Our Next Event: Alts Expo - Oct 4th
Armada was a presenting partner at Multifamily Investor Expo 2023, a one-day virtual event hosted by WealthChannel. In this webinar, David Auerbach presents Armada’s Residential REIT ETF (HAUS).
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- Background on Armada and its publicly-traded residential REIT ETF.
- Overview of REIT investing and the potential benefits of the REIT structure.
- Specific areas of focus for the HAUS ETF.
- How increases in raw material costs are impacting REIT investing.
- How work-from-home is impacting residential real estate prices.
- Presentation of the HAUS ETF investment process.
- Live Q&A with webinar attendees.
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Jimmy: Next up is Armada ETF Advisors.
David: Thank you so much for having me here today. So, I’m bringing a different approach, since we are focused on multifamily investors here today. We are bringing a residential REIT ETF product to attendees today. And so, we’re a publicly-traded company, Armada ETFs. We run the home… well, it used to be the Home Appreciation U.S. ETF. If you see that listed, it’s now known as the Residential REIT Income ETF, and we’ll get all into that. But our ticker is HAUS, H-A-U-S.
Like I said, we are publicly-traded. And because of that, my fun compliance department always makes us show this little disclaimer screen. Obviously, you know, talking about investment risks and all that fun stuff. But we’re here to talk about REITs, Real Estate Investment Trusts. A Real Estate Investment Trust is simply a tax structure. It’s a tax vehicle. And as a result, you know, there are many different types of REITs, office buildings, shopping centers, malls, hotels, industrial, self-storage, student housing, cell towers, data centers. The list goes on and on. But we’re focused on the world of residential REITs, and when I talk about residential REITs, in our universe of the ETF, we’re focused on really four to five sub-sectors, those being coastal and Sunbelt apartments, single-family rentals, manufactured housing, and senior housing REITs.
The number one appeal of the REIT is this top bullet point here, that 90% of that taxable income that the REIT regenerates is passed through to shareholders in the form of dividends. These REITs own real, tangible assets, buildings that you can own, look, see, touch, feel, smell. I usually start out these conversations where I would say to, you know, a prospective advisor or somebody, you know, “Have you gone to a Starbucks or a Dunkin Donut recently for a cup of coffee?” “Have you gone to a CVS drugstore or a Walgreens drugstore recently to pick up a prescription?” And I’ll give you a better one. “Have you gone to the grocery store recently to pick up groceries?”
In each of those examples, you’ve interacted with a REIT-owned property. And this is a way that you can earn income off of that property. And because we’re talking about publicly-traded REITs, they’re liquid. You can trade these in the public market, that we have 25 names in our fund, and we’ll talk about them as we go through it. But you can own these 25 names with properties all across the country. We’re talking hundreds of thousands of units, and in one ETF wrapper.
And we’ve been talking about multifamily here today, you know, some really interesting conversations. And the one takeaway that you’ve heard in several of these conversations is that the U.S. housing market is in a housing supply…we’re lacking in that supply. Fannie Mae, Freddie Mac quoting anywhere from 3.8 million units and up. We have American Homes 4 Rent. They’re one of the largest single-family rental REITs, saying that, “You know, we need, you know, three to five million units.”
And because of where we’re at with this interest rate cycle right now, as we know, interest rates are hovering near 5%, basically going from zero to 5% in a year. Construction costs are up, both the cost of timber, as well as all the interior costs, drywall, marble, all the other things that go into the cost of a house, those costs have gone up dramatically over the past year or two.
As a result, the home affordability has gone out the window for many, many prospective tenants. You know, we don’t have starter homes anymore. The average home that’s being developed is several hundred thousand dollars. But yet the salaries, and, you know, what families are bringing home aren’t anywhere near what some of these properties cost. And as we look, according to RealPage, you know, we see that the amount of demand versus the amount of supply that’s being generated, it’s still just a massive disconnect here. There’s just so much demand for properties, especially affordable properties. And this is going to be continuing into the near future.
