The Principal Real Estate Income Fund (the “Fund”),
acting pursuant to a Securities and Exchange Commission (“SEC”) exemptive order and with the approval of the Fund’s
Board of Trustees (the “Board”), have adopted a plan, consistent with the Fund’s investment objectives and policies,
to support a level monthly distribution of income, capital gains and/or return of capital (the “Plan”). In accordance
with the Plan, the Fund distributed $0.11 per share on a monthly basis through October 31, 2020.
The fixed amount distributed per share is subject to change at the
discretion of the Fund’s Board. Effective November 2020 the monthly distribution rate was changed to $0.08 per share. Under
the Plan, the Fund will distribute all available investment income to its shareholders, consistent with the Fund’s primary
investment objectives and as required by the Internal Revenue Code of 1986, as amended (the “Code”). If sufficient
investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return of capital
to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed
amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases
to enable the Fund to comply with the distribution requirements imposed by the Code.
Shareholders should not draw any conclusions about the Fund’s
investment performance from the amount of these distributions or from the terms of the Plan. The Fund’s total return performance
on net asset value is presented in its financial highlights table.
The Board may amend, suspend or terminate the Fund’s Plan
at any time without prior notice if it deems such action to be in the best interest of either the Fund or its shareholders. The
suspension or termination of the Plan could have the effect of creating a trading discount (if a Fund’s stock is trading
at or above net asset value) or widening an existing trading discount. The Fund is subject to risks that could have an adverse
impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns
impacting the markets, increased market volatility, companies suspending or decreasing corporate dividend distributions and changes
in the Code. Please refer to the Fund’s prospectus for a more complete description of its risks.
Please refer to the Additional Information section in this shareholder
report for a cumulative summary of the Section 19(a) notices for the Fund’s current fiscal period. Section 19(a) notices
for the Fund, as applicable, are available on the Principal Real Estate Income Fund’s website; www.principalcef.com.
The graph below illustrates the growth of a
hypothetical $10,000 investment assuming the purchase of common shares of beneficial interest at the closing market price (NYSE:
PGZ) of $20.00 on June 25, 2013 (the date of commencement of operations), and tracking its progress through October 31, 2020.
The Fund did not have any securities that used
significant unobservable inputs (Level 3) in determining fair value, and there were no transfers into or out of Level 3, during
the year ended October 31, 2020.
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
Commercial Mortgage Backed Securities:
As part of its investments in commercial real estate related securities, the Fund will invest in CMBS which are subject to certain
risks associated with direct investments in CMBS. A CMBS is a type of mortgage-backed security that is secured by a loan (or loans)
on one or more interests in commercial real estate property. Investments in CMBS are subject to the various risks which relate
to the pool of underlying assets in which the CMBS represents an interest. CMBS may be backed by obligations (including certificates
of participation in obligations) that are principally secured by commercial real estate loans or interests therein having multi-family
or commercial use. Securities backed by commercial real estate assets are subject to securities market risks as well as risks similar
to those of direct ownership of commercial real estate loans because those securities derive their cash flows and value from the
performance of the commercial real estate underlying such investments and/or the owners of such real estate.
Real Estate Investment Trusts ("REITs"):
As part of its investments in real estate related securities, the Fund will invest in REITs and is subject to certain risks associated
with direct investment in REITs. REITs possess certain risks which differ from an investment in common stocks. REITs are financial
vehicles that pool investors' capital to acquire, develop and/or finance real estate and provide services to their tenants. REITs
may concentrate their investments in specific geographic areas or in specific property types, e.g., regional malls, shopping centers,
office buildings, apartment buildings and industrial warehouses. REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. REITs depend generally on their ability to generate cash flow to make distributions
to shareowners, and certain REITs have self-liquidation provisions by which mortgages held may be paid in full and distributions
of capital returns may be made at any time.
As REITs generally pay a higher rate of dividends
than most other operating companies, to the extent application of the Fund's investment strategy results in the Fund investing
in REIT shares, the percentage of the Fund's dividend income received from REIT shares will likely exceed the percentage of the
Fund's portfolio that is comprised of REIT shares. Distributions received by the Fund from REITs may consist of dividends, capital
gains and/or return of capital.
Dividend income from REITs is recognized on
the ex-dividend date. The calendar year-end amounts of ordinary income, capital gains, and return of capital included in distributions
received from the Fund's investments in REITs are reported to the Fund after the end of the calendar year; accordingly, the Fund
estimates these amounts for accounting purposes until the characterization of REIT distributions is reported to the Fund after
the end of the calendar year. Estimates are based on the most recent REIT distribution information available.
The performance of a REIT may be affected by
its failure to qualify for tax-free pass-through of income under the Internal Revenue Code of 1986, as amended (the "Code"),
or its failure to maintain exemption from registration under the 1940 Act. Due to the Fund's investments in REITs, the Fund may
also make distributions in excess of the Fund's earnings and capital gains. Distributions, if any, in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's common shares and, after that basis has been reduced to zero,
will constitute capital gains to the common shareholder.
Concentration Risk: The Fund invests
in companies in the real estate industry, which may include CMBS, REITs, REIT-like structures, and other securities that are secured
by, or otherwise have exposure to, real estate. Any fund that concentrates in a particular segment of the market will
Annual Report | October 31, 2020
|
25
|
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
generally be more volatile than a fund that
invests more broadly. Any market price movements, regulatory changes, or economic conditions affecting CMBS, REITs, REIT-like structures,
and real estate more generally, will have a significant impact on the Fund's performance.
Foreign Currency Risk: The Fund expects
to invest in securities denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates
may affect the value of securities owned by the Fund, the unrealized appreciation or depreciation of investments and gains on and
income from investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated
in such currencies, which means that the Fund's net asset value could decline as a result of changes in the exchange rates between
foreign currencies and the U.S. dollar. These risks often are heightened for investments in smaller, emerging capital markets.
The accounting records of the Fund are maintained
in U.S. dollars. Prices of securities denominated in foreign currencies are translated into U.S. dollars at the closing rates of
the exchanges at period end. Amounts related to the purchase and sale of foreign securities and investment income are translated
at the rates of exchange prevailing on the respective dates of such transactions.
The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains
or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s
books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses
arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period-end, resulting
from changes in exchange rates.
A foreign currency contract is a commitment
to purchase or sell a foreign currency at a future date, at a negotiated rate. The Fund may enter into foreign currency contracts
to settle specific purchases or sales of securities denominated in a foreign currency and for protection from adverse exchange
rate fluctuation. Risks to a Fund include the potential inability of the counterparty to meet the terms of the contract.
3. LEVERAGE
Under normal market conditions, the Fund's
policy is to utilize leverage through Borrowings and the issuance of preferred shares in an amount that represents approximately
33 1/3% of the Fund's total assets, including proceeds from such Borrowings and issuances (or approximately 50% of the Fund's net
assets). It is possible that the assets of the Fund will decline due to market conditions such that this 33 1/3% limit will be
exceeded. In that case, the leverage risk to shareholders will increase. Borrowings will be subject to interest costs, which may
or may not be
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
recovered by appreciation of the securities
purchased. In certain cases, interest costs may exceed the return received on the securities purchased.
The Fund maintains a $60,000,000 line of credit
with State Street Bank and Trust Company ("SSB"), which by its terms expires on September 10, 2021, subject to the restrictions
and terms of the credit agreement. Prior to September 11, 2020 the Fund maintained a $70,000,000 with SSB. As of October 31, 2020,
the Fund has drawn down $40,500,000 from the SSB line of credit and the maximum borrowing outstanding during the year was $60,000,000.
The Fund is charged an interest rate of 1.00% (per annum) above the one-month LIBOR (London Interbank Offered Rate) or 1.14%, as
of the last renewal date, for borrowing under this credit agreement, on the last day of the interest period. The Fund was charged
a commitment fee on the average daily unused balance of the line of credit at a rate of 0.15% (per annum) until September 10, 2020,
and at a rate of 0.25% (per annum) from September 11, 2020 to October 31, 2020. The Fund pledges its investment securities as the
collateral for the line of credit per the terms of the agreement. The average annualized interest rate charged and the average
outstanding loan payable for the year ended October 31, 2020, was as follows:
Average Interest Rate
|
1.97%
|
Average Outstanding Loan Payable
|
$48,598,361
|
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
ALPS Advisors, Inc. ("AAI") serves
as the Fund's investment adviser pursuant to an Investment Advisory Agreement with the Fund. As compensation for its services to
the Fund, AAI receives an annual investment advisory fee of 1.05% based on the Fund's average Total Managed Assets (as defined
below). Pursuant to an Investment Sub-Advisory Agreement, AAI has retained Principal Real Estate Investors, LLC (''PrinRei'') as
the Fund's sub-advisor and pays PrinRei an annual fee of 0.55% based on the Fund's average Total Managed Assets.
ALPS Fund Services, Inc. (''AFS''), an affiliate
of AAI, serves as administrator to the Fund. Under an Administration, Bookkeeping and Pricing Services Agreement, AFS is responsible
for calculating the net asset values, providing additional fund accounting and tax services, and providing fund administration
and compliance-related services to the Fund. AFS is entitled to receive a monthly fee, accrued daily based on the Fund's average
Total Managed Assets, as defined below, plus a fixed fee for completion of certain regulatory filings and reimbursement for certain
out-of-pocket expenses.
DST Systems, Inc. (''DST''), the parent company
of AAI and AFS, serves as the Transfer Agent to the Fund. Under the Transfer Agency Agreement, DST is responsible for maintaining
all shareholder records of the Fund. DST is entitled to receive an annual minimum fee of $22,500 plus out-ofpocket expenses. DST
is a wholly-owned subsidiary of SS&C Technologies Holdings, Inc. ("SS&C"), a publicly traded company listed on
the NASDAQ Global Select Market.
The Fund pays no salaries or compensation to
any of its Officers. The three independent Trustees and, effective July 1, 2020, one interested Trustee of the Fund receive an
annual retainer of $21,000 and an additional $4,000 for attending each meeting of the Board. In addition to the attendance fee,
the Chairman of the Board will be paid a meeting fee of $1,125 for each Board meeting and the Chairman of the Audit Committee of
the Board will be paid a meeting attendance fee of $1,125 for
Annual Report | October 31, 2020
|
27
|
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
each meeting of the Audit Committee of the
Board. The Trustees are also reimbursed for all reasonable out-of-pocket expenses relating to attendance at meetings of the Board.
Certain Officers of the Fund are also officers
of AAI and AFS.
Total Managed Assets: For these purposes,
the term Total Managed Assets is defined as the value of the total assets of the Fund minus the sum of all accrued liabilities
of the Fund (other than aggregate liabilities representing Limited Leverage, as defined below), calculated as of 4:00 p.m. Eastern
time on such day or as of such other time or times as the Board may determine in accordance with the provisions of applicable law
and of the declaration and bylaws of the Fund and with resolutions of the Board as from time to time in force. Under normal market
conditions, the Fund's policy is to utilize leverage through Borrowings (as defined below) and through the issuance of preferred
shares (if any) in an amount that represents approximately 33 1/3% of the Fund's total assets, including proceeds from such Borrowings
and issuances (or approximately 50% of the Fund's net assets) (collectively, ''Limited Leverage''). ''Borrowings'' are defined
to include: amounts received by the Fund pursuant to loans from banks or other financial institutions; amounts borrowed from banks
or other parties through reverse repurchase agreements; amounts received by the Fund from the Fund's issuance of any senior notes
or similar debt securities. Other than with respect to reverse repurchase agreements, Borrowings do not include trading practices
or instruments that, according to the SEC or its staff, may cause senior securities concerns, and are intended to include transactions
that are subject to the asset coverage requirements in Section 18 of the 1940 Act for the issuance of senior securities evidencing
indebtedness (e.g., bank borrowings and the Fund's issuance of any senior notes or similar securities) and senior securities in
the form of stock (e.g., the Fund's issuance of preferred shares).
5. DISTRIBUTIONS
The Fund intends to make a level monthly distribution
to common shareholders after payment of interest on any outstanding borrowings or dividends on any outstanding preferred shares.
Distributions to shareholders are recorded by the Fund on ex-dividend date. The Fund may also retain cash reserves if deemed appropriate
by PrinRei to meet the terms of any leverage or derivatives transactions. Such distributions shall be administered by DST. While
a portion of the Fund's distributed income may qualify as qualified dividend income, all or a portion of the Fund's distributed
income may also be fully taxable. Any such income distributions, as well as any distributions by the Fund of net realized short-term
capital gains, will be taxed as ordinary income. A portion of the distributions the Fund receives from its investments may be treated
as return of capital. While the Fund anticipates distributing some or all of such return of capital, it is not required to do so
in order to maintain its status as a regulated investment company under Subchapter M of the Code.
The Fund has a managed distribution plan in
accordance with AAI's Section 19(b) exemptive order described below (the "Managed Distribution Plan"). Under the Managed
Distribution Plan, to the extent that sufficient investment income is not available on a monthly basis, the Fund will make regular
monthly distributions, which may consist of long-term capital gains and/or return of capital in order to maintain the distribution
rate. In accordance with the Managed Distribution Plan, the Fund made monthly distributions to common shareholders at a fixed monthly
rate of $0.11 per common share for the year ended October 31, 2020.
