Global real estate stocks posted strong gains in the third quarter of 2024 (Q3 2024), as the Federal Reserve (the Fed) and other global central banks transition from monetary policy tightening to the beginning of an easing cycle. Despite the host of geopolitical and macroeconomic concerns during the quarter, investors focused on the prospect of central bank easing along with an expectation of a soft landing, which appears to be increasingly likely.
The FTSE EPRA Nareit Developed Index (the Index) had a total return of 16.33% for the quarter, while the Easterly Global Real Estate Fund (the Fund)—specifically the I class, JARIX—generated a total return of 17.41%, outperforming the Index by 108 basis points (bps).1
The Funding Environment for Commercial Real Estate
Listed real estate investment trusts (REITs) enjoy access to all four quadrants of the capital markets (public, private, debt, and equity), typically giving them greater access to capital than their private real estate counterparts. Moreover, public REITs typically operate with lower leverage than most private real estate companies, which further insulates them from any disruptions in the capital markets.
REITs have performed well following the end of the previous three hiking cycles.2 Over the past 25 years, there have been four main episodes of Fed rate-hike cycles. REITs have historically delivered strong total returns following the end of tightening cycles, outperforming private real estate. This performance has strengthened over time. Pension Real Estate Association (PREA) highlights the performance difference between public equity REITs and private real estate after monetary policy tightening cycles end. On average, across the one-, two-, and four-quarter time horizons following the end of the three rate-hike cycles since 1999, REITs outperformed private real estate. The performance gap has widened in more recent periods, with the FTSE Nareit All Equity Index outperforming the NCREIF Fund Index by 22.7% in the quarter immediately following the most recent tightening cycle that ended in Q3 2023.
Finally, office buildings, especially those located in central business districts, have a challenging outlook. The fundamental changes in office space management (due to the increase in hybrid work models) will cause significant headwinds for office building owners in the next five-or-so years as existing leases expire and tenants downsize their spaces.
This decrease in value could mirror the previous decline in regional malls due to the disruptive impact of e-commerce, causing what some would call the “Amazon effect.” Just as the commercial real estate industry managed to thrive in the face of substantial value deterioration in the regional mall sector (which at one time had a larger market capitalization than the office sector), it’s certainly possible that the coming difficulties in the office sector can be contained without spreading to other sectors or the funding markets for commercial real estate. Continuously looking ahead, the portfolio management team saw the impending challenges and was proactive in reducing the portfolio’s exposure to preserve the Fund’s capital.
Performance Comparison of Fund’s Q3 2024 Returns3
Key contributors and detractors to the Fund’s relative performance over the second quarter are outlined below:
- The Fund’s performance in the residential sector was the largest contributor to portfolio returns. The Fund also benefited from an overweight in cell towers, student housing, outdoor advertising, single-family rental, and manufactured home community sectors and an underweight in the data center, retail, diversified, industrial, health care, net lease self-storage, medical office buildings, lodging/leisure, office, and cold storage sectors
- Notably, none of the sectors detracted from portfolio returns.
Top individual contributor to the Fund’s performance in the quarter:
Link Real Estate Investment Trust (Contributed 132 bps)
- Link REIT is the largest Asian REIT with a portfolio predominantly comprised of grocery-anchored shopping centers across Hong Kong, China, Australia, and Singapore.
- The drivers of the Q3 2024 positive performance were increased optimism regarding monetary stimulus from China, decreasing global interest rates as well as the moderation of cross-border shopping from Hong Kong into Shenzhen, China.
Only individual detractor from the Fund’s performance in the quarter:
Lifestyle Communities Ltd. (Detracted 46 bps)
- Lifestyle Communities Ltd. builds, owns, and operates land lease communities that provide affordable housing options in Australia.
- The drivers of negative Q3 2024 performance were management’s removal of unit sales volume guidance due to the challenging sales environment in Melbourne; uncertainty about the long-term viability of the deferred management fee (DMF) structure utilized by Lifestyle; and uncertainty of the outcome of Victorian Civil and Administrative Tribunal (VCAT) proceedings relating to complaints about the DMF structure.
Conclusion
Despite the remaining macroeconomic uncertainty and geopolitical stress, our outlook for the global real estate market is increasingly constructive. Real estate fundamentals and earnings growth in most property sectors remain healthy amidst an environment characterized by low supply paired with high construction costs.
Our high-conviction, benchmark-agnostic investment approach allows us to focus on identifying and owning the 50 highest-quality companies in our investable universe. We’re extremely confident in our fundamental research, as well as in the management teams of the companies we own. While global capital markets continue to experience transitory periods of market distraction by non-fundamental factors, we believe the portfolio is well positioned as investor attention inevitably returns to fundamentals.
1Source: Morningstar Direct as of September 30, 2024
2Source: Pension Real Estate Association, 2024 (PREA), Federal Reserve Board, Nareit, NCREIF
3Source: FactSet as of September 30, 2024.
Fund holdings, sector weightings, market capitalization and portfolio characteristics are subject to change at any time.
