Market Commentary | November 22, 2023


Pass the Dramamine

In January, I will begin my 41st year as an investment advisor. That tenure should lend credence to my observation that interest rate volatility has never been more dizzying.

At the end of October, as anxiety and fear of the Fed’s next move drove bond prices down and the 10Y T-Note yield up to 5.02%, the fallout and price dislocation in less liquid markets (our markets) grew extreme. This month, benign employment and inflation reports left us with a more dovish Federal Reserve, and we today awoke to 10Y T-Note yields of 4.36%. Much, but not all, of the price dislocation remains and we aim to optimize our investment in this vertiginous environment.

Back for Seconds

In early 2022, it became apparent that the long-suffering retail real estate sector was experiencing resurgent demand in the absence of new supply. Screening the whole sector, we came to believe that grocery-anchored, open-air shopping centers were the most opportunistic and, within that lot, Kite Realty Group (KRG) and Whitestone REIT (WSR) appeared to have the most potential.

Quarter to quarter, Kite Realty reported strong leasing activity, growing earnings, and rising dividends. The market noticed share prices rose 15% and KRG was no longer the cheapest in the sector. We were largely out of the position last November.

Whitestone REIT has a geographically concentrated (Houston, Dallas, Austin, and Phoenix) portfolio of open-air shopping centers located in high-income catchment areas. WSR has also reported strong leasing activity and rising occupancy but continues to carry too much variable-rate debt. Earlier this month, Bloomberg reported that Fortress Investment had taken a position in Whitestone and made overtures to take the company private. WSR rejected the offer, and its share price has risen about 15%.

Meanwhile, KRG has twice revised its earnings guidance higher, raised its dividend twice, and its share price has declined by about 15% to levels we purchased in 2022. WSR is still demonstrably cheap, but not as cheap as KRG. We are selling Whitestone to get back into Kite.

In the long run, markets are efficient. In the interim, we will pick our points of entry and exit.

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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