USRT - USRT: Diversified Equity REIT Fund With Decent Yield But Poor Price Growth

2023-06-17 07:11:20 ET

Summary

• 90% of USRT’s investments are made in five sectors - specialized REITs, industrial REITs, retail REITs, residential REITs and healthcare REITs.
• Price growth generated by industrial & specialized REITs is getting offset by residential and retail REITs. Price growth of healthcare REITs is not stable.
• USRT has been able to deliver a consistent yield of 3 to 4 percent, irrespective of the economic scenario, but its total return has been disappointing.
• In the long run, retail REITs and healthcare REITs might be able to post higher price growth. But in the short run, these REITs will persist with low growth.

~ by Snehasish Chaudhuri, MBA (Finance)

BlackRock Fund Advisors manage the iShares Core U.S. REIT ETF (USRT), which invests in equities of various real estate investment trusts. This ETF seeks to track the performance of the FTSE Nareit Equity REITs Index (FNER), by using representative sampling techniques. FNER is composed of the most valued U.S. based REITs, excluding infrastructure REITs, mortgage REITs, and timber REITs. The fund has a huge asset base of almost $2 billion, with an extremely low expense ratio of 0.08 percent. No wonder, that USRT has a very low turnover ratio of 9 percent. This passively managed fund doesn't make much expenses on stock selection, and it's a highly diversified one, too. Due to this, it has been able to partially invest in segments with strong future prospects. Significant proportion of USRT's investments lack alpha generator stocks.

USRT Generates Decent Steady Yield But Strong Total Returns Over the Long Run

iShares Core U.S. REIT ETF was formed on May 1, 2007, and since then, has been paying quarterly dividends on a consistent basis. The fund has been quite consistent with its yield too. Prior to the covid-19 pandemic (2012 to 2019), USRT generated an annual average yield of 3.75 percent. Post pandemic that yield has been reduced to 3 percent. However, despite such steady yield, the fund had disappointing total returns. Annual average total returns generated during the past 12 months and past five years stood at 1.48 percent and 5.06 percent respectively. However, that did not deter its investor. USRT is currently trading at a marginal premium of 0.05 percent to its NAV.

USRT Invests Almost 90 Percent of Its AUM on five Specific Types of REITs

Although highly diversified, iShares Core U.S. REIT ETF focuses on five sectors in particular - specialized REITs, industrial REITs, retail REITs, residential REITs and healthcare REITs. Almost 90 percent of this fund is invested in these five types of REITs. Specialized REIT is more often used as a broad umbrella term. But in this case, we have included only self-storage REIT, data & information REITs, gaming & advertising REITs, and logistics REITs. Healthcare REITs are also a type of specialty REITs. However, generally this is considered a different segment. Both specialized REITs and healthcare REITs are highly cyclical in nature, as they create and operate specific and unique types of facilities.

Significant Investments Were Made in Specialized, Industrial and Healthcare REITs

iShares Core U.S. REIT ETF made large bets on specialized REITs, industrial REITs and healthcare REITs. Investments in specialized REITs included global leader in logistics real estate - Prologis, Inc. ( PLD ), world's largest self-storage REITs - Public Storage ( PSA ), Extra Space Storage Inc. ( EXR ), CubeSmart ( CUBE ), Life Storage, Inc. ( LSI ) and W. P. Carey Inc. ( WPC ); America's largest outdoor advertising REIT - Lamar Advertising Company ( LAMR ); largest data center REITs - Digital Realty Trust, Inc. ( DLR ) and Equinix, Inc. ( EQIX ); global leader for storage and information management services - Iron Mountain Incorporated ( IRM ), and world's largest gaming facilities REITs - VICI Properties Inc ( VICI ) and Gaming and Leisure Properties, Inc. ( GLPI ).

All the six large healthcare REITs - Welltower Inc ( WELL ), Ventas, Inc. ( VTR ), Healthcare Realty Trust Incorporated ( HR ), Omega Healthcare Investors, Inc. ( OHI ), Medical Properties Trust, Inc. ( MPW ) and Healthpeak Properties Inc. ( PEAK ); and a handful of industrial REITs such as Rexford Industrial Realty, Inc. ( REXR ), Americold Realty Trust, Inc. ( COLD ), EastGroup Properties, Inc. ( EGP ), First Industrial Realty Trust, Inc. ( FR ), STAG Industrial, Inc. ( STAG ) and Terreno Realty Corporation ( TRNO ) also featured among the top 85 percent of USRT's equity investments. Since the onset of covid-19 pandemic, REITs in these sectors have performed much better than other REITs, such as office REITs, residential REITs, retail REITs, mortgage REITs and hospitality REITs.

