For income investors, 2022 has been a trying time. Interest rates are rising, acting as a drag on the bond market. Conversely, inflation remains high, eroding purchasing power and amplifying the need for income.
Investors’ income demands coupled with the real estate sector’s inflation fighting capabilities could highlight the allure of strategies such as the Virtus Duff & Phelps Global Real Estate Securities (VGISX). VGISX is actively managed, which is beneficial on multiple fronts, including identifying income and value opportunities in the real estate sector as well as minimizing interest rate risk. Indeed, an active approach to real estate income could be warranted in this environment.
“Over the past decade, REITs have provided a dividend yield that is approximately 1.5% higher than the available rate on the U.S. 10-year Treasury,” wrote Morningstar analyst Kevin Brown. “While the spread jumped during the first year of the pandemic as the Federal Reserve lowered interest rates to stimulate the economy while the drop in share prices increased REIT dividend yields, the sector returned to the historical average spread in the second half of 2021.”
Undoubtedly, VGISX has an impressive track record. It earned five-star Morningstar ratings over the trailing three-, five-, and 10-year periods. Additionally, the fund ranked no worse than the eleventh percentile in its Lipper peer group over the trailing year, three-, five-, and 10-year periods.
That’s testament to the benefits of active management and a strategy that focuses on rental properties with solid contractual revenue. VGISX managers also emphasize not only excess return, but the potential to deliver superior risk-adjusted performance, too. Those are traits for investors not only because of the importance of cash flow in real estate, but also owing to the specter of rising rates.
“With further interest-rate increases expected through the year, we anticipate that share prices may see further downward pressure as income-oriented investors rotate out of the sector. However, we believe cash flows should continue to benefit from high inflation through the back half of the year as many companies still anticipate record levels of growth in their 2022 outlooks,” added Brown.
At the end of the first quarter, VGISX was home to 60 stocks, including some that Morningstar is constructive on. That group includes Simon Property Group (NYSE:SPG).
“Tenants are now much healthier, with occupancy costs at the lowest levels in over six years, which should allow Simon to see further occupancy and rent increases. Additionally, Simon recently acquired Class A mall competitor Taubman Centers, which should increase cash flows and provide more leverage when negotiating with tenants,” concluded Brown.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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