WELL - IGR: As Global Real Estate Stabilizes Collect A 15% Yield From This CEF

2023-11-27 12:54:46 ET

Summary

• Real estate has been one of the worst-performing sectors in the U.S. equity market over the past three years.
• Global real estate market conditions are stabilizing, indicating a potential recovery in the sector.
• CBRE Global Real Estate Income Fund is showing signs of recovery and offers high current income and potential for capital appreciation.

While many income-oriented investors who seek to achieve growth in their portfolio while generating income for retirement have traditionally viewed real estate as a core asset class, the past 3 years have not been kind to the real estate equity sector. According to market statistics for key market sectors in U.S. equity markets, Real Estate has only been surpassed by Utilities as the worst-performing sector over the past 3 years as shown on Seeking Alpha's Market Data view.

Traditionally, REITs have offered investors high yield income along with potential for capital appreciation and tend to be uncorrelated to broader stock market returns. However, with rising inflation and post-Covid pandemic impacts on commercial real estate and rising interest rates impacting residential real estate investments, the REIT sector has struggled to deliver positive returns over the past two years. However, we may be seeing the beginning of a global recovery in real estate. According to this recent report from Jones Lang LaSalle (JLL), global real estate market conditions are stabilizing.

The challenges facing the global economy continue as we approach the end of 2023, from a still high but falling rate of inflation, to monetary tightening by many of the major central banks, to signs of slowing in labor markets. Cyclical and structural uncertainty are weighing on occupier demand as companies review their portfolios and take longer to make decisions, while the high cost of capital and conservative underwriting from investors are slowing capital flows.

Despite slowing economic growth, a recovery in international travel and resilient consumer spending have supported retailer sentiment and hospitality. Challenging conditions will persist into 2024, but we are anticipating greater stability to emerge through the next year with expectations for lower inflation and the start of the interest rate cutting cycle.

Direct investment in real estate globally has been declining steadily since Q2 2021, as illustrated in this chart from the JLL report.

However, sentiment is beginning to shift, and the beginning of a recovery appears to be occurring as we near the end of 2023 and as the likelihood of further interest rate increases is diminishing. The month of November has witnessed some recovery from the market correction in the equities market in October, with four straight weeks of positive price action. REITs also continued to show some gains in November ahead of the holiday season.

One fund that invests in global real estate and is also showing signs of recovery in November is the CBRE Global Real Estate Income Fund (IGR). This closed-end fund is an actively managed CEF that has a primary objective of high current income with a secondary objective of capital appreciation. The fund invests globally in income-producing common equity and up to 25% in preferred shares of global real estate companies. The IGR fund offers investors global diversity, high current income with monthly distributions, and the potential for capital appreciation.

At the time of writing this analysis, IGR is paying a monthly dividend of $0.06 and trades at a market price of $4.53 resulting in an annual yield of 15.9% while trading at a discount to NAV of -13.5%. Because of the high yield distribution and the wide discount while global real estate is showing signs of recovery, I rate IGR a Strong Buy for income-oriented investors.

While IGR has struggled to deliver market price gains in 2023, the NAV has begun to recover in the past few weeks as the price remains depressed, offering investors an opportunity to buy the fund at a very wide discount that is close to the 52-week low discount as shown in this overview chart from CEFconnect. The discount was even wider back in March after the fund announced a rights offering to raise cash, which resulted in about a -3.5% hit to the NAV as a result of the oversubscribed offering as discussed in this review .

Fund Facts and Portfolio Holdings

The inception date of the IGR fund was 2/24/2004, and as of 10/31/23, it has about 140M shares outstanding. Total managed assets of $946M include 31% leverage leaving net assets under management, or AUM, of $652M. The fund expense ratio is 2.29%, including interest expense, which is on the lower end for an actively managed CEF. The management fee is 0.85%.

