Inside REIT ETFs, With David Auerbach

REITs have been incredibly popular among High Net Worth investors in the past few decades. In recent years this momentum has continued for both non-traded REITs as well as publicly-traded REITs, although the latter type have been trading at a discount lately.

David Auerbach, managing director at Armada ETF Advisors, joins the show to discuss trends in the REIT space, as well as a unique REIT ETF offering from his company.

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Episode Highlights

  • David’s background in the REIT space, including how he got his start.
  • Details on David’s Daily REIT Beat newsletter, including how to learn more about becoming a subscriber.
  • Analysis of valuations in the publicly-traded REIT space (and how these might compare to valuations for non-traded REITs).
  • The origins of HAUS, the Residential REIT Income ETF from Armada ETF Advisors.
  • David’s predictions for the future of the ETF market (including one eye-popping number).

Today’s Guest: David Auerbach, Armada ETF Advisors

David Auerbach on The Alternative Investment Podcast

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to the “Alternative Investment Podcast.” I’m your host, Andy Hagans, and we are continuing our series on liquid alts and alternative ETFs. So, very excited that joining me today is David Auerbach, who’s managing director at Armada ETF Advisors. David, welcome to the show.

David: Andy, thanks so much, and thanks for giving me the khaki memo to, like, why we’re able to coordinate our outfits.

Andy: Yeah. You gotta look good, right? I mean, it’s a video podcast so we gotta look great for the YouTube audience. So, David, I first heard about you and your ETF on Kathy Fettke’s “Real Wealth Show.” I’ll be sure to link to that in the show notes, by the way. I really enjoyed that, and I was just floored by your insights, but I was like, “Wow, this guy covers, you know, the REIT Beat. He has a liquid alt-type ETF, so much insights on the, you know, residential market and income from that. I have to get this guy on the show.” So, thanks so much for making time. Before we jump in to the ETF stuff, I want to learn more about how you got started in the REIT space. So, where did you get started there?

David: First, thank you for having me. And by the way, you’re hired. I’m looking for a professional spokesperson, like, hype man, and so you fit the role perfectly. So that’s cool.

Andy: You got it.

David: You know, I’m very lucky. I’m talking to you from Dallas, Texas, and Dallas, Texas…when you think of Wall Street, Dallas is not one of the cities that you think of, you know. Usually, it’s New York, San Francisco, L.A., Chicago. Those are the top markets that, usually, Wall Street people think about. And when I graduated from the University of Texas in 1999, I had a job lined up to basically be a retail stock broker, you know, mom-and-pop advisor. My sponsor was a CPA who happened to rent some space from my father, who is also a CPA, but this particular CPA did investment practice. He managed clients’ accounts while he was doing their tax returns. And there was a boutique broker-dealer based here in Dallas at the time that was called H.D. Vest, which H.D. Vest basically geared toward CPA, so we did tax returns and investment practices for their clients.

So, at the time, I got my licenses. I spent several months with them. And when I went live, when I was ready to go out on my own, my boss sits me down, and he basically lays out the world for me, “Here’s what life’s gonna be like for you. You’re mine during market hours.” “Okay. Sure. No problem.” Well, I got a phone call from a prospect who asked me to go out for lunch with them one day. Then I went to my boss, and I’m like, “Hey, this prospect wants me to go to lunch with them. Can I go?” And he’s like, “No, you can’t.” And I’m like, “Why?” And he’s like, “You’re mine during market hours. If you wanna network and prospect, that’s on your time after market hours. But between 9:30 to 4:00, New York central trading time, you are not to be interacting with any of your clients. You are my guy.”

And I’m like, “That’s ridiculous. How can you tell me when I can and can’t go see a prospect? You know, networking and prospecting is a 24-hour day job. There is no time frame on when you can go and not go see a client. If a guy says they wanna meet me at 5 a.m. for breakfast, I’m gonna go see the guy at 5 a.m. for breakfast. If the guy wants to meet for lunch, you go and meet for lunch.”

Andy: That sounds to me, like, even bad business, like.

David: Right. I don’t really go out on Sunday nights. I had a colleague that was in town this past week for a job interview here in Dallas on Monday, and I went and had dinner with him on a Sunday night. Like, you don’t put a time on when you go to network. And I’ll never forget, I sat there, and I basically said to my boss, literally, “You just hired me. I just got my licenses. I’m green. I’m going on my own.” I go, “You’re wrong.” I go, “That’s the stupidest thing I’ve ever heard. You’re wrong.” He’s like, “What did you say?” I go, “You’re wrong. No, I’m going out to network with this guy.” He goes, “No, you’re not.” And, well, P.S., the next day, I got fired because I talked back to my boss. And here we are now, almost 25 years later from that moment, and I still stand my ground saying that I was right and he was wrong. That was the stupidest thing I’ve ever heard.

Anyway, when this all happened, you know, I’m here in Dallas, and I’m like, “Great. Now, what am I gonna do?” And this was back in the day when the newspapers used to actually publish daily classified ads. You know, if you want a job, you do it from newspaper and read the classified section. And there was a little, tiny ad. I’m not exaggerating. It’s about this big, two-line, you know, “Have Series 7 and 63? Call this number.” Didn’t know, called the phone number, and I was brought into a kind of an office in the not-so-nice part of town but wound up being an institutional trading desk for REITs, real estate investment trust. And the firm was called Green Street Advisors, or at the time was called Green Street Advisors, which was the preeminent REIT research firm in the country based out of Newport Beach. The trading just happened to be based in Dallas, Texas.

And I interviewed and had a good meeting, and my boss…who then became my boss, you know, on the day I got hired, she goes, “Look, I wanna tell you something.” Literally, this is her expression, “Kids your age don’t get the opportunity that you’re about to get.” And I was like, “How dare you call me a kid? I’m 22 years old. Like, I’m not a kid, you know. Shame on you.” But it worked out to be the truest statement, because 22-year-old kids don’t get offered desk jobs, who get to work in institutional trading desk jobs. Those gigs happen in New York and in San Francisco, not in Dallas, Texas.

Andy: You must have really impressed them in that job interview. What did you say?

