REITs, the Environment, Sustainability, and Governance

I’m pleased to report that NAREIT has released its first ever Environment, Sustainability, and Governance (ESG) report this month.  For many years, REITs have been concerned about their environmental footprints, and have been at the lead in reducing energy consumption and waste.  However, REITs and the leadership at NAREIT want to go beyond that, and are now promoting best practices in these three key areas.  This month’s report — hopefully the first in a series — synopsizes how well we are doing.

Of course, doing “good” can also mean doing “well”, and REITs are still committed to offering solid diversified returns and liquidity to investors.  We here at ACCRE are committed to being good citizens of the world around us, so it is useful that as we look for great REIT investments, we can also make sure we are owing a piece of firms that are “doing good”.

What exactly constitutes positive practices in ESG?  For example,  the report documents REIT performance in a number of key areas, including (but not limited to):

Green Building Certification
Emission Reductions
Decreased Energy Consumption
Energy Efficiency
Waste Reduction
Water Conservation
Creating Lasting Social Impact
Focus on surrounding Communities
Investing in Employee Development and Wellbeing
Robust Governance & Board Diversity
Supply Chain Management

In all of these areas, REITs appear to be taking the lead in the real estate sector.  Of course, there is always more work to do, and it’s great to know that NAREIT is prioritizing good citizenship among its members.  For your own copy of the report, click here.

Trade Tensions and REITs

Real estate in general, and REITs in particularly, look very good in a world of trade tensions.  Sarah Borshersen-Keto, writing for NAREIT last week, interviewed Joel Beam, a senior portfolio manager at Salient while at NAREIT‘s REITweek conference in New York.  Beam noted that REITs have had a great run relative to other equities during the recent trade-war spat.  As quoted in the article, Beam noted, “I think that’s a testament that real estate represents a flight-to-safety approach for a lot of folks.”

Beam went on to describe the level of capital chasing REITs as “enormous”.  Beam noted that the high returns from REITs, coupled with the low volatility, helped explain why REITs were so attractive to investors right now.

To read the entire article, and others on the NAREIT site about the REIT world today, click here.

ACCRE diversification + excess returns

As I noted last week, ACCRE continued with positive returns in May, even in the wake of a terrible month for the S&P.  However, that only tells part of the story.  REIT investment in general, and ACCRE’s philosophy in particular, provide significant diversification during troubled times as well as substantial excess returns.

First, the diversification story.  Our good friend, Dr. Brad Case at NAREIT, wrote an excellent piece for REIT.COM back in January.  In it he shows that REITs in general are historically highly uncorrelated with the market in general.  For the uninitiated, if we can find an investment class which is uncorrelated with the market but offers positive excess returns, it is like “found money” for our portfolio.  Dr. Case shows that REITs are typically between 50% and 70%, and in 2018 hardly got above 60%.  ACCRE’s has a correlation to the S&P of 43.12%, measured since the inception of the fund.  Click here for a full copy of Dr. Case’s article.


Adapted from Case (2019)

Of course, diversification only tells part of the story.  ACCRE also provides positive excess returns, and in fact those excess returns have been significantly higher than the S&P since the inception of the fund.  Excess returns, by the way, are a measure of how much you would have earned, on a daily-return basis, over and above what you would have earned if you had invested in something risk-free, such as t-bills.  Specifically, since the fund began, ACCRE’s daily average excess return has been 0.062%, or 22.13% annualized.  This compares to the S&P, which  has averaged 0.012%, or 4.48% annually over that same period.

FInally, the Sharpe Ratio allows us to examine these returns in the context of risk.  Specifically, we know that the S&P not only has lower returns, but also a high degree of volatility compared to those returns.  The Sharpe Ratio allows us to quantify that risk.  It is the ratio of average excess returns to the standard deviation of those returns.  A higher Sharpe Ratio indicates more return (more “bank for the buck”) compared to risk.  Not surprisingly, ACCRE’s Sharpe Ratio is 6.1%, compared to the S&P at 1.6%  This may not sound like much, but it basically means that ACCRE is providing nearly four times as much return for every unit of risk.

ACCRE report for May

It’s been a busy few weeks for Greenfield, so I’m just getting caught up with ACCRE and a few other items.  May was a very tough month for the stock market in general.  Specifically, the S&P was down 6.58% last month, for an annualize negative return of almost 79%.  REIT stocks in general held their own, and ACCRE continued to outperform both the market and the over all REIT universe, up about 0.24% on the month.

ACCRE May dollar invested updatedSpecifically, a dollar invested in ACCRE since the inception would be worth $1.51 today.  That same dollar invested in the S&P would only be worth $1.16.  I would note that this is the first time in almost two years that the cumulative return on the NAREIT index has passed the S&P — a dollar in NAREIT would be worth $1.19 today.

ACCRE continues to provide excellent diversification on top of these stellar returns.  I’ll have more about that next week.  Best wishes to you all for a great weekend.