2023-03-12 08:00:00 ET
Summary
- As readers know, we have been covering ETF alternatives for income investors.
- In a recent article, a reader requested an article on closed end funds.
- So, I decided to start with two REIT closed end funds that are yielding around 8%.
Today we’re going to look at two funds that are similar in many ways.
Both are closed-end funds, both funds are managed by Cohen & Steers ( CNS ), both funds are leveraged, and both funds put emphasis on current income.
Although differently weighted, both funds have the same top ten equity holdings (excluding short-term investments and derivative instruments), and both funds are heavily weighted in REITs.
The asset type is very similar for both funds.
Both funds hold equity securities (primarily REITs), both hold preferred and fixed income securities, and both funds hold derivatives in the form of interest rate swaps and option contracts.
Where the funds differentiate is the asset composition of the portfolio. While they hold mostly the same type of assets, RNP is more heavily weighted in preferred / fixed income, while RQI is more heavily weighted in equities.
Closed-End Funds
Closed-end funds has features that are similar to open-end funds, more commonly known as mutual funds, but also has several characteristics that are different.
I think the easiest way to understand a closed-end fund is to contrast the differences between them and mutual funds.
Both mutual funds and closed-end funds are run by management companies, and both contain a basket of stocks that are selected by a portfolio manager. Both have management fees and report the fund’s net asset value (“NAV”).
Where they differ is that mutual funds are bought directly from the management company and are re-priced once a day after the market closes.
Because mutual funds are bought directly from the management company, whenever someone buys a mutual fund new shares are added, and any time someone sells a mutual fund the shares are redeemed by the management company.
A closed-end fund, however, has a set number of shares that are initially brought to market by the management company, but then are sent to an exchange to trade.
So, like a regular stock, anytime someone buys a closed-end fund, they buy it from another investor on an exchange and the total share count is unchanged. Since closed-end funds trade on an exchange, their price fluctuates throughout the day and closed-end funds can be traded anytime the market is open.
In many ways, closed-end funds are more similar to actively managed ETFs than they are to mutual funds.
Cohen & Steers REIT and Preferred and Income Fund ( RNP )
The primary objective of RNP is high current income with investments in real estate and preferred securities. The funds’ secondary objective is capital appreciation.
RNP was created in 2003 and currently has $1.51 billion managed assets consisting of 289 holdings . They pay monthly distributions and currently have a 7.65% distribution rate.
Additionally, they attempt to amplify returns through leverage and have a 29.73% leverage ratio as of January 31, 2023. While the use of leverage can increase returns during an up market, it can do the opposite during a down market.
They have a high expense ratio . Their managed assets expense ratio is 1.33%. This percentage is based off of the net assets plus principle amounts from leverage. They have a 1.78% common assets expense ratio which is the annual expense as a percentage of net assets of the fund.
Whichever expense ratio you want to use it is much higher than an ETF like Vanguard Real Estate Index Fund ( VNQ ) that has an expense ratio of 0.12%, or a real estate mutual fund like FRESX (Fidelity Real Estate Investment Portfolio) that has an expense ratio of 0.71%. See my latest article on VNQ HERE .
As of December 31, 2022, RNP’s asset mix consisted of 48% common equity and 52% preferred & fixed income. As previously mentioned, even though RNP & RQI both hold very similar asset classes, RNP has a much heavier weighting towards preferred and fixed income with more than 50% of total assets in this category.
RQI Fact Sheet
RNP breaks down its sector diversification for both its REIT holdings and its preferred portfolio. RNP’s top REIT sectors are industrial, infrastructure, and apartments.
Its lowest weighting in the REIT sector is in manufactured homes and regional Malls. The largest sector in its preferred portfolio is in banking, which makes up 58% of their preferred holdings.
RNP leverages its portfolio with both fixed and variable rate debt. Fixed rate financing makes up 81% of their debt and has a weighted average interest rate of 1.9% while variable rate financing makes up 19% of their debt and has a weighted average interest rate of 5.2%.
RNP’s top ten holdings are all well-known REITs such as Prologis ( PLD ), American Tower ( AMT ), and Realty Income ( O ). Combined their top 10 holdings make up 29.6% of RNP’s managed assets.
