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Cohen & Steers Quality Income R Message Board

  • tweetymerc tweetymerc May 19, 2011 6:03 PM Flag

    interst hikes

    I have owned RQI for 3 years now. Can anyone tell me what will happen to the dividend or share price, if we start seeing interest rate hikes in the fall? I heard someone say it will really hurt the reit community. I was thinking if we started seeing inflation, the real estate market would benefit.

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    • I think you’ve missed a couple of points:

      1. Regarding getting ~5%, and that’s not so bad. Look, you can get 4+% just owning many REITs (e.g. KIM, VNO, CLI, O, etc), what’s the RQI leverage, that you’re paying for and running risks with, actually getting you? Maybe not much.

      2. The real issue isn’t the 5%, it’s the huge ROC component in your distribution. As long as the market is going up it’s fine to take some of what would otherwise wind up in the NAV and return it to shareholders as ROC, it just means RQI’s NAV will grow slower than it otherwise would. But in a down market when you return NAV you lose capability to generate NII when you sell holdings and return capital, so you’re in a degenerative cycle, and the leverage makes it worse, and the managed distribution policy keeps it worse. Example: if RQI doesn’t have enough NII to cover the quarterly distribution coming up, it sells some holdings to cover the difference - the reduced holdings reduce RQI’s ability to generate NII for the Sept quarterly distribution, and the cycle repeats with each time a little more worse. So things just spin in, unless the market turns up or the distribution gets cut to a realistic level. Because RQI has a managed distribution policy, history shows there will not be any cut until the crisis is over. This is not a hypothetical issue, it’s what happened; and there’s no reason to expect it won’t happen again, if the market continues it’s dismal performance. This is a systemic issue with any CEF that includes a large ROC in it’s distribution, and the leverage and managed distribution policy just makes it worse.

      FWIW, until things turn (Nov?), I’m out.

    • This has been bothering me too. As rates rise bonds will be a more competative option for those seeking income also, RQI's cost of money will rise. I think this will outstrip any rise in the value of thier real estate assets which will lag inflation, at least for a time.

      IMHO when QE 2 ends next month bond rates will most likley rise. But if the Fed fund rate stays at current (very low) levels we may still be OK. On this I would be happy to hear other opinions because I am not at all of certain this logic.

      • 1 Reply to whymechi
      • If rates rise, I think the price of RQI will take a hit for 3 reasons;
        - If rates are raised the entire market will swoon. RQI is in the market, it will swoon to regardless of anything else - everything will be hit.
        - The value of RQI is in it’s portfolio. The price of the holdings will be hit by the general market swoon, thus the NAV of RQI will take a hit.
        - Cohen & Steers borrows money for the leveraged portion of RQI. Increasing rates will affect the net cost of that leverage, which means even more ROC to support the RQI distribution, which makes the fund less desirable, which will affect price.

        The 3 effects may be coupled, but I expect RQI to react more negatively to a rate rise than a non-financial stock, or an unleveraged closed end fund, or a mutual fund. I'm often wrong.

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