RFI - RFI: Earn 8% Yield In 2024 On Real Estate

2023-12-17 09:15:00 ET

Summary

• The Real Estate sector rose over 10% in the past month, leading all other sectors, due to potential rate cuts in 2024.
• Cohen & Steers Total Return Realty Fund offers high yield income through real estate investments.
• RFI has a managed monthly distribution and a reasonable expense ratio, with a yield of 8.23% at its current price.

Looking for high yield income via investing in the Real Estate sector?

With the Fed signaling a pause in rate hikes, and possibly even 3 rate cuts in 2024, the Real Estate sector has been bouncing back over the past month, rising over 10%, and leading all other sectors.

Fund Profile:

The Cohen & Steers Total Return Realty Fund ( RFI ) is a closed end fund, a CEF. The investment objective of the Fund is to seek to achieve a high total return through investment in real estate. The fund is managed by Cohen & Steers Capital Management, Inc., and invests in the public equity markets of the United States. The fund seeks to invest in stocks of companies operating in the real estate sector, including real estate investment trusts. It invests in stocks of companies across all market capitalizations (source: RFI site).

RFI is in the smaller tier of Real Estate funds, with $281M in Net Assets, and a $309M market cap. It has a reasonable expense ratio, at 0.89%, and uses virtually no leverage. It has a "managed" monthly distribution, i.e. fixed. It had 165 holdings as of 9/30/23, with 80K in average daily volume:

Dividends:

Management pre-announces each quarter's monthly payout, which they've held at $.08 since October 2016, when they switched to a monthly distribution. They also paid special dividends of $.05, $.21, and $.266 in 2020-2022.

At its 12/15/23 $11.67 closing price, RFI yielded 8.23%. It goes ex-dividend next on 1/16/24:

In the 6 months ending 6/30/23, common distributions of $16.35M were partially covered, ~63%, by $10,375M in NII and Net Realized Gains. The remainder was covered by unrealized appreciation.

The year ending 12/31/22 had a similar dividend coverage situation, with $32.32M in payouts only covered by $21.14M in NII and Realized Gains, for 65%. However, RFI had -$113.69M in unrealized appreciation in 2022 - a year which saw several rate hikes by the Fed:

Holdings:

RFI's biggest sector exposure is in Infrastructure, at 12%, followed by Corporate Bonds, at 11%, both of which should do well in 2024, due to the Infrastructure Act, and falling rates.

RFI also holds several other sectors, ranging from 3% in self storage REITs, to 10% in Industrial REITs, in addition to a mix of other sub-sectors totaling 13%:

Its top 10 holdings form ~51% of its portfolio, topped by cell tower company American Tower ( AMT ) at 8.7% all the way down Mid-America Apartment Communities ( MAA ), at 3.1%. These holdings' dividend yields run from under 2% for Equinix ( EQIX ), to 5.5% for Crown Castle ( CCI ).

Performance:

Those top 10 positions have mostly rallied over the past month and week, led by Prologis ( PLD ), a major Industrial REIT, which rose 12% this week, and 21.5% over the past month.

Retail REIT Simon Property Group ( SPG ) has also been on fire, rising 8.6% this week, and 21.5% over the past month.

Comparing RFI to a group of Real Estate CEFs shows RFI gaining in the past week, month, and quarter, but lagging the group and the broad Real Estate sector over the past week, month, year and so far in 2023.

RFI has outperformed the Morningstar US CEF Real Estate group over the past 3 and 6 months, the past year, 3-year, 5-year, and 10-year periods:

Valuations:

CEFs' daily valuations are calculated at the end of each trading day. Buying CEFs at deeper than historical discounts to NAV can be a useful strategy, due to mean reversion. As of the 12/14/23 close, RFI was trading at a slight 0.17% premium to its $11.97 NAV/share. That compares well with its 1-, 3-, and 5-year NAV average prices which were all at higher premiums, ranging from 1.51%, 3.93%, and 2.43%, respectively.

Parting Thoughts:

With interest rates most likely headed down sometime in 2024, income investors are looking for ways to benefit from the big "pivot". RFI should be a good place to gain some income in 2024, with its exposure to real estate and many of its sub-sectors.

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