Performance Overview | |
| 2 | |
Report of Independent Registered Public Accounting Firm | |
| 10 | |
Statement of Investments | |
| 11 | |
Statement of Assets and Liabilities | |
| 17 | |
Statement of Operations | |
| 18 | |
Statements of Changes in Net Assets | |
| 19 | |
Statement of Cash Flows | |
| 20 | |
Financial Highlights | |
| 22 | |
Notes to Financial Statements | |
| 25 | |
Dividend Reinvestment Plan | |
| 37 | |
Approval of Investment Advisory and Sub-Advisory Agreements | |
| 39 | |
Trustees & Officers | |
| 42 | |
Additional Information | |
| | |
Portfolio holdings | |
| 50 | |
Proxy voting | |
| 50 | |
Section 19(a) notices | |
| 50 | |
Unaudited tax information | |
| 51 | |
Licensing agreement | |
| 51 | |
Custodian and transfer agent | |
| 51 | |
Legal counsel | |
| 51 | |
Independent registered public accounting firm | |
| 51 | |
Summary of Updated Information Regarding the Fund | |
| 52 | |
Privacy Policy | |
| 77 | |
www.principalcef.com
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
INVESTMENT
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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.
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).
PERFORMANCE
OVERVIEW
Principal
Real Estate Income Fund (“PGZ” or the “Fund”) was launched June 25, 2013. As of October 31, 2022 the Fund was
65.25% allocated to commercial mortgage backed securities (“CMBS”) and 31.82% in U.S. and International real estate securities,
primarily real estate investment trusts (“REITs”). For the 12-month period ended October 31, 2022, the Fund delivered a net
return, at market price, of -24.29%, assuming dividends are reinvested back into the Fund, based on the closing share price of $10.74
on October 31, 2022. This compares to the return of the S&P 500® Index, over the same time-period, of -14.61% assuming dividends
are reinvested into the index. This also compares to the return of the Barclays U.S. Aggregate Bond Index of -15.68%.
The
October 31, 2022 closing market price of $10.74 represented a 16.09% discount to the Fund’s Net Asset Value (“NAV”).
This compares to an average 2.32% discount for equity real estate closed-end funds and a 3.54% discount for mortgage-backed securities
closed-end funds (source: Bloomberg).
Based
on NAV, the Fund returned -21.36%, including dividends, for the 12-month period ended October 31, 2022. The theme that dominated the
market during this period was inflation spiking during the first six months of 2022 to a peak of over 9% in June and the Fed’s
rapid response of a 50bps hike in May followed by three 75bps hikes in June, July, and September with the expectations for another 75bps
hike in November. Inflation was already becoming a major issue for consumers in the U.S. heading into the period, but the Russian invasion
added higher oil and gasoline prices to the list of concerns. The pressures of rising wages and prices resulted in core inflation increasing
at the highest rate in 40 years during the period. The Fed’s response was also historic as the move in Fed Funds from 0.25% to
3.25% was the fastest and steepest move over the past 35 years. The market responses to these events were violent as 10-year interest
rates were driven higher by 275bps to a peak of 4.25% late in the period, CMBS credit spreads gapping materially wider and an even stronger
sell-off in REIT prices. The market reaction was especially reflected in market volatility. During the period, VIX averaged 25 and spiked
from below 20 to the mid-high 30’s five times over 30-day periods with a peak of 36.5 in early March. VIX ended the period at 26.
This strong market response reflected the consensus that the only way the Fed succeeds in bringing inflation back to their target is
to put the U.S. economy into a recession.
Commercial
real estate, including CMBS, was one of the asset classes most impacted by the economic shut down associated with the nation’s
response to COVID-19 and most impacted by the distribution of multiple vaccines that helped drive the re-opening of the economy.
Hotel and retail properties that were basically shut down due to COVID-19 and have since reopened have benefited the most from the
resumption of leisure and business travel and consumers back out shopping. These were the property types that were most under stress
with CMBS loan delinquencies peaking in July 2020 at 25% for hotels and 15% for retail. As of March 31, 2022, delinquencies on
hotels and retail were 10% and 7% respectively. CMBS delinquencies have been trending lower as borrowers who were granted
forbearance by the special servicers to get them to the other side of COVID-19 have brought loans current and the most distressed
loans have started to be liquidated through foreclosure. The pace of new defaults has slowed materially as well, as borrowers who
were able to make it through the crisis were in a better position with the re- opening of the economy starting sooner than expected.
