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Equity values are based on cash flows over a long period of time. In other words, stocks have a very long duration (as implied by bond duration values). When you buy a company you are trying to own a multi-decade right to its cash flow. While events like the Coronavirus Pandemic can derail short-term cash flows, they don’t change the long-term prospects significantly for a large swath of companies. Investors often forget that and focus on selling assets when times are tough and buying them when things look chirpy. That unfortunately results in a graph that looks like this.

Source: JPMorgan

Panicking when things get bad almost never pays off. At the same time though, we have to examine if the company can weather the short-term challenges. If that’s definitely the case, it will survive and not be forced to issue stock or onerous debt at rock bottom prices, and we can make a case to buy in any crisis.

The Case For Real Estate

The narrative always is based on the present times. When things are good, real estate is touted as one of the best investments and phrases like “They are not making any more land,” “Real Estate is the best hedge against inflation” regularly make the rounds. Today we are hearing different tunes altogether. One month of listening to negative headlines has convinced the masses that all of us will always work from home and visit a hotel once about every 30 years. A lot of this has to do with how the media reports items. For example saying “This is a temporary blip in the normal course of things” is not a headline that gets clicks. Instead we get this.

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But the reality is often far less gruesome. Yes, things do change in response to such events, but the impacts are far less than what most people imagine. Companies may develop better backup plans to enable remote working, but the whole lot of companies are not suddenly going to tell employees to continue working from home even when this crisis has passed. Office real estate will continue to be in high demand. Vacations may be deferred, but absolutely will be taken when this is over. If there’s one thing certain in all of this, it’s the fact that the more things change, the more they remain the same.

Real estate has been beaten alongside the broad market, but in some cases the punishment has been far in excess. Solid companies that showed their mettle during the 2008-2009 crisis, like WP Carey (WPC) and Realty Income (O), have been thrashed more than the broader indices. While investors have raised the alarm over debt loads in companies, REITs have actually moved away from this after the last financial crisis. Debt to EBITDA is a whole two turns lower to start with than the levels we had in 2008.

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https://static.seekingalpha.com/uploads/2020/3/31/47392447-1585658015991207.pngAlongside that, REITs have used the low interest rates to extend debt maturities and enhance their balance sheet strength.

Aberdeen Global Premier Properties (AWP)

While individual stock picks are an excellent choice for those that want to do their due diligence, they often create a stronger emotional roller coaster for the average investor. Fund investing on the other hand takes away this negative impact and investors are more likely to stick with a fund than they would with an individual stock pick.

Closed-end funds are a unique subset of funds that offer additional advantages. One key advantage is that they often trade at the widest discounts when things appear horrible. This creates the opportunity to buy an asset class at what we would call a double-discount. As we scoured the market for values, one name definitely sticks out, Aberdeen Global Premier Properties. We go through below what you get with this CEF and why this is a good time to buy this Fund.

Diversification

AWP owns a wide variety of REITs and real estate operating companies.

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Source: CEF Connect

The fund does have a slightly higher concentration in the top names but total holdings are more than one hundred and most have a small weight in the Fund. Seventy separate holdings have a less than 1% weight in this CEF. It’s definitely a far cry from a closet index fund as explained in the most recent update.

Active Share is a holdings-based measure of active management representing the percentage of a portfolio that differs from a benchmark index. A vehicle with an Active Share of 0 would hold exactly the same portfolio as the benchmark index, while a vehicle with an Active Share of 100 would have no holdings in common with the benchmark.

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Source: AWP February Fact Card

A True Global Fund

This closed-end fund is well diversified and has about half its assets outside the U.S.

https://static.seekingalpha.com/uploads/2020/3/31/47392447-15856601405045729.png

Source: AWP February Fact Card

NAV discount

At present we believe that most REITs are trading at substantial discounts to their net asset values. When we say that, we are cognizant that the current market is extremely dislocated. There are very fewer buyers today. So for us, the net asset values are what we think REITs would fetch when things stabilize. Investors often ask as to what those properties would be worth today, and the truth is that absolutely nobody knows the answer to that. But when purchasing a REIT, assuming there are no immediate pressing concerns to sell properties at distressed rates, valuation should always be assumed in a stable market with discerning buyers and sellers.

With AWP you get a second layer of a buffer. REITs are cheap and AWP is trading at a wide discount to its underlying value.

