BMO Global REIT Fund Active ETF Series-BGRT

March Recap:

Global REITs outperformed broader indices in March, as economic data remained resilient and 10-year bond yields softened modestly, with the U.S. 10-year reaching 4.20% at month-end, down 5bps sequentially. All property types except Data Centers delivered positive returns in March, with Diversified, Self Storage, and Multifamily Residential REITs leading the group.

For the month, the fund’s holdings in Industrial, Multifamily Residential, and Retail REITs were the greatest contributors to performance, while the fund’s Data Center holdings detracted from performance. Individual contributors to fund performance in February included Goodman Group (ASX: GMG), Granite REIT (TSX: GRT.UN), Apartment Income REIT (NYSE: AIRC), SEGRO plc (LSE: SGRO), and AvalonBay Communities (NYSE: AVB), while Equinix (NYSE: EQIX), Minto Apartment REIT (TSX: MI.UN), Prologis Inc (NYSE: PLD), Killam Apartment REIT (TSX: KMP.UN), and Sun Communities (NYSE: SUI) detracted from performance for the month.

In early March, we attended Citi’s Global Property CEO conference, which brings together property companies from around the globe, with over 175 North American and international CEOs in attendance. We were encouraged to hear conference attendance was up year-over-year. As is customary, a number of REITs published operating updates through February in advance of the conference. These operating updates and our discussions with management teams were generally constructive. We came away with the view that initial 2024 guidance may prove conservative in many cases.

While in Miami, we took advantage of the opportunity to tour a number of properties owned by the fund’s holdings, including Equity LifeStyle Communities’ Breezy Hill Resort, Sun Communities’ Safe Harbor Lauderdale Marine Center, AvalonBay Communities’ Merrick Park apartments, Camden Property Trust’s Brickell apartments, Kimco Realty’s Mary Brickell Village, Apartment Income REIT’s Southgate Towers, and Equinix’s Ml1 data center.

In addition to a busy cadence of conferences, 1x1s, and property tours, March was news and noteworthy across a number of key fund holdings. Our key takeaways for the month are captured below:

• On March 20, Hindenburg revealed its short thesis on Equinix (NYSE: EQIX), with a report detailing a number of items, including Hindenburg’s view that Equinix misclassifies ​“maintenance capex” as ​“growth capex”, thereby inflating its accounting for AFFO¹, a key profitability metric for Equinix (and REITs more broadly). Hindenburg sees EQIX’s FY2023 AFFO as overstated by ​“at least 22%”. In response, Equinix announced its Audit Committee has commenced an independent investigation to review the matters referenced by Hindenburg. Shortly after the report’s release, Equinix received a subpoena from the U.S. Attorney’s Office for the Northern District of California, which Equinix stated ​“is not unusual in these circumstances”. Equinix will fully cooperate in this matter. Importantly, many points Hindenburg revealed in its report are not new and have been put forth by other short sellers over recent years, including Jim Chanos. We remain constructive on Equinix’s long-term opportunity to deliver high single digit AFFO per share growth and note Equinix’s maintenance capital expenditure classifications are similar to other data centers companies.

• On March 20, Bloomberg reported that alternative asset manager TPG Inc is in exclusive negotiations to acquire Canadian Apartment REIT​’s (TSX: CAR.UN) manufactured housing communities (MHC) for more than C$700 million. The news didn’t come as a surprise, as it aligned with CAPREIT’s strategy and focus on newly built apartment properties in Canada. The ​“more than C$700 million” sale price compares to CAPREIT’s MHC IFRS carrying value of $701 million at a 6.05% cap rate as of December 31, 2023. Our conversations with market participants suggest the portfolio is being sold for C$770 million, which implies a 5.5% cap rate, and that the deal is signed and waiting on financing.

