IGR: 3 Reasons This REIT Fund Gets A Downgrade (NYSE:IGR)

Fundamentals evolve at a slow pace. Prices on the other hand, follow the madness of crowds and can rapidly outpace the fundamentals. This applies in either direction. On our last coverage of CBRE Global Real Estate Income Fund (NYSE:IGR) we decided that nature had run its course, but a bit too far and a bit too fast. We gave you three reasons that we were upgrading IGR to a “Hold”. While nowhere near the exact bottom, the thesis did play out shortly after that. IGR has rebounded and if we stayed with the “Sell” call, we would have definitely had some explaining to do.

Investors sometimes get confused as to how to use a “Sell” to “Hold” transition (assuming you agree with the thesis). Most investors don’t short sell on a regular basis and this is generally near impossible to execute for CEFs, which have high borrowing costs. Our response is that if you agree with our analytical logic, a “Sell” is a very high-risk entry point. A “Hold” is a less risky entry point. That is all there is to it. So if you followed the premise, and went with avoiding IGR on September 21, 2022, you did not buy it at $6.57. When you get the “green light” (more like a yellow light really), you could step in at $4.45 when we gave the upgrade. That brings us back to today and three reasons we are now saying, don’t buy and also consider selling if you do have any.

1) The Fund Is Extremely Expensive

With CEFs, the valuation is done at the macro level (as in what asset class it wades in) and also on a pricing level. On the first front, we think REITs are not done on the downside, at least collectively and there will be more pain to come. On the second, IGR’s pricing has gone from modestly cheap at the end of September 2023, to extremely expensive today. Yes, IGR still trades at a discount, but there are great reasons for that. We will get to that in our third point. But what you need to know now is that the discount of just 8% makes this fund expensive.

The best way to get proof of that is to look at the Z-score. This measure looks at the fund’s discount/premium in relation to its history. A high positive Z-score means the fund is expensive. A high negative Z-score means the fund is now cheap relative to its history. The Z-score can also be run on various timeframes. For IGR we see that fund is modestly expensive relative to its one-year history and extremely expensive relative to its shorter-term history.

So that gives us reason #1 to move to the Sell side.

2) Oversold Bounce Is Done

It is always dangerous to press negative bets in this market and that was one reason we dialed it back in September 2023. Back then we showed you this chart.

The 14-day RSI was at 14.06. It recently hit a high of 72 and has relieved that oversold condition.

One other technical measure we look at is the price relative to its 200-day moving average. In late September 2023, the price was 20% below this average.

The bounce has taken this all the way to 6% over the 200-day moving average.

Again, a great place to get rid of the fund and look for a better entry point down the line.

3) Distribution Cut Is Inevitable At Some Point

The fund’s longer-term NAV performance has been poor.

A lot of that was generated at a time when interest rates were very conducive for REITs and CEFs focused on REITs. Even if we take the higher of the two highlighted numbers and add 2% to that as the longer-term return possibility, we can still see that the current distribution is not covered. THE CEF is distributing 72 cents a year and that works to about 12.3% on the NAV of $5.81. The cut is going to come at some point and the risk is that it happens in 2024. The discount likely moves to 20% at that point and your total returns will likely be quite poor.

Verdict

We really did not get into this as one of the three reasons, but it does play a factor in avoiding most CEFs today: The underlying leverage.

This leverage problem is compounded when the CEF makes a high and unsustainable distribution. It has to constantly sell its holdings to fund the distribution. It also has to sell more of its holdings to keep leverage constant. That is a tough task and one we think makes IGR more likely to deliver negative returns from here. We are moving this to a Sell and will reevaluate in 3-6 months as conditions dictate.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.