A Clarion Call for Real Estate Returns

04/05/2019 5:00 am EST

Focus: FUNDS

Michael Foster

Editor, BNK Invest

CBRE Clarion Global Real Estate Income Fund (IGR) has a high current yield of 8.3%, future dividend growth and trades at a huge discount to net asset value (NAV), asserts Michael Foster, editor of Contrarian Outlook.

When it comes to real estate, CBRE — the fund company and the team at the top — is a jack of all trades and a master of all: in addition to IGR and private-investor funds, it manages properties, operates a brokerage and invests its own money in real estate.

The company boasts 80,000 employees in over 100 countries, giving it a global perspective and relationships in foreign countries that no single landlord can match.

The fund itself is in the hands of two expert portfolio managers who also run CBRE's asset-management divisions, CBRE Global Investors and CBRE Clarion: Ritson Ferguson and Steven Burton.

Ferguson has been in real estate for 32 years; Burton for 34. Both have deep connections in the industry, thanks to their participation in NAREIT (the national association of REITs) as members and the fact that they oversee $100 billion (with a b!) in assets as C-suite executives for CBRE.

Their formidable skills come to us for a modest cost of 1.54% of assets, which is on the lower end for an actively managed real estate fund. That fee is even more modest when you consider that it includes all the fund's leverage costs, too.

Currently, IGR borrows against 9.44% of its portfolio, which is extremely small compared to many CEFs that have leverage ratios of 20%.

Here's the thing I love about IGR now: even though it has racked up a 19% year-to-date return, it still trades at a bargain 15.1% discount to NAV, setting us up for a "second stage" of gains.

That's because that 15.1% discount is still well below the 10-year average discount of 11.5%. And bear in mind that this average has been dragged down by the last four years of weakness. A much better future discount to look for is the 5% IGR traded at before the Great Recession and in 2010, 2011 and 2013.

The bottom line? IGR's double-digit discount can't last forever, especially as its returns improve and its income stream strengthens. As the discount narrows, it will push IGR's market price up.

One of the most impressive things about IGR is that, unlike many other REIT funds, it hasn't cut its dividend since the Great Recession. That's because management prudently set a realistic dividend yield after the meltdown and stayed patient, keeping the payout constant from 2009 to 2015. Then they hiked the dividend just as the latest rate-hike cycle started.

Let's put the payout puzzle together: thanks to the fund's smart use of leverage and its big discount to NAV, its dividend looks safer than ever. That's because its 8.3% dividend yield (based on market price) is actually a 7% yield based on NAV.

And that means the fund only needs to get a 6.6% return on its portfolio to maintain its payouts (net of borrowing costs). Right now, the average capitalization rate-or the percentage of a property's current market value you can expect to generate in income in a given year-is 7.1% across all US real estate sectors.

Add in tailwinds from the US dollar and higher cap rates in other foreign markets, and you can see that IGR's income is facing almost no threats — even if the market is pricing it as if it is. That, in turn, has made this fund's 8.3% payout one of the safest in the CEF world.

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