This positive change in fundamental performance and market sentiment over the past 12 months is now being overshadowed by negative
market sentiment on the outlook for the economy.
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
Global
equity markets have experienced a broad-based sell-off over the last 12 months, sparked by inflation concerns, sharply higher bond yields,
more hawkish than anticipated central bank rhetoric, and geopolitical concerns (Russia/Ukraine conflict). Over the last 12 months, there
has been quite a bit of volatility, with false dawn rallies on hopes of peaking inflation being dashed by continued hawkish Fed rhetoric
on continued high inflation readings. Global REITs have declined 24% during this time frame, with all sectors in the red. More defensive
self-storage and net lease stocks were top performers, due to investors’ flight to safety on recession fears. Hotels have also
benefited from leisure demand and better than expected business travel. On the other end, office fundamentals continue to be pressured
by persistent work from home trends. The apartments sector was also weak, dragged by West Coast landlords on concerns over slowing technology
employment trends. Europe was the worst regional performer, hurt by the outbreak of conflict in the Ukraine and currency headwinds. The
UK’s misjudged debt- financed tax cut plan in the 3rd quarter further roiled investors. The Americas performed best, supported
by private market transaction activity in the U.S. Asia lagged the Americas but was supported by reduced social distancing and travel
restrictions.
CMBS
The
CMBS holdings within the Fund returned -6.16% for the 12 months ended October 31, 2022. The main drivers of returns for the period were
wider AAA CMBS spreads, steepening of the credit curve, material increases in interest rates and the shorter duration and higher yield
profile of the portfolio. Credit spreads came under pressure as economic growth concerns and recession fears became reality as the Fed
reacted swiftly to inflation spiking during the summer. Bond fund outflows also pressured credit spreads as selling overwhelmed demand
across the fixed income market. The uncertainty around how different markets and property types would recover from the pandemic has now
been replaced with the uncertainty on how markets and property types will be impacted by a recession. The current capital markets environment
makes refinancing a maturing loan much more difficult for borrowers which could lead to loans being extended and exposed to potential
losses. Longer term uncertainty on office fundamentals in what has become a persistent work-from-home environment has also weighed on
credit spreads. These changes have brought concerns about systematic risk back into the market which is driving loss expectations and
credit spreads higher.
For
the 10-month period ending October 31st, 2022 AAA spreads widened 140-145bps, AA spreads widened 160-165bps, A spreads widened
230-235bps, BBB- spreads widened 350-360bps and BB spreads widened over 400bps in response to the material change in market
sentiment and higher interest rates. According to Trepp, CMBS delinquencies peaked June 2020 at just over 10.3% and has since
improved most every month since, ending the period at 3.0% driven by the continued recovery of commercial real estate
fundamentals post the pandemic. The extreme risk-off reaction by the market during a time where commercial real estate fundamentals
have stabilized does confirm the market expectation is now a recession in 2023 which will result in higher loan defaults and
eventually higher losses than what were expected at the beginning of the period.
Annual Report | October 31, 2022 | 3 |
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
The
performance of the CMBS holdings within the Fund reflects this dramatic turnaround in market sentiment from the optimistic outlook for
real estate after recovering from the impact of the pandemic on demand for space. The near-term direction of CMBS prices is going to
be driven by broader risk sentiment as the Fed looks to walk the thin line between slowing down the economy to fight inflation and pushing
the economy into a recession. The longer term impact of a potential recession on CMBS credit will be determined by how long the recession
lasts and ultimately how it impacts employment and potential job losses.
GLOBAL
REAL ESTATE SECURITIES
The
global real estate securities holdings within the Fund returned approximately -26.5%, during the trailing 12 months ending October 31,
2022.
On
an absolute basis, our portfolio’s heavier exposures were detractors given most sectors were in the red during the year. Our global
industrial exposure in the U.S., Australia, UK, and a Japan REIT was a main detractor, as the low cap rate sector has been pressured
by rising yields as well as concerns on future demand. Our portfolio weight in U.S. and German multi-family residential detracted. In
the U.S. our exposure to west coast landlords was detractive as there were concerns over slowing technology employment trends, while
Germany has been pressured by the Russia/Ukraine fallout’s impact on the region. Our U.S. healthcare exposure to senior housing
was also a drag on total returns, as occupancy hasn’t recovered as much as expected.