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
The amount of the Fund's distributions pursuant
to the Managed Distribution Plan are not related to the Fund's performance and, therefore, investors should not make any conclusions
about the Fund's investment performance from the amount of the Fund's distributions or from the terms of the Fund's Managed Distribution
Plan. The Board may amend, suspend or terminate the Managed Distribution Plan at any time without notice to shareholders.
AAI has received an order granting an exemption
from Section 19(b) of the 1940 Act and Rule 19b-1 thereunder to permit the Fund, subject to certain terms and conditions, to include
realized long-term capital gains as a part of its regular distributions to its stockholders more frequently than would otherwise
be permitted by the 1940 Act (generally once per taxable year). To the extent that the Fund relies on the exemptive order, the
Fund will be required to comply with the terms and conditions therein, which, among other things, requires the Fund to make certain
disclosures to shareholders and prospective shareholders regarding distributions, and would require the Board to make determinations
regarding the appropriateness of the use of the distribution policy. Under such a distribution policy, it is possible that the
Fund might distribute more than its income and net realized capital gains; therefore, distributions to shareholders may result
in a return of capital. The amount treated as a return of capital will reduce a shareholder's adjusted basis in the shareholder's
shares, thereby increasing the potential gain or reducing the potential loss on the sale of shares. There is no assurance that
the Fund will continue to rely on the exemptive order in the future.
6. CAPITAL TRANSACTIONS
The Fund is a statutory trust established under
the laws of the state of Delaware by an Agreement and Declaration of Trust dated August 31, 2012, as amended and restated through
the date hereof. The Declaration of Trust provides that the Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of common shares. The Fund intends to hold annual meetings of common
shareholders in compliance with the requirements of the NYSE.
Additional shares of the Fund may be issued
under certain circumstances pursuant to the Fund's Dividend Reinvestment Plan, as defined within the Fund's organizational documents.
Additional information concerning the Dividend Reinvestment Plan is included within this report.
7. PORTFOLIO INFORMATION
For the year ended October 31, 2020, the cost
of purchases and proceeds from sales of securities, excluding short-term securities, were as follows:
Purchases
|
Sales
|
$ 64,368,399
|
$ 85,539,273
|
8. TAXES
Classification of Distributions: Net
investment income/(loss) and net realized gain/(loss) may differ for financial statement and tax purposes. The character of distributions
made during the year from net investment income or net realized gains may differ from its ultimate
Annual Report | October 31, 2020
|
29
|
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
characterization for federal income tax purposes.
Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal
year in which the income or realized gain was recorded by the Fund.
The tax character of distributions paid during
the year ended October 31, 2020 and October 31, 2019 were as follows:
|
|
For the Year Ended October 31, 2020
|
|
Ordinary Income
|
|
$
|
6,500,092
|
|
Long-Term Capital Gain
|
|
|
719,485
|
|
Return of Capital
|
|
|
1,888,159
|
|
Total
|
|
$
|
9,107,736
|
|
|
|
For the Year Ended October 31, 2019
|
|
Ordinary Income
|
|
$
|
9,107,736
|
|
Total
|
|
$
|
9,107,736
|
|
Components of Earnings: Tax components
of distributable earnings are determined in accordance with income tax regulations which may differ from composition of net assets
reported under accounting principles generally accepted in the United States. Accordingly, for the year ended October 31, 2020,
certain differences were reclassified.
The reclassifications were as follows:
|
|
Paid-in capital
|
|
|
Distributable earnings
|
|
Principal Real Estate Income Fund
|
|
$
|
(65,309
|
)
|
$
|
|
65,309
|
|
These differences are primarily attributed
to the payment of excise taxes.
Tax Basis of Distributable Earnings:
Tax components of distributable earnings are determined in accordance with income tax regulations which may differ from composition
of net assets reported under GAAP.
As of October 31, 2020, the components of distributable
earnings on a tax basis were as follows:
Accumulated Capital Loss
|
|
$
|
(16,662,637
|
)
|
Unrealized Depreciation
|
|
|
(14,920,449
|
)
|
Total
|
|
$
|
(31,583,086
|
)
|
Principal Real Estate Income Fund
|
Notes to Financial Statements
|
October 31, 2020
Capital Losses: Under current law, capital
losses maintain their character as short-term or long-term and are carried forward to the next tax year without expiration. As
of the current fiscal year end, the following amounts are available as carry forwards to the next tax year:
|
|
Short-Term
|
|
|
Long-Term
|
|
Principal Real Estate Income Fund
|
|
$
|
3,209,189
|
|
|
$
|
13,453,448
|
|
Tax Basis of Investments: Net unrealized
appreciation/(depreciation) of investments based on federal tax cost as of October 31, 2020, were as follows:
Cost of investments for income tax purposes
|
|
$
|
152,551,603
|
|
Gross appreciation on investments (excess of value over tax cost)
|
|
$
|
4,380,920
|
|
Gross depreciation on investments (excess of tax cost over value)
|
|
|
(19,303,796
|
)
|
Net appreciation of foreign currency and derivatives
|
|
|
2,427
|
|
Net unrealized depreciation on investments
|
|
$
|
(14,920,449
|
)
|
These differences are primarily attributed
to the different tax treatment of foreign currency, passive foreign investment companies (PFICs), and wash sales.
Federal Income Tax Status: For federal
income tax purposes, the Fund currently qualifies, and intends to remain qualified, as a regulated investment company under the
provisions of Subchapter M of the Code by distributing substantially all of its investment company taxable net income and realized
gain, not offset by capital loss carryforwards, if any, to its shareholders. No provision for federal income taxes has been made.
As of and during the year ended October 31,
2020, the Fund did not have a liability for any unrecognized tax benefits. The Fund files U.S. federal, state, and local tax returns
as required. The Fund's tax returns are subject to examination by the relevant tax authorities until expiration of the applicable
statute of limitations, which is generally three years after the filing of the tax return. Tax returns for open years have incorporated
no uncertain tax positions that require a provision for income taxes.
The Fund recognizes interest and penalties,
if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year ended October
31, 2020, the Fund did not incur any interest or penalties.
9. SUBSEQUENT EVENTS
Subsequent to October 31, 2020, the Fund paid
the following distributions:
Ex-Date
|
Record Date
|
Payable Date
|
Rate (per share)
|
November 12, 2020
|
November 13, 2020
|
November 30, 2020
|
$0.08
|
December 16, 2020
|
December 17, 2020
|
December 31, 2020
|
$0.08
|
On December 16, 2020 the Board announced that
it approved a share repurchase program. Under the share repurchase program, the Fund may purchase up to 5% of its outstanding common
shares beginning January 19, 2021 in the open market, until January 19, 2022.
Annual Report | October 31, 2020
|
31
|
Principal Real Estate Income Fund
|
Dividend Reinvestment Plan
|
October 31, 2020 (Unaudited)
Unless the registered owner of Common Shares
elects to receive cash by contacting DST Systems, Inc. (the "Plan Administrator"), all dividends declared on Common Shares
will be automatically reinvested by the Plan Administrator for shareholders in the Fund's Automatic Dividend Reinvestment Plan
(the "Plan"), in additional Common Shares. Common Shareholders who elect not to participate in the Plan will receive
all dividends and other distributions in cash paid by check mailed directly to the shareholder of record (or, if the Common Shares
are held in street or other nominee name, then to such nominee) by the Plan Administrator as dividend disbursing agent. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed
by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect
to any subsequently declared dividend or other distribution. Such notice will be effective with respect to a particular dividend
or other distribution (together, a "Dividend"). Some brokers may automatically elect to receive cash on behalf of Common
Shareholders and may re-invest that cash in additional Common Shares.
The Plan Administrator will open an account
for each Common Shareholder under the Plan in the same name in which such Common Shareholder's Common Shares are registered. Whenever
the Fund declares a Dividend payable in cash, non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Administrator for the participants' accounts,
depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares
from the Fund ("Newly Issued Common Shares") or (ii) by purchase of outstanding Common Shares on the open market ("Open-Market
Purchases") on the NYSE or elsewhere. If, on the payment date for any Dividend, the closing market price plus estimated brokerage
commissions per Common Share is equal to or greater than the NAV per Common Share, the Plan Administrator will invest the Dividend
amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to
each participant's account will be determined by dividing the dollar amount of the Dividend by the NAV per Common Share on the
payment date; provided that, if the NAV is less than or equal to 95% of the closing market value on the payment date, the dollar
amount of the Dividend will be divided by 95% of the closing market price per Common Share on the payment date. If, on the payment
date for any Dividend, the NAV per Common Share is greater than the closing market value plus estimated brokerage commissions,
the Plan Administrator will invest the Dividend amount in Common Shares acquired on behalf of the participants in Open-Market Purchases.
In the event of a market discount on the payment
date for any Dividend, the Plan Administrator will have until the last business day before the next date on which the Common Shares
trade on an "ex-dividend" basis or 30 days after the payment date for such Dividend, whichever is sooner (the "Last
Purchase Date"), to invest the Dividend amount in Common Shares acquired in Open-Market Purchases. It is contemplated that
the Fund will pay monthly income Dividends. If, before the Plan Administrator has completed its Open-Market Purchases, the market
price per Common Share exceeds the NAV per Common Share, the average per Common Share purchase price paid by the Plan Administrator
may exceed the NAV of the Common Shares, resulting in the acquisition of fewer Common Shares than if the Dividend had been paid
in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases,
the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the
purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease
making
Principal Real Estate Income Fund
|
Dividend Reinvestment Plan
|
October 31, 2020 (Unaudited)
Open-Market Purchases and may invest the uninvested
portion of the Dividend amount in Newly Issued Common Shares at the NAV per Common Share at the close of business on the Last Purchase
Date provided that, if the NAV is less than or equal to 95% of the then current market price per Common Share, the dollar amount
of the Dividend will be divided by 95% of the market price on the payment date for purposes of determining the number of shares
issuable under the Plan.
The Plan Administrator maintains all shareholders'
accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders
for tax records. Common Shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the
Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator
will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with
the instructions of the participants.
In the case of Common Shareholders such as
banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator will administer the
Plan on the basis of the number of Common Shares certified from time to time by the record shareholder's name and held for the
account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect
to Common Shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred
in connection with Open-Market Purchases. The automatic reinvestment of Dividends will not relieve participants of any federal,
state or local income tax that may be payable (or required to be withheld) on such Dividends. Participants that request a sale
of Common Shares through the Plan Administrator are subject to brokerage commissions.
The Fund reserves the right to amend or terminate
the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the
right to amend the Plan to include a service charge payable by the participants.
All correspondence or questions concerning
the Plan should be directed to the Plan Administrator.
Annual Report | October 31, 2020
|
33
|
Principal Real Estate Income Fund
|
Approval of Investment Advisory and Sub-Advisory Agreements
|
October 31, 2020 (Unaudited)
At the September 10, 2020 meeting ("Meeting")
of the Board of Trustees (the "Board") of Principal Real Estate Income Fund (the "Fund"), the Board, including
those Trustees who are not "interested persons" of the Trust (the "Independent Trustees"), as that term is
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), approved ALPS Advisors, Inc. (the "Adviser")
and Principal Real Estate Investors, LLC, (the "Sub-Adviser") to serve as the Trust's investment adviser and sub-adviser,
respectively, and approved the renewal of the investment advisory agreement between the Adviser and the Trust, and the sub-advisory
agreement between Sub-Adviser and the Adviser with respect to the Trust (collectively, the "Advisory Agreements"), upon
the terms and conditions set forth therein. In connection with considering the approval of the renewal of the Advisory Agreements,
the Independent Trustees met in executive session with independent counsel, who provided assistance and advice.
Although not meant to be all-inclusive, the
following portion of the minutes summarizes the factors considered and conclusions reached by the Trustees in the executive session
and at the Meeting in determining to approve the Advisory Agreements.
Nature, extent, and quality of services.
In examining the nature, extent and quality of the investment advisory services provided by the Adviser, the Trustees considered
the qualifications, experience and capability of the Adviser's management and other personnel and the extent of care and conscientiousness
with which the Adviser performs its duties. In this regard, the Trustees considered, among other matters, the process by which
the Adviser performs oversight of the Fund, including ongoing due diligence regarding product structure, resources, personnel,
technology, performance, compliance and oversight of the Sub-Adviser.
With respect to the nature, extent and quality
of the investment advisory services provided by the Sub-Adviser, the Trustees considered the Sub-Adviser's investment management
process it uses in managing the assets of the Fund, including the experience and capability of the Sub-Adviser's management and
other personnel responsible for the portfolio management of the Fund and compliance with the Fund's investment policies and restrictions.
The Trustees also considered the favorable assessment provided by the Adviser as to the nature and quality of the services provided
by the Sub-Adviser and the ability of the Sub-Adviser to fulfill its contractual obligations.
Based on the totality of the information considered,
the Trustees concluded that the Fund was likely to benefit from the nature, extent and quality of the Adviser's and the Sub-Adviser's
services, and that the Adviser and the Sub-Adviser have the ability to provide these services based on their respective experience,
operations and current resources.