Since its inception in 2003, RNP has an average annual return of 8.87%. For the last ten years they have averaged a total return of 8.94%, and 5.55% for the last five years. Last year was rough with REITs and fixed income both seeing significant declines. Over the last year RNP has a total return of -22.57%.
One thing I like to point out regarding the power of dividends is that on a price basis alone, RNP has lost -17.67% since 2003. When including the dividends, they have an average annual return of 8.87% based on their NAV.
Cohen & Steers Quality Income Realty Fund ( RQI )
RQI has the same objectives as RNP in that its primary goal is to provide high current income through real estate securities with a secondary goal of capital appreciation. RQI was created in 2002 and currently has $2.57 billion managed assets consisting of 207 holdings.
They pay monthly distributions and currently have a 7.75% distribution rate. Additionally, they attempt to amplify returns through leverage and have a 27.65% leverage ratio as of January 31, 2023. Like RNP, they have a high expense ratio of 1.45% for managed assets and 1.91% for common assets.
As of December 31, 2022, RQI’s asset mix consisted of 79% common equity and 21% preferred & fixed income. Both funds hold REITs, preferred stock, and fixed income but RQI is heavily weighted in common equity, primarily REITs, with almost 80% of their managed assets in this category.
RQI - Fact Sheet
RQI is well diversified by sector, with individual sectors ranging from 5% to 12% of its total holdings. RQI’s largest two sectors are corporate bonds at 12% and “other” at 12%.
The “other” category consists of derivatives, specialty, manufactured homes, shopping centers, hotels, private real estate, office, timber, and cash. The next largest category is industrial at 11% of their total holdings.
RQI leverages its portfolio with both fixed and variable rate debt. The breakdown of their financing is almost identical to RNP. Fixed rate financing makes up 81% of their debt and has a weighted average interest rate of 1.8% while variable rate financing makes up 19% of their debt and has a weighted average interest rate of 5.2%.
RQI - 2022 Annual Report
Similarly, RQI’s top ten holdings are identical to RNP, just with different weightings. For example, both funds top holding is Prologis, but RNP’s weighting is 5.1%, whereas Prologis makes up 8.4% of RQI’s managed assets.
The top five holdings for both funds are identical and there is very little difference in the order of the remaining five holdings. The largest difference is the total concentration in each fund’s top ten holdings. RNP has 29.1% of its total holdings in its top ten, but RQI is much more concentrated with 49.0% of their total holdings in its top ten.
Since its inception in 2002, RQI has an average annual return of 8.97%. For the last ten years they have averaged an annual total return of 9.13%, and over the last five years they have averaged an annual total return of 5.90%.
RQI has outperformed RNP over the last 5 and 10 years, but underperformed RNP over the last year with RQI’s NAV falling -26.83% vs a decline of -22.57% for RNP.
Again, illustrating the power of dividends, on price action alone RQI has lost -20.05% since 2002, but when including the dividends, they have an average annual return of 8.97% since 2002 based on NAV.
RNP & RQI Top 10 Holdings
Prologis ( PLD ) is an industrial REIT and the global leader in logistics properties with 5,495 buildings covering 1.2 billion square feet in 19 countries. They serve approximately 6,600 customers in two main categories: business to business and online fulfillment. They are currently priced at a Blended P/FFO of 23.95x and pay a 2.78% dividend yield.
American Tower ( AMT ) is a REIT that owns and develops cell towers. It is critical infrastructure that allows everything from e-commerce, texting, to talking on the phone. They specialize in multitenant communications real estate that includes cell towers and distributed antenna systems (“DAS”) networks. They have a global portfolio of almost 225,000 communication sites in 26 countries. They are currently priced at a Blended P/FFO of 20.06x and pay a 2.99% dividend yield.
Welltower ( WELL ) is a REIT in the healthcare sector that specializes in senior housing, post-acute care, and outpatient medical centers and in total has 1,965 properties. They are investment-grade rated with a BBB+ credit rating and have $5.1 billion in liquidity as of December 31, 2022. They are currently priced at a Blended P/FFO of 22.12x and pay a 3.27% dividend yield.
Invitation Homes ( INVH ) is a REIT that specializes in single-family homes for lease. As of December 31, 2022, INVH owned over 80,000 homes in 16 markets across the United States. They target markets with strong demand, high barriers to entry, and homes that are in close proximity to jobs and good schools. They are currently priced at a Blended P/FFO of 18.71x and pay a 3.29% dividend yield.