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https://static.seekingalpha.com/uploads/2020/3/31/47392447-1585660630847522.png

Source: CEF Connect

The fund does average about a 10% discount so one must not expect that gap to close completely.

https://static.seekingalpha.com/uploads/2020/3/31/47392447-15856606731140153.png

Source: CEF Connect

Even so, buying at a discount does create a higher “yield on cost” even if that discount never closes. There’s no way you, by yourself, could assemble such a diverse global portfolio in one click, but thanks to the miracle of closed-end funds, you can. AWP is an exceptionally strong buy today.

Sector Bets

AWP does not overexpose itself to any single sector.

https://static.seekingalpha.com/uploads/2020/3/31/47392447-15856610626467369.png

Source: AWP February Fact Card

But of course, in the current environment investors can find something wrong with every sector and a reason not to invest, in which case Treasury bills might be a better choice for them. However, if they do believe in real estate’s enduring value, then AWP covers all sectors for them. We would note though, that of all the sectors which AWP invests in, mortgage REITs are the ones most likely to suffer some permanent impairments as they have been forced to sell assets at irrational prices. AWP had a 6.5% exposure going into March 2020. All of that, as far as we could tell, came from Starwood Properties Trust (STWD) and Blackstone Mortgage REIT (BXMT). We are comfortable with both these REITs and the current market price has certainly priced in a lot of bad news for both.

Chart

Lack Of Leverage

The fund also uses very little leverage. We saw in the recent market turmoil that high leverage can create very significant amplifying impacts. One Fund we follow has been left with most of its eggs in a large illiquid private investment, as it was forced to sell at rock bottom prices. AWP routinely operates at a sub 10% leverage and that is a soothing relief for investors.

https://static.seekingalpha.com/uploads/2020/3/16/47392447-1584372306290494.png

Source: CEF Connect

Leverage will spike higher during market downturns but the buffer is very large and should require little to no forced selling.

Fees

With ETFs available to suit every need, investors are increasingly shunning CEFs for the less expensive ETFs. We think this creates a higher risk in the long run as investors passively bid up index companies. On the other hand, this has had the favorable impact of lowering fees on CEFs as well as they seek to compete better. AWP’s fees certainly fit that description and at 1.17% for a globally diversified CEF, we think they are quite competitive. One point to note here is that AWP’s actual expenses are running higher at close to 1.37%.

https://static.seekingalpha.com/uploads/2020/3/31/47392447-15856624442167673.png

Source: AWP February Fact Card

The only reason they are as low as they are is because of expense waivers agreed upon by management.

Effective May 4, 2018, Aberdeen Asset Managers Limited has entered into a written contract with the Fund to waive fees or limit expenses. This contract may not be terminated before May 4, 2020. Absent such waivers and/or reimbursements, the Fund’s returns would be lower. See Note 3 in the Notes to Financial Statements.

Source: AWP Annual Statement

Investors buying into this Fund should check if those are extended or not beyond May 2020.

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Yield

The Fund pays four cents monthly for a 48 cent payout annually. That creates a yield of about 10% on NAV and 12% at $4/share. Let us make one thing clear about the yield. There’s a significant component of return of capital here. What we mean by that is the fund’s underlying holdings don’t come close to generating the yield paid. That has historically been achieved via NAV appreciation. So in a sense the 10% yield on NAV represents the sum of the yield of the underlying holdings and potential capital appreciation. At current beaten-down values with the average REIT yielding well in excess of 6%, we believe that the 10% yield on NAV will be maintained.

Performance

Over long periods of time AWP’s total returns have kept up with its benchmarks. That is notable as fees generally work against funds when we stack them up against benchmarks.

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Source: AWP February Fact Card

AWP also has done this while distributing a high amount of current income to its shareholders. Our opinion here is that a systematic distribution makes the job of fund managers much harder because when distributing a fixed amount they are automatically forced to sell more securities at low prices than at high prices. So to match or outperform an index, they have to overcome the fees and inbuilt “sell-high and sell more low” limitations. Considering this, the performance gets above average marks from us.

Conclusion

In the long run, real estate values go up. They certainly will go higher in this environment of exceptionally low rates. Yes the virus will dampen activity, and sure, certain tenants may get temporary rent breaks. On the whole though, 95%-99% of their revenue stream will not even change in the medium term. That has been coupled with a selloff the likes of which we have never seen. So REITs are very cheap in relation to fundamentals. With AWP you can buy the best of all of them together. Investors should grab this opportunity with both hands and buy for yield and capital appreciation.

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Disclosure: I am/we are long AWP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.