Perspective

Review of Q4 Market and Fund Performance

Global real estate stocks posted gains in the fourth quarter of 2023, despite multiple exogenous factors weighing on the capital markets (e.g., central banks slowing the pace of monetary policy tightening, the war in Ukraine, China’s muted recovery as it seeks to transition from COVID lock-downs to re-opening its economy, the looming risk of a shut-down of the U.S. government, and the growing tension in the Middle East following the October 7th attack on Israel). Notwithstanding this host of geopolitical and macroeconomic concerns, investors instead focused on the prospect of a transition from central bank tightening to easing along with an expectation that a “soft landing” is appearing increasingly likely. The FTSE EPRA Nareit Developed Index (the “Index”) had a total return of 15.59% for the quarter, while the Easterly Global Real Estate Fund (the “Fund”) generated a total return of 12.59%, underperforming the Index by 300 basis points.¹

The Funding Environment for Commercial Real Estate

Listed REITs enjoy access to all four quadrants of the capital markets (public and private, debt and equity), providing them with greater access to capital than is typically available to their private real estate counterparts. Moreover, public REITs typically operate with lower leverage than do most private real estate companies – thus further insulating them from any disruptions in the capital markets. Accordingly, any stress that emerges in the regional banking system will no doubt have greater impact on private real estate companies than on public real estate companies.

As to the implications or ramifications for JARIX’s portfolio, we have evaluated all companies owned with an eye toward identifying any that have near-term refinancing risk. We have determined that none of the companies owned in the portfolio have any potentially challenging debt maturities until 2025. As a further test we evaluated each company’s exposure to variable-rate debt and determined that none of the companies owned in the portfolio have an amount that exceeds our comfort level as well as prudent amounts that are consistent with their capital formation cycles and overall financial flexibility.

Finally, as it relates to the highly challenging outlook for office buildings, owners will experience significant headwinds over the next five plus years with the impact of fundamental changes in how companies manage their office space needs due to hybrid work models, existing leases expire and tenants downsize their space needs. The ensuing erosion of value will in some ways be similar to the secular decline in regional malls resulting from the “Amazon effect,” i.e., the disruptive impact of e-commerce. Just as it was evident the commercial real estate industry managed to thrive in the face of substantial value destruction in the regional mall sector (which at one time had a larger market capitalization than the office sector), it is certainly plausible that the coming difficulties in the office sector can be contained without spreading to other sectors or the funding markets for commercial real estate. (Note that in both of these situations, the portfolio management team foresaw the impending challenges and was proactive in reducing the Portfolio’s exposure in order to preserve the Fund’s capital.)

Attribution of the Fund’s Q4 2023 Performance ²

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

• The Fund’s positioning in the Residential sector was a contributor to relative returns vs. the benchmark, resulting from stock selection. The Fund also benefited from being underweight and stock selection in the Health Care sector and its overweight and stock selection in the Cell Towers, Life Science/Lab Space and Outdoor Advertising sectors.
• The Fund’s stock selection in the Data Center, Industrial, Lodging, Retail and Self-Storage sectors detracted from relative returns.

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

TAG Immobilien AG (TEG GY – contributed 44 basis points)

• TAG Immobilien is a residential landlord with a portfolio of 87,000 affordable apartments across Germany and a residential development business in Poland.
• TAG’s solid balance sheet post rights issuance (2022), asset sales success, strength in Poland and strong operational performance in German residential, combined with a material decline in long term interest rates, drove strong stock price appreciation during the quarter.

SBA Communications Corp. (SBAC – contributed 33 basis points)

• SBA Communications is a U.S. owner, operator, and leaser of wireless infrastructure including towers, rooftops and other structures that support antennas for wireless communications.
• The stock benefitted from solid 3Q earnings, further debt paydown, and the resumption of stock repurchases as well as a drop in interest rates, particularly given SBA Communications’ maturity debt repayment schedule in 2025.

Link Real Estate Investment Trust (823 HK – contributed 21 basis points)

• Link REIT is the largest Asian REIT with a portfolio predominantly comprised of grocery anchored shopping centers across Hong-Kong, China, Australia and Singapore.
• Investors continued negative sentiment related to Hong Kong/China landlords. Link REIT (recapitalized post rights issue, offering a high and sustainable dividend yield) performed very well in Q4 mainly due to the significant decline in long-term interest rates.

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

DigitalBridge Group, Inc. (DBRG – detracted 52 basis points)

• DigitalBridge, a manager of digital infrastructure assets, has simplified its business and nearly completed its rotation into a capital light manager of Digital Infrastructure, a multi-year project.
• DigitalBridge underperformed in Q4 as their asset raising for the quarter, while remaining on track with guidance, fell short expectations for a raise after stellar performance earlier in the year. Further, DigitalBridge did not have the same positive reaction to the change in interest rate expectations that REITs did.

Independence Realty Trust, Inc. (IRT – detracted 48 basis points)

• Independence Realty Trust, Inc. is a multi-family REIT with properties across non-gateway U.S. markets.
• The shares underperformed as supply concerns grew in the Sunbelt, recession fears rose, and rent growth continued to moderate off record levels. IRT has higher leverage than peers in a sharply rising rate environment which has also been a headwind.

