The Residential Ship Remains Steady

Hong Kong harbour

 

3Q Update

 

With the busy Fall conference season now underway, it is typical for publicly-traded REITs to provide mid-quarter operating updates (in the form of company presentations, press releases and 8-K filings) before they go on the road. We have had many of our constituent companies in the residential REIT sub-sectors provide updates over the past week and we believe the feedback bodes well for 3Q results and implies a solid close to an impressive 2022. 

Equity Residential (EQR) Update

 

Equity Residential (EQR, 9.45%) provided a glimpse into July and August operating results reporting that their blended rental rate growth was 12.8% and 11.8%, respectively, compared to 14.3% in June. Occupancy for July and August ticked down slightly to 96.5% and 96.6%, respectively, from 96.7% in June. The company commented that results are on track to meet or exceed expectations put forth at the end of the second quarter and also reiterated that rent growth likely peaked in early August and will moderate through the balance of the year, which is normally the case following the busy Spring/Summer leasing season and as residents and their families settle back into school/work schedules for the balance of the calendar year. The still vibrant leasing activity and rent growth exhibited by EQR in recent months is an example of the continued strength in their markets.[1]

 

Essex Property Trust (ESS) 3Q Update

 

Essex Property Trust (ESS, 7.38%) provided an update that was not dissimilar to the one articulated by EQR. Their July/August same property revenue growth was a strong 12.4% and in-line with the upwardly revised company guidance that was put out at the end of Q2. Their July/August blended lease rates increased 10.3% (year-over-year), slightly above expectation. The company notes that the moderation in rent growth is primarily a function of more difficult comparisons from the same period in 2021 and not from a material drop-off in current market conditions. Finally, cash delinquencies as a percentage of rent were 0.6% for July/August, which is a solid improvement versus recent periods.[2]

 

UDR Inc. (UDR) 3Q Update

 

UDR Inc. (UDR, 5.71%) highlights the persistently strong operating results in their blended coastal/sunbelt portfolio stating that market rents continued to increase sequentially in August. They anticipate occupancy for 3Q and the balance of the year will remain exceptionally high, in the range of 96.7-97%. They also expect blended lease rate growth of 13% for 3Q compared to 15.7% in July and 13.5% in August, a moderation in growth driven by seasonality, but quite strong none-the-less. UDR expects operating expense pressure to persist through the balance of the year and trend above 5% in 2H22 as inflationary pressures from utilities, repairs and maintenance and property taxes remain elevated. The company’s continued optimism can be partially attributed to demand drivers including traffic (physical and virtual), rising income levels, shrinking household sizes and rent-to-income for new residents that are comfortably in the low-20% range.[3]

 

Mid-America Apartments (MMA) & Camden Property Trust (CPT) Q3 Updates

 

Sunbelt market bellwethers, Mid-America Apartments (MAA, 8.87%) and Camden Property Trust (CPT, 4.78%) continued to turn out strong operating results in the July/August period, but we would note that they have kept full year guidance numbers consistent with what was reported with 2Q results. MAA disclosed blended lease growth in July and August of 16.5% and 14.1%, respectively, which compares to 17.1% in 1H22. As we touched on above, the deceleration in growth is primarily driven by the “base-line effect” of 2021 comparisons much more than any deceleration in demand or deterioration in fundamentals. Full year net operating income ((NOI)) guidance continues at a 15% mid-point and 2022 Funds From Operations guidance implies 18% growth over 2021.[4] CPT July/August occupancy was maintained at 96.7%, down only 20 basis points from peak occupancy of 96.9% reported in 2Q and blended lease growth for July and August was a healthy 12-13%.[5]

 

Invitation Homes (INVH) & American Homes 4Rent (AMH) Q3 Updates

 

In the single-family rental category, both Invitation Homes (INVH, 5.00%) and American Homes 4Rent (AMH, 7.82%) also provided operating updates for July/August. In both instances, blended rent growth has maintained the strong pace which has been exhibited since the start of 2022. INVH rent growth was in line with 2Q results at a remarkable 11.8%[6] while AMH increased lease rate growth modestly to 9.6% in July/August up from 9.3% in 2Q.[7] A consistent theme in the single-family rental sub-sector has been consistently low resident turnover which has the effect of moderating blended lease growth relative to traditional apartments as rent growth on renewed leases is typically more modest than rent growth on new leases. Low resident turnover (high retention) is however more positive for operating expenses as “turn costs” can be expensive for the landlord and often entail downtime to refresh the unit for new occupants, as well as advertising costs and other expenditures. Occupancy levels for both AMH and INVH were down slightly in July/August relative to 2Q, but both companies report that occupancy thus far in 3Q is above 97%, so extremely strong going into the quiet leasing season which typically defines the 4Q period. 

 

Residential REITs Are Well Positioned

 

In summary, the strength of the late summer residential leasing season bodes well for our constituent companies as they transition into the quieter part of the leasing calendar. The fact that rents and occupancy levels are strong going into 4Q is especially comforting given the softening economic environment now starting to play out across the U.S. as stubborn inflationary pressures and rising interest rates zap consumer confidence and cause businesses to reassess their growth plans going into 2023. We believe the residential REITs, many of which should provide initial 2023 earnings guidance in late October and early November, are poised to continue demonstrating consistent and predictable growth in operating cash flow and dividends for 2023 and beyond.  

