Cohen & Steers Quality Income Realty Fund (RQI) is one of our favorite closed-end funds (CEFs) in the real estate investment trust (REIT) sector, explains Rida Morwa, editor of High Dividend Opportunities.
One of the features we love about CEFs is their ability to produce high yields from high-quality investments that generally don't have dividends that meet our income goals.
RQI's top 10 holdings are a "who's who" of blue chip REITs such as like Realty Income (O) and Welltower (WELL). This focus on quality has allowed RQI to dramatically outperform the Vanguard Real Estate ETF (VNQ) over the past decade.
It is a unique period for REITs, their largest source of revenue is rent. Rents are rising thanks to the high demand for real estate along with inflation.
At the same time, modern REITs have very little exposure to inflation-sensitive expenses. It has become common for bills like insurance, taxes, and maintenance to be the tenant's responsibility in most commercial leases. As a result, most REITs are seeing same-store net operating income increase quickly.
On the expense side, the largest expense for your typical REIT is interest. Over the past two years, REITs with even a decent quality balance sheet refinanced as much debt as they could at historically low levels. The high-quality REITs that RQI holds were able to lock in low rates for 10+ years and few have any significant debt maturing before 2024.
As a result, REITs are experiencing the benefits of inflation immediately. REITs are experiencing rising revenues while expenses remain low. That is a fantastic combination for the sector and will lead to several years of strong fundamentals driving their cash flow, FFO, and higher dividends. RQI is a great CEF to take advantage of this strong sector.