PEAK - ICF: A Low-Yielding Diversified ETF Focusing On The Right REIT Segments

Summary

• ICF paid quarterly dividends since its inception, generated low but consistent yield and was able to successfully generate strong returns over the long run.
• ICF invested only in 30 stocks and most of ICF’s equity holdings performed reasonably well during the past three months, as well as over the long run.
• Significant proportion of ICF’s assets are invested in industrial, specialized, and healthcare REITs - the segments expected to have strong growth potential.
• Due to investing in the right segment of REITs, this fund will be able to sustain its current level of yield, and also the total returns over the coming decade.

~ by Snehasish Chaudhuri, MBA (Finance)

iShares Cohen & Steers REIT ETF ( ICF ) is an exchange traded fund that invests in equities of various types of real estate investment trusts. The fund was launched by BlackRock, Inc. and is managed by BlackRock Fund Advisors. It seeks to track the performance of the Cohen & Steers Realty Majors Index, by investing in a group of stocks that properly represent the index. This index is composed of relatively large and liquid REITs that are expected to benefit from future securitization and consolidation of the U.S. real estate sector. This fund generates low and consistent yield, but generates a strong annual average total return over the long run. During 2016 and 2021, average total return generated by ICF was 11.87 percent. The fund is currently trading at $62.3, at par with its net asset value. Expense ratio is relatively low at 0.32 percent.

ICF Generates Low and Stable Yield But Strong Return Over the Long Run

iShares Cohen & Steers REIT ETF was formed in January 2001 and has been paying quarterly dividends for the past 22 years. The fund generated an annual average yield of 3 percent during the past 10 years, and the yield has been quite consistent ranging between 2 percent and 4 percent. ICF’s exposure in strong growth sub-sectors such as specialized REITs, healthcare REITs and industrial REITs have benefitted largely from increased demand for such specialized infrastructure. Further, this fund is dominated by large-cap REITs, which are in a position to acquire properties at a cheap rate. There is an assumption that a higher interest rate regime could make things more challenging for real estate companies on account of higher borrowing costs. However, fortunately these real estate investment trusts have relatively lower leverage and are expected to overcome the current macroeconomic situation.

iShares Cohen & Steers REIT ETF’s Portfolio - Composition and Performance

More than 60 percent of ICF’s assets are invested in specialized REITs, industrial REITs and healthcare REITs. iShares Cohen & Steers REIT ETF invests its $2.58 billion AUM only in 30 equity stocks, all of these companies operate in the real estate sector. Notable investments include large-scale data centers - Digital Realty Trust, Inc. ( DLR ) and Equinix, Inc. ( EQIX ); owner of self-storage facilities - Extra Space Storage Inc. ( EXR ) and Public Storage ( PSA ); leading gaming and casino operator - VICI Properties Inc. ( VICI ); infrastructure and telecommunication towers operators - Crown Castle Inc. ( CCI ), American Tower Corporation ( AMT ), and SBA Communications Corporation ( SBAC ); and logistics based real estate infrastructure providers - Rexford Industrial Realty, Inc. ( REXR ) and Prologis, Inc. ( PLD ).

Largest two healthcare REITs, namely Welltower Inc. ( WELL ), and Healthpeak Properties, Inc. ( PEAK ); are also part of ICF’s portfolio. Stocks of industrial REITs, healthcare REITs and specialized REITs have been the best performing ones, both during the short run and the long run. Out of these 12 REITs listed above, barring DLR and PEAK, all other REITs had a price growth in excess of 33 percent during the past 5 years, i.e., almost 6 percent compounded annual growth rate. Again, during the past three months, barring EXR and VICI, all other stocks generated a double-digit price growth. Moreover, iShares Cohen & Steers REIT ETF has a very low portfolio turnover ratio of 11 percent, implying that management is quite consistent with its portfolio.

Almost one-third of ICF’s assets are invested in residential REITs and Retail REITs such as Mid-America Apartment Communities, Inc. ( MAA ), Equity Residential ( EQR ), Invitation Homes Inc. ( INVH ), Alexandria Real Estate Equities, Inc. ( ARE ), UDR Inc. ( UDR ), Equity LifeStyle Properties Inc. ( ELS ), AvalonBay Communities, Inc. ( AVB ), Sun Communities, Inc. ( SUI ), Essex Property Trust, Inc. ( ESS ), Simon Property Group, Inc. ( SPG ), Kimco Realty Corp. ( KIM ) and Realty Income Corporation ( O ). Barring SPG, ESS, AVB and EQR, all other stocks registered a price growth in excess of 33 percent during the past 5 years, while stocks of INVH, ESS, AVB and EQR failed to generate a double-digit growth rate during the past three months. Thus, most of the equity components of iShares Cohen & Steers REIT ETF performed quite well over the past five years, as well as during the immediate short run.

Growth Prospects of Specialized REITs, Industrial REITs & Healthcare REITs

Although, during a scenario of rising inflation and interest rate hikes, REITs are generally considered good bets, in my opinion, the coming decade is very critical for the real estate sector. Selecting the right kind of real estate properties or real estate investment trusts is the key. REITs in which tenants sign long-term lease agreements are generally less impacted by recession. Industrial REITs, Data Center REITs, healthcare REITs and infrastructure REITs are engaged in installation, construction, acquisition and operation of strategic real estate properties such as telecommunication towers, hospitals, skilled nursing facilities, self-storage, warehouses, data centers, etc.

Digital revolution and e-commerce boom created further demand for technology-oriented industrial REITs that own, lease or manage e-commerce facilities, factories, warehouses, and distribution centers. With the growing trend of online shopping, e-commerce companies are aggressively setting up fulfillment centers and warehouses near metropolitan areas. There is a demand-supply mismatch for storage and logistics services, and thus growth of e-commerce businesses is expected to benefit these industrial REITs over the coming decade. Retail REITs, Hospitality REITs, Office REITs, and Residential REITs, on the other hand, failed to generate significant growth.

Investment Thesis

iShares Cohen & Steers REIT ETF has a high asset base and is trading at par with its NAV. The fund’s expense ratio is also quite low. It has paid quarterly dividends since its inception, generated low but consistent yield over the years and has been able to successfully generate strong returns over the long run. ICF’s portfolio consists of only 30 equity stocks which are well-known large-cap established REITs. Most of its holdings performed reasonably well during the past three months, as well as over the long run. Significant proportion of its assets are invested in industrial REITs, specialized REITs, and healthcare REITs - the segments I expect to have strong growth potential in the coming decade.

Under the current macroeconomic condition, specialized REITs, healthcare REITs and industrial REITs have performed much better than other REITs. These REITs suffered the least due to Russia’s invasion of Ukraine and the Covid-19 pandemic prior to that. The reason is quite simple - supply-chain disruptions created higher demand for such REITs and due to scarcity of such specific real estate properties, their margins went up. Due to investing in established and sought-after REITs in the right real estate segment, I believe this fund will be able to sustain its current level of yield, and also the total returns over the coming decade. However, due to its low yield, I’d recommend iShares Cohen & Steers REIT ETF only to long-term growth seeking investors.

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