Where the Wild Yields (and Value) Are
It's often said that investors searching for that alluring combination of defensive traits and high yields, such as those availed by the real estate sector, will pay up. Defensive sectors usually command premiums relative to the broader market. Throw in above-average yields at a time when investors are starved for income, and those multiples can climb even more.
However, there are avenues for investors looking for defense and robust yields at a reasonable price, including the Global X SuperDividend REIT ETF (SRET). Often overlooked in the global real estate investment trust (REIT) ETF conversation, SRET is no small potato. The fund, which is nearly five years old, has almost $510 million in assets under management.
Like other REIT ETFs with international flavor, SRET offers an enticing yield. On a trailing 12-month basis, SRET yields 8%. That's more than double the yield on the MSCI US Investable Market Real Estate 25/50 Index, a favorable trait to have in today's low-yield environment.
“Lower interest rates reduced borrowing costs and spurred greater investor demand for REITs given their typically high dividend yields,” said Global X in a recent note. “After a strong year, however, investors are questioning whether REITs have further upside. In this post, we explore valuations within the REIT segment and identify areas that may demonstrate more attractive characteristics.”
Speaking of Valuation...
Global ETFs, such as SRET, are different from international funds in that the former contain domestic equities. The Global X fund devotes almost 87% of its weight to US-based REITs. Remember, the ETF's objective is to hold 30 highest yielding REITs on a global basis. If those yields are found in the U.S. or in another major market, SRET's geographic exposure will reflect as much.
In theory, the combination of high yields and large U.S. exposure would serve to inflate SRET's multiples. In reality, the fund appears inexpensive when measure against domestic REITs and the S&P 500. A price-to-earnings ratio of 10.62x and a price-to-book value of 1.04x confirm as much. Data suggest REIT multiples should be expanding at a faster rate than is happening.
“Beyond greater investor demand, REITs benefited at an operational level, as lower interest rates allowed many to refinance their debt,” according to Global X. “As a result, REITs climbed 29% in 2019, but EBITDA growth only made up 2% of that total return. The EV/EBITDA valuation went up nearly three multiples, showing that much of the rally was due to a valuation expansion based on investor demand rather than fundamental improvements in their investments.”
As the chart below indicates some REITs are in fact getting somewhat pricey relative to historical averages.
Courtesy: Global X
While some REITs are starting to look expensive, that isn't necessarily true of all SRET components.
“One area that typically offers more attractive valuations are high yield REITs, or those with higher dividend yields than the broader market,” notes Global X. “This is intuitive because yield is a function of price and dividends, so higher yielding securities tend to have lower relative prices.”
Surprising Value
Using funds from operations (FFO), the most commonly used REIT valuation metric, it becomes clearer that SRET is attractively valued. For investors considering SRET, FFO is important because it paints a paint a picture of a REIT's cash flow, providing investors with a gauge of dividend coverage and the ability of the company to potentially boost payouts.
Based on adjusted FFO (AFFO) SRET's price/AFFO is just 12.51x compared to 17.58x for a broader REIT basket. Yes, that's a discount and it's one that comes with a significantly higher yield as added compensation.