Real estate investment trust-related exchange traded funds may be returning value to investors through more than dividends as some REITs have been enacting share repurchasing programs.
According to SNL Financial, an increasing number of REITs have instituted share repurchase programs in 2015, writes Todd Rosenbluth, Director of ETF Research at S&P Capital IQ, in a research note.
Year-to-date through September 15, 28 REITs have announced share repurchase plans, with 17 occurring in the third quarter, write Jacob Wiggins and Tom Yeatts for SNL Financial.
“Fundamentals are still very strong, and pricing is very strong in the direct property markets, but REITs have sold off substantially,” Stephen Boyd, director for U.S. REITs and Lodging at Fitch, told SNL. “I think management teams look at that, and they look at alternative uses for their capital, and it [repurchasing shares]makes sense to a lot of them.”
After the recent selling, many companies are trading at notably high discounts to net asset value – the median discount to NAV across the public equity REIT space with a repurchase plan was 17.4% at September 15. Additionally, Rosenbluth pointed to three REITs trading at discounts of 20% or more to NAV, including Brandywine Realty Trust (NYSE: BDN), CBL & Associates (NYSE: CBL) and General Growth Properties (NYSE: GGP).
S&P Capital IQ Equity Analyst Cathy Seifert has an optimistic view on the space. For instance, the S&P analyst believes that GGP revenues increase between 2% to 4% in 2015 and accelerate to 5% to 7% growth in 2016 as rents and occupancy levels improve. BDN could enjoy greater leasing activity, notably on higher demand in Austin and Philadelphia, and the firm could see occupancy rates hit 92% for 2015, up from 91% in 2014.
“For investors who prefer exchange-traded funds (ETFs), due to the benefits of diversification, intraday market liquidity, and lower management fees relative to other diversified financial instruments, one option in the REIT space is First Trust REIT Index (FRI),” Rosenbluth suggested. “The ETF ranks favorably to S&P Capital IQ for the low qualitative risk assessments of its holdings.”
The First Trust S&P REIT Index Fund (NYSEArca: FRI), which tracks a S&P United States REIT Index, is comprised of U.S. REITs. The ETF includes a 2.2% tilt toward GGP, 0.3% in CBL and 0.3% in BDN. FRI has a 12 month yield of 2.65%.
Alternatively, the PowerShares KBW Premium Yield Equity REIT Portfolio (NYSEArca: KBWY) targets small- and mid-sized U.S. companies and includes a greater weight toward these undervalued REITs. CBL is 3.7% of KBWY and BDN makes up 2.7% of the fund’s portfolio. KBWY has a 5.59% 12-month yield.
The recently launched Guggenheim S&P 500 Equal Weight Real Estate ETF (NYSEArca: EWRE), which follows an equal-weight indexing methodology also leans toward smaller companies, includes a 3.7% position in GGP. [New Equal-Weight ETF for Real Estate Exposure]
The iShares Cohen & Steers Realty Majors (NYSEArca: ICF) also includes a 3.8% position in GGP. ICF has a 3.33% 12-month yield.
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.