3 Monthly REIT Income Funds Yielding 6%, Beating The Market In 2019, No K-1s (2024)

If you're looking for some outperforming high-yield vehicles, take a look at these three REIT-focused closed-end funds.

The Principal Real Estate Income Fund (PGZ) is the smallest of this group, with ~$151M in assets, vs. $2B for Cohen & Steers REIT and Preferred Income Fund (RQI) and $1.5B for Cohen & Steers Quality Income Realty Fund (RNP).

The major difference for PGZ is that its primary concentration is in mortgage-backed debt, ~65%, while RQI holds ~65% in real estate common equities and 14% in real estate preferreds, and RNP holds a roughly 52%/48% split of real estate debt/preferreds and real estate common equities.

All three funds have large concentrations of US holdings - RQI holds 100%, PGZ holds ~81%, and RNP holds ~79%:

Leverage and Expenses:

PGZ is the newcomer of the group - it IPOd in 2013, and it has much higher baseline and interest expense ratios than RQI and RNP.

Performance:

We initially wrote about these three funds back in early April when their outperformance first caught our eye. Since then, RQI has been the top performer, gaining 12.94%, vs. 8.67% for RNP, and 5.25% for PGZ.

All three funds trounced the S&P 500, which was up a scant 1.69% in the past four months:

Looking at other recent time periods shows the same results - even in the past tumultuous trading week, all three funds gained, while the S&P churned to a small loss.

The Fed "rate pivot" also seems to have helped these funds to outperform the market in all of these other periods as well.

RQI has had the biggest year-to-date gains, at ~38%, but RNP is up a whopping ~25%, and PGZ is up ~21%. Looking back over the past year, RQI also leads the pack, gaining ~16%, but by a much smaller margin, with PGZ and RNP up ~12% to ~12.8% respectively, vs. a small 2.29% gain by the market.

Monthly Dividends:

Those outsized gains don't include the attractive monthly distributions either, which would add another 6% to 7% on top.

All three funds pay monthly, and go ex-dividend in mid-month, with a pay date at the end of the month. Cohen & Steers pre-announces each quarter's monthly distribution for RNP and RQI in the middle of the previous quarter's final month. This announcement came out in early June:

PGZ announced its payouts and dates for the next three months in early July: The yields are currently the same for RQI and RNP, at 6.63%, with PGZ currently having a slightly higher yield, at 6.65%.

PGZ dropped its monthly distribution from $.145 to $.11 in October 2017. RQI switched from a quarterly $.24 payout to $.08/month in October 2016, and has held it at $.08 ever since. RPN also switched in October 2016, going from a quarterly $.37 payout to $.124/month, and has held it at $.124 ever since.

Holdings:

PGZ's top 10 holdings include debt from JPMorgan (JPM), Goldman Sachs (GS), and Wells Fargo (WFC):

PGZ has ~65% in CMBSs and also holds 18.5% in non-US real estate securities, and 16% in US real estate securities, giving it a bit more geographical diversification:

(Source: PGZ site)

RQI's Top 10: With the exception of Public Storage (PSA) and one other holding, RQI's Top 10 holdings are similar to RNP's, with RQI holding ~12% in infrastructure REIT's, and RNP holding a bit more, at 14%.

RQI holds a broad range of real estate securities, with 14% in preferreds. Its "other" sector includes these sub-industries: Shopping Center, Hotel, Manufactured Home, Single Family Homes, Diversified, Regional Mall, Cash and Derivatives.

RQI's two biggest geographic concentrations are on the West Coast, at 36%, and the east coast, at 32%:

(Source: RQI site)

RNP's top 10 also includes Invitation Homes (INVH), an owner and operator of single-family rental homes.

RNP has the broadest scope of all three funds, aiming to earn "high current income through investment in real estate and diversified preferred securities. The secondary investment objective is capital appreciation. Real estate securities include securities of any market capitalization issued by real estate companies (including REITs), and preferred securities are issued by U.S. and non-U.S. companies."(Source: RNP site) Unlike RQI, RNP holds preferreds in many different sectors, such as banking, 45%, and insurance, 26%.

(Source: RQI site)

Valuations:

PGZ has the biggest discount to net asset value, NAV, in the group, at -12.26%, vs. -5.75% for RNP, while RQI's stronger price performance has led to it selling a slight 0.35% premium to NAV.

PGZ also has had the best one-year return on NAV, at 16.86%, vs. 15.62% for RQI, and 14.70% for RNP. It also has the highest NAV return since inception, at 10.62%, followed by RQI, at 9.52%, and RNP, at 9.13%.

RNP's lower NAV performance makes sense in that it holds a larger amount of preferreds, which tend to have limited price gains past their call values.

Here's a breakdown of recent z-scores for all three funds.

Risks:

Although all three of these funds have been beating the market over the past year, they're not immune to strong market pullbacks, like the one we witnessed in Q4 2018, when the S&P 500 fell over -20%.

All three funds, though, outperformed during the Q4 '18 pullback - PGZ held up the best in Q4 '18, falling -12.33%, whereas RQI got hit the most, declining -18.20%, while RNP dropped by -15.64%.

Of course, all market pullbacks aren't created equal - the Q4 '19 pullback was inspired by the Fed being in a hawkish rate trajectory, whereas, these days, the Fed is looking a lot more dovish. Lower rates should continue to support these 3 real estate-based funds.

That seemed to be the case both in the May '19 pullback, when all three funds outperformed the S&P, with RQI actually rising during that period, by 1.52%.

They've all also held up better since the late July market highs - PGZ is up 4.2%, RQI has gained 3.28%, and RNP is up .81%, vs. a -2.86% decline for the S&P, and a -3% fall for the Dow:

Taxes:

All three funds issue statements throughout the year identifying the sources of income for their recent monthly distributions.

PGZ issued this table on 6/28/19, which shows 13.63% return of capital for its Q1-2 '19 distributions:

RQI issued this table on 7/30/19, which shows no return of capital. Long-term capital gains comprised 91.61% and net investment income, NII, comprised the remaining 8.39% of its Jan - July distributions:

RNP also its sources of income table on 7/30/19. Its income came from 67.17% long-term capital gains, and 32.83% NII, with no return of capital.

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

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.