Weekly Review: Real Estate CEFs - A Positive Week For The Sector

by: Arbitrage Trader

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.


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.

The Benchmark

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)

The News

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.

Source: CEFConnect.com

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.

Source: CEFConnect.com

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.

Source: CEFConnect.com

Also, I will show the year-to-date return of the funds, because 2018 is coming to an end.

Source: CEFConnect.com

4. Highest Premium

Source: CEFConnect.com

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

Source: CEFConnect.com

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.

Source: CEFConnect.com

The chart translated in numbers.

Source: CEFConnect.com

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.

Source: CEFConnect.com

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.

Source: CEFConnect.com

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.

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.