David: I mean, look at this face. I mean, come on, right? I mean, this just screams knowledge. But, you know, this happened…I started on March 2nd, 2000, which was literally the official date of the NASDAQ crash, going back to the stock market heyday. And for many years, my boss always said, “My biggest mistake was hiring you, because the day you started was the day that the market crashed.” She’s like, “If I hadn’t hired you, who knows where the market would be today?” And I think that was all funny, but it’s amazing how a significant date in history can last for so many years.

So, in 2000, the REIT industry back then was, frankly, infantile compared to what it looks like today. There weren’t as many public trading companies. There weren’t as many private companies. This was back in the day when everything was so tech-heavy that REITs were kinda considered an afterthought. And in fact, that same day that I started, I remember our partner came up to me, he was introducing himself, and he’s like, “Man, keep your resume fresh. I’m telling you, REITs are boring. They’re not here to stay. We’re all gonna be out of the job within five years because who cares about REITs.” And I still joke with that person many years later, I’m like, “How is that five-year clock looking for you these days, buddy? Like, are you sure about that?”

And so I really got to witness the growing up of the REIT industry, you know, where hundreds of companies became public, investment advisors across the globe getting involved in the space. And you know, really just to answer your question, it was by luck that I happened to find myself working in the REIT industry, but through hard dedication and effort, it’s how I’ve been able to establish my presence in the industry 20+ years later.

Andy: Absolutely. No, I love how, you know, honest you are that you just sort of lucked into it. But as you say…and I know you’re very plugged into the REIT industry, even aside from your ETF. And you know, this episode is part of our broader series on liquid alts and alternative ETFs, and it’s cool that we get to talk about REITs because a lot of our audience, family offices, high net worth investors, REAs, they’re invested into REITs both non-traded REITs as well as publicly-traded REITs. I know we have a ton of REIT fans in our listenership and in our viewership. So I have to ask about your newsletter, in that case, The Daily REIT Beat. First of all, awesome name, very catchy, The Daily REIT Beat. Could you tell us more?

David: All the REIT news that’s fit to print, exactly.

Andy: So, tell us more about the newsletter. How do I subscribe? Because I don’t get this in my inbox right now.

David: So, actually, it’s kind of, like, hidden beneath the surface type of product. The Daily REIT Beat was originally geared towards what I call the New York City portfolio manager, the guy who manages, you know, hundreds of millions of dollars of institutional capital, but he’s taking the train every single day from Greenwich, Connecticut. And so, when you’re on that, you know, 6:30, 7 a.m. train, back in the day, you’re scrolling through your BlackBerry, if you remember your BlackBerry, but the PM would have 1,000 emails in his inbox. And if you’re a portfolio manager, the last thing you want to do is spend your time going through thousands of emails. And so the goal of the note was, basically, become an aggregation source, bring in all the major relevant press releases, for now, across the 180 publicly-traded U.S. REITs that are out there, find all the major research reports, rating changes, price target changes, performance metrics, you know, little charts, basically, anything that moves the REIT sector.

But the real bread and butter of it, frankly, is the news article section, and it’s changed dramatically over the past 15, 16 years that I’ve been doing the note. Actually, probably a little bit longer than that. But, you know, ideally, it used to be, with so many news publications that are out there, both hard print, soft print, online, with so much data that’s being thrown at investors every single day, my job is to try to, what I call, level the playing field. Here’s an example.

AvalonBay is an apartment REIT across the country to get a presence in the northeast. Let’s say there was a fire in one of the properties that they run for development in Trenton, New Jersey. Wall Street Journal, Barron’s, Bloomberg, nobody is picking up on it, but, like, the New Jersey Weekly may have a flash article about, “Oh, hey, this property caught fire last night. It’s demolished.” Well, you know, I used to surf, and I still do, but I used to surf, like, literally, 100 news sites every morning at, like, 5 a.m., 6 a.m. Eastern, calling all these news publications, every major metro newspaper, every major commercial real estate news source, GlobeSt, CoStar, Commercial Property Executive, you name it, and try to link to all of these article stories so that when somebody would be like, “Hey, what’s going on with AvalonBay today?” “Oh, did you see the story out in Trenton, New Jersey about the apartment that burned down last night?” “No.” “Well, if you read my notes, you would see that.”

So, really, what we’re trying to do is we try to bring all the information into one central location. So, again, going back to what I had said earlier, it doesn’t matter if it’s Cohen & Steers and the biggest real estate investors in the world or if it’s, what I call, grandma and grandpa who live in the villages in the retirement community in Florida, but they could open their inbox at 8 a.m. Eastern, give or take a few minutes, read this publication, and have just as much news and information as the New York City portfolio manager, the guy that’s managing billions of dollars of institutional REIT capital. So it’s headlines, it’s rating changes, it’s performance metrics, it’s graphs, it’s new articles, but it’s a daily publication that goes out to several hundred folks across the globe. We publish a weekly edition as well, which, again, culminates a lot of the stuff in the daily publication, but also, we bring in weekly index performance metrics. So we cover all the REITs in the S&P 500, the mid-cap 400, the small-cap 600, the Russell 1000, the Russell 2000, the REIT closed-end funds, the REIT ETFs, and the REIT mutual funds. We’re talking, you know, hundreds of lines of data of performance metrics, short ratios, dividends, well, basically, just to try to provide a database of all the REIT stock that’s out there.

Andy: And now…go ahead.

David: To answer your question, how does one get? Well, that’s the cool thing. So, if people are listening to you here, they will have access to my contact info, hopefully, reach out to me. We would get them added. The product has kind of evolved over the past several years. It is a subscription-based product. We are moving it towards our ETF research platform. So there’s going to be kind of, like, another evolution of it as Armada, I said, as we’re calling it, but it is a subscription-based publication. And we can discuss that on an afterthought basis. But it does not have a website. We’re potentially building one now. The reason being, again, it was geared more towards the institutional guys, the institutional traders, the institutional investors. But as my career has kind of shifted over the past decade-plus, I’ve realized that some of the retail minds are just as sharp as some of the institutional players, that there’s guys that sit there, eat, breathe, sleep, dream, bathroom 24 hours a day, the REIT product, just as much as some of the institutional REIT guys do. And so, that’s why, you know, we’ve noticed a big interest from some of the retail or high net worth individuals for the subscription service.

