Perspective

Review of Q4 2022 Market and Fund Performance

Global real estate stocks posted gains in the fourth quarter of 2022, as the multiple exogenous factors weighing on the capital markets (e.g., central bank tightening to rein in inflation, the trajectory of the pandemic, the war in Ukraine, and China’s efforts to contain COVID-19) became less distracting to investors, allowing them to return their attention to industry and company fundamentals. The FTSE EPRA Nareit Developed Index (the “Index”) had a total return of 7.11% for the quarter, while the Easterly Global Real Estate Fund (the “Fund”) generated a total return of 7.08%, underperforming the Index by 3 basis points.

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.

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 property type positions (e.g., Cell Towers, Student Housing and Medical Office Buildings) representing the bulk of the Fund’s remaining European exposure.

Attribution of the Fund’s Q4 2022 Performance

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

• The Fund’s positioning in the Self-Storage sector was a contributor to relative returns vs. the benchmark, primarily resulting from our underweight allocation and stock selection. The Fund also benefited from its stock selection in the Cold Storage and Residential sectors.
• The Fund’s stock selection in the Retail, Diversified and Industrial sectors were detractors to relative returns. We believe that the sell-off in Specialty property types with strong growth prospects, such as Data Centers and Cell Towers, has presented attractive 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 32 basis points)

Japan Hotel REIT, the largest hotel landlord in Japan with 41 properties, outperformed during the quarter as it continued to benefit from the relaxation of the COVID-related travel restrictions in Japan.

With room revenue still 13% below pre-COVID levels and a weak Japanese yen, the market has begun to price in a strong recovery in revenues and dividends.

Americold Realty Trust, Inc.
(COLD – contributed 30 basis points)

Americold, which operates temperature-controlled warehouses, outperformed during the quarter as operations improved from COVID with inventory increasing materially and guidance raised for the full year improving the financial outlook for 2022 and 2023.

CBRE Group, Inc.
(CBRE – contributed 22 basis points):

CBRE is a commercial real estate and investment services company. The results and outlook for the full year were better than expected and the company used their strong balance sheet to continue repurchasing shares with free cash flow.

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

Mitsubishi Estate Company, Limited
(8802 JP – detracted 41 basis points)

Mitsubishi Estate, one of the largest Japanese developers, underperformed during the quarter as the Bank of Japan adjusted its yield curve control policy at its December meeting, surprising most investors.

The shares, which otherwise performed strongly in 2022, sold off as the market was concerned with the impact on property prices from higher bond yields.

UDR, Inc.
(UDR – detracted 35 basis points)

UDR is an owner of multifamily apartment communities. Through Q4 2022 investors continued to focus on deceleration in leasing fundamentals and elevated supply. There was a continued fear of a potential recession and subsequent leasing challenges in 2023. These combined to cause a valuation multiple decline on lower consensus estimates for 2023 earnings.

TAG Immobilien AG
(TEG GY – detracted 27 basis points)

TAG, a residential landlord with a portfolio of 87,000 affordable apartments across Germany and a residential development business in Poland, underperformed during the quarter as the market remained concerned about its leverage in the context of declining property values across its geographies.

2023: Outlook for the Year Ahead

Factors that could bode well for the global REIT market in 2023 and beyond include:

1. The ending of tax loss selling when the calendar turned, along with the reinvestment of some or perhaps even most of the capital raised once the 31-day wash sale period is passed.

2. The probability of an up market in 2023, based on the historical record that following a down year, the market is up the next year 81% of the time. Since 2000, there has only been one instance that global REITs were negative 2 years in a row.

3. Uncertainty and the resulting volatility have likely peaked.

4. Inflation has demonstrably peaked, even before the economy has experienced the full (lagged) impact of the Fed’s tightening measures thus far.

5. The Fed is a lot closer to the end of its tightening process than the beginning, which means that it’s also closer to its first rate cut when it becomes clear that the economy needs stimulus.

