2023-04-19 12:48:20 ET
Summary
- iShares Residential and Multisector Real Estate ETF has decent assets under management, generates a low but decent yield, and has produced strong average total returns. Moreover, the exchange-traded fund has had an extremely consistent yield.
- The REZ ETF invests half of its assets in residential REITs, which at present, lack any momentum. However, this segment delivered strong returns over the long run.
- REZ has been able to generate consistent growth on its investments in self-storage REIT, and a large exposure in the largest healthcare REIT, Welltower Inc.
- REZ is an interesting pick for investors looking to avoid office real estate while taking advantage of benefits of real estate markets and the REIT asset class.
~ by Snehasish Chaudhuri, MBA (Finance).
iShares Residential and Multisector Real Estate ETF (REZ) is an exchange traded fund that primarily invests in various types of real estate investment trusts, or REITs. The fund is currently trading almost at par. It offers quarterly pay-out and generates decent yield on a consistent basis. Annual average total return over the long term is strong enough. It has a decently strong asset base and relatively low expense ratio.
REZ is an interesting pick for investors looking to avoid office real estate while taking advantage of some of the benefits of real estate markets and the REIT asset class. REITs generally perform well when the economies are turning around from a sluggish phase. However, there are some problem areas that make this particular REIT fund less than unimpeachable.
REZ Has Generated Decent Yield And Strong Total Returns Over The Long Run
iShares Residential and Multisector Real Estate ETF recorded an average yield of 3.33 percent during the past 10 years. Trailing-twelve-months yield was 3.38 percent. This suggests how consistent this fund is. The fund has an attractive total return. Annual average total return has been 12.7 percent during the five-year period in between 2017 and 2021. 2022, as we all know, has been poor for all equity based funds. REZ has a decent expense ratio of 0.46 percent on a decent asset base of $624 million. Various other REIT funds have an expense ratio close to 2 percent and have a much smaller asset base of less than $150 million. Such a high expense ratio on a smaller asset base has the potential to be risky in absence of consistent returns.
REZ Invests Primarily In Residential REITs, Healthcare & Self-Storage REITs
iShares Residential and Multisector Real Estate ETF was formed by BlackRock, Inc., almost 16 years ago. At present, BlackRock Fund Advisors is managing this fund. It creates its portfolio using representative sampling techniques using FTSE Nareit All Residential Capped Index as a benchmark. FTSE Nareit All Residential Capped Index is composed of U.S. residential, healthcare and self-storage REITs. Almost half of the entire portfolio is invested in residential REITs. Another half of this ETF's assets are invested in healthcare REITs and self-storage REITs. The fund is extremely consistent with its holdings with a turnover ratio of only 8 percent. There's little or almost no office exposure, which is good. There is quite a lot of leverage in the office real estate world, and this segment has a highly uncertain future.
REZ Invested In Stocks Of All 15 Healthcare REITs, Which Performed Poorly
All the 15 healthcare REITs are included in REZ's portfolio. However the nine smaller healthcare REITs namely CareTrust REIT, Inc. ( CTRE ), Universal Health Realty Income Trust ( UHT ), Community Healthcare Trust Incorporated ( CHCT ), National Health Investors, Inc. ( NHI ), Physicians Realty Trust ( DOC ), Sabra Health Care REIT, Inc. ( SBRA ), LTC Properties, Inc. ( LTC ), Global Medical REIT Inc. ( GMRE ), and Diversified Healthcare Trust ( DHC ) constitute less than 4 percent of iShares Residential and Multisector Real Estate ETF.
Large-cap healthcare REITs, namely Welltower Inc. ( WELL ), Healthpeak Properties, Inc. ( PEAK ), Medical Properties Trust, Inc. ( MPW ), Ventas, Inc. ( VTR ), Healthcare Realty Trust Incorporated ( HR ) and Omega Healthcare Investors, Inc. ( OHI ) accounts for more than 22.5 percent of REZ's entire portfolio. During the past 3 months, only WELL, CTRE and DHC were able to generate positive price growth. The same performance prevailed during the past five years, as only CTRE, WELL and CHCT were able to register a growth in excess of four percent CAGR. Good thing is that the iShares Residential and Multisector Real Estate ETF allocated 10 percent of its fund in WELL.