Andy: Well, you know, you don’t need to justify not having a website or anything like that. Like, whenever I hear about these under-the-radar newsletters, it just piques my…it just, like, makes me more interested like, “Oh, you don’t even have a website?” It’s kind of an…

David: Well, you of all people, Andy, since you’re invested in both the public and private, I will get you out right after this, but you will definitely see value in the publication, again, especially on the weekly basis, because it really provides some high level of what’s happening, what do the stocks look like, and you can kinda go through it very quickly and see, you know, some of those trends that we’re trying to follow. ADVs, average daily volumes, how are these things trading? What’s the stock doing over the past quarter, past month, past year, whatever it is? So, you know, I know we’re gonna get into that conversation, but the takeaway right now is that a lot of these high-quality REITs are trading at deep discounts to net asset value.

Andy: So I have to ask though for the new…so it sounds like it covers a whole lot of REIT stuff, maybe the whole universe, but does the newsletter cover non-traded REITs as well as publicly-traded REITs, or is it more…?

David: So, if there’s news stories around regarding them, yes. But I don’t do performance tracking measures of the non-traded REITs. I mean, there’s a whole separate discussion as to why for that. It’s very easy with the publicly-traded players, especially in this day and age of transparency and there’s so much information. I mean, I have a Bloomberg. I’ve got constant news hitting me. If you saw my launch pad, you’d be like [vocalization]. You know, I’ve got so much information that’s bombarding me. It’s my job to, again, be that filter so that I can try to put together a daily publication that the end investor reads. Now, there are some days that the content is very light, you know, when the news machine is pretty quiet. There’s days like today where we had four REIT deals, six companies announcing their year-end property, you know, year-end summary recaps, preferred deals announced, a couple of rating changes. Like, today was a pretty big note.

And then, come earnings season, come quarterly earnings season, I go in and I cover every single company’s earnings. I will put in bullet points from every single press release, provide links to the actual release. So, I mean, during earnings seasons, there’s days that the note could be 20, 30 pages long, because I’m putting that much content. And that’s the other thing. Everything that’s put together is done by me. It’s not automated. I literally put together every single publication every single day. And so, whatever you see, it’s been done by me. I mean, I call it 24/7 notes because I’m always working.

Andy: This reminds of the Drudge Report, like, back in the day. This was probably 10 years ago. It’s kind of the one guy curating this stuff with maybe not a huge audience but an audience that has a lot of financial leverage, it sounds like…

David: I definitely have a captured audience, especially when I have C-suite executives, CEOs that make beau coups and beau coups of money and more money that I can ever dream of, where people come out to me like, “I just want you to know, this is the first thing that my guys have to read every single day. They’re not allowed to come into our morning meeting without reading your note first.” And I used to have, at my old work computer, unfortunately, I didn’t take it with me, but I used to have, like, a three-page long testimonial sheet from all these REIT CEOs and institutional investors, you know, praising me about this thing as, you know, a godsend. “I won’t really do my day without reading this thing.” And so it’s nice.

Ideally, to go back to that example, you know, of that portfolio manager on the train, thinking about those thousand emails, “I need to read this press release. I need to read this upgrade/downgrade report by Evercore ISI. Oh, and there’s these two great stories in ‘The Wall Street Journal.'” Boom, I’ve gotten rid of 975 emails in this inbox, and now that PM can focus on what they wanna do, which is trade the portfolio and, more importantly, raise assets, talk to investors, be the face of the firm that you’re supposed to be.

Andy: Absolutely. Okay. So you obviously have your finger on the pulse of the REIT universe. It sounds like it’s wired into your mainframe. This is great. So, you know, this is a question that comes up again and again. We recently had our Alts Expo event in December. I moderated a panel there. We asked a question to the panelists, got some interesting answers. This is coming up again and again, so I’m not gonna dance around. I’m just gonna ask it. I want to know your opinion. Because we cover non-traded REITs here on this podcast, but we also cover publicly-traded REITs. I mean, honestly, the two interact, right? Sometimes you’ll see publicly-traded REITs go private. And as an investor, you know, you’re looking for value. So, in your opinion, right now, you know, in January 2023, where’s the value? Is there more? Is there potentially more value in the publicly-traded REIT world where some of these REITs are trading at discounts, or, you know, do you think it sort of depends on the fund compared to the non-traded REITs? You know, how do you see this issue that keeps coming up again and again?

David: It’s a loaded question. It’s a great, great question. Love it. I would say, it’s a little bit of both, but I’m not gonna lie, I’m biased. I’m a publicly-traded REITs guy. It’s how I grew up in the business. It’s what I know better than anything. I will tell you that, don’t take it from me, take it from every Wall Street shop that’s out there, there’s enough publications that are talking about it right now, publicly-traded REITs are trading at deep, deep discounts to net asset value, where you can buy some of these companies, I don’t want to exaggerate, but 60, 70, 80 cents on the dollar. Where fundamentals for a lot of these companies have not changed whatsoever, operations remain very strong, but the stock market has not rewarded performance because, basically, everything has been thrown out over the past year performance-wise.

As far as non-traded REITs are concerned, there are some fantastic vehicles that are out there. I am not here to tarnish any particular entity like Blackstone or Starwood. Blackstone and Starwood are two of the largest commercial real estate owners on the planet, run by very, very well-respected management teams. I have the utmost respect for Jon Gray, Steve Schwarzman, Barry Sternlicht, all those players that are out there. But I think it’s important for all investors, and again it doesn’t matter if you, you know, are a $100 Robinhood investor at a college or you’re an ultra-high net worth investor of $100 billion in the bank, it’s important that every investor does their own research. You need to know what’s under the hood of the car, what’s driving the engine. And if you don’t know what properties are owned in the non-traded REIT, if you don’t read the fine print and the boilerplate language in the back of the prospectus, that’s 10 pages of legalese, if you don’t read the fine print and know what you’re getting into, then bad things can potentially happen. And that’s something I know that we’ll address through this episode.