As we look through, you know, we note that the new homes deliver… you know, in a reasonable square footage, call it 1400 square foot, that number continues to decline. And to go hand in hand with that… By the way, this comes from the Census Bureau and Freddie Mac. But in addition, you know, one big takeaway from COVID is that work from home is here to stay. I’m a Wall Street guy. Back in my days, back in the early, you know, my 25 years ago, Wall Street firms used to have what they call disaster recovery offices.
My boss used to say, “Just because it snows in Dallas, Texas doesn’t mean that they’re closing the New York Stock Exchange. Just because your office building has a fire and you go down, doesn’t mean that they’re gonna close the exchange for you.” So, many companies would set up secondary trading desks and locations to have a just-in-case their, you know, users have to set up shop and keep working.
But with COVID, what happened? Well, now we’re talking doing this on a Zoom technology today. Or Teams, or Slack, or Google Meet, or any of these different platforms that are out there. And as a result, because work from home is here to stay, the disaster recovery location has gone away. But in addition, the physical footprint that is necessary is also declining.
You know, so, talk about New York City, San Francisco, some of these big markets, where the typical in-person work week might be Tuesday, Wednesday, Thursday. Monday is dead. Friday, most people are home, working from home. And so most people are commuting to the city Tuesday, Wednesday, Thursday. Now, the office REITs will tell you, you know, some of these properties are 80%, 90%, 100% leased. But the key is, what’s the physical in-person presence occupancy? And the number is much, much, much lower than that.
So, then you start looking at some of the funds that are out there. There’s passive index funds, market cap-weighted funds. And, you know, if you look at a lot of these major funds that are out there, and chances are if you’re a real estate investor, and if you own physical real estate in your portfolio, I call it that 5% to 15% left side your portfolio, chances are, you’re gonna be exposed to sectors that you may not wanna be invested in right now.
If you use COVID as the example, what were the sectors that you did not wanna be invested in real estate during COVID? Office buildings, hotels, mall properties, these were the companies and the sectors that really took it on the chin, while some of the sectors like industrial, residential, single-family rentals, data centers, towers, these were the sectors that were on fire during the COVID era.
And so as a result, when some of these passive market cap-weighted index funds were doing their rebalance, you know, you were still being exposed to sectors that you didn’t wanna be invested in, like malls, again, office properties, hotels, and also some of these other companies, like office leasing companies like CBRE, Cushman & Wakefield, Jones Lang LaSalle, the list goes on and on.
And because of what’s happening in some of these market cap-weighted funds, you can’t really take advantage of some of these names that are trading at a deep discount. There’s valuation discrepancies that are out there. You know, obviously, it says here, “Works best in trending markets rather than mean-reverting markets.”
And so, we took a very different approach as we were building out this fund, and it starts with, obviously, our approach, but also the who that we have brought on to this. Before I go into this, I wanna emphasize, there are a couple of thousands different ETFs that are on the market. You have a variety of products to choose from.
I will go on record and state that 99.9% of the ETFs that are run on the market are run by a computer, a model. A boss says to employee, “Hey, go run this fund.” None of them are actually experienced in the field of the ETF that they’re managing, high-level. “I have a solar ETF.” “That’s great. Did you work in the solar business before you guys launched this solar ETF?” “No, I’m a Wall Street guy.” “Well, you know, you have a REIT ETF. Do you have REIT experience?” “Yes.” And I’m gonna go into that with you.
But let’s start with our process. What we do is we define the universe, and as I mentioned, there’s 25 names, we’ll go into it. And we basically do a top-down and bottom-up approach. Top down, we look at all the macro trends that are out there, Case-Shiller, Zillow, Redfin, RealPage, U-Haul, all the economic data that comes out basically on a daily basis that tells us what’s happening across the country with migration trends and the housing markets.
