Company: PGZ
Filing Date: 2025-01-03
Form Type: N-CSR
Source: 0001398344-25-000145
Chunk: 4

Company: Principal Real Estate Income Fund
Filing Date: 2025-01-03
Form: N-CSR
Chunk 4
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 on inflation and market implied rate cut pricing has resulted in choppy performance. After a
rally in rate sensitives in 4Q23 on moderating inflation, REITs proceeded to lag broader equity markets, particularly large cap
tech on the AI tailwind, during the first half of 2024. However, with signs of economic softening and markets anticipating central
bank cuts in the third quarter, REITs rallied and closed the gap, ending the twelve-month period modestly behind equities. Toward
the end of the period however, rising expectations of a Trump presidency drove a backup in bond yields, once again pressuring REITs.

CMBS

The CMBS holdings within the Fund returned
25.22% for the 12 months ended October 31, 2024. This compares to the return of the Bloomberg US CMBS 2.0 BBB of 26.39%. The main
drivers of returns for the period were the material flattening of the credit curve for BBB and BB rated bonds issued in 2019-2021,
discounts getting smaller for originally BBB and BB rated bonds from seasoned deals issued in 2012-2014, lower interest rates and
the strong carry and positive relative spread performance of interest only securities. CMBS spreads, and especially on more recently
issued BBB and BB rated bonds, that had been under pressure due to refinance and recession fears in 2023, materially tightened
to start the year as the Fed signaled to the market that there would be no more rate hikes and to expect multiple rate cuts in
2024. While the initial expectations for rate cuts have been lowered and 10-year rates have moved higher since mid-September, the
bid for CMBS credit and especially BBB and BB rated bonds remained strong. Pricing on seasoned credit exposure in the portfolio
also benefited from the outlook for the resolution of 2012-13 vintage loans improving as more loans were extended during the period.
The price action reflects clarity on how these defaulted loans would be resolved and a higher probability that these loans can
eventually be resolved with lower losses than were previous expected. We agree that loan extensions are a positive signal for credit
as this indicates the borrower is willing to invest new equity in the properties in exchange for an extension while avoiding a
liquidation in a stressed market. Positive performance in the portfolio also came from exposure to interest only loans that are
structurally protected from initial loan defaults and benefit from loans not being able to refinance