• On March 21, Canada’s Minister of Immigration, Refugees, and Citizenship Marc Miller announced plans to limit the number of temporary residents Canada allows into the country. The new rules will apply to international students, foreign workers, and asylum seekers. The plan is to reduce temporary residents from 2.5 million or 6.2% of the population to 5% of the population in 3 years. According to some estimates, this implies a net reduction of approximately 375,000 temporary residents over the period. The change is expected to reduce Canada’s national population growth CAGR² to ~1% for 2025-2027, which remains elevated versus G7 peers and should continue to support healthy supply/​demand fundamentals for multifamily residential. The fund remains well positioned in Canadian multifamily REITs, with its largest exposures geared to Killam Apartment REIT (TSX: KMP.UN), Canadian Apartment REIT (TSX: CAR.UN), and Minto Apartment REIT (TSX: MI.UN) at present.

• On March 27, Kimco Realty (NYSE: KIM) announced the disposition of 10 former RPT Realty properties totaling 2.1M square feet of GLA (gross leasable area) for an aggregate price of US$248M, reflecting a~8.5% blended cap rate on in-place net operating income. With these sales, Kimco has fulfilled its 2024 disposition target for the former RPT properties well ahead of schedule. The disposition properties were lower growth, higher risk assets with elevated capex profiles. Blended pricing achieved on the sale of these properties was in-line with management’s previously communicated cap rate assumptions, and at a similar level to where Kimco acquired RPT Realty as a whole – yet another datapoint underscoring a public-to-private valuation disconnect. We view the sales positively and are pleased to see management execute as promised. Management anticipates Kimco will see investment activity outpace dispositions for the balance of the year, which should be a driver of growth going forward. In early March, we toured Kimco’s Mary Brickell Village asset in Miami, which Kimco acquired as part of its purchase of RPT Realty. Management walked us through their vision for the property, which includes significantly increasing density through development, while also highlighting the significant retail mark-to-market opportunity, as in-place rents are meaningfully below market rates.

• On March 28, Bloomberg reported Invitation Homes (NYSE: INVH) has agreed to manage approximately 3,000 single family rental homes for Nuveen. The news follows Invitation Homes’ recent launch of its professional management services to third-party portfolio owners, providing runway to drive capital- light earnings growth through fee income, which we view positively. With the addition of Nuveen’s 3,000 homes, Invitation has scaled its third-party management business to 17,000 homes. Incremental third-party management fees, including fees that will be earned for managing the 3,000 homes owned by Nuveen, are not baked into 2024 guidance/​estimates and are likely to be a tailwind for earnings.

• Also on March 28, Rexford Industrial (NYSE: REXR) announced a 48-property, 3,008,000 square foot portfolio acquisition from Blackstone Real Estate for US$1.0 billion equating to $332 per square foot. The portfolio is 98% leased, with 99% of the portfolio square footage located in core, infill submarkets in Los Angeles and Orange counties. In aggregate, the assets are expected to generate a weighted average initial unlevered cash yield of 4.7% and an anticipated stabilized unlevered cash yield of 5.6%. The transaction was funded using proceeds from Rexford’s exchangeable senior note offerings and cash on hand. From an accretion standpoint, REXR expects mid-single digit FFO³ contribution in 2024. Also on March 28, REXR announced an US$840 million forward ATM issuance to a long-only West Coast-based investor, which was notable. Looking forward, Rexford’s pipeline comprises approximately US$300 million of additional investments under contract or accepted offer, bringing its aggregate year-to-date total to US$1.4 billion completed or in the pipeline at a weighted average 5.0% anticipated initial unlevered cash yield and anticipated 5.7% stabilized unlevered cash yield. The magnitude of deal flow suggests price discovery for industrial assets is improving and bid/​ask spreads narrowing.

¹ Adjusted Funds From Operations (AFFO) is a measure of the financial performance of a REIT. It is calculated by making adjustments to the FFO value to deduct normalized recurring expenditures and to use straight-lining of rents.

² CAGR (Compound Annual Growth Rate) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.

³ Funds from Operations per share (FFO) is calculated by adding depreciation, amortization, and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income. It is sometimes quoted on a per-share basis.