REZ: Fundamentals Improving

seekingalpha09-06

PM Images Investment Thesis iShares Residential and Multisector Real Estate ETF (NYSEARCA:REZ) invests in a portfolio of U.S. residential and multi-sector REITs. The fund has a focus on residential, ...

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The fund has a focus on residential, ...</p>\n\n<a href=\"https://seekingalpha.com/article/4719322-rez-etf-fundamentals-improving\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"CFA.SI","symbol_name":"NikkoAM-STC Asia REIT","start_time":0,"source_url":"https://seekingalpha.com/article/4719322-rez-etf-fundamentals-improving","article_id":"2465657927","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1445810160/image_1445810160.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2465657927","pubTimestamp":1725560863,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"PM Images Investment Thesis iShares Residential and Multisector Real Estate ETF (NYSEARCA:REZ) invests in a portfolio of U.S. residential and multi-sector REITs. The fund has a focus on residential, s","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"CFA.SI":"NikkoAM-STC Asia REIT","REZ":"住宅房产信托ETF-iShares","USRT":"iShares Core U.S. REIT ETF","CFA":"VictoryShares US 500 Volatility Wtd ETF"},"translate_title":"REZ：基本面正在改善","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"REZ":1,"USRT":1,"CFA":0.9,"CFA.SI":0.9},"content_text":"PM Images Investment Thesis iShares Residential and Multisector Real Estate ETF (NYSEARCA:REZ) invests in a portfolio of U.S. residential and multi-sector REITs. The fund has a focus on residential, self-storage, and healthcare REITs. The fund charges an expensive expense ratio of 0.48%. Other REITs such as iShares Core U.S. REIT ETF (USRT) only charges an expense ratio of 0.08%. REZ has a distribution yield of about 2.7% and has generated an average annual return of 6.6% since its inception in 2007. This is equivalent to a total return of 197.5%. REZ’s portfolio is less impacted by different stages of the economy and is considered defensive in nature. As inflation cools off and interest rate declines, the outlook for residential, healthcare, and self-storage REITs has also improved. Therefore, we are optimistic about REZ and think REZ deserves a buy-rating for investors with a long-term investment horizon.   YCharts Fund Analysis Sector Allocation: A focus in three subsectors Unlike many REIT funds that include a variety of different REIT subsectors, REZ is much more simplified. Its portfolio can easily be classified into three subsectors: residential, healthcare, and self-storage REITs. In iShares website, they have separated multifamily residential and single-family residential REITs as two separate categories, but in this article, we will simply refer to them as residential REITs. This subsector consists of about 42.8% of the total portfolio. The second-largest subsector is healthcare REITs, which consists of about 34.9% of the total portfolio. Finally, self-storage REITs consist of about 22.2% of the total portfolio.   iShares Source: iShares Unlike many REIT funds that include cyclical sensitive subsectors such as office, hotel and retail REITs, REZ’s exposure is less sensitive to different stages of the economy. While shares of REZ can still fall if broader stock markets decline, investors should be comfortable that occupancy rates of these REITs are less impacted as people still need to find a place to live, and patients still needs to find clinics and hospitals for healthcare services even in economic recessions. In the next three sections, we will discuss the outlook of these three different subsectors. We will start with healthcare REITs first. Improving healthcare margin is a positive sign Healthcare industry went through rough times during the COVID-19 pandemic as people minimized their visits to hospitals and clinics. As a result, revenues of many healthcare providers dwindled during the pandemic. As can be seen from the chart below, hospital margins turned negative during the pandemic. Although margins have gradually improved, it has yet to return to the level before the pandemic. One major reason is due to higher inflation and labor shortage. Fortunately, inflation has now subsided considerably. This past July’s inflation rate of 2.9% is the lowest we have seen since March 2021. We are confident that as time unfolds, inflation rate will retreat down to the 2% Federal Reserve target. Ultimately, as healthcare industry margins improve, healthcare REITs should see improving occupancy rate. This should result in better rental revenue.   Kaufman Hall Low residential inventory is positive In the residential REIT space, we have observed several important trends. First, we noticed that U.S. housing inventory is now at a historical low level. As can be seen from the chart below, the current level of housing inventory in the U.S. is roughly about 1.3 million units (see blue line in the chart). This is the lowest we have seen at least in the past four decades. In addition, U.S. housing starts is also at a cyclical low since the beginning of the pandemic in 2020. This means future supplies will likely also remain tight at least in the near-term. This demand and supply imbalance should be very beneficial and favors more rental rate increases.   Trading Economics Self-storage market may improve as migration activities pickup Although self-storage REITs only represent about 22.2% of REZ’s portfolio, it is still worth discussing. Below is a chart that shows the asking rent trends for self-storage subsector. As can be seen from the chart below, both non-climate-controlled (non-CC) and CC asking rents per square foot have been declining since the peak of 2021.   Crowd Street This may look like bad news. However, we think this trend may be about to reverse. The reason for the decline is likely due to lower migration activities. The reason behind this lower migration activities is due to higher interest rate environment. As we know, interest rate have remained elevated in the past two years. This restricted many people from changing their homes (whether upsizing or downsizing). Many potential buyers are still staying on the sidelines, waiting for the interest rate to drop. In this environment, the demand for storage spaces has remained very weak. Fortunately, inflation has subsided substantially, and the Federal Reserve now has room to lower the rate further. The future lower rate environment should result in higher migration activities. The chart below shows exactly this trend. In the past lower interest rate environment such as between 2002~2004, 2010~2018, 2020~2022, we tend to see increasing housing sales. Increasing housing activities means more people are migrating and should help increase demand for self-storage spaces.   Trading Economics REZ will benefit from a lower interest rate environment A declining rate environment is generally a big plus for REIT funds. Since most REITs have mortgage loans in their real estate portfolios, the declining rate environment means that interest expenses can be lowered upon refinancing their loans. In fact, REZ’s fund price performance generally has an inverse correlation to the change in federal fund rate, as illustrated in the chart below. However, we think the recent surge in REZ's fund price is likely already reflecting the future lower rate environment.   YCharts Recession risk is real While the anticipated rate decline cycle has been viewed positively by investors of REITs (REZ’s fund price has surged by 19.3% year-to-date versus the S&P 500 index’s return of 15.7%), an economic recession has the potential to derail this performance trend. As can be seen from the chart below, REZ has declined more significantly than the S&P 500 index in each of the past two recessions in 2008/2009, and 2020 despite REZ’s exposure to defensive sectors. While a soft-landing is what investors of REITs is looking for (and investors appear to already bake in this scenario, as the REIT sector has performed strongly this year), an economic recession can quickly reverse this trend. Therefore, investors should not ignore the risk of an economic recession.   YCharts Investor Takeaway REZ provides a stable dividend yield of 2.7%. The outlook of each of the three subsectors in its portfolio appears to be improving. The fund is also less economically sensitive than other diversified REIT funds. Therefore, we think this is a good fund for investors wishing to invest in the REIT space in the long run. Therefore, we have a buy-rating for REZ. However, given the fund's recent outperformance, conservative investors may wish to wait for a pullback.  Additional Disclosure: This is not financial advice and that all financial investments carry risks. 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