Investment performance of the Fund, the
Adviser and the Sub-Adviser. The Board reviewed the Fund's investment performance over time and compared that performance to
other funds in its peer group. In making its comparisons, the Board utilized a report from Fuse Research Network, LLC ("Fuse"),
an independent provider of investment company data. The Board also considered the views of the Adviser and the Sub-Adviser that
in light of the Fund's dynamic allocation strategy that permits it to vary its allocation to both commercial mortgage backed securities
and other U.S. and non-U.S. real estate-related securities, such as REITs and REIT-like entities, there are no directly comparable
peer funds that utilize a similar investment strategy.
Principal Real Estate Income Fund
|
Approval of Investment Advisory and Sub-Advisory Agreements
|
October 31, 2020 (Unaudited)
Costs of services and profits realized,
and comparison with other advisory contracts. The Board considered the fees payable under the Advisory Agreements. The Board
reviewed the information compiled by Fuse comparing the Fund's contractual management fee rate (on managed assets) and net management
fee rate (on both managed assets and common assets— which includes advisory and sub-advisory and administrative service fees—as
well as the Fund's net total expense ratios) to other funds in its expense group.
The Trustees also considered that the fee paid
to the Sub-Adviser is paid out of the fees paid to the Adviser and that no separate fee for sub-advisory services is charged to
the Fund and that the Sub-Advisory Agreement was the subject of arm's length negotiations between the parties. The Trustees also
considered the fees charged by the Sub-Adviser to other accounts managed using a CMBS strategy, and to other accounts managed using
a REIT strategy, during which it was noted that the Sub-Adviser differentiated the types of services that the Fund receives, noting
that the Sub-Adviser does not provide a leverage strategy or a dynamic asset allocation strategy for the other accounts, and does
not utilize derivative instruments for that account, in each case unlike the mandate it has with respect to the Fund. The Trustees
also considered the Adviser's opinion that the compensation payable to the Sub-Adviser is reasonable, appropriate and fair in light
of the nature and quality of the services provided to the Fund.
The Board reviewed the Meeting Materials it
received from the Adviser regarding its revenues and expenses in connection with the services provided to the Fund, both solely
with respect to the Adviser, as well as together with revenues earned by the Adviser's affiliates, AFS (in its capacity as administrator
of the Fund), and DST Systems, Inc. (in its capacity as transfer agent of the Fund). The Trustees also reviewed the profitability
information provided by the Adviser for the years 2017 to 2019 and the Sub-Adviser for the years 2016 to 2019. The Board noted
that the Sub-Adviser's profitability was not a significant factor considered by the Board, as the sub-advisory fee is paid by the
Adviser out of the advisory fee paid to it by the Fund, and not by the Fund.
Economies of scale. With respect to
whether economies of scale are realized by the Adviser and the Sub-Adviser and whether management fee levels reflect these economies
of scale for the benefit of Fund investors, the Board considered the Adviser's view that adding breakpoints would not be appropriate
at this time and that any increases in the Fund's assets are primarily attributable to market appreciation and dividend reinvestments,
rather than raising new capital. With respect to whether assets would be expected to increase, to a level such that economies
of scale might be realized by AAI and the Sub-Adviser, the Board considered the Adviser's and Sub- Adviser's view that the Fund's
closed-end structure limited the likelihood of significant future increases in the Fund's asset levels which would reach the point
where the imposition of breakpoints in the management fees would be appropriate, and ultimately determined that the level of management
fees charged and fee structure remained appropriate.
Indirect benefits. The Board considered
whether there were any "fall-out" or ancillary benefits that may accrue to the Adviser or Sub-Adviser or their affiliates
as a result of their relationships with the Fund. The Trustees considered that both the Adviser and Sub-Adviser noted their belief
that they would not experience any "fall-out" benefits other than as noted above.
After evaluation of the performance, fee and
expense information and the profitability, ancillary benefits and other considerations as described above, and in light of the
nature, extent and quality
Annual Report | October 31, 2020
|
35
|
Principal Real Estate Income Fund
|
Approval of Investment Advisory and Sub-Advisory Agreements
|
October 31, 2020 (Unaudited)
of services provided by the Adviser and the
Sub-Adviser, the Board concluded that the level of fees to be paid to each of the Adviser and the Sub-Adviser was reasonable.
In summary, based on the various considerations
discussed above, the Board determined that approval of the renewal of the Advisory Agreements was in the best interests of the
Fund.
Principal Real Estate Income Fund
|
Trustees & Officers
|
October 31, 2020 (Unaudited)
Name and Year of Birth
|
Position(s) Held with Registrant
|
Term of Office and Length of Time Served
|
Principal Occupation(s) During Past 5 Years
|
Number of Funds in Fund Complex(1) Overseen by Trustee
|
Other Directorships(2) Held by Trustee During Past 5 Years
|
Jennifer Craig
(1973)
|
Assistant Secretary(5)
|
Has served since September 2019.
|
Ms. Craig joined ALPS in 2007 and is currently Assistant Vice President and Paralegal Manager of ALPS. Ms. Craig is deemed an affiliate of the Fund as defined under the 1940 Act. Ms. Craig is also Assistant Secretary of Clough Global Dividend and Income Fund, Clough Global Equity Fund, Clough Global Opportunities Fund, Financial Investors Trust, Liberty All-Star Equity Fund and Liberty All-Star Growth Fund, Inc and Clerk of Goehring & Rozencwajg Investment Funds.
|
N/A
|
N/A
|
(1)
|
The term “Fund Complex” means two or more registered investment companies that:
|
|
(a)
|
hold themselves out to investors as related companies for purposes of investment and investor services; or
|
|
|
|
|
(b)
|
have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
|
(2)
|
The numbers enclosed parenthetically represent the number of funds overseen in each directorship that the Trustee has held. Regarding ALPS ETF Trust and ALPS Variable Investment Trust, all funds are included in the total funds in the Fund Complex column. As to Financial Investors Trust, 11 funds are included in the total funds in the Fund Complex column.
|
|
|
(3)
|
“Interested Trustees” refers to those Trustees who constitute “interested persons” of a Fund as defined in the 1940 Act.
|
|
|
(4)
|
Officers are elected annually. Each officer will hold such office until a successor has been elected by the Board.
|
|
|
(5)
|
Sharon Akselrod resigned as Secretary on December 4, 2020 and Jennifer Craig was appointed as Secretary on December 16, 2020.
|
Principal Real Estate Income Fund
|
Additional Information
|
October 31, 2020 (Unaudited)
PORTFOLIO HOLDINGS
The Fund files a complete schedule of portfolio
holdings with the U.S. Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year
on Form N-PORT within 60 days after the end of the period. Copies of the Fund's Form N-PORT are available without a charge, upon
request, by contacting the Fund at 1-855-838-9485 and on the SEC's website at http://www.sec.gov.
PROXY VOTING
A description of the Fund's proxy voting policies
and procedures is available (1) without charge, upon request, by calling 1-855-838-9485, (2) on the Fund's website located at http://www.principalcef.com,
or (3) on the SEC's website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities
during the twelve-month period ended June 30th is available on the SEC's website at http://www.sec.gov.
SECTION 19(a) NOTICES
The following table sets forth the estimated
amount of the sources of distribution for purposes of Section 19 of the Investment Company Act of 1940, as amended, and the related
rules adopted there under. The Fund estimates the following percentages, of the total distribution amount per share, attributable
to (i) current and prior fiscal year net investment income, (ii) net realized short-term capital gain, (iii) net realized long-term
capital gain and (iv) return of capital or other capital source as a percentage of the total distribution amount. These percentages
are disclosed for the fiscal year-to-date cumulative distribution amount per share for the Fund. The amounts and sources of distributions
reported in these 19(a) notices are only estimates and not for tax reporting purposes. The actual amounts and sources of the amounts
for tax reporting purposes will depend upon the Fund's investment experience during the remainder of the calendar year and may
be subject to changes based on tax regulations. The Fund will send you a Form 1099-DIV for the calendar year that will tell you
how to report these distributions for federal income tax purposes.
Per Share Cumulative Distributions
for the Year Ended October 31, 2020
|
|
Percentage of the Total
Cumulative Distributions for the
Year Ended October 31, 2020
|
Net Investment Income
|
Short- Term Capital Gains
|
Long- Term Capital Gains
|
Return of Capital
|
Total Per Share
|
|
Net Investment Income
|
Short- Term Capital Gains
|
Long- Term Capital Gains
|
Return of Capital
|
Total Per Share
|
$1.2068
|
$0.0001
|
$0.0503
|
$0.0628
|
$1.32000
|
|
91.43%
|
0.00%
|
3.81%
|
4.76%
|
100.00%
|
Annual Report | October 31, 2020
|
45
|
Principal Real Estate Income Fund
|
Additional Information
|
October 31, 2020 (Unaudited)
UNAUDITED TAX INFORMATION
Of the distributions paid by the Fund from
ordinary income for the calendar year ended December 31, 2019, the following percentages met the requirements to be treated as
qualifying for the corporate dividends received deduction and qualified dividend income:
|
Dividend Received Deduction
|
Qualified Dividend Income
|
Principal Real Estate Income Fund
|
0.02%
|
7.56%
|
In early 2020, if applicable, shareholders
of record should have received this information for the distributions paid to them by the Fund during the calendar year 2019 via
Form 1099. The Fund will notify shareholders in early 2021 of amounts paid to them by the Fund, if any, during the calendar year
2020.
LICENSING AGREEMENT
Morningstar
The Fund is not sponsored, endorsed, sold or
promoted by Morningstar, Inc. or any of its affiliates (all such entities, collectively, "Morningstar Entities"). The
Morningstar Entities make no representation or warranty, express or implied, to the owners of the Fund or any member of the public
regarding the advisability of investing in mutual funds generally or in the Fund in particular or the ability of the Morningstar
Index Data to track general mutual fund market performance.
THE MORNINGSTAR ENTITIES DO NOT GUARANTEE THE
ACCURACY AND/OR THE COMPLETENESS OF THE MORNINGSTAR INDEX DATA OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR ENTITIES SHALL HAVE
NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
Principal Real Estate Income Fund
|
Additional Information
|
October 31, 2020 (Unaudited)
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, located
at State Street Financial Center, One Lincoln Street, Boston, MA 02111, serves as the Fund's custodian and will maintain custody
of the securities and cash of the Fund.
DST Systems, Inc., located at 333 West 11th
Street, 5th Floor, Kansas City, Missouri 64105, serves as the Fund's transfer agent and registrar.
LEGAL COUNSEL
Dechert LLP, located at 1095 Avenue of the
Americas, New York, New York 10036, serves as legal counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cohen & Company, Ltd. is the independent
registered public accounting firm for the Fund.
Annual Report | October 31, 2020
|
47
|
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
The following information in this annual report
is a summary of certain information about the Fund and changes since the Fund's annual report dated January 3, 2020 (the "prior
disclosure date"). This information may not reflect all of the changes that have occurred since you purchased the Fund.
Investment Objective. The Fund's investment
objective is to seek to provide high current income, with capital appreciation as a secondary objective, by investing in commercial
real estate-related securities. There can be no assurance that the Fund will achieve its investment objective.
Principal Investment Strategies.
Under normal market conditions, the Fund will
invest at least 80% of its total assets in commercial real estate-related securities, primarily consisting of commercial mortgage
backed securities ("CMBS") and other U.S. and non-U.S. real estate-related securities (primarily real estate investment
trusts ("REITs") or REIT-like entities). Under normal circumstances, the Fund will invest between 40% and 70% of its
total assets in CMBS and will invest between 30% and 60% in other real estate-related securities (including REITs). A CMBS is a
type of mortgage-backed security that is secured by a loan (or loans) on one or more interests in commercial real estate property.
REITs are pooled investment vehicles that invest in income producing real estate, real estate-related loans, or other types of
real estate interests. The Fund will invest in CMBS and other real estate-related securities at new issuance and in the secondary
market which the Fund's investment subadviser, Principal Real Estate Investors, LLC ("PrinREI"), believes will generate
attractive risk-adjusted current yields and the potential for capital appreciation for the Fund. The Fund will limit its investments
in CMBS to issuers organized in the United States. The Fund will invest in REITs and other real estate-related securities of issuers
organized in a number of countries, including the United States.
The Fund may invest in both investment grade
and below investment grade debt securities (i.e., "junk bonds"). With respect to CMBS deals issued prior to 2009, the
Fund may only invest in CMBS securities originally rated no lower than "A-" by Standard & Poor's Financial Services
LLC ("S&P") or Fitch Ratings, Inc., ("Fitch"), or "A3" by Moody's Investors Service, Inc. ("Moody's").
In addition and also with respect to CMBS deals prior to 2009, it is expected that the Fund will invest no more than 20% of its
total assets in CMBS securities originally rated lower than "AAA" by S&P or Fitch, or "Aaa" by Moody's.
No investment in an individual CMBS bond may comprise 10% or more of the Fund's total assets.
The Fund's net asset value will vary and its
distribution rate may vary and both may be affected by numerous factors, including changes in the market spread over a specified
benchmark, market interest rates and performance of the broader equity markets. Fluctuations in net asset value may be magnified
as a result of the Fund's use of leverage. An investment in the Fund may not be appropriate for all investors.
