David Auerbach

David Auerbach has spent his career in the thick of REITs and ETFs. He started at Green Street Advisors trading REITs for over a decade, then moved to Esposito Securities where he watched the ETF industry grow up from the inside, working with issuers who were unknown at the time but are now household names. After a few career pivots, including ringing the closing bell at both the NASDAQ and NYSE within weeks of each other, he landed at Hoya Capital in September 2023 when the firm had about $75 million under management. Today they're north of $135 to $140 million across two funds. When he's not covering REITs, he's chasing the rock band Phish, closing in on 250 shows and hoping for another hundred before they retire.

On this episode of Behind the Ticker, David sits down with Brad to break down Hoya Capital's two ETFs, why most REIT allocations are doing it wrong, and what advisors miss about the real estate sector.

REIT vs. HOMZ: Growth and Income

Hoya runs two funds with a clean split. HOMZ plays the housing supply-demand imbalance. It covers homebuilders, residential REITs, service providers, brokers, agents, and retailers like Home Depot and Lowe's. It's a single wrapper for the entire housing story. At the time of launch, there wasn't a one-stop way to play housing. Existing options like IHB (the homebuilders index) or REZ (which mixes storage and residential) only captured pieces of the picture.

REIT is a completely different animal. It's built around income, targeting REITs that pay the highest dividends with the lowest leverage ratios. But it deliberately goes where the big passive REIT ETFs don't. Instead of concentrating in the same large-cap names that dominate VNQ's top 10 holdings (which yield 2 to 3%), REIT focuses on four areas: small caps, mid caps, mortgage REITs, and REIT preferred stocks. No individual holding exceeds about 1.5% weighting. The fund pays a monthly dividend currently annualized at over 10%.

One thing that makes REIT genuinely different: it combines common and preferred REIT stocks in the same portfolio. About one-third of the roughly 100 names are liquid REIT preferred stocks, which adds a couple of percentage points of yield to the bottom line. Auerbach notes that REIT preferreds are "a whole different animal" and liquidity is key, since some preferreds have wide spreads that can eat 1 to 2% on execution.

The Two Biggest Misconceptions About REITs

Auerbach has strong opinions about what advisors get wrong. The first misconception: REITs equal high yield. The top 10 REITs making up most passive ETF weightings actually yield 2 to 3%. You're not getting much income for your investment. The second: REITs are interest rate sensitive. Auerbach's rebuttal is practical. "We're using a REIT right now to have this conversation," he says, pointing out that nobody thinks about interest rates before logging into a Zoom call on infrastructure owned by REITs. He ties REIT sensitivity more to the 10-year Treasury specifically, with 4% as the magic number. Below 4% on the 10-year, REITs benefit. Above it, they compete unfavorably with fixed income.

He also pushed back on the "death of office" narrative. Office only represents 4 to 5% of REIT portfolio weightings but gets 90% of the headline attention. Meanwhile, there are REITs with 99-year ground leases under properties like the MGM Grand. If you own the land under the building, you don't care about daily headlines.

The Housing Gap and What Fills It

The HOMZ thesis is simple math: there aren't enough affordable homes for the demand. Auerbach sees several potential solutions playing out. Homebuilders need to deliver a $300,000 product instead of $400,000 to $500,000. Manufactured housing needs to shed its "trailer park trash" reputation (and you can literally buy a manufactured house on Amazon now). Single-family rental REITs continue to grow on both the public and private side. He's also watching the emergence of rent-to-own models where tenants live in a property for 5 years, build up a down payment, and take over the mortgage.

Until the market delivers another 5 to 6 million homes, the rental players stay in demand. And the administration's recent headlines about institutional housing investors might actually benefit REITs, since REITs aren't technically institutional investors in the way the government is targeting.

Lifting the Hood on REIT ETFs

Auerbach's pitch to advisors who already own VNQ or IYR is that REIT and HOMZ make great complements rather than replacements. He points out that the top holdings across most passive REIT ETFs (VNQ, IYR, XLRE, SCHH, KBWY) are basically identical. Having three names represent 23% of portfolio weight in one of those big funds means heavy concentration in low-yielding mega-cap REITs.

His analogy for the REIT universe: it's like your high school graduating class. You have the valedictorian and salutatorian (S&P 500 REITs, dividend champions). The bottom 10% are the bullies and troublemakers (overleveraged, dividend cutters). But the middle of the curve, the 150 or so REITs that nobody knows, is where the interesting stories live. The selection process for REIT resembles an NCAA tournament bracket, "last in, first out," constantly evaluating the bottom 5 to 10 names for replacement while the top of the portfolio stays stable.

On the M&A front, 17 REITs have merged or pursued strategic alternatives in just the past 4 months. When M&A starts in REITs, it tends to cascade. Many REITs trade at discounts to net asset value, making acquisitions cheaper than building. Auerbach's favorite example: Empire State Realty Trust, which owns the Empire State Building, trades at $6.50 a share. Whatever your model says, the most famous office building in the world is probably worth more than that.

Key Takeaways

• Hoya's REIT ETF holds about 100 names with max 1.5% individual weighting, focusing on small caps, mid caps, mortgage REITs, and preferred stocks. It currently yields over 10% annualized with monthly distributions.
• One-third of REIT's holdings are liquid REIT preferred stocks, a feature Auerbach believes is unique among REIT ETFs and adds roughly 2 percentage points of additional yield.
• The 10-year Treasury at 4% is the dividing line for REIT sentiment: below 4% benefits REITs, above 4% makes fixed income more competitive.
• 17 REITs have merged or pursued strategic alternatives in the past 4 months, with many trading below net asset value, making acquisitions cheaper than new construction.
• The US housing market needs 5 to 6 million additional homes to meet demand, keeping rental-focused REITs and homebuilders in a structural growth position.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.