VNQ - RFI Vs. AWP: High Yield REIT Funds Offer A Choice

2023-10-12 17:59:23 ET

Summary

• Investors need to constantly update their thinking and consider price and fundamental changes when choosing between investment funds.
• We go over two high yield CEFs today focusing on REITs.
• We consider yield, performance, pricing, and leverage and give you our verdict.

Updates are not just for your WINDOWS software. Investors need to constantly refresh their thinking and factor in price and fundamental changes. We are doing one today and two funds that we have followed for some time and telling you what you need to know to choose between them.

abrdn Global Premier Property Fund ( AWP )

AWP has been around for a long time and is a REIT fund focusing on companies around the world. On our last call, we gave it yet another Sell rating. That was in June 2023 and in all fairness, the returns have not been too bad. Yes, there is red ink, and it matches the "red" Sell rating, but REITs have been butchered over this timeframe. AWP has actually done a bit better than the Vanguard Real Estate ETF ( VNQ ) since then.

Cohen & Steers Total Return Realty ( RFI )

While with AWP we have slathered on the "Sells" repeatedly over the last year or so, with RFI we used a little more discretion. Yes, we gave it a "Sell" when the "this time is different" crowd bid it up to an undeserved 12.46% premium .

We were early on the upgrade to neutral/hold as the premium dissipated. We now go over the key considerations today that should help you make up your mind as to which fund you want in your portfolio.

Yield

This is probably the first time that we have started off with yield. We know it is a crowd favorite and once the Pavlovian drool response to high-yield sets in, pretty much nothing can cure it. So here it is, starting with AWP.

RFI's is a bit more modest but approaching double digits as well.

Neither of them can be remotely compared to what you get from standard REIT ETFs.

Why do closed-end funds give you such high yields? It certainly is not because they save you on fees and pass on the excess. VNQ for example charges 12 basis points, while RFI was at 96 basis points. AWP's annual report showed an expense above 160 basis points, but we believe real-time data puts this well over 250 basis points. So you could make the argument that CEFs should pay less in distributions. The reason why CEFs pay more is simply because they aim to match distributions with total returns and not the yield of the underlying holdings. Perhaps that is a generalization, but that is the function of most managed distributions.

Performance

So AWP wins in the yield category, but can it generate the 13% returns to manage the 13% yield? The answer is "yes", but only if you ignore every piece of evidence from the last decade. AWP generated 1.13% in total annual returns on NAV over the last 10 years (till September 30, 2023).

So in essence you want AWP to do annually, what it actually did cumulatively over 10 years. Actually, AWP did not even manage 13% total, but we were rounding up.

RFI is definitely a different beast, and while it has not met the return profile of the current yield, it certainly has been a competitive performance.

Timeframes matter here as well. We would have got a return of over 102% in total if we went with the 10-year period ending December 31, 2022, for RFI. AWP is shown as a comparative for the same timeframe.

Pricing

Unlike ETFs, CEFs can and almost always do, trade away from their NAVs. This offers important decision-making information. It often offers a chance for free 20-40% annualized alpha. You can see one recent example here. The current pricing for both looks okay. Both are at a discount to NAV, albeit small.

The Z-scores paint a different picture though RFI is currently superior here with a 1-year Z-score of negative 1.16.

While AWP has a positive 0.46 1-year Z-score.

That means that RFI is cheaper relative to its history and AWP while at a discount, is still more expensive relative to its history. This makes sense as one would expect to pay far less for a premium fund like RFI than a mediocre one like AWP.

Leverage

One of the best things about RFI in this world laden with leverage is that it does not use any. Well except for that rounding error there.

AWP tacks on less leverage than the typical CEF, but it is still a dealbreaker for us at this point in the cycle.

Verdict

If you want to start dollar cost averaging into a CEF, then RFI is a good choice and this is not a bad place to start. The froth has been taken out of the REIT market, and we expect most REITs to deliver solid, but not spectacular returns over the next decade. RFI's pricing has also improved and that adds another leg to the bull thesis. We think in a full-blown equity bear market it could hit as low as $8.50, so we wouldn't assume that this is about as bad as it can get. Still, with no leverage to compound your woes, we will give this a passing grade.

AWP is a different matter as its longer-term returns have been getting awful of late. The distribution is miles and miles ahead of what total returns we expect from REITs and that means NAV depletion is about as assured as the other two certainties in life. Leverage is another negative factor, and one we would avoid until the cycle is fully cleared. We have been and continue to be bullish on the US Dollar for the last two years and this makes us stay away from the global nature of AWP. The final problem is that a distribution cut could push this as low as 20% below its NAV. So the math is extremely compelling to continue to stay away, and we are happy handing out yet another Sell.

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