RWR ETF: Plowing Up Benefits Of Diversification In Real Estate

The SPDR Dow Jones REIT ETF (NYSEARCA:RWR) is an exchange traded fund (ETF) which invests in equity shares of various types of Real Estate Investment Trusts (REITs). REIT is an entity that owns, operates, and/or finances income-generating real estate assets. Equity REITs can be classified into seven broad groups – Residential REITs, Retail REITs, Healthcare REITs, Hotel REITs, Industrial/Office REITs, Self-Storage REITs, and Diversified REITs. Besides, there are Mortgage REITs that invest in mortgages as opposed to real estate itself.

I have been tracking healthcare REITs like Medical Properties Trust, Inc. (MPW), Healthpeak Properties (PEAK), Ventas, Inc. (VTR), Welltower Inc. (WELL), Omega Healthcare Investors, Inc. (OHI), Healthcare Trust of America Inc. (HTA), Healthcare Realty Trust Incorporated (HR), National Health Investors Inc. (NHI), CareTrust REIT Inc (CTRE), Sabra Health Care REIT, Inc. (SBRA), LTC Properties Inc. (LTC), Global Medical REIT Inc. (GMRE), Community Healthcare Trust Incorporated (CHCT), NorthWest Healthcare Properties Real Estate Investment Trust (OTC:NWHUF), Universal Health Realty Income Trust (UHT), Diversified Healthcare Trust (DHC), etc.

From my understanding of healthcare REITs, this sector, although somewhat depressed today, has huge growth potential. In the long run, due to surging demand for healthcare needs, demand for healthcare facilities are bound to increase. As a result, healthcare REITs which are engaged in the business of owning, operating, or financing healthcare real estate facilities will generate more revenue, earnings, and cash flow; which will eventually lead to upward movement of those REITs. Interestingly, RWR has investments in all these healthcare Trusts (barring SBRA and NWHUF). However, healthcare REITs constitute only about 11.6 percent of RWR’s portfolio.

The largest pie of investments is in industrial/office REITs (31.54 percent), followed by residential REITs (22.56 percent) and retail REITs (15.31 percent). Another 10.33 percent is invested in Self storage REITs. I am trying to find out how lucrative REIT ETFs are, and more specifically how effective diversified ETFs are compared to just healthcare REITs. This REIT ETF launched by State Street Global Advisors, Inc. on April 23, 2001, and managed by SSGA Funds Management, Inc. is a very good fund to understand how the REIT sector is performing and where the future lies.

However, SPDR Dow Jones REIT ETF is a passive fund and there is hardly any difference in the composition with its benchmark index – Dow Jones U.S. Select REIT Index. Being a passive ETF, RWR’s expense ratio is very low at 0.25%, and its price is almost equal to its NAV per unit. RWR’s weighted average market capitalization is approximately $32.6 billion, and its funds from operations (FFO) grew by 60 percent over the past one year. As of Mar 24 2022, RWR has assets under management (AUM) of $2.13B, and a net cash balance of $5.14 million. RWR has been paying steady quarterly dividends since 2008, and has recorded an average yield of 3 to 4 percent during the past ten years.

Historically, SPDR Dow Jones REIT ETF has a very strong and steady performance. RWR has recorded a growth of around 8 percent, 7 percent, and 9 percent over the past three years, five years, and ten years, respectively. From its inception in 2001 (20 years ago), RWR has generated an average price growth of 9.86 percent, while the price has moved up by 24.84 percent during the past one year. Needless to say, as a passive fund, RWR’s return has been almost similar to that of Dow Jones U.S. Select REIT Index.

Considering the pandemic related stock market crash in March 2020, and global financial crisis in 2008, the medium and long term returns are quite healthy. Out of the 16 healthcare REITs mentioned above, only six REITs – CHCT, GMRE, CTRE, NWHUF, MPW, and WELL – have been able to generate positive returns over the last five years. Moreover, only CHCT, GMRE, and MPW have been able to surpass RWR’s return over the past five years.

Surely, diversification has been beneficial for SPDR Dow Jones REIT ETF. No matter how much digitisation we have, we can’t do away with real estate properties. For every kind of operation, we require a minimum infrastructure and space. As REITs specialize in creating and managing some specific types of facilities, these assets will always have demand. However, this demand will vary from sector to sector and will have a cyclical effect due to the cyclical nature of the segment for which it is offering such infrastructures. Due to that, diversified REITs will always be more steady and less volatile in nature. However, due to resource constraints, it’s quite difficult to own and/or manage real estate facilities in multiple sectors. Diversified REIT ETFs are thus the best options to enjoy the return of various types of REITs, and benefit out of diversification.

A closer inspection of its top 55 percent holding reveals that, only 2 out of 16 REITs generated negative returns over the past five years. Simon Property Group Inc. (SPG) and Ventas Inc. (VTR) recorded a negative growth of 22.52 percent and 3.89 percent respectively. Together these two stocks constitute 6.3 percent of RWR’s portfolio. On the other hand, RWR’s largest holding, Prologis, Inc. (PLD), which constitutes around 10.81 percent of its portfolio, grew by an astonishing 205.5 percent over the same period. Another five REITs grew by more than 100 percent over the past five years. They are Extra Space Storage Inc. (EXR), Essex Property Trust Inc. (ESS), Duke Realty Corporation (DRE), Sun Communities Inc. (SUI), and Mid-America Apartment Communities Inc. (MAA). Out of the remaining 8 REITs, barring Realty Income Corporation (O), all others have recorded a price growth in excess of 30 percent over the same period.

RWR is currently trading at a 7.7 percent discount to its 52 week high. Looking at the historical trends and the effectiveness of stocks selected, there is every possibility of RWR’s price moving upwards and crossing this 52 week high of $123.1. As all the short term moving averages are placed above the long term moving averages, the technical indicators are in favor of an upward movement of RWR’s market price. Price to book value of 2.32 as compared to 3.05 P/BV of its peers also suggests that the firm is not at all overvalued. Price to Cash flow of 20.63 is very close to its peers’ average Price/cash flow of 20.69.

These ratios also suggest that investors have faith in the management of RWR, that in future they will be able to utilize its assets to generate sufficient cash flow and earnings. I also have high regards for RWR’s parent organization, State Street Corporation (STT), which is one of the largest asset management companies globally. It is a pioneer in launching and managing ETFs under the SPDR ETF brand. With $1.05 trillion total net assets, and $90 billion investment flows, this fund manager is too big to fail. The P/E of RWR though is quite high at 45.45. However, we can ignore this P/E, because this ratio doesn’t hold much significance for real estate based companies. The value of real estate investments is more meaningful in terms of assets rather than earnings.

As the US economy is slowly overcoming its pandemic related stagnation, and moving towards steady growth, the real estate sector is going to be one of its biggest beneficiaries. As RWR’s investments are spread all over the real estate sector, overall economic growth will only strengthen the already growth generating portfolio of RWR. There is no reason to not expect a steady price growth between 8 to 10 percent in the medium and long run. Moreover, all the technical indicators point towards an upward movement of RWR’s price in the short run. Besides the price growth, RWR has also been providing a steady dividend yield between 3 to 4 percent. As a long term investor having high hopes in the real estate sector, I’ll obviously keep SPDR Dow Jones REIT ETF in my portfolio of investments. This diversified REIT’s performance is also a lesson for hardcore healthcare investors like myself to look beyond our comfort zone in these – according to some pundits – pre-recession times.