RQI - RQI: 2024 Real Estate Pick 8% Yield 6% Discount Monthly Payer

2024-01-05 09:15:00 ET

Summary

• The real estate sector has gained nearly 16% in the past three months due to the Fed's dovish stance on interest rates.
• The Cohen & Steers Quality Income Realty Fund is a closed-end fund that offers diversified exposure to real estate assets.
• RQI yields 7.84%, pays monthly, and has a deeper-than-average discount to NAV.

With the Fed having a more dovish stance on interest rates, certain sectors stand to have an edge in 2024. Real estate is one of them. This sector has led all others over the past three months, gaining nearly 16%:

If you're an income investor seeking diversified exposure to real estate assets, you may want to check out Cohen & Steers Quality Income Realty Fund ( RQI ). RQI is a closed-end fund that invests in several real estate sub-sectors such as infrastructure, industrial, data centers, healthcare, and apartments, in addition to corporate bonds.

Fund Profile:

"The primary investment objective of the Fund is high current income through investment in real estate securities. The secondary investment objective is capital appreciation." (RQI site)

As of 9/30/23, RQI had $2.34B in assets, with 186 holdings. Its distributions are managed/fixed, at $.08/month. Management uses ~30% leverage to goose returns.

Holdings:

As of 9/30/23, RQI's holdings were comprised of 79% common stocks and 21% preferreds and fixed income. Its top sectors were infrastructure, up from 10% to 12% in Q3 '23. Corporate bonds moved from 11% to 12%; Industrials moved from 10% to 11%. Healthcare remained at 9%, while preferreds moved from 9% to 8%.

This table compares RQI's 9/30/23 holdings to that of its blended benchmark, which consists of 80% in the FTSE Nareit All Equity REITs Index and 20% in the ICE BofA REIT Preferred Index.

The two biggest differences were the 11.58% overweight in corporate bonds and the 11.52% underweight in Preferreds. Management also favored single family homes, overweight by 3.22%, free standing retail, regional malls, and infrastructure, at ~2% overweight:

As of 9/3-/23, RQI's top 10 holdings formed 50.6% of the portfolio, with a notable increase in American Tower ( AMT ), which rose from 6.4% to 8.7%. Prologis decreased from 8.6% to 6.9%.

Dividends:

Management pre-announces each quarter's ex-dividend and pay dates.

RQI pays $.08/month, but also paid a year-end 2022 capital gain distribution of $.237/share, which it paid to allow the fund to meet its 2022 distribution requirement for federal excise tax purposes.

It goes ex-dividend in mid-month, with pay dates near the end of the month.

At its 1/4/24 $12.24 price, RQI yielded 7.84%.

Taxes:

2023 distributions are estimated to have consisted of ~48% NII, and ~52% long-term capital gains.

Debt:

81% of RQI's financing is fixed rate, at an average rate of 1.7%, (a very low rate compared to most other financing rates in 2023), with an average term of 3.1 years. The 19% variable rate balance had a 6% rate, as of 6/30/23:

Performance:

RQI has outperformed the broad real estate sector - XLRE - and the S&P by wide margins over the past month and quarter. It outperformed the real estate sector on a one-year total return basis, but trailed the S&P, due to underperformance in January - October 2023.

RQI's calendar year performance outperformed the Morningstar US CEF Real Estate category on a price and NAV basis in 2019 - 2021, and in 2023:

Valuations:

Buying CEFs at deeper than historic discounts to NAV can be a useful strategy, due to mean reversion. CEF daily valuations are calculated at the end of each trading day.

As of the 1/3/24 market close, RQI was selling at a 6.68% discount to NAV/Share, which is a deeper discount than its one-, three-, and five-year discounts of 6%, 4.86%, and 4.83%, respectively.

Parting Thoughts:

We rate RQI a buy based upon its positioning in real estate assets, which should benefit from lower rates in 2024. It also offers an attractive 7.8% yield, pays monthly, and has a deeper-than-average discount.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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