RFI: A Well-Diversified Real Estate CEF


As some of my regular readers may know, one of my favorite asset classes to invest in is real estate. There are a few reasons for this including the fact that it is a hard asset with a finite supply, so it can help someone preserve their wealth, as well as the fact that one can derive a nice income stream by leasing it out. While there are numerous top-notch real estate investments trusts that can be invested in, some investors may be better served by investing in a closed-end fund specializing in the sector. This is due to the fact that the fund can provide both diversity and a higher yield than any individual trust provides. One of the better funds focusing on the sector is the Cohen & Steers Total Return Realty Fund (RFI).

About The Fund

According to the fund’s web page, the Cohen & Steers Total Return Realty Fund has the objective of delivering a high total return through investment in real estate securities. Admittedly, this is pretty much what we would expect from the fund’s name. Unlike many other real estate funds, though, RFI does not limit itself to investing only in the common equities of real estate investment trusts. Instead, the fund considers a real estate security to be common stock, preferred stock, and anything else that is strictly not a debenture. For the most part, though, the fund invests in common equity as only about 15% of the fund’s assets is currently invested in preferred stock. In addition, not all of the companies that the fund invests in are real estate investment trusts as the fund considers anything in the real estate industry to be fair game, but admittedly, most of them are structured as trusts.

The fund’s assets are fairly well diversified across the various different types of real estate. We can see this clearly here:

Source: Cohen & Steers

As we can clearly see here, the fund has exposure to many different types of real estate, with no single type having a particularly high exposure. This is quite a good thing due to the fact that different types of real estate have different fundamentals. An obvious example is that a retail store or a shopping mall is going to be much more vulnerable to an economic slowdown than a hospital or data center. Apartment buildings, which have the greatest weighting in the fund outside of real estate-backed preferred stock, are also relatively recession resistant since it is likely that people will do everything they can to keep a roof over their heads even if their income declines due to a recession. It is a good thing therefore that the fund has much higher exposure to such defensive sectors than it does cyclical ones given the risks that the economy is facing right now.

We can also see some diversity by looking at the individual positions in the fund. Here are the largest ones:

Source: Cohen & Steers

As we can clearly see here, RFI’s ten largest holdings span a variety of sectors, which reinforces the fact that the fund appears to be committed to spreading its assets across the various real estate sectors. In addition, with the possible exception of Invitation Homes (INVH), these are all companies that will likely perform reasonably well regardless of what happens in the broader economy.

Unfortunately, we also see a negative point here. As my regular readers on the topic of closed-end funds are no doubt aware, I generally dislike seeing any asset have a weighting greater than 5% in a fund’s portfolio. This is because this is approximately the level at which that asset begins to expose the portfolio as a whole to idiosyncratic risk. Idiosyncratic, or company-specific, risk is that risk which any financial asset has that is independent of the risk possessed by the broader market. This is, for example, the risk that a company will get sued and see its stock price decline or some similar event. Thus, the concern here is that some event could occur that causes the stock price of a heavily-weighted asset to decline, and since the risk is not fully diversified away, it drags the entire fund down with it. As we can see above, there are two positions in the fund that have a weighting of greater than 5% and one more that is right at 5% so the fund is exposed to some risks from these positions.

Why Invest In Real Estate?

A few weeks ago, I published an article to this site suggesting that investors maintain a position in gold (PHYS) to protect their wealth against the specter of inflation, rising government obligations, and the likelihood of a permanent money-printing regime. Real estate shares many of the same qualities as gold when it comes to its ability to protect the wealth that you worked hard to accumulate. Like gold, it is in finite supply so as the money supply increases so should the value of land as more money ends up chasing the same amount of land. While gold has the advantage of being portable, meaning it can be easily carried with you (land obviously cannot be moved), real estate can be leased out to other people and can thus generate an income for its owner. Thus, both gold and real estate have a place in your portfolio as a way to protect your wealth, although real estate might be favored by those that want an income to pay their bills or for any other purposes.


As real estate is often bought by investors looking for income, one might expect RFI to pay out a fairly solid distribution to its investors. This is indeed the case as the fund pays out $0.08 per share per month, which gives it an annualized 7.26% yield at the current price. Admittedly, this yield is not as high as some of the other real estate funds that I cover, such as the CBRE Clarion Global Real Estate Income Fund (IGR), but it is still respectable. One thing that potential investors might like, though, is that not much of the fund’s distributions have been classified as return of capital in recent months:

Source: Fidelity Investments

As I have discussed before, return of capital distributions are not necessarily a bad thing when it comes to equity funds. This is because there are numerous things that can trigger a distribution to be classified as return of capital including the distribution of money received from a partnership or the distribution of unrealized capital gains. However, there are still some investors that get nervous with return of capital so they may be comforted by the fact that the fund has not paid any for more than two quarters.

Unfortunately, there is a downside to the fund’s lack of return of capital distributions. This is the very simple fact that investors are unable to benefit from the significant tax benefits that come along with return of capital distributions. Basically, there are neither income nor capital gains taxes levied against these distributions. Instead, the fund’s holder needs to reduce their cost basis by the amount of the distribution. This essentially defers income taxes until the fund is sold, which grants a valuable benefit. As RFI has not been making return of capital distributions lately, investors in the fund have not been able to take advantage of this tax benefit. Of course, anyone holding the fund in an IRA or other tax-advantaged vehicle does not have to worry about this.


As is always the case, it is critical for us to ensure that we do not overpay for any asset in our portfolio. This is because overpaying for any asset is a surefire way to ensure that we generate sub-optimal returns from that asset. In the case of a closed-end fund like RFI, the usual way to value it is by looking at the fund’s net asset value. Net asset value is the market value of every holding in the fund minus any outstanding debt. It is therefore the amount that the fund’s shareholders would receive if the fund was immediately liquidated and the assets distributed to all of the shareholders.

Ideally, we want to purchase shares of the fund when they are trading at a price below net asset value. This is because this means that an investor is essentially acquiring all of the fund’s assets for less than they are actually worth. As of May 10, 2019 (the latest date for which information is currently available), RFI had a net asset value of $13.49 per share. As the fund currently trades for $13.22, this is a 2.00% discount to net asset value. However, as the entire market declined sharply on May 13, it is questionable how much of a discount someone buying today is really getting. Over the past month, the fund has traded at a 1.04% premium to net asset value so realistically you will not be getting the very attractive 5%-10% discounts that some comparable funds have.


In conclusion, the Cohen & Steers Total Return Realty Fund is a fairly well diversified domestic real estate fund with a solid distribution. In addition, some investors may appreciate the fact that the fund does not pay out much in the way of return of capital distributions. However, given the fact that the fund trades very close to net asset value, it is questionable how much value you are really getting here. Potential investors may want to wait until the pricing improves and the fund is available at a discount before buying in.

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Disclosure: I am/we are long IGR. 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.

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