IGR: Investing In Right Segments, Diversifying Around The Globe

CBRE Clarion Global Real Estate Income Fund (NYSE:IGR) is an actively managed closed-end fund that invests in various types of real estate equity securities. “Real estate equity securities” include common stocks, preferred securities, warrants and convertible securities issued by global real estate companies, such as real estate investment trusts (REITs). This New York Stock Exchange (NYSE) traded fund invests in public equity markets across the globe. This trust primarily seeks high current income with capital appreciation as a secondary objective. IGR benchmarks its performance against FTSE EPRA Nareit Developed Index

IGR’s Diversified Global Portfolio

REITs, especially in the US equity market, can be classified into three categories according to their performance. The worst performing segments are office REITs, Hotel REITs, and Healthcare REITs – where this fund has invested 23 percent of its total funds. The best performing segments are Industrial REITs, Storage REITs, and Diversified REITs. IGR has invested 47 percent of its holdings in these three segments. The Retail REITs, Specialized REITs (Tower, Data Center, Net Leased) and Residential REITs fall in between. Almost 65 percent of IGR’s funds is invested in these segments. IGR has a short position of 35 percent.

In the US market, IGR’s most productive investments (22 percent of entire fund) are in various REITs primarily engaged in warehousing, logistics and diversified real estate services such as Prologis Inc (PLD), CubeSmart (CUBE), Extra Space Storage Inc. (EXR), Rexford Industrial Realty, Inc. (REXR), Life Storage, Inc. (LSI), National Storage Affiliates Trust (NSA) and Duke Realty Corporation (DRE). These companies have generated significant positive returns, amid all types of chaos in the US financial market.

Another 25 percent of investments in similar companies in non-US markets signify that IGR understands the importance of investing in the right segments and diversifying it around the globe. For example, if someone thinks that warehousing, and logistics based real estate companies have good future prospects, he/she needs to invest in equity shares of such companies in all the major logistic hubs. IGR has rightly invested in similar companies across Japan, United Kingdom, Mexico, Hong Kong, Singapore, Australia, and Continental Europe.

At the same time, investments in office, hotel, and healthcare related real estate businesses in non-US markets is just above 5 percent. There is a significant investment in renowned US based companies in those sectors with an objective of earning a steady return in the form of dividend. This fund has made some strategic investments in equity and preferred stocks of hotels and hotel REITs, such as Host Hotels & Resorts, Inc. (HST), Sunstone Hotel Investors, Inc. (SHO), Pebblebrook Hotel Trust (PEB), Park Hotels & Resorts Inc. (PK), and Summit Hotel Properties, Inc. (INN). Investments in non-US markets are made only in office REITs.

Dividend, Price Growth, and Expense Ratio

As any investor would have expected, IGR didn’t disappoint in the dividend front. For the past 10 years, the fund paid steady monthly dividends, and generated a yield between 6 percent to 10 percent. The dividend also grew at a very slow but steady rate, irrespective of IGR’s price volatility. The stock was able to recover fully from its historical bottom of $3.53 during March 2020. IGR’s Price grew by almost 180 percent in the next 20 months, before it started falling at the beginning of this year. IGR’s market price dropped by almost 25 percent during the past 6 months.

There are some negatives about this fund, however. Because this fund invests almost 45 percent of its fund in non-US markets, spread over more than 10 developed markets, the expense ratio is quite high. High turnover of the component stocks in its portfolio is another reason for such a high expense ratio. At present the reported turnover is 78.5 percent. Also, as IGR takes a short position for a high proportion of its portfolio, the fund is a bit riskier.

IGR Lost 25% in 2022

A price drop of almost 25 percent in the past 6 months is a matter of concern for IGR’s investors. However, I feel that this drop has been caused by various factors, such as a price correction, bearish market scenario, and an overall negative investors’ sentiments regarding the REIT funds – and has little to do with IGR’s fundamentals. The market is in a bearish mood due to some macroeconomic issues, such as supply chain breakdown, shortage of supplies, high inflation, series of interest rate hikes (both actual and expected), rising unemployment, etc.

Needless to say, the Russian invasion of Ukraine has had a catastrophic impact all over the world. Besides that, a price growth of 180 percent in 20 months prior to 2022, had pushed the valuation of IGR to much higher than what it should have been. A price/Book (P/B) of 1.54, Price/sales (P/S) of 6.25, and Price/Cash flow (P/CF) of 18.07 brings the valuation down to the level of its peers. The corresponding figures for the peers’ average price multiples stand at P/B of 1.3, P/S of 5.84, and P/CF of 17.89. The price multiples of IGR’s benchmark index stand at P/B of 2.32, P/S of 5.18, and P/CF of 12.85.

A comparison of price performance of IGR’s closer peers such as Aberdeen Global Premier Properties Fund (AWP), SPDR DJ Wilshire Global Real Estate ETF (RWO), SPDR Dow Jones International Real Estate ETF (RWX), iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index ETF (IFGL), and iShares Trust – iShares International Developed Property ETF (WPS) reveals that there is an overall negative investors’ sentiments regarding REIT funds over the past 6 months. On the other hand a comparison of dividend performance reveals that IGR has been the best performing among all its closer peers.

Investment Thesis

In a scenario of high inflation and rising interest, “Real Estate Equity Securities” are generally a good bet. However, investors are required to be selective regarding the nature of business of those real estate companies or the kind of properties those REITs possess. Real estate businesses which are more diversified, are less impacted by recession and in which tenants sign long term lease agreements, like industrial real estate properties, storage properties, and diversified REITs, are expected to perform better. On the other hand, investors need to stay away from specific types of office, hotel and healthcare properties.

CBRE Clarion Global Real Estate Income Fund has mostly done the right things. It invested significantly in industrial real estate properties, storage properties, and diversified REITs, and it has diversified it across all the major industrialized global markets. It has invested much less in office, hotel and healthcare properties, and mostly those are strategic investments, in order to generate a steady dividend income. Macro-economic roadblocks like pandemic, inflation, and looming recession have relatively lower impact on this fund. This fund recorded a steady dividend yield and significant price growth since the pandemic. The recent price loss can largely be attributed to price correction and the bearish market, and presents a buying opportunity.