From the bottom up, then we do a company-by-company review. Right now we’re in the middle of earnings season for the REIT sector. It’s the longest earnings season in history, it seems. But we have, right now, because of how these companies operate with, remember, I used that word transparency, they regularly disclose quarterly earnings, they regularly host earnings conference calls with investors and the Wall Street community and the analyst community. In addition, they publish monthly operating updates that tell you, here’s how things are going. Here’s what’s going on.
And so we’re able to review all this top-down, bottom-up data, and then, kind of, what we call generate an output. And at that point, because we run an active fund, I don’t have to wait for a quarterly rebalance. If somebody comes out and we’re seeing some strength coming back to New York apartment markets, and Northern California and some of these other California markets that were really taking it on the chin during COVID and kind of coming out of COVID, and now have come roaring back, well, we can adjust the portfolio on the fly and adjust our weightings to go towards those markets.
We built this fund on two principles. Where are people moving across the country? And because we’ve heard consistently today how hard it is to buy a house or what’s happening in a lot of these markets in the housing markets, which of these REIT segments benefit from that relocation across the country? And because of that, we can then determine the weightings, and generate an output.
But then it also starts with the team. I’m just one of a handful of people on our team. I’m showing you, this is the physical day-to-day team of the operations. Phil, my CEO, ran exchange-traded funds on the New York Stock Exchange for many years. He’s an ETF issuer himself. Al is my portfolio manager. Al manages billions of dollars at one of the original REIT investment firms on Wall Street, called European Investors, EII Capital, and he is running the day-to-day fund of our portfolio. I am a 25-year REIT industry veteran, focused on institutional trading, research, corporate access. I’m connected with all of these REIT management teams, all the investors, all the analysts. I’m a REIT networker extraordinaire. I know this industry backwards, forwards, inside, and out.
But remember I told you about, it’s the experience in the industry, and it’s focused on this, what I call this advisory board. The Advisory Board is really the sweet sauce of our ETF, because, combined, between myself, Al, and the three people that you see on the screen here, we have 150 years of experience in the REIT industry.
It starts with Chris Volk, our president, CEO, representative of the board, and their deal just closed in the past couple of weeks. Chris was the former CEO of STORE Capital, a net lease REIT based out of Scottsdale, Arizona. And why, I’ve known Chris for many, many years. But why I specifically targeted Chris was that during his tenure, he sold 10% of STORE Capital to Berkshire Hathaway, Warren Buffett. And so, you know, it’s not many people I could say that I know that have Warren Buffett’s number on speed dial, but because Chris understands Berkshire, and because Berkshire understands housing, Chris gets the REIT industry, Chris understands what Berkshire is looking for, and, again, ideally, I’d love to have Warren as an investor in my ETF, it’s never gonna happen, but that being said, Chris is a very well-known, respected entity in the REIT industry. And he is, like, just a brilliant mind. And we’re doing a lot of work with Chris, looking at some of the private REIT vehicles that have been out there. You may have seen us quoted talking about Blackstone, Starwood, and some of the private REITs that are out there that recently gated redemptions.
John Guinee was a very well-respected research analyst at Stifel. He covered REITs for institutional coverage at Stifel for many, many, many years. And so, we can go to Chris, to John, and then Richard. Richard was the founder of European Investors, one of the original what they called REIT Mafia firms. Cohen & Steers, European Investors, Morgan Stanley, these companies got the REIT industry off the ground in the ’80s. So, there’s 180 publicly-traded REITs, equity REITs that are out there today, and Richard in his cohorts in the industry were the guys that were seeding these ETFs to get them off the ground.