But I think, from the beautiful thing about the publicly-traded REITs…and everything I say comes from the National Association of Real Estate Investment Trust. That organization is called Nareit. They are the parent of the REIT industry. They are the spokespeople for the REIT industry. Why I mention Nareit is they have an amazing education platform. If you want to learn REIT 101, how REIT works and what it means, and all the different stories that are out there, the first place you should go is reit.com. That’s the whole name. But Nareit, as I mentioned, is…when they talk about why publicly-traded REITs, a lot of the reasons that they hammer on kind of show why the non-traded REITs can kinda catch you in a box. Number one is transparency. The publicly-traded REITs have quarterly conference calls, quarterly earnings press releases, daily mark-to-market with data spreads on the screen during market hours.

You can buy $1 million, $100 million, whatever it is, you can transact in these REITs, very liquid, especially for those guys that are in the S&P 500 or the small-cap 400. Remember what it takes to be added as a constituent of the S&P 500. Think about some of the quality of these companies that had been around for generations that are in the S&P 500. It’s almost like making the Dow 30. I know it’s changed since in time, but for you to become a constituent or a stalwart in that index shows the amount of confidence and respect that the industry has…

Andy: You’re out there with Coca-Cola, Berkshire Hathaway, you know.

David: Exactly.

Andy: Yeah, I guess.

David: I’ll use an example. There’s a publicly-traded apartment REIT called Mid-America, MAA. Mid-America has been in the S&P 500 for many years. The CEO has been there for 28 years as the CEO. These companies, you know, using Mid-America as the example, have seen every single economic cycle over the course of his tenure, prosperity to recession. They’ve seen wars, 9/11, COVID. These CEOs have seen every economic cycle that’s out there. Why I mentioned this is that, because they’ve seen so many different economic conditions, they know when to go on offense. They know when to go on defense. They know when to deploy capital. They know when to refinance their capital. And if you use COVID as a good example, think about all the industries that were affected by COVID and how these executives have learned from what’s happened so that the next time that the next event happens, they know how to respond accordingly, case in point.

If you use 9/11 as an example for us on Wall Street, previously, Wall Street firms used to have what we call disaster recovery offices. God forbid, your office burns down. Just because your office burned down in Dallas doesn’t mean they’re gonna close in your stock exchange on Monday morning. So, what are you gonna do to make sure that you’re up and running on your desk on Monday morning? And we used to replicate our desk at an alternate location, pay a second rent, have a second computer, second everything that we literally never use. It was money thrown down the drain just in case this happens. What happened during COVID? Everybody had to go to their disaster recovery offices, right, because nobody was working in the office anymore. Do you know what became the new disaster recovery office? Your laptop. That was your new disaster recovery office.

And what’s happened is that this is an evolution that now what we used to call the DRO has gone away because work-from-home is here to stay. We’ve known how to respond from what has happened, and the next time that next thing happens, you know, what do the apartment operators do during COVID? They didn’t kick tenants out. They worked on tenant relief programs. They’ve made it so that their tenants would have a place to stay, and they worked out rent arrangements with them. Okay. What do we do in the next COVID or, God forbid, the next event happens? Well, here’s what we did last time. Here’s what worked. Here’s what didn’t work. So let’s make sure we do these same things the next time. Oh, by the way, we’ve been thinking about this in case this ever happens again. Now we can implement this new program to complement.

So, you know, these management teams are learning from previous cycles how to be better operators going into the future, and that’s why we have this utmost respect for a lot of these management teams, again, because they’ve been doing it for so long that it’s very rare that something is gonna be thrown at them where they don’t know how to respond. And COVID was a game changer because that impacted every single industry and every single person, you know. And a good example is office buildings. I mean, frankly, office buildings are a perfect example of what’s happened through COVID. Previously, everybody worked in an office building. I used to work in an office building, and you know, we have to deal with traffic and all that nonsense every single day. Well, I don’t know about you, but I don’t work in an office building anymore. And many of my friends in the big, big cities, you talk to them, and, yeah, they’re in the office, but it’s Tuesday, Wednesday, Thursday. No, they’re not in the office Monday and Friday.

I was in New York for business…I’ve been in New York a lot, but I was up there for a meeting just a couple of months ago. We were going out for lunch, and my boss calls, and, like, these places are only open for lunch on Tuesdays, because Tuesday is the new Monday in New York City, Well, if I’m running a fund of office REITs these days, you know, I don’t know what office REITs look like in the future compared to what it looked like five years ago. So, you know, this is a constant sector that’s, REITs in general, constantly going under evolution. Another good example, five years ago, there was no such thing as cannabis REITs. Now, there are several cannabis REITs that are out there, both in the production, the development warehouse side of it. A decade ago, there was no such thing as tower and data center REITs. Like, what was a tower, you know what I mean? Like, cellphone tower is what we’re referring to. Data centers, back when things were very, you know, infantile with the internet, and now we have all these different sectors.

So the question is, you know, again, just, like, you heard me mention many times today, where’s that puck going? What’s the next sector that’s out there? What’s the next story that nobody is talking about? Right now, one of the stories that really nobody’s been talking about anymore that’s been picking up steam is the non-traded REITs, and they’re talking about a sector that’s been around for many, many years. I mean, non-traded REITs have been around for a long, long time. There ain’t good ones. There are some not-so-good ones. And so the takeaway here is read the cover, look under the hood, know what’s driving the engine of the car.

Andy: Yeah. And I think that’s good advice, whether we’re talking about a non-traded REIT or a publicly-traded REIT. And obviously, with the non-traded, you know, as an accredited investor, as an advisor, it’s your responsibility. You have to take ownership to look under the hood, to do your due diligence. But you mentioned one thing, which was, obviously, we’re seeing discounts in the publicly-traded REIT universe where you mentioned 60%, 70%, 80% of book value, I believe. Is there a number, you know, that you would view as, like, a normal discount where, you know, if the market overall moves back to X discountable value that then, at that point, they’re maybe fairly valued? Obviously, you can always own REITs. You know, you’re always gonna be looking for the right REIT, but it seems like your point is the sector as a whole or the REITs as a whole are undervalued right now. Is there any formula or number that you’d point to as, like, “Well, this would be normal. This would be what I would expect as, like, kind of a par value?”

