Tuesday, November 25, 2008

Home Prices/Lexington Realty (LXP) & LXPPRD/GXP/PWE/AAV

Home prices, the achilles heal of the economy, fell a record 17.4% for the year ending in September 2008 in the 20 major cities tracked by the Case-Schiller home price index. MarketWatch Phoenix had the largest decline at 31.9%.  Other cities include Miami, down 28.4%; San Franciso down 29.5%; and Los Angeles down 27.6%.  In cities that did not experience a parabolic rise in home prices, like Charlotte and Dallas, the declines were far more modest, less than 5%. Nashville is not in the index but I suspect the fall is close to Charlotte.  There is a lesson to learn from this fiasco.  If you are in a home market where the price is going up at a 20% compound rate, the general idea is to sit tight in what you have or to sell (and buy only in a community like Nashville which never goes parabolic) and most importantly do not buy into it, wait if you can for prices to correct.  Prices can not rise at 20% compounded for more than a few years without a serious correction for the simple reason that incomes are not rising anywhere near that rate. You may have very isolated pockets that can maintain that growth rate longer than others, due to unique factors like ocean front property or exclusive properties for the rich and famous, but eventually reality has to set in and the sobering reality is ability to pay.  The decline in prices may even accelerate due to increasing joblessness and the failure to come to grips with loan modifications to avert the avalanche of foreclosures.  Lenders will just have to eat some of the principal associated with mortgages tied to excessive valuations created by the bubble, before the bleeding can stop.   

Lexington Realty just became the latest REIT to cut the common stock dividend.   Yahoo! Finance It of course had to maintain its preferred stock dividends since it still plans to pay a common dividend.  I have been looking at one of its preferred issues, LXPPRD, that is currently selling at around 7, with a $25 par value and a 7.55% coupon, currently yielding about 27% at that $7 price.  LXPPRD Stock Quote - Lexington Rlty Tr Stock Quote - LXPPRD Quote - LXPPRD Stock Price It is cumulative.  I realize the risk with these issues and do not expect all of them to work out.  Nonetheless, the yields are tempting and I am attempting to evaluate them separately and on their on merits to improve my likelihood of avoiding too many blow ups.  I have not decided yet on this one but 50 shares would be my limit for it.   

Great Plains Energy (GXP), one of my positions, went ex dividend today and I am reinvesting dividends on that one.  I also had a couple of Canadian Energy Trusts go ex dividend today, which pay monthly distributions and are recent adds, but have not yet been discussed, PWE and
AAV Stock Quote - Advantage Energy Income Fund Stock Quote - AAV Quote - AAV Stock Price  I did discuss another one PVX and the same problems mentioned in that post are equally applicable to PWE and AAV.  The later two have been impacted adversely by the fall in gas and oil prices, even with some collars in place. INZ AND PVX  As mentioned in that post, these companies can pay high dividends because they do not have to pay Canadian taxes at the federal level and can thus distribute more income to shareholders, but this will cease in 2011 when Canada will start to tax them as regular corporations. The fall in energy prices is another negative issue.  The fall in the Canadian dollar over the past several months, (see chart of FXC), results -in and of itself- in lower dividends to a U.S. holder and Canada taxes the distribution by requiring the company to withhold 15%.  Some of the Canadian Energy Trusts have already lowered their dividends to reflect the fall in prices, including PVX and ERF.  However, these stocks are starting to interest me after being smashed over the past several weeks.   Last earnings report for PWE: Penn West announces its results for the third quarter ended September 30, 2008: Financial News - Yahoo! Finance
My max for AAV is 100 shares which I already have and 150 for PWE and I am at 70 so far.  I do not intend to add to PWE for the remainder of the year or until I see some kind of stabilization to energy prices. 

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