The fund portfolio includes roughly 60% U.S. common equities and 6.5% U.S. preferred, with the remainder spread across Europe, Japan, Hong Kong, the UK, Singapore, Australia, and Canada. The sectors are diversified, with the highest concentration in Retail, followed by Residential as shown on the website.

The top 10 holdings in the fund represent more than 50% of the total portfolio value, with the vast majority invested in common equities of U.S.-based REITs.

Because the majority of the fund holdings include these U.S.-based REITs, I believe that the prospects for a recovery in the NAV and thus potential for price appreciation are quite positive, with the U.S. leading the global real estate recovery. Nearly all of these top 10 holdings are rated a Buy (or Hold in the case of CCI) by both Wall Street analysts and SA analysts.

Prologis, Inc. ( PLD )

Simon Property Group, Inc. ( SPG )

Public Storage ( PSA )

Invitation Homes Inc. ( INVH )

Sun Communities, Inc. ( SUI )

Crown Castle Inc. ( CCI )

CubeSmart ( CUBE )

AvalonBay Communities, Inc. ( AVB )

Rexford Industrial Realty, Inc. ( REXR )

Link REIT (LKREF) based in Hong Kong is a new addition to the top 10 in October, replacing Welltower ( WELL ) which was shown as a top 10 holding as of 9/30/23. Link has demonstrated resilient performance and strong financial strength in 2023 despite persistent challenges in Hong Kong and mainland China.

Distributions

The IGR fund has delivered consistent high-yield income with no cuts to the dividend for the past 10 years, and with 2 increases during that time, as shown on the Dividend History page. The most recent increase in the dividend occurred in March 2022, when it was raised from $0.05 to $0.06, and where it has remained through the end of 2023.

The most recent distribution announcement on October 9, 2023, declared the monthly distribution through December, showing confidence in the distribution coverage, further demonstrated in the estimated source of distributions which includes about 19% ROC for the entire calendar year.

Summary

During the Q3 webinar , the IGR fund managers discussed YTD results and the outlook for global REITs going forward. The screenshot below from the webinar illustrates the notion of the "catch-up trade" opportunity that exists (as of the end of September) for IGR to deliver attractive total returns.

Because the fund is actively managed, capital gains have been used to offset the volatility that has impacted fund performance in 2023. The pending end of Fed interest rate tightening is a potential catalyst for future fund performance. Furthermore, REIT pricing power has already begun to recover (other than the Office sub-sector, which represents less than 5% of the total portfolio value) in the second half of 2023 which is also likely to lead to improved REIT performance.

In addition, the debt profiles for publicly listed REITs are in much better shape now than in past years. The average LTV (loan to value) is only 27% and with 91% of debt at fixed rates with an average of 6.5 years to maturity, most of the REITs are insulated from interest rate risk. Debt maturities represent only about 8% of commercial real estate debt maturing through 2025.

Public REITs also have an advantage over private markets with access to capital. In fact, the trend has been for publicly listed REITs to provide capital to private markets through the issuance of unsecured bonds (more than $30 billion issued in 2023) and by acquisitions of private companies by public REITs. This is a trend that is likely to benefit global public REITs for years to come.

One final point made by the fund managers during the Q3 webinar is that global REIT growth remains resilient and is expected to provide attractive opportunities in 2024 due to contractual rent increases, high occupancy rates, and prior-year leases coming online.

Despite all these positive indicators, global REITs trade at historically low valuations. These types of wide discounts to NAV have not been seen since the Covid drawdown and during the GFC in 2008/2009 and represent an opportunity as oversold REITs begin to recover in price. This is evident in the widening discount of IGR even as the NAV begins to recover as discussed at the beginning of this article.

If you are seeking high-yield income with the potential for some price appreciation, consider buying shares of IGR to capture a yield approaching 16% paid monthly while it trades at a wide discount to NAV. I do believe that this opportunity will not last much longer as investors begin to realize that the REIT industry is beginning to recover from its post-pandemic and Fed tightening woes.

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