Does your portfolio have real estate exposure? With the Fed raising rates in 2018, the real estate sector fell -6.59%. But now, in 2019, after the Fed has become more dovish, interest-rate sectors have performed much better year to date, with the real estate sector among the leaders, rising by 17.74%:
While real estate still trails the tech, consumer discretionary, and industrial sectors year to date, the good news for income investors is that the real estate sector offers much better yields.
With that in mind, we went looking for real estate income vehicles and came up with three closed-end funds, all of which yield 7% or more but are still trading at discounts to NAV.
The Principal Real Estate Income Fund (PGZ) is by far the smallest of this trio, with ~$205M in assets vs. $1.43B for Cohen & Steers Quality Income Realty Fund (RQI) and $1.97B for Cohen & Steers REIT and Preferred Income Fund (RNP).
The other major difference with PGZ is that its primary concentration is in mortgage-backed debt, 64%, while RQI holds ~79% in real estate common equities and RNP holds 50%.
PGZ also holds 18.6% in non-US real estate securities and 16.6% in US real estate securities, giving it a bit more geographical diversification:
(Source: PGZ site)
RQI and RNP have similar top 10 holdings, with several equities appearing in both funds, except for Digital Realty (NYSE:DLR), which only appears in RQI's top 10, and Realty Income (NYSE:O), which is only in RNP's top 10 holdings.
RQI Top 10:
RNP Top 10:
RQI also has exposure to REIT preferred stocks, with a 15% weighting, with its biggest geographic weightings in the Pacific (30%) and South Atlantic (19%) regions:
(Source: RQI site)
RNP has the broadest scope of all three funds, aiming to earn "high current income through investment in real estate and diversified preferred securities. The secondary investment objective is capital appreciation. Real estate securities include securities of any market capitalization issued by real estate companies (including REITs) and preferred securities are issued by U.S. and non-U.S. companies."
Unlike RQI, RNP holds preferreds in many different sectors, such as banking (46%) and insurance (26%).
All three funds pay monthly and go ex-dividend in mid-month, with a pay date at the end of the month. RQI and RNP pre-announce each quarter's monthly distribution in the middle of the previous quarter's final month, whereas PGZ appears to have switched to announcing the next three months' dates at the beginning of January and April so far in 2019.
The yields range from 7% to 7.48%, with RQI currently having the highest yield at 7.48%. PGZ dropped its monthly distribution from $.145 to $.11 in October 2017.
RQI switched from a quarterly $.24 payout to $.08/month in October 2016 and has held it at $.08 ever since.
RPN also switched in October 2016, going from a quarterly $.37 payout to $.124/month and has held it at $.124 ever since.
All three funds issue a 1099-DIV form at tax time to investors - no K-1. PGZ had $.2974 in return of capital in 2018, 22.5% of its payouts, while RQI and RNP had no ROC in 2018.
The two Cohen & Steers CEFs have performed the best, with RNP rising 24.81% and RQI rising 16.85%, while PGZ is up 13.91%. Considering their 7% yields, all three of them have very attractive total returns thus far in 2019.
However, they're all still selling at a discount to NAV, with PGZ showing the largest discount of -10.19% vs. -9.31% for RNP and -7.10% for RQI. The return on NAV since inception is somewhat similar for RQI and RNP, with RQI showing a 9.35% return vs. 8.92% for RNP.
PGZ trails with a 6.09% return on NAV since inception.
Leverage and Expenses:
PGZ is the newest of these three funds, having IPOd in 2013 vs. 2002 for RQI and 2003 for RNP.
PNG has the highest leverage at ~31% vs. ~26% for RQI and ~27% for RNP. PNG also has the highest baseline and interest expenses at 2.08% and 1.31%, respectively vs. a much lower baseline expense of 1.05% for RNP. RQI and RNP have similar interest expense figures of .85% and .87%, respectively.
We rate RQI as a buy based upon its higher concentration in real estate equities and its -7.10% discount to NAV, which is closer to its one-year NAV discount than these other two CEFs. It also has a better return on NAV since inception and a higher current yield.
All tables in this article are furnished by DoubleDividendStocks.com, except where otherwise noted.
Disclaimer: This article was written for informational purposes only and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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Disclosure: I am/we are long RQI. 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.
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