Tuesday, May 29, 2012

Colt Defense Downgrade/Bought 50 SIR at $21.86/Sold 100 HTGC at $10.64/Bought 100 ONB at $11.85

It is rare to see a baseball player successfully steal home. An even rarer occurrence is a successful triple steal. Last Saturday, Vanderbilt was successful in completing the triple steal against Florida. Vanderbilt Triple Steal - YouTube

SunOpta, a LT selection, has agreed to sell its Canadian natural health products distribution business to Banyan Capital Partners. The transaction is valued at CAD $14.7 million. At closing, Banyan will pay CAD $14 million in cash. The remanding consideration is contingent on future EBITDA earnings targets. SunOpta rose 4 cents in trading last Friday to close at $5.85.

The VIX had its 10th consecutive close above the important 20 demarcation line last Friday. Mark Hulbert and the Use of the VIX as a Timing Model

The U.K.'s Office of National Statistics revised GDP for the 2012 first quarter to a negative .3% from -.2%.

According to the NYT, Nasdaq has admitted that 30 million Facebook shares were executed improperly. The losses to market makers are currently estimated at over $100 million. A good summary of what went wrong can be found in an article at Reuters.

According to a news release issued by Merchants Bank, that bank is ranked by two banking journals as one of the top performing small banks in the U.S. Bought 50 MBVT at $26.25 (5/2/12 Post); Bought 50 MBVT at 22.9 (April 2010 Post); SOLD 50 MBVT at 26.5 (July 2011 Post)

I received the stock dividend from Valley National last Friday, plus $5.7 in lieu of fractional shares:

Those stock dividend shares bring me up to 262 VLY shares. I have not been reinvesting the dividend.

1. Colt Defense (own 1 2017 Bond): Last Thursday, S & P downgraded the Colt Defense 2017 unsecured senior bond to CCC. TEXT-S&P In addition to its high leverage and several poor earnings reports since my 1 bond purchase, Colt recently lost the contract to supply the M4 carbine to the U.S. military. Colt has filed a protest to the government's award of that contract to Remington. S & P does note that Colt will receive a 5% royalty for the M4s manufactured by its competitor.

I recently increased my risk rating for this bond to 9+. Colt Defense-Raising Risk Rating to 9+ I am not optimistic about this company surviving to pay off this bond at maturity. (see also Item # 5 Colt Defense discussing earnings report for the 2012 first quarter). I have been disappointed by the performance of the company. 

2. Bought 50 SIR at $21.86 Last Friday (see Disclaimer): Select Income REIT is a recent IPO. The shares were priced at $21.5. IPO Prospectus With the over-allotment option, which was exercised, SIR sold 9.2 million shares. www.sec.gov As previously noted, this REIT was formed by Commonwealth REIT who contributed 251 properties to SIR in exchange for 22 million shares and a $400 million note. SIR intended to use the proceeds of the IPO to pay back that note. The note has been repaid in full,  Form 10-Q at page 6.

As of 3/6/12, the date of that prospectus, SIR's Hawaii properties contributed 68.1% of SIR's total revenues. Of the 228 properties located in Oahu, Hawaii, 215 are "commercial lands", most of which "are leased on a long term basis to tenants that operate businesses and have contracted buildings on our properties".

Simultaneously with the closing of the IPO, SIR entered into a $500 million credit facility. As of 3/31/2012, the company had borrowed $227 million under that facility.  (pages 6, 20 of  Form 10-Q)

SIR expects to pay a quarterly dividend of 40 cents per share for at least the first year following its IPO. (page 26 of the Prospectus) U.S. tax law requires a REIT to distribute annually at least 90% of its taxable income, excluding net capital gains.

Assuming the continuation of a 40 cent quarterly dividend, which is of course in no way assured, the dividend yield at a total cost of $21.86 would be about 7.3%.

The company reported $1.34 per share in net income for the first quarter of 2012. 10-Q at page 2 As of 3/31/12, the company had leases covering 95.2% of its total square feet. (page 9). The majority of SIR's Hawaii properties "are lands leased for rents that are periodically reset on fair market values, generally every five to ten years". (page 11)

While I can not examine any of SIR's Hawaii land leases, land leases generally do not require capital expenditures from the lessor since the lessee will build and maintain the structure on the leased land. As a consequence, a land lease can be close to pure profit net of any applicable taxes, with expenses generally limited to the costs incurred with the lease agreement, any re-zoning expenses, and any interest expenses associated with the land acquisition.

