Talk about a Pyrrhic victory.
The $127 million
Neuberger Berman Real Estate Income Fund is slated to be liquidated -- despite winning a nearly three-year battle with dissident shareholders.
NRL successfully defended in court what may have been the first use of a poison pill defense against a hostile takeover by a closed-end mutual fund. Nevertheless, the fund's board said last week it's recommending that the fund be liquidated and the proceeds distributed to investors.
Unlike open-end funds, which issue and redeem shares at net asset value upon request by shareholders, closed-end funds issue a fixed number of shares that trade on an exchange. That means their share prices can fall below their net asset value per share when the investment strategy falls out of favor.
That was the case with NRL, which traded at a discount of just over 10% to NAV as recently as March 31. That meant shareholders who wanted out at that point would have had to sell their shares for 90% of the value of the constituent stocks.
Selling the fund's holdings and returning the proceeds to shareholders will allow them to realize the full value of their holdings. Indeed, investors have already bid the fund's shares up in anticipation of its liquidation: As of the close of trading July 12, the discount had narrowed to 3.55% of NAV, according to Morningstar.
The five-year-old fund, which invests primarily in domestic REITs such as
Vornado Realty Trust
Tanger Factory Outlet Centers
, first came under attack in 2004, when two trusts operated by Stuart R. Horejsi attempted a hostile takeover.
The Wall Street Journal
in May of that year that he intended shift the fund's portfolio into more offshore REITs and replace its investment adviser with a firm that he owns.
The entities Horejsi controls, the Lola Brown Trust No. 1B and the Ernest Horejsi Trust No. 1B, offered to buy some 1,825,000 shares for $19.89 per share in September of that year.
Two weeks later, the fund's board took actions to combat the offer. It issued shares to its sub-adviser in an attempt to place the offer under the state of Maryland's anti-takeover statutes and approved litigation, thereby preventing the offer.
The board also authorized a "poison pill" designed to make the fund less attractive as a takeover candidate: It approved a shareholder rights agreement for a self-tender of up to 20% of total shares at a price of $20 a share. That would tend to narrow the discount to NAV, making the shares less of a bargain. It would be triggered whenever an investor acquires an 11.5% stake.
These actions attracted the attention of another big closed-end fund investor, Phillip Goldstein's Full Value Partners. He joined the fray in November of that year, filing suit against NRL's manager to block the poison pill. But Goldstein had a different strategy for profiting from the discount on the fund's share price: He wanted to convert it to an open-end fund.
Goldstein bought enough stake in NRL to prompt the poison pill in November 2005, but fund's board opted not to use the tactic.
(The Ernest Horejsi Trust No. 1B dropped out of the tender offer on May 25, 2005, while the Lola Brown Trust No. 1B extended its offer by increasing the number of shares it intended to buy, according to filings with the
Securities and Exchange Commission
NRL filed for summary judgment in November 2005, while the Horejsi party filed its own request for summary judgment a month later.
The case continued to wind its way through the courts until a federal district court upheld NRL's poison-pill agreements earlier this year. It also declared that the Lola trust could only vote shares it acquired after NRL's initial poison pill filing with approval from two-thirds of NRL's stockholders who were not involved with the takeover.
Notwithstanding this victory, the fund's board opted to recommend liquidating the fund because the takeover battle itself had attracted a lot of big investors essentially looking to make a quick buck, according to a letter from the chairman printed in the fund's most recent semi-annual report.
"The board has observed that the fund's shareholder base has evolved since the announcement of the hostile tender offer to include a greater concentration of institutional investors interested in realizing full net asset value for their shares through open-ending or liquidating the fund," he says in the letter.
The letter also says the board also came to the conclusion that "the fund's small size and current shareholder composition leave it vulnerable to difficulties and to a risk of mounting expenses in the future."
Neuberger Bermann has waived all management and administration fees for the fund to help offset costs associated with the litigation.
There's another irony to the story. For most of the period the litigation dragged on, NRL's returns were pretty impressive, even if shares traded at a steep discount. Over the three years ended July 12, it produced annualized returns of 22.38%, according to Morningstar. That was slightly better than the 20.68% average return for the 245 REIT funds Morningstar tracks. But for the year to date it has lost 10.4%, signficantly underperforming the 2.59% decline for the average REIT fund.
Conceivably, investors could have made nearly as much money, in absolute terms, by cashing out last year, when the discount was wider, but the NAV was higher.