Traded Versus Non-Traded Real Estate: A Healthy Dose of Industrial Real Estate

The U.S. industrial real estate market is expected to see rising vacancy rates at the national level with Costar Group projecting 476 million square feet of deliveries over the next 12 months and approximately 300 million square feet of net absorption, implying that vacancy levels will rise modestly from current levels, but remain well below historic levels. The torrid pace of rent growth experienced over the past several years should also moderate as retailers and wholesalers are pausing further inventory accumulation out of caution over the economic outlook. Pundits believe the pause in fundamentals will be relatively short-lived as construction starts on new industrial projects have also been plummeting since last fall, with developers increasingly concerned that higher interest rates are causing values of newly delivered projects to dip below replacement costs. The pullback in starts signals that by spring 2024, the number of new projects completing construction each quarter should begin to decline. This could set the stage for vacancies to tighten again by late 2024 and for rent growth to potentially reaccelerate.[i]

With the recent launch of Private Real Estate Strategy via Liquid REITs ETF (PRVT), investors will be exposed to a sizeable allocation to industrial real estate which has been a cornerstone investment for several non-traded REITs. As of 1Q23, the Blackstone Real Estate Investment Trust (BREIT), a non-traded REIT, held a 23% weight to industrial real estate equity having amassed an owned portfolio of 3,255 properties aggregating 452 million square feet with a gross asset value of $27.5 billion. BREIT began buying industrial property at its inception in 2017 and was a highly aggressive purchaser in 2019 and 2021, having taken a pause in 2020 following the onset of the pandemic. Industrial real estate is also a large segment of their unconsolidated entities in which they own varying interests in more than 12 ventures for a book value of $4.0 billion.[ii] BREIT also disclosed that they anticipate continued secular demand from e-commerce and the “onshoring” of supply chains. Vacancy levels in BREITs industrial portfolio dropped to 2.5% in 1Q23 compared to 3.4% in 1Q22 and the portfolio benefited from rent increases of 37%.

PRVT was conceived with a 25% weight to the industrial REIT sector, with Prologis Inc. (PLD) selected as the centerpiece holding at a weight of approximately 8%. The industrial REIT category has been a stellar performer within the REIT space for the last ten years having outperformed the broader REIT benchmark as measured by the FTSE-NAREIT Equity REITs Index, on a compound annual total return basis for the 1YR, 3YR, 5YR and 10YR periods.[iii]

PLD reported strong 1Q23 results which included a modest increase to already positive expectations for 2023. Market rents across the U.S. continue to move higher and construction deliveries are expected to potentially peak over the coming quarter. Portfolio occupancy was 98% at the end of the period, flat versus the end of 2023. As a sign of substantial embedded cash flow growth, the company reported that lease mark-to-market expanded to 68% in the quarter, implying that even if rent growth flattens out from here, there is still visible growth for income and the dividend as in-place rents get marked up to market levels as leases expire and roll-up. The company also reported record same-store operating metrics in 1Q23 as NOI increased 11.4% on a cash basis. PLD echoed other sources in commenting that the national vacancy rate for industrial may rise modestly in the second half of 2023 as new supply gets absorbed but vacancy levels could come back down in 2024.[iv]

The PLD platform differentiates itself in several ways, one being that it is a global business with 86% of net operating income (NOI) coming from U.S. markets with the balance generated in Europe and Asia. The sheer size of the platform also distinguishes PLD from the pack as the company boasts over $200 billion in assets under management (AUM) across 1.2 billion square feet of property on four continents. PLD has an equity market capitalization of $118 billion and a credit rating of A3 and A by the rating agencies Moody’s and Standard and Poor’s, respectively. At the end of 1Q23, the company reported a debt/gross real estate value ratio of 29.6% and floating rate debt as a percentage of total debt was a low 7.6%. Also, aside from the owned real estate business which generates over $5.0 billion of recurring annual NOI, approximately 10% of funds from operation (FFO) comes from the Strategic Capital business which manages private real estate funds on behalf of institutional investors. Finally, the company has an extensive industrial development capability allowing for substantial value creation opportunities across markets.[v]

The distinguishing characteristics exemplified by PLD have resulted in solid long-term financial results as measured by several important factors including FFO growth, dividend growth and retained cash flow. The company has outperformed REIT indices such as the FTSE-NAREIT Equity REIT Index over a three-year and five-year basis for per share FFO compound annual growth (CAGR) and per share dividend CAGR while generating $1.0 billion of free cash flow after dividends in 2022.[vi]

The success of PLD’s size, scale and efficiency not only translates into earnings and dividend growth, but also a low-cost operating structure which accrues to shareholders as well. PLD’s adjusted general and administrative expense (G&A) as a percentage of its gross book value assets under management has decreased materially since 2011 having dropped from 0.85% to 0.33% for 1Q23. The company’s G&A-to-AUM also looks very attractive.[vii]

In closing, we believe PLD represents an example of a large cap, best-in-class, listed-REIT that is dedicated to a single property sector and could be considered as a core holding in the buildout of a targeted and thematic investment allocation process to approximate direct real estate.

Holdings Subject to Change. For a complete list of Fund holdings, please visit:

https://armadaetfs.com/prvt

Free Cash Flow – free cash flow is the cash a company or entity generates after taking into consideration cash outflows that support its operations and maintain its assets.

PRVT will invest in REITs and mortgage-backed securities that, in the determination of Armada ETF Advisors LLC, the Fund’s subadviser, have similar qualitative characteristics to the aggregate real estate portfolio holdings of a select group of public, non-traded REITs. Non-traded REITs are real estate funds whose shares do not trade on stock exchanges. Rather, they generally can be sold only to accredited and institutional investors.

PRVT & BREIT COMPARISON CHART

07122023 image01

LINKS:

BREIT Performance        www.breit.com/performance/

BREIT Prospectus            www.breit.com/stockholders/

PRVT Performance         www.armadaetfs.com/prvt

PRVT Prospectus             www.armadaetfs.com/wp-content/uploads/2023/06/prvt-pro_060223.pdf

Footnotes:

[i] Costar Group: United States Industrial Overview – June 16,2023

[ii] BREIT: 1Q223 10-Q

[iii] NAREIT: Return Data as of June 7, 2023

[iv] Prologis Inc. – 1Q23 Financial results

[v] Prologis Inc.: NAREIT Presentation – June 5, 2023

[vi] Prologis Inc.: NAREIT Presentation – June 5, 2023

[vii] Prologis Inc: NAREIT Presentation – June 5 2023

PRVT Prospectus             www.armadaetfs.com/wp-content/uploads/2023/06/prvt-pro_060223.pdf

Footnotes:

[i] Costar Group: United States Industrial Overview – June 16,2023

[ii] BREIT: 1Q223 10-Q

[iii] NAREIT: Return Data as of June 7, 2023

[iv] Prologis Inc. – 1Q23 Financial results

[v] Prologis Inc.: NAREIT Presentation – June 5, 2023

[vi] Prologis Inc.: NAREIT Presentation – June 5, 2023

[vii] Prologis Inc: NAREIT Presentation – June 5 2023

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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.

Distributed by Foreside Fund Services, LLC.
Launch & Structure Partner: Tidal ETF Services.

Foreside, Tidal, and Armada are not affiliated.