6. We appear to be at or perhaps just past the point of peak pessimism—an inflection to just marginally less bearish sentiment would be positive for stocks.

7. Having already sold off as much as it has, the market might be pricing in a worse scenario than we actually get—suggesting upside for stocks.

How are Global REITs Positioned vs. The Broad Equity Market?

In 2022 Global REITs posted a -24.4% total return vs. the MSCI World Index posting a total return of -18.1%, thus Global REITs underperformed the MSCI World Index by 6.3% for the year. 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%. 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.

In addition to their attractive set-up, REITs’ historical record of relative performance bolsters the case for listed real estate outperforming the broad market in 2023. The average annualized return of Global REITs from 2000-2022 was 10.2% vs. the MSCI World Index of 6.5%.

The Sell-Off Has Put Commercial Real Estate “On Sale” in the Public Market

All of the stress that weighed on the market drove a sharp sell-off in 2022 which has put commercial real estate “on sale” now in the public market, as evidenced by the very large discounts to private market value. Not only are the discounts very large, but they are also substantially larger than the long-term historical average. At the end of 2022, the average discount was -26% below private market value vs. the historical average of -6%.

Public vs. Private – Arbitrage Opportunity

The difference in valuation methodologies between public real estate and private real estate can (and like now, often do) create pricing dislocations and thus compelling arbitrage opportunities. Private real estate vehicles (i.e., funds and REITs) report valuations that are based on appraisals, which are by definition backward-looking and smoothed, while public REITs are valued daily by the equity market which looks forward and discounts the market’s expectation for conditions in 3-6 months—as well as reflecting the balance between the emotions that inform investor sentiment. These short-term differences in returns will eventually catch up and converge, and over the long sweep of time public REITs have historically delivered total returns that exceed those generated by private real estate—in addition to their other benefits of greater liquidity, better diversification, lower leverage, access to higher-growth specialty property types and alignment of interests through high insider ownership. The very large delta in performance in 2022 between public REIITs and private real estate vehicles has created a wide valuation gap making public REITs an attractive investment opportunity—particularly in comparison to the dated and thus still-high valuations being reported by private real estate vehicles. Indeed, when public REITs have traded at NAV discounts above 10%, they have subsequently outperformed private real estate by more than 1,500 bps per year over the next three years.¹

Recent M&A Activity in the Public REIT Market

Historically, the combination of such large discounts to private market value, along with enormous pools of capital being raised by private equity funds, has resulted in a surge in M&A activity. Under such conditions, private equity funds sometimes in conjunction with sovereign wealth funds seek to buy commercial real estate that are undervalued in the public market. Over the last 12-months or so, there have been 11 such transactions and the Fund benefited by owning five of those 11 companies. Also notably, the combined aggregate consideration for all 11 transactions was $80 billion and the observed premium to the last sale price averaged 27.6% – comparable to the average discount to private market value at which Global REITs are currently trading.

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 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 periods of market fixation on non-fundamental factors, we believe our portfolio is well positioned as investor attention turns back to fundamentals.

12/31/2022	QTD	1 YEAR	3 YEAR	5 YEAR	10 YEAR	Since Inception (8/1/2011)
I Shares	7.08%	-24.18%	-2.14%	2.48%	5.19%	6.25%
Morningstar Global Real Estate Category	7.38%	-25.52%	-4.85%	-0.21%	2.68%	3.45%
FTSE EPRA Nareit Developed Index	7.11%	-24.41%	-4.06%	0.69%	3.90%	4.59%

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 invest directly into an index. For performance information current to the most recent month-end, please call 888-814-8180.

Source: Morningstar Direct. Performance data quoted above is historical.

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.2 5.75% is the maximum sales charge on purchases of A Shares.

¹ Source: Green Street Advisors, The Volatility Opportunity, July 26, 2022.
² 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.

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.

16333198-UFD 01/26/2023