RMR Real Estate: Income at a Discount

03/02/2020 5:00 am EST

Focus: FUNDS

Michael Foster

Editor, BNK Invest

There’s a way you can buy into today’s healthy real estate market without paying full price. In fact, you can get in for a lot less — I’m talking 16% below market value, asserts Michael Foster, fund expert and editor of Contrarian Outlook.

This may sound impossible, but it’s easy to do with closed-end funds (CEFs). That’s because there’s a CEF that invests only in real estate, and its market price is actually 16% lower than the value of its portfolio of assets.

There’s much more to this fund, too. Not only does it hold a diversified real estate portfolio, but it also pays out a 5.9% dividend that’s risen 73% in the last decade. Let me introduce you to RMR Real Estate Income Fund (RIF) and explain why it’s worth considering now.

RIF, like many real estate-focused CEFs, invests in REITs. You can think of REITs as a kind of pass-through investment: these landlords collect funds from investors, hire real-estate experts to buy, rent and sell properties with those funds, then pass 90% (or more) of the rents they collect to us as dividends.

And if the REIT’s real estate portfolio appreciates, we get our big rent-driven income streams, plus capital gains, too. REITs can also help you diversify your own personal real estate holdings beyond your own house and, say, a rental property. That’s because they have hundreds of properties rented to different tenants.

A fund like RIF will diversify even further by buying many different REITs, resulting in a portfolio of hundreds (and potentially thousands) of offices, houses, apartments, self-storage units, hospitals and other kinds of buildings.

What’s more, RIF has crushed the S&P 500 for years, thanks to its 16% discount to net asset value (NAV, or the value of the REITs in its portfolio), which has narrowed somewhat over time.  REITs are great on their own for the market-busting profits, but the REIT business model is tailor made for a CEF, thanks to the income angle.

With their focus on maximizing income to shareholders, REITs are an ideal way for a fund manager to get a lot of income. The manager can simply buy shares in a lot of REITs, group them together, manage the portfolio and hand that income to shareholders.

That’s how RIF can sustain a 5.9% dividend andincrease its payouts over the long haul—at a time when safe, high payouts are increasingly tough to come by.

Subscribe to Contrarian Outlook here…

Related Articles on FUNDS