Concern
over inflation persistence has forced the hand of central banks around the world to taper and embark on rate hikes that could eventually
trigger a recession. For now, most central banks appear willing to tolerate the potential recessionary costs of taming inflation, and
there are few indications of an imminent dovish pivot. In some regions, such as Europe, macro indicators are already starting to roll
over, though U.S. data remains robust and not yet suggestive of an imminent recession. Meanwhile, other factors that have clouded the
macro outlook remain unresolved. The conflict in Ukraine looks set to be a protracted one, with rising risk of escalation as Putin looks
increasingly backed into a corner. In China, the zero tolerance COVID policy remains a drag on growth although the government is taking
more concerted easing measures to stem the property market crisis.
Uncertainty
over the trajectory of central bank rate hikes has weighed heavily on both broader equity markets and REITs year-to-date, as
investors have increased their discount rate assumptions for valuing stocks, resulting in a multiple-compression-driven unwind in
equity markets. While it may still be too early to call time on a peaking out of central bank rate hike momentum, some encouraging
signs that we are nearer to the end are starting to emerge. Yield curves are inverting and key measures of forward inflation
expectations are keeling off sharply as central bank credibility is reasserted. More central banks have started to skew dovish
including the RBA, the Bank of Canada and even the ECB, suggesting that the focus is incrementally shifting from inflation to
growth. As highlighted in previous outlooks, the factors pushing up inflation are a mix of both transitory and structural ones.
While the structural forces could linger, we expect the transitory forces to abate somewhat as the reopening trajectory
around the world continues, easing supply chain constraints.
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
Moving
into the later stages of the rate hike cycle, investor attention is likely to shift incrementally away from interest rates and toward
earnings sustainability as growth concerns move to the forefront. To the extent that the next few sets of inflation data and U.S. labor
market tightness start to abate, this could provide support to rate sensitive stocks that have lagged year-to-date as the market starts
to anticipate more wriggle room for the Fed to taper the magnitude of subsequent rate hikes. REITs have tended to perform better relative
to equities in the later stages of the rate hike cycle with their relative outperformance becoming more marked as rates peak and fall.
Today, global REITs look cheap against physical real estate. The staggered nature of REIT leases over multiple years should help insulate
against a weaker economic outlook. Meanwhile, many REIT leases are structured with annual rent escalations or cost pass throughs that
mitigate against rising cost pressures.
What
has become clearer since the beginning of the year is that central bank determination to curb inflation is likely to cause a meaningful
economic slowdown, if not a recession, potentially by next year. REITs have historically functioned well as a late cycle defensive hedge
and hiding place during periods of uncertainty. We would expect this time to be no different. Admittedly, there remain some risks that
could change this outcome, not least the conflict in Ukraine further exacerbating the tightness in commodity supply and driving prices
higher, creating upside risks to inflation and even more downside risks for growth. This could trigger an even more unrelentless pace
of central bank rate hikes to ward off inflation. Coming in an environment where growth is already challenged, this stagflationary scenario
would negatively impact not just property stocks but broader risk assets.
Our
portfolio construction process remains focused on bottom-up stock selection. At the same time, we are mindful of potential swings in
sentiment driven by dynamic macro news flow that can drive style shifts that cause performance leadership to flip between different groups
of stocks. We continue to maintain a core of select structural growth stocks which we believe have pricing power given strong demand
supply fundamentals and which should be well positioned to weather any growth slowdown driven by overzealous central bank rate hikes
or other geopolitical concerns.
The
Fund intends to make regular monthly distributions to stockholders at a constant and fixed (but not guaranteed) rate. The Board of Trustees
approve the distribution and may adjust it from time to time. The monthly distribution amount paid from November 1, 2021 to January 31,
2022 was $0.0875 per share. The Fund paid $0.10 per share monthly between February 1, 2022 and April 30, 2022. The Fund paid $0.105 per
share monthly between May 1, 2022 and October 31, 2022.
At
times, to maintain a stable level of distributions, the Fund may pay out less than all of its net investment income or pay out accumulated
undistributed income, or return of capital, in addition to current net investment income. There is no guarantee that the Fund’s
current distribution policy will reduce or eliminate the Fund’s market price discount to its net asset value per share and the
Fund’s trustees have no fiduciary duty to take action, or to consider taking any action, to narrow any such discount. The distribution
policy may be changed or discontinued without notice.
