Higher Interest Rates Pressure REIT-Focused IGR's Distribution

The CBRE Global Real Estate Income Fund (IGR) invests in a portfolio of 75 global REIT stocks, with around one-third of the closed-end fund's investments outside the U.S.

IGR's portfolio is well-diversified by property type (residential and retail REITs each account for about 16% of the portfolio), and the fund's largest holdings include quality, growth-oriented REITs such as Prologis, Equinix, CubeSmart, and Invitation Homes.

Many of these holdings thrived during the era of rock-bottom interest rates and soaring property values spurred on by the government's response to the pandemic.

This gave IGR confidence in early 2022 to raise its monthly distribution by 20%, the fund's first payout increase since an 11% hike in 2015.

Unfortunately, the tide has changed abruptly this year and may make this higher distribution unsustainable if global REITs do not begin to recover soon.

The rapid rise in interest rates has hit the valuations of growth stocks and REITs particularly hard. IGR's net asset value (NAV) per share, or the value of the fund's investment assets net of any liabilities, has fallen more than 30% since the start of 2022, amplified by its use of leverage.

IGR's NAV is also around 30% below its pre-pandemic level, but the distribution is 20% higher.

The fund is now distributing over 11% of its NAV each year to shareholders. This is the hurdle IGR's total returns need to exceed going forward to cover the distribution and stop NAV from eroding further.

Prior to the pandemic, IGR's distribution rate sat closer to 7% of NAV. Barring a quick recovery in global REIT stocks, which may be unlikely as the Fed appears intent on keeping interest rates high to fight inflation, IGR may find it prudent to return its distribution rate to pre-pandemic levels.

A 20% to 30% distribution cut would get IGR's distribution rate closer to 8% to 9% of NAV, a more sustainable level based on the fund's long-term performance and one that recognizes that future investment returns could be higher whenever the market recovers, though unlikely to return to 2021's frothy valuations.

Management may try to defend IGR's higher distribution rate for now since they believe publicly-traded REIT stocks trade at a substantial discount to the value of their underlying properties.

Regardless, IGR's higher distribution appears harder to sustain in today's environment. In recognition of the growing chances of a material distribution cut, we are downgrading IGR's Dividend Safety Score from Borderline Safe to Unsafe.

Shares of IGR would still yield over 8% if the fund cut its distribution by 30%. But conservative  investors desiring safer REIT fund options could consider Cohen & Steers Quality Income Realty Fund (RQI), its debt-free cousin RFI, and Cohen & Steers REIT and Preferred Income Fund (RNP). Each yields around 8% and allocates more to defensive preferred stocks.

With shares of IGR trading at a smaller discount to NAV than usual (and well above the 20% discount seen in parts of 2020), now could be a good for IGR investors to mull alternatives.

We will continue monitoring IGR and provide updates as needed.