PORTFOLIO REVIEW - Q2/2025

PORTFOLIO REVIEW - Q2/2025

Table of Contents

1. Opening Notes

2. Changes Portfolio Holdings

3. Changes to HYL Ratings

4. The Core Portfolio (Our Main Portfolio)

5. The Retirement Portfolio (Our Secondary Portfolio)

6. The International Portfolio (Our Optional Portfolio)

1. Opening Notes

The main theme of the past quarter was capital recycling.

We are entering a different environment and adapting the portfolio accordingly.

The trade war is increasing near-term inflation risk, which could delay rate cuts. But it also puts pressure on the economy, which may lead to larger cuts in 2026. We are positioning the portfolio to do well in both scenarios.

The AI revolution is also just beginning. It will create strong demand for certain property types like data centers, self-storage, and energy infrastructure. At the same time, it is making others, like office buildings and certain retail and experiential properties, less relevant. This is a long-term trend that we want to be ahead of.

The market has also been volatile, with big divergences. Some REITs have rallied close to fair value, while others have been ignored and now look very cheap, creating compelling opportunities for active investors.

We sold a total of 9 legacy holdings, most of which had large gains, and reinvested in 6 new companies that offer better upside, stronger fundamentals, and a better alignment with our current views.

Sold:

• Agree Realty (ADC): Great REIT, but as we sold half of our position, it was trading at its all-time highs, offering only a 3.7% dividend yield, even as we risk seeing an uptick in inflation.

• Modiv Industrial (MDV): We like its unique business model focusing on manufacturing net lease properties, but we fear that the trade war could hurt some of its tenants and potentially even lead to some lease defaults if this continues.

• KlePierre (LI): It owns some of the best malls in Europe, but its share price has surged near fair value, even as risks have grown due to the weakening economy and the trade war. There is little margin of safety if we go into a recession and key performance metrics turn negative.

• Essential Properties Realty Trust (EPRT): Same story as Agree Realty, but potentially even worse as it focuses on weaker middle-market tenants, which are at greater risk of lease default. EPRT is heavily exposed to car washes, which is concerning as this sector seems to be getting oversupplied.

• Safehold (SAFE): We continue to like it a lot as a leveraged bet on lower interest rates, but we have identified another company (STHO) that gives us the same exposure at an even lower valuation. Selling it allowed us to lock in a tax loss while increasing our future upside potential.

• EPR Properties (EPR): We fear that Google's new innovations in AI video production could become a significant long-term headwind for movie theaters, as they will greatly reduce the cost of movie production, making direct-to-digital strategies more economically feasible. It will also lead to an avalanche of new content of all sorts, increasing the competition for our attention. Finally, this increased uncertainty may make it more challenging for EPR to sell movie theater properties and diversify its portfolio. This is not an imminent risk, but it reduces its long-term upside potential, especially given that it has surged so much already.

• VICI Properties (VICI): This is the REIT that I was the saddest to let go of. If it ever drops back below $30 per share, we will likely buy it back, but for our Retirement Portfolio this time. When we initially invested in it in 2019, it made more sense for our Core Portfolio, given that it was a smaller REIT with only a short track record, operating in a new property sector. But since then, it has become a true blue-chip REIT with enormous scale and an excellent track record. It’s now massive scale is likely to limit its future growth potential, but it also increases its safety.

• Stoneweg European REIT (CWBU): The thesis is broken. The manager sold its stake and management agreement to another external manager, removing the path to an eventual internalization and the upside associated with it. It also reduces our confidence in the company's NAV as its manager sold its stake at a steep discount. Finally, the REIT still owns a significant number of office buildings that are likely to suffer in the years ahead as the AI revolution eliminates many white-collar jobs. We are happy to get out about even on our investment given this bad news.

Bought: