Review of Q2 2022 Market and Fund Performance
Global real estate stocks posted losses in the second 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 -17.23% for the quarter, while the Easterly Global Real Estate Fund (the “Fund”) generated a total net return of -13.64%, outperforming the Index by 359 basis points.
- During the quarter, despite continued strong industry fundamentals, the global REIT market was weighed down by exogenous factors, including:
- 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
It is instructive to consider that a historical review of listed real estate returns during periods of rising 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 Q2 2022 Performance
Key contributors and detractors to the Fund’s relative performance over the second quarter are outlined below:
- The Fund’s stock selection in the Diversified sector was a contributor to relative returns vs. the benchmark, primarily as a result of our overweight positions to four Asia-Pacific companies. The Fund also benefited from its stock selection in the Cold Storage sector, a Specialty property type, with our overweight to AmeriCold, a U.S.-based owner/operator of a diversified portfolio of cold storage distribution facilities.
- The Fund’s stock selection in the Residential sector and the Specialty sector 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:
Americold Realty Trust, Inc. (COLD) (contributed 100 basis points)
- Americold, an owner/operator of cold storage facilities, began to recover from pandemic-induced disruptions in inventory levels and labor availability.
- Demand for food is recession-resistant; an equity market increasingly concerned about economic contraction is also contributing to share price recovery.
CatchMark Timber Trust, Inc. (CTT) (contributed 74 basis points)
- During the quarter, CatchMark received and accepted an offer from PotlachDeltic to purchase the company at a 55% premium to its pre-deal price.
Coima RES S.p.A. (CRES IM) (contributed 36 basis points)
- During the quarter, Coima, an office landlord in Italy, received a tender offer at a 22% premium to the pre-offer share price from its largest shareholder, Qatar Investment Authority.
Notable individual detractors from the portfolio’s performance in the quarter include:
- TAG Immobilien AG (TEG GY) (detracted 62 basis points)
- TAG, a German residential landlord, experienced headwinds in the quarter as German residential landlords tend to be extra-sensitive to higher interest rates due to regulatory caps on rental growth, and during the quarter the 10-year German Bund yield increased from 50 basis points to 130 basis points.
- TAG acquired a Polish residential developer in December 2021, financed via a bridge loan, and as a consequence had a short-term refinancing need which weighed on the performance of the shares as credit markets tightened across Europe.
DigitalBridge Group, Inc. (DBRG) (detracted 53 basis points)
- Digital Bridge, a manager of digital infrastructure assets, announced its transition from a REIT to a C-corporation which caused REIT-dedicated investors to sell the shares.
- Higher interest rates impacted valuations of technology-oriented companies.
CellNex Telecom, S.A. (CLNX SM ) (detracted 18 basis points):
- CellNex, which owns wireless cell towers across Europe, experienced sector headwinds as towner ownership is a high-duration business model and European sovereign yields rose substantially during the quarter, negatively impacting the company’s share price.
- Prospective acquisition-related overhang (CellNex was a competitive bidder for Deutsche Telecom’s tower portfolio) led the equity market and bond market to price in the risk of the company overpaying for the acquisition, pressuring the shares. (CellNex ultimately cancelled their bid).
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.
|Morningstar Global Real Estate Category||-16.82%||-20.93%||-15.25%||2.34%||4.71%||4.18%|
|FTSE EPRA Nareit Developed Index||-17.23%||-20.35%||-12.73%||2.89%||5.59%||5.31%|
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.