GLPI - AWP: Strong And Steady Yield But Likely Unsustainable

Summary

• Despite a high expense ratio, AWP generates a strong yield on a consistent basis, and it seeks to pay dividends irrespective of its earnings.
• AWP is generating pay-out out of its capital, which is not a good practice.
• Absence of any kind of fixed income portfolio makes AWP vulnerable to high market volatility, and low level of fixed income.

~ by Snehasish Chaudhuri, MBA (Finance)

Aberdeen Global Premier Properties Fund ( AWP ) is a closed-ended equity mutual fund ((CEF)) that invests in stocks of companies operating across real estate sectors throughout the globe. It has a significantly high expense ratio of approximately 1.6 percent. Despite that it generates a strong yield, that too on a consistent basis. The Fund seeks to pay dividends irrespective of its earnings. The fund has paid monthly dividends since the very beginning and has generated a yield between 8 percent to 11 percent during the past 10 years. However, its price has dropped by almost 30 percent during the past one year.

Abrdn Global Premier Properties Fund

Abrdn Global Premier Properties Fund was formed on February 13, 2007 and is domiciled in the United States. This was the time the global real sector was at its peak, and the housing bubble burst took place soon after. The fund in general targets undervalued publicly listed securities in the real estate sector. The fund also has a provision for investing up to 10 percent of its managed assets in illiquid securities. It benchmarks its portfolio against the FTSE EPRA/NAREIT Global TR Index, MSCI US REIT Gross Total Return Index, and S&P Developed BMI Property Index Net TR Index.

AWP’s Portfolio

Abrdn Global Premier Properties Fund was launched and is managed by Alpine Woods Capital Investors, LLC. Almost 41.5 percent of investments are made outside the United States. The major non-US markets are Japan, United Kingdom, Singapore, Canada, Australia, and Germany, where it has invested almost 25 percent of its funds. The Fund limits its investments in emerging markets up to 35 percent. AWP has an asset under management ((AUM)) of $470 million, and a market capitalization of $413 million.

Almost 35 percent of its fund is invested in diversified REITs, industrial REITs, and specialized REITs. Another 26 percent of the fund is invested in the office REITs, retail REITs, and healthcare REITs. During the past one year, industrial REITs, diversified REITs, and specialized REITs have performed well while office REITs, retail REITs, and healthcare REITs have performed poorly. The largest chunk of investments was made in residential REITs, almost one-sixth of the entire portfolio. Due to poor price performance of most REITs, the fund also lost significant value during the past 12 months.

How Did AWP’s Portfolio Perform During the Past One Year

Some of the major investments (in excess of 1.5 percent of the entire portfolio) in industrial REITs, diversified REITs, and specialized REITs included Prologis, Inc. ( PLD ), Public Storage ( PSA ), Equinix, Inc. ( EQIX ), VICI Properties Inc. ( VICI ), Duke Realty Corporation ( DRE ), SEGRO Plc ( SEGXF ), Mitsui Fudosan Co., Ltd. ( MTSFF ), Host Hotels & Resorts, Inc. ( HST ), Land Securities Group plc ( LSGOF ), Extra Space Storage Inc. ( EXR ), Gaming and Leisure Properties, Inc. ( GLPI ) and Mitsubishi Estate Co., Ltd. ( MITEY ). Barring PLD, EQIX, SEGFX, and LSGOF, all other REITs recorded positive price growth during the past one year. Those REITs generating positive price growth accounted for only 16 percent of its entire portfolio.

During the same period, all major investments in office REITs, retail REITs, healthcare REITs, and residential REITs recorded negative price growth. These companies included Realty Income Corporation ( O ), Welltower Inc. ( WELL ), AvalonBay Communities, Inc. ( AVB ), Equity LifeStyle Properties, Inc. ( ELS ), Equity Residential ( EQR ), Invitation Homes Inc. ( INVH ), SmartCentres Real Estate Investment Trust ( CWYUF ), Camden Property Trust ( CPT ), Ventas Inc. ( VTR ), Mid-America Apartment Communities, Inc. ( MAA ), Sun Communities Inc. ( SUI ), and Vonovia SE ( VNNVF ).

As a result, during the past 12 months, the price dropped by almost 30 percent. Earlier, the fund’s price almost halved during the covid-19 pandemic related market crash during March 2020. Otherwise, the fund traded around a price between $5 to $7 during the eight years before the pandemic. If we consider this, then this fund seems to be a good investment option for the income seeking investor. However, the fund is generating pay-out out of its capital investments, which is not a good practice. AWP’s investment objective of paying dividends irrespective of its earnings may not be a sustainable policy for an indefinite time period, and especially during a looming economic recession.

A Comparison Between AWP and RNP

I believe that it’s difficult for a REIT fund to generate strong and steady yield, especially double-digit yield over a longer time horizon without touching its capital. The reason is simple. On an average, REITs offer a low to medium dividend, not exceeding 4 percent. I recently covered a REIT fund, Cohen & Steers REIT and Preferred Income Fund ( RNP ) that offers a monthly pay-out with 6 to 8 percent yield, which is well supported by a positive price growth. I concluded that RNP has a fair chance to outperform other REIT funds both in the short term and long term.

RNP’s portfolio included more or less the same REITs that are included in AWP’s portfolio. However, the secret lays in RNP’s fixed income portfolio, which invested in debt and preferred securities of companies operating across diversified sectors. Almost 73 percent preferred portfolio or fixed income portfolio was invested in companies from the banking and insurance sector. This fixed income portfolio enabled RNP to offer a monthly pay-out with a steady yield. As a result of such steady yield, RNP was successful in generating annual average total return in between 6 to 10 percent.

Real assets in general have low correlation with other assets, can generate strong operating cash flow, work as a hedge against inflation, and tend to appreciate in value much more than liquid assets. REITs allow investors to enjoy the benefit of real assets with a limited amount of money. On the other hand, preferred stocks guarantee a steady fixed income. Thus, the blend of REIT and preferred stocks helps RNP diversify its investments, outperform the market during inflationary periods, and generate attractive total returns. The absence of any kind of fixed income portfolio makes AWP vulnerable to high market volatility, and low level of fixed income. Thus, AWP fails to outperform the market and similar REIT funds. AWP’s objective of paying dividends irrespective of its earnings does not seem to be a sustainable policy either.

Bottom line

Despite a high expense ratio, AWP generates a strong yield on a consistent basis, and it seeks to pay dividends irrespective of its earnings. However, the fund is generating pay-out out of its capital, which is not a good practice. On an average REITs offer a low to medium dividend, and thus the absence of any fixed income portfolio makes AWP vulnerable to high market volatility, and low level of fixed income. The fund is not extremely volatile, but the price being so low, that even a $1 change in price makes a huge difference to investors’ capital. It lost 30 percent of market value during the past 1 year, and suffered almost 50 percent price loss during the covid-19 pandemic related market crash. Thus, despite such strong and steady yield, I’d prefer to stay away from this closed-ended REIT fund.

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