What’s driving the market?
- Capital markets are grappling with the pace and duration surrounding the withdrawal of unprecedented monetary stimulus and the attendant risk of a policy error resulting in either a growth shock that could derail the recovery, or unchecked inflation that could lead to even higher rates.
- Regional bank mini-crisis revealed the long and variable lagged effect of rate hikes to date—with the resulting tightening of credit doing some of the Fed’s work for it, thus shifting the narrative to lower for shorter.
- Russian invasion of Ukraine—escalation or an off-ramp?
- China’s re-opening is jump-starting China’s economy, boosting global growth—but also potentially adding to inflation pressures.
- Industry fundamentals still matter, just less than usual most days.
Why Public Real Estate vs. Private Real Estate moving forward?
- The recent market sell-off has made publicly traded real estate undervalued. Listed real estate securities are undervalued to their historical NAVs with JARIX currently undervalued by 28% as of June 30, 2023.
- Green Street Research, an institutional real estate securities research firm, found that when public REITs have been undervalued, based on P/NAV, by greater than 10%, they have subsequently outperformed Private Market Real Estate by more than 1,500 bps per annum over the next three years. By contrast, when they are trading at 10%+ premiums to P/NAV, they have underperformed by about 500 bps per year after trading at large (10%) premiums.
- Looking ahead into 2023, Global REITs are projected to have positive cash flow growth of +6.0%, while the MSCI World Index is projected to have cash flow growth of +0.5%.1
- The disparity between relative performance in 2022 and projected cash flow growth in 2023 presents a compelling set-up for REITs to outperform the broad market in 2023.
WHY PUBLIC LISTED REAL ESTATE VS. PRIVATE?
What’s the current state in office space specifically?
- Over the last 12-18 months you have seen many headlines in the news about Commercial Real Estate, specifically in the office space following the WFH phenomenon and stories about increased vacancies following the pandemic. First, we feel it’s important to point out that currently office space makes up about 5% of the overall global real estate index, and the Global Real Estate Fund (JARIX) is underweight the space as it only makes up 4.5% of the fund across three individual names in the portfolio. Again, these names are included based on their underlying fundamentals not because of a macro/top-down view, andeach stock has its own idiosyncratic reasons for being within our 50 best ideas.
- We see a bifurcation occurring within the office space. One where you see newer, higher quality, and well “amenitized” office buildings winning at the expense of older and lower quality buildings. Higher quality, investment grade CMBS have continued to stay relatively tight, whereas lower quality below investment grade CMBS has seen spreads blow out over the past 18-24months.
MARKET INSIGHTS: OFFICE SECTOR
Why today is an attractive entry point for the Global Real Estate Fund (JARIX)
- The recent market volatility and dislocation offers an opportunity for seasoned and nimble active managers like us to be opportunistic throughout the portfolio.
- In order to outperform the market, one must manage high-conviction portfolios which do not look like the benchmark index (i.e.,portfolios with high active share).
- Access to “Specialty” Real Estate Property Types e.g., data centers, cell towers, life science lab space, student housing, etc.
- JARIX currently has a 30% exposure to Specialty REITs which represents the fastest growing part of the overall real estate market with differentiated demand drivers. The demand for these assets far outstrips supply, this gives pricing power to the landlord over the tenant allowing them to drive higher rents and increase cash flows.
- JARIX is currently trading at a lower Price/Cash Flow multiple than that of the index, while having 50% higher cash flow growth.This speaks to our fundamental stock picking ability and over time our ability to outperform the market. We feel this dislocation in the real estate space, specifically in the public space, offers long term investors an attractive entry point to help achieve their long-term needs and goals.
1Source: Ranger Global Real Estate Advisors LLC.
The Global Real Estate Fund
A benchmark agnostic, high conviction portfolio sourced from bottom-up fundamental stock selection. The fund has a high active share to best navigate today’s environment.
FLYER COMMENTARY CONTACT US
To purchase Fund shares or obtain updated performance information and Fund literature, contact your Financial Advisor or the Fundat: 888.814.8180 | www.EasterlyAM.com
17214379-UFD 07/21/2023