benedekThe Nuveen Short-Term REIT ETF (BATS:NURE) has now given back all gains made since the onset of COVID-19. Despite huge rent growth in apartments and self-storage as well as a resounding recovery in hotels and lodging, NURE’s residential, storage, and hotel REITs have slumped to lower levels than before the pandemic, on average. Data by YChartsOf course, the tyranny of the average comes into play here. Not all apartment REITs are created equal. The same holds true for manufactured housing REITs, self-storage REITs, and hotel REITs. Their individual mileage varies in this market. In what follows, we’ll get a brief review of the NURE ETF and then explore the differences in performance between the various constituent REITs of the ETF. For those unfamiliar with NURE, I’d recommend reading some of my other articles on the ETF: In short, though I think NURE will perform well from this price point going forward, I do not think it will perform any better than the broader REIT index, and it definitely won’t perform as well as a few of its particular holdings. I outline at the end which of NURE’s holdings I like most going forward. Overview of NURE In exchange for managing and regularly rebalancing a portfolio of 37 REITs on your behalf, Nuveen charges a 0.35% expense ratio for NURE. The ETF holds four different kinds of REITs. Nuveen NURE ETFAround half of the portfolio is in apartment REITs, while 22% is in storage REITs, 18% is in hotel REITs, and 10% is in manufactured homes REITs. Here are the top 15 holdings of the NURE ETF as of January 11th: Nuveen NURE ETFInterestingly, the top two holdings by weight right now are both manufactured home REITs – Equity LifeStyle Properties (ELS) and Sun Communities (SUI). Interestingly, the only hotel REIT to make it into the top 15 is Host Hotels & Resorts (HST). What all of these four different kinds of REITs hold in common are short-term leases, ranging from one day for hotels to a year or more for the residential REITs. This gives them the ability to raise rents quickly (as long as they have the pricing power to do so, of course) in inflationary environments. Given NURE’s correlation with inflation (after all, its rent rates end up going into the CPI number), you would think that the disinflation experienced in recent months is the primary cause of NURE’s pullback. Redfin recently reported that asking residential rents declined 1.4% from November to December and were 3.6% lower than their August 2022 peak. This coincides with the data we see from Apartment List, showing month-over-month rent rate declines since August. Apartment ListSimilar stories could be told about self-storage and hotels. The hot rent growth and hotel occupancy rates experienced in late 2021 and through the middle of 2022 are cooling down. But actually, I don’t think this is the primary reason for NURE’s poor price performance. It plays a role, no doubt, but it can’t explain why NURE’s price is below pre-pandemic levels. After all, apartment rents are still around 20% above pre-pandemic levels, even after the pullback. Much the same holds true for self-storage and hotels. I believe the primary cause of the decline is interest rates. Compare, for example, NURE’s price movements against the fluctuations of the BBB corporate bond yield. NURE peaked and began its decline as corporate bond yields picked up their upward momentum, and lately NURE’s price movements are inversely correlated with bond yields. Data by YChartsIn short, the inflationary tailwind for NURE is now gone, and that has left it with only the interest rate headwind. Until the interest rate headwind is removed, NURE will likely continue to be rangebound or in decline. Breaking It Down By Sector In my last article on NURE before this one, I explained that even though NURE is a nice one-click solution for exposure to short-term lease REITs, I prefer picking a handful of stocks from the list to own individually. Part of the reason for that is that these REITs are most certainly not created equally. Performance varies significantly, for a number of reasons. First and foremost, short-term leases are about the only thing that residential real estate has in common with self-storage and hotels. Otherwise, these different commercial real estate sectors have very different fundamental drivers of performance. Apartments can be doing well even while hotels are struggling. Self-storage can be plugging along without a care in the world while the rest are in a downturn. Alternatively, manufactured housing, which is dependent more on government benefits like Social Security, can be plugging along while the rest are struggling. Other than short-term leases, these four CRE sectors are odd bedfellows. Second, even within each sector, there are notable distinctions. For instance, the pandemic-accelerated trend of domestic net migration from coastal cities to Sunbelt cities continues apace, which explains the wide performance divergence between Sunbelt apartment REITs like Mid-America Apartment Communities (MAA) and Camden Property Trust (CPT) and coastal apartment REITs like AvalonBay Communities (AVB), Equity Residential (EQR), and Essex Property Trust (ESS): Data by YChartsTurning to storage REITs, it is interesting to note that the biggest names concentrated most heavily in primary markets like Public Storage (PSA) and Extra Space Storage (EXR) are substantially outperforming National Storage Affiliates (NSA), which is focused more on secondary and tertiary markets: Data by YChartsWhen it comes to hotels, there has been an interesting divergence between various types of hotels. Apple Hospitality REIT (APLE), focused on low-cost, no-frills, efficiency hotels, has performed the best in terms of price, actually exceeding its pre-pandemic price at this point. Likewise, HST with its emphasis on conference rooms and meeting space has enjoyed a revival of business travel. Data by YChartsBut Pebblebrook Hotel Trust (PEB) with its concentration in high-end hotels and resorts saw its fortunes decline in the latter half of 2022. My Take Personally, my opinion remains the same about NURE. Why pay a 0.35% expense ratio when you can pick the best and most preferred names among the relatively small list of holdings? Now, for those who don’t wish to engage in stock-picking, buying NURE at this time does look opportunistic. As for me, though, I will stick with my individual stock picks. I am bullish on Sunbelt real estate, which is why I own CPT and MAA as well as single-family rental REIT American Homes 4 Rent (AMH). Just a few days ago, I wrote a “Strong Buy” article on AMH, and its already up ~6% since then. The yield is low at around 2.2%, but I think AMH is one of the best positioned REITs to profit from the housing shortage. Keeping on the Sunbelt theme, I have also been buying NSA hand over fist recently. The self-storage REIT is in secondary and tertiary markets mainly in Sunbelt states. And when it comes to manufactured housing REITs, my favorite is ELS, as you can read about in this recent “Strong Buy” article. Since so many of its tenants are retirees living off of Social Security benefits, ELS should be able to up its rent growth as high cost of living adjustments (“COLAs”) are implemented. As for hotel REITs, I steer clear of the whole sector. It’s too cyclical for me. It isn’t great for long-term buy-and-holders like me. Take a look, for instance, at the long-term price chart for HST, the biggest REIT in the lodging sector: Data by YCharts Going forward, since the bulk of the inflationary surge is behind us, NURE should perform more or less in line with the broader real estate index as measured by the Vanguard Real Estate ETF (VNQ). Thus, for investors who would prefer an ETF solution, I would suggest looking at the VNQ instead of this higher-cost specialized ETF.
