Confirming there are benefits when active management is applied in the real estate sector, the ALPS Active REIT ETF (REIT ) is up more than 13% year-to-date and is beating the largest passive ETF in the category by about 500 basis points since the start of the year.
That doesn’t mean REIT’s upside from here is limited. In fact, the ALPS ETF could deliver more gains for a variety of reasons. For example, albeit in modest fashion, the fund has some exposure to hotel real estate investment trusts (REITs). That’s a potentially noteworthy trait over the near-term due to solid revenue per available room (RevPAR) trends. With the World Cup starting later this week, higher demand and rates are expected across various North American cities.
REIT, which turned five years old in February and sports a trailing 12-month dividend yield of 2.74%, has even more sources of allure for investors.
Tailwinds Abound for REIT
In what could amount to good news for real estate ETFs, some landlords, particularly those in the lodging arena, are becoming more selective, expressing desires to focus more on quality over quantity.
“REITs are increasingly focused on pruning portfolios, reinvesting in higher-quality assets, and maintaining acquisition discipline amid a still-dislocated transaction market and a persistent cost-of-capital mismatch,” said Jefferies analyst David Katz. “The prevailing view is that owning fewer, better assets drives superior returns relative to growth for growth’s sake, while the value proposition of public REIT structures continues to be questioned relative to private market valuations, in our view.”
Fundamentals for the broader real estate sector are underpinned by a sturdy U.S. economy, including solid GDP and jobs growth, as well as increasingly impressive funds from operations (FFO) outlooks. FFO perspectives are especially important to advisors and investors mulling ETFs like REIT because that metric is used to gauge REITs’ financial health, including the companies’ ability to sustain and grow dividends.
“GDP growth is healthy, deregulation and high business capital investment appear likely, some indicators such as the NFIB hiring intentions index suggest job growth may improve from current low levels, and the K-shaped economic recovery is supporting demand for high quality properties,” said Truist analyst Michael Lewis in a report earlier this year. “We project FFOps growth for our REIT coverage universe to accelerate into 2027. The Fed is likely to further cut short-term interest rates and many REITs trade at significant discounts to NAV and lower than typical FFO multiples.”
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