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Perspective

Global Real Estate Q3 2022 Commentary

Review of Q3 2022 Market and Fund Performance

Global real estate stocks posted losses in the third quarter of 2022, with macroeconomic uncertainty exacerbated by geopolitical tension driving a sell-off in risk assets, including listed real estate prices. The FTSE EPRA Nareit Developed Index (the “Index”) had a total return of -11.39% for the quarter, while the Easterly Global Real Estate Fund (the “Fund”) generated a total return of -15.33%, underperforming the Index by 394 basis points.

During the quarter, despite continued strong industry fundamentals, the global REIT market was weighed down by exogenous factors, including:

  • Elevated inflation and its potential impact on consumer confidence and the economy;
  • Concerns over the pace/timing of stimulus withdrawal and rate hikes by the U.S. Fed;
  • Geopolitical stress driven by Russia’s invasion of Ukraine; and
  • Covid lockdowns in China exacerbating existing supply chain disruptions

A historical review of listed real estate returns during periods of high inflation serves as a reminder that real estate values tend to increase with inflation, as rising inflation is typically an indicator of a growing economy – the most important driver of demand for most property types. Additionally, commercial real estate leases often incorporate annual rent escalators, helping to provide additional protection of real estate cash flows during inflationary periods.
Capital markets were also impacted during the quarter by the continued Russia-Ukraine conflict and the resulting impact on commodity prices and the global supply chain.

Higher energy prices, particularly in Europe, may reduce consumer spending and negatively impact sectors exposed to discretionary spending. Notably, the Fund is positioned defensively in Europe, with a substantial portion of its European holdings invested in German residential companies, whose fundamentals are not only unimpacted by rising energy prices, but are in fact bolstered by increased demand for housing, spurred by the tide of migrants fleeing the Ukraine. Other European positions are similarly insulated from the economic fallout of the conflict in Ukraine, with Specialty positions (e.g., Cell Towers, Student Housing) representing the bulk of the Fund’s remaining European exposure.

Attribution of the Fund’s Q3 2022 Performance

Key contributors and detractors to the Fund’s relative performance over the third quarter are outlined below:

  • The Fund’s stock selection in the Diversified sector was a contributor to relative returns vs. the benchmark, primarily resulting from our overweight positions to four Asia-Pacific companies. The Fund also benefited from its stock selection in the Lodging, Industrial and Health Care sectors.
  • The Fund’s stock selection in the Residential and Specialty sectors were detractors to relative returns. We believe that the sell-off in Specialty property types with strong fundamentals, such as Data Centers and Cell Towers, has presented deep value investment opportunities for the Fund.

Notable individual contributors to the portfolio’s performance in the quarter include:

Japan Hotel REIT Investment Corp. (8985 JP) (contributed 40 basis points)

  • Japan Hotel REIT, the largest hotel landlord in Japan with 41 properties, outperformed during the quarter as Japan relaxed the COVID-related travel restrictions.
  • With room revenue still 50% below pre-COVID levels and a very weak Japanese yen, the market has begun to price in a strong recovery in revenues and dividends.

Alexandria Real Estate Equities. Inc. (ARE) (contributed 12 basis points)

  • The sharp rebound in Biotech stocks (since bottoming in late 2nd Quarter 2022) improved sentiment on the life science-focused REIT, Alexandria Real Estate Equities.

CatchMark Timber Trust, Inc. (CTT) (contributed 11 basis points)

  • CatchMark Timber received and accepted an offer from PotlachDeltic (PCH) to purchase the company at a 55% premium to its pre-deal price.
  • Tied to PotlachDeltic’s stock via the announced merger, CatchMark benefitted from PotlachDeltic’s outperformance based on merger benefits and stable timber values, despite lower housing activity and lumber prices.
  • CatchMark’s discount adjusted to PotlachDeltic’s price closed fully when the transaction closed on 9/15/2022.

Notable individual detractors from the portfolio’s performance in the quarter include:

DigitalBridge Group, Inc. (DBRG) (detracted 79 basis points)

  • DigitalBridge, a manager of digital infrastructure assets, had negative performance in Q3 as risk-off sentiment and rising interest rates created fears that third-party capital formation will slow and existing investments under management returns will be damaged by the higher rate environment. This would reduce fee-bearing capital and carried interest income growth.

CellNex Telecom, S.A. (CLNX SM) (detracted 44 basis points)

  • Cellnex, Europe’s largest cell tower owner with more than 110,000 sites (France, Italy, UK, Spain, Nordics, Poland), underperformed during the quarter as it tends to be very sensitive to rising bond yields (German 10-Yr Bund yield increased 80 bps)
  • External growth has slowed down meaningfully as competition for European towers from private equity remains very strong while at the same time Cellnex’ cost of capital has increased.

Grainger plc (GRI LN) (detracted 22 basis points)

  • Grainger, a UK apartment for rent landlord and developer (existing 10,000 units and 4,000 units under construction), underperformed during the quarter due to rising bond yields (UK 10-yr Gilt yields increased by 200 bps during the quarter) and the large development exposure at a time when financial conditions are tightening significantly.
  • Particularly sensitive to higher rates because the cap rate on its portfolio is low (close to 3%).