But I use this approach, or why I leave this name on the screen here for you, is that, picture a square in your head. You’ve got Chris in a corner, John in a corner, Richard in a corner, myself in a corner, and we could take, let’s say, an earnings report. I’m just gonna take it outside of REITs. We’ll just use a regular… We’ll use Pulte Homes, hypothetically. Let’s say Pulte Homes publishes their earnings press release. “Chris, you are a REIT CEO. You know Pulte. You know the team there. Where do they hide the bad news? What’s the good news? How would you, if you were writing the earnings press release, or going through the Q&A, how would you put a pretty picture on what’s really happening out there?”
“John, you have the model on Pulte because you covered them for 30-plus years. So you know where all the numbers are, how they hide the bad news and highlight the good news. What’s the takeaway here?” “Richard, you and Al invested billions of dollars into these companies. What would you be looking for as a portfolio manager on their earnings press release? Where’s the good news? Where’s the bad news?” “David, what is the street saying? What are you hearing from the companies, the analysts, the investors?”
And what happens is that, you know, we can take, from all of our experience in the industry, any piece of information that comes out, and the ideal at the end of the day is, it doesn’t matter if it’s the smartest real estate investor in the room, or what I call grandma and grandpa who live down in the villages in Florida, this team that we’ve assembled can generate an output that looks out for all investors, on all aspects of residential REITs, and really, again, where that puck is going. Because, again, we’re focused on rental income. Where’s the most rental income coming in, and how can we maximize the dividend in investors’ pockets, capturing all of that income? So, I kind of went through that story with our advisory board edge, as we go through that process.
Then we start talking about glide paths. I mean, I’m sure people have heard about target allocation. Remember, I’m talking about that 5% to 15% on the left side of the portfolio. When you’re talking about stock markets, you hear about Jim Cramer, Cathie Wood, Bitcoin, all of these crazy vehicles that are out there. Man, I only care about REITs. REITs are boring. You know, boring wins the race. Slow and steady wins the race. The REITs are the tortoise in the tortoise and the hare of your portfolio. That’s why you wanna have REIT exposure now. If you’re way out from retirement, load up the truck on, you know, that REIT exposure, that REIT allocation because it’s that dividend income that’s going to appreciate over the next 10, 20, 30, 40, 50-plus years, where it may seem like it’s small bucks today, but over time, as dividends compound and add up, you can be talking some serious income in your pocket.
And what this chart is showing you on the table here is that basically, the closer that you get towards retirement, you’re still always gonna wanna have a big portion of your portfolio, until you get into retirement, where you’re still gonna wanna maintain that 5% to 15%, but then you’re gonna pick up other vehicles in your portfolio, like fixed income and utilities, and other income-producing investments inside that wrapper.
Lastly, I know this is an October chart, but our portfolio has not changed much from this. And so I just wanna highlight what we call implied liquidity. And what we’re implying here is that if you look at the table, this is the securities that are in our fund. And you will notice the average daily trading volume. These underlying securities trade hundreds of thousands of shares a day. And so as a result, the ETF is extremely liquid. We can trade, you know, any amount of volume, because the underlying ETF constituents themselves are highly liquid. And we’re talking about S&P 500, Mid-Cap 400, Small-Cap 600 names. These are what it takes, again, to an S&P constituent level, you know, these are companies that have been around for many, many, many years.
And so, for our goal from where we sit is, you know, what’s the next Raleigh? What’s the next Nashville? What’s the next Charlotte? Is it gonna be Wichita? Is it gonna be Oklahoma City? Is it gonna be Rhinelander, Wisconsin? I don’t know. But if our constituents start developing in those areas, so we know that that’s where the migration trends are going, then we could position the portfolio to account for where that income is going to be coming from.
So, that’s HAUS in a nutshell. You can contact me, and you have our, see our contact here, armadaetfs.com. But I’m more than happy to answer any questions about REITs in general, what we’re seeing out there in the REIT landscape, what’s happening in the world of residential, because we’re here to educate. That’s the other thing. We’d like to educate about REITs in general. We feel it’s just kind of an unloved, under-appreciated sector that’s out there. And so, if we’re able to change investors’ minds about, again, that slow-and-steady-wins-the-race approach, then we’re here to add that value. So, this has been great. Thank you.
