Monday, December 20, 2010

Bought 50 MSPRA at 19.71/Rounded UZV to 200 shares/Added 40 CWH at 24.14 in the Roth IRA

1. Call Warrant Exercised for the Trust Certificate XFB (See Disclaimer): The owner of the call warrant attached to the TC XFB has indicated its intent to redeem the trust certificates on 12/22/2010 at their $25 par value plus accrued interest.Conditional Full Redemption of Corporate Backed Trust Certificates, News America Debenture-Backed Series 2002-9 Trust Class A-1 Certificates (CUSIP: 21988G437; NYSE: XFB)     I recently bought this TC and will suffer a small net loss as a result of this redemption since I paid a premium to par value and the TC just went ex interest.  The accrued interest will be $.1184895 per certificate.  /Added 50 XFB @ 25.39   BOUGHT 50 XFB at 25.5  As discussed in those posts, the existence of the call warrant caused me to limit the amount of my purchase since the TC has just gone ex interest and the underlying bond was selling at over par value.   XFB was  a Lehman ABS creation and I am curious whether the Lehman Bankruptcy Estate owned the call warrant.

2. Bought Back 50 MSPRA at $19.71 on Friday (see Disclaimer): Before placing this order, I checked my realized gains from this security in 2010.  After commissions, I have realized a profit of $962.87, based on two transactions, with the first round trip providing the bulk of the gains. Bought 100 MSPRA at $12.88 (May 2009)   SOLD 100 MSPRA at 21.43 Bought 50 MSPRA at 15.7   Sold MSPRA at 18.50

I am just willing to play with the house's money on this non-cumulative equity preferred stock issued by Morgan Stanley at the current price. MSPRA pays qualified dividends.  The rate is the greater of 4% or .7% over the 3 month LIBOR rate. (prospectus:  Par value is $25.

I discuss at more length the advantages and disadvantages of this type of security in an earlier post:  Advantages and Disadvantages of Equity Preferred Floating Rate Securities

The guarantee is the applicable rate now. At the 4% guarantee, the yield at a total cost of $19.71 is about 5%.   That is okay in the current abnormally rate environment, given the tax advantage, but not a sufficient reason to buy it given the risk's inherent in this kind of security.

While the guarantee is the worst rate, these equity preferred floaters have no legal limit on the best rate payable under the LIBOR float.  So, for example, if a hyper inflationary period arrives, somewhat similar to the late 1970s or early 1980s, and the 3 month LIBOR rate rose to 12%, vintage fixed coupon bonds would suffer a significant diminution in price to make their yields competitive with new issues.  MSPRA, whose coupon floated up with the short term rates, would be desirable, assuming of course Morgan Stanley is then paying the dividend. At a cost of $19.71, that coupon rate of 12% plus the .7% spread would result in a   yield of 16.1% at that $19.71 total cost.

A more realistic scenario is to assume an average LIBOR rate based on historical numbers over the past twenty years, just to arrive at a feel. LIBOR Rates History (Historical) We know that the 3 month LIBOR is likely to be low well into 2011.  At some point, it will start to rise to more normal levels.  Based on the historical record,  an average 3 month LIBOR rate of 4.5% over a 20 year period would be a rational forecast for the future.  At 4.5%, the coupon becomes 5.2% or 6.6% at the $19.71 per share total cost.  I will most likely hold this security, collect a dividend or two, and clip a small profit.

The time to buy these securities was during the Dark Period when they were just smashed.  My second post in this blog discussed METPRA, LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK (October 2008), which was then selling for $9.8 with a 4% guarantee on a $25 par value and a 1% 3 month LIBOR float.  And that was not even the lowest price for that security, now selling near par value, since I later mentioned buying shares at $7.

3.  Completed Order to Round up UZV to 200 Shares on Friday (see Disclaimer):  As previously discussed, Telephone & Data Systems will soon redeem about 100 of my 200 shares of its senior exchange traded bond, TDA, and I decided to use part of those proceeds to add to my existing position in UZV, a United States Cellular senior bond.   That bond was just discussed and I have nothing further to add.  UZV closed at $24.95 on Friday. Added to UZV at 25.01 (Post dated 12/15/2010)


4.  Added 40 CWH in the Roth IRA at 24.14 on Friday (see Disclaimer):  I now own 140 shares of the common shares of  CommonWealth Reit (CWH) and 100 shares of its senior exchange traded bond maturing in 2019.   The dividend yield on the stock is higher than on the bond.  The current quarterly dividend rate on the common shares is 50 cents. That works out to a yield of about 8.28% at a total cost of $24.14.  I last discussed buying some CWH shares at 25.2.   I will just copy some of those comments and then add some more recent information:

"CWH fell in price some after selling 7.5 million shares at $26.75, 8k, intending to use the proceeds to fund a portion of its redemption of its 8.75% series B preferred stock and to repay amounts outstanding under its credit facility.

As of 6/30/10, CWH owned about 31.8% of the outstanding shares of Government Properties Income Trust, a former subsidiary. (p. 8 10q)

As of June 30, 2010, CWH owned 291 suburban office properties, 44 central business district office properties and 186 industrial & other properties, excluding one property classified as held for sale and included in discontinued operations. Included in those totals is 17.9 million square feet in of industrial and commercial lands in Oahu, Hawaii.

CWH has a 89.1% of its total square footage under lease as of 6/30/10. Rental rates are under pressure due to the recession. Occupancy rates are still trending down. One knock on this REIT is the number of suburban properties owned by it. Generally speaking, there are no barriers to entry in that kind of market.

CWH entered agreements to sell 15 properties to GOV with approximately 1,900,000 square feet for an aggregate sales price of $231m, excluding closing costs.

This REIT was formerly known as HRPT Properties.

S & P has CWH rated 4 stars with a $30 12 month price target."    (Post Dated 10/1/2010)

Since that date, CWH agreed to sell 27 properties for 470 million and anticipates realizing a net capital gain of approximately 174 million.   The properties are being sold to Senior Housing Properties Trust, formerly owned by CWH and spun out of it in 1999.   Those properties have a current average occupancy rate of 95%.   SEC FORM 8-K 

In the last filed  Form 10 Q, the company stated that it owned 9,950,000 shares of Government Properties Income Trust (GOV).  That stock closed at $26.12 on Friday.  

15 of CWH's properties are secured by mortgage debt of 352.575 million with a book value of  493.032 million.  The outstanding debt is listed at page 28 of the last Form 10-Q.  As previously mentioned in connection with the purchases of the senior exchange traded bond, CWHN, this REIT recently sold 250 million of a senior unsecured noted maturity in 2020 with a 5.875% coupon.  

CWH is still rated 4 stars by Morningstar.  At that page, price to book is shown at .7.   And S & P still rates the stock 4 stars with a $30 12 month price target.  That estimate is made based on their forecast of a FFO of $3.85 and applying a 7.8 multiple to that estimate. 

As of September 30, 2010, CWH owned 285 suburban office properties, 41 central business district, or CBD, office properties and 193 industrial & other properties.   

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