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REIT market: ‘Slow and steady is a good hedge’ to overall portfolio, ETF expert says

Armada ETF Advisors Managing Director David Auerbach joins the show to discuss the real estate investment trust (REIT) market amid rising mortgage rates, a fluctuating house market, and the Fed's economic adjustments.

Video Transcript

- A, quote, "difficult correction." That's what the Fed Chair says the housing market must endure to bring supply and demand back into balance. What should investors take away from the Powell comments and the recent data? David Auerbach, Armada ETF Advisors managing director here as part of our ETF report brought to you by Invesco QQQ. David, good to see you. Collectively, those words and actions of the Fed yesterday, what's the translation for real estate investors at this moment?

DAVID AUERBACH: Well, thanks for having me back on. Hope you're enjoying those Lululemon pants from our last conversation.

- I am indeed. They are on right now. I don't know how you knew it.

DAVID AUERBACH: I haven't forgotten. I say here as we run Armada, the home appreciation US ETF, that with the Fed news yesterday as well as most likely what's coming in November that this bodes well for us because we're focused on rental income. We're focused on those residential REITs with renters focused towards apartments, manufactured housing, single-family rentals, and senior housing.

So as a result, because interest rates continue to go up, that means the mortgage gets that much more expensive, which means that prospective home buyer will be renting for that much longer. Remember, we're in an environment where interest rates have literally doubled. Mortgage rates have doubled year over year. And so from going from a three handle to a six handle and most likely higher, the cost of that mortgage continues to go up and up every single month.

- So then as you look at how some of these REIT ETFs are faring, what are some of the strongest performers there? And what are some of the nuances that you think people need to be aware of when investing in these.

DAVID AUERBACH: That's a great question. First of all, I would start with the active versus passive. For those that don't know, passive rebalance a couple of times a year. Active we can trade whenever we want. We're one of the only active REIT ETF products that's on the market. And in fact, we're currently the only active residential REIT fund that's on the market. So for us, we could take what I call a proactive approach. When we originally built HAUS, we built it off of two fundamental theses. Where are people moving across the country? And which of the residential REIT segments benefit from that relocation because of what's going on in the state of the housing market?

We are seeing headlines that house prices are starting to moderate. I think it's on a case by case example. I'm coming to you from Dallas. And though it's not as much of a frenzy as it was just a couple of months ago, the Dallas market is still very hot. And so I think if you look-- mentioning where is the focus, I think right now, we're still seeing that strength in the Sunbelt based on the updates that a lot of the companies are reporting. You're seeing a big return to the coasts.

I was just in New York last week. And there's no question about it. New York is coming back. Same with San Francisco and some of these very hard to barrier entry cities. From a broader perspective, though, from a bigger REIT perspective, we're seeing still strength in the industrial REITs, the self-storage REITs, the towers and data centers. There's a lot of REIT sectors that are just humming along in this rising interest rate inflation environment.

One more point. I refer to NAREIT, the National Association of Real Estate Investment Trusts. They have a great education portal on their website. But they basically say, in times of rising volatility and interest rates, over long-term horizons, the REIT sector is where you want to be. REITs are boring. I'm sorry. Slow and steady wins the race. And because of all this volatility it's happening it's out there, that slow and steady is a good hedge to the overall bigger picture of the portfolio.

- So David, you don't think the correction that Powell warned about numerous times during the press conference yesterday, you don't think it's going to be as severe that many economists have been calling for?

DAVID AUERBACH: I'm not saying that it's not going to be as severe. I feel that these companies have done a really good job of forecasting that we are seeing some moderation ahead. Look, for the apartment REITs, they may not be reporting 15% NOI growth year over year on new renewal leases. But if that number goes from 15, let's say, to 8 or 9, you're still putting up strong rental growth. And also, we're talking about properties that are anywhere from literally 94% to 99% occupied. For those that are in the home market, though, that are actually out there trying to buy that home, it feels like, right now, waiting is in your favor.

The longer you wait, the home price comes down. But in the same breath, with mortgage rates going up, at the end of the day, it's a wash-wash. There's plenty of stories that are going around right now where people want to sell their houses. But in the same breath, they're locked in a 2.75, 2 and 1/2 mortgage. Why would I saw my 2 and 1/2 mortgage house and go in and buy a 6% mortgage property Now

- Yeah. Certainly have seen a slowdown. The question is how big of a slowdown we could potentially see over the coming months. David, always great to have you. Thanks so much for joining us.