BofA Downgrades Closed-End REITs On Distribution Risks

With some holdings ceasing dividend payouts, REITs are facing a hit to income potential, while lower net asset values (NAVs) have resulted in a substantial increase in the distribution rates of the funds, according to BofA Securities.

Downgrades

Elias Lanik downgraded the ratings for Cohen & Steers Quality Inc Realty Fund Inc RQI and CBRE Clarion Global Real Estate Income Fund IGR from Buy to Neutral.

The analyst said Alpine Global Premier Properties Fund AWP is currently trading at a discount that's in-line with the group average and maintained a Neutral rating on the stock.

The Thesis

Close-end REITs had NAV-based distribution rates of an average 6.6% at the end of 2019, which has now spiked to 9.1%, Lanik said in the note. She explained that the spike means that these funds need to earn 9.1% in total return over the next 12 months to be able to cover distributions.

“This is clearly a stretch especially given the funds’ reliance on capital gains and the potential for continued pressure on REIT sector pricing overall stemming from the ongoing economic fallout from the coronavirus pandemic,” Lanik wrote.

She added that the funds will need to either reduce distributions or classify them as return of capital, both of which could negatively impact investors.