David: Well, first of all, I think it’s on a sector-by-sector basis. Some sectors are more invoked and command higher valuations versus other sectors. I will say, historically, a lot of the REITs are traded at premiums to net asset value, especially, like, some of the industrial REITs that are out there, self-storage, again, some of these in-demand sectors. You know, New York office used to be a very desirable asset, because they’re not building more land in New York, as what they used to say. And so, because of that, most of the REITs have usually traded at a premium to NAV. Some of them, if they traded at a discount, it was, like, why? You know, “Oh, this thing is yielding 10%. You know, it’s a home run.” If something has a 10% handle, it’s not a home run, you know what I mean? Like, you have to…it’s changed over the years

Andy: Well, and to that point, David, to that point, so if par is actually par, right, your point, if a lot of these, historically, have traded premium, and I guess, now, I think a lot of investors are almost, like, being conditioned to expect them to trade at a discount, is that even sustainable though? Because we’ve seen some REITs that were publicly traded recently that seems like there’s more that are…I may have my data mixed up, but I thought I’d read that there were more turning private than there were going public over a certain period of time, which was actually, like, a sea change for the REIT industry.

David: Yeah. And I believe that. There’s no doubt about it, because there’s obviously many over the past several years, as many public-to-publics as we have. When we’ve had Blackstone and some of these other vehicles, our sovereign wealth funds able to take entities private, you’re absolutely right on that.

Andy: And what’s the incentive? What’s the incentive to IPO if I IPO and then I’m gonna trade at a discount immediately? Why would I even IPO?

David: Well, it used to be, you know, why does a company go public? Well, it’s so that management can get out, right? What’s your end game? Well, it used to be the end game was either…and it still kinda holds true today, either another publicly-traded company buys us or Blackstone buys us. It used to be Blackstone was, like, I don’t know what they used to say. Blackstone is going to be either the last REIT standing, they’re gonna be the last man in the room, or they’re gonna call us the biggest commercial real estate collabs in the history of mankind. And Blackstone is always at that table for that conversation because, again, of the pools of capital that they’ve raised. In the same breath, you’ve got…look at all these sovereign wealth entities that are getting into the space. Look at all of these sovereign wealth funds that are entering the single-family rental space, again, housing, residential housing. When it’s not just J.P. Morgan and Bank of America, but it’s the government of Singapore, Abu Dhabi Investment Authority, BlackRock, Blackstone, literally, every single type of investment allocator wants to get in the space again, because where is the puck going? Well, we’re talking about residential here, and so, does the United States need more office buildings? I don’t know the answer to that.

Andy: I don’t think so.

David: Do we need more indoor malls? I don’t know. But we know we need more residential. No matter how you slice and dice it, you know, we are looking for the latest and greatest, the newest technology initiatives, you know, green energy, carbon neutral properties, whatever it is. That’s what tenants want, especially now, when you look at the demographic that’s graduating high school, going into college, and they’ll be in the job market 5 to 10 years from now. What do they want? What will they want as a tenant? The same thing that, fast forward, because we have senior housing in our portfolio. I think you and I are close to the same age with our guessing-the-age game, but let’s put it this way. I’m sorry for all this coughing. I do apologize. I get so animated that I just wore myself up.

I don’t know when the last time was that you went to a senior housing property where you went and saw somebody at a nursing home or anything like that. And the reason why I mention that is the senior housing product that exists today will look nothing like the senior housing product that you and I will live in tomorrow. And I mean it from both a surface level as well as an operation’s deeper dive perspective. On the surface, what have we grown accustomed to that we don’t really see in properties today? Well, starting with the obvious, hardwood floors, LED lighting, modern fixtures, USB ports, high-speed internet, this, that. A lot of those properties are not equipped for that today. And so this is an industry that’s literally going to be demolished and rebuilt. A good example is…and I love bringing the subject because even though it’s not residential, it still kind of plays into this. You’ve heard of companies called Hilton and Marriott?

Andy: Of course.

David: Do you know what they do? They own hotels, right? They rent hotel rooms. Did you know that both Hilton and Marriott, at their corporate headquarters, have what they call an innovation lab, and this innovation lab is the hotel room of the future? Well, the last time I was in a hotel, which is pretty much every other week, it’s a bed, it’s a bathroom, it’s a dresser, with a TV on it, and a desk with a chair, and a sitting chair, right, you know, the little lounge sitting chair.

Andy: Sure.

David: What does that room look like 25 years from now? Well, not that I know anything, but it’s gonna have a bed, it’s gonna have a bathroom, it’s gonna have a dresser, a TV on it, the desk. But they’re basically saying, “What is that consumer gonna want 25 years from now?” And they’re trying to develop that hotel room, again, where that puck is going so that, when that time comes, “We’re there. Well, we already have it. Well, we’ve been doing this for 10 years now.” So I think what you’re noticing is that a lot of these operators and owners are trying to build that product for the 10-years-out consumer. We know that we don’t have enough housing inventory to satisfy the next generation of demand that’s out there. We don’t have enough modern apartments to satisfy that next generation of renters that’s coming to market. And so, as a result, residential is a perfect industry that, of all the other sectors that are out there in the world of real estate and REITs, at least the one story that continues to play out is residential. We know what that looks like, and we can get more into that, but you know, we’re focusing on, again, rental income, apartments, maybe fashion housing, senior housing, and single-family rentals.

Andy: And so, yeah. No problem. I wanna talk about the residential space. So, obviously, that’s…as a sector, obviously, you have a lot of interest there. And specifically, now, I’d like to dive into HAUS, your ETF. So that’s the REIT ETF from Armada ETF Advisors, and that ticker is HAUS, right? So that’s HAUS.

David: Yes, it’s the Residential REIT Income ETF. That is correct.

Andy: So, what makes HAUS unique? What makes this ETF, you know, this REIT ETF, you know, unique and appealing for investors?

David: Sure, and it’s a great question. I love answering this question because it never gets old. The founder of Armada ETF is an owner/operator of apartments up and down the East Coast, and our founder works with several of these apartment REITs. And then, when you’re an owner/operator of any type of property class, you know what your property is worth, you know what the property across the street is worth, you know if the new guy down the street has got the newest product on market, what his units are worth. This is a sector that pretty much everybody knows everybody. And as a result, my founder went to his advisor during COVID, and he’s like, “Look, I wanna sell my whole portfolio securities, and I wanna buy a pure-play residential REIT ETF.” And the advisor was like, “Well, that makes sense. This is your day-to-day job. This is what your family does. You know this business. You work with these companies. Great.” And the next day, the advisor calls him back and says, “Well, that doesn’t exist.” And my partner is like, “What are you talking about? There’s always residential real estate ETFs that are on the market. What do you mean?”

