NRO: 4.7% Payer Offers Solid NAV Growth And Dividend Coverage

Sep. 4.14 | About: Neuberger Berman (NRO)

Summary

4.7% dividend 100% funded by Net Investment Income.

Annual NAV growth has averaged 19.8%.

Trading at deep 15.4% discount to NAV.

Neuberger Berman Real Estate Fund (NYSEMKT:NRO) was included in my Conservative Hedged Income CEF Fund. This Real Estate Fund trades at a deep discount to its historical discount, has demonstrated strong NAV growth and pays a 4.7% dividend wholly funded by Investment Income.

NRO Chart

NRO data by YCharts

Description

NRO is a 10-year-old, $280MM Closed-End Fund that invests primarily in securities issued by Real Estate Companies, including REITs. The Fund is 23.7% leveraged which accounts for 40 basis points of its 2.10% expense ratio. The Fund's average daily volume is 160,000 shares or $800,000, which may pose an issue if an investor needs to move a sizable position. However, with a bid-ask spread of a penny, that issue may be mitigated.

Management

The Fund has been managed since inception by Steve Shigekawa. Brian Jones joined Mr. Shigekawa in 2008. Given the tenure of this team, management continuity should not be an issue. Neither manager appears to have a personal stake in the Fund.

Dividend

NRO currently pays a monthly 2 cps dividend. An examination of the Semi-Annual Report for the six months ended April 30, 2014 reveals that the Fund generated $8.4MM of net investment income and paid out $6.7MM and for the eighteen months, generated $19.1MM and paid out $20.1MM. The deficit was easily funded by capital gains. They have not returned any capital over the last 5 years.

Portfolio

The Fund primarily invests in U.S.-based Medium-Cap stocks. The average market capitalization is $6.0B. 100% of the portfolio is in the Real Estate sector. The 3 largest holdings are Ventas, Sovran Self Storage and Omega Healthcare Investors.

Over the last 5 years, NRO's monthly NAV growth has been 1.49% or 19.42% annualized. However, performance has been volatile with a a standard deviation of 4.30%. The highest one-month gain was 10.33% in October 2011 and the lowest was -8.89% in September 2011.

NRO NAV Growth History

1mo 3mo YTD 1yr 3yr 5yr Avg
+0.8% -4.1% +21.3% +21.5% -17.8% +22.4% +19.4%
Click to enlarge

Source: Morningstar.com

Premium/Discount to NAV History

NRO's current discount of 15.4% is 1.4 standard deviations below its 5-year average of -12.0%. This premium collapse is similar to what has been observed in other Real Estate CEFs such as JRS, RQI and RNP. A reversion to the mean could result in an additional 4.0% in price appreciation.

NRO Average Premium/Discount History

6mo 1yr 3yr 5yr Avg
-15.3% -15.1% -13.2% -11.9% -12.0%
Click to enlarge

Source: CEFConnect.com

Alternative CEF Investments

The three Real Estate CEFs that are similar to NRO are Nuveen Real Estate Income (NYSE:JRS), Cohen & Steers Quality Income Realty (NYSE:RQI) and Cohen & Steers REIT & Preferred Income (NYSE:RNP).

NRO is the lowest yielding of the 4, but it has not returned capital since 2010. If return of capital concerns you, then you may be concerned that RQI and RNP have had to return modest percentages for the first time in five years. JRS's distribution is 58% return of capital and may be vulnerable should the interest rate environment change.

Another source of investor concern is a Fund's leverage. NRO has the lowest ratio of the 4 at 23.7%. JRS employs the highest leverage of the 4 at 28.5%.

NRO, despite these favorable metrics, is not being rewarded by the market as it trades at a 15.4% discount to NAV. Investors appear to be chasing yield and have rewarded the 8.1% yielding JRS with a 4.4% discount to NAV.

NRO is the most conservative investment of the 4 as it trades at the widest discount to NAV, does not return any capital and employs the lowest leverage. JRS is suitable for more aggressive investors as it pays the highest dividend, but it has the highest leverage.

Real Estate CEFs

Fund Yield ROC% NAV Growth Prem/Disc
NRO 4.7% 0% +19.8% -15.4%
JRS 8.1% 58% +19.3% - 4.4%
RQI 6.7% 7% +22.1% -11.2%
RNP 7.1% 7% +20.1% -12.1%
Click to enlarge

Source: Morningstar.com

Conclusion

Neuberger Berman Real Estate Fund pays a monthly dividend that is 100% funded by Net Investment Income. It also has a history of solid NAV growth. It trades at a decent discount to its historical premium/discount to NAV and could offer additional return on a reversion to the mean.

Disclosure: The author is long JRS.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.