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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 77271  
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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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70336 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/13/2012 7:26 PM
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ears:
great post!...i am going to dig in deeper over the weekend, and get a better grip than my brief scan...thanks for your hard work.

quick responses:

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.

when i see large holdings by BIG GUYS in a limited field like REIT preferreds, i start to feel twitchy....how does a small investor (i.e. micro investor like me) not get stepped on if/when the elephants stampede? even a major migration for new feeding grounds would seriously affect the market...your statement that they are in it for the long haul is comforting, i suppose, but i am skeptical that it is fully true (funds don't necessarily have a long view when subscriptions are made or lost by quarterly returns)

* What should I get for my youngest son – he’s going to be 31 – for his birthday on Sunday?
if he is nearby, father/son tickets to any upcoming local sporting event or activity...or tech toy.

and further OT
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.
(childhood flashback to elephant jokes)
Q. "Why do elephants paint their toenails pink?"
(no, why)
A. "To hide in cherry trees."

Q. "Ever seen an elephant in a cherry tree?"
(no, why)
A. "Sure do hide good, don't they?)


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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70346 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/14/2012 11:29 AM
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how does a small investor (i.e. micro investor like me) not get stepped. - hondodog

Think what happened to PLD issues some time back, they went on a sale and presented a great buying opportunity and the price eventually recovered. I guess that kind of volatility is really good for small folks like me. It gives me an opportunity.

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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: 70349 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/14/2012 11:54 AM
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Hey Hondodog,

when i see large holdings by BIG GUYS in a limited field like REIT preferreds, i start to feel twitchy....how does a small investor (i.e. micro investor like me) not get stepped on if/when the elephants stampede? even a major migration for new feeding grounds would seriously affect the market...your statement that they are in it for the long haul is comforting, i suppose, but i am skeptical that it is fully true (funds don't necessarily have a long view when subscriptions are made or lost by quarterly returns)


I share your concerns, which is one reason I'm trying to dig into these funds a bit. Looking at the facts behind the largest fund in the REIT preferred space -- Forward Select Income Fund (KIFAX) -- may give some perspective:

1) Joel Beam has been managing or co-managing the KIFAX since it's inception on 03/30/2001.

2) KIFAX has had three owners since inception -- The Coventry Group, The Kensington Funds, and now Forward Management. All this time the fund objective has stayed the same: focus on REIT preferred with a smattering in real estate debt and REIT common.

3) As of 3/31/2002 KIFAX had $161 million in total assets with 60% of that in REIT preferred. As of 06/30/2009, when it was taken over by Forward, KIFAX had $707 million total assets with 86% REIT preferred. As of 06/30/2011, KIFAX had total assets of $1,644 million with 79% REIT preferred.

The fact that this fund has been around for almost eleven years, gone through three owners, survived the turmoil of 2008-2009, significantly increased it's value during that time, *and* kept it's focus primarily on REIT preferreds throughout that whole time...well, it tells me this fund is in it to win it...sorry, too much IDOL...in it for the long haul.

In order for there to be a market in REIT preferred so that a peon like me can feel like he's 'investing', there needs to be demand. Imagine what it would take to fill the KIFAX shoes. Yes, it's true, that's *exactly* the worry -- what if KIFAX goes away? -- but look at their track record. I'm happy with this heffalump in the room.

Thanks,
Ears

P.S., KIFAX is activiely managed using a stratgey which includes dividend capture, leverage, and hedging -- which makes it even more interesting. More on this another time.

Disclosure: no positon in KIFAX.

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Author: klee12 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70351 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/14/2012 1:26 PM
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hondodog wrote <<how does a small investor (i.e. micro investor like me) not get stepped on if/when the elephants stampede? >>

As another micro investor, I am welcome an elephant stampede (provided it's not justified). If the cash flow of the underlying REIT is stable then the prices should recover. Here's where following the REIT comes in handy, especially if it's a high yield preferred comes in handy. I think Simon Wadsworth is correct in saying, essentially, the higher yielding REIT preferred market is inefficient.