Use of Leverage
The Fund generally will seek to enhance the
level of its cash distributions to holders of Common Shares ("Common Shareholders") through the use of leverage, which
may include Borrowings (as defined below), the issuance of preferred shares, and the use of derivatives or certain investment techniques.
Under normal market conditions, the Fund's policy is to utilize leverage through
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
Borrowings and the issuance of preferred shares
(if any) in an amount that represents approximately 331/3% of the Fund's total assets, including proceeds from such Borrowings
and issuances (or approximately 50% of the Fund's net assets). However, based on market conditions at the time, the Fund may use
such leverage in amounts that represent less than 331/3% of the Fund's total assets. "Borrowings" are defined as: amounts
received by the Fund pursuant to loans from banks or other financial institutions; amounts borrowed from banks or other parties
using reverse repurchase agreements; or amounts received by the Fund from the Fund's issuance of any senior notes or similar debt
securities. Other than with respect to reverse repurchase agreements, Borrowings do not include trading practices or instruments
that, according to the SEC or its staff, may cause senior securities concerns.
The Fund currently leverages through the use
of bank borrowings, but may use other similar term loans and/or reverse repurchase obligations. In connection with the Fund's use
of leverage, PrinREI may seek to hedge the associated interest rate risks through derivative instruments, which may include interest
rate swaps, caps, floors, collars, rate forwards and interest rate futures (and options thereon). PrinREI is not required to engage
in any hedging techniques, and there can be no assurance that any interest rate hedging transactions, if undertaken, will be successful,
and such transactions may adversely affect the Fund's achievement of its investment objective. There is no guarantee that the Fund
will engage in hedging transactions.
Effects of Leverage
The following table is furnished in response
to requirements of the SEC. It is designed to illustrate the effect of leverage on Common Share return, assuming investment portfolio
total returns (comprised of income and changes in the value of securities held in the Fund's portfolio) of minus 10% to plus 10%.
These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio
total returns experienced or expected to be experienced by us. Further, the assumed investment portfolio total returns are after
(net of) all of the Fund's expenses other than expenses associated with leverage); but such leverage expenses are deducted when
determining the Common Share return. See "Risks." The table further reflects the use of leverage representing 33 1/3%
of the Fund's total assets and estimated leverage costs of 1.22%.
Assumed Portfolio Return
|
|
|
-10.00
|
%
|
|
|
-5.00
|
%
|
|
|
0.00
|
%
|
|
|
5.00
|
%
|
|
|
10.00
|
%
|
Common Share Total Return
|
|
|
-15.43
|
%
|
|
|
-8.01
|
%
|
|
|
-0.59
|
%
|
|
|
6.83
|
%
|
|
|
14.25
|
%
|
Corresponding Common Share return is composed
of two elements: Common Share dividends paid by the Fund (the amount of which is largely determined by the Fund's net distributable
income after paying interest or dividends on the Fund's Limited Leverage) and gains or losses on the value of the securities the
Fund owns. As required by SEC rules, the table above assumes that the Fund is more likely to suffer capital losses than to enjoy
capital appreciation. For example, to assume a total return of 0% would assume that the distributions the Fund receives on its
investments are entirely offset by losses in the value of those securities.
Annual Report | October 31, 2020
|
49
|
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
Risks
Investment and Market Risk. An investment
in Common Shares is subject to investment risk, including the possible loss of the entire principal amount invested. An investment
in Common Shares represents an indirect investment in the securities owned by the Fund, which are generally traded on a securities
exchange or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down,
sometimes rapidly and unpredictably. Overall stock market risks may also affect the NAV of the Fund. Factors such as domestic and
foreign economic growth and market conditions, interest rate levels and political events affect the securities markets. The Common
Shares at any point in time may be worth less than the original investment, even after taking into account any reinvestment of
dividends and distributions.
Risks Associated with Investment in Commercial
Real Estate Loans. Investments in CMBS are subject to the various risks which relate to the pool of underlying assets in which
the CMBS represents an interest. CMBS may be backed by obligations (including certificates of participation in obligations) that
are principally secured by commercial real estate loans or interests therein having a multi-family or commercial use, such as shopping
malls, other retail space, office buildings, industrial or warehouse properties, hotels, nursing homes and senior living centers.
CMBS are subject to particular risks, including lack of standardized terms, shorter maturities than residential mortgage loans
and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. Securities
backed by commercial real estate assets are subject to securities market risks as well as risks similar to those of direct ownership
of commercial real estate loans because those securities derive their cash flows and value from the performance of the commercial
real estate underlying such investments and/or the owners of such real estate. These risks include:
|
·
|
Declines in the value of real estate;
|
|
·
|
Declines in rental or occupancy rates;
|
|
·
|
Risks related to general and local economic conditions;
|
|
·
|
Dependency on management skills of the borrower or third-party property management firm;
|
|
·
|
Risk depending on the timing of cash flows from the underlying mortgage properties;
|
|
·
|
Possible lack of available mortgage funds to refinance the mortgage loans at maturity;
|
|
·
|
Overbuilding;
|
|
·
|
Extended vacancies in properties;
|
|
·
|
Increases in property taxes and operating expenses, including energy costs;
|
|
·
|
Changes in zoning laws and other governmental rules, regulation and fiscal policies; compliance with existing legal and regulatory requirements, including environ-mental controls and regulations;
|
|
·
|
Risks related to the ability of a property to attract and retain tenants, including those listed in this section, as well as the ability of a property owner to pay leasing commissions, provide adequate maintenance and insurance, pay tenant improvement costs and make other tenant concessions;
|
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
|
·
|
Expenses incurred in the cleanup of environmental problems;
|
|
·
|
Costs and delays involved in enforcing rights of a property owner against tenants that default under the terms of leases or seek protection of bankruptcy laws;
|
|
·
|
Risks related to the type and use of a particular commercial property, e.g., hospitals, nursing homes, hospitality properties and other property types;
|
|
·
|
Casualty or condemnation losses, including where liability and casualty insurance does not provide full protection;
|
|
·
|
Changes in interest rates and the availability of credit to refinance such loans at or prior to maturity;
|
|
·
|
Changes in tax laws;
|
|
·
|
Terrorist threats and attacks;
|
|
·
|
Social unrest and civil disturbances; and
|
|
·
|
Weather and other acts of God.
|
The above factors may impact the ability of
a borrower to meet its obligations on the loan. Certain loans may default which could result in either a foreclosure of the property
or a restructure of the loan. Such actions may impact the amount of proceeds ultimately derived from the loan, and the timing of
receipt of such proceeds may be shorter or longer than the original term of the loan. Losses on the loans will negatively impact
the most subordinate CMBS classes first. Any proceeds received from the loans will generally be applied to the most senior bonds
outstanding before any payments are made to the subordinate bonds. The occurrence of defaults and losses on the loans may result
in downgrades of the CMBS by the NRSROs.
In addition the following risks apply to investments
in CMBS (several of which also apply more generally to investments in debt securities and other asset backed securities):
Credit Quality and Selection. In addition
to the risks listed above, CMBS are affected by the quality of the credit extended.
As a result, the quality of the CMBS is dependent
upon the selection of the commercial mortgages for each issuance and the cash flow generated by the commercial real estate assets.
Risk factors related to the foregoing include:
|
·
|
Potential lack of diversification in certain CMBS issuances;
|
|
·
|
Dependence on the skills, decision-making and experience of the various issuers in selecting the commercial mortgages backing the issuances; and
|
|
·
|
Adverse borrower selection within an issuance.
|
Amortization, Refinance or Sale. Commercial
real estate loans are generally not fully amortizing, which means that they may have a significant principal balance or "balloon"
payment due on maturity. Commercial loans with a balloon payment involve a greater risk to a lender than fully amortizing loans
because the ability of a borrower to make a balloon payment typically will depend upon its ability either to fully refinance the
loan or to sell the property securing the loan at
Annual Report | October 31, 2020
|
51
|
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
a price sufficient to permit the borrower to
make the balloon payment. The ability of a borrower to effect a refinancing or a sale will be affected by a number of factors,
including the value of the property, the level of available mortgage rates at the time of sale or refinancing, the borrower's equity
in the property, the financial condition and operating history of the property and the borrower, tax laws, prevailing economic
conditions and the availability of credit for loans secured by the specific type of property. In addition, commercial real estate
loans generally are nonrecourse to borrowers. In the event of foreclosure on a commercial real estate loan, the value of the collateral
securing the loan at the time of foreclosure may be less than the principal amount outstanding on the loan plus accrued but unpaid
interest thereon, resulting in a non-collectable deficiency. Losses realized on the sale of foreclosed properties could negatively
impact the credit enhancement provided to certain CMBS investments and eventually lead to a loss of principal.
Lack of Sufficient Investment Opportunities.
It is possible that the Fund will never be fully invested if the Fund does not receive its desired allocations of investments or
PrinREI does not find a sufficient volume of investments it deems appropriate for the Fund. New issuances of CMBS were halted during
the recent global liquidity crisis. While new CMBS issuances have resumed, it remains uncertain how robust the market will become
or the impact any potential regulatory reform may have on the CMBS market. Such market conditions could impact the valuations of
the Fund's investments and impair PrinREI's ability to buy securities for the Fund. The business of acquiring the type of investments
targeted by the Fund is highly competitive and involves a high degree of uncertainty.
Lack of Operating Control of Underlying
Investments. The day-to-day operations of the real estate companies and properties underlying the commercial real estate loans
that secure the Fund's CMBS investments will be the responsibility of the owners and developers of such companies and properties.
Although PrinREI will be responsible for monitoring the performance of each CMBS investment, there can be no assurance that the
owners and developers will be able to operate the underlying companies or properties in accordance with their business plans or
the expectations of the Fund.
Lack of Control Over CMBS. The Fund
will generally not have a right to vote or to make decisions with respect to the administration of the CMBS investments or servicing
of the commercial real estate loans that underlie the Fund's CMBS investments. Those decisions will generally be made by one of
the master servicer, special servicer, trustee or a controlling party. Any decision made by one of those parties may not be in
the best interest of the Fund and, even if that decision is determined to be in the Fund's best interests by that party, may be
contrary to the decision that the Fund would have made and may negatively affect the Fund's interests.
Due Diligence Risks of CMBS. Before
making any investments in CMBS, PrinREI will assess the factors that it believes will determine the success of that investment.
This process is particularly important and subjective because there may be little information publicly available about the CMBS
other than what is available in the prospectuses, offering memoranda or similar disclosure documentation associated with the CMBS.
The Fund cannot provide any assurances that these due diligence processes will uncover all relevant facts of the underlying commercial
real estate loans or that any investment in a CMBS issuance will be successful.
Principal Real Estate Income Fund
|
Summary of Updated Information
Regarding the Fund
|
October 31, 2020 (Unaudited)
Credit Ratings — Rating Agencies.
The Fund can invest in CMBS rated "investment grade" or "below investment grade" by an NRSRO. The term "investment
grade" denotes a credit rating of BBB- or higher by S&P, or Baa3 or higher by Moody's, or BBB- or higher by Fitch, or
BBB- or higher by Kroll Bond Rating Agency, Inc., or BBB (low) or higher by Dominion Bond Rating Service or BBB- or higher by Morningstar
Credit Ratings, LLC ("Morningstar") or such comparable rating by any other NRSRO. The term "below investment grade"
(commonly referred to as "junk bonds" or "high yield securities") denotes a credit rating of BB+ or lower by
S&P, or Ba1 or lower by Moody's, or BB+ or lower by Fitch, or BB+ or lower by Kroll Bond Rating Agency, Inc., or BB (high)
by Dominion Bond Rating Services or BB+ or lower by Morningstar or such comparable rating by any other NRSRO. A credit rating is
a current assessment of the probability of timely payment of interest and ultimate recovery of principal. The ratings are based
on current information furnished by the issuer or obtained by the NRSRO from other sources the credit rating agency considers reliable.
NRSROs do not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. NRSROs
may take into consideration obligors such as guarantors, insurers or lessees.
Use of Credit Rating. A credit rating
is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability
for a particular investor. Credit ratings do not constitute a guarantee of the quality of CMBS. The rating assigned to a security
reflects only the NRSRO's opinion. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability
of, sufficient information or for other circumstances. A change in a bond's credit rating typically will affect the price of the
bond. The use of credit ratings for evaluating bonds involves certain risks. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of bonds. Also, NRSROs may fail to change credit ratings in a timely
manner to reflect recent events. If a NRSRO changes the rating of a security held by the Fund, the Fund may retain the security
if PrinREI believes such retention is in the best interest of the Fund's investors.
Risks Associated with the Insolvency of
Obligations Backing CMBS. The commercial real estate loans backing the CMBS may be subject to various laws enacted in the jurisdiction
or state of the borrower for the protection of creditors. If an unpaid creditor files a lawsuit seeking payment, the court may
invalidate all or part of the borrower's debt as a fraudulent conveyance, subordinate such indebtedness to existing or future creditors
of the borrower or recover amounts previously paid by the borrower in satisfaction of such indebtedness, based on certain tests
for borrower insolvency and other facts and circumstances, which may vary by jurisdiction. There can be no assurance as to what
standard a court would apply in order to determine whether the borrower was "insolvent" after giving effect to the incurrence
of the indebtedness constituting the commercial mortgage backing the CMBS, or that regardless of the method of valuation, a court
would not determine that the borrower was "insolvent" after giving effect to such incurrence. In addition, in the event
of the insolvency of a borrower, payments made on such commercial mortgage loans could be subject to avoidance as a "preference"
if made within a certain period of time (which may be as long as one year and one day) before such insolvency.
Risks Associated with Interest Shortfalls.
The Fund's CMBS investments may be subject to interest shortfalls due to interest collected from the underlying loans not being
sufficient to pay accrued interest to all of the CMBS. Interest shortfalls to the trust will occur when the servicer
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does not advance full interest payments on
defaulted loans. The servicer in a CMBS trust is required to advance monthly principal and interest payments due on a delinquent
loan. Once a loan is 60 days delinquent, the servicer is required to obtain a new appraisal to determine the value of the property
securing the loan. The servicer is only required to advance interest based on the lesser of the loan amount or 90% of the appraised
value. Interest shortfalls occur when 90% of the appraised value is less than the loan amount and the servicer does not advance
interest on the full loan amount. The resulting interest shortfalls impact interest payments on the most junior class in the trust
first. As interest shortfalls in-crease, more senior classes may be impacted. Over time, senior classes may be reimbursed for accumulated
shortfalls if the delinquent loans are resolved, but there is no guarantee that shortfalls will be collected. Interest shortfalls
to the trust may also occur as a result of accumulated advances and expenses on defaulted loans. When a defaulted loan or foreclosed
property is liquidated, the servicer will be reimbursed for accumulated advances and expenses prior to payments to CMBS bond holders.
If proceeds are insufficient to reimburse the servicer or if a defaulted loan is modified and not foreclosed, the servicer is able
to make a claim on interest payments that is senior to the bond holders to cover accumulated advances and expenses. If the claim
is greater than interest collected on the loans, interest shortfalls could impact one or more bond classes in a CMBS trust until
the servicer's claim is satisfied. Interest shortfalls will be more likely during times of economic stress or other significant
market events, which will result in greater risk of loss on the Fund's investments.
Risks Associated with Prepayment. The
Fund's CMBS investments may be subject to prepayment. Prepayments on CMBS are affected by a number of factors. If prevailing rates
for commercial real estate loans fall below the interest rates on the commercial real estate loans underlying the Fund's CMBS investments,
prepayments would generally be expected to increase. Conversely, if prevailing rates for commercial real estate loans rise above
the interest rates on the commercial real estate loans underlying the Fund's CMBS investments, prepayment rates would generally
be expected to decrease. Faster than expected prepayments may adversely affect the Fund's profitability, particularly if the Fund
is forced to invest prepayments it receives in lower yielding securities. Certain commercial real estate loans underlying CMBS
may have lockout periods and/or defeasance periods during which time prepayment is prohibited or prepayment penalties or substitute
defeasance collateral is required. However, certain of such CMBS permit prepayment after such lockout periods or defeasance periods
or the periods for such prepayment premiums have expired. Prepayments on CMBS are also affected by the value of the related mortgaged
property, the borrower's equity in the mortgaged property, the financial circumstances of the borrower, fluctuations in the business
operated by the borrower on the mortgaged property, competition, general economic conditions and other factors. However, there
can be no assurance that the underlying loans of a CMBS issue will prepay at any particular rate.
Risks Associated with Extensions. The
Fund's CMBS investments may be subject to extension, resulting in the term of the securities being longer than expected. Extensions
on CMBS are affected by a number of factors, including the general availability of financing in the market, the value of the related
mortgaged property, the borrower's equity in the mortgaged property, the financial circumstances of the borrower, fluctuations
in the business operated by the borrower on the mortgaged property, competition, general economic conditions and other factors.
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Reinvestment Risk. Reinvestment risk
is the risk that income from the Fund's portfolio will decline if the Fund invests the proceeds from matured, traded or called
bonds at market interest rates that are below the Fund's portfolio's current earnings rate. A decline in income could affect the
Common Shares' market price or their overall returns.
Risks Associated with the Servicers.
The exercise of remedies and successful realization of liquidation proceeds relating to commercial real estate loans underlying
CMBS may be highly dependent on the performance of the servicer or special servicer. The servicer may not be appropriately staffed
or compensated to immediately address issues or concerns with the underlying loans. Such servicers may exit the business and need
to be replaced which could have a negative impact on the portfolio due to lack of focus during a transition. Special servicers
frequently are affiliated with investors who have purchased the most subordinate bond classes, and certain servicing actions, such
as a loan extension instead of forcing a borrower pay off, may benefit the subordinate bond classes more so than the senior bond
classes. While servicers are obligated to service the portfolio subject to a servicing standard and maximize the present value
of the loans for all bond classes, servicers with an affiliate investment in the CMBS may have a conflict of interest. There may
be a limited number of special servicers available, particularly those which do not have conflicts of interest.
Risks Associated with Structured Securities.
Structured securities are securities that entitle the holders thereof to receive payments that depend primarily on the cash flow
from, or sale proceeds of, a specified pool of assets that by their terms convert into cash within a finite time period, together
with rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities.
The CMBS in which the Fund will invest are structured securities. Thus, CMBS will bear various risks typically experienced by structured
securities: credit risks, liquidity risks, interest rate risks, market risks, operational risks, structural risks and legal risks.
The CMBS are subject to the significant credit risks inherent in the underlying collateral and to the risk that the servicer fails
to perform. The performance of the CMBS is also dependent on the allocation of principal and interest payments as well as losses
among the classes of such securities of any issue. In addition, concentrations of CMBS backed by underlying collateral located
in a specific geographic region or concentrations of specific borrowers or property types, may subject the CMBS to additional risk.
Certain CMBS may have structural features that divert payments of interest and/or principal to more senior classes when the delinquency
or loss experience of the pool exceeds certain levels, which would reduce or eliminate payments of interest on one or more classes
of such CMBS for one or more payment dates. Additionally, as a result of cash flow being diverted to payments of principal on more
senior classes, the average life of the more junior securities may lengthen. As a result, a shortfall in payments to subordinate
investors in CMBS will generally not result in a default being declared on the transaction and the transaction will not be restructured
or unwound.
Risks Associated with the Limited Liquidity
of CMBS. The CMBS investments the Fund may invest in may have no, or only a limited, trading market. The liquidity of the CMBS
will generally fluctuate with, among other things, general economic conditions, domestic and international political events, developments
or trends in a particular industry. The credit markets, including the CMBS market, have periodically experienced decreased liquidity
on the primary and secondary markets during periods of extreme market volatility, such as the recent global liquidity crisis. Such
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market conditions could re-occur and would
impact the valuations of the Fund's investments and impair PrinREI's ability to sell securities. Some or all of the CMBS may also
be subject to restrictions on transfer and may be considered illiquid.
Risks Associated with Interest Rate Movements.
Debt securities, such as CMBS, are sensitive to changes in interest rates. In general, bond prices rise when interest rates fall
and fall when interest rates rise. Longer-term bonds are generally more sensitive to interest rate changes. The Fund may utilize
derivative instruments for purposes of hedging interest rate risk. The use of derivatives may involve certain costs and risks which
are outlined below.
"Spread Widening" Risk. For
reasons not necessarily attributable to any of the risks set forth herein (for example, supply/demand imbalances or other market
forces), the market spreads of the securities in which the Fund invests may increase substantially causing the securities prices
to fall. It may not be possible to predict, or to hedge against, such "spread widening" risk. In addition, mark-to-market
accounting of the Fund's investments will have an interim effect on the reported value prior to realization of an investment.
Risks Associated with Hedging. The Fund
may, but is not obligated to, utilize financial instruments, such as over-the-counter derivatives transactions, to hedge its investments
and the interest rate and/or spread risk associated therewith. There can be no assurance that the Fund will hedge when appropriate
or choose the correct hedge if it does hedge. The use of hedging transactions involves certain risks. These risks include (i) the
possibility that the market will move in a manner or direction that would have resulted in gain for the Fund had a particular hedging
transaction not been utilized, in which case the Fund's performance would have been better had the Fund not engaged in the hedging
transaction; (ii) the risk of imperfect correlation between the risk sought to be hedged and the hedging instrument used; (iii)
potential illiquidity for the hedging instrument used, which may make it difficult or costly for the Fund to close-out or unwind
a hedging transaction; and (iv) market conditions.
Over-the-counter derivatives transactions are
also subject to counterparty risk. Counterparty risk is the risk that the party on the opposite side of a contract will be unable
to fulfill the terms of the contract when called upon, creating exposure equal to the replacement cost or loss of market value
of the contract. To minimize counterparty risk, the Fund may diversify its counterparty exposure and may create exposure limits.
The Fund's use of derivatives or other hedging
transactions may be limited by legal and regulatory requirements applicable to the Fund or PrinREI.
Tax Risk Relating to Investments in Certain
REMICs. The Fund may acquire residual interests in REMICs. The Fund may be taxable at the highest corporate income tax rate
on a portion of the income arising from a residual interest in a REMIC that is allocable to the percentage of the Fund's Common
Shares held by "disqualified organizations," which are generally certain cooperatives, governmental entities and tax-exempt
organizations that are exempt from unrelated business taxable income. Because this tax would be imposed on the Fund, all of the
Fund's investors, including investors that are not disqualified organizations, would bear a portion of the tax cost associated
with the Fund's investment in a residual interest in a REMIC.
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In addition, if the Fund realizes excess inclusion
income and allocates it to Common Shareholders, this income cannot be offset by net operating losses of the Common Shareholders.
If the Common Shareholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as
unrelated business taxable income under Section 512 of the Code. If the Common Shareholder is a foreign person, it would be subject
to U.S. federal income tax withholding on this income without reduction or exemption pursuant to any otherwise applicable income
tax treaty.
Risks Associated with Tax Code or Accounting
Changes. CMBS are generally structured as REMICs under the Code, which impacts the tax treatment of the CMBS. Changes to REMIC
legislation could impact the investment performance of the CMBS and, as a result, the Fund. In addition, changes in accounting
standards, such as mark-to-market or consolidation rules, could negatively impact the performance of the Fund.
Below Investment Grade Securities Risk.
The Fund may invest in CMBS and other securities rated below investment grade or, if unrated, determined by PrinREI to be of comparable
credit quality, which are commonly referred to as "high-yield" or "junk" bonds. Investment in junk bonds involves
substantial risk of loss. Junk bonds are predominantly speculative with respect to the issuer's capacity to pay interest and repay
principal when due and therefore involve a greater risk of default or decline in market value due to adverse economic and issuer-specific
developments. Junk bonds display increased price sensitivity to changing interest rates and to a deteriorating economic environment.
The market values for junk bonds tend to be more volatile and such securities tend to be less liquid than investment grade debt
securities.
Real Estate-Related Securities Risk.
Although the Fund will not invest directly in real estate, the Fund will in-vest in securities of issuers that are have significant
exposure to real estate and the real estate industry. Such in-vestments are subject to certain risks associated with the ownership
of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value
of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or other
limitations on access to capital; overbuilding; risks associated with leverage; market illiquidity; extended vacancies of properties;
in-crease in competition, property taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental
regulation; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems;
tenant bankruptcies or other credit problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other
natural disasters; limitations on and variations in rents, including decreases in market rates for rents; investment in developments
that are not completed or that are subject to delays in completion; and changes in interest rates. To the extent that assets underlying
the Fund's investments are concentrated geographically, by property type or in certain other respects, the Fund may be subject
to certain of the foregoing risks to a greater extent. Investments by the Fund in securities of companies providing mortgage servicing
will be subject to the risks associated with refinancings and their impact on servicing rights.
In addition, if the Fund receives rental income
or income from the disposition of real property acquired as a result of a default on securities the Fund owns, the receipt of such
income may adversely affect the Fund's ability to retain its tax status as a regulated investment company because of certain income
source requirements applicable to regulated investment companies under the Code.
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REIT-Related Risk. The Fund may invest
in equity and mortgage REITs. Equity REITs invest in real estate, and mortgage REITs invest in loans secured by real estate. Investing
in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general.
Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified, and are subject
to heavy cash flow dependency, default by borrowers and self-liquidation. REITs also are subject to the possibilities of failing
to qualify for tax free pass-through of income under the Internal Revenue Code of 1986, as amended (the "Code"), and
failing to maintain their exemption from registration under the 1940 Act. Investment in REITs involves risks similar to those associated
with investing in small capitalization companies, and REITs (especially mortgage REITs) are subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate obligations can be expected to rise. Conversely, when interest
rates rise, the value of a REIT's investment in fixed rate obligations can be expected to decline. By investing in REITs, the Fund
will indirectly bear its proportionate share of the expenses of the REITs.
Risks Associated with Direct Ownership
of Real Estate Loans.
Commercial Mortgage Loans. The Fund
may invest in commercial mortgage loans. The value of the Fund's commercial mortgage loans will be influenced by the historical
rate of delinquencies and defaults experienced on the commercial mortgage loans and by the severity of loss incurred as a result
of such defaults. The factors influencing delinquencies, defaults, and loss severity include: (i) economic and real estate market
conditions by industry sectors (e.g., multifamily, retail, office, and hospitality); (ii) the terms and structure of the mortgage
loans; and (iii) any specific limits to legal and financial recourse upon a default under the terms of the mortgage loan.
Commercial mortgage loans are generally viewed
as exposing a lender to a greater risk of loss through delinquency and foreclosure than lending on the security of single-family
residences. The ability of a borrower to repay a loan secured by income-producing property typically is dependent primarily upon
the successful operation and operating income of such property (i.e., the ability of tenants to make lease payments, the ability
of a property to attract and retain tenants, and the ability of the owner to maintain the property, minimize operating expenses,
and com-ply with applicable zoning and other laws) rather than upon the existence of independent income or assets of the borrower.
Most commercial mortgage loans provide recourse only to specific assets, such as the property, and not against the borrower's other
assets or personal guarantees.
Commercial mortgage loans generally do not
fully amortize, which can necessitate a sale of the property or refinancing of the remaining "balloon" amount at or prior
to maturity of the mortgage loan. Accordingly, investors in commercial mortgage loans bear the risk that the borrower will be unable
to refinance or otherwise repay the mortgage at maturity, thereby increasing the likelihood of a default on the borrower's obligation.
Exercise of foreclosure and other remedies may involve lengthy delays and additional legal and other related expenses on top of
potentially declining property values. In certain circumstances, the creditors may also become liable upon taking title to an asset
for environmental or structural damage existing at the property.
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Subordination of Investments. Some of
the Fund's investments may be in b-notes and other subordinated loans, structurally subordinated mezzanine loans and preferred
equity interests of a direct or indirect property owning entity. These investments will be subordinated to the senior obligations
of the property or issuer, either contractually or inherently due to the nature of equity investments. Greater credit risks are
usually attached to these sub-ordinated investments than to a borrower's first mortgage or other senior obligations. In addition,
these investments may not be protected by financial or other covenants and may have limited liquidity. Adverse changes in the borrower's
financial condition and/or in general economic conditions may impair the ability of the borrower to make payments on the subordinated
investments and cause it to default more quickly with respect to such investments than with respect to the borrower's senior obligations.
In many cases, the Fund's management of its investments and its remedies with respect thereto, including the ability to foreclose
on any collateral securing such investments, will be subject to the rights of any senior creditors and, to the extent applicable,
contractual inter-creditor and/or participation agreement provisions.
Mezzanine Loans. Although not secured
by the underlying real estate, mezzanine loans are also subject to risk of subordination and share certain characteristics of subordinate
loan interests described above. As with commercial mortgage loans, repayment of a mezzanine loan is dependent on the successful
operation of the underlying commercial properties and, therefore, is subject to similar considerations and risks, including certain
of the considerations and risks described herein. Mezzanine loans may also be affected by the successful operation of other properties,
the interests in which are not pledged to secure the mezzanine loan. Mezzanine loans are not secured by interests in the underlying
commercial properties. In addition, a mezzanine lender typically has additional rights vis-à-vis the more senior lenders, including
the right to cure defaults under the mortgage loan and any senior mezzanine loan and purchase the mortgage loan and any senior
mezzanine loan, in each case under certain circumstances following a default on the mortgage loan.
B-Notes and A/B Structures. The Fund
may invest in b-notes, which investments are subordinate to the a-note portion of the same loan (which the Fund would not expect
to hold). In addition to the risks described above in Subordination of Investments, certain additional risks apply to b-note investments,
including those described herein. The b-note portion of a loan is typically small relative to the overall loan, and vis-à-vis the
a-note portion of the loan is in the first loss position. As a means to protect against the holder of the a-note from taking certain
actions or receiving certain benefits to the detriment of the holder of the b-note, the holder of the b-note often (but not always)
has the right to purchase the a-note from its holder. If available, this right may not be meaningful to the Fund. For example,
the Fund may not have the capital available to protect its b-note interest or purchasing the a-note may alter the Fund's overall
portfolio and risk/return profile to the detriment of Common Shareholders. In addition, a b-note may be in the form of a "rake
bond." A "rake bond" is a CMBS backed solely by a single promissory note secured by a mortgaged property, which
promissory note is subordinate in right of payment to one or more separate promissory notes secured by the same mortgaged property.
Bridge Financings. The Fund may invest
in bridge loans as part of its investment strategy. The Fund will bear the risk of any changes in financing markets, which may
adversely affect the ability of a borrower to refinance any bridge financings. If the borrower were unable to complete a
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refinancing, then the Fund could be left holding
an unexpected long-term investment in a junior security or that junior security might be converted to equity. The Fund may make
an investment with the intent of financing or otherwise reducing the Fund's investment shortly after the closing of such investment.
There can be no assurance that other transactions designed to reduce or leverage the Fund's investment will occur, or that terms
of such financings will be attractive when closed. If the Fund is unable to complete such an anticipated transaction, its investments
will be less diversified than intended. In addition, bridge financings may be secured by properties that are in transition or under
"lease up." There is a risk that completion of such transition or "lease up" of such properties will not occur.
In that event, the Fund may be required to take possession of the property.
Concentration Risk. The Fund will be
concentrating in companies in the real estate industry, which may include CMBS, REITs, REIT-like structures, and other securities
that are secured by, or otherwise have exposure to, real estate. The focus of the Fund's portfolio on this sector may present more
risks than if the Fund's portfolio were broadly spread over numerous sectors of the economy. A downturn in this sector (or any
sub-sectors within it) would have a larger impact on the Fund than on an investment company that does not concentrate solely in
this specific sector (or in specific sub-sectors). At times, the performance of companies in the real estate industry (or a specific
sub-sector) may lag the performance of other sectors or the broader market as a whole. Any market price movements, regulatory changes,
or economic conditions affecting CMBS, REITs, REIT-like structures, and real estate more generally, will have a significant impact
on the Fund's performance.
Credit Risk. The Fund could lose money
if the borrower, issuer or guarantor of a loan underlying a CMBS, or the counterparty to a derivatives contract, repurchase agreement
or a loan of portfolio securities, is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor
its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings. These risks
are heightened with respect to issuers of high-yield or "junk" bonds.
Pricing Risk. Daily valuations of most
of the Fund's securities are provided by a third-party pricing service. There can be no assurance that PrinREI will be able to
sell the securities at the same price as the valuations. If market conditions make it difficult to value some investments, the
Fund may value these investments using more subjective methods, such as fair value pricing. In such cases, the value determined
for an investment could be different than the value realized upon such investment's sale. Non-public or non-securities investments
will be valued on a fair-value pricing basis. In addition, the valuation of real estate generally, and of the collateral underlying
the loans in which the Fund invests in, is inherently subjective due to, among other things, the individual nature of each property,
its location, the expected future cash flows from that particular property and the valuation methodology adopted. There can be
no assurance that any such valuations obtained will accurately reflect the value of such underlying collateral.
Secondary markets may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods, which may prevent the Fund from being able to realize
full value and thus sell a security for its full valuation. This could cause a material decline in the Fund's net asset value.
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Excise Tax Risk. A regulated investment
company that fails to distribute, by the close of each calendar year, an amount at least equal to the sum of 98% of its ordinary
income for such calendar year and 98.2% of its capital gain net income for the one-year period ending on October 31 of such calendar
year, plus any shortfalls from any prior year's required distribution, is liable for a 4% excise tax on the portion of the undistributed
amounts of such income that are less than the required distributions.
Asset-Backed Securities Risks. Because
asset-backed securities may not have the benefit of a security interest in the underlying assets, asset-backed securities present
certain additional risks that are not present with mortgage-backed securities. For example, credit card receivables are generally
unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the credit cards, thereby reducing the balance due. Furthermore,
most issuers of automobile receivables permit the servicer to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be avail-able to support payments on these securities.
Payments of principal and interest on asset-backed
securities may be dependent upon the cash flow generated by the underlying assets backing the securities and, in certain cases,
may be supported by some form of credit enhancement. The degree of credit enhancement provided for each issue is generally based
on historical information respecting the level of credit risk associated with the underlying assets. Delinquency or loss in excess
of that anticipated or failure of the credit enhancement could adversely affect the return on an investment in such a security.
The value of the securities also may change because of changes in interest rates or changes in the market's perception of the creditworthiness
of the servicing agent for the loan pool, the originator of the loans or the financial institution providing the credit enhancement.
Additionally, since the deterioration of worldwide economic and liquidity conditions that became acute in 2008, asset-backed securities
have been subject to greater liquidity risk. Asset-backed securities are ultimately dependent upon payment of loans and receivables
by individuals, businesses and other borrowers, and the Fund generally has no recourse against the entity that originated the loans.
The yield characteristics of the asset-backed
securities in which the Fund may invest differ from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on asset-backed securities (usually monthly) and that principal may be
prepaid at any time because the underlying assets generally may be prepaid at any time. As a result, if the Fund purchases these
securities at a premium, a prepayment rate that is faster than expected will reduce their yield, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield. Conversely, if the Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, the yield on these
securities. Because prepayment of principal generally occurs during a period of declining interest rates, the Fund may generally
have to reinvest the proceeds of such prepayments at lower interest rates. Therefore, asset-backed
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securities may have less potential for capital
appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity.
The availability of asset-backed securities
may be affected by legislative or regulatory developments. It is possible that such developments may require the Fund to dispose
of any then-existing holdings of such securities.
Repurchase Agreement Risk. While repurchase
agreements involve certain risks not associated with direct in-vestments in debt securities, the value of the collateral underlying
the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the repurchase
agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent
that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss.
Risks Related to the Fund's Use of Leverage.
Since the holders of Common Shares pay all expenses related to the issuance of debt or use of leverage, the use of leverage through
borrowing of money, issuance of debt securities or the issuance of preferred stock for investment purposes creates risks for the
holders of Common Shares. Leverage is a speculative technique that exposes the Fund to greater risk and increased costs than if
it were not implemented. Increases and decreases in the value of the Fund's portfolio will be magnified when the Fund uses leverage.
As a result, leverage may cause greater changes in the Fund's NAV. The Fund will also have to pay interest on its borrowings or
dividends on preferred stock, if any, which may reduce the Fund's return. The leverage costs may be greater than the Fund's return
on the underlying investment. The Fund's leveraging strategy may not be successful.
If the Fund utilizes leverage in the form of
borrowing, the money borrowed for investment purposes will incur interest based on shorter-term interest rates that would be periodically
reset. So long as the Fund's portfolio provides a higher rate of return, net of expenses, than the interest rate on borrowed money,
as reset periodically, the leverage may cause the holders of Common Shares to receive a higher current rate of return than if the
Fund were not leveraged. If, however, long-term and/or short-term rates rise, the interest rate on borrowed money could exceed
the rate of return on securities held by the Fund, reducing return to the holders of Common Shares.
There is no assurance that a leveraging strategy
will be successful or that it will be used. Leverage involves risks and special considerations for Common Stockholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the Common Shares than a comparable portfolio without leverage;
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the risk that fluctuations in interest rates on borrowings or on short-term debt or in the interest or dividend rates on any debt securities or preferred shares that the Fund must pay will reduce the return to the Common Stockholders;
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the Common Shares than if the Fund were not leveraged, may result in a greater decline in the market price of the Common Shares;
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when the Fund uses financial leverage, the investment management fees payable to the Adviser and the subadvisory fees payable by the Adviser to the Subadviser will be higher than if the Fund did not use leverage. This may create a conflict of interest between the Adviser and the Subadviser, on the one hand, and the holders of Common Shares, on the other; and
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leverage may increase operating costs, which may reduce total return.
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The use of leverage will require the Fund to
segregate assets to cover its obligations (or, if the Fund borrows money or issues preferred shares, to maintain asset coverage
in conformity with the requirements of the 1940 Act). While the segregated assets will be invested in liquid securities, they may
not be used for other operational purposes. Consequently, the use of leverage may limit the Fund's flexibility and may require
that the Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Fund's
leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Certain types of
borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the short-term debt securities or preferred shares issued by the Fund. These guidelines may
impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Subadviser
does not believe that these covenants or guidelines will impede it from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies if the Fund were to utilize leverage.
Risks Associated with Swap Transactions.
The Fund may enter into interest rate, index, total return and currency swap agreements. Swap agreements are two-party contracts
under which the fund and a counterparty, such as a broker or dealer, agree to exchange the returns (or differentials in rates of
return) earned or realized on an agreed-upon underlying asset or investment over the term of the swap. The use of swap transactions
is a highly specialized activity which involves strategies and risks different from those associated with ordinary portfolio security
transactions. If the Subadviser is incorrect in its forecasts of default risks, market spreads, liquidity or other applicable factors
or events, the investment performance of the Fund would diminish compared with what it would have been if these techniques were
not used. Swaps and swap options can be used for a variety of purposes, including: to manage fund exposure to changes in interest
or foreign currency exchange rates and credit quality; as an efficient means of adjusting fund overall exposure to certain markets;
in an effort to enhance income or total return or protect the value of portfolio securities; to serve as a cash management tool;
and to adjust portfolio duration.
There are risks in the use of swaps. Swaps
could result in losses if interest or foreign currency exchange rates or credit quality changes are not correctly anticipated.
Total return swaps could result in losses if the reference index, security, or investments do not perform as anticipated. Total
return swaps involve an enhanced risk that the issuer or counterparty will fail to perform its contractual obligations. Total return
swaps may effectively add leverage to the Fund's portfolio because the Fund would be subject to investment exposure on the full
notional amount of the swap. To the extent the Fund enters into a total return swap on equity securities, the Fund will receive
the positive performance of a notional amount of such securities underlying the total return swap. In exchange, the Fund will be
obligated to pay the negative performance of such
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notional amount of securities. Therefore, the
Fund assumes the risk of a substantial decrease in the market value of the equity securities. The use of swaps may not always be
successful; using them could lower fund total return, their prices can be highly volatile, and the potential loss from the use
of swaps can exceed the fund's initial investment in such instruments. Also, the other party to a swap agreement could default
on its obligations or refuse to cash out the fund's investment at a reasonable price, which could turn an expected gain into a
loss.
Currently, certain categories of interest rate
swaps are subject to mandatory clearing, and more are expected to be cleared in the future. The counterparty risk for cleared derivatives
is generally expected to be lower than for uncleared over-the-counter derivative transactions as each party to a transaction looks
only to the central clearing house for performance of obligations under the transaction. However, there can be no assurance that
a clearing house, or its members, will satisfy the clearing house's obligations to the fund or that the fund's use of swaps will
be advantageous.
Preferred Stock Risk. The Fund may have
exposure to preferred stocks. In addition to credit risk, investments in preferred stocks involve certain other risks. Certain
preferred stocks contain provisions that allow an issuer under certain conditions to skip distributions (in the case of "non-cumulative" preferred stocks) or defer distributions (in the case of "cumulative" preferred stocks). If the Fund
owns a preferred stock that is deferring its distributions, the Fund may be required to report income for tax purposes while it
is not receiving income on this position. Preferred stocks often contain provisions that allow for redemption in the event of certain
tax or legal changes or at the issuers' call. In the event of redemption, the Fund may not be able to reinvest the proceeds at
comparable rates of return. Preferred stocks typically do not provide any voting rights, except in cases when dividends are in
arrears beyond a certain time period, which varies by issue. Preferred stocks are subordinated to bonds and other debt instruments
in a company's capital structure in terms of priority to corporate income and liquidation payments, and therefore will be subject
to greater credit risk than those debt instruments. Preferred stocks may be significantly less liquid than many other securities,
such as U.S. government securities, corporate debt or common stock.
Foreign Securities Risk. Investments
in securities of non-U.S. issuers will be subject to risks not usually associated with owning securities of U.S. issuers. These
risks can include fluctuations in foreign currencies, foreign currency exchange controls, social, political and economic instability,
differences in securities regulation and trading, expropriation or nationalization of assets, and foreign taxation issues. In addition,
changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation
or depreciation of the Fund's securities. It may also be more difficult to obtain and enforce a judgment against a non-U.S. issuer.
Foreign investments made by the Fund must be made in compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments. The risks of foreign investing may be magnified for investments in issuers located
in emerging market countries.
To the extent the Fund invests in depositary
receipts, the Fund will be subject to many of the same risks as when investing directly in non-U.S. securities. The holder of an
unsponsored depositary receipt may have limited voting rights and may not receive as much information about the issuer of the underlying
securities as would the holder of a sponsored depositary receipt.
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Emerging Markets Risk. The Fund may
invest in securities of issuers located in emerging markets. Emerging markets issuers are those (i) whose securities are traded
principally on a stock exchange or over-the-counter in an emerging market country, (ii) that are organized under the laws of and
have a principal office(s) in an emerging market country or (iii) that have at least 50% of their revenues, profits or assets in
emerging market countries. Emerging market countries include any country not included in the MSCI World Index, a free float-adjusted
market capitalization weighted index that is designed to measure the equity market performance of developed markets. Risks of investing
in emerging markets issuers include: smaller market capitalization of securities markets, which may suffer periods of relative
illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment
income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political
crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation
of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation
rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Certain emerging markets also may face other significant internal or external risks, including a heightened risk of war, and ethnic,
religious and racial conflicts. In addition, governments in many emerging market countries participate to a significant degree
in their economies and securities markets, which may impair investment and economic growth, and which may in turn diminish the
value of the companies in those markets.
Foreign Currency Risk. Investments in
securities that trade in and receive revenues in foreign currencies are subject to the risk that those currencies will decline
in value relative to the U.S. dollar. Currency rates in foreign countries may fluctuate significantly over short periods of time.
A decline in the value of foreign currencies relative to the U.S. dollar will reduce the value of securities held by the Fund and
denominated in those currencies. Some foreign governments levy withholding taxes against dividend and interest income. Although
in some countries portions of these taxes are recoverable, any amounts not recovered will reduce the income received by the Fund,
and may reduce distributions to common shareholders. These risks are generally heightened for investments in emerging market countries.
Small and Mid-Capitalization Stock Risk.
The Fund may invest in companies of any market capitalization. The Fund considers small companies to be those with a market capitalization
up to $2 billion and medium-sized companies to be those with a market capitalization between $2 billion and $10 billion. Smaller
and medium-sized company stocks may be more volatile than, and perform differently from, larger company stocks. There may be less
trading in the stock of a smaller or medium-sized company, which means that buy and sell transactions in that stock could have
a larger impact on the stock's price than is the case with larger company stocks. Smaller and medium-sized companies may have fewer
business lines; changes in any one line of business, therefore, may have a greater impact on a smaller or medium-sized company's
stock price than is the case for a larger company. As a result, the purchase or sale of more than a limited number of shares of
a small or medium-sized company may affect its market price. The Fund may need a considerable amount of time to purchase or sell
its positions in these securities. In addition, smaller or medium-sized company stocks may not be well known to the investing public
and may held primarily by insiders or institutional investors.
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Convertible Securities Risk. The market
value of convertible securities tends to fall when prevailing interest rates rise. The value of convertible securities also tends
to change whenever the market value of the underlying common or preferred stock fluctuates. Convertible securities tend to be of
lower credit quality.
Risks Associated with Futures Contracts.
If futures are used for hedging purposes, there can be no guarantee that there will be a correlation between price movements in
the futures contract and in the underlying financial instruments that are being hedged. This could result from differences between
the financial instruments being hedged and the financial instruments underlying the standard contracts available for trading. In
addition, price movements of futures contracts may not correlate perfectly with price movements of the financial instruments underlying
the futures contracts due to certain market distortions. Successful use of futures by the Fund also is subject to PrinREI's ability
to predict correctly movements in the direction of the relevant market. For example, if the Fund uses futures to hedge against
the possibility of a decline in the value of a currency in which certain portfolio securities are denominated, and the value of
that currency increases instead, the Fund will lose part or all of the benefit of the increased value of the securities denominated
in the currency which it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances
the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Fund may have to
sell such securities at a time when it may be disadvantageous to do so.
Risks Associated with Forward Currency Contracts.
PrinREI's decision whether to enter into forward foreign currency contracts will depend in part on its view regarding liquidity,
market conditions, and the direction and amount in which exchange rates are likely to move. The forecasting of movements in exchange
rates is extremely difficult, so that it is highly uncertain whether a currency management strategy, if undertaken, would be success-ful.
To the extent that PrinREI's view regarding future exchange rates proves to have been incorrect, the Fund may realize losses on
its foreign currency transactions. Even if a foreign currency hedge is effective in protecting the Fund from losses resulting from
unfavorable changes in exchange rates between the U.S. dollar and foreign currencies, it also would limit the gains which might
be realized by the Fund from favorable changes in exchange rates.
The Fund may also utilize forward rate contracts.
Under forward rate contracts, the buyer locks in an interest rate at a future settlement date. If the interest rate on the settlement
date exceeds the lock rate, the buyer pays the seller the difference between the two rates. If the lock rate exceeds the interest
rate on the settlement date, the seller pays the buyer the difference between the two rates. If the other party to a forward rate
contract defaults, the Fund's risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive
that is in excess of collateral posted by the Fund's counterparty (whether a clearing corporation in the case of exchange-traded
instruments or another third party in the case of over-the-counter instruments) in respect of such liability. If there is a default
by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction.
These instruments are traded in the over-the-counter market.
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Certain currency derivatives are subject to
regulation under the Dodd-Frank Act. Potential rulemaking with respect to such derivatives could affect the cost of such derivatives
or otherwise restrict the fund's ability to effectively use currency derivatives.
Risks Associated with Covered Calls.
The Fund may write covered call options, subject to the limitation that no more than 50% of the Fund's assets attributable to equity
securities will be subject to covered call options at any given time. As the writer of a covered call option, during the option's
life the Fund gives up the opportunity to profit from increases in the market value of the security covering the call option above
the sum of the premium and the strike price of the call, but the Fund retains the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer
of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction to terminate
its obligation under the option and must deliver the underlying security at the exercise price. There can be no assurance that
a liquid market will exist when the Fund seeks to close out an option prior to exercise. If trading were suspended in an option,
the Fund would not be able to close out the option position. If the Fund were unable to close out a covered call option that it
had written on a security, the Fund would not be able to sell the underlying security unless the option expired without exercise.
Portfolio Turnover Risk. The techniques
and strategies contemplated by the Fund may result in a high degree of portfolio turnover. The Fund cannot accurately predict its
securities portfolio turnover rate, but anticipates that its annual portfolio turnover rate will not exceed 100% under normal market
conditions, although it could be materially higher under certain conditions. Higher portfolio turnover rates could result in corresponding
increases in brokerage commissions and generate short-term capital gains taxable as ordinary income.
Market Price of Common Shares. The shares
of closed-end management investment companies often trade at a discount from their NAV, and the Fund's common shares may likewise
trade at a discount from NAV. The trading price of the Fund's common shares may be less than the public offering price. The returns
earned by common shareholders who sell their common shares below NAV will be reduced.
Risks from Non-Diversified Status. As
a non-diversified investment company under the 1940 Act, and the rules and regulations thereunder, the Fund may invest a greater
portion of its assets in a more limited number of issuers than a diversified fund. The Fund will participate in a limited number
of investments and all or a substantial majority of its investment portfolio may be in a particular bond class. As a result, the
Fund's investment portfolio could have significant investments in a particular issuer or bond class. An investment in the Fund
may, under certain circumstances, present greater risk to an investor than an investment in a diversified company because changes
in the financial condition or market assessment of a single issuer may cause greater fluctuations in the value of the Common Shares.
While the investment limitations of the Fund restrict investments in any specific CMBS bond to a maximum of 10% of the Fund's total
assets, losses incurred on an investment of this size could still have a significant impact on overall Fund performance. The Fund
intends to comply with the diversification requirements of the Code applicable to regulated investment companies.
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Management Risk. The Fund is subject
to management risk because it is an actively managed portfolio. ALPS, PrinREI and the individual portfolio managers will apply
investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will
produce the desired results.
Capital Market Risk. Global financial
markets and economic conditions are volatile due to a variety of factors, including significant write-offs in the financial services
sector, and therefore companies may have difficulty raising capital. In particular, as a result of concerns about the general stability
of financial markets and specifically the solvency of lending counterparties, the cost of raising capital from the credit markets
generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards,
re-fused to refinance debt on existing terms or at all and reduced, or in some cases ceased to provide, funding to borrowers. In
addition, lending counterparties under existing revolving credit facilities and other debt instruments may be unwilling or unable
to meet their funding obligations. Due to these factors, companies may be un-able to obtain new debt or equity financing on acceptable
terms or at all. If funding is not available when needed, or is available only on unfavorable terms, companies may not be able
to meet their obligations as they come due.
Anti-Takeover Provisions. The Fund's
declaration of trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of the Board of Trustees. In certain circumstances, these provisions might also
inhibit the ability of shareholders to sell their shares at a premium over prevailing market prices.
Derivatives Risks. The Fund may enter
into derivatives. Generally, a derivative is a financial contract the value of which depends upon, or is derived from, the value
of an underlying asset, reference rate, or index, and may relate to individual debt or equity instruments, interest rates, currencies
or currency exchange rates, commodities, related indexes, and other assets. Derivatives can be volatile and involve various types
and degrees of risk, depending upon the characteristics of a particular derivative. Derivatives may entail investment exposures
that are greater than their cost would suggest, meaning that a small investment in a derivative could have a large potential impact
on the performance of a fund. The fund could experience a loss if derivatives do not perform as anticipated, if they are not correlated
with the performance of other investments which they are used to hedge or if the fund is unable to liquidate a position because
of an illiquid secondary market. The market for many derivatives is, or can suddenly become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices of derivatives. When used for speculative purposes, derivatives
will produce enhanced investment exposure, which will magnify gains and losses. Certain derivatives transactions may give rise
to a form of leverage. The use of leverage may cause a fund to liquidate portfolio positions when it may not be advantageous to
do so to satisfy its obligations or to meet segregation requirements. Leverage may cause a fund to be more volatile than if it
had not been leveraged. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the
Fund's portfolio securities. Further, using derivatives may include the risk of mispricing or improper valuation of derivatives
and the inability of derivatives to correlate perfectly, or at all, with the value of the assets, reference rates or indexes they
are designed to closely track. The Fund also will be subject to credit risk with respect to the counterparties to the derivatives
contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a
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derivative contract due to financial difficulties,
the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization
proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
Regulatory developments affecting the exchange-traded
and OTC derivatives markets may impair a Fund's ability to manage or hedge its investment portfolio through the use of derivatives.
In particular, in October 2020, the SEC adopted a final rule related to the use of derivatives, short sales, reverse repurchase
agreements and certain other transactions by registered investment companies that will rescind and withdraw the guidance of the
SEC and its staff regarding asset segregation and cover transactions reflected in the Funds' asset segregation and cover practices
discussed herein. The final rule requires Funds to trade derivatives and other transactions that create future payment or delivery
obligations (except reverse repurchase agreements and similar financing transactions) subject to a value-at-risk ("VaR")
leverage limit, certain derivatives risk management program and reporting requirements. Generally, these requirements apply unless
a Fund qualifies as a "limited derivatives user," as defined in the final rule. Under the final rule, when a Fund trades
reverse repurchase agreements or similar financing transactions, including certain tender option bonds, it needs to aggregate the
amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount
of any other senior securities representing indebtedness when calculating the Fund's asset coverage ratio or treat all such transactions
as derivatives transactions. Reverse repurchase agreements or similar financing transactions aggregated with other indebtedness
do not need to be included in the calculation of whether a Fund is a limited derivatives user, but for funds subject to the VaR
testing, reverse repurchase agreements and similar financing transactions must be included for purposes of such testing whether
treated as derivatives transactions or not. The SEC also provided guidance in connection with the new rule regarding use of securities
lending collateral that may limit the Funds' securities lending activities. Compliance with these new requirements will be required
after an eighteen-month transition period. Following the compliance date, these requirements may limit the ability of a Fund to
use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These
requirements may increase the cost of a Fund's investments and cost of doing business, which could adversely affect investors.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the rules promulgated thereunder
may limit the ability of a Fund to enter into one or more exchange-traded or OTC derivatives transactions.
Market Disruption and Geopolitical Risk.
The value of your investment in the Fund is based on the values of the Fund's investments, which may change due to economic and
other events that affect markets generally, as well as those that affect particular regions, countries, industries, companies or
governments. These movements, sometimes called volatility, may be greater or less depending on the types of securities the Fund
owns and the markets in which the securities trade. The increasing interconnectivity between global economies and financial markets
increases the likelihood that events or conditions in one region or financial market may adversely impact issuers in a different
country, region or financial market. Securities in the Fund's portfolio may underperform due to inflation (or expectations for
inflation), interest rates, global demand for particular products or resources, natural disasters, pandemics, epidemics, terrorism,
regulatory events and governmental or quasi-governmental actions. The occurrence of global events similar to those in recent years,
such as terrorist attacks around the world, natural disasters, social and
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political discord or debt crises and downgrades,
among others, may result in market volatility and may have long term effects on both the U.S. and global financial markets. The
occurrence of such events may be sudden and unexpected, and it is difficult to predict when similar events affecting the U.S. or
global financial markets may occur, the effects that such events may have and the duration of those effects. Any such event(s)
could have a significant adverse impact on the value, liquidity and risk profile of the Fund's portfolio, as well as its ability
to sell securities to meet redemptions. There is a risk that you may lose money by investing in the Fund.
Social, political, economic and other conditions
and events, such as natural disasters, health emergencies (e.g., epidemics and pandemics), terrorism, conflicts and social unrest,
may occur and could significantly impact issuers, industries, governments and other systems, including the financial markets. As
global systems, economies and financial markets are increasingly interconnected, events that once had only local impact are now
more likely to have regional or even global effects. Events that occur in one country, region or financial market will, more frequently,
adversely impact issuers in other countries, regions or markets. These impacts can be exacerbated by failures of governments and
societies to adequately respond to an emerging event or threat. These types of events quickly and significantly impact markets
in the U.S. and across the globe leading to extreme market volatility and disruption. The extent and nature of the impact on supply
chains or economies and markets from these events is unknown, particularly if a health emergency or other similar event, such as
the recent COVID-19 (the "Coronavirus") outbreak, persists for an extended period of time. Social, political, economic
and other conditions and events, such as natural disasters, health emergencies (e.g., epidemics and pandemics), terrorism, conflicts
and social unrest, could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines,
and generally have a significant impact on the economies and financial markets and the Adviser's investment advisory activities
and services of other service providers, which in turn could adversely affect the Fund's investments and other operations. The
value of the Fund's investment may decrease as a result of such events, particularly if these events adversely impact the operations
and effectiveness of the Adviser or key service providers or if these events disrupt systems and processes necessary or beneficial
to the investment advisory or other activities on behalf the Fund.
Legislation, Policy and Regulatory Risk.
At any time after the date of this report, legislation or additional regulations may be enacted that could negatively affect the
assets of the Fund or the issuers of such assets. Recent changes in the U.S. political landscape and changing approaches to regulation
may have a negative impact on the entities and/or securities in which the Fund invests. Legislation or regulation may also change
the way in which the Fund itself is regulated. New or amended regulations may be imposed by the Commodity Futures Trading Commission
("CFTC"), the SEC, the Board of Governors of the Federal Reserve System (the "Federal Reserve") or other financial
regulators, other governmental regulatory authorities or self-regulatory organizations that supervise the financial markets that
could adversely affect the Fund. In particular, these agencies are empowered to promulgate a variety of new rules pursuant to financial
reform legislation in the United States. There can be no assurance that future legislation, regulation or deregulation will not
have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objective. The
Fund also may be adversely affected by changes in the enforcement or interpretation of existing statutes and rules by these governmental
agencies.
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The current U.S. presidential administration
has expressed interest in altering the regulation of U.S. financial markets, including the amendment or repeal of certain regulations
relating to the Fund. The U.S. presidential administration has also instituted or proposed changes in trade policies that include
the negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions
on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries
that the Fund invests. The new tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries,
and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. It is not possible
to predict the actions that will be taken, if any, or, if taken, their effect on the economy, securities markets or the financial
stability of the United States or globally.
LIBOR Discontinuance or Unavailability Risk.
The London InterBank Offered Rate ("LIBOR") is intended to represent the rate at which contributing banks may obtain
short-term borrowings from each other in the London interbank market. The regulatory authority that oversees financial services
firms and financial markets in the U.K. has announced that, after the end of 2021, it would no longer persuade or compel contributing
banks to make rate submissions for purposes of determining the LIBOR rate. As a result, it is possible that commencing in 2022,
LIBOR may no longer be available or no longer deemed an appropriate reference rate upon which to determine the interest rate on
or impacting certain loans, notes, derivatives and other instruments or investments comprising some or all of a Fund's portfolio.
In light of this eventuality, public and private sector industry initiatives are currently underway to identify new or alternative
reference rates to be used in place of LIBOR. There is no assurance that the composition or characteristics of any such alternative
reference rate will be similar to or produce the same value or economic equivalence as LIBOR or that it will have the same volume
or liquidity as did LIBOR prior to its discontinuance or unavailability, which may affect the value or liquidity or return on certain
of a Fund's investments and result in costs incurred in connection with closing out positions and entering into new trades.
Neither the effect of the LIBOR transition
process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in
markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While
some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative
rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies
to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty
regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In
addition, a liquid market for newly-issued instruments that use a reference rate other than LIBOR still may be developing. There
may also be challenges for the Fund to enter into hedging transactions against such newly-issued instruments until a market for
such hedging transactions develops. All of the aforementioned may adversely affect the Fund's performance or net asset value.
Fundamental Investment Restrictions
The following investment restrictions of the
Fund are designated as fundamental policies and as such cannot be changed without the approval of the holders of a majority of
the Fund's outstanding voting securities, which as used in this annual report means the lesser of (a) 67% of
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the shares of the Fund present or represented
by proxy at a meeting if the holders of more than 50% of the outstanding shares are present or represented at the meeting or (b)
more than 50% of outstanding shares of the Fund. As a matter of fundamental policy the Fund:
|
(1)
|
Will concentrate its investments in the real estate industry, which may include CMBS, REITs, REIT-like structures, and other securities that are secured by or otherwise have exposure to, real estate;
|
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(2)
|
May not borrow money, except as permitted by (a) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction, or (b) exemptive or other relief or permission from the SEC, SEC staff or other authority;
|
|
(3)
|
May not issue senior securities, as defined in the 1940 Act, other than (a) preferred shares which immediately after issuance will have asset coverage of at least 200%, (b) indebtedness which immediately after issuance will have asset coverage of at least 300% or (c) borrowings permitted by investment restriction (2) above;
|
|
(4)
|
May not purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities); provided that the purchase of investment assets with the proceeds of a permitted borrowing or securities offering will not be deemed to be the purchase of securities on margin;
|
|
(5)
|
May not underwrite securities issued by other persons, except insofar as it may technically be deemed to be an underwriter under the Securities Act in selling or disposing of a portfolio investment;
|
|
(6)
|
May make loans, only as permitted under the 1940 Act, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time;
|
|
(7)
|
May not purchase or sell real estate, although it may purchase and sell securities which are secured by interests in real estate and securities of issuers which invest or deal in real estate; provided that the Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities; and
|
|
(8)
|
May not purchase or sell commodities, except that the Fund may purchase and sell futures contracts and options, may enter into foreign exchange contracts and may enter into swap agreements and other financial transactions not requiring the delivery of physical commodities.
|
The Fund may borrow money as a temporary measure
for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.
Principal Real Estate Income Fund
|
Privacy Policy
|
October 31, 2020 (Unaudited)
FACTS
|
WHAT DOES PRINCIPAL REAL ESTATE INCOME FUND DO WITH YOUR PERSONAL INFORMATION?
|
WHY?
|
Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do.
|
WHAT?
|
The types of personal information we collect
and share depend on the product or service you have with us. This information can include:
·
Social Security number
·
Assets
·
Retirement Assets
·
Transaction History
·
Checking Account Information
·
Purchase History
·
Account Balances
·
Account Transactions
·
Wire Transfer Instructions
When you are no longer our customer,
we continue to share your information as described in this notice.
|
HOW?
|
All financial companies need to share customers' personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers' personal information; the reasons Principal Real Estate Income Fund chooses to share; and whether you can limit this sharing.
|
REASONS WE CAN SHARE YOUR
PERSONAL INFORMATION
|
DOES PRINCIPAL REAL ESTATE INCOME FUND SHARE?
|
CAN YOU LIMIT
THIS SHARING?
|
For our everyday business purposes –
such as to process your transactions, maintain your account(s),
respond to court orders and legal investigations, or report to credit bureaus
|
Yes
|
No
|
For our marketing purposes –
to offer our products and services to you
|
No
|
We don't share
|
For joint marketing with other financial companies
|
No
|
We don't share
|
For our affiliates' everyday business purposes –
information about your transactions and experiences
|
No
|
We don't share
|
For our affiliates' everyday business purposes –
information about your creditworthiness
|
No
|
We don't share
|
For non-affiliates to market to you
|
No
|
We don't share
|
QUESTIONS?
|
Call 1-855-838-9485
|
Annual Report | October 31, 2020
|
73
|
Principal Real Estate Income Fund
|
Privacy Policy
|
October 31, 2020 (Unaudited)
WHO WE ARE
|
Who is providing this notice?
|
Principal Real Estate Income Fund
|
WHAT WE DO
|
How does Principal Real Estate Income protect my personal information?
|
To protect your personal information from unauthorized access and
use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.
Our service providers are held accountable for adhering to strict
policies and procedures to prevent any misuse of your nonpublic personal information.
|
How does Principal Real Estate Income collect my personal information?
|
We collect your personal information, for example, when you
· Open
an account
· Provide
account information
· Give
us your contact information
· Make
deposits or withdrawals from your account
· Make
a wire transfer
· Tell
us where to send the money
· Tells
us who receives the money
· Show
your government-issued ID
· Show
your driver's license
We also collect your personal information from other companies.
|
Why can’t I limit all sharing?
|
Federal law gives you the right to limit only:
·
Sharing for affiliates' everyday business purposes – information about your creditworthiness
·
Affiliates from using your information to market to you
·
Sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights
to limit sharing.
|
Principal Real Estate Income Fund
|
Privacy Policy
|
October 31, 2020 (Unaudited)
DEFINITIONS
|
Affiliates
|
Companies related by common ownership or control. They can be financial
and nonfinancial companies.
·
Principal Real Estate Income Fund does not share with our affiliates for marketing purposes.
|
Non-affiliates
|
Companies not related by common ownership or control. They can be
financial and nonfinancial companies.
·
Principal Real Estate Income Fund does not share with nonaffiliates so they can market to you.
|
Joint marketing
|
A formal agreement between nonaffiliated financial companies that
together market financial products or services to you.
·
Principal Real Estate Income Fund does not jointly market.
|
Annual Report | October 31, 2020
|
75
|