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To be honest, I’m a huge fan of JPMorgan as an asset manager. Having reviewed several JPMorgan products in the past few months, including the JPMorgan Hedged Equity Laddered Overlay ETF (HELO) and JPMorgan Equity Premium Income ETF (My pocket), I find that JPMorgan tends to run best-in-class funds in their respective fields.
This article analyzes the JPMorgan Realty Income Fund (NYSEARCA:JPRE) to see if it is also a best-in-class real estate fund.
The JPRE ETF is an actively managed fund focused on REIT investments. The Manager proactively screens and invests in REITs with strong financials and growth potential.
Given the fund’s allocation, I’m impressed that the JPRE ETF overweights data center and real estate REITs, two sectors with strong growth tailwinds.
With interest rates stubbornly rising, I think investors are interested Real estate investments will have to select managers who can navigate the challenging macro landscape and select outperforming subsectors like JPRE. I rate JPRE a Buy.
Fund overview
The JPMorgan Realty Income ETF aims to provide high total returns through a combination of current income and capital appreciation. The JPRE ETF primarily invests in stocks of real estate investment trusts (REITs) across the market cap spectrum and is actively managed. The Fund continually examines the universe of REITs for companies that demonstrate superior financial strength, operating income and attractive growth potential.
The JPRE ETF was previously a mutual fund known as the JPMorgan Realty Income Fund and converted to an ETF structure in May 2022. The JPRE ETF is managed by a team of managers with 66 years of industry experience (Figure 1). As for JPMorgan, the GBRE ETF is relatively small, with just $313 million in assets. The fund charges a net expense ratio of 0.5%.
Figure 1 – JPRE overview (am.jporgan.com)
Portfolio holdings
The JPRE ETF has 29 positions and Figure 2 shows the sector allocations to the JPRE ETF. The largest sector weights in JPRE ETFs are Diversified REITs at 32.9%, Apartments at 15.7%, Healthcare at 15.6%, Industrials at 10.4%, and Shopping Centers at 6.7%.
Figure 2 – JPRE Sector Allocations (am.jporgan.com)
Figure 3 shows the sector allocation to a passive REIT index, the iShares US Real Estate ETF (IYR), for comparison (Figure 3).
Figure 3 – Allocation of sectors for the International Year of Rice (ishares.com)
Readers should note that JPMorgan classifies towers, data centers and timber REITs as “diversified REITs,” so relative to the negative index, JPRE has a significant overweight in this sector (32.9% compared to 23.8% combined for the year International) (Figure 4).
Figure 4 – JPRE classifies data centers, towers and timber REITs as diversified REITs (JPRE Annual Report)
JPRE is also overweight in apartment (15.7% vs. 9.4%) and health care (15.6% vs. 10.9%). It is underweight in retail (6.7% vs. 12.2%), industrial (10.4% vs. 11.5%), and warehousing (5.6% vs. 7.3%).
Portfolio returns
Figure 5 shows the historical returns of the JPRE ETF. While historical returns have been modest, with annual returns averaging just 3/5/10 years -0.2%/3.6%/5.1%/10.7% respectively through May 31, 2024, the problem is mostly within the asset class. In the face of rising interest rates. Compared to its peers, Real estate Within the Morningstar category, the JPRE ETF generally delivered first or second quarter performance.
Figure 5 – JPRE Historical Returns (morningstar.com)
Distributions and returns
Although the JPRE fund is called a “real estate income” fund, the fund itself does not pay a very high distribution yield. The JPRE ETF currently has a trailing distribution yield of 3.1% (Figure 6).
Figure 6 – JPRE’s distribution yield is relatively low (Searching for Alpha)
This may be a result of the fund’s allocation to REITs that historically do not pay distributions as high as data centers. Other passive real estate ETFs, such as the Vanguard Real Estate ETF (VNQ) and the Real Estate Select SPDR ETF (XLRE) pay higher distribution yields of 4.1% and 3.5%, respectively (Exhibit 7).
Figure 7 – JPRE vs. Peers, Distribution Yield (Searching for Alpha)
Real estate is a macroeconomic-driven asset class
Readers often ask me why I have a bias towards the real estate asset class. For example, I recently wrote a cautious article about Ares Commercial Real Estate (ACRE).
To be clear, I’m not a biased investor; My writing is simply the product of my overall top-down analysis. In the past, I wrote bullish at the right time And Bearish articles on Vornado Realty Trust (VNO).
I’m currently cautious about ACRE and other office REITs because I’m concerned about the massive write-downs we’re seeing across the industry on office towers and office loans.
The decline in real estate valuations is primarily due to rising interest rates and, in the case of office properties, the long-term overall trend of work from home (“WFH”).
However, in the world of real estate, there are pockets of relative strength. For example, in 2023, the outperforming properties were retail, residential, lodging, healthcare, and data center REITs (Figure 8).
Figure 8 – Real estate sub-sector performance (Reit.com)
These outperforming sectors have benefited from several macroeconomic drivers. For example, retail REITs benefit from American consumers’ insatiable appetite for consumption; Apartments REITs are benefiting from the current shortage in housing supply (Figure 9); While data center REITs have benefited from interest in artificial intelligence (“AI”) demand for computational power.
Figure 9 – The United States has a housing deficit of $3 million (Axios.com)
As long as interest rates remain high, I think investors considering real estate investments will have to be more nimble and find managers who can recognize and capitalize on key macro trends, rather than just buying index funds like IYR. While index funds have succeeded in the past when interest rates have been in long-term decline, they are unlikely to succeed in the current environment.
For me, I think JPRE’s diversified portfolio could be a good way to invest in this challenging asset class. From Figure 2 above, we can see that JPRE is overweighting sectors with macro tailwinds such as data centers and apartments.
Conclusion
JPMorgan Realty Income ETF (JPRE) is an actively managed fund of REITs. They are managed by industry experts who screen and select investments with high financial strength, operating income and growth potential. JPRE currently has an overweight to data center and apartment REITS with strong macro tailwinds.
With interest rates remaining high, I believe real estate investors need to be more discerning with their investments and find managers like JPRE who can pick outperformance sectors. I rate JPRE close He buys.
