Clients and investors that aren’t landlords in the traditional still widely embrace the real estate sector due in large part to the group’s above-average income stream and inflation-fighting potency, among other positive attributes.
As advisors know, the preferred avenue for accessing real estate equities for many clients and retail investors is either via individual stocks or index funds and exchange traded funds. Over time, that strategy has worked well, but many of those products are prosaic and haven’t adequately kept with the real estate sector’s pace of evolution.
In recent years, real estate sub-groups such as data centers, industrial and other tech-related groups gained more prominence in the sector, but many old guard funds weren’t adequately positioned to capture that momentum. Some still aren’t. Other fund issuers saw the writing on the wall and launched products more reflective of the current and long-ranging opportunity sets in the real estate sector.
Sometimes, Change Is Good
In other examples, fund issuers altered existing fare to better address the new wave of real estate investing opportunities. Take the case of the WisdomTree New Economy Real Estate Fund (WTRE).
That ETF turns 16 years old in June, but last April, WisdomTree changed WTRE’s underlying index to the CenterSquare New Economy Real Estate Index – a move that paid off. Owing to the index’s growth feel relative to traditional real estate gauges, the first six months for WTRE following the swap where rocky, but since late last October, the ETF strutted its stuff.
The fund’s points of emphasis are data centers, cell towers, life sciences labs, last-mile distribution and cold storage facilities, according to WisdomTree. In many cases, old guard passive real estate funds are usually under-allocated to those industries. As just one example, WTRE’s exposure to cell tower real estate investment trusts (REITs) is notable because the transition to 5G is ongoing.
“When looking at cell phone tower REITs, it’s important for investors to remember that many of the deals related to the underlying cash flows are set for long periods of time,” writes WisdomTree Global Head of Research Christopher Gannatti. “The dominant factor influencing the market is more likely to be the transition of the world from 4G LTE standards to 5G standards, which is a massive investment for wireless providers. The macroeconomic environment matters, but the pull from all angles to be able to process and transmit more data faster is inexorable.”
The allure of cell tower REITs is further enhanced by the group’s price/adjusted funds from operations (P/AFFO). Adjusted funds from operations (AFFO) is a key real estate valuation metric and one that provides insight into a REIT’s ability to sustain dividends.
“The five-year average P/AFFO Multiple NTM was 24.7x, looking at three very large operators. Each of those operators is now tracking below this level by this metric after starting 2022 with all three trading above this average level,” adds Gannatti.
Reasonable Price of Admission
REITs are historically sensitive to rising interest rates and that’s one reason the group slumped last year. Further pinching growthier strategies such as WTRE. Add to that, cell tower, data center and industrial REITs were richly valued entering 2022, making those groups vulnerable in an environment hostile to growth investing.
Following last year’s declines, some of the real estate sub-groups featured in WTRE are attractively valued. More importantly, that perk comes with added benefit of stout earnings growth potential.
“As of December 31, 2022, the CenterSquare New Economy Real Estate Index demonstrated weighted average EBITDA growth of 15.08%. Broad real estate benchmarks, as of that same period, were in the roughly 7%–8% range for this metric,” concludes Gannatti. “This tells us that a focus on technology within Real Estate has been demonstrating growth. If this premium growth relative to the broader market can be maintained—and we believe that it can, especially relative to older office buildings and strip malls—2022’s correction could represent an interesting catalyst to more closely review the sector.”