Highland Opportunities and Income Fund: Underwhelming Performance Leads to Discounted Valuation.

Highland Opportunities and Income Fund (HFRO) is a closed-end fund with a blended portfolio of real estate securities and fixed-income assets. The fund aims to provide attractive total returns. HFRO's performance has been underwhelming, leading to a discounted valuation. The fund's real estate holdings have been impacted by the COVID-19 pandemic and economic uncertainty.

Highland Opportunities and Income Fund (HFRO) is a closed-end fund with a blended portfolio of real estate securities and fixed-income assets. The fund aims to provide attractive total returns. However, HFRO's performance has been underwhelming, leading to a discounted valuation. The fund's real estate holdings have been significantly impacted by the COVID-19 pandemic and economic uncertainty.

HFRO's share price has increased by about 5.7% over the last twelve months, but including all distributions paid to shareholders, the total return jumps to nearly 15.8% HFRO: Discounted Valuation As A Result Of Underwhelming Performance^[1]. The fund now offers investors a starting dividend yield of about 6.9% and monthly payouts. However, the sustainability of these distributions remains uncertain, as the latest semi-annual report indicates that the fund struggles to generate consistent earnings.

HFRO's portfolio is heavily focused on real estate, with 92.3% of assets allocated to this sector. This focus has led to significant volatility in the fund's performance. For instance, HFRO's share price has declined by over 57.1% since its public inception, even when including all distributions HFRO: Discounted Valuation As A Result Of Underwhelming Performance^[1]. The fund's use of leverage, currently at 28.01% of assets, has also contributed to its vulnerability to shifts in the interest rate environment.

Investors should be cautious about HFRO's value proposition. The fund's large discount to NAV valuation may seem attractive, but it could also indicate internal weaknesses. Alternative funds, such as Cohen & Steers Quality Income Realty Fund (RQI), offer better value propositions for investors seeking exposure to the real estate sector and high income potential.

Moreover, HFRO's dividend sustainability is a concern. The fund's annual earnings have been inconsistent, and it has previously cut distributions to preserve the health of the NAV. If earnings do not improve, further cuts to payouts may be necessary.

In conclusion, while HFRO's discounted valuation may seem appealing, investors should approach the fund with caution. The fund's internal structure has led to underwhelming performance and inconsistent income levels. If earnings do not improve, the sustainability of HFRO's distributions may be at risk.