Various Residential REITs & Retail REITs Feature Among USRT's Major Investments

iShares Core U.S. REIT ETF invested almost 18.5 percent of its assets in some of the most renowned residential REITs - Equity Residential ( EQR ), AvalonBay Communities, Inc. ( AVB ), Alexandria Real Estate Equities, Inc. ( ARE ), Invitation Homes Inc. ( INVH ), Mid-America Apartment Communities, Inc. ( MAA ), Sun Communities, Inc. ( SUI ), Equity LifeStyle Properties, Inc. ( ELS ), UDR, Inc. ( UDR ), American Homes 4 Rent ( AMH ), Essex Property Trust, Inc. ( ESS ), Camden Property Trust ( CPT ) and Apartment Income REIT Corp. ( AIRC ).

Established retail REITs such as Simon Property Group, Inc. ( SPG ), and Realty Income Corporation ( O ), Kimco Realty Corporation ( KIM ), Regency Centers Corporation ( REG ), NNN REIT, Inc ( NNN ), Federal Realty Investment Trust ( FRT ), Brixmor Property Group Inc. ( BRX ), Agree Realty Corporation ( ADC ), Spirit Realty Capital, Inc. ( SRC ), and Kite Realty Group Trust ( KRG ) also feature among the top 85 percent investments of iShares Core U.S. REIT ETF. Almost 16 percent of its entire portfolio is invested in various retail REITs.

USRT's Portfolio Had a Mixed Price Performance Over the Past Five Years

Specialized REITs and industrial REITs performed extremely well over the past five years. Barring WPC and DLR, all other stocks generated a price growth in between 35 to 110 percent. Healthcare REITs on the other hand, were equally disappointing. Barring Welltower, not a single stock generated positive price growth in the past five years. However, healthcare stocks are on a recovery path and barring Healthpeak Properties, all other stocks posted positive price growth during the past three months. Price data of the past five years is of prime importance here, as most of these stocks are more or less part of the core portfolio of iShares Core U.S. REIT ETF for the past 44 months.

Residential REITs had a mixed performance during the past five years. While AMH, MAA, INVH, ELS and SUI generated a price growth in between 38 to 68 percent, EQR, ESS, AIRC and ARE registered a price growth lower than 7 percent. And during the past 12 months, not a single stock was able to grow by more than 5 percent. On the other hand, retail REITs had even more disappointing performance. Not a single stock registered a price growth in excess of 30 percent during the past five years and only KRG and SPG were able to register a price growth in excess of 7 percent during the past 12 months. Incidentally, USRT had a price loss of 2 percent during this period.

Future Prospects of Top Portfolio Investments of iShares Core U.S. REIT ETF

As the economy opens up and consumer spending goes up, the retail REIT segment is also expected to grow much faster than other REIT segments. Increase in population and purchasing power will generate demand for retail REITs. However, that will take time and expecting a high growth in 2023 will be too much too soon. Healthcare REITs have suffered from excess capacity. But going forward the demand for such facilities are bound to increase, as the aging population will create demand for specialized and efficient healthcare infrastructure. The same cannot be said about residential REITs. Due to interest rate hikes, high unemployment and economic uncertainty, residential REITs likely will have a tough time in the near future. However, when it comes to industrial REITs and specialized REITs, the respective stocks will most likely carry on with a significantly high price growth over an extended period.

Investment Thesis

It seems that iShares Core U.S. REIT ETF has been able to invest in segments with strong future prospects, only to some extent. The price growth generated by industrial REITs and specialized REITs are getting offset by residential REITs and retail REITs. In the longer run, I expect this fund to perform well on the assumption of retail REITs and healthcare REITs posting high returns. But in the short run, these types of low growth will most probably be a reality. Total returns have been quite low of late, and may continue in 2023, too. This may disappoint growth-seeking investors. But, income-seeking investors may find USRT attractive since it has been able to deliver a consistent yield irrespective of the economic scenario. A decent 3 to 4 percent yield, coupled with occasional price gain, may not be bad enough reason to hold this fund.

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