Annual Report | October 31, 2022 | 5 |
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
References:
The
Premium/Discount is the amount (stated in dollars or percent) by which the selling or purchase price of a fund is greater than (premium)
or less than (discount) its face amount/value or net asset value (NAV).
Duration
is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration
is expressed as a number of years. The duration number is a calculation involving present value, yield, coupon, final maturity and call
features. The bigger the duration number, the greater the interest-rate risk or reward for bond prices. Rising interest rates mean falling
bond prices, while declining interest rates mean rising bond prices.
S&P
500® Index – A large cap U.S. equities index that includes 500 leading companies and captures approximately 80%
coverage of available market capitalization.
Bloomberg
U.S. Aggregate Bond Index – A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed rate
taxable bond market, including Treasuries, government related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass
throughs), ABS, and CMBS.
Morningstar
Developed Markets Index – An index that captures the performance of the stocks located in the developed countries across the world.
Stocks in the index are weighted by their float capital, which removes corporate cross ownership, government holdings and other locked-in
shares.
Basis
point (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th
of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
A
bond rating is a grade given to bonds by private, independent ratings services that indicates their credit quality. Investment grade
bonds range from AAA to BBB- and will usually see bond yields increase as ratings decrease.
Issuance
information – JPMorgan
Principal
Real Estate Income Fund |
Performance
Overview |
|
October
31, 2022 (Unaudited) |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
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
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.
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
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.
Market
Disruption and Geopolitical Risk: The value of your investment in the Fund is based on the market prices of the securities the Fund
holds. These prices change daily due to economic and other events that affect markets generally, as well as those that affect particular
regions, countries, industries, companies or governments. These price 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 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 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 outbreak, persists for an extended period of time. 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 and risk profile of the Fund’s portfolio. There is a risk
that you may lose money by investing in the Fund.
Annual Report | October 31, 2022 | 29 |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
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, persists for an extended
period of time. Such events could impact 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 investments 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, other activities
on behalf the Fund.
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 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 8, 2023, subject to the restrictions and terms of the credit agreement. As of October 31, 2022 the Fund has drawn down $40,000,000
from the SSB line of credit, the maximum borrowing outstanding during the period was $50,000,000. The Fund is charged an interest rate
of 1.00% (per annum) above the one-month SOFR (Secured Overnight Financing Rate) or 4.30%, as of the last renewal date, for borrowing
under this credit agreement, on the last day of the interest period. Prior to September 9, 2022 the Fund was charged an interest rate
of 1.00% (per annum) above the one-month LIBOR (London Interbank Offered Rate). The Fund was charged a commitment fee on the average
daily unused balance of the line of credit at a rate of 0.25% (per annum). 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, 2022 was as follows:
Average
Interest Rate |
2.08% |
Average
Outstanding Loan Payable |
$47,172,131
|
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
4.
INVESTMENT ADVISORY AND OTHER AGREEMENTS
ALPS
Advisors, Inc. 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. Investment
advisory fees are paid monthly.
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-of-pocket 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 interested Trustees or Officers. The four independent Trustees of the Fund each
receive an annual retainer of $24,000 and an additional $5,000 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 $1,500 for each Board meeting and the Chairman of the Audit
Committee of the Board will be paid a meeting attendance fee of $1,250 for 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).
Annual Report | October 31, 2022 | 31 |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
5.
DISTRIBUTIONS
The
Fund intends to make a 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 $0.0875 per common share until February 2022, when the monthly distribution rate was increased
to $0.10. In May 2022, the monthly distribution rate was increased to $0.105 per share.
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.
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
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.
On
December 16, 2020, the Board announced that it approved a share repurchase program. Under the share repurchase program, the Fund could
purchase up to 5% of its outstanding common shares beginning January 19, 2021 in the open market, until January 19, 2022. On December
13, 2021 the Board announced that it approved a renewal of the share repurchase program, under which the Fund may purchase up to approximately
4% of its outstanding common shares beginning January 20, 2022 in the open market, until January 20, 2023.
The
total shares remaining that can be repurchased as of October 31, 2022 are 247,988. During the year ended October 31, 2022, the Fund repurchased
10,124 shares (0.15% of the shares outstanding at October 31, 2022) of its shares for a total cost of $108,353 at an average discount
of 15.34% of net asset value. The average market price paid per share for the year ended October 31, 2022 was $10.70.