Investment Performance (%)
| 9/30/2024 | QTD | YTD | 1-YEAR | 3-YEAR | 5-YEAR | 10-YEAR | SINCE INCEPTION* |
|---|---|---|---|---|---|---|---|
| I Shares | 17.41 | 13.1 | 27.34 | -1.04 | 3.57 | 6.37 | 6.95 |
| A Shares w/ load* | 10.49 | 6.27 | 19.58 | -3.34 | 1.96 | 5.29 | 7.28 |
| A Shares w/o load | 17.26 | 12.74 | 26.83 | -1.40 | 3.17 | 5.91 | 7.70 |
| C Shares w/ load* | 16.02 | 11.08 | 24.87 | -2.15 | 2.39 | 5.14 | 6.83 |
| C Shares w/o load | 17.02 | 12.08 | 25.87 | -2.15 | 2.39 | 5.14 | 6.83 |
| R6 Shares | 17.4 | 13.16 | 27.44 | -0.95 | 3.69 | N/A | 5.50 |
| FTSE EPRA Nareit Developed Index | 16.33 | 12.64 | 30.20 | 1.37 | 2.37 | 5.04 | N/A |
*5.75% is the maximum sales charge on purchase of A Shares. Class C charges a maximum contingent deferred sales charge of 1.00% if you redeem Class C shares within 18-months after purchase. Class C shares convert to Class A shares after 8 years from the last day of the month in which the shares were purchased.
The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions and does not guarantee future results. Returns for periods less than one year are cumulative, and results for other share classes will vary. Shares will fluctuate in value and, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance cited. Investors cannot invest directly into an index. All classes of shares may not be available to all investors or through all distribution channels. For the most recent month-end performance, visit Funds.Easterlyam.com or call 888-814-8180.
The Fund’s investment manager has contractually agreed to waive all or a portion of its advisory fee and/or pay expenses of the Fund to limit total annual Fund operating expenses (excluding front-end and contingent deferred sales loads, leverage, interest and tax expenses, dividends and interest on short positions, brokerage commissions, expenses incurred in connection with any merger, reorganization or liquidation, extraordinary or non-routine expenses and the indirect costs of investing in other investment companies) until at least December 31, 2024 for I, A, C and R6 Shares to ensure that net annual operating expenses will not exceed 1.04%, 1.69%, 2.37% and 0.94%, respectively. The fee waiver and/or expense reimbursement are subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus. Performance shown would have been lower without the fee waiver and/or expense reimbursement effect.
The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least December 31, 2024 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund (excluding front-end and contingent deferred sales loads, leverage, interest and tax expenses, dividends and interest on short positions, brokerage commissions, expenses incurred in connection with any merger, reorganization or liquidation, extraordinary or non-routine expenses and the indirect costs of investing in other investment companies) will not exceed 1.04%, 1.42%, 2.17% and 0.94% respectively, subject to possible recoupment from the Fund in future years. For more information, please refer to the Fund’s summary prospectus and prospectus.
The Fund has adopted the performance of the James Alpha Global Real Estate Investments Portfolio, a series of The Saratoga Advantage Trust (the “Predecessor Portfolio”) as the result of a reorganization of the Predecessor Portfolio into the Fund, which was consummated after the close of business on March 19, 2021 (the “Reorganization”). The returns shown for periods ending on or prior to March 19, 2021 are those of the Class A, Class C, Class I, and Class S shares of the Predecessor Portfolio, which were reorganized into Class A, Class C, Class I, and Class R6 shares of the Fund, respectively, after the Reorganization. Class A, Class C, Class I, and Class R6 shares’ returns of the Fund will be different from the returns of the Predecessor Portfolio as they have different expenses.
Returns greater than one year are annualized. Returns for the Fund’s first year are since fund inception. Calendar year returns do not reflect the maximum sales charge; otherwise, returns would vary.
FTSE EPRA Nareit Developed Index: An Index whose constituents include publicly-traded real estate investment trusts (“REITs”) located on both domestic and foreign exchanges in developed countries. The Index includes securities of companies that derived in the previous full fiscal year at least 75% of its total earnings before interest, depreciation and amortization (“EBIDA”) from the ownership, trading and development of income-producing real estate. Investors cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses, or sales charges.
Risks & Disclosures
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal.
There is no assurance that the portfolio will achieve its investment objective. he Fund is subject to stock market risk, which is the risk that stock prices overall will decline over short or long periods, adversely affecting the value of an investment. Risks of one’s ownership are similar to those associated with direct ownership of real estate, such as changes in real estate values, interest rates, cash flow of underlying real estate assets, supply and demand and the creditworthiness of the issuer. International investing poses special risks, including currency fluctuations and economic and political risks not found in investments that are solely domestic. Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.
The Easterly Funds are distributed by Easterly Securities LLC, member FINRA, SIPC. Ranger Global Advisers, LLC is the fund’s subadvisor, not affiliated with Easterly Securities LLC. Easterly Funds is a mutual fund platform advised by Easterly Investment Partners LLC, an SEC registered investment adviser, offering investors access to boutique managers and unique strategies with differentiated investment approaches. The Easterly Funds family of mutual funds include portfolios focused on hedged equity, global REITs and structured credit, which are intended to provide low volatility growth, alternative sources of income, quarterly or even monthly distributions. Registration does not imply and should not be interpreted to imply any particular level or skill or expertise. See Form ADV at www.sec.gov.
Easterly Investment Partners LLC and EAB Investment Group LLC are affiliates of Easterly Securities LLC. Orange Investment Advisers, LLC and Ranger Global Advisers, LLC are not affiliated with Easterly Securities LLC.
As with any investment, there are multiple risks associated with REITs. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property and defaults by borrowers, to name a few. Please see the prospectus for a full disclosure of all risks and fees.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.
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