REET: Diversified REIT Fund Investing In Growing Real Estate Segments

~ by Snehasish Chaudhuri, MBA (Finance).

iShares Global REIT ETF (NYSEARCA:REET) is an exchange-traded fund (“ETF”) that diversifies its investments among various types of real estate investment trusts (“REITs”). These REITs are companies that own, finance and/or operate revenue-generating real estate properties. The fund has assets under management (“AUM”) of $3 billion, which it invests in almost 350 REITs. A substantial portion of its assets is invested in three segments – industrial REITs, specialized REITs, and residential REITs. REET pays quarterly dividends and generates an annual average yield of 4.5 percent over the past 6 years. The fund has recorded an average total return of 9 percent during 2016 and 2021. This year, however, it failed to generate positive growth. In my opinion, if REET can sustain its yield and total returns, that’ll make it attractive for investors.

REET’s Portfolio Emphasizes on Industrial, Residential and Specialized REITs

iShares Global REIT ETF was launched by BlackRock, Inc. and is managed by BlackRock Fund Advisors. It seeks to track the performance of the FTSE EPRA Nareit Global REITs Index by using representative sampling techniques.

REET invests in REITs all over the globe. However, 70 percent of its assets are invested in the U.S. market. And the good thing is the fund has a very low expense ratio of 0.14 percent. The index is designed to track the performance of publicly-listed REITs throughout the globe. REET invests in almost 350 securities. However, almost 44 percent is invested only in 20 REITs. Almost 60 percent of the entire fund is invested in industrial, specialized and residential REITs. Post covid-19 pandemic, REITs in these three sectors have performed much better than other REITS, such as Office, Retail and Hospitality REITs.

A close look at the top 20 equity investments reveals that iShares Global REIT ETF has made large bets on industrial and specialized REITs. More than 20 percent of its assets is invested in six such REITs – Digital Realty Trust, Inc. (NYSE:DLR), Equinix, Inc. (NASDAQ:EQIX), Public Storage (NYSE:PSA), Extra Space Storage Inc. (NYSE:EXR), Prologis, Inc. (NYSE:PLD), and W. P. Carey Inc. (NYSE:WPC). Another 10 percent of AUM is invested in 8 residential REITs – AvalonBay Communities, Inc. (NYSE:AVB), Equity Residential (NYSE:EQR), Invitation Homes Inc. (NYSE:INVH), Mid-America Apartment Communities, Inc. (NYSE:MAA), Sun Communities, Inc. (NYSE:SUI), Essex Property Trust, Inc. (NYSE:ESS), UDR, Inc. (NYSE:UDR), and Camden Property Trust (NYSE:CPT).

“Specialized REIT” is a broad umbrella term, which may include various property types like data storage REIT, farmland REIT, self-storage REIT, etc. Industrial REITs and Specialized REITs are highly cyclical in nature. As specialty REITs and industrial REITs create and operate specific and unique types of facilities, these assets will always have lower supply and higher demand. However, the demand will vary from time to time, and will be more dependent on the growth of those specific industries for which such facilities are constructed. Residential REITs again is an evergreen sector. As long as there is a growth in population and increase in purchasing power, the residential REITs will continue to generate growth. So, overall, I feel that iShares Global REIT ETF has selected the right segments for investments.

Performance of iShares Global REIT ETF Has Been Above Average

iShares Global REIT ETF benchmarks its performance against the FTSE EPRA Nareit Global REITs Index, which tracks the performance of the highest yielding REITs globally. REET has assets under management of $3 billion, and an expense ratio of 0.14 percent. The expense ratio of similar REIT ETFs such as SPDR Dow Jones REIT ETF (NASDAQ:RWR), Global X SuperDividend REIT ETF (NASDAQ:SRET) and iShares Cohen & Steers REIT ETF (NASDAQ:ICF) are comparatively higher at 0.25 percent, 0.58 percent, and 0.33 percent, respectively. It also generates a higher yield than two of those funds – RWR and ICF.