And that goes back to what we were talking about, doing your own due diligence, know what’s under the hood of the car. Well, all of these residential funds that are out there, all have some kind of what I call a rub to it. One of them leads with self-storage REITs. Self-storage REITs are a great sector. I mean, there’s six publicly-traded companies. They do a fantastic job. But for the broader sense, residential…excuse me, self-storage is not residential.

Andy: No, it isn’t. And I mean, even from, like, an income or valuation, you know, cap rate perspective, those are gonna be different sectors, you know, significantly.

David: Different comps, different everything, absolutely. Another one leads with a couple of healthcare REITs that are also in our fund, but they have them way up on the stack, and they’re exposed to hospitals, medical office buildings, some stuff that would be considered nonresidential.

Andy: So, wait, these other ETFs, are these marketed as residential REIT ETFs, or are they just ETFs that hold REITs?

David: Yes. Yes.

Andy: Okay.

David: No, they’re marketed as residential real estate ETFs or residential REIT ETFs. That’s absolutely correct.

Andy: Are they tracking indexes? And the indexes…

David: Yes, because they are passing, so they create an index. That is correct, yes.

Andy: Okay. Okay, go on.

David: One of them has, like, Home Depot and Lowe’s and Restoration Hardware and Home Builders. You know, it’s a housing ETF. It’s all-encompassing.

Andy: Oh, I see.

David: We wanted to take a different approach. We wanted to focus…again, because my team is REIT experts. I have a REIT CEO, I have a REIT analyst, I have REIT portfolio managers. We have a team that’s basically been in the REIT industry for 150 years, give or take. That’s all we know as REITs. And so we want to apply our REIT knowledge to one specific sector starting out, and that way, we could focus on really the idea of the fund was based off of a COVID thought of where are people moving across the country and which of these REIT segments benefit from this relocation. Case in point, I’m in Dallas, Texas. Dallas is one of the highest housing markets during COVID because, among other statistics, 1 out of every 10 people that relocated to Texas came from California. So, if we had…I’ll just throw a random number out there, 25,000 people that moved from California to Texas, but yet we only had 5,000 homes available to them, you know, what happens to all the other people? Well, they’re going to go back to the market and try and bid on that house, or they’re going to go rent an apartment or a single-family rental.

So, as we were going through this, we had this epiphany that, look, there’s 3,000 ETFs that are on the market. There’s a lot of products that are out there. I don’t understand a lot of the products that are out there. If you can explain it to me, I can invest in it. And if there’s one thing that everybody understood, look, I’ll put you on the spot, Andy, what do you and I have in common? It’s very simple. We go to sleep with a roof over our head every single night. Whether I rent an apartment, I own a house, or I rent a house, I make that property my own. And we started out saying, “Real estate is personal.” You know, gas prices are up. Great, the rent’s due next week. I can’t afford this. Great, your rent is due next week. That rent payment gets paid every single month. And so we were focusing on that income from that rental payment. In a REIT structure, it’s even better because a REIT is basically just a tax-sheltered vehicle that…it’s a tax entity, these companies are set up as a REIT, and you have to pass all of these qualifying tests for you to become a REIT. But once you qualify, then, basically, 90% of that net income is passed through to shareholders in the form of a dividend.

Andy: And it’s tax-advantaged, right? So we’re not paying the double taxation.

David: Exactly.

Andy: It sounds like…so this ETF, if I understand it correctly, it’s actively managed.

David: Correct.

Andy: But it seems to me like maybe there’s two separate issues here. Issue number one, it seems like there’s a hole in the market or a lane, I should say, even for just an index that is pure play residential REITs without…

David: There is no such thing. That is correct. That does not exist.

Andy: Okay. But then you kind of took that idea that there’s a hole in that space, but then you also wanted to add in active management to sort of, I guess, bet on demographic trends.

David: Correct. Exactly. Where are the people moving to? Because as a result, if we know that Raleigh, Charlotte, Nashville, and Tampa are the biggest rent earners or rent collectors, well, then we could position our portfolio towards those publicly-traded companies that have that big exposure there. And ideally, what’s gonna happen is then that elevated rent payment, a portion of that goes into your pocket in the form of dividends. That’s what we’re focused on is that all of this rental income that’s being generated by these companies is being passed through to shareholders in the form of dividends.

Andy: Yeah. And you know, like you said, you know, talking about investments, if you can explain it and an RIA or fiduciary can’t sort of understand what it is, very quickly, then it’s probably gonna struggle to succeed in the marketplace. So, how is the reception been to this REIT ETF? Because it seems to me like there was probably demand for it, kind of, I don’t know, silent demand, but probably a lot of people were looking for an ETF like this, right?

David: Well, it’s both funny and sad that you ask that because it’s really been a tale of two different stories for us. It’s our first few months when we launched and then everything that’s happened since then. Because when we launched, the timing was we were the only IPO in the country when we launched the week of March 1st, 2022. That’s because the Russia-Ukraine crisis had just started to unfold. And then interest rate hikes started, inflation commenced, recession. All of these broad economic conditions started kind of being thrown at us that, at that point, kind of it didn’t matter what we were doing. Everything was being thrown out with the bathwater,

Andy: Sure.

David: And my job is to focus on fundamentals, okay? And so, when I’m having these conversations, I would say, “Look, I can’t control my ETF stock price. I can’t control my constituent’s stock price. The underlying companies in our fund, I can’t control their stock price. But here’s what I can control, how we weight the portfolio and who’s in and out of the portfolio.” So I would go back to a person and be like, “Okay, forget REITs for a second. Don’t tell me, but picture your favorite Wall Street company that’s out there. Is it Apple? Is it Tesla? Is it Microsoft? Whatever the company is, keep this in the back of your head for a second. Okay. That company that we’re talking about right now, at the end of the day, you, the investor, want them to do four things. Literally, you want them to do four things. I got to figure it out, okay. It’s very simple. If your company is doing this, you’re in good shape. Are you ready? Number one, grow your revenue. You want to see a company continue to grow their revenues. Topline, always going up. Number two, about the ball, that’s the net income. You want that to keep going up as well, which leads to number three, that dividend keeps going up. A raised dividend is…you know, the safest dividend is the one that just got raised. Number four, which kinda goes with all three, is grow your guidance. Grow your annual guide. Show that you are growing consistently.”

