Wednesday, June 27, 2012

Bought Roth IRA: 50 AVK at $15.3 and100 BDN at $11.24

There is a great deal of hand wringing among economists, journalists and assorted pundits about the upcoming fiscal cliff. This would include a recent warning from the CBO that falling off that cliff could lead to a U.S. recession, ABC News This cliff refers to the looming expiration of the Bush tax cuts and automatic spending cuts. The CBO estimates that the simultaneous removal of the tax and spending stimulus will cause the economy to shrink 1.3% in the 2013 first half before expanding 2.3% in the second half. CBO | Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013

Maybe it would be for the best to go ahead and jump. Something needs to be done now about budget deficits running at over a trillion a year. As noted in a Reuters article about the austerity measures implemented by the Baltic countries in 2009, it is better to "just do it" and move on. It may take a few months to adjust, and the rich will complain about the restoration of tax rates in effect during the Clinton administration. Many of them complain about paying any taxes. The end to the current uncertainty will allow people to adapt. And, the U.S. will have at least taken the first baby step in addressing its own looming fiscal crisis. So, from where I sit, bring it on.

After the close on Monday, Moody's downgraded its ratings of 28 Spanish banks by one to four notches. Moody's downgrades Spanish banks Banco Santander is rated one notch higher than Spain's Baa3 rating, due to its geographic diversification of its balance sheet and income sources.

Nonetheless, Santander's senior debt was downgraded from A3 to Baa2. Santander's subordinated debt was downgraded to Baa3, just one notch above junk. The equity preferred stock, issued by Santander Finance, appears to me to be rated at Ba3 down from Ba1. I own 130 shares of equity preferred floating rate preferred SANPRB, which holds some limited appeal to me at its current price. Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6, SAN.PB. I have already booked profits on that security with my current position near break-even. (snapshots at Advantages and Disadvantages of Equity Preferred Floating Rate Securities) The symbol for that security recently changed from STDPRB. When I first bought this security, it was rated in investment grade territory and now it is moving deeper into the junk category.

Spain sold yesterday €3.08 billion in three month bills at a 2.362% yield, up from the .846% yield in the previous auction.

For a change, the Case Shiller index of home prices rose in April, with home prices in 19 out of 20 metropolitan areas rising.

My two Canadian bond ETFs, CBO and CLF, both traded on the Toronto exchange, were ex dividend for their monthly distributions yesterday. I own 300 CBO and 500 CLF. CBO invests in corporates bonds issued by Canadian companies. CBO Holdings CLF invests in debt issued by Canada and its provinces. CLF Holdings Both funds use a 1-5 year ladder strategy. CBO: iShares 1-5 Year Canadian Corporate Bond ETFCLF: iShares Canada 1-5 Year Canadian Government Bond ETF

The market has a small rally yesterday that faded into the close. The VIX fell 2.8% to close at 19.81.

1. Bought 100 BDN at $11.238 Last Friday-Roth IRA (see Disclaimer):  BDN was down about 9 cents from the prior close last Thursday, when the DJIA declined 250+ points. BDN declined 36 cents, or 3%, last Thursday, closing at $11.33 on 6/21/12. BDN Historical Prices I would prefer to see a REIT stock suffer significantly less during a big stock market down day. 

An investor can view this REIT's properties by going to its website, Our Properties: Brandywine Realty Trust. Under the heading "property search", click the sate and view the properties. The REIT has a number of office properties in the Metro D.C. including southern Maryland and Northern Virginia; Richmond, VA; Philadelphia and its suburbs; and in NJ. 

Morningstar has the stock rated currently at 3 stars, with a $12 fair value estimate and a consider to buy target at $7.2 which I view as unrealistic. I would view the Morningstar report to be too negative, though Brandywine's market may still favor tenants in lease negotiations.  

I would not view the operating history between 2008-2010 to be a harbinger for the future, nor would I continue the conditions of that negative period deep into the future. 

Prior to the near Depression, BDN had an occupancy rate of 93.5%. That rate fell to 85% at the end of 2010. When occupancy rates fall, that fact is noticed by existing tenants whose leases are expiring, and the company would suffer a deterioration in net operating income from that double whammy (lower occupancy and lease concessions on renewal).

As of 3/31/12, the occupancy rate was at 86.7%, page 44 BDN 03.31.2012 10-Q. However, with leases signed after 3/31/12, the occupancy rate was 88.8% leased.

As of 3/31/12, Brandywine had a property portfolio consisting of 205 office properties, 20 industrial facilities, and five mixed-use properties. Altogether, those properties have 25.1 million net rentable square feet. Page 43 BDN 03.31.2012 10-Q

For the 2012 first quarter, BDN reported FFO of $.32 per share, down 1 cents from the year earlier quarter. SEC Filed Press Release The company guided FFO for the year to a range of $1.3 to $1.35. As of 3/31/12, BDN had assets of $3.98 billion; cash and cash equivalents of $284.236M; held to maturity securities of $50.164M; mortgage debt of $508.21M; and unsecured senior loans of $600M. (page 6: Balance sheet numbers)

The YF Key Statistics page has price to book at .88.

BDN is currently paying a 15 cent per share quarterly dividend. At that rate, the dividend yield would be about 5.34% at a total cost of $11.24 per share.

Profile page at Reuters

Key Developments page at Reuters

Subsequent to my purchase, Brandywine Realty announced that its joint venture acquired three office buildings in Silver Spring, Maryland, with 499,395 square feet, near a recently renovated transit station. And, Brandywine Realty announced yesterday that it had sold a two-building in Carlsbad, CA. for $29 million, or $239 per square foot, that was 84% leased.

