There are usually plentiful closed-end funds (“CEFs”) whose discounts from Net Asset Value (“NAV”) are alluring. Such temptation does not always lead to outsized market returns. Unusual (positive or negative) market returns often relate to changes in the discount or premium. In my view, the most dramatic changes are causal.
I believe that fund-specific catalysts are likely to drive Alpine Global Premier Properties Fund (AWP) from its current double-digit NAV discount to a market premium in 2010. I am fully aware that a premium thesis on a closed-end fund which currently trades at a double-digit discount is uncommon; I invite assertive comments which challenge my thesis.
There are three Alpine closed-end funds. AOD and AGD already trade at premiums in the vicinity of 30%. AWP shares design-oriented premium explanations with AOD and AGD .The circumstances surrounding AWP current valuation gap are poised to be significantly changed in February, in my view.
Premiums have been more common than uncommon for Alpine funds. Excerpting the period surrounding March of 2009, AOD and AGD traded at consistent premiums during a year in which the public generally disfavored equity funds. I believe the premiums are explained primarily by the extraordinary monthly dividends afforded by Alpine’s dividend capture strategy.
The Funds’ governance may over time augment Alpine’s placement within the current high monthly distribution, high premium CEFs peer group (GUT, PGP, CFP, CLM, CRF). I have liked everything that I have observed in consistent governance effort to benefit shareholders. Alpine has found creative ways to accrete NAV. Alpine avoided Auction Rate Preferreds (“ARP”) which rightly or wrongly have continued to tarnish much of the CEF space. To me, it speaks volumes that when I have called the Chief Financial Officer (“CFO”), he has bent over backwards to provide clear answers. I believe Alpine is in business to create value for shareholders and that they actually earn their fee revenue.
So why is AWP at a double digit discount while AOD and AGD trade around 30% premiums? In short, AWP’s slightly different objective caused the Board to take an exceptionally risk-averse approach to the monthly dividends it paid or declared in 2009. Still, shareholders did get the exceptional full year income that Alpine Fund Investors have come to expect, but nearly half of it came in the form of a special dividend. The median prospective public investor who today considers AWP among other alternatives perceives that it “pays” 5.5% of its current $6.54 in dividends. It actually paid (and earned) 9.6% of current market in 2009. And, no part of any dividend was paid in newly issued shares below NAV (a CEF industry practice that harms NAV performance).
For better or worse, the closed-end fund marketplace is grossly inefficient. Shareholders themselves may never read their documents. If they read their semiannual and annual reports, they would have a keen appreciation for why their 2009 monthly distributions were so conservative, and the circumstances management has been waiting for to return to the monthly distributions that shareholders have expected from Alpine.
So where is the catalyst? The new CFO is due for his first Board Meeting. He strikes me as smart, focused, and I believe that he and the entire Board are on the right side of the table. Alpine is in position to normalize the monthly dividends, and base it on its now higher asset base. I speculate that before the end of February, Alpine will announce its monthly dividend to more than double (76 cents for all of 2010 would imply 3 cents monthly for Jan-Feb, and 7 cents monthly for March-December). Regardless as to whether my own speculation derives was influenced guidance provided in publicly available documents, be fully aware that Alpine has not made any such announcement to date.
Please do not assume that this article either represents my entire understanding of AWP, nor a recommendation of AWP for any person or organization’s investing needs. Excluded from this article is detailed discussion of design, governance motivations, contingency probabilities, and other dynamics which complement my primary thesis.
This article is a limited scope representation of my own thesis which may have already been disseminated by me. Anyone who contemplates investing in any closed-end fund should be considerate of the fund’s investing focus. AWP is classified as a Global Real Estate Fund. According to the Closed End Fund Association its Lipper 1yr NAV performance was in the top 15% (currently the best among Alpine’s CEFs) but in my qualitative research I have not made any effort to validate such data.
When researching anything about CEFs, it is important that people know that Lipper and Morningstar are purely quantitative in their approach to closed-end funds. Additional qualitative commentary is certainly invited as comments.
Disclosure: Author holds long positions in AWP, CFP. He holds no other positions.