NRO: This Real Estate Fund Is Worth Considering, But Don't Ignore The Risks

2025-01-28 18:01:41 ET

Summary

• The Neuberger Berman Real Estate Securities Income Fund Inc offers high current income and inflation-resistant real estate exposure, boasting an 11.01% yield, significantly higher than the 2.52% yield of the iShares U.S. Real Estate ETF.
• Despite its attractive yield, the fund has underperformed the U.S. real estate index over the past decade, partly due to leveraged losses during market downturns.
• The NRO closed-end fund's portfolio is invested primarily in equity REITs, which should prove better than mortgage REITs for inflation protection.
• The NRO's current 6.37% discount to net asset value is appealing, especially compared to its long-term average and peer funds, making it a reasonable buy.
• While the fund covers its distributions, risks from rising mortgage rates and commercial real estate struggles persist, warranting close monitoring of its net asset value and financial health.

The Neuberger Berman Real Estate Securities Income Fund Inc ( NRO ) is a closed-end fund, or CEF, that investors can use to obtain or increase the exposure that their portfolio has to the inflation-resistant real estate sector along with a high level of current income. In a previous article , I shared an academic paper written by Brad Case of the NAREIT and Professor Susan M. Wachter of the Wharton School of Business that explained how real estate can protect investors against inflation. That paper included this statement:

The Gordon growth model suggests that real estate can be considered a perfect hedge against inflation – unlike, for example, most fixed income products, because real estate is a long-lived asset with income that adjusts to inflation.

This is something that could be significant today, as there are signs that inflation has begun to reaccelerate. For example, the month-over-month rate of change in the consumer price index, which is considered to be a much more insightful real-time measure of inflation than the headline year-over-year rate, has been rising since June 2024 and appears to be accelerating:

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