Earlier this year, BDN sold a fully leased office building in Herndon, Va. for $91.1 million.

Brandywine Realty closed at $11.2 in trading yesterday, up 6 cents per share.  The next ex dividend date is 7/2.

The goal for this kind of security is a 10% total return within a one to two year time period. Over one half of that return can be provided by the dividend. The stock needs to appreciate 4.61% on an annualized basis, after brokerage commissions, to achieve that goal. A ten percent gain in the shares within the next two years would require a price 16 cents in excess of $12.37. The stock did trade at over $12.75 in May 2011. Last summer was a bad time for the stock and the market in general. BDN Interactive Chart

2. Bought 50 AVK at $15.3-ROTH IRA Last Friday (see Disclaimer): AVK is a closed end fund that owns convertible securities. Last Friday, the fund closed with a net asset value per share of $16.5, creating a discount to net asset value of -7.27% at that time.

Convertible bonds are hybrid securities, in that they combine potential characteristics of both bonds and common stocks. Generally, due to their bond characteristics, they provide some downside protection, while having the upside potential of common stock due to the convertibility feature. The downside protection will generally be more pronounced when the security has an investment grade rating, with less protection for convertible bonds rated as junk during periods where junk bonds without conversion features are declining in tandem with stocks (though not as much).

I will use the market action last Thursday, when the S & P 500 fell 2.2%. On that same day, iShares iBoxx $ Investment Grade Bond ETF (LQD) rose 18 cents, or .15%, to close at $116.95, hardly exciting but better than the 2.2% decline in the SPDR S&P 500 ETF. A convertible securities ETF, CWB, declined 38 cents or 1% to close at $37.15.

On June 6th, the S & P 500 rose 2.4%, Historical Prices. The convertible securities ETF CWB rose but only by .65%. LQD declined slightly that day, falling 34 cents.  CWB  had a 26.91% weighting in below investment grade convertible bonds as of 6/25/12 (29.86% not rated; 26.92% Baa; 11.72% A; 1.595 AAA-CWB - SPDR Barclays Capital Convertible Securities ETF)

In the decade ending July 2010, the S & P 500 lost a cumulative 7.37%, while the Bank of America/Merrill Lynch All Convertible Index rose 32.64%. Convertibles As noted in the foregoing linked article published in Financial Advisor Magazine, convertible securities had a rough 2008 and rebounded sharply in 2009, showing unusual volatility in both years.

Sponsor's webpage: AVK - Fund Overview
AVK Page at the CEFA

The fund is highly leveraged (40.24% as of 6/22/12).

According to note 7 of the Annual Report at pages 35-36, the leverage consists of auction market preferred shares that current have a low interest rate. Brokers placed their clients in this kind of security, and now those clients find their investments illiquid when the auctions started to fail. Auction rate security The fund shareholders benefit, since these securities are a low cost way for the fund to borrow money. The annualized dividend rates on theses auction preferred shares averaged between 1.41% to a high of 1.52% for the F/Y ending 10/31/2011. Fitch recently reaffirmed its AAA rating of those auction rate securities, TEXT-Fitch.

Monthly dividends are paid at the current rate of $.0939. Capital gain distributions were also made in December 2000, and 2011. AVK - Historical Distributions At the current monthly distribution rate, the dividend yield would be approximately 7.36% at a total cost of $15.3 per share.

SEC Form N-Q: Holdings as of 1/31/12. As of that date, there was a 89.2% weighting in convertible bonds (weighted in junk rated securities) and 6.1% in convertible preferred stocks. The credit quality is lower than the securities owned by CWB:

Link to the AVK SEC Filed Annual Report

{Powershares also has a convertible ETF. The credit quality for that one is lower than CWB overall but higher than AVK, Convertible Securities Portfolio | CVRT}

Due to the juice provided by the low cost leverage, its lower quality bonds, and a market price below its net asset value, AVK will have a significantly higher yield than the convertible ETFs.

I plan to average down by buying another 50 shares if and when the price falls below $14.75.

During an Unstable VIX Pattern, I will chop orders up into pieces and will trade those lots more frequently, compared to a Stable VIX Pattern, when positions would need to be acquired all at once for the most post. The Unstable VIX Pattern will have a considerable amount of whipsaw action in the market, a roller coaster ride, where sell the rips and buy the dips is the guiding trading principal.

The odd lots will be traded, generally speaking, in the same order as their purchase, so that the highest cost lot is sold first hopefully after a pop that generates a profit. With CEFs and other securities that pay good dividends, I am not that interested in the amount of the profit, but in capturing the dividend without losing money on the shares.

Advent Claymore Convertible Securities & Income Fund (AVK) closed yesterday at $15.28 and had a net asset value per share at that time of $16.39.

In 2011, this fund was trading mostly in a $18-$20 range, AVK Interactive Chart. If you adjust those prices down for the subsequent monthly distributions, the range would be lower,  AVK Historical Prices. As with all income CEFs, the goal is simply to capture the dividend without losing anything on the shares. When held in the ROTH IRA, that dividend in effect becomes tax free.  

1 comment:

  1. I take the annual dividend and divide that number by the cost per share. For a security that pays monthly dividends, I need to multiply the monthly penny rate by 12 to arrive at an annual number. The dividend yield will of course change as the price changes, and whenever the dividend is raised or cut.

    For AVK, the dividend is paid monthly at the current rate of $.0939. I calculated the yield at about 7.36% at a total cost per share of $15.3 ($.0939 x. 12 months=$1.1268 per share annually, divided by cost per share of $15.3=7.36%).