The RMR Group: Deep Discounted Real Estate Closed-End Funds

Includes: AWP, RAP, RIF
by: Robert Lewis

RMR Real Estate Income Fund (NYSEMKT:RIF) and RMR Asia Pacific Real Estate Fund (NYSEMKT:RAP) both trade on the NYSE-Amex. The investment advisor had a series of funds that went through much turmoil, and these two funds are the result of the merger of the remnants.

Both RIF and RAP have been selling at extreme discounts and are well worth examining. They appear to have stabilized in their goals and the discounts from net asset value approaching 20% adds to their appeal. Each fund invests in real estate but with substantially different orientations and goals. I will address each one separately.

RMR Real Estate Income Fund

RIF seeks to produce income from its real estate investments, with capital appreciation, over time. It is invested primarily in Real Estate Investments Trusts (REITs) as follows:

Common securities - 55%
Preferred securities - 43%
Short term investments - 2%

The investment portfolio is allocated over the following sectors:

Lodging/resorts REITs - 25%
Office REITs - 12%
Diversified REITs - 12%
Apartment REITs - 11%
Others REITs - 33%
Other securities - 7%

For the six months ending June 30, 2011, the net yield was 4.83% with portfolio turnover of less than 5%. RIF had gross assets of slightly more than $ 93,000,000 with $ 26,000,000 of leverage, bringing gross assets to slightly less than $ 120,000,000.

It should be noted that the turmoil experienced by the RMR group of closed end real estate funds related to being fully leveraged as the portfolio of securities collapsed. At present the existing leverage is as follows:

Revolving credit facility - $10,000,000 - 10.7%
Preferred shares - $16,675,000 - 17.9%

This 28.6% leverage is below the maximum allowed to retain Chapter M of the Internal Revenue Code status as a pass through entity but does not leave all that much margin for error. RIF does have in excess of $51,000,000 of preferred securities to produce sufficient income to more than service its leveraged debt.

The portfolio is well diversified over many different sectors of the REIT spectrum and does produce a decent yield. If real estate prospers, then so will RIF. If real estate swoons, then so will this portfolio. Preferred shares offer only a small measure of protection over the common shares.

It is not a bad way of investing in real estate while seeking a current return. Needless to say the discount adds to the attraction. To make this a meaningful investment, it must be bought on the cheap. Look for the discount to net assets to approach 20% before committing.

RMR Asia Pacific Real Estate Fund

RAP is a non-leveraged real estate fund investing primarily in Southeast Asia. RAP has a turnover in excess of 50% and pays no dividends. It is intended for capital appreciation. As of June 30, 2011, it had assets of slightly more than $ 73,000,000. Its portfolio was geographically diversified as follows:

Australia - 14.6%
China - 7.3%
Hong Kong - 38.7%
Japan - 23.3%
Singapore - 13.0%
India - .8%

I have written about Alpine Global (NYSE:AWP) in Seeking Alpha and I'm a strong believer in every investor having some of his/her assets in global real estate. AWP is a much bigger fund but may lack the zest of RAP. When RAP is at a large discount, then it is worth purchasing. If AWP and RAP are at similar discounts, or even close, then i would buy AWP. It never hurts to hold two funds rather than just one.

Disclosure: I am long RAP, RIF, AWP.

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