What Lies Ahead of REIT ETFs This Earnings Season?

This week marks the beginning of the real estate earnings season, featuring reports from 175 equity REITs, 40 mortgage REITs, and several housing industry firms, per Hoya Capital. After a challenging two-year period (including 50 percentage points of market underperformance), REITs are poised for potential gains following recent Federal Reserve rate cuts.

Since mid-April, the Equity REIT Index has jumped by 14.0%, topping the S&P 500's 12.8% gain. Small caps and rate-sensitive REITs have led this revival. The recent retreat in interest rates has instilled optimism in the REIT sector, helping an apparent "REIT revival."

Even before this changing sentiment about rate shift, there were signs of stabilization in private real estate valuations during late spring and early summer. The signs of recovery were in areas of office leasing activity and a continued firming in residential rents (especially in limited-supply markets and sub-sectors), according to Hoya Capital.

Inside Industry Ranks & Valuation

REIT and Equity Trust - Residential industry falls in the top 18% segment of 250 Zacks industries. The industry is trading at a forward P/E of 16.85X versus 18.99X recorded by the S&P 500.

Real Estate - Development industry's rank falls into the top 40%. The industry has a forward P/E of 11.78X, again indicating undervaluation compared with the S&P 500.

REIT and Equity Trust - Retail falls in the top 12% section of 250 Zacks industries. The industry has a forward P/E of 13.76X, which is another area of undervaluation.

REIT and Equity Trust - Other also boasts a good industry rank (top 39%). The industry trades with a forward P/E of 12.88X.

ETFs in Focus

With the Fed likely to cut interest rates as soon as in September, REITs are likely to rebound as this a rate-sensitive investing area. The segment offers a sturdy yield, which is a plus for income-seeking investors if rates fall.

Hoya Capital High Dividend Yield ETF RIET charges 50 bps in fees but yields as high as 9.54% annually. No stock accounts for more than 3.05% of the fund.

Vanguard Real Estate ETF VNQ charges 13 bps in fees and yields 3.97% annually. The fund, however, has high company-specific concentration risks.

Real Estate Select Sector SPDR ETF XLRE charges 9 bps in fees and yields 3.33% annually. The fund also has high company-specific concentration risks with Prologis making up more than 10% of the fund, followed by American Tower (9.20%), Equinix (7.43%) and Welltower (5.89%).

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