GLPI - RLTY And JRI: 2 Real Asset Buys

2023-08-29 15:31:32 ET

Summary

• Cohen & Steers Real Estate Opportunities and Income Fund (RLTY) and Nuveen Real Asset Income and Growth Fund (JRI) are two closed-end funds focused on real assets.
• RLTY has a portfolio split between equities and preferred securities with an emphasis on REIT investments, while JRI invests in real asset-related companies around the world across the spectrum.
• Both funds are trading at attractive discounts and offer attractive monthly distributions.

Written by Nick Ackerman, co-produced by Stanford Chemist.

Real assets can come in the form of real estate, energy infrastructure, utilities and commodity investments, or any other sort of tangible product or service that a company can provide. These are often critical infrastructures that aren't always the most exciting investments, but being necessary means, they'll be around for the long term.

I wanted to focus on two closed-end funds that are focused on real assets that are trading at attractive discounts and spinning off attractive monthly distributions. Those two funds include Cohen & Steers Real Estate Opportunities and Income Fund ( RLTY ), the latest REIT fund from Cohen & Steers, and Nuveen Real Asset Income and Growth Fund ( JRI ). JRI is focused on investing in a broad spectrum of real assets that also go across asset type categories, including equities, preferred and fixed-income.

RLTY Basics

• 1-Year Z-score: 0.08.
• Discount: -11.89%.
• Distribution Yield: 9.73%.
• Expense Ratio: 1.74%.
• Leverage: 35.44%.
• Managed Assets: $441.8 million.
• Structure: Term (anticipated liquidation date February 23rd, 2034).

RLTY's investment objective is "high current income." The secondary objective is for "capital appreciation." To achieve this, the fund will invest "at least 80% of its managed assets in (i) real estate-related investments, and (ii) preferred and other income securities." This is pretty straightforward and quite similar to Cohen & Steers' other real estate-focused funds.

This is the latest REIT fund offering from C&S, launching in early 2022. Unfortunately, that proved to be a terrible time to offer up a leveraged real estate-focused fund. It came about as real estate was about to take a devastating hit due to the Fed ramping up interest rates. Therefore, if one is looking at a price and NAV chart alone, it would likely leave little encouragement.

That being said, over the last year, RLTY has performed mostly in line with its sister funds. It was lagging in the beginning, but they were still establishing their portfolio.

RLTY has a portfolio mixture that is somewhere in between Cohen & Steers REIT and Preferred and Income Fund ( RNP ) and Cohen & Steers Quality Income Realty Fund ( RQI ). RLTY carries a portfolio that is roughly 70/30% split between equities and preferred. RQI and Cohen & Steers Total Return Realty Fund ( RFI ) are the most similarly weighted, coming in exactly the same at 79/21% equity versus preferred weighting. RNP has a portfolio that is the most balanced, with an equity and preferred split of 51/49%.

RLTY's top ten also make up a considerable portion of the portfolio alone, coming in at a nearly 42% weighting.

Given this performance being so similar, it brings up a great time to point out the fact that a distribution tax classification does NOT tell us how a fund is performing. RLTY was simply a new fund and hadn't had time to build up capital gains in its underlying portfolio.

Therefore, we could expect characterizations of return of capital distributions in the prior year, even if RQI and RNP didn't show any ROC. In the end, performance can still be similar and separating out tax classifications with actual distribution coverage and performance is something CEF investors could benefit from.

Here's the breakdown of the distributions between the funds for 2022, where RLTY shows some of its distribution was ROC when its sister funds showed all either income or capital gains.

Speaking of the distribution, it was recently just raised a touch to bring it up to an even $0.11 per month.

The fund is heavily leveraged, which should be considered before an investor jumps into this fund. That being said, while most closed-end funds are dealing with higher leverage costs, C&S has mostly hedged against rising interest rates. This remains the case for the next few years, during a period that is largely expected to see lower rates once the Fed has made sure to dampen inflation.