 

Footnotes:

  1. Equity Residential: 3Q22 Operating Update

  2. Essex Property Trust: September 2022 Investor Presentation

  3. UDR Inc.: September 2022 Investor Presentation

  4. Mid-America Apartments: September 2022 Investor Presentation

  5. Camden Property Trust: September 2022 Investor Presentation

  6. Invitation Homes: September 2022 Investor Presentation

  7. American Homes 4Rent: September 2022 Investor Presentation

Definitions:

Basis Points: The conventional measure for interest rates and other percentages in finance. One basis point equals 1/100th of 1% (0.01%)

Current and future holdings are subject to change. Holdings are as of 9/26/2022

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (800) 693- 8288 or visit our website at www.armadaetfs.com. Read the prospectus or summary prospectus carefully before investing.

Investments involve risk. Principal loss is possible

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Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (800) 693-8288 or visit our website at www.armadaetfs.com. Read the prospectus or summary prospectus carefully before investing.

Investments involve risk. Principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Brokerage commissions may apply and would reduce returns. The fund is new and has limited operating history to judge.

Fund Risks: The funds are classified as non-diversified investment companies. The Funds may invest a greater portion of their assets in the securities of a single issuer or a smaller number of issuers than if they were diversified funds. To the extent the Funds invest in other funds, a shareholder will bear two layers of asset-based expenses, which could reduce returns when compared to a direct investment the underlying funds.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (800) 693-8288.

To view the ETF’s holdings and standardized performance, click here. References to other securities is not an offer to buy or sell. Dividends are not guaranteed, and the dividend yield may fluctuate. Through their investments in REITs, the Funds are subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems, and natural disasters. The Funds may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses. The Funds invest in residential mortgage backed securities (RMBS), which are subject to the risks generally associated with fixed-income securities and mortgage-backed securities. Delinquencies and defaults by borrowers in payments on the underlying mortgages, and the related losses, are affected by general economic conditions, the borrower’s equity in the mortgaged property, and the borrower’s financial circumstances. The Funds may invest in debt securities which are subject to the risks of an issuer’s inability to meet its obligations under the security; failure of an issuer or borrower to pay principal and interest when due; and interest rate changes affect the prices of fixed income securities. In addition, an increase in prevailing interest rates typically causes the value of existing fixed income securities to fall and often has a greater impact on longer duration and/or higher quality fixed income securities. Unlike typical exchange-traded funds, there are no indexes that the Funds attempt to track or replicate. Thus, the ability of the Funds to achieve their objectives will depend on the effectiveness of the portfolio manager. In general, ETFs can be tax efficient. ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold. Investment Objective: Residential REIT ETF (HAUS) seeks total return. Investment Objective: Intelligent Real Estate ETF (REAI) seeks total return.

Glossary Terms

Basis Point (BPS): A basis point is a common unit of measure for interest rates and other percentages in finance. Basis points are typically expressed with the abbreviations bp, bps, or bips. One basis point is equal to 1/100th of 1%, or 0.01%.

Beta: Beta is a measure of a stock’s volatility in relation to the overall market. 

Book Value: Book value is equal to the cost of carrying an asset on a company’s balance sheet, and firms calculate it netting the asset against its accumulated depreciation.

Cap Rates: The capitalization rate (also known as cap rate) is used in commercial real estate to indicate the expected rate of return on an investment property.

Dow Jones: A stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.

Dow Jones US Real Estate Index: This index is designed to track the performance of real estate investment trusts (REITs) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.

Earnings Per Share (EPS): Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.

Funds From Operation (FFO): The most commonly accepted and reported measure of REIT operating performance. Equal to a REIT’s net income, excluding gains or losses from sales of property and adding back real estate depreciation.

Gated: The practice of temporarily blocking withdrawals from an investment fund

Loan-to-Value: The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage.

Margin Call: A broker’s demand that an investor deposit more cash or securities into a margin account to cover potential losses. 

NARIET: National Association of Real Estate Investment Trusts

Nasdaq 100: The 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. Includes sectors such as health care, retail, industrial, technology, biotechnology and others. Does not include financial sectors.

Net Asset Value (NAV): The “market value” of all a company’s assets, including but not limited to its properties, after subtracting the “market value” of all its liabilities and obligations.

NOI: Net operating income (NOI) is a calculation used to measure the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses.

Real Estate Select Sector SPDR ETF Index: The Real Estate Index contains companies from Real Estate Management & Development and REITs, excluding Mortgage REITs. Components include American Tower, Crown Castle, ProLogis and Equinix.

REIT: A REIT (Real Estate Investment Trust) is a company that owns, operates or finances income-producing real estate.

S&P 500: A market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.

S&P Mid Cap 400: The S&P Mid Cap 400 is a benchmark index comprised of 400 companies that broadly represent companies with midrange market capitalization between $3.6 billion and $13.1 billion.

SEC 30-Day Yield:  The yield is calculated with a standardized formula and represents net investment income earned by a fund over a 30-day period, expressed as an annual percentage rate based on the fund’s share price.

Smart beta: The goal of smart beta is to obtain alpha, lower risk, or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing.

The Dow Jones U.S. Select REIT Index: Tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

S&P 500 TR: is the Standard & Poor’s index calculated on a total return basis. Widely regarded as the benchmark gauge of the U.S. equities market, this index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.

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