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Hello. I'm Todd Kellenberger, Client Portfolio Manager for Principal's Public REIT strategies. Welcome to our 2024 outlook.

The end of rising interest rates is expected to drive REIT market outperformance in 2024. Combined with historically cheap relative valuations, steady fundamentals, and a macro environment supportive of longer duration risk assets, public REITs look especially attractive relative to other equities and private real estate.

Let's take a closer look at what we're watching for in the year ahead. Historically, the peaking of long-term real yields has been a significant catalyst for REIT market total returns and their relative performance to broader equity indices. And history is starting to repeat itself. With REITs rallying late last year as yields declined. When yields fall, the cost of capital for real estate improves, and lower property yields are supportive of real estate values. While interest rates are unlikely to revert back to the ultra low yields from three years ago, further moderation of interest rates in 2024 will continue to support REIT stocks.

The durable, long-duration nature of REIT cash flows that help guard against the sharp earnings declines will matter this year. Economic growth will slow in the year ahead, and we believe downside risks to a soft landing remain. Should a harder landing materialize, market pullbacks in the short term are likely, investor patience might be necessary, but investor rotation in defensive equities would benefit REITs. If a soft economic landing is achieved, then public REITs will continue to have the strong tailwinds of both a good economy and lower yields.

Public REITs offer a compelling opportunity to buy discounted real estate right now. Public REITs have led private real estate markets down since the U.S Fed started hiking rates. The gap in valuations between the two remains open, and we believe the recovery backup will be led by REITs as private real estate could experience another year of value declines.

The discount of REITs relative to equities is near historical levels entering this year and comparable to the big discounts observed during the global financial crisis and COVID, which preceded an extended period of strong outperformance of REITs over equities.

To wrap up, 2024 should offer a compelling window of opportunity to increase a strategic allocation to REITs as our long-term views on the market remain positive. As portfolio managers, we see long-term opportunities in REITs and property sectors with resilient, structurally driven demand drivers that offer attractive, long-term growth.

Areas of concern for real estate, particularly traditional office assets and upcoming debt maturities, are well contained in REIT markets and our portfolios. For more insights, please read our 2024 REIT market outlook and other thought capital found on the Principal Asset Management website. On behalf of the REIT team, thank you. And we look forward to speaking with you this year.

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