7.
PORTFOLIO INFORMATION
For
the year October 31, 2022, the cost of purchases and proceeds from sales of securities, excluding short-term securities, were as follows:
Purchases |
Sales |
$28,583,183 |
$44,221,804 |
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 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.
Annual Report | October 31, 2022 | 33 |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
The
tax character of distributions paid during the year ended October 31, 2022 and October 31, 2021 were as follows:
| |
For the Year Ended October 31, 2022 |
Ordinary Income | |
$ | 7,473,490 | |
Return of Capital | |
| 650,610 | |
Total | |
$ | 8,124,100 | |
| |
For the Year Ended October 31, 2021 |
Ordinary Income | |
$ | 6,719,717 | |
Total | |
$ | 6,719,717 | |
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, 2022, certain differences were reclassified.
The
reclassifications were as follows:
| |
Paid-in capital
| |
Distributable earnings |
Principal Real Estate Income Fund | |
$ | (35,387 | ) | |
$ | 35,387 | |
These
differences are primarily attributed to non-deductible excise taxes paid.
As
of October 31, 2022, the components of distributable earnings on a tax basis were as follows:
Undistributed Ordinary Income | |
$ | – | |
Accumulated Capital Loss | |
| (22,553,558 | ) |
Unrealized Depreciation | |
| (15,598,777 | ) |
Total | |
$ | (38,152,335 | ) |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
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 | |
$ | 3,573,412 | | |
$ | 18,980,146 | |
Tax
Basis of Investments: Net unrealized appreciation/(depreciation) of investments based on federal tax cost as of October 31, 2022,
were as follows:
Cost of investments for income tax purposes | |
$ | 140,208,427 | |
Gross appreciation on investments (excess of value over tax cost) | |
$ | 4,717,716 | |
Gross depreciation on investments (excess of tax cost over value) | |
| (20,312,480 | ) |
Net depreciation of foreign currency and derivatives | |
| (4,013 | ) |
Net unrealized depreciation on investments | |
$ | (15,598,777 | ) |
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, 2022, 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, 2022, the Fund did not incur any interest or penalties.
Annual Report | October 31, 2022 | 35 |
Principal
Real Estate Income Fund |
Notes to Financial Statements |
October
31, 2022 |
9.
SUBSEQUENT EVENTS
Subsequent
to October 31, 2022, the Fund paid the following distributions:
Ex-Date | |
Record Date | |
Payable Date | |
Rate (per share) |
November 14 , 2022 | |
November 15, 2022 | |
November 30, 2022 | |
$0.105 | |
December 14, 2022 | |
December 15, 2022 | |
December 30, 2022 | |
$0.105 | |
On
December 19, 2022 the Board announced that it approved a renewal of the share repurchase program. Under the share repurchase program,
the Fund may purchase up to approximately 3.5% of its outstanding common shares beginning January 21, 2023 in the open market, until
January 21, 2024.
Principal
Real Estate Income Fund |
Dividend Reinvestment Plan |
October
31, 2022 (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 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.
Annual Report | October 31, 2022 | 37 |
Principal
Real Estate Income Fund |
Dividend Reinvestment Plan |
October
31, 2022 (Unaudited) |
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. 430 West 7th Street, Kansas City, MO 64105-1407
or toll free: 1-855-552-6280
Principal
Real Estate Income Fund |
Approval of Investment Advisory|and Sub-Advisory Agreements |
October
31, 2022 (Unaudited) |
At
the September 26, 2022 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 discussion summarizes the factors considered and conclusions reached by the Trustees in
the executive sessions 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 CMBS
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.
Annual Report | October 31, 2022 | 39 |
Principal
Real Estate Income Fund |
Approval of Investment Advisory|and Sub-Advisory Agreements |
October
31, 2022 (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 Board also reviewed
information comparing the Fund’s gross expense ratio and contractual management fee rate (on managed assets) to other funds in
a supplemental peer group prepared by the Adviser. The Board also considered information provided by the Adviser comparing the Fund’s
contractual management fee rate (and the Adviser’s share of the contractual management fee rate) to comparable funds advised by
the Adviser.
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 and the Sub-Adviser. 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.
Principal
Real Estate Income Fund |
Approval of Investment Advisory|and Sub-Advisory Agreements |
October
31, 2022 (Unaudited) |
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 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.
