Neuberger Berman Real Estate Income Fund (NRO) – Odd Lot Tender Offer – 5% upside

Current Price –$5.29

Offer Price - $5.56 (depends on NAV)

Upside – 5%

Expiration Date - 9th of Jan 2017

No proration for Odd Lot Holders (99 shares and less)

SEC Filling

Background

NRO is a diversified, closed-end management investment company that invests primarily in securities (mostly common and proffered equity) issued by Real Estate Companies, including Real Estate Investment Trusts (REITs). As most CEFs it trades at a discount to NAV. This discount recent started to narrow with the involvement of Bulldog Investors, who are known for their activism in pushing CEFs to close discounts to NAV one way or another (see ‘Pricing Information’ tab in CEF Connect).

The current tender offer is likely the result of Bulldog’s efforts. The fund is offering to purchase 15% of outstanding shares at 98% of NAV (on the 9th of Jan). At the time of writing NAV stood at $5.67. If NAV remains unchanged, this offer represents 5% upside to current prices.

No proration for odd lot holders

The Fund will first purchase shares tendered by any Stockholder who owns, beneficially or of record, an aggregate of not more than 99 shares of Common Stock.

Source and Amount of Funds

The actual cost to the Fund cannot be determined at this time because the number of shares of Common Stock to be purchased will depend on the number tendered, and the price will be 98% of the NAV on January 9, 2017, or such later date to which the Offer is extended. If the NAV on that date were the same as the NAV on December 1, 2016, and if the Offer Amount for the Fund is purchased pursuant to the Offer, the estimated cost to the Fund, not including fees and expenses incurred in connection with the Offer, would be approximately $45,857,610.

The Fund intends to use cash on hand and also may sell portfolio securities to pay the purchase price for Common Stock tendered. The Board believes that the Fund has monies, either as cash or through the sale of portfolio securities, to purchase the Common Stock that may be tendered pursuant to the Offer. In addition, the Fund may, but currently does not intend to, borrow under the Facility to purchase tendered Common Stock.

Risks

The main risk here is that in the upcoming month NAV might drop below the current share price levels. Historical data shows that NAV of NRO can easily move +/-5% in a month. If the discount to NAV prevails, then buying closer to the tender expiration date might make more sense. At the same time NAV might work in the opposite direction and be beneficial to the early buyers of NRO. It might be possible to partially hedge against NAV movements by shorting one of REIT ETFs, but I have not found a good target for this yet.

The offer is likely to be prorated. Bulldog had $33m stake in NRO and will most likely use the opportunity to cash-out (this is Bulldog’s main strategy). So those tendering more than 99 shares will not be fully cashed out. However, if the discount to NAV remains at current levels I would expect continued liquidation of the fund and further tenders returning cash to shareholders.

10 COMMENTS

  1. Nick Meilinger

    Thank you, very interesting opportunity.
    Since I am new – how would you go about play an opportunity like this?
    If limited to the odd-lot, this would limit the upside to ~30USD under current assumptions. So risk the proration or just take the quick buck?

    Thanks!
    Nick

    1. dt

      Nick, you are correct that this is a tiny opportunity where one stands to make only c. $30 for the odd-lot holding.
      As I wrote above, the offer will almost certainly be prorated. Bulldog alone has almost 10% of the shares and will most likely tender them all (that is their cpre strategy, to exit the position at or close to NAV). They have actually started selling their stake in the open market as well:
      https://baseballnewssource.com/markets/bulldog-investors-llc-sells-45096-shares-of-neuberger-berman-real-estate-sec-inc-fd-nro-stock/293668.html

      Another strategy would be to buy larger holding and then hedge the prorated part by shorting the next day after the tender expiration. But there are two problems – pro-ration factor might not be known then yet and shares might already open lower.

  2. bellwether

    WBMD was a fun situation. Didn’t realize it would drop so much following tender expiration. Is this usual, and if so, isn’t there an opportunity there to short/buy puts on afternoon of Dec 15 for overnight trade? Price action on afternoon of Dec 15 indicates someone following this playbook. Way more risk than arb though.

    1. dt

      The main problem with shorting (or buying puts) before tender expiration is that one never knows where the stock is going to move afterwards. There have been a number of cases where it dropped as with WBMD, but also many others where shares breached the upper limit right after the expiration.
      One might be able to guess it in some cases (like WBMD) but can get easily burned on the others.

  3. jason kravitz

    Just signed up for your services. Silly question though any easy way to check real time NAV on this stock?

    1. dt

      Not a silly question at all. You can track NAV using the links below:
      http://www.nb.com/_layouts/www/closed-end-fund-prices-performance.aspx
      http://www.cefconnect.com/fund/NRO

      If you want real time NAV, you could try reconstructing NRO portfolio from the holdings data (majority of holdings are listed) and then track NAV by adjusting real time holdings prices. Using google sheets this can be done automatically. Just keep in mind that these are end of quarter holdings so there might be some inaccuracies if new holdings were added or existing ones sold down.

      http://www.nb.com/pages/public/en-us/holdings.aspx#

  4. dt

    On the 9th of Jan, NAV stood at $5.93, so shares will be purchased at $5.81 (98% of NAV).

    This trade resulted in 10% return over a month for odd-lot holders. Proration factor for larger holders is not yet clear.

    1. Nick Meilinger

      What is your experience on “time to cash” after expiration date of the offer? (I assume this varies from broker to broker, but would be interested for IB)

Comments are closed.