Realty Income ( O ) is a triple net-lease REITs with 12,237 commercial properties serving 1,240 tenants in 84 industries. They have properties in all 50 states and a growing international presence with properties in the UK, Spain, and Italy. Realty Income has a 28-year streak of dividend increases, making them one of the elite members of the S&P 500 Dividend Aristocrat index. They are currently priced at a Blended P/FFO of 15.91x and pay a 4.73% dividend yield.
Simon Property Group ( SPG ) is an internally managed REIT that owns a mix of properties including shopping, entertainment, and mixed-use properties that consist primarily of Class-A Malls, Premium Outlets, international properties, and The Mills. As of the end of the 3rd quarter Simon owned or had an interest in 230 properties totaling 184 million SF in North America, Europe, and Asia. They are currently priced at a Blended P/FFO of 10.22x and pay a 5.89% dividend yield.
Digital Realty Trust ( DLR ) owns over 300 Data Centers across the globe and serves over 4,000 customers. Data Centers are very specialized facilities that house servers and are a critical piece to the digital infrastructure of the world. They are currently priced at a Blended P/FFO of 15.79x and pay a 4.61% dividend yield.
Public Storage ( PSA ) is a REIT that specializes in self-storage facilities. They are the largest owner, operator and developer of self-storage properties with 2,869 facilities across 40 states in the U.S. Their properties cover more than 204 million net rentable square feet and serve approximately 1.8 million customers. They are currently priced at a Blended P/FFO of 18.73x and pay a 3.99% dividend yield.
Equinix ( EQIX ) is a data center REIT with 248 data centers covering approximately 29 million square feet over 32 countries and on 6 continents. It’s the largest data center REIT with current market cap is 63.36 billion, over double that of its closest competitor. Equinix’s global network provides customers access to 2,100+ network services, 450+ content and digital media services, and 3,000+ cloud and IT services. They are currently priced at a Blended P/FFO of 23.23x and pay a 1.97% dividend yield.
Mid-America Apartment Communities ( MAA )is a real estate investment trust ( REIT ) that builds, acquires, manages, and leases multifamily residential properties. MAA was founded in 1977, went public in 1994, and currently has approximately 102,000 apartment units primarily located in the southeast, the southwest, and the mid-Atlantic. MAA has particularly strong focus on the sunbelt, with their top 10 markets all located in the sunbelt region. They are currently priced at a Blended P/FFO of 18.61x and pay a 3.59% dividend yield.
In Closing...
Closed End Funds ('CEFs') start out by raising a fixed amount of capital with a fixed number of shares through an initial public offering ('IPO'). They are then structured, listed, and traded like stocks on a stock exchange, where they can make income and capital gain distributions to shareholders.
CEFs have several unique attributes. Unlike regular stocks, they represent interest in specialized portfolios of securities that are actively managed by investment advisors and typically concentrate on a specific industry, geographic market, or sector.
Importantly, the potential for higher dividends makes CEFs attractive, but the potential downside is greater, too, not only because of the leverage these funds use but also their structure. Because they trade throughout the day, CEFs can trade below their NAV for a long time — and they often do. But that’s also an opportunity for a smart investor...
To recap our latest ETF research reports:
- Pacer US Cash Cows 100 ETF ( COWZ ) 1.9% Yield
- Vanguard Real Estate ETF ( VNQ ) 3.5% Yield
- JPMorgan Equity Premium Income ETF ( JEPI ) 12.1% Yield
- InfraCap Equity Income Fund ETF ( ICAP ) 9.0 % Yield
- iShares U.S. Real Estate ETF ( IYR ) 2.9% Yield
- Schwab U.S. Dividend Equity ETF ( SCHD ) 3.5%
These CEFs:
- Cohen & Steers REIT and Preferred and Income Fund ( RNP ): 7.9% Yield
- Cohen & Steers Quality Income Realty Fund ( RQI ): 8.0% Yield
As always, thank you for reading and commenting.
Happy SWAN Investing!
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
RNP And RQI: 2 Dirt Cheap High-Yielding Cohen & Steers CEFs