Saturday, August 23, 2014

Added 200 NWH_UN:CA at C$10.16/Sold148+ FMIHX/Bought 200 BHK at $13.4/Bought Roth IRA: 50 EMQ at $25.11, 50 RFT at $24.28, and 100 LXP at $10.64/Sold Roth IRA: 50 IPB at $26.5

Friday's Closing Prices 8/22/14
S & P 500 1,988.40 -3.97 (-0.20%)
The S & P 500 only stayed briefly before its 50 SMA line: S&P 500 Index Chart
DJIA: 17,001.22 -38.27 (-0.22%)
The DJIA bounced off its 200 day SMA line on 8/7: Chart
VIX: 11.47 -0.29 (-2.47%) : VOLATILITY S&P 500 (Phase 2 Stable Vix Pattern)
Phase 2 is the most bullish of the two phases.

TLT: $117.29 +0.65 (+0.56%) : iShares 20 Year Treasury Bond ETF
JNK: $41.26 -0.07 (-0.17%) : SPDR Barclays High Yield Bond ETF
GLD: $123.21 +0.33 (+0.27%) : SPDR Gold Trust
VNQ: $76.75 -0.62 (-0.80%) : Vanguard REIT ETF (unusual strong negative correlation w/bonds)
KRE: 38.96 +0.08 (+0.21%) : SPDR S&P Regional Banking ETF

Big Picture Synopsis: 

Stable Vix Pattern (Bullish-Historically Intermediate Term Indicator)
Use of the VIX as a Timing Model
Short Term: Market Needs to Correct
Intermediate Term: Slightly Bullish
Long Term: Bullish

The WSJ noted that Vanguard saw a surge in money flow to its low cost S & P 500 index fund after Warren Buffet gave that fund a recommendation. Buffet told his trustee to "put 10% of the cash in short-term government bonds and 90% in a very low-cost S & P 500 index fund. (I suggest Vanguard's.)." That comment is made at page 20 of his last letter to Berkshire's shareholders: I would recommend that everyone read his "Thoughts about Investing" starting at page 17. 

One trader summarized three reasons why stocks were cruising for a bruising. MarketWatch One of those indicators is the Cook Cumulative Tick Indicator. The guy who wrote the article is Mark Cook, the apparent inventor of that indicator. Collapse

Shiller wrote a column published in the NYT, noting again the elevated and worrisome level of his CAPE P/E ratio, and opined that he could not find an objective reason for the current valuation. He "suspects" that the "real answers lie largely in the realm of sociology and social psychology-in phenomenon like irrational exuberance, which, eventually, always faded before".

I read last week a chapter in a book titled "The Behavior of Individual Investors" that is available online from Berkeley. behavior of individual investors.pdf There has never been any doubt in my mind that the "rational man" model for evaluating individual investors was hokum and snake oil. The preceding book chapter discusses the studies on this issue which confirms what I have seen for decades now and debunks that rational man hypothesis. The reasons for underperformance are explored starting at page 1547.

Stocks, Bonds & Politics: Efficient Market Hypothesis as Hokum (March 2010)

Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS (December 2011)