Finally, one of the reasons that RLTY is more compelling relative to its sisters is the fund's discount has become quite deep. This isn't uncommon for a new fund to IPO and then drop to a substantial discount. We often like looking at relative discounts rather than an absolute discount on its own. However, given the performance between the funds correlating so closely, it's generally not a bad idea to buy the cheapest and let it sort itself out over time.

JRI Basics

• 1-Year Z-score: -0.16.
• Discount: -14.09%.
• Distribution Yield: 9.16%.
• Expense Ratio: 1.81%.
• Leverage: 29.86%.
• Managed Assets: $527.125 million.
• Structure: Perpetual.

JRI seeks "to deliver a high level of current income and long-term capital appreciation by investing in real asset-related companies across the world and the capital structure, including common stocks, preferred securities, and debt." They define real asset-related companies as "those engaged in owning, operating, or developing infrastructure projects, facilities, and services, as well as REITs."

Further, they invest "up to 40% of its assets may be debt securities, all of which may be rated below investment grade, though no more than 10% of its assets may be invested in securities rated CCC+/Caa1 or lower at any time. Non-U.S. exposure represents 25% to 75% of the Fund's managed assets."

JRI is another leveraged fund, so similar to RLTY; one should take some caution before diving right in.

The latest stats from JRI are that their borrowing costs are now up to 5.83%. That's quite the hurdle to climb to make a positive spread because the fund's expense ratio also has to be factored in. The total expense ratio comes up to 3.95% when including those leverage costs.

Fortunately, JRI had also hedged against higher interest rates with interest rate swaps and futures contracts. These both contributed to a net positive outcome to the fund's performance in the prior year.

Year-over-year, JRI's interest expense climbed from $1.582 million to $4.365 million. Meaning that the $2.783 million increase in this period was more than offset by the realized or unrealized gains seen from the fund's futures contracts and swaps.

That being said, the fund still reduced the distribution it was paying out to investors earlier in the year.

This was likely due to the fact that the underlying portfolio itself saw a substantial decline. JRI carries a hybrid allocation with heavy exposure to real estate that got hit hard; then, they also carry preferred and fixed-income securities, which we know were also hit substantially with higher interest rates.

Additionally, the fund had deleveraged through the last year as well, which could have been another determining factor to trim it up.

This reduction was a fairly modest 9.8% reduction, but most investors don't like seeing cuts at all. The general reaction is to sell off the position immediately, and that often creates an opportunity in itself.

However, JRI was already trading at a substantial discount. While the cut could have widened the discount during this time, it has since started to recover more recently. The narrowing of the fund's discount still means it is trading at a substantially wider discount relative to its long-term history. With higher interest rates, that could be appropriate, but the fund's interest rate swaps don't mature until 2027. So the fund has plenty of time to wait for interest rates to come back down.

JRI carries a larger portfolio relative to RLTY, with 414 total holdings. The top ten make up a fairly minimal weighting relative to the overall fund. In fact, the top ten make up 10% of the portfolio.

There are a few REITs listed in the fund's top ten, such as Prologis ( PLD ), Gaming and Leisure Properties ( GLPI ) and VICI Properties ( VICI ). However, we also see that energy infrastructure names are some of their largest holdings too, with Enbridge ( ENB ) being the largest but also holdings in Pembina Pipeline Corp ( PBA ) and The Williams Cos ( WMB ).

JRI also doesn't have any constraints to investing in terms of investing around the globe. The fund is primarily comprised of a heavy U.S. weighting at 58.1% of the fund. However, that leaves a material weighting outside of the U.S. as well. This added flexibility allows them to invest where they believe they can find the best opportunities.

Conclusion

RLTY and JRI offer exposure to real assets that are critical to society operating. While that doesn't mean they can't experience losses during some periods, it can still provide some reassurance for the long-term investor that these underlying companies will continue operating long into the future. Both RLTY and JRI also trade at meaningful discounts, which can provide another reason why both are worth exploring.

For further details see: