Exchange traded fund investors should consider how real estate can play a part in their portfolios. The same investors can look to a focused real estate investment trust strategy that targets sustainable income and predictable growth.
In the recent webcast, Connecting Income, Inflation, & Real Estate: An Expert Panel with Ritholtz Wealth Management, Raymond James, and Fundamental Income, Alexi Panagiotakopoulos, Co-Founder, Partner and CIO, Fundamental Income; RJ Milligan, Equity Research Analyst – REITS, Raymond James; Michael Batnick, Director of Research, Ritholtz Wealth Management; and Ben Carson, Director of Institutional Asset Management, Ritholtz Wealth Management, underscored the long-term benefits of REITs in a diversified portfolio. Publicly listed equity REITs exhibited some of the best average annual net return over the two-decade long period, outperforming broad asset categories like U.S. small caps, U.S. large caps, and non-U.S. equities, among others.
Furthermore, the sector provided a great source of diversification in a traditional stock and bond mix. Due to their unique structure, REITs have historically offered diversification benefits through lower correlations to other asset classes.
REITs are also a reliable source of income, typically passing through 90% of their taxable income to their shareholders as dividends, which helps serve as a dependable stream of income.
Additionally, with the market’s recent focus on rising inflationary pressure due to aggressive fiscal and monetary policies, REITs can also act as a means to hedge against inflation ahead. The underlying properties owned by REITS and associated rent rates charged to real estate tenants have historically grown faster than the rate of inflation.
Not all of the companies in the REIT sector are the same. Specifically, net lease REITs center around a specific lease type, rather than property categories such as industrial, office, or retail. Net lease REITs focus on properties leased to individual companies. They generally lease properties on longer lease terms. More importantly, the tenant is responsible for most if not all operating expenses, property taxes, and insurance costs.
These properties include convenience stores, drug stores, restaurants, grocery stores, distribution centers, corporate headquarters, health clubs, and movie theatres.
Owning properties net leased to single tenants requires minimal management and fewer risks to consider, as compared to multi-tenant REITs. Traditional landlords of a REIT with multiple tenants will have to consider operating expenses, property management, rent roll, lease maturities, alternative space, and local supply/demand. Single tenant net leases will need to consider tenant credit quality, the importance of the property to the tenant, and alternative spaces available. Minimal landlord responsibilities results in higher margins and more consistent cash flows for single tenant net leases.
As a way to gain exposure to real estate companies that generate income from net leases primarily in commercial property, investors can look to the Fundamental Income Net Lease Real Estate ETF (NYSEArca: NETL), which tries to reflect the performance of the Fundamental Income Net Lease Real Estate Index.
Financial advisors who are interested in learning more about income, inflation, and real estate can watch the webcast here on demand.