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Author: earslookin Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77361  
Subject: In Which Ears Hunts for Heffalumps Date: 1/13/2012 11:17 AM
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THIS IS NOT A RECOMMENDATION TO BUY OR SELL ANY OF THE SECURITES LISTED BELOW.
THIS IS NOT IN ANY FORM INTENDED AS INVESTMENT ADVICE.
THE DATA IS APPROXIMATE AND VERY LIKELY CONTAINS ERRORS.
THE SOLE PURPOSE HERE IS TO SUGGEST IDEAS FOR DISCUSSION AND FURTHER STUDY.
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IN BRIEF

* Yodaorange identified the fund KIFAX as the “elephant in the room” of REIT preferred holders.

* Here we’ve hunted down a few smaller elephants and plenty of pygmy elephants in the room.

* This post isn’t about whether or not to buy the elephants.

* It’s about what we can learn from the elephants.

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KIFAX, THE ELEPHANT

Yodaorange wrote a series of extraordinary posts back in 2010 about “Searching for the Holy Grail of REIT Preferred prices/yields”. One of these posts – Chapter 5 – dealt with the size of the REIT preferred marketplace, and whether there were any big players in that market. Using the list of REIT preferreds from LordXot’s spreadsheet, the closing price from 4/16/2010, and the approximate number of outstanding shares, Yoda estimated the total REIT preferred market cap at roughly $17 billion, and took a guess that TMF REITsters owned about .3% of that. He then revealed the major player in the space…

The next question is who owns the other 99.7% of REIT preferreds and is there an elephant in the room. I have found at least one elephant in the same REIT preferred room that we are in. Based on limited data, he appears to be a nice, friendly elephant wishing us no harm. The elephant is the Forward Select Income Fund, symbol KIFAX.

When Yoda examined KIFAX holdings, he determined their REIT preferred position totaled roughly $964 million, or about 5.6% of the total REIT preferred market cap at the time. Even more interesting, he found that KIFAX owned very large stakes in some of the preferreds. For example, they owned 48% of UPD-PD (and still do, as of 11/30/2011).

Here is the link to Yoda’s post:

http://boards.fool.com/reit-preferred-prices-chapter-5-28447...

MORE ELEPHANTS

Yoda’s study inspired me to look for more elephants in the REIT preferred space. My guess was that the rest of the players would be much smaller, but I wondered how much smaller, and also what the combined clout might be if you combined the rest of these players together.

Turns out it is not that easy to hunt for elephants. The hunting grounds are vast and REIT preferred stakes are well camouflaged in the bush. Using two basic search strategies – screeners and SEC full text search – I was able to create a list of hundreds of mutual funds, closed-end funds, ETFs, and institutions that could possibly have REIT preferred filings, and needed further study. My gut feel is that there are plenty I missed. In the last week I’ve been going through the detailed filings for some of those on my list. I’ve only gotten about ¼ of the way through.

Below is a list of players that I’ve found so far, and the value of their *REIT preferred holdings* sorted by size. (Note: most all these funds have other holdings which are not included in the totals below). I’ve included KIFAX for comparison. Altogether they represent $2.8 billion, or about 16.5% of the estimated $17 billion REIT preferred market cap. Please note that these numbers are approximate – different funds have slightly different reporting periods, so some of these have July 30th as the close, some August 31st, and so on. It’s not precise, in other words, but just gives you a ballpark estimate. Remember, I’ve only gone through about ¼ of my list so far, and even those may only be a fraction of what’s out there, so the numbers below are very incomplete at this point.


Ticker Fund Value of Pref Pct Tot Pct Tot

KIFAX Forward Select Income 1,210,554,895 43.2% 43.2%
PPSAX Principal Preferred Securities Fund 394,254,000 14.1%
RQI Cohen & Steers Quality Income Realty 223,855,696 8.0%
FRNIX Fidelity Advisor Real Estate Income 197,363,994 7.0%
NRO Neuberger Berman Real Est Sec 173,078,147 6.2%
JRS Nuveen Real Estate Income 124,578,678 4.4%
ASRAX Invesco Select Real Estate Income 83,587,641 3.0%
CPXAX Cohen & Steers Pref Income 72,682,065 2.6%
PGBAX Principal Global Diversified Income 65,486,000 2.3%
RIT LMP Real Estate Income 62,377,972 2.2%
RNP Cohen & Steers REIT & Pref 47,869,125 1.7%
RIF RMR Real Estate Income Fund 47,663,685 1.7%
EIIRX E.I.I. Realty Securities 23,319,000 0.8%
RREIX REMS Real Estate Income 50/50 Instl 20,154,737 0.7%
RFI Cohen & Steers Tot Ret Realty 18,400,414 0.7%
IARAX Invesco Real Estate 14,199,900 0.5%
HLRRX REMS Real Estate Value Opportunity 11,644,047 0.4%
CSEIX Cohen & Steers Realty Income 10,471,276 0.4% 56.8%