Annual Report | October 31, 2022 | 41 |
Principal
Real Estate Income Fund |
Trustees
& Officers |
|
October
31, 2022 (Unaudited) |
| (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, 8 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. Effective
January 1, 2021, Jeremy Held is no longer an interested trustee. |
| (4) | Officers
are elected annually. Each officer will hold such office until a successor has been elected by the Board of Trustees. |
| (5) | Brendan
Hamill resigned as Secretary on October 21, 2022 and Nicholas Adams was appointed as Secretary on December 19, 2022 |
Annual Report | October 31, 2022 | 49 |
Principal
Real Estate Income Fund |
Additional
Information |
|
October
31, 2022 (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, 2022
| |
Percentage of the Total
Cumulative Distributions for the
Year Ended October 31, 2022 |
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 |
$1.1401 | |
$0.00 | |
$0.00 | |
$0.0524 | |
$1.1925 | |
95.61% | |
0.00% | |
0.00% | |
4.39% | |
100.00% |
Principal
Real Estate Income Fund |
Additional
Information |
|
October
31, 2022 (Unaudited) |
UNAUDITED
TAX INFORMATION
Of
the distributions paid by the Fund from ordinary income for the calendar year ended December 31, 2021, 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 |
0.08% |
|
6.57% |
Of
the distributions paid by the Fund for the calendar year ended December 31, 2021, pursuant to Section 852(b)(3) of the Internal Revenue
Code, the Fund had no long-term capital gain dividends.
In
early 2022, if applicable, shareholders of record should have received this information for the distributions paid to them by the Fund
during the calendar year 2021 via Form 1099. The Fund will notify shareholders in early 2023 of amounts paid to them by the Fund, if
any, during the calendar year 2022.
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.
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, 2022 | 51 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (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 10, 2022 (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 Borrowings and 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). However, based on market conditions at the time, the Fund may use such leverage in amounts that represent less than 33 1/3%
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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 4.40%.
Assumed
Portfolio Return |
-10.00% |
-5.00% |
0.00% |
5.00% |
10.00% |
Common Share
Total Return |
-17.01% |
-9.58% |
-2.14% |
5.29% |
12.72% |
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.
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.
Annual Report | October 31, 2022 | 53 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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; |
| ● | 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; |
| ● | 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; |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
| ● | 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 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 non-recourse 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.
Annual Report | October 31, 2022 | 55 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Annual Report | October 31, 2022 | 57 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Annual Report | October 31, 2022 | 59 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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. The Fund’s investments will be subject to the risks inherent in the ownership and operation
of real estate and real estate-related businesses and assets. These risks include, but are not limited to:
| ● | the
burdens of ownership of real property; |
| ● | general
and local economic conditions (such as an oversupply of space or a reduction in demand for
space); |
| ● | the
supply and demand for properties (including competition based on rental rates); |
| ● | energy
and supply shortages |
| ● | fluctuations
in average occupancy and room rates; |
| ● | the
attractiveness, type and location of the properties and changes in the relative popularity
of commercial properties as an investment; |
| ● | the
financial condition and resources of tenants, buyers and sellers of properties; |
| ● | increased
mortgage defaults; |
| ● | the
quality of maintenance, insurance and management services; |
| ● | changes
in the availability of debt financing which may render the sale or refinancing of properties
difficult or impracticable; |
| ● | changes
in building, environmental and other laws and/or regulations (including those governing usage
and improvements), fiscal policies and zoning laws; |
| ● | changes
in real property tax rates; |
| ● | changes
in interest rates and the availability of mortgage funds which may render the sale or refinancing
of properties difficult or impracticable; |
| ● | changes
in operating costs and expenses; |
| ● | energy
and supply shortages; |
| ● | uninsured
losses or delays from casualties or condemnation; |
| ● | negative
developments in the economy that depress travel or leasing activity; |
| ● | environmental
liabilities; |
| ● | contingent
liabilities on disposition of assets |
| ● | uninsured
or uninsurable casualties; |
| ● | acts
of God, including earthquakes, hurricanes and other natural disasters; |
Annual Report | October 31, 2022 | 61 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
| ● | social
unrest and civil disturbances, epidemics, pandemics or other public crises; - terrorist
attacks and war; |
| ● | risks
and operating problems arising out of the presence of certain construction materials, structural
or property level latent defects, work stoppages, shortages of labor, strikes, union relations
and contracts, fluctuating prices and supply of labor and/or other labor- related factor;
and |
| ● | other
factors which are beyond the control of the Adviser and its affiliates. |
In
addition, the Fund’s investments will be subject to various risks which could cause fluctuations in occupancy, rental rates, operating
income and expenses or which could render the sale or financing of its properties difficult or unattractive. For example, following the
termination or expiration of a tenant’s lease, there may be a period of time before the Fund will begin receiving rental payments
under a replacement lease. During that period, the Fund will continue to bear fixed expenses such as interest, real estate taxes, maintenance
and other operating expenses. In addition, declining economic conditions may impair the Fund’s ability to attract replacement tenants
and achieve rental rates equal to or greater than the rents paid under previous leases. Increased competition for tenants may require
the Fund to make capital improvements to properties which would not have otherwise been planned. Ultimately, to the extent that the Fund
is unable to renew leases or re-let space as leases expire, decreased cash flow from tenants will result, which could adversely impact
the Fund’s operating results.
