Co-produced with PendragonY for High Dividend Opportunities
We are pleased to provide an updated report on Aberdeen Global Premier Properties Fund (NYSE:AWP), a property REIT CEF that we have been recommending to our investors. The property REIT sector has been on fire lately, and most REIT CEFs have gone up significantly in price. AWP remains very attractively priced and offers both high yield and upside potential. This is also a defensive CEF that is set to do well during periods of market volatility. AWP can be used in conjunction with two other property REIT CEFs that we like: Cohen & Steers Quality Income Realty Fund (RQI) with a yield of 6.9% and Cohen&Steers Total Return Realty Fund (RFI) with a yield of 6.7%. We recently wrote about RQI and RFI in an article HERE.
At High Dividend Opportunities, we have been repositioning our portfolio to prepare for the eventual end of the current bull market. Our primary goal is to find investments that provide a reasonably safe high current income that should continue during a potential bear market.
In our article entitled, "How To Protect Your Income From Falling Interest Rates?", we advocated a "three-legged" strategy for income investors utilizing preferred shares, bonds, and high dividend common equities.
To build the common equity leg, one sector we find to be particularly appealing is the property REIT sector. As pass-through corporations, REITs are required to distribute 90% of their taxable income. That requirement leads to a class of equities that have higher-than-average dividend payments. While there are still many quality REITs trading at a good value (and, thus, good yields), they are getting harder to find as prices continue to climb following the lows from last December.
Aberdeen Global Premier Properties Fund is a publicly-traded closed-end fund that invests in the global property sector, including REITs and other real estate-related securities. Using only a small amount of leverage (about 3%), it provides instant global diversity.
AWP was launched in 2007, so it has survived the great financial crisis. This was a somewhat inauspicious time to start a REIT fund, but despite the difficult times that followed, AWP managed to survive and to begin growing again.
We first recommended AWP more than 2 years ago, and it continues to produce solid income payments and a reasonable total return. We still see it as a strong buy.
While most REIT CEFs are 100% allocated to the US market, AWP has a 53% foreign market exposure and is truly international in this sense.
AWP provides an easy and cost-efficient way of gaining exposure to foreign REITs and real estate holdings without all the headaches that typically come with foreign investments. Given less-than-perfect correlation between various foreign real estate markets and adding exposure to non-US markets, we lessen our dependence on US economic performance. It is worth to note that property REITs in Europe and Asia are currently much more undervalued compared to their U.S. peers and, thus, offer a great buying opportunity.
AWP, while it does use leverage, uses very little leverage. According to CEFConnect, it uses just 3%. Many closed-end funds, especially in the real estate sector, use significant leverage. Leverage is a two-edged sword, helping on the upside but hurting on the downside.
Given that property REITs themselves already use substantial amounts of debt to finance their properties, we believe that low leverage at the closed-end fund level is a prudent move. Having experienced significant value destruction during the financial crisis, AWP is today relatively conservative with its capital structure.
An issue with many CEFs, and actively managed funds, in general, is that their performance doesn’t really justify their fees. This is because of conflicts of interest between the manager who wants to earn fees and the investor who wants to earn excess returns. To reduce the risk of investors pulling out their capital, managers often build portfolios that are very similar to benchmarks so that underperformance never becomes too high. This helps them to retain assets and earn higher fees at the expense of investors who would often be better off investing in index funds in the first place, rather than paying high fees.
AWP is no closet-indexer. It is doing what it is paid to do, namely seek to outperform and provide high monthly payments to its shareholders. Its portfolio is reflective of this objective with significant differences relative to its benchmarks. While most benchmarks have a very high allocation to retail and relatively low exposure to residential, that is not the case for AWP:
Looking at the correlation between AWP and two benchmark funds, VNQ and VNQI, we can see that, while AWP has a moderate amount of correlation, it is very much different from those two funds. With correlation less than 60% between AWP and either of the two benchmarks, it's clear the managers are not just duplicating those indexes but also that a combination of those two indexes is a good benchmark as well. First Trust FTSE EPRA/NAREIT Global Real Estate Index ETF (FFR) is based on the index that AWP management uses as a benchmark for the fund’s performance. Its correlation with AWP falls between the two Vanguard funds as it could be considered a blend of those two funds.
Finally, in terms of fees, we find AWP to fit in the mid-range compared to its peers. It is not excessively expensive, neither cheap with a 1.18% annual management fee charged to investors.
Current holdings represent some quality REITs, like Realty Income (O), Prologis (PLD), and Simon Property Group (SPG). At just over 27% of the total portfolio, concentration in the top 10 holdings is not excessive.
We first recommended AWP in April of 2017. How has it done since then? We can take a look here, with a comparison to the Vanguard Real Estate ETF (VNQ) and the Vanguard Global ex-U.S. Real Estate ETF (VNQI) with dividends reinvested.