2,801,541,272 100.0% 100.0%


As Yoda says, it gets even more interesting when you look at individual holdings. Below I’ve selected a sampling of four REIT preferreds showing the stake of KIFAX and the combined stakes of the smaller elephants (which I’ve imaginatively named “OTHER”) for each preferred. I picked AIV-U and CBL-D for the sample because they had the highest combined ownership in my list. I picked ELS-A and RPT-D because I own them both. Again, realize that what you see below represents only a fraction of the funds I’ve searched so far.


COMBINED
KIFAX OTHER TOTAL

CBL-D CBL & Associates Properties 7.38% Series D 24.8% 37.2% 62.0%
AIV-U Apartment Investment & Mgmt 7.75% Series U 27.0% 31.6% 58.6%
RPT-D Ramco-Gershenson Prop Trust 7.25% Series D 12.5% 14.9% 27.4%
ELS-A Equity Lifestyle Properties 8.03% Series A 5.0% 21.1% 26.6%


ELEPHANT DROPPINGS

Study of scat is very important to a hunter. We investor scatologists perhaps have much to learn from the droppings of these elephants in the land of REIT preferred holders. Here are some questions that come to mind immediately:

* What REIT preferred issues do they not own?

* What changes have they made in the last month / quarter / year?

* Which issues are most heavily owned amongst all the funds – share percent and dollar size?

* Is there any correlation between the level of fund holdings and macroeconomic events?

* What should I get for my youngest son – he’s going to be 31 – for his birthday on Sunday?

In addition to examining fund data, it’s helpful to put that data in context. Each fund manager provides commentary at least every six months on the state of their fund. Each fund also has a published general strategy. For example, one fund states that it will take “defensive action” in a severe downturn. Another fund, which is normally allocated 50/50 between REIT common and REIT preferreds, may shift the allocation to 75/25 or 25/75. Depending on the security, those can be large moves. At the very bottom of this post is a list of funds I’ve found so far, and their online site where you can find the commentary. It is usually in the Annual or Semi-Annual reports.

CONCLUSION

I have zero interest in buying any of the funds above. But I am extremely interested in their behavior and what they say because of what it might tell me about the REIT preferreds I own or want to own. I’m also encouraged by this level of ownership. These funds are in for the long haul, and most of the managers have fairly constrained guidelines, so to me that bodes well for a mostly stable REIT preferred marketplace, except under extreme stress.

My plan is to dig deeper into this fund data and keep some sort of database. I also plan to review fund manager comments periodically. If you have suggestions for further research, they would be much appreciated, especially in the following two categories:

How to find funds that own REIT preferreds? What are some good search strategies?

What are some questions you have about REIT preferreds that these elephant droppings might help answer?

Thanks,
Ears

Disclosure: Of the securities mentioned in this post, I own ELS-A and RPT-D.

LIST OF FUND ONLINE SITES

CPXAX http://www.cohenandsteers.com/opmc_overview.asp?cusip=26

RQI http://www.cohenandsteers.com/opmc_overview.asp?cusip=9

RNP http://www.cohenandsteers.com/opmc_overview.asp?cusip=11

RFI http://www.cohenandsteers.com/opmc_overview.asp?cusip=3

EIIRX http://www.sec.gov/Archives/edgar/data/911088/00009110881100...

FRINX https://advisor.fidelity.com/advisor/portal/performance?deep...

KIFAX http://www.forwardfunds.com/prospectuses.htm?set=default&...

IARAX https://www.invesco.com/portal/site/us/menuitem.e7659573b7a2...

ASRAX https://www.invesco.com/portal/site/us/menuitem.e7659573b7a2...

RIT https://individualinvestor.myleggmason.com/portal/server.pt?...

NRO https://www.nb.com/CEFLiterature.aspx?id=1281

JRS http://www.nuveen.com/CEF/Product/Overview.aspx?fundcode=JRS...

PPSAX http://www.principalfunds.com/investor/funds/portfolios.htm

RREIX http://www.remsgroup.com/income5050.html http://www.theworldfunds.com/

HLRRX http://www.remsgroup.com/income5050.html http://www.theworldfunds.com/

RIF http://www.rmrfunds.com/products/funddetails.aspx?t=RIF
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