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)
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.
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.