Market Commentary | June 20, 2024

Back in 2018, 2nd Market Capital attached to the phrase, “REITs Touch Every Economic Sector”. Marketing slogans often quickly go musty, and dusty, and lose their significance, but based on how world economies are evolving, this statement is more accurate than ever. Specifically, we are talking today about the infrastructure that supports Nvidia’s (NVDA) graphic processing units (GPUs), Artificial Intelligence (AI), and the power grid.

AI, Reshoring, and Energy Transition

The pandemic, war in Ukraine, and evidence of climate change have combined to provide resounding lessons about supply chain interruption, energy dependence, and concerns about national security. In response, passage of the CHIPs Act (Creating Helpful Incentives to Produce Semiconductors) and the tax incentives of the Inflation Reduction Act (IRA) have prompted huge capital expenditures to promote on-shoring and near-shoring of domestic industrial production and renewable energy development in solar, wind, and energy storage.

Interruption in delivery of foreign-sourced microprocessors stalled the production of automobiles and household appliances and inspired the CHIPS Act that is now helping capitalize new semiconductor factories in Ohio and Arizona. Intel (INTL) and Taiwan Semiconductor (TSM) hope to serve as domestic foundries to produce NVDA’s GPUs and other chips that will support the data centers that run artificial intelligence for all types of American business. AI has inspired development of fleets of supersized data centers in Northern Virginia, Phoenix, Salt Lake City, and Racine, Wisconsin. The IRA provides billions of dollars in tax incentives to produce EVs, batteries, and renewable energy here in the United States.  The factories and upsized data centers will consume staggering amounts of electricity and that’s where the REIT and REIT-adjacent opportunities lie.

Infrastructure at the Right Price

AI technology companies that form The Magnificent 7 have led stock market price performance.  Surprisingly, while infrastructure REITs and electric utilities face sustaining demand growth, their shares are trading at below market P/E ratios. We have identified the REITs, utilities, and renewable energy producers that will supply the electricity to meet the enhanced targeted demand. Moreover, in addition to revenues from solar and wind energy production, the agricultural, land, and timber REITs are contracting new revenues for reduction of greenhouse gases through carbon capture and sequestration services.

Rebalancing for Growth

We have been seeding portfolios with these AI and manufacturing companies for a few months now, but plan to opportunistically add to our holdings.  We will fund the acquisitions through dividend cash flow and trimming of selected portfolio positions.

Happy summer solstice! Stay cool. It’s forecast to be a hot one.       

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