Armada ETF Advisors and the Tidal Financial Group have opened the door for a new kind of real estate investment trust exchange-traded fund: the Private Real Estate Strategy via Liquid REITS ETF (PRVT) .
A little over a year ago I wrote a piece about relatively new exchange-traded fund issuers that had launched new funds targeting the residential real estate market, including Armada ETF Advisors and its predecessor to PRVT, The Home Appreciation U.S. REIT ETF (HAUS) . While this newest fund isn't the first multi-sector REIT fund in the marketplace, issuer Armada has taken a novel marketing approach.
Let's take a look at the fund and what it is doing to try and raise assets.
Armada Expands Its Fleet
PRVT launched on June 12 and sports a 59-basis point expense ratio, so $1,000 invested over a calendar year would see $5.90 go toward fees.
While the fund doesn't have any REIT sector information posted on its information page I was able to download the latest holdings. In terms of overlap with HAUS, if you own shares of PRVT you will own 76% of the names of HAUS and just over 90% of the allocation to those names. Those same names account for just over 50% of the weight of positions in PRVT so while there is overlap between the two funds shareholders of PRVT are getting a different, broader exposure to REITs. The segment differences come in the form of a 25% allocation to Industrial REITs, roughly 15% spread across Office, Data Center, Retail, Hotels & Resorts, Self-Storage REITs, and finally a 6.70% position in Other Specialized REITs.
As PRVT is actively managed, the strategy is laid out in the prospectus. Eligible securities include REITs, up to a 10% allocation to Mortgage-Backed Securities (MBS) listed in the U.S., and "to a lesser extent, stock exchanges in Canada, Europe, and Asia." Security and segment selection is informed through the issuer creating an aggregate portfolio based on publicly available information about the holdings of private REIT portfolios, hence the "Private" and "Liquid" parts of PRVT's name.
Armada's fund has a name to ponder. If you've been following the Private REIT space, you've probably seen articles over the past few months about a BlackStone (distantly related to BlackRock) fund, BlackStone Real Estate Income Trust (BREIT) . This actively managed fund has been around for years, has a full range of REIT segments, and has a current Net Asset Value of $68 billion of investor assets. This fund doesn't own REITs, it owns actual properties. One of the hallmarks of any portfolio is the periodic valuation of the assets held in the portfolio. Mutual Funds, Closed-End Funds, and, of course, ETFs generally hold exchange-listed assets, which from a valuation perspective means those holdings are valued with every trade. This is often referred to as "Price Discovery" and has to do with the "Discovery" of what price will bring buyers and sellers together. Because BREIT holds properties, the only way they can truly find out what the value of those properties are, is to sell them. Anyone who has sold a home knows that the next best gauge of a property's value is by looking at comparable properties that have recently sold, or "Comps."
The issue that has been identified with many private REIT funds like BREIT is that many of these funds perform their own analysis when it comes not just to what properties to own, but also what they should be valued at. As a result, when you compare these funds' returns to publicly traded REITS, or even comparable properties, the private REIT valuations seem to defy gravity consistently. Investors in these funds have had a feeling that while they don't necessarily have a problem with current valuations, they recognize that the rest of the space is correcting. Because of this, some are looking to sell their high-priced private shares and potentially re-invest in lower-priced public funds, or maybe even hold on to that cash for later in the cycle. As a result, some of these funds, BREIT, in particular, have had to restrict their shareholders from withdrawing too many dollars, or "Gate" the fund, so that it isn't forced to sell properties in order to fulfill redemptions.
Wrap It Up
If you hold BREIT or another private REIT portfolio, you might want to consider arbitraging your position by selling those shares and establishing a position in PRVT. You'll be getting a very similar exposure to the REIT market at a lower expense ratio. As an added bonus, you will be buying in at lower valuations without having to take the haircut. If I had private REIT fund shares, I would have done this already for what it's worth.