AWP - AWP: Global REIT Fund With An Unsustainable Distribution
2023-08-31 02:00:45 ET
Summary
- The abrdn Global Premier Property is marketed as a global real estate fund, but it simply buys a portfolio of REITs.
- AWP offers a high distribution yield of 12.0%, but its historical returns and distribution volatility raise concerns.
- Investors should consider the iShares Global REIT ETF as a more cost-effective and higher-performing alternative to AWP.
While screening for high yielding real estate funds, I came across the abrdn Global Premier Property ( AWP ). The AWP fund pays an attractive 12.0% distribution yield.
However, upon closer analysis of the fund's historical returns and distribution, I am concerned that the fund has been highly volatile and has not earned sufficiently high returns to fund its distribution yield. What ends up happening is that the AWP fund liquidates NAV in poor performing years to fund its distribution yield, which may lead to a long-term declining NAV and distributions.
I rate AWP a hold and would avoid the fund.
Fund Overview
The abrdn Global Premier Property is a closed-end fund ("CEF") that provides exposure to a portfolio of real estate investment trust ("REITs") across the world.
The AWP fund has $368 million in net assets and charges a 1.40% total expense ratio after fee waivers (Figure 1). The AWP fund may use leverage to enhance returns and as of July 31, 2023, the AWP fund had 16.4% effective leverage.
Figure 1 - AWP fund facts (AWP factsheet)
Portfolio Holdings
While AWP is marketed as a global fund, 62% of the fund's assets are still invested in U.S.-based REITs. 10% is invested in Japanese real estate, 6% in the U.K. and 4% in Hong Kong (Figure 2).
Figure 2 - AWP geographical allocation (AWP factsheet)
The AWP fund's sector allocation is shown in Figure 3 below. the largest sector allocations are Industrial (16%), Retail (13%), Data Center (9%), Health Care (9%), and Multi-Family Residential (8%).
Figure 3 - AWP sector allocation (AWP factsheet)
The AWP fund's top 10 holdings comprise 39% of the fund and are mostly U.S.-based REITs (Figure 4).
Figure 4 - AWP top 10 holdings (AWP factsheet)
Returns
The AWP fund has historically delivered very modest total returns, with 3/5/10/15Yr average annual total returns of -0.2%/-0.6%/2.5%/3.0% respectively to July 31, 2023 (Figure 5).
Figure 5 - AWP historical returns (morningstar.com)
While long-term returns have been poor for the fund, the AWP fund does generate eye-popping annual returns with large volatility. For example, AWP lost 33.3% in 2022, but made 27.5% in the prior year.
Figure 6 - AWP annual returns (morningstar.com)
Overall, the risk-adjusted returns of the AWP fund is poor, with 5-Yr volatility of 22.5% and Sharpe Ratio of 0.02. The AWP fund has higher volatility and lower returns than the Morningstar US Real Estate Total Return Index (Figure 7).
Figure 7 - AWP risk metrics (morningstar.com)
Distribution & Yield
Despite the fund's history of volatility and poor returns, the AWP fund pays a very high distribution yield. The AWP fund is currently set to pay $0.04 per month for a 12.0% forward distribution yield. On NAV, AWP is yielding 11.7%. AWP's distribution has been maintained for the past several years (Figure 8).
Figure 8 - AWP distribution is current set at $0.04 / month (Seeking Alpha)
However, investors should be mindful that the AWP fund has not earned its distribution. Historically, the AWP fund has heavily relied on return of capital ("ROC") to fund its distribution yield (Figure 9).
Figure 9 - AWP has heavily used ROC to fund distribution (AWP semi-annual report)
As AWP's distribution yield (11.7% of NAV) far exceeds the fund's long-term total returns (2.5% over 10 years), the fund has been liquidating NAV to fund its distribution, in a classic 'return of principal' fashion. Shareholders are essentially getting their money paid back to them through the distribution, leading to a long-term amortizing NAV and share price (Figure 10).
Figure 10 - AWP show signs of being an amortizing return of principal fund (morningstar.com)
Long-term investors in 'return of principal' funds end up losing both principal from price declines, and income, as the pool of assets to fund its distribution shrinks. AWP's annual distributions have declined from $0.60 / year in 2012 to $0.48 / year since 2020 (Figure 11). Given the fund's poor long-term investment performance, I would not be surprised if the distribution rate is cut further in the future.
Figure 11 - AWP's distribution has been in long-term decline (Seeking Alpha)
AWP vs. REET
Instead of paying abrdn 1.4% total expense to hold a global portfolio of REITs, investors may want to consider a simple passive solution like the iShares Global REIT ETF ( REET ). The REET ETF charges a 0.14% expense ratio and holds similar REITs as the AWP fund (Figure 12 and 13).
Figure 12 - REET geographical allocation (ishares.com) Figure 13 - REET top 10 holdings (ishares.com)
Furthermore, the REET ETF has delivered 3 and 5Yr average annual total returns of 6.0% and 2.0% to July 31, 2023, far superior to AWP's -0.2% and -0.6% respectively (Figure 14).
REET historical returns (morningstar.com)
Conclusion
The abrdn Global Premier Property gives investors exposure to a global portfolio of real estate. However, the AWP fund is not an operating real estate company. Instead, it simply buys and holds REITs in various global jurisdictions like the U.S. and Japan.
Historically, the fund's total returns have been very volatile with poor long-term total returns. Although the fund does pay a very attractive 12.0% forward distribution yield, I fear the distribution may not be supported by the fund's earnings potential, as the fund has heavily relied on return of capital to fund its distribution.
Instead of owning the AWP fund, I recommend investors looking for global REIT exposure to consider the REET ETF, as it delivers superior total returns at a fraction of the fees.
For further details see:
AWP: Global REIT Fund With An Unsustainable Distribution