It is not enough to pick the preferred with the highest expected return; one must also have enough faith not to get shaken out of that preferred when it's price plunge. I once thought that I had nerves of steel and could handle volatility. In the Great Recession I found that wasn't completely true. I was shaken out of my non REIT investments but I hung onto my REIT investments (I shifted into preferreds). Why? Because of faith; I felt I understood the REITs better. That's why I finally decided, after the Great Recession, to remain very overweighted in REITs. I expect volatility and I'm afraid of getting shaken out of good investments that I have little faith in.

Comments, corrections, bricks welcome

klee12

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Author: LordXot Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70358 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/14/2012 10:01 PM
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"As another micro investor, I am welcome an elephant stampede (provided it's not justified). If the cash flow of the underlying REIT is stable then the prices should recover."


The statement above was graphically illustrated just recently. Before CSA-A is redeemed and the chart disappears, take a look at the price and volume action on 11/30/2011. On that day, CSA-A dropped from the previous close of 22.99 to close at 21.63 (-$1.36). The low for the day was $21.25 (-$1.74). The difference in closing prices is -5.9%. At the low, the decline was -7.56%. Volume was 86,864 shares. The day before it was 3076 and the day after it was 4688. For comparison, the common of CSA rose 4.15% on that day and the DJI was up over 400 points.

I bought CSA-A that day and detailed my reasons for doing so in a post on IV. That post is below. Bottom line is it was plain to me that CSA-A was under liquidation....without "justification".......as stated above. In other words, there was no company specific reason for the share sell off.

This is relevant to the discussion regarding KIFAX and funds holding large amounts of reit pfds. It's of concern that these funds could harm investors if they move too quickly. The example of CSA-A dispells that notion graphically. Large amounts of shares cannot be forced into illiquid markets without drastic price disruptions as illustrated by the one day action in CSA-A. Of courses, you may ask how a drastic price disruption is not harmful to investors but this disruption occurred on 11/30 and by 12/7, the price had returned to $23.23 for a gain of 7.39% in seven days. If you bought into it, you made money and bought at a better yield. If you didn't, well, nothing happened. The price returned to and surpassed the previous level.

If KIFAX (for example) was responsible or the 87,000 CSA-A shares shoved into the market on 11/30, thank you. I'd like some more please. How about blowing out 300,000 ELS-A for me. Pretty please.

Bottom line is KIFAX can't hurt reit pfd investors by liquidating shares, generally speaking. It's the individual reits in and of themselves that will hurt you if it comes..................Xot

The pfd cefs also hold reit pfds. These are FFC, FLC, HPF, HPI, HPS, JHP, JPS, JTP, PDT, PFD, PFO, PSF




My post regarding CSA-A 11/30/2012.

"I just picked up a 100 at 22 and then another 200 at 21.50. Orders filled immediately. Sat here and watched the price walk down in .05 increments from 21.70 to 21.50 in the span of 30 seconds. Never saw that before on a non-panic day. I would guess there is a seller looking to liquidate a large number of shares as volume is 25 times normal. I can't see all the trades today to see if there are some blocks that have traded. But the tell is that the common is up 5.28% as i write. Bad news is always reflected in the common. If the common is up and there is a large price decline on big volume in the pfd, then there is a liquidator. Liquidators driving down the price = buy. Too bad i'm heavier in this name than i want to be and i'm trying to hang onto some funds to buy FUR-D or i would buy some more shares here for a flip if nothing else. There is no situation i like better than a big decline in the pfd in direction opposition to a big advance in the common. I would buy and buy if i had the cash and my position was smaller. This is near as good as it gets.

Maybe this is a tax seller. Who knows? Who cares?.......................................................Xot"

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Author: JimLuckett Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70364 of 77271
Subject: Re: In Which Ears Hunts for Heffalumps Date: 1/15/2012 9:46 AM
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hondodog wrote <<how does a small investor (i.e. micro investor like me) not get stepped on if/when the elephants stampede? >>

Hold.

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