Third Quarter of 2024

Dear Clients,

We hope everyone had a nice summer and is starting to enjoy some cooler weather. Before we get into the quarterly letter, we have a quick announcement that we are excited to share. Brasada will be hosting a luncheon for clients and friends at the Briar Club on January 23, 2025. The format of this luncheon will be a bit different than the format the past few years. Instead of hosting a dinner with a speaker, we will instead be presenting our outlook for 2025 and discussing several of the companies we own across our investment strategies. There will also be plenty of time for Q&A. Invitations to this event will go out later this year, and we are looking forward to seeing everyone there.

Election Implications

Thus far, 2024 has been a solid year for the markets and if history is any guide, we are now headed into the seasonally stronger part of the year. In our meetings with clients, the election has been top of mind. We know that this can be a touchy subject, with many strong opinions. For us, however, we are more focused on what, if any, the impact of the election will have on markets.

Consider that under a Harris Administration, we would likely have a more stringent regulatory environment compared to that of a Trump Administration. Regarding government spending, neither candidate wants to cut spending and neither candidate has a plan to reduce the Federal Debt which is now approaching $35 Trillion. Unfortunately for the country, the last time the government ran a budget surplus was in 2001 during the Clinton Administration. 

That said, while there will be some stocks that will fare better under a Trump Administration, and vice versa under a Harris Administration, we do believe that the market in general will do well under either candidate, and will do best if neither party controls all three branches of government. After all, no matter who wins, remember that our country’s founders set up a system of checks and balances. Below is a chart that depicts market returns in each administration since Kennedy was President.

Source: Dimensional Fund Advisors

There are arguably many other factors outside of the election that matter more to markets. For example, who the Chairman of the Federal Reserve is will be more impactful to the markets than who the President is, and luckily, Jerome Powell is set to remain Chairman of the Fed until at least 2026. Consider that after hiking interest rates from 0 to 550 basis points in 16 months (the quickest in history) the Fed has now finally begun to cut interest rates with their announced 50 basis point cut in September likely being first of many. Currently the market expects the Fed to cut rates by an additional 150 basis points by the end of 2025. Since the economy is relatively strong, these cuts should serve to bolster the economy and help companies that have struggled with higher rates such as companies involved in commercial construction, home sales, auto sales, and other companies that are reliant on leverage. Many investors have short term time horizons and only care about the results for the next 3 months. We are thinking about the next 3 years and beyond. Over the past year, we have purchased companies that we believe will benefit from lower rates, one of which we highlight below.

Investment Highlight: Camden Property Trust

In our Dividend Growth and Equity Income strategies, Real Estate Investment Trusts (REITs) are one of the sectors that we have a long history of investing in. REITs own some of the best real estate properties in the United States, their income streams are very predictable, and they possess some of the higher dividend yields in the market as they are required to pay out 90% of their taxable income.

For some historical context, 2021 was the second best year ever for the REIT sector and 2022 was the second worst year ever. Needless to say, it has been a bumpy ride. Aside from REITs that own office properties (which we have not owned for years), REIT fundamentals were fantastic in 2021. This combined with zero interest rates led to the strong REIT performance in 2021. In 2022, REIT fundamentals began to deteriorate, and interest rates rose rapidly which was especially bad for REITs which are rate sensitive for two reasons. First, they borrow a sizeable amount of money to acquire and develop properties. If interest rates move higher, it makes it more expensive to borrow and it lowers the return on investment for any potential developments or acquisitions. Second, valuations of the properties REITs own are worth less if interest rates are higher as the future cash flows must be discounted at a higher interest rate. Now that rates are finally coming down, we expect the sector to continue to recover much of its lost ground.

We love to meet with companies and in October of 2022 we walked 15 minutes from our office to the headquarters of Camden Property Trust to meet with one of the founders of the company, Keith Oden, and several other members of the management team. Camden is one of the largest owners of apartments in the United States, with 58,000 units in 15 major markets:

After our meeting with management, we concluded that Camden had a solid strategy, but it was likely that tough times were ahead. Zero interest rates led to an unusually high number of apartments that began construction in 2021 and 2022, which would in turn likely lead to several years of oversupply and downward pressure on rents. We believed that we could be patient and wait for a better entry point.

Flash forward, as rates rose rapidly in 2022 it became almost impossible to make the math work on developing a new apartment project. These higher rates led to a lack of starts which flipped the prior narrative and would mean strong rent growth for apartments from about 2026 to 2028. In December 2023, we decided that the time was right to buy Camden. We had more visibility into apartment starts, and the risk reward was very attractive at a price below $100 and a dividend yield above 4% both of which we believe reflected an overly skeptical outlook on the business. Given favorable longer-term demographic trends within Camden’s core markets, our confidence in the management team’s growth strategy, and the continued national shift toward renting over owning, all together created a very attractive entry point. The stock traded significantly below both its historical multiple and comparable private market value

When we bought Camden, we didn’t know when the stock would rebound, but we knew we were buying a great portfolio of apartments, operated by a great management team, and at a great price. Camden and the REIT sector have rallied this year due to prospects of interest rates coming down. Camden’s total return for us this year is approaching 30%. We don’t believe the fundamentals have begun to rebound yet, just that the supply of new apartments coming online has peaked. We still think there is a long way to go for the stock price as the fundamentals improve over the next two to three years.

As always, thank you for the confidence you have placed in us. We own the same companies in our portfolios that we own for you. We think it’s critical in this business to be aligned with your clients. If you are doing well, we are doing well. We hope to see you in January at the Briar Club where we can answer any questions you have about Camden or any other stocks that we own for you.

Sincerely,

Jonathan Reichek, CFA

This quarterly update is being furnished by Brasada Capital Management, LP (“Brasada”) on a confidential basis and is intended solely for the use of the person to whom it is provided. It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Brasada. This document does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services or to participate in any trading strategy.

The net performance results are stated net of all management fees and expenses and are estimated and unaudited. These returns reflect the reinvestment of any dividends and interest and include returns on any uninvested cash. In addition to management fees, the managed accounts will also bear its share of expenses and fees charged by underlying investments. The fees deducted herein represent the highest fee incurred by any managed account during the relevant period. Past performance is no guarantee of future results. Certain market and economic events having a positive impact on performance may not repeat themselves. The actual performance results experienced by an investor may vary significantly from the results shown or contemplated for a number of reasons, including, without limitation, changes in economic and market conditions.

References to indices or benchmarks are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the managed accounts. The managed accounts do not necessarily invest in all or any significant portion of the securities, industries or strategies represented by such indices and performance calculation may not be entirely comparable. Indices are unmanaged and have no fees or expenses. An investment cannot be made directly in an index and such index may reinvest dividends and income. References to indices do not suggest that the managed accounts will, or is likely to achieve returns, volatility or other results similar to such indices. Accordingly, comparing results shown to those of an index or
benchmark are subject to inherent limitations and may be of limited use.

Certain information contained herein constitutes forward looking statements and projections that are based on the current beliefs and assumptions of Brasada and on information currently available that Brasada believes to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements. Due to various risks and uncertainties, actual events or results or the actual performance of any entity or transaction may differ materially from those reflected or contemplated in such forward-looking statements. The information contained herein is believed to be reliable but no representation, warranty or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Brasada.