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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Annual Report | October 31, 2022 | 63 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Annual Report | October 31, 2022 | 65 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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:
| ● | the
likelihood of greater volatility of NAV, market price and dividend rate of the Common Shares
than a comparable portfolio without leverage; |
| ● | 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; |
| ● | 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; |
| ● | 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 |
| ● | leverage
may increase operating costs, which may reduce total return. |
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.
Annual Report | October 31, 2022 | 67 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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.
Annual Report | October 31, 2022 | 69 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 be held primarily by insiders or institutional
investors.
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 successful. 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
Certain
currency derivatives are subject to regulation under the Dodd-Frank Act. Potential rule- making 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.
Annual Report | October 31, 2022 | 71 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
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 unable 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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
Fund’s 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.
Annual Report | October 31, 2022 | 73 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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.
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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.
LIBOR
Discontinuance or Unavailability Risk. The London Interbank Offering 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. On March 5, 2021, the U.K.
Financial Conduct Authority ("FCA") publicly announced that (i) immediately after December 31, 2021, publication of the 1-week
and 2-month U.S. Dollar LIBOR settings will permanently cease; (ii) immediately after June 30, 2023, publication of the overnight and
12-month U.S. Dollar LIBOR settings will permanently cease; and (iii) immediately after June 30, 2023, the 1-month, 3-month and 6-month
U.S. Dollar LIBOR settings will cease to be provided or, subject to the FCA's consideration of the case, be provided on a synthetic basis
and no longer be representative of the underlying market and economic reality they are intended to measure and that representativeness
will not be restored. There is no assurance that the dates announced by the FCA will not change or that the administrator of LIBOR and/or
regulators will not take further action that could impact the availability, composition or characteristics of LIBOR or the currencies
and/or tenors for which LIBOR is published, and we recommend that you consult your advisors to stay informed of any such developments.
In addition, certain regulated entities ceased entering into most new LIBOR contracts in connection with regulatory guidance or prohibitions.
Public and private sector industry initiatives are currently underway to implement new or alternative reference rates to be used in place
of LIBOR. There is no assurance that 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, unavailability or replacement, all
of which may affect the value, volatility, liquidity or return on certain of a Fund's loans, notes, derivatives and other instruments
or investments comprising some or all of a Fund's investments and result in costs incurred in connection with changing reference rates
used for positions, closing out positions and entering into new trades. Certain of the Fund's investments may transition from LIBOR prior
to the dates announced by the FCA. The transition from LIBOR to alternative reference rates may result in operational issues for the
Fund or its investments. No assurances can be given as to the impact of the LIBOR transition (and the timing of any such impact) on the
Fund and its investments. These risks may also apply with respect to changes in connection with other interbank offering rates (e.g.,
Euribor) and a wide range of other index levels, rates and values that are treated as "benchmarks" and are the subject of recent
regulatory reform.
Annual Report | October 31, 2022 | 75 |
Principal
Real Estate Income Fund |
Summary
of Updated Information
Regarding the Fund |
|
October
31, 2022 (Unaudited) |
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 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; |
| (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, 2022 (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, 2022 | 77 |
Principal
Real Estate Income Fund |
Privacy
Policy |
|
October
31, 2022 (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, 2022 (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, 2022 | 79 |