Real estate investment trusts (REITs) are companies that own or finance income-producing real estate properties. Their securities have traits of both equities and fixed income securities. Their high-dividend yields provide consistent income, but valuations can swing along with the equity market. Historically, REITs have good performance, but lately, this sector is under pressure like other fixed-income investments in a rising rate environment. When we add the effect of leverage and the fact that closed-end funds are mostly targeted and used by retail investors, this makes them much more volatile and offers various opportunities for investors and traders like us.
Source: Yahoo Finance
This week two funds declared monthly distribution:
- Principal Real Estate Income Fund (PGZ) announced that it maintains its monthly distribution for November as $0.1100.
- Neuberger Berman Real Estate Securities Income Fund (NRO) announced that it decreases with $0.0050 its monthly distribution for November to $0.0400.
1. Highest Z-Score
We use the Z-Score to find statistically undervalued or overpriced funds in the sector. If the value of a Z-Score is negative, it signals a "buy" opportunity. Conversely, if you are looking for a "sell" candidate, you should be interested in a positive Z-Score value. We use a one-year basis to see how many times the current discount deviates from its mean for that period.
At this point, there are no funds trading with positive Z-Score. That means that based on statistics, there are no funds suitable for short trades.
2. Lowest Z-Score
Here things look a little bit different. As we see from the table, there are plenty of undervalued closed-end funds. In other words, here we can choose several "buy" candidates which we can add to our portfolios. Of course, we should not forget that this is only from a statistical perspective and we are scratching the surface here, so before entering a trade, deeper research should be done.
The average 1-year Z-Score for the group is -1.88 (last week it was -1.74).
3. 5-year Annualized Return On NAV
The aim of the below ranking is to show us the senior loan funds with the higher yields based on the net asset value. Combination of the return with the other metrics that we have is the foundation of our research for potential "long" candidates.
4. Highest Premium
In this little CEF universe, there are no funds trading at a premium. This means that we will have a hard time finding shorts for hedging reaction.
5. Biggest Discount
Based on the discount, we have plenty of funds for this category. This market environment is more suited for short trades, but there are no candidates based on the statistic.
Neuberger Berman Real Estate Securities Income Fund (NRO) seems a buy with his -3.10 Z-Score and -9.36% discount, but the news that there is a decrease in distribution suggest more selling. The other negative sign is that during this year, part of every distribution is formed from a return of capital. This is part of the distribution announcement:
The decrease in the Fund's distribution rate is the result of numerous factors, including increased volatility and general price pressure on real estate investment trusts as interest rates have moved higher; reductions in the Fund's leverage and level of leverage that the Fund will likely have in the near future; and the resultant overall reduction in the amount of investment income earned, and expected to be earned in the near future, by the Fund.
This factors will affect to a greater or lesser extent all the funds in the group.
The Fund seeks to deliver a high level of current income and long-term capital appreciation by investing in real asset-related companies across the world and the capital structure, including common stocks, preferred securities, and debt. Real asset-related companies include those engaged in owning, operating, or developing infrastructure projects, facilities, and services, as well as REITs.
The fund is diversified geographically:
And by industry:
This is the last earnings coverage data.
This is how the price to NAV chart looks.
The chart translated in numbers:
The fund trade at -14.65% discount (-2.10 Z-Score) which means that there is 3.04% profit potential if the fund returns back to its 52-week average discount. Unfortunately, according to cefdata.com, the most correlated peer is CBRE Clarion Global Real Estate Income Fund (IGR) which also trade at a very large discount so there is no proper hedging reaction based on the statistic.
6. Highest Distribution Rate
The table shows the funds with the highest distribution rate on price. Additionally, I have included here the distribution rate based on the net asset value. Most of the market participants find the second metric to be more important.
The average distribution rate on price for all Real Estate CEFs is 8.88%.
7. Highest Effective Leverage
From a leverage perspective, we have one closed-end fund whose effective leverage is equal to zero, the Cohen & Steers Total Return Realty Fund (NYSE:RFI). The other two funds, the Alpine Global Premier Properties Fund (AWP) at 0.28% and the CBRE Clarion Global Real Estate Income Fund at 13.07%, which are not very leveraged, are diversified by geographic region.
In an environment with a flattening yield curve, do not underestimate the effect of the leverage. Be sure it's included in your analysis.
Real estate is one of the basic asset classes of the so-called real assets. It has historically exhibited a lower correlation to a wide variety of investment alternatives, so it's a good instrument for diversification. Besides that, in a rising rate environment, the CEFs, especially the leveraged ones, will have a hard time. So, if you try mean-reversion trades on the long side, my advice is to start small and be patient.
Note: This article was originally published on Nov. 4, 2018, and some figures and charts might not be entirely up to date.
At Trade With Beta, we also pay close attention to closed-end funds and are always keeping an eye on them for directional and arbitrage opportunities created by market price deviations. As you can guess, timing is crucial in these kinds of trades; therefore, you are welcome to join us for early access and the discussions accompanying these kinds of trades.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.