costly since mortgage rates have more than doubled. Apartments are a clear substitute product and rent growth is likely to follow unless rates come down meaningfully. Of course, if rates were to drop, multi-family assets should increase in value, so the sector is poised to perform well in multiple environments. NXRT is particular is a well-managed REIT that has generated substantial value for its shareholders over the years. It should grow faster than peers because of its sizable renovation program.
VTR is one of the largest healthcare REITs with operations in medical office, life sciences, triple-net, and senior housing operating properties. Its senior housing segment has been recovering since the pandemic and is poised to gain in occupancy. Furthermore, the aging demographic is expected to keep demand elevated for the foreseeable future, driving additional pricing power. Lastly, the lack of new supply due to higher costs of construction and higher financing costs should keep competition rational. Senior housing had been a depressed asset class for years as low borrowing costs kept supply elevated and technological advances pushed the age at which seniors required assisted living. It seems we have finally reached a stage where the supply to demand balance has shifted towards the property owners, as vacancy rates are at historical lows. VTR saw the benefits of these shifting dynamics during the quarter with Q1 results reporting a 270bps increase in year-over-year same-store occupancy, and further acceleration in May with year-over-year occupancy up 300 bps.
Our two worst performing securities were Taylor Morrison Home (TMHC; 4.90%**; Homebuilding) and Mitsubishi Estate Company (MEC or 8802; 2.65%**; Diversified Real Estate Activities).
TMHC is one of the top 10 homebuilders in the US. Headquartered in Scottsdale, AZ the company focuses on entry level, move up and active adult categories in markets such as Arizona, Florida, and Texas. It has grown recently through acquisitions and also through an interest in a single-family rental partnership with a Phoenix-based developer. Gross margins have improved significantly during the pandemic as a lack of supply coupled with increasing demand from new home buyers drove prices to new heights. Demographic trends as well as a shift in home ownership behavior have changed the demand dynamic for housing for the foreseeable future. Furthermore, while homebuilding is perceived as a highly cyclical business that experiences dramatic drawdowns during recessions, we believe that the industry has changed meaningfully since the last downturn in the prior decade. Builders have become more disciplined with their purchase of land and returns for the industry have improved as a result. With the recent rise in interest rates, the homebuilding sector has become increasingly dislocated from fundamentals. TMHC is one of better values in the sector and should perform well even if margins normalize to a lower level over time.
MEC is a property manager in Japan. It invests in real estate projects and leases, manages, and develops commercial buildings in central Tokyo. Japan’s stock market has long underperformed other developed countries, largely due to a lack of focus on returns by management teams. Similarly, we believe MEC has also historically underearned its potential. However, the company has recently shifted its focus to better capital allocation, targeting a higher return on equity. With positive prospects for housing (albeit with timing lags), as well as office rent improvement in their key markets, we believe their goals are achievable. With the increased focus on returns, management may continue to buy back shares, which should also help to drive performance. While the stock gave back gains generated in the prior quarter, we are encouraged by the company’s announcement in May of a dividend payment policy and share buyback plan to return capital to investors.
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* It should not be assumed that an investment in the securities listed was or will be profitable. **Portfolio securities are stated as a percentage of the Fund’s total net assets including cash and cash equivalents as of June 30, 2024. |
Representative Buys (Ticker; Sector)*
Welltower (WELL; 3.00%** Health Care REITs) – WELL is a leader in the North American senior housing industry, providing a full suite of real estate offerings that include no-service (age-restricted apartments), low-service (independent living communities with central dining, housekeeping, transportation, laundry), and high-service (assisted living communities with bathing, dressing, medications, toileting, memory care). The Baby Boomer generation is coming into the average age of first- year residents within senior housing in what will start a period of well above-average population growth within this cohort (4.4% CAGR versus 1.7% in the decade prior). The wealth amassed by the tenant base following decades of house price and stock market appreciation has resulted in a considerable gap between rents charged by WELL and accumulated wealth, providing pricing visibility to support WELL’s mid-single digit rent growth.
SBA Communications (SBAC); 1.99%**; Telecom Tower REITs) – SBA Communications (SBAC) operates a predominantly U.S. network of macro cell towers, though with solid exposure in select international markets such as South America, Central America, Canada, and South Africa. Secular drivers such as increased data traffic domestically, increased wireless penetration internationally, and the upcoming tailwind from 5G (only ~50% of the of the coverage phase has been deployed, with high-value densification phase to follow) should result in promising organic growth prospects for the foreseeable future. Management anticipates 6% to 7% growth rates for SBAC, which should translate into 70%+ EBITDA margins through via a high operating leverage model.