With this type of investment, my goal is a modest one. I would hope that SIR at least maintains the quarterly dividend at 40 cents. If I am able to exit the position with an annualized 10% total return, I will be satisfied with that result. Given the dividend yield, I can achieve that goal with a relatively small appreciation in the shares.

This is a link to SIR's investor presentation made last March:  sirreit.com 

LINK to Website: Select Income REIT

As noted in the press release announcing 2012 first quarter earnings, SIR signed agreements to purchase two single tenant office buildings in April 2012. SEC Filed Press Release  A 100% net leased office building located in Provo, Utah with 405,699 square feet will cost $85.5 million. The other office building is also 100% net leased to a single tenant and is located in Englewood, CO.

Select Income REIT Profile Page at Reuters

Select Income REIT (SIR) rose 6 cents in trading last Friday to close at $21.93.

3. Sold 100 HTGC at $10.64 Last Friday (see Disclaimer): After buying 100 of HTGZ in the Roth IRA last Thursday, I decided to liquidate the common shares of Hercules Technology Growth Capital. The common shares just went ex dividend prior to my sell.  HTGC Stock Quote HTGZ is a senior bond issued by Hercules with a $25 par value and matures in 2019 at $25.  Bought 100 HTGZ at $24.6-ROTH IRA I now own 200 shares of that bond which is all of the exposure that I want to this BDC. I realized a small gain on the HTGC shares plus two quarterly dividends.

Hercules Technology Growth Capital (HTGC) rose 5 cents in trading last Friday to close at $10.56.

4. Bought 100 ONB at $11.85 Last Friday (Regional Bank Basket Strategy)(see Disclaimer): Old National Bancorp is a bank holding company headquartered in Evansville, Indiana.  Through its banking subsidiary, Old National Bank, ONB operated 181 banking centers primarily in Indiana, Kentucky and Illinois as of 12/31/11. FORM 10-K

In January 2012, ONB agreed to acquire Indiana Community Bancorp (INCB) in an all stock transaction valued at approximately $79.2 million. INCB is headquartered in Columbus, Indiana and has 17 branches in south central Indiana. I did review the last earnings report for this bank, which was not good. Indiana Community Bancorp Announces First Quarter Results NPLs were 4.59% of total assets and the bank reported a loss for the first quarter. I would not even consider purchasing a bank stock as part of my Regional Bank Basket Strategy with that level of NPLs.  I assume ONB is interested in the branch locations and INCB's customers.

In 2011, ONB acquired Integra Bank in an FDIC assisted acquisition. Integra was also headquarterd in Evansville and operated 52 branches.

In another 2011 acquisition, ONB acquired Monroe Bancorp in an all stock transaction, which added 15 banking centers. Monroe was headquartered in Bloomington, Indiana. The Indiana University is located in that town. I counted 9 ONB branches in or near Bloomington using Google Maps.

It is clear that ONB has used the Great Recession period to considerably expand its geographic footprint and operations.

For the 2012 first quarter, ONB reported an E.P.S. of $.23 on a GAAP basis which included some extraordinary expenses associated with ONB's acquisition activities. SEC Filed Press Release As of 3/31/12, the net interest margin was at 4.2%; the TIER 1 leverage ratio was 8.8% and the total risk based capital ratio was 15.4%; NPLs to total non-covered loans was high at 2.77%; the coverage ratio for non-covered loans was at 48%; and the return on average assets was 1.02% for the quarter.  I prefer to see the coverage ratio over 100% and NPLs less than 1%.  {As a mitigating factor, I was not able to determine how much of the NPLs were associated with the Monroe Bank acquisition. That bank was publicly traded under the symbol MROE, and I briefly examined its last filed SEC Form 10-Q for the Q/E 9/2010. That acquisition was not FDIC assisted.}

The capital ratios are currently good:

Form 10-Q for the Q/E 3/31/12 at page 64.

The current consensus estimate is for an E.P.S. of 96 cents this year and $1.06 net year. ONB Analyst Estimates

In January 2012, Old National increased the quarterly dividend to 9 cents per share from 7 cents and further authorized the purchase of up to 2 million shares.

Assuming a continuation of that penny rate, the dividend yield at a total cost of $11.85 would be about 3%.

Link to Recent Investor Presentation: SEC Filing (contains map of branch locations)

While declining from over $13 per share earlier this year, ONB shares were still trading over their 200 SMA at the time of my purchase, but had pierced the 50 day SMA to the downside.  ONB Interactive Chart

Old National Bancorp (ONB) declined 14 cents in trading last Friday to close at $11.86. 

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