Ellington Financial (EFC – detracted 42 basis points)

• Ellington Financial is a U.S. residential mortgage REIT that specializes primarily in providing residential loans to high-net-worth individuals, transitional real estate loans and reverse mortgages.
• Ellington Financial underperformed in Q4 as it closed on a stock merger with Arlington Financial and there was significant selling pressure from legacy Arlington holders when they received their new Ellington Financial shares.

2024: Outlook for the Year Ahead

Factors that could bode well for the global REIT market in 2024 and beyond include:

• Wall Street’s uncertainty about the direction of the economy has subsided.
• The timing and extent of central bank policy tightening has clearly peaked and has transitioned to the anticipation of easing.
• Inflation is on a trajectory towards the Fed’s 2% target, even before the economy has experienced the full (lagged) impact of the Fed’s tightening measures.
• The Fed has declared that it is close to or at the end of the tightening cycle, which means that it is also closer to its first rate cut, which it has forecasted to occur in the first half of 2024.
• Long-term interest rates (7-10 years which serve as the cost of capital benchmark for commercial real estate) peaked at 5% in October and have since declined to below 4% — thus serving as less of a headwind and even a bit of a tailwind for most property types.
• The equity market has clearly passed the point of peak pessimism. The inflection to improved sentiment is yet another bullish factor for stocks.
• Commercial real estate industry fundamentals (i.e., the balance between supply and demand) remain healthy for most property types and even strong for many, including data centers, cell towers, student housing, single-family rental homes and manufactured home communities — notably, all of which are Specialty property types that are favored by the Portfolio Management team.

Commercial Real Estate is “On Sale” in the Public Market

All the stress that weighed on the market has driven a sharp sell-off since 2022 which has put commercial real estate on sale in the public market, as evidenced by the large discounts to private market value. At the end of 2023, the average discount was 11.2% below private market value, meaningfully below the long-term historical average.3

Public vs. Private- Arbitrage Opportunity

The difference in valuation methodologies between public real estate and private real estate can create pricing dislocations and thus compelling arbitrage opportunities. Private real estate vehicles 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 investor sentiment. These short-term differences in returns may eventually converge, as 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, broader access to higher-growth specialty property types and alignment of interests through high insider ownership.⁴ The very large delta in performance since 2022 between public REITs and private real estate vehicles 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, historically 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.⁵

Recent M&A Activity in the Public REIT Market

Historically, the combination of large discounts to private market value, along with enormous pools of capital being raised by private equity funds, has resulted in a surge of M&A activity. Under such conditions, private equity funds and sovereign wealth funds seek to buy commercial real estate “on the cheap” in the public market. Over the last 18-months or so, there have been fourteen such transactions and the portfolio benefited by owning five of those 14 companies. Also notable, the combined aggregate consideration for all fourteen transactions was $96 billion and the observed premium to the last sale price averaged 30.8% – reflecting the buyers’ willingness to pay an additional premium in respect of public REITs owning portfolios of generally higher quality assets and in better locations.⁵

Conclusion

Despite the lingering macroeconomic uncertainty and geopolitical stress capturing headlines, 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 be highly focused on identifying and owning only the 50 highest-quality companies in our investable universe. We have high confidence 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: Bloomberg as of 12/31/2023.

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.

²Source: FactSet as of December 31, 2023.

Fund holdings, sector weightings, market capitalization and portfolio characteristics are subject to change at any time.

³Source: UBS, as adjusted by Ranger Global to account for regional nuances of countries as of December 31, 2023. Historical performance is not indicative of future performance.

⁴Past performance is not an indication of future performance. Diversification does not guarantee a profit nor protect against loss in any market.

⁵Source: Green Street Advisors, The Volatility Opportunity, July 26, 2022.

⁶Source: Bloomberg as of 12/31/2023.

Fund Performance

12/31/2023	QTD	YTD	1-YEAR	3-YEAR	5-YEAR	10-YEAR	SINCE INCEPTION 8/1/2011
I Shares	12.59%	7.22%	7.22%	-0.17%	5.78%	5.59%	6.33%
Morningstar Global Real Estate Category	15.09%	10.24%	10.24%	0.68%	3.58%	3.68%	3.94%
FTSE EPRA Nareit Developed Index	15.59%	10.85%	10.85%	2.16%	3.79%	4.52%	5.08%

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 December 31, 2024 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 1.17%, 1.42%, 2.17%, and 1.17%, respectively; total annual operating expenses after the expense reduction/reimbursement are 1.04%, 1.42%, 2.17% and 0.94% respectively. 5.75% is the maximum sales charge on purchases of A Shares.

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%, 1.69%, 2.37% 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 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 Funds.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. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities LLC. Easterly Investment Partners, LLC and EAB Risk Solutions, LLC are affiliates of Easterly Securities LLC, member FINRA/SIPC. Orange Investment Advisors, LLC and Ranger Global Advisers are not affiliated with Easterly Securities LLC. Certain associates of Easterly Securities 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  serves as the Adviser to the Easterly Fund family of mutual funds and related portfolios. Easterly Funds, LLC is  registered as investment advisers with the SEC. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities LLC. Although Easterly Funds, LLC is a registered investment adviser, 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.

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