Jimmy: All right. Well, thank you, David. Thanks for joining us today. We’ve got four or five minutes to take some questions. If you do have questions, use your Q&A tool in your Zoom toolbar. We got a couple questions in already. David, how does your REIT differ from an ETF like RESI?
David: Sure. That’s a great question. So, RESI has a different mix of names that are in the portfolio. It is also a passive ETF. It only rebalances twice a year. In addition, it has some exposure to some Canadian holdings as well, some Canada names. So, in addition, you’re bringing in maybe a little bit of FX risk into the portfolio, but all of the ETFs that are out there all have some different, you know, niches to them. We are unique in that we’re active. We have a REIT management team running this ETF.
Jimmy: As you mentioned that RESI was passive, you guys are actively managed. And the next question comes in, asks a little bit about that. Well, David, you also mentioned that chart from October. You really hadn’t turned over the portfolio a whole lot since then. But this questioner wants to know, can you give any examples of recent changes that you’ve made to the portfolio?
David: Certainly. So, a great example of that would be Invitation Homes. It’s a single-family rental REIT based here in Dallas. You know, from a very high level, if there’s anything that investors and portfolio managers dislike, it’s one word, and that one word is uncertainty. And why I mention Invitation Homes is that they’re currently involved in a couple of federal class action lawsuits against the company for some unpermitted contractor work on some of their properties, where a contractor came in, something happened to the property, and the tenant was stuck with the bill or something happened to the property.
Well, because of this class action lawsuit, I don’t know how it’s gonna play out. Is it gonna cost the company 10 grand, a million bucks, 10 million bucks? I don’t know the answer to that. I do know that, like, Mid-America, MAA, is gonna have pretty much another, what we’re expecting a pretty solid year for a Sunbelt apartment. So, because of this lawsuit overhang, we took chips off the table of Invitation Homes, and put it into something more certain, like we buffed up our exposure to MAA ahead of earnings season.
Jimmy: Very good. Let’s see. We’ve got two more minutes left before I’ll cut you loose, David. Next question that came in, admits they…I don’t know if you’re gonna answer this question or not. But does it make sense to hold REITs in a certain type of investment account? For example, tax-advantaged versus non-tax-advantaged? Where should different investors hold a REIT, in your mind?
David: You know, I think that’s a great question. And I hate to use that because I used it earlier. The answer is, it really, it depends. Because how far away are you from retirement? What kind of sector are you going into? What’s the end goal for that investment? It sure doesn’t hurt from a tax-advantaged account because of the fact of how, you know, you’re basically just shielding your dividend income protection on that tax side of it. But at the end of the day, you’re still being taxed at your ordinary income tax rate. So, really, it’s only on the dividend income.
Think about it this way. The stock’s trading at $25 a share, and they pay a $2.50 annual dividend. You’re gonna make back the cost of that stock in 10 years on dividend collection, not counting any upside appreciation in that stock. So, it’s really trying to think with a 20, 30, 50-year mindset on that dividend accumulation.
Jimmy: Good. Well, David, we’ve run out of time for your segment today. Really appreciate you joining us. And it is great to hear your perspective. I think you’re the only real liquid option that’s presenting today on this event. The other funds are Opportunity Zone funds, or other types of non-traded REITs or private equity funds. So, it’s interesting to get the perspective of, or the opportunity to invest in, a liquid, actively-managed ETF, David.
David: But we’re all selling the same thing. We’re all trying to promote the same thing, about how important that roof is over your head. Liquid, illiquid, private, public, that roof is the most important investment decision that any investor makes, any single day.
Jimmy: That’s exactly right. Yeah, we all love multifamily as a sector. I think that’s what we all have in common. But a whole different array of options for our attendees today. David, thank you so much for joining us today. Really appreciate it.
David: Thank you so much. Appreciate it.