SRET Hit By Asset Value Declines

The Global X SuperDividend REIT ETF (NASDAQ:SRET) continues to be an attractive pick on the basis of its specialty REIT exposures, as well as other property market exposures that aren’t exposed too much to duration risk. Property values have fallen, and that was clearly going to happen, but you need to deploy dollars in the current environment to outrun persisting and propagating inflation. The monthly cash flows from SRET provide the ability to reinvest and the average down and they derive from cash flows on assets whose yields will rise, and more or less keep up with rising rates and inflation. Yield that can be relied upon is essential to define some returns where capital appreciation is going to be difficult. We still like SRET and think it has the right characteristics for our part of the market cycle.

Rates Continue to Rise

Since our last coverage, the developments can be summarized by inflation being more stubborn than was expected. We thought markets had expected inflation to be stronger than expected because of the jobs report that preceded the inflation report, where more people were looking for jobs, and jobs were continuing to be created, which is a double-whammy of inflation support according to what had become an old-fashioned Phillips Curve logic. As such, the 75 bps hikes continue, and will probably continue indefinitely till inflation is curbed. The Fed was clear that people need to basically become unemployed more, and misery needs to increase for the inflation objective to be accomplished. Commercial real estate is falling, as is residential real estate, by substantial amounts in US markets.

SRET has some exposures that shouldn’t react too much to the current environment. Firstly, there are quite a few allocations into mortgage REITs within SRET, more than 10%. They usually don’t have duration issues because they can flex with rate hikes, as most mortgages are variable rate. The chief reason for declines should therefore be on credit concerns, but lending standards are better after the financial crisis, and equity levels are pretty high in housing. We see no risk of total collapse, and that’s without even considering latent demand factors.

Other specialty exposures like Gaming and Leisure Properties (GLPI) likewise have rock-solid leases supported by regulatory and government stakeholders, and they rise by a percent per year in order to play some catch up with rising bond yields and inflation. Duration isn’t a concern here either. Other commercial leases, mostly specialty within SRET, similarly have modes of increasing rent to keep up with rising rates. The end-markets in all these cases are rock-solid. Cloud for data-center assets, gambling for casino REITs, logistics and supply chain for warehouse assets, and healthcare demand for healthcare facility assets. While asset values may be on a technical decline because their trading value is falling as their markets become less liquid and difficult to finance, the cash flows are likely to keep up with required economic returns. Therefore the declines seem overdone.

Remarks

The 8.5% dividend yield really is ample. It is paid on a monthly basis too. It was halved in March 2020 on account of the total freak-out around the beginning of the pandemic. It is normal for dividends to be cut like this by funds who manage retail money, because they want to be conservative when there’s any reason for it. Therefore, they haven’t restored the dividend either. That is probably a good sign. Things haven’t looked worse for the world than when the pandemic hit, and a recession bringing us down to the lockdown situation economically shouldn’t be a justification for further dividend declines. This is likely the floor. Expense ratios aren’t too bad at 0.58%, yields outrun it easily.

Then there’s the fact that REITs usually outperform during the downcycle and the recovery in late-stage market cycles. We continue to like SRET.

While we don’t often do macroeconomic opinions, we do occasionally on our marketplace service here on Seeking Alpha, The Value Lab. We focus on long-only value ideas, where we try to find international mispriced equities and target a portfolio yield of about 4%. We’ve done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, us at the Value Lab might be of inspiration. Give our no-strings-attached free trial a try to see if it’s for you.