iShares Global REIT ETF was formed on July 8, 2014, and has been paying quarterly dividends since then. During 2022, average yield is 3.4 percent, and the annual average yield during the past six years has been 4.5 percent. Although not an incredibly high yield, it is still higher than average. This makes this fund attractive for income-seeking investors. Such a higher-than-average yield enabled REET to generate an average annual return of 9 percent during 2016 and 2021. Returns in 2022 have been discouraging at negative 25 percent. However, as we all know, the broader market has failed to generate positive growth this year, and most indices have suffered a double-digit price loss.

iShares Global REIT ETF is also an incredibly well-diversified fund, much more diversified than all its peers. It has a portfolio of almost 350 equity stocks. Diversification reduces risk and volatility of its portfolio. Still, selecting the right real estate segment is also quite important. As economies worldwide are moving towards steady growth, the real estate sector is going to be one of its bigger beneficiaries. However, that growth will not be secular among all segments of real estate. Fortunately, REET has invested almost 60 percent in industrial, specialized, residential and diversified REITs – segments that are expected to deliver higher growth rates than the other types of REITs.

Impact of Inflation and the Current Economic Situation on the Real Estate Industry

Despite living in a digitalized world and technology replacing the traditional way of doing business and living our lives, we can’t do away with real estate properties. For everything in life, we need minimum infrastructure and space. As REITs are in the business of creating and managing specific types of physical assets, they will always generate some kind of growth over a long period of time. However, it’s quite difficult to own and/or manage such real estate facilities in multiple sectors, which makes it difficult for investors to diversify their investments and gain from multiple real estate sectors, such as industrial, retail, or residential REITs. REIT ETF funds are thus the best options to enjoy the return of various types of REITs, and benefit out of diversification.

Real estate sector outperforms most forms of securities – equities, bonds, commodities, etc. Real estate companies also tend to perform reasonably well when inflation is high. Inflation leads to rising prices, including increasing rates of real estate properties, which are self-evidently beneficial for real estate companies. It’ll be unfair to formulate such a direct relationship, but the market sentiment and broader economic conditions are most likely to result in increasing real estate rates, and that leads to better operating performances of REITs. NAREIT also has observed that REITs outperform equities during the period of higher inflation.

Economies worldwide are slowly overcoming three years of persistent economic uncertainties arising out of pandemic-related economic stagnation, and Russia’s invasion-related inflation and supply-side shortages. As the economies are recovering from years of low or poor growth post covid-19 pandemic, the real estate sector is expected to post strong, market-beating returns, and that trend is expected to continue for a longer period. Economic growth and hikes in real estate prices will not only help the specialized REITs and industrial REITs, but also pull up the revenue and earnings of residential REITs, Retail REITs, and Office REITs. For reference, iShares Global REIT ETF has invested 28 percent of its assets in Office REITs and Retail REITs.

Investment Thesis

iShares Global REIT ETF has a reasonably high AUM, and generates a decent level of yield. It invests a significant proportion of its assets in Industrial REITs, Specialized REITs and Residential REITs. These three types of REITs performed better than Office REITs, Retail REITs, or Hospitality REITs. The prime reason behind this was lack of business, consumption, travels, and popularity of work from home phenomenon. Due to lack of supply of industrial and specialized REITs, inflation also leads to better growth of such REITs.

REET is highly diversified, and is thus less susceptible from negative impacts on a particular REIT segment or few large-size REITs. A higher-than-average yield enabled REET to generate an average annual return of 9 percent between 2016 and 2021. The fund also has a low expense ratio, and its portfolio has a very low turnover ratio. Moreover, REET has proved to be a better fund than most other REIT funds available in the market. In my opinion, all these factors should instill confidence in investors that the iShares Global REIT ETF is in a position to sustain its yield and total returns over a longer period of time.