Real Estate Funds Bounce Back

With floods drenching hundreds of Ohio homes, mortgage debt securities turning toxic and home values dropping nationwide, pessimism in real estate investments has maxed out -- for now. Last Friday, the Fed valiantly rescued the market with a half point cut in the discount rate.

Exactly 100 years ago, six years before the creation of the Federal Reserve System, it was the large banks that restored market sanity after panics and crashes. Big banks stepped up to the plate again this week, when in a show of solidarity, Citigroup(C), Bank of America (BAC), JPMorganChase(JPM) and Wachovia(WB) each borrowing half a billion dollars from the Fed's discount window. J. Pierpont Morgan, the private banker whose leadership and confidence turned around the Panic of 1907, would have been proud

All this liquidity makes it possible for banks to keep lending. Going one step further, Bank of America helped to stabilize the mortgage industry by investing $2 billion in Countrywide Financial (CFC), easing fears of bankruptcy at one of America's largest mortgage lenders.

Optimism abounded. The market rallied, and real estate companies rose too. The average real estate fund tracked by TheStreet.com Ratings climbed 6.91% for the five trading days ended Thursday, Aug. 23.

For the first time since this column was launched, all 10 of the best performers were closed-end funds. Unlike the other two kinds of funds we rate, open-end funds and exchange-traded funds, closed-end funds issue a fixed number of shares. As a result, they often trade out of line with their net asset values. When fundamentals get thrown out the window in a panic, closed-end funds can sell at a deep discount. Conversely, when sentiment turns positive, investors bid these funds up above their net asset value, paying a premium for the assets.

This is just what happened for our best performer of the week, (RDR)RMR Preferred Dividend Fund (RDR). The fund went from selling at a discount of 9.9% on Thursday, Aug. 16, to a premium of 4.2% a week later. Put another way, the net asset value of the fund increased by 5.95%, less than the average real estate fund; but the reversal in market sentiment from fear to greed sent the shares higher by a whopping 22.61%.

Similarly, the discount on the (NRO)Neuberger Berman Real Estate Securities Income Fund (NRO) narrowed to 6.5% from 15.8%, and the fund's net asset value increased by 7.97%, translating to a jump in value of of 19.97% for shareholders. Several of the fund's holdings had a good week, with CBRE Realty Finance (CBF) up 34.06%, Crystal River Capital (CRZ) up 16.94%, Gramercy Capital Corp/New York(GKK) up 15.52% and American Financial Realty Trust(AFR) up 14.75%. CBRE Realty added a former Bank of America executive, and American Financial Realty announced the continuation of a $100 million share-buyback plan.

Best Performing Real Estate Funds Ranked by returns for the week ending Aug. 23
Fund	Ticker	Rating	Fund Type	1 Week Total Return
RMR Preferred Dividend Fund	RDR	E	Closed-End	22.61%
Neuberger Berman Real Estate Securities Income Fund	NRO	C	Closed-End	19.97%
Dividend Capital Realty Income Allocation Fund	DCA	E-	Closed-End	17.89%
Cohen & Steers Quality Income Realty Fund Inc	RQI	C-	Closed-End	17.63%
Cohen & Steers Advantage Income Realty Fund Inc	RLF	C	Closed-End	17.34%
LMP Real Estate Income Fund Inc	RIT	C	Closed-End	17.17%
Cohen & Steers Premium Income Realty Fund Inc	RPF	C	Closed-End	16.45%
Neuberger Berman Realty Income Fund	NRI	C	Closed-End	15.73%
RMR Real Estate Fund	RMR	C	Closed-End	14.82%
Neuberger Berman Real Estate Income Fund Inc	NRL	C	Closed-End	14.37%
Source: Bloomberg

Read here for an explanation of our ratings.

Among the worst performers were two funds that short the real estate market, specifically the Dow Jones U.S. Real Estate Index. UltraShort Real Estate ProShares(SRS), an exchange-traded fund, sank 10.28%, matching its goal of twice the inverse return of the index, which rose 5.24% over the same period. The nonleverage (SRPIX)ProFunds Short Real Estate ProFund (SRPIX), an open-end mutual fund, unsurprisingly did half as bad, losing 4.96%.

The next two spots on the list are held by exchange-traded funds targeting the homebuilders. SPDR S&P Homebuilders ETF (XHB), up 1.54%, outperformed the iShares Dow Jones US Home Construction Index Fund(ITB), which fell 0.12%. While there is a lot of overlap between the holdings of the two funds, Skyline(SKY), which fell 11.74%, and Tousa(TOA), down 9.41%, are unique to the iShares, while Sherwin-Williams (SHW), up 8.38%, and Lowe's(LOW), up 10.52%, are unique to the SPDR.

Worst-Performing Real Estate Funds Ranked by returns for the week ending Aug. 23
Fund	Ticker	Rating	Fund Type	1 Week Total Return
UltraShort Real Estate ProShares	SRS	U	ETF	-10.28%
ProFunds Short Real Estate ProFund	SRPIX	U	Open-End	-4.96%
iShares Dow Jones US Home Const Index Fund	ITB	E-	ETF	-0.12%
SPDR S&P Homebuilders ETF	XHB	E-	ETF	1.54%
Fidelity Real Estate Income Fund	FRIFX	D-	Open-End	2.04%
Kensington Select Income Fund	KIFAX	E	Open-End	3.49%
Franklin Real Estate Securities Fund	FREEX	E-	Open-End	4.01%
Vanguard REIT ETF	VNQ	E	ETF	4.09%
iShares FTSE NAREIT Retail Index Fund	RTL	U	ETF	4.20%
Fidelity Advisor Real Estate Fund	FHEAX	E+	Open-End	4.21%
Source: Bloomberg

Read here for an explanation of our ratings.

Does all this optimism mean the real estate recession is over and done with? Not by a long shot. There are more mortgages with low, introductory "teaser" interest rates that will be resetting this year and next year, sending additional borrowers into distress. Those who can take advantage of the newfound banking liquidity to refinance might be able to save their homes.

Those who can't make their payments or refinance will be forced to sell or lose their homes through foreclosure. But with all the interest in saving the real estate industry (if not a directly bailing people out, at least averting a steep market crash), I'm expecting an orderly decline over the next year or so.

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