Conclusion

Despite the macroeconomic noise capturing headlines, our outlook for the global real estate market continues to be constructive. Real estate fundamentals and earnings growth remain strong amidst an environment characterized by low supply in many sectors, paired with high construction costs.

Our high conviction, benchmark-agnostic investment approach allows us to maintain a laser-focus on identifying and owning only the 50 highest-quality companies in our investable universe. We have high conviction in our fundamental research and confidence in the management teams of the companies we own. While global capital markets continue to experience transitory periods of market fixation on non-fundamental factors, we believe our portfolio is well-positioned as investor attention turns back to fundamentals.

A historical review of listed real estate returns during periods of high inflation serves as a reminder that real estate values tend to increase with inflation, as rising inflation is typically an indicator of a growing economy – the most important driver of demand for most property types.

9/30/2022QTDYTD1-Year3-Year5-Year10-YearSince Inception
I Shares-15.33%-29.19%-25.36%-2.81%2.07%5.09%5.75%
Morningstar Global Real Estate Category-12.27%-30.64%-24.92%-5.93%-0.76%2.68%2.88%
FTSE EPRA Nareit Developed Index-11.39%-29.42%-22.10%-5.62%0.07%3.77%4.06%

Performance data quoted above is historical. Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot directly invest in an index, and unmanaged index returns do not reflect any fees, expense, or sales charges. For performance information current to the most recent month-end, please call 888-814-8180.

Source: Morningstar Direct.

The Fund’s management has contractually waived a portion of its management fees until March 19, 2023 for I, A, C and R6 Shares. The performance shown reflects the waivers without which the performance would have been lower. Total annual operating expenses before the expense reduction/reimbursement are 1.26%, 1.51%, 2.26% and 1.26% respectively; total annual operating expenses after the expense reduction/reimbursement are 1.04%, 1.51%, 2.26% and 0.94% respectively.1 5.75% is the maximum sales charge on purchases of A Shares.

1 The Fund’s investment adviser has contractually agreed to reduce and/or absorb expenses until at least March 19, 2023 for I, A, C and R6 Shares, to ensure that net annual operating expenses of the fund will not exceed 1.04%, 1.69%, 2.37% and 0.94%, respectively, subject to possible recoupment from the Fund in future years.

The FTSE EPRA Nareit Developed Global Real Estate Index is comprised of publicly-traded REIT securities in developed countries worldwide which have met certain financial criteria for inclusion in the Index. Each company must derive the bulk of its earnings through the ownership, management or development of income-producing commercial real estate.

About the Author, Andrew J. Duffy, CFA

Andrew Duffy is the Senior Portfolio Manager of the Easterly Global Real Estate Fund, a mutual fund that invests in publicly-traded global REIT securities. Mr. Duffy has more than 30 years of global real estate securities investment experience.

Mr. Duffy co-founded Ranger Global Real Estate Advisors, LLC in 2016 and serves as the Chief Investment Officer. Previously, he served as the Senior Portfolio Manager with Ascent Investment Advisors. Prior to joining Ascent Investment Advisors, Mr. Duffy was a Managing Director with Citigroup Principal Strategies, where he managed a long/short portfolio of global real estate securities. From February 2005 until January 2008, he was with Hunter Global Investors, L.P. where he was the Co‐-Portfolio Manager of the Hunter Global Real Estate Fund, LP. Before that he was a portfolio manager at TIAA‐ CREF for more than six years, during which time he was directly responsible for managing more than $3 billion in global real estate equity and debt securities. Between 1993 and 1999, Mr. Duffy was a Senior Research Analyst at Eagle Asset Management, where he launched and managed a dedicated real estate securities investment program.

Prior to his career in investments, Mr. Duffy served for five years as an officer in the United States Army, where his assignments included serving in the 7th Special Forces Group and the 82nd Airborne Division. Mr. Duffy received a BS from the United States Military Academy at West Point in 1979 as a Distinguished Graduate (top 5% of class) and an MBA from Harvard Business School in 1986. He earned the Chartered Financial Analyst® designation in 1996.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting www.EasterlyAM.com.

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. The Easterly Funds are distributed by Ultimus Fund Distributors, LLC. Easterly Funds, LLC and Ranger Global Real Estate Advisors, LLC are not affiliated with Ultimus Fund Distributors, LLC, member FINRA/SIPC. Certain associates of Easterly Funds, LLC are registered with FDX Capital LLC, member FINRA/SIPC.

There is no assurance that the portfolio will achieve its investment objective. The 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.

Easterly Funds, LLC and Easterly Investment Partners, LLC both serve as the Advisors to the Easterly Fund family of mutual funds and related portfolios. Both Easterly Funds, LLC and Easterly Investment Partners, LLC are registered as investment advisers with the SEC. Mutual Funds are distributed by Ultimus Fund Distributors, LLC, a member of FINRA and SIPC. Although Easterly Funds, LLC and Easterly Investment Partners, LLC are registered investment advisers, registration itself does not imply and should not be interpreted to imply any particular level of skill or training.

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.

15783472-UFD 10/14/2022

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