Supply of New REITs Meets ETF Demand

While REIT stocks have been out of favor in 2015, investors have put fresh money into REIT ETFs that hold such stocks. Even as selling occurred this year in dividend focused sub-industries, such as diversified REITs, office REITs and retail REITs, ahead of the Federal Reserve's rate hike, REIT ETFs added $1.6 billion of fresh assets year to date through November. More than half of the assets hit the ETFs last month according to SSGA data.

REIT ETFs, like most sector ETFs, are passively managed and are usually market cap weighted. As such investors in them should not regularly see changes in the number or the weighting of constituents in these diversified products, unless new companies became public and are added to the underlying indices behind the ETFs.

Yet in a recent SNL Financial article on the top 25 institutional holders of REITs, Imran Tahir noted that BlackRock Fund Advisors, which manages iShares ETFs, and SSGA had three additional REIT positions in the third quarter. 

One such holding was Four Corners Property Trust (FCPT), a recent spinoff from Darden Restaurants (DRI). FCPT owns the real estate associated with 424 restaurants, nearly all which will be leased back to Darden subsidiaries through triple-net leases with 15-year initial terms on average. FCPT is a specialized REIT that is a member of the S&P Small Cap 600 index.

A second new REIT holding for the ETF providers was NorthStar Realty Europe (NRE), which was recently spun off from NorthStar Realty Finance (NRF). As its name suggests, NRE is a European focused office REIT.

FCPT and NRE are two of the smallest positions in the well diversified and market-cap weighted iShares US Real Estate (IYR) Combined they were just 0.17% of assets of the ETF's assets, much smaller then Simon Property Group (SPG 191 *****) and American Tower (AMT). SPG and AMT combined comprised 15% of IYR's assets. However, we note that AMT, a former telecom services company, converted to a REIT in early 2012, part of an ongoing trend.

Meanwhile as a member of the S&P Small Cap index, FCPT is also a constituent of iShares Core S&P Small Cap (IJR) and SPDR S&P 600 Small Cap ETF (SLY). Supported by REITs, financial services is the largest sector, recently at 24% of assets; in 2016 REITs will become its own sector in S&P indices.

Both SNL Financial and S&P Dow Jones indices, like S&P Capital IQ, are part of McGraw Hill Financial.

While McDonalds (MCD) announced last month it would not create a REIT out of its assets, other consumer focused companies have done so. For example, MGM Resorts (MGM) announced in late October it planned to create a REIT for seven Las Vegas and three regional casinos in early 2016. 

As Jacob Wiggins and John Yellig of SNL Financial noted "by conducting the transaction as an IPO and not a spinoff, MGM Growth avoids the numerous regulatory headaches that accompany a REIT spin, particularly the need to obtain a private letter ruling from the IRS, which has clamped down on their issuance this year". 

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