Weekly Review: Real Estate CEFs - A Positive Week For The Sector
- Review of where real estate funds and their benchmarks ended last week.
- Recap of news related to the group, if any.
- Comparison of the funds using several important metrics.
- This idea was discussed in more depth with members of my private investing community, Trade With Beta. Start your free trial today »
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.
Vanguard Real Estate ETF (VNQ) has a positive week. The fund started at $80.27 and finished the week at $81.98, gaining 1.71 points.Source: Barchart.com VNQ daily chart (6 months)
Source: Yahoo Finance
This week, one fund declared monthly distributions:
- Neuberger Berman Real Estate Securities Income Fund (NRO) announced that it maintains its monthly distribution for December as $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, we can see that there are not any funds with positive Z-Score. That means that, based on statistics, we have not any short trade candidates.
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 for this week is -1.33 (last week, it was -1.8).
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.
Also, I will show the year-to-date return of the funds, because 2018 is coming to an end.
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. Based on Z-Score, we have 3 funds that have statistically significant numbers. These are the usual suspects from the top of the discount chart - Neuberger Berman Real Estate Securities Income Fund (NRO), RMR Real Estate Income Fund (RIF) and CBRE Clarion Global Real Estate Income Fund (IGR). As I have mentioned in previous reviews, there is some kind of problems or features that do not appeal to investors so if you try to trade long these funds be sure that the sector is going up.
This week Cohen & Steers REIT and Preferred Income Fund (RNP) decreased his discount from -13.10% to -12.68% but for me is still attractive. This fund invests in real estate and diversified preferred securities. Below you can see how the fund traded during last week.
Source: Barchart.com RNP daily chart (6 months)
Also, this fund has a good correlation with his brothers and the Vanguard Real Estate ETF so you can have hedging reaction in case something does not look good for the sector.
Source: CEF Analyzer
Below, you can see how the fund traded to its NAV.
The chart translated in numbers.
Now, the fund trade only 1.75% away from his 52-week average. This is around $0.33 profit potential, and while this does not look very big, be careful and take the trade only if the benchmark goes in the same direction.
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 8.65%.
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 (RFI). The other two funds, the Alpine Global Premier Properties Fund (AWP) at 0.28% and the CBRE Clarion Global Real Estate Income Fund (IGR) at 13.10% (the CEFConnect data is a little bit outdated), 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 Dec. 02, 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.
This article was written by
Day trader whose strategy is based on arbitrages in preferred stocks and closed-end funds. I have been trading the markets since I started my education in Finance. My professional trading career started right before the big financial crisis of 2008-2009 and I clearly understand what are the risks the average investor faces. Being a very competitive trader I have always worked hard on improving my research and knowledge. All my bets are heavily leveraged(up to 25 times) so there is very little room for mistakes. Through the years my approach has been constantly changing. I started as a pure day trader. Later I added pair trades. At the moment most of my profits come from leveraging my fixed income picks. I find myself somewhere in between a trader and an investor. I am always invested in the markets but constantly replace my normally valued constituents with undervalued ones. This approach is similar to rebalancing your portfolio and I just do this any time there is some better value in the markets. I separate my trading results from my trading/investment results. I target 40% ROE on my investment account and since inception in 2015, I am very close to this target.
My main activity is running a group of traders. Currently, I have around 40 traders on my team. We share our research and make sure not to miss anything. If there is something going on in the markets it is impossible not to participate somehow. Some of my traders are involved in writing the articles in SA. As such Ilia Iliev is writing all fixed-income IPO articles. This is part of their development as successful traders.
My thoughts about the market in general:
*If it is on the exchange it is overvalued and our job is to find the least overvalued.
*Never trust gurus - they are clueless.
*Work hard - this is the only way to convince yourself you deserve success.
*If you take the risk it is you who has to do the research.
*High yield is always too expensive.
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