Well, most of the REITs, especially some of the residential guides, have done all four of these things. They’ve grown their revenues, they’ve grown their profits, they’ve grown their dividend, and they’ve grown their guidance, but yet the stock prices aren’t reflecting the strong fundamentals.

Andy: And the guidance would be…one thing I was thinking as you were talking through those would be the debt level, responsible debt level. That would be reflected in number four, the guidance part.

David: Correct. I would say, you know, “Hey, we’re guiding our earnings per share this year, FFO, function operations, or adjusted function operations.” In ’22, we did $2 to 2 in a quarter. In ’23, we’re forecasting a 10% growth. We’re saying 2.25 to 2.50.

Andy: Right. And as well as the dividend, I guess, because, you know, if you’re able to pay that dividend, that shows that you have cash flow, right? So it’s not just…

David: Exactly. Correct.

Andy: Yeah, okay.

David: And so, what I’m saying is that though these companies were mostly doing these things across the board, the stock prices weren’t being compensated for that. The investors weren’t being compensated for the good fundamentals that these companies were operating in. So it’s our job to say, “Look, here’s what CNBC and Bloomberg and all these networks are not telling you because it’s not as fun and sexy, as exciting as the crash of Bitcoin or what’s happening with Elon Musk and Twitter and Tesla.” Like, that’s not gonna draw eyeballs. Remember, I’m focused on that, what I call, the boring left side of portfolio, the 5% to 15% weighting of that portfolio. It doesn’t matter who you talk to, but pretty much every allocator says 5% to 15% should be in REIT and real estate. I always say REITS are boring. Slow and steady wins the race. REITs are the tortoise in the tortoise and the hare of your portfolio, but Bitcoin and Tesla and Cathie Wood ETFs and all that stuff go fly and do all the stuff that they’re gonna do over here, and let’s just, slow and steady, hang out here and earn income and dividends off of the operations.

Andy: Yeah. David, as you’ve alluded to, we have a housing unit shortage of, depending on who you ask, 5 million or whatever the number is, so there’s that macro trend that sort of underlies almost as a moat or a margin of safety, I guess, investing in this asset class. And then, real estate, a lot of times, investing in it, typically, that illiquid investment, depending on how you invest into real estate, you might get an illiquidity premium for investing in an illiquid vehicle. But right now, these REITs are trading at significant discounts, so it’s, like, you’re able to buy value, and you get the liquidity for free. Like, I don’t even care about the liquidity. I wasn’t expecting the liquidity. But if you believe in the thesis and you have the ability to buy it at a discount, then it’s basically that allocation, that 5% to 15%, that sounds about right, but it just offers a better value probably than it almost ever has, historically.

David: Especially since we know…I mean, again, it’s going to happen because it can’t last as long. The private real estate values are about to correct. There’s just no way, it’s possible, no matter you slice and dice it, that the publicly-traded REITs are trading at a discount and the private guys are saying, “No, we run it better. We’re trading at a premium.” Well, the promise that their valuations are three to six months old, they’re going off of all comps versus what the public guys are doing every single day when their numbers are reset. And so, what’s going to happen when some of these private guys start seeing their NAV numbers come down a little bit because the world didn’t reset around them?

And the problem, you know, if you’ve got $100 billion in the bank, kudos to you. Please give me a call. If you’ve got $100 billion in the bank but $5 billion of that is locked up in one of these non-traded private vehicles, you’re not losing sleep. You’re okay. But if you’ve got $2 million in the bank and you’ve got a couple of hundred grand or 500 grand locked up in one of these private vehicles, and your spouse passes away and you need to pay for the funeral or something happens, you can’t get out. You can’t access liquidity. Whereas, if I want to sell a billion-dollar possession in Prologis, I’m gonna move the stock, but I can sell a billion-dollar possession in Prologis and be out like that.

Andy: Right. And, I mean, I totally agree in that sense, and that’s one thing I love about REITs is you have great products. And you know, you’ve said that you’re a little bit biased, which is…everybody’s a little bit biased. But there are great non-traded REITs. There are great publicly-traded REITs. I mean, it’s a great product because it’s tax-advantaged, and you know, if you’re an ultra-high net worth investor or a family office, as you said, you can deploy, you can afford to be illiquid with a huge portion of your portfolio, possibly the majority. The vast majority of your portfolio you can afford to be illiquid with, but at the same time, you know, ETFs like HAUS and a lot of, you know, other ETFs, as well as the REITs themselves, allow really any investor to participate. So I know we’re running short on time, but given that you’re so plugged into this world of REITs and ETFs and, you know, I would call it liquid alts, this whole universe, do you have any predictions for the next few years, either in the world of REIT ETFs or maybe REITs themselves or just any trends that you think that our audience should be keeping in mind?

David: I have lots of predictions. Obviously, the question is, how many become right? We are going to see a lot more REIT ETFs come to market. You know, we are dealing in an industry that mutual fund is going away. Mutual funds are dying. We’re seeing this big conversion of mutual funds to ETFs. We’re, in fact, talking to a couple of different guys to potentially maybe help them do that, convert their mutual funds to ETFs. So investors, that 3,000 number is probably gonna double in the next few years, if I have to guess.

Andy: Wow. Wow. Okay, that’s prediction number 1, 3,000 ETFs were gonna double in…

David: I would say within five years, if not sooner, we’re gonna have at least 5,000 to 6,000 ETFs, because I think all those mutual funds are all gonna go away and convert, yes.

Andy: You heard it here first, folks. Okay. That’s prediction one, okay.

