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This 9% Yield Real Estate CEF Is Attractive

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Income Investors are often attracted to real estate securities because they offer big steady yields. For example, the real estate sector ETF (XLRE) offers an attractive 4.1% dividend yield. And considering the sector had a relatively poor 2016 (XLRE was up only 4.9% versus up 13.4% for the S&P 500 ETF), it’s even more attractive in 2017 from a contrarian standpoint.

However, if you are a mature income-focused investor there are other attractive ways to play the sector. This article reviews a compelling, real estate Closed-End Fund (CEF) that offers a big 9.2% yield (paid quarterly), it will benefit handsomely as the sector rebounds, and it currently trades at an attractive 6% discount to its net asset value (NAV).

Nuveen Real Estate Income Fund (NYSE:JRS):

The Nuveen Real Estate Income Fund is a closed-end fund (CEF) that offers a big 9.2% distribution yield. As a CEF, it trades on an exchange (NYSE), and its price fluctuates throughout the course of each trading day. However, because it’s a CEF, its price can deviate significantly (discount or premium) relative to its net asset value (the aggregate market value of the individual holdings within the fund) thereby creating some very attractive opportunities (more on JRS’s discounted price later).

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The objective of Nuveen Real Estate Income Fund (NYSE:JRS) is to seek high current income and capital appreciation through investments in income producing common stocks, preferred stocks and debt securities issued by real estate companies. For reference, here is a breakdown of the fund’s current holdings.

 

 

Important to note, the majority of the “Other” category is leverage (the fund’s current leverage ratio is 30.1%, more on leverage later). And for reference, here is a recent snapshot of the fund’s top holdings.

Source: Nuveen

Sources of Income:

Considering the fund holds primarily real estate securities (mostly REITs), you may be wondering how it is able to pay out a 9.2% distribution yield when REITs yield, on average, only 4.1% as measured by the Real Estate Sector ETF (XLRE). The answer is a combination of dividends/income, capital gains, leverage, and in rare cases a return of capital. Specifically, the 9.2% yield is reasonable if we assume REITs will deliver a long-term total return (dividends plus price appreciation) of 7.3% (this is the 2017, 10 to 15 year estimate, provided by JP Morgan).

More specifically, if this 7.3% return is levered by 1.3x (the fund’s leverage ratio) then the gains available for distribution actually exceed the 9.2% payout (1.3x is a conservative leverage ratio, and is limited by regulation from going much higher). Further, considering the fund trades at a discount to NAV, and considering publicly traded real estate is an attractive contrarian play right now, we’re comfortable that the fund can comfortably maintain this healthy 9.2% payout ratio.

And for reference, this table from Nuveen shows the recent breakdown of distribution income sources.

 

 

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