REITs Continue To Fly Under The Radar

| About: Vanguard REIT (VNQ)

Summary

Publicly traded REITs, both in the U.S. and globally, have turned in some impressive results of late.

There are many other different sectors of REITs available for consideration that are not necessarily significantly correlated to residential housing.

From a historical perspective, REITs have demonstrated that they have actually performed well in environments when the Fed has gradually raised interest rates.

The stocks, and/or preferred securities, of publicly traded REITs can be purchased directly or as part of a packaged product strategy through vehicles such as mutual funds, closed-end funds (CEFs),

Real estate investment trusts (REITs) represent a type of security that invests in real estate, through either property or mortgages, and typically trade on an exchange. While many concerns have been raised about non-traded REITs in recent years, publicly traded REITs, both in the U.S. and globally, have turned in some impressive results of late. Consider the performance of two of the better known indexes that track U.S. and global REITs over the past year and thus far in 2016.

Index Name

1 Year % Return

2016 Year-to-Date (YTD) % Return

Dow Jones U.S. Select REIT index

8.07%

+2.04%

Dow Jones Global ex-U.S. Select REIT index

4.78%

+11.68%

Click to enlarge

Source: Wells Fargo Advisors as of May 3, 2016. Index performance is total return performance which includes gains and losses plus income unless otherwise noted. You cannot invest directly in an index. Past performance is not an indication of future results.

As a point of reference, the S&P 500 index; a widely recognized benchmark of U.S. stock market performance, has returned 1.21% and 1.74% respectively over these timeframes. Yet despite this apparent momentum, and some recent optimistic forecasts from a couple of well-known investors such as Jeffrey Gundlach, CEO of DoubleLine Capital and Bill Gross, Portfolio Manager at Janus (specifically related to mortgage REITs - click here for Morningstar's account of this forecast), REITs have basically continued to fly under the radar of the attention of the media and many investors for some reason.

Perhaps this aversion is due to either the lingering effects of the non-traded REIT fallout on advisors or concerns that REITs may not perform well in a rising interest rate environment. Many assume that REITs are synonymous with the housing market and while there may be some correlation with mortgage REITs and housing, there are many other different sectors of REITs available for consideration that are not necessarily as correlated to residential housing. According to the Global Industry Classification Standard (GICS), as published by MSCI, there are currently nine sub-industries of REITs as follows:

  1. Diversified REITs - companies or Trusts with significantly diversified operations across two or more property types.
  2. Industrial REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of industrial properties. Includes companies operating industrial warehouses and distribution properties.
  3. Mortgage REITs - companies or Trusts that service, originate, purchase and/or securitize residential and/or commercial mortgage loans. Includes trusts that invest in mortgage-backed securities and other mortgage related assets.
  4. Hotel & Resort REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of hotel and resort properties.
  5. Office REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of office properties.
  6. Health Care REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of properties serving the health care industry, including hospitals, nursing homes, and assisted living properties.
  7. Residential REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of residential properties including multifamily homes, apartments, manufactured homes and student housing properties.
  8. Retail REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of shopping malls, outlet malls, and neighborhood/community shopping centers.
  9. Specialized REITs - companies or Trusts engaged in the acquisition, development, ownership, leasing, management and operation of properties not classified elsewhere. Includes trusts that operate and invest in storage properties. It also includes REITs that do not generate a majority of their revenues and income from real estate rental and leasing operations.

After the market closes on August 31, 2016, S&P Dow Jones Indices and MSCI is scheduled to even reclassify exchange listed real estate companies, including listed equity REITs, from the Financials Sector to a new Real Estate specific GICS sector. The REITs Industry is being renamed to Equity Real Estate Investment Trusts (REITs), and excludes Mortgage REITs. Mortgage REITs will remain in the Financials sector under a newly created Industry and Sub-Industry called Mortgage REITs. These changes will certainly help portfolio managers navigate the complex REIT marketplace more efficiently.

It is also interesting to note that from a historical perspective, REITs have demonstrated that they have actually performed well in environments when the Fed has gradually raised interest rates (i.e. the same scenario that we, at Hennion &Walsh, believe will take place this time around). For example, during the timeframe of 2004-2006, the Fed raised the Federal Funds Target Rate on 17 different occasions in 25 basis point (0.25%) increments, and U.S. publicly traded REITs, as measured by the Wilshire REIT Index, experienced an average annual total return of 27.7%.

Year

# of Fed Funds Rate Increases

Wilshire REIT Index Total Return %

2004

5

33.2%

2005

8

13.8%

2006

4

36.0%

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Source: Wells Fargo Advisors. The Wilshire REIT Index measures U.S. publicly traded Real Estate Investment Trusts. The Wilshire US REIT Index (WILREIT) is a subset of the Wilshire US Real Estate Securities Index (WILRESI). You cannot invest directly in an index. Past performance is not an indication of future results.

The stocks, and/or preferred securities, of publicly traded REITs can be purchased directly or as part of a packaged product strategy through vehicles such as mutual funds, closed-end funds (CEFs), unit investment trusts (UITs) and exchange-traded funds (ETFs). As opposed to conducting their own research to select a REIT on their own, many individual investors and financial advisors often choose to leverage the research and selection abilities of experienced professionals by investing in a diversified portfolio of REITs through one of these product types. Some of the most popular U.S. and global REITs, based on total assets, that track REIT indexes, according to ETFdb.com, include the following:

Ticker

Name

Assets

2016 YTD % Performance

VNQ

Vanguard REIT ETF

$31,954,294

+7.04%

RWX

SPDR Dow Jones International Real Estate ETF

$4,762,097

+6.36%

IYR

iShares U.S. Real Estate ETF

$4,310,498

+5.97%

VNQI

Vanguard Global ex-U.S. Real Estate ETF

$3,093,200

+4.12%

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Source: ETFdb.com as of May 13, 2016. Past performance is not an indication of future results.

It is important to recognize that REITs contain their own set of unique risk factors that should be thoroughly reviewed and analyzed before considering an investment in them directly or through a packaged product structure.

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Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program to the Vanguard REIT ETF (Ticker: VNQ) and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with the investment strategies reviewed above. This posting is provided for informational purposes and is not a solicitation to buy or sell any of the investment strategies or companies discussed.

Disclosure: I am/we are long VNQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.