Monthly Paying Closed-End Fund NRO Offers 8% Return

By | September 17, 2015

Scalper1 News

Summary NRO pays $0.03 per month per share and currently returns 8%. NRO is currently selling at a 17% discount to NAV. The share price of NRO should grow as REITs gain favor again with investors. I wrote an article in June suggesting Neuberger Berman Real Estate Securities Income Fund (NYSEMKT: NRO ) was a good closed equity fund to place one’s money to get a 7% distribution on a monthly basis. At that time NRO was offering a 7% yield and was selling about 15% below NAV. The issue was selling for about $5.00 per share and was paying $0.03 per share a month. Since the company is now selling at about $4.54 per share (9/16/15), I thought I would take another look at this CEF again to see what is happening. NRO is still paying $0.03 per share a month which takes the distribution return up to 8% at the current price. It reports a NAV of $5.47 per share as of 9/16/2015 and therefore is selling at a 17% discount to its assets. The market price of NRO is down about 7% from the beginning of the year. This coincides with the price drop seen in REITs from the beginning of the year. It appears that investors are running scared from REITs because the FED is threatening to increase interest rates. I am convinced that the threat is much greater than the reality. It will be a long time before the FED gets interest rates up to 2% and REITS will continue to fare well in this low interest rate environment. If I am correct, both the NAV and the market price of NRO will do well over the next year or two. The price of REITs will rise when people realize that government bonds and CDs are not going to pay much more than they currently offer over the next few months. Investors will again pour their funds into REITs to reap a much better return and that in turn will likely cause the price of NRO to rise. The price of NRO’s holdings will rise since it has many REITs where prices have declined because of investor fears over interest rates. A list of the top 10 holdings by number of shares and their price decline is shown below: Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield SRC Spirit Reality Cap 617,000 12.06 9.25 -25% 7.4% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRF Northstar Realty Fin. 531,900 17.88 13.96 -22% 11.5% CBL CBL & Assoc. Prop. Trust 509,700 19.75 14.68 -25% 7.2% LXP Lexington Realty Trust 497,200 11.19 8.30 -26% 8.2% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% UBA Urstadt Biddle Class A 425,693 22.10 18.67 -16% 5.5% Source: My own work with figures from Interactive Brokers The chart indicates that the prices of all REITs have dropped; Some REITs declined as much as 25% to as low as 3%. The REITs that dropped the most are mortgage REITs since high interest rates would hurt their earnings the most. The following chart lists the top 10 holdings of NRO by dollar value and the decline in prices from the beginning of the year. Ticker Description Shares Price 1/2/15 Price 9/16/15 Difference Current Yield OHI Omega Healthcare Inv 396,700 40.43 33.64 -17% 6.5% PSA Public Storage Reit 70,100 187.23 205.65 +9% 3.3% STWD Starwood Prop. Trust 583,000 23.41 21.52 -8% 8.9% HCP HCP Inc. Reit 321,800 44.85 32.72 -27% 6.0% KIM Kimco Realty Corp. 474,600 25.46 23.60 -7% 4.1% HIW Highwoods Prop. Inc. 272,880 44.94 39.00 -13% 7.2% BPY Brookfield Prop. Ptnrs. 553,100 22.95 21.40 -7% 5.0% NRFpB Northstar Pref. B 444,484 25.00 24.27 -3% 8.3% PSApY Public Storage Pref Y 400,000 26.37 26.10 -1% 6.1% ROIC Retail Opp. Inv. 593,000 16.98 16.40 -3.5% 4.1% Source: My own work with figures from Interactive Brokers This chart shows nearly the same declines as the prior chart. There is one major difference in that PSA actually increased in price between the beginning of the year and now. It is also surprising to see the 27% decline in the price of HCP. HCP is a hybrid REIT that invests in both property and loans in the healthcare industry. The price has declined as if it were a pure mortgage REIT. Doing this chart for NRO indicates that HCP should be poised to rise quite a bit as well. Both charts indicate that prices of most of the investments that NRO holds as of 7/31/2015 have declined considerably since the beginning of the year. As these prices regain momentum after investors realize that interest rates are not rising as fast or as soon as expected, the discount between the stock price of NRO and NAV will increase or the price of NRO must increase with them. Conclusion: With NRO currently offering an 8% return along with a huge discount from NAV, it looks like an outstanding buy. Furthermore, it appears to be positioned to make some capital gains as investors begin to realize that interest rates are not going to rise very quickly over the next 2 years. The landscape for this closed fund looks especially good at the current time for an outstanding dividend and possible capital gains in the future. Disclosure: I am/we are long NRO, OHI, HCP, SRC, LXP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News

Scalper1 News