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Aberdeen Global Premier Properties (NYSE:AWP) is one high yielding closed end fund. Let's face it, that is the primary attraction here. AWP's 7.88% yield dwarfs what you can get from the more conventional REIT ETFs like Vanguard Real Estate ETF (VNQ).
Of course were hardly unaware of this fact, and yet, the last time we covered it we told readers that this was a "sell". Specifically we said,
A 10% widening of the fund's discount, alongside a 10% drop in the REIT indices, can create a rather bad set of returns for investors. If this is accompanied by a rising US dollar, the fund is likely to suffer even more. We think the fund is a sell at this point and we will reexamine this once sentiment has normalized.
Source: 3 Reasons To Sell
Bearish articles tend to get more vociferous comments and this was no different. The counterarguments ran along all 3 of our points. Let's see how things have shaken out since and whether we can change our stance.
The Returns
AWP has at least given a nod to our bearish views and underperformed both the broader market (SPY) and VNQ.
So at the minimum if you sat out heeding the bearish call, you would have not lost anything. But what has caused this underperformance and have the factors played out as expected?
Overvalued REITs
The first leg of our bearish thesis was that AWP was dabbling in a lot of overvalued REITs. These included Prologis, Inc. (PLD), Welltower Inc. (WELL) and Digital Realty Trust Inc. (DLR), all of which were in the top 25 holdings of the fund. Of those, valuations are beginning to bite only on DLR.
WELL remains detached from all semblances of normalized valuations at 28X cash flow and close to 26X forward funds from operations (FFO).
If you run through the list of shares owned by AWP, you can see that most of the REITs with extreme valuations still remain at those levels. So we are seeing only a modest correction of this bearish factor.
US Dollar Getting Stronger
This was one factor that we got the most pushback on as pretty much no one could see why the US dollar would strengthen. The US dollar index is primarily an Anti-Euro index. In this race, we have an inebriated runner (US Dollar) and an inebriated runner shot twice with bear tranquillizer (Euro). Guess which one we have put our money on?
The Euro is moving as we expected and we see more pain ahead for those bearish on the US dollar. But this bearish factor too, has played out partly.
The Discount To NAV
The last point we stressed about back in June was that AWP was trading at an unusually low discount compared to history. Back then the 3.42% discount was unacceptably low for this fund.
AWP's discount to NAV has widened and is now moving into the neutral zone.
Source: CEF Connect
Where Does That Leave Us?
We see all three factors having room to run further. The overvalued REITs have a lot of room to drop, especially if interest rates rise as we expect. AWP owns a lot of data center, industrial and self storage REITs that sport sky high multiples and we see very little value in holding most of these.
US Dollar is likely to strengthen more and anyone complaining about the Quantitative Easing here just needs to look at the balance sheet expansion being done in Europe.
Finally on the discount to NAV front, while it has normalized, we think it goes into the other extreme. CEFs premiums and discounts tend to swing like a pendulum and spend just a brief amount of time at the "just-right" level.
Conclusion
AWP thesis has partially played out as expected and it has underperformed. We are now moving to the neutral camp as the downside risks while still present have decreased in magnitude. We fully expect this fund to move lower, but on a risk-reward basis, the bearish stance is no longer justified. That said, we are not anywhere close to a buy point here and while a few REITs are attractive, heading into a closed end fund requires a very a different approach.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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