David: I think, you know, the battle is to find the next sector. You know, we’ve had cannabis, we’ve had towers, we’ve had data centers, we’ve had infrastructure, we’ve had postal, you know. What’s that next make-a-REIT-type sector that’s out there? How does blockchain impact the REIT sector? How does blockchain help the investor that lives in Malta or Cape Town, South Africa access the U.S. REIT market through their existing platform, if that makes sense? So I think we’re going to see this world open up even more. It used to be that REITs are for grandma and grandpa because of the income. And now, with so many REIT funds that are out there in the metaverse, you know, for the next generation and some of these other things that are out there, REITs are very commonplace. You know, I always tell investors, “Invest with your eyes.” “What do you mean?” “Well, okay, let’s start with this.”

And this is a sophisticated audience, and they probably already got this, but you know, look at the shopping center at this intersection of Main and Main. Is that parking lot always full? What about the grocery store that’s at that shopping center? Is it always full? When you drive by at night, do you happen to notice that maybe, like, a sign or two is missing a light? Is it flickering? You know, does it look like it needs a new coat of paint? What about…then I go the step further. Andy, I’m gonna give you a trick question here, okay? Have you gone to Starbucks for a cup of coffee recently?

Andy: Oh, about a year ago is probably the last time.

David: You don’t drink coffee?

Andy: I drink a ton of coffee, but we make it at home, so.

David: How about…have you gone to CVS or Walgreens to get a prescription?

Andy: Oh, yeah, all the time, unfortunately. Five kids, so somebody’s always…

David: And do you remember that shopping center example that I used? Have you bought groceries recently?

Andy: Yes, I have.

David: Well, in every single one of those examples, you’ve interacted with a REIT. REITs hit investors 24/7. You can’t go from point A to point B without being hit in the face by a REIT, whether it’s a billboard that you see driving down the road, the apartment property, the self-storage property, the mall, the shopping center. REITs are a daily facet of our lives, and so, as a result, when I say invest with your eyes, you know, “Oh, that parking lot’s full. Who owns that? Oh, It’s Kimco. What else does Kimco own? Wow, they own this and this. Oh, and they own the shopping center that I heard of, you know, right down the street from where my parents live.” And then that kinda gets that snowball rolling down the mountain.

Andy: Sure. Okay. Well, I certainly think, you know, your career…it’s been fascinating, you know, kinda walking us through how that started. It sounds like your career kind of grew up with the REIT industry in a way, because, obviously, you know, REITs, they’re not like some small thing anymore, right? They’re a mainstay. They’re a pillar of so many portfolios.

David: No, that five-year clock continues to go on. Yeah, it’s not going anywhere.

Andy: Exactly.

David: Well, it’s its own S&P asset class of the financials. It’s a standalone asset class on its own now. That’s why you’re seeing, I think, a proliferation of investors and investment funds that are getting involved in the space. You know, you can get very thematic. When I say thematic, you know, I just want to invest in but not lease. I just want to invest in towers or data centers or residential. You know, it is getting more thematic, but again, it goes back to knowing what’s under the hood. Where do they own the properties? What do the properties do? You know, is it gonna be around 10 years from now? I don’t know, you know, whether office REITs are gonna be around a decade from now. I truly don’t. And I’m a voice to the REIT industry, but I sense the concern of what’s happening with some of these office REITs. Whereas I know what apartments are gonna look like five years from now.

Now, I may not know what the apartment of the future looks like. I love this Hilton and Marriott innovation thing, incubator thing, but we know that there’s going to be demand for residential from here to eternity. Let’s be honest. Interest rates keep going up? That’s great. You’re gonna keep renting that apartment. Interest rates go down? That’s great. That means that you’re gonna finally get that chance to move out into that first home. But guess what, that means the next generation is gonna go rent that first apartment for the first time. So, you know, apartments have been around for long before you and I were alive. They’re gonna be around long after you and I pass.

Andy: Yeah, absolutely. I mean, multi-family is as close to a sure thing, provided you’re using leverage responsibly. It’s as close to a sure thing.

David: You said it, not me.

Andy: So, David, really appreciate all your insights on ETFs, on REITs, being very generous, and giving us just your transparent thoughts. I love it when, you know, people say it like it is, tell us what they really think. And also, you know, the ETF that you all have launched, the HAUS ETF, I think it’s a fascinating product. I think a lot of our viewers and listeners would be interested in it. So, that being said, where can they go to learn more about this ETF and about Armada ETF Advisors?

David: So, thank you for that. And first of all, you know, we wanna educate. You know, if this fund’s for you, that’s great. Let’s talk. If this fund isn’t for you, that’s great, but let’s talk about REITs and why REITs should be in your portfolio. So I recommend, everybody, go check out our website, armadaetfs.com. Breaking things in the office, that’s not good. Go to armadaetfs.com. It’s Armada ETFs. Check out our Insights tab. We have lots of blogs and research published on any relevant topic about, you know, how does inflation impact residential REITs, what about recession, what about geopolitical unrest, whatever it is. But we have a lot of research focusing on why residential. In addition, we have several CEO constituent interviews where I’ve gone and sat down with the CEOs in several of our companies. And don’t take it from me, take it from the CEO of these companies on why you should be looking at residential REITs.

I’ll give you an example. I mentioned that Mid-America CEO. The guy is doing very well in this career. What keeps you up at night, Mr. CEO? And his response was very simple. “How do I keep raising my shareholder dividend? Raising my dividends is what keeps me up at night.” And that’s great. Because remember, these CEOs got huge stock packages and compensation because of REITs with their dividends. If that dividend goes up 10%, guess what, his quarterly bonus just went up 10%. So he is just as aligned as what I call grandma and grandpa over in the villages who wanted to see this company do well.

But check out Armada ETFs. They can email me at [email protected]. Always happy to sit here and talk REITs. If they wanted to inquire about the newsletter, they could shoot me an email. I’m happy to have that conversation as well. We are trying to be the one-stop shop when it comes to REIT education.

Andy: Absolutely. And so I’ll be sure to link to all that in our show notes, including…I just added a note to link to the Insights section on your website.

David: Thank you.

Andy: You’re also on Twitter, right? I follow your Twitter account. So I’m going to make sure to link to the Twitter account in the show notes as well. So, for our viewers and listeners, you can always read those show notes at altsdb.com/podcast. David, thanks again for coming on the show today.

David: Andy, thanks so much for having me. This was awesome. I really appreciate it.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.