Hilton Grand Vacations (HGV; 0.86%**; Hotels Resorts & Cruise Lines) – HGV is a timeshare business that provides fractional ownership and exchange services for vacation properties. The timeshare industry is concentrated in a few large companies that each have meaningful market share. While the timeshare industry has been around for decades, it is largely misunderstood by most investors and consumers. Sales practices in the past have been a concern for regulatory agencies and there have been periods of controversy surrounding the business model. Despite the occasional negative headline, the sector has been relatively resilient and has operated through multiple cycles. We believe that the business will be less cyclical than what is being priced in.
Representative Sells (Ticker; Sector)†*
During the quarter we exited Independence Realty Trust (IRT; Multi-Family Residential REITs), as well as the April 20/18 BXMT put spread (BXMT April P20 and BXMT April P18; Mortgage REITs).
Market Outlook
Looking forward, after the equity market’s strong performance in the first half, the outlook for this full year and next have only grown more optimistic. While company fundamentals have largely validated the stock market’s year-to-date advance – with Magnificent 7 names a large contributor – there is potential that cracks in the macro landscape could weigh on the economy and subsequently, equities. Thus far the Fed’s approach to cooling inflation while avoiding a “hard landing” has proven achievable, as emerging trends like AI have helped to buoy corporate activity and performance enough to dispel investors’ worries of an economic slowdown.
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* It should not be assumed that an investment in the securities listed was or will be profitable. **Portfolio securities are stated as a percentage of the Fund’s total net assets including cash and cash equivalents as of June 30, 2024. † Not held by the Fund as of June 30, 2024. |
We are becoming increasingly more constructive on the REIT space. Following years of disdain, neglect, and pronounced underperformance, we believe that parts of the sector are now meaningfully undervalued. There are numerous instances of public companies trading at a substantial discount to private market values. In many cases, valuations are even below replacement costs. While some headwinds remain (like maturing debt that will have to be refinanced at higher rates), fundamentals in certain sub-sectors are strong and should buoy the asset class in aggregate. Over time, high-quality assets with scarcity value will likely command premium rents. Higher rates and inflationary pressures have increased the cost to add new supply, which will eventually lead to shortages in certain property types. Other factors such as improving occupancy rates and anticipated interest rate cuts could also help REITs outperform. After lagging the markets for years, REITs now seem undervalued compared to other stocks and may be poised for a recovery.
We value your support and thank you for your trust.
Iman H. Brivanlou, PhD, Lead Portfolio Manager, Managing Director – High Income Equities
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Please see additional disclosures on the following page(s). IMPORTANT DISCLOSURE This material may include estimates, projections and other “forward-looking” statements. Actual events may differ substantially from those presented. TCW assumes no duty to update any such statements. This material reflects the current opinions of the author but not necessarily those of TCW and such opinions are subject to change without notice. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. This material may include estimates, projections and other “forward-looking” statements. Actual events may differ substantially from those presented. TCW assumes no duty to update any such statements. All projections and estimates are based on current asset prices and are subject to change. Performance Detail as of June 30, 2024
Annual fund operating expenses as stated in the Prospectus dated March 1, 2024, excluding interest and acquired fund fees and expenses, if any. The performance data presented represents past performance and is no guarantee of future results. Returns assume all income items are reinvested. Current performance may be lower or higher than the performance data presented. Performance data current to the most recent month end is available on the Fund’s website at TCW.com. Investment returns and principal value will fluctuate with market conditions. The value of an investment in the Fund, when redeemed, may be worth more or less than its original purchase cost. The annualized since inception return for the index reflects the inception date of the TCW Class I and Class N Share Funds, respectively. For period 11/28/2014-6/30/2024. Effective March 1, 2024, the Fund’s investment advisor has agreed to waive fees and/or reimburse expenses to limit the Fund’s total annual operating expenses (excluding interest, brokerage, extraordinary expenses and acquired fund fees and expenses, if any) to 0.90% of average daily net assets with respect to Class I shares and 1.00% of average daily net assets with respect to Class N shares. The contractual fee waiver/expense reimbursement will remain in place through March 1, 2025 and before that date, the investment advisor may not terminate this arrangement without approval of the Board of Directors. S&P Global REIT Index: Serves as a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets. The index is not available for direct investment; therefore its performance does not reflect a reduction for fees or expenses incurred in managing a portfolio. The securities in the index may be substantially different from those in the Fund. Source: TCW, FactSet, State Street B&T Investment Risks Equity investments entail equity risk and price volatility risk. The value of stocks and other equity securities will change based on changes in a company’s financial condition and in overall market and economic conditions. Fund share prices and returns will fluctuate with market conditions, currencies, and the economic and political climates where the investments are made. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile. The Fund’s investments denominated in foreign currencies will decline in value if the foreign currency declines in value relative to the U.S. dollar. Because the Fund concentrates its investments in the real estate industry, it may be susceptible to the impact of market, economic, regulatory, and other factors affecting the real estate industry and/or the local or regional real estate markets, which may cause the value of the Fund to fluctuate more widely than it would in a fund that invested more broadly across varying industries and sectors. REITs invested in mortgages or loans may also be indirectly subject to various risks associated with those investments, including, but not limited to, interest rate risk, credit risk and defaulted securities risk. The value of the Fund’s investments in REITs will decline based on a decline in the value of real estate and general real estate market and local economic conditions. REITs are pooled investment vehicles that typically invest directly in real estate, in mortgages and/or loans collateralized by real estate. REITs are also subject to highly technical and complex provisions under federal tax law. Please see the Fund’s Prospectus for more information on these and other risks. IMPORTANT DISCLOSURE Glossary of Terms Basis Point (‘bps’)– One hundredth of one percent, used chiefly in expressing differences of interest rates. Corporate– Of or relating to a bond issued by a corporation as opposed to a bond issued by the U.S. Treasury, a non-U.S. government or a municipality. CPI (Consumer Price Index)– Measures the average change in prices over time that consumers pay for a basket of goods and services. Cyclical– A cyclical stock is a stock highly correlated to changes in the economy. Expense Ratio– A measure of what it costs an investment company to operate a mutual fund. Fed (Federal Reserve)– The central bank of the United States which regulates the U.S. monetary and financial system. Global REIT– Real Estate Investment Trusts offering investors access to portfolios of income producing real estate across the globe. Growth– A diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. Portfolio companies would mainly consist of companies with above-average growth in earnings that reinvest their earnings into expansion, acquisitions, and/or research and development. Housing Market Index (HMI) (National Homebuilder Index)– The index is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes. Scores for responses to each component are used to calculate a seasonally adjusted overall index, where a number over 50 indicates more builders view sales conditions as good rather than poor. Inflation– A condition of a rise in the general level of prices of goods and services in an economy over a period of time. Inflationary– Of, associated with, or tending to cause inflation. Interest Rate– The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. Labor Market– The nominal market in which workers find paying work, employers find willing workers, and wage rates are determined. Leverage– The use of borrowed money to increase investing power. A firm with significantly more debt than equity is considered to be highly leveraged. Magnificent 7– The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. MSCI U.S. REIT Index– A free float market capitalization weighted index that is comprised of Equity REITs securities that belong to the MSCI U.S. Investable Market 2500 Index. Mutual Funds– An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money-market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. Nikkei 225 Index– a price-weighted index composed of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange. Overweight– A condition where the portfolio exposure to a given asset class (or risk measure) exceeds that of the benchmark index. REIT (Real Estate Investment Trusts) – Any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages under Internal Revenue Code section 856. S&P 500 Total Return Index (‘SPXT’)– Is calculated intraday by S&P based on the price changes and reinvested dividends of S&P 500 Index with a starting date of Jan 4, 1988. S&P Global 1200– A free-float weighted stock market index of global equities from Standard & Poor’s. The index covers 31 countries and approximately 70 percent of global stock market capitalization. S&P Global REIT Index– Serves as a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets. Total Return– The rate of return on a security, including income from dividends and interest, as well as appreciation or depreciation in the price of the security, over a given time period of time. TSE REIT Index– A capitalization-weighted index based on all REITs (Real Estate Investment Trust) listed on Tokyo Stock Exchange. Underweight– A condition where a portfolio does not hold a sufficient amount of a particular security when compared to the security’s weight in the underlying benchmark portfolio. YTD– Year-to-date. For more information about the Fund call us at 800 386 3829. Visit our web site for a full menu of products and services at TCW.com. The TCW Funds are distributed by TCW Funds Distributors LLC |
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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