REIT and fixed income investors alike should consider the benefits of real estate credit and how a portfolio allocation to real estate debt can enhance and diversify investment portfolios. In our recent webcast for financial advisors and institutional investors, Real Estate Redefined - Strengthening diversification with real estate credit, Gabriel Hammond, Emles’ Chief Executive Officer, outlined the current state of the real estate market.
“While investors typically look to real estate investment strategies to help diversify the risks of traditional asset classes,” Hammond said, “the real estate market is still subject to volatility, which can increase during periods of economic stress.”
The COVID-19 pandemic has spurred volatility in the real estate market, with increased unemployment, vacancies and challenges for some commercial or residential tenants to even pay rent. Year-to date, a well-known representation of the Real Estate Investment Trust (“REIT”) market, the FTSE Nareit All Equity REITs index, was down ~15.2%1.
On the flip side, the debt issued by real estate companies has performed strongly year-to-date. In fact, as of October 31, 2020, real estate corporate bonds, as represented by the Solactive U.S. Real Estate Bond Index, were up ~4.6% year-to-date1.
While market pullbacks may seem nerve-racking, volatility is part of normal market behavior – and real estate companies have been preparing for the last decade for it. Following the 2008 Financial Crisis, the strength of REIT’s balance sheets has continued to grow. REITs have significantly improved their capital adequacy and liquidity coverage ratios, while also growing net income.2
“We believe the fundamentals of REITs are relatively stable and strong,” said Hammond.
Taking a deeper look at the fundamental underpinnings of real estate companies, we believe they are compelling opportunities from a debt perspective. However, investors have historically struggled to access a portfolio of bonds issued by real estate companies in a single investment – with the ease and transparency of an ETF.
Until now. Rachel Deinhart, an Emles portfolio manager, highlighted the Emles Real Estate Credit ETF (REC), which is the first ETF to offer a portfolio of corporate bonds issued by real estate companies.
The Emles Real Estate Credit ETF (REC) is designed to reflect the performance of the Solactive U.S. Real Estate Bond Index, a market value weighted index designed to measure the performance of corporate bonds issued by U.S. companies in the real estate sector. The index selects bonds based on size, time to maturity and credit rating. For inclusion in the index, bonds must have a minimum outstanding value of $400 million and above, have a minimum term of 3 years (at issuance) and/or 18 months to maturity, and lastly, a credit rating of B- / B3 or above. It’s our view that the non-investment grade bonds included in the index still have strong returns and credit quality – and therefore help increase the portfolio’s yield while also providing additional diversification benefits. The result is a diversified portfolio of corporate fixed-rate real estate bonds that aims to generate current income.
For investors looking to initiate or expand their existing real estate portfolios, an allocation to real estate corporate bonds may potentially lower volatility and increase diversification. For fixed income investors, REC may provide enhanced yield and diversification benefits.
“Considering the volatility in the market this year, we believe diversification and accessing differentiated sources of yield will be important looking forward,” Deinhart added.
“REC consists of bonds that we believe exhibit strong financials and may be well positioned even if market stressors reemerge. U.S. real estate corporate bonds spanning REITs and other real estate services can be accessed through REC at a fee of just 0.48%.”
Financial advisors and institutional investors who are interested in learning more about the real estate credit can listen to the webcast Real Estate Redefined - Strengthening diversification with real estate credit here on demand.