Source: Portfolio Visualizer
Starting in April of 2017, an investment in AWP has significantly outperformed investments in either VNQ or VNQI. With a CAGR of 12.57%, it has done quite well with the two REIT ETFs returning more than 300 basis points lower per year. But we recommended AWP for income. How did it do generating income?
Source: Portfolio Visualizer
AWP clearly generated more income than either VNQ or VNQI, and income grew faster for it as well. This is exactly what we want in an income investment.
Looking at when we first recommended it on April 2, 2017, we also see that, on a total return basis, AWP did quite well compared to several similar funds. These include the Nuveen Real Asset Income&Growth Fund (JRI), the CBRE Clarion Global Real Estate Income Fund (IGR), and the First Trust FTSE EPRA/NAREIT Global Real Estate Index ETF (FFR). FFR is included as it is an ETF that is based on the index AWP uses for its own benchmark. While much of that outperformance was during 2017, AWP has done quite well during this year as well.
Over the last 3 years, NAV has been roughly stable swinging between $6.00 and $7.50. That indicates that, currently, the dividend is well supported. The current dividend of 5 cents a month has been in place since July of 2011. Interestingly enough, 2 monthly dividends, while declared on time, ended up being paid in the following month.
Currently, the discount to NAV is 10.51%. This is about mid-way between the smallest discount and the largest discount over the last 12 months. It is also a slightly larger discount than the average discount over the last 12 months. As such, it looks like AWP is trading at a good value.
The current dividend yield is about 10.0% based on the 5 cents per share monthly dividend, which has been maintained for over 7 years, with little impact on NAV. The dividend payout includes some tax-advantaged "return of capital" or ROC as the CEF also pays out some of its capital gains to shareholders. As a reminder to our readers, ROC, in the case of equity CEFs, is non-destructive, provided that it does not impact the "Net Asset Value" of the fund. This is clearly the case with AWP.
While there are quite a few positive factors for AWP, we need to also identify a few risk factors to consider. The first one is the historical track record. AWP went public right before the financial crisis, and as such, it suffered high underperformance during that time. It has not yet fully recovered from the losses experienced during the crisis.
The market environment has drastically changed since the financial crisis, in part because the REITs that survived restructured to use leverage much more conservatively. We believe that AWP’s portfolio is well structured to perform relatively well in the current interest rate environment. While we expect a recession starting in about 18 months, we don’t see it being as severe as the last one. We also see REITs, and AWP, being better positioned to handle the downturn.
The second main key risk factor is the large dividend payout. AWP (intentionally) pays a dividend composed of recurrent cash flow + return of capital. It results in a sizable monthly payment (10.07% yield), but this may not always be the case in the future. It has been maintained for the last five years, but it could well be discontinued if AWP starts experiencing capital losses.
For the most part, it is fair to say that you should never expect a >10% yield, to be perfectly consistent. While the history indicates a stable payment policy, one should not be surprised at a dividend cut if REITs start cutting their dividends or experience large share price drops. Having said that, we believe we are in the midst of a strong bull market which will likely last until late 2020 or even into 2021. With the economy not shrinking and interest rates stable or declining, we expect REIT share prices and dividends to outperform very well into 2021.
One should note that equity CEFs such as AWP are very different from "Fixed Income" CEFs, and Return of Capital (or ROC) for equity CEFs does not mean that it is bad or "destructive". Many equity CEFs pay a part of their dividends in the form of ROC, which are the result of capital gains on their underlying holdings. In a bull market, the fund manager may decide not to sell stocks that have greatly appreciated but instead use cash on his balance sheet to pay the distribution. In such cases, part of the distribution may be labeled as ROC for tax purposes, and it is not destructive.
ROC for tax purposes can actually be advantageous. Investors do not have to pay tax on the ROC portion of dividends received until they sell the security, because ROC typically results in a reduction of the investment cost basis rather than an immediate tax liability. Only if the cost basis is reduced to 0, does ROC result in capital gains taxes being due before sale.
This is very different from "Fixed Income" CEFs where the investment income is predictable, and any ROC over and above income earned can be "destructive". For equity CEFs, our rule of thumb is that ROC is not destructive as long as the NAV is stable or continues to increase.
While its track record since inception has been adversely impacted by starting up just before the Great Recession, AWP’s record, since we recommended it in April of 2017, has been pretty good with an annual total return CAGR of 12.57%. It has produced solid income and income growth for the investor while also outperforming two benchmark index funds, VNQ and VNQI.
With a discount to NAV of 10.5%, slightly better than the average over the last 12 months, we see the current price as a good deal. We like this fund at any price where the yield is above 9.6%, which sets a buy under price of $6.20.
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Disclosure: I am/we are long AWP, 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.