Residential REITs: Balance Sheets Built to Last

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With 10-year treasury yields now approaching 4%, August housing data showing the first signs of home prices moving lower after a ten-year bull market, and sequential asking rents in several major metro apartment markets turning down for the first time since the pandemic-driven reopening of the economy, we are shedding some light on the balance sheet characteristics of the Top 10 holdings (constituting roughly 70% of the total portfolio) within HAUS.

Coastal Apartment Companies

The coastal apartment companies within the Top 10 represent just over 32% of the portfolio and all four names have investment grade credit ratings of BBB+/Baa1 or higher, with Equity Residential (EQR) the highest at A-/A. EQR has just over 20% of its debt maturing through 2025 and 42% of its debt will not mature until 2030 or beyond for a weighted average year- to-maturity of debt in excess of 8.5 years. The weighted average interest rates across EQR’s debt structure was an attractive 3.33% at the end of 2Q22. AvalonBay Communities (AVB) and Essex Property Trust (ESS) both have debt maturity schedules which mirror that of EQR with 23-25% of debt maturing over the next three years and over 40% of the debt load extended out to 2030 and beyond. UDR Inc. (UDR) manages its balance sheet at a bit higher level than its peers with a goal of 5.3x-5.7x consolidated net-debt-to-EBITDA, however its debt maturity schedule is quite conservative with just under 12% of total debt maturing through 2025 and almost 53% of the debt stack extending out through 2030 and beyond. UDR also did an exceptional job of locking in low rates for its longer maturity debt, contributing to a “sector-best” weighted average interest rate of 2.9%. ESS had total liquidity of $1.4 billion at the close of 2Q22 and a net debt to adjusted EBITDA ratio of 5.8x. ESS has also executed extremely well with the timing of their financings, bringing the weighted average interest rate on their $6.0 billion debt load down to 3.2%.

Sunbelt Apartments

The large sunbelt apartment names in the Top 10 are Mid-America Apartments (MAA) and Camden Property Trust (CPT) at an aggregate weight of 14% in the portfolio. Both companies are similarly rated at A3/A- for CPT and BBB+/A- for MAA. The term structure of CPT’s balance sheet is well laddered with just over 30% of debt maturing through 2025 and almost 45% of all debt extending out beyond 2029. The weighted average interest rate on all debt equaled 3.7% at the end of 2Q22 at a 6.4 year weighted average maturity. CPT also has a sizeable $1.2 billion of availability on its unsecured revolving credit facility. Net debt-to-adjusted EBITDA was a comfortable 4.4x and CPT has a massive unencumbered asset pool of approximately $19 billion. MAA completed 2Q22 with equally impressive balance sheet statistics with approximately 28% of total debt maturing over the next three years and 30% of total debt extending out beyond 2029. Weighted average interest rate and maturity were 3.4% and 8.2 years, respectively, at the end of 2Q22 and net debt-to-adjusted EBITDA stood at 4.0x.

Manufactured Housing Sector

The manufactured housing sector is well represented within the Top 10 holdings of HAUS with Equity Lifestyle (ELS) and Sun Communities (SUI) aggregating a 11.4% weighting. ELS boasts a rock-solid balance sheet with only 7.5% of total debt maturing through 2025 and this is inclusive of current outstanding borrowings on their line of credit. It is also impressive and noteworthy that 70% of their total debt matures in 2030 or beyond, providing the company with a sector leading 10-year average years to maturity. The weighted average interest rate on all debt is 3.5% and just over 20% of debt is fully amortizing, further reducing interest rate risk over the next several years. Total debt to adjusted EBITDA as of 2Q22 was 5.3x. SUI is rated BBB/Baa3 and has been one of the more acquisitive companies within our constituent universe over the past two years. As a result, SUI does have a higher percentage of total debt rolling through 2025, at 39%. This number is inflated by the $1.8 billion of unsecured revolving credit facilities which matures near the end of 2025. The company also has a large portion of their debt extending out through 2030, at 46%, and thus providing an overall 7.9 years to maturity, which is in-line with peers. The average interest rate across the debt capital stack was 3.4% at the end of 2Q22 and net debt to EBITDA was 6.3x (inclusive of the most recent acquisitions).

Single Family Rental REITs

Rounding out the Top 10 holdings are two single-family rental REITs, American Homes 4Rent (AMH) and Invitation Homes (INVH) which constitute a combined 13% of the fund. AMH was recently upgraded to BBB by S&P Global and carries a Baa3 rating from Moody’s. At 2Q22, AMH held an impressive liquidity position of $1.8 billion, including $70 million of unrestricted cash, $1.25 billion of undrawn capacity on its revolving credit facility and $489 million of expected net proceeds from forward equity shares. Net debt and preferred shares-to-adjusted EBITDA stood at 6.2x. Total debt of the company stands at $4.5 billion, with 22% maturing through 2025, and almost 77% extending to 2028 or beyond. INVH is rated BBB-/Baa3 and had total debt of $7.8 billion at the end of 2Q22. While the company only has 7.3% of total debt maturing through 2025, they do have several large maturities in 2026, constituting 40% of total debt and just under 30% extending out past 2031. Given the 2026 maturities, INVH has a modestly shorter weighted average years to maturity than other residential REITs at 5.8 years and carries a weighted average interest rate on total debt of 3.6%. Net debt-to-adjusted EBITDA was 5.9x for the past quarter.

HAUS Top 10 – Debt Analysis Chart

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Outlook

In summary, we remain confident that residential REIT operating fundamentals will meet the lofty expectations set for the balance of 2022 and are well positioned to handle the “normalization” phase of the apartment cycle which will come in 2023. Apartment rent growth has historically matched inflation over the course of an economic cycle and given the economic underpinnings of the current environment, coupled with strong property level operating metrics across many markets, we believe that revenue growth and net operating income will perform well in coming quarters. The debt and liquidity characteristics described above give us comfort that these companies were aggressive and prudent to take advantage of the low interest rate environment of 2021/early 2022, thus providing the financial flexibility to manage through turbulent times as conditions potentially change for the worse.[1]

Definitions:

EBITDA stands for earnings before interest, taxes, depreciation, and amortization that is used as an indicator of the overall profitability of a business.

Consolidated Net-Debt-EBITDA: On any date of determination, the ratio of (a) Consolidated Net Debt on such date to (b) EBITDA for the one-year period ending on such date.

Net Debt To Adjusted EBITDA: Means at any date of determination, the ratio of Net Debt as of the last day of the most recently ended fiscal quarter to Adjusted EBITDA for the most recently ended four fiscal quarters.

Debt To Adjusted EBITDA: is a ratio measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

Net Debt And Preferred Shares-To-Adjusted EBITDA: Companies will also include the preferred shares outstanding in the calculation, thus making the numerator….”net debt and preferred shares” divided by “adjusted EBITDA” as the denominator. Essentially treating the preferred shares as another form of debt for this particular calculation.

Footnotes:

[1] Financial disclosures including 10-Q, supplemental earnings reports and company presentations

Disclosures:

Quality ratings reflect the credit quality of the underlying securities in the Fund’s portfolio and not that of the fund itself. Quality ratings are subject to change. The credit quality rating listed first is S&P. S&P assigns a rating of AAA as the highest to D as the lowest credit quality rating. The credit quality rating listed second, is from Moody’s. Moody’s assigns a rating of Aaa as the highest to C as the lowest credit quality rating.

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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