REZ's Investments In 5 Self-Storage REITs Generated Strong Price Growth
Fortunately, the price performance of self-storage REITs was much better. iShares Residential and Multisector Real Estate ETF invested 25 percent of its total assets in five of the most reputed self-storage REITs such as Life Storage Inc. ( LSI ), CubeSmart ( CUBE ), Extra Space Storage Inc. ( EXR ), Public Storage ( PSA ), and National Storage Affiliates Trust ( NSA ). All these stocks generated positive price growth during the past three months and registered a price growth in excess of 9 percent CAGR during the past 5 years. Interestingly, REZ didn't invest in the largest self-storage REIT - Prologis, Inc. ( PLD ), which delivered negative growth during the past three months.
Much of REZ's Price Returns Are Dependent On Its Investments In Residential REITs
iShares Residential and Multisector Real Estate ETF invested almost 48 percent of its assets in 19 residential REITs. The list included most of the sought after REIT stocks such as Apartment Income REIT Corp. ( AIRC ), American Homes 4 Rent ( AMH ), Equity Residential ( EQR ), AvalonBay Communities, Inc. ( AVB ) and Essex Property Trust, Inc. ( ESS ), Invitation Homes Inc. ( INVH ), Mid-America Apartment Communities, Inc. ( MAA ), Sun Communities, Inc. ( SUI ), UDR, Inc. ( UDR ), Equity LifeStyle Properties, Inc. ( ELS ), Independence Realty Trust, Inc. ( IRT ), Elme Communities ( ELME ), Veris Residential, Inc. ( VRE ), Apartment Investment & Management Company ( AIV ), UMH Properties, Inc. ( UMH ), Centerspace ( CSR ), NexPoint Residential Trust, Inc. ( NXRT ), BRT Apartments Corp. ( BRT ) and Camden Property Trust ( CPT ).
During the past three months only INVH was able to generate a price growth in excess of 2 percent, and during the past one year, only AIV posted positive price growth. When only 1 out of 19 stocks performs, then we can understand what impact it creates on the entire fund. Not surprisingly REZ's price fell by 2 percent and 26 percent during the past three months and one year, respectively. However, over a period of five years, these stocks delivered strong price growth. CSR, IRT, NXRT, AMH, MAA, BRT, SUI, ALS, AIV and INVH - all grew in excess of 8 percent CAGR. CPT, UDR, UMH, AVB and EQR also registered positive price growth, and not surprisingly, iShares Residential and Multisector Real Estate ETF, too, registered a price CAGR of almost 5 percent.
Housing Market Is Not Gaining Momentum And Requires A Course Correction
Residential housing market is currently struggling due to increasing costs of everything, including rent. Mortgage rates and rental rates are due for a correction. Although inflation is easing, the housing market is not gaining any momentum. Rental rates are expected to come down further due to slower growth in housing prices, lower inflation, and higher inventory. Rise in mortgage rates together with slower growth in other sectors, such as home building, are clear indicators of weakness in the residential REIT sector. Residential REITs performed well enough over the long run, and probably will perform equally better in the future, but in the immediate short run, the scenario looks gloomy, and investors need to pray for a course correction.
Investment Thesis
iShares Residential and Multisector Real Estate ETF has a decent assets under management ("AUM"), and generates a low but decent yield. Moreover, the fund has been extremely consistent with its yield. It invests half of its assets in residential REITs, which at present, is going through a difficult time. However, this segment has delivered strong returns over the long run, and despite concerns over the short run, I am hopeful that REZ's investments in residential REITs will generate strong price growth over the long run. The same is true about REZ's investments in healthcare REITs. Good thing is that Welltower Inc., in which this fund invested almost 10 percent, has been quite consistent in generating strong growth. A low turnover ratio means that composition will be consistent.
iShares Residential and Multisector Real Estate ETF has been able to generate consistent growth on its investments in self-storage REIT. A quarter of its assets are invested in five self-storage REITs, which hardly have disappointed REZ's investors. Demand and rates for self-storage REITs and Healthcare REITs will keep on increasing, due to the lack of infrastructure in the field of such specialized REITs. REZ's annual average total return over the long term is quite strong if we discount the poor price performance in 2022.
Overall, iShares Residential and Multisector Real Estate ETF has selected the right real estate segments for long-term investments. I have no doubt about the sustainability of its yield, and a decent total return over the long run. I'd like to repeat what I said in the very beginning, iShares Residential and Multisector Real Estate ETF is an interesting pick for investors looking to avoid office real estate while taking advantage of the benefits of real estate markets and the REIT asset class.
For further details see:
REZ ETF: Decent And Consistent Yield In The Right REIT Segments