Commentary

BMO Global REIT Fund Active ETF Series-BGRT

Top up your Monthly Cash Flow with Rental Income

Jan. 31, 2024

We are delighted to share the monthly commentary for the BMO Global REIT Fund. We look forward to providing monthly commentary highlighting sector performance, fund positioning, as well as key trends and takeaways each month.

January Recap:

Global REITs underperformed broader indices in January as 10-year yields climbed on strong economic datapoints, reaching 4.18% on January 24th before softening into month-end. All property sectors with exception to Data Centers delivered negative returns for the month, with Self Storage, Healthcare, and Office lagging the group. Despite soft returns to start the year, January brought a return of M&A, with fund holding Tricon Residential (TSX: TCN) announcing it will be acquired by Blackstone Real Estate Partners X and Blackstone Real Estate Investment Trust (“BREIT”) for US$11.25 per share in cash or US$3.5B, representing a mid-5% implied cap rate1, a healthy 30% premium to Tricon’s January 18th closing price, and a whopping 42% premium to the 90-day VWAP (volume weighted average trading price)2.

Q4 earnings kicked off in late January with a number of industrial, multifamily residential, and office REITs reporting, including fund holdings Prologis (NYSE: PLD), Equity LifeStyle Communities (NYSE: ELS), and Alexandria Realty (NYSE: ARE). Thus far, Q4 operating and financial results and 2024 guidance have generally tracked in-line with consensus expectations.

For the month, the fund’s holdings in Single Family Residential, Data Centers, and Seniors Housing contributed positively to fund performance, while Industrial, Telecom Tower, and Self Storage REITs detracted from performance.

Individual contributors to fund performance in January included Tricon Residential (TSX: TCN), Equinix (NYSE: EQIX), Killam Apartment REIT (TSX: KMP.UN), Digital Realty (NYSE: DLR), and Chartwell Retirement Residences (TSX: CSH.UN), while Prologis (NYSE: PLD), American Tower Corp. (NYSE: AMT), Public Storage (NYSE: PSA), SBA Communications (NYSE: SBAC), and Granite REIT (TSX : GRT.UN) detracted from performance for the month.

Of interest, on its Q4 2023 earnings call, Blackstone President & COO Jonathan Gray provided commentary on three major real estate transactions it has announced over the last two months, which included the US$3.5B privatization of Tricon Residential announced on January 19th, We think this is just the start as Blackstone Real Estate has US$65 billion of dry powder to invest into this dislocated market.” Given the public to private valuation gap, we anticipate we’ll see further deal activity ahead.

In other news:

  • On January 31, Canada Mortgage and Housing Corporation (CMHC) released its 2024 Rental Market Report, which showed strong rental demand has continued to outpace supply, resulting in tighter markets. The national vacancy rate for purpose-built rental apartments in Canada reached a new record low of 1.5% in 2023, while average rental rate growth reached a new record high of 8.0% (well above the 1990-to-2022 average of 2.8%), creating competitive rental conditions across markets3. Despite an increase in the overall survey universe of rental units (i.e. rental inventory), new supply was unable to keep pace with demand, which was lifted by increased immigration, employment growth for younger households (a prime rental demographic), and a higher overall tendency to rent due to the low affordability of home ownership. Toronto, Montreal, Calgary, and Edmonton witnessed significant declines in vacancy rates, while Vancouver and Ottawa remained stable. The data supports our constructive stance and overweight position in the Canadian Apartment REITs, including Killam Apartment REIT (TSX: KMP.UN), Minto Apartment REIT (TSX: MI.UN), and Canadian Apartment Properties REIT (TSX: CAR.UN).

As we look ahead, we continue to favour REITs benefitting from tailwinds to operating growth, with portfolios supported by favourable supply/​demand dynamics. The fund remains skewed in favour of needs-based and secular growth sectors, including industrial, multifamily residential, retail (and specifically grocery- anchored/necessity-oriented retail), single family rental, data center, and telecom tower REITs, which together comprise approximately 80% of fund holdings. We remain cautious on discretionary retail amid concerns of a weakening consumer, and are highly selective in office, given continued headwinds from work from home/​hybrid work trends, as well as elevated vacancy levels.

By geography, the fund is biased towards the U.S., Canada, and the U.K., driven by a function of fundamentals, valuation, and balance sheet health.

From a stock perspective, the fund continues to emphasize REITs with low leverage, sustainable payout ratios, and ample liquidity.

1 The implied cap rate is calculated by dividing the (NOI) net operating income by the quantity of a REIT’s equity market capitalization and the full amount of outstanding debt. It can be used as a benchmark for an investment decision.

2 Volume-weighted average price (VWAP) is a commonly used benchmark derived from a ratio of the average share price for a stock compared to total volume of shares traded over a particular time frame.

3 Canada Mortgage and Housing Corporation (CMHC) 2024 Rental Market Report January 312024.

Disclaimer

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/​or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/​or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

As the fund is less than one year old, the actual Management Expense Ratio (MER) will not be known until the fund financial statements for the current fiscal year are published. The estimated MER is an estimate only of expected fund costs until the completion of a full fiscal year, and is not guaranteed. Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

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