Thoughts On The Neuberger Berman Real Estate Income Fund Situation (CEFs: NRL, IGR, RWF)

The Horejsi Trust filed today that they have extended their tender offer until April 25, 2006 for up to 50% of the shares of the Neuberger Berman Real Estate Income Fund (NRL). I’ll use this opportunity to give my take on what would be best for shareholders.

First off, I think that if Horejsi is able to gain control of the fund, it would be very bad news for minority shareholders. In their original tender offer the filing states that they would propose the following among other things:

Stewart R. Horejsi, an investment consultant to us, be appointed as NRL's portfolio manager;

NRL change its investment policies and objectives, which may include, among other changes, proposals for NRL to expand its scope to include investments in real estate operating companies and investment trusts outside the United States, consistent with our philosophy that NRL's advisors should have the greatest possible flexibility to seek out and invest in what they believe to be the best values among any asset class anywhere in the world.

If a current NRL shareholder was looking for an international real estate fund, there are options such as the ING Clarion Global Real Estate Income Fund (IGR) and the Cohen & Steers Worldwide Realty Income Fund (RWF). So presumably shareholders invested in NRL at the time of the tender offer were interested in a domestic real estate fund. As part of the tender offer, if these changes do take place, minority shareholders who no longer want to invest in the fund are not given the chance to exit their investment at NAV. Horejsi did this previously when they gained control of what is now the Boulder Total Return Fund (BTF). They changed the strategy from "high current income consistent with the preservation of capital" to "total return". The fund previously invested in preferred stocks, but after the strategy change the focus of the fund changed to equities. Investors who were not looking for equity exposure from this fund were forced to sell their shares at a large discount. So the Horejsi Trust buying shares should not be viewed as a positive for the other shareholders.

That being said, I don’t like closed-end funds adopting poison pills. Poison pills could easily be abused by fund managements to stop activist shareholders from building up a position in a poorly run fund. The Board of NRL should take other steps to protect minority shareholders such as proposing supermajority voting requirements for strategy changes, or something along these lines which require shareholder approval to implement.

As far as Phillip Goldstein’s entrance into the fund, I think the main reason he bought shares was because he believes the Board is more likely to open-end the fund than turn control over to the Horejsi Trust. This makes the fund vulnerable, so if some large shareholders apply pressure there is a reasonably good chance that an open-ending, or some other opportunity for shareholders to exit the fund at NAV will occur. Phillip Goldstein probably isn’t too concerned about the other shareholders in NRL, as his main priority is making money for his own shareholders. However, as a shareholder, he does have the right to push his own agenda, and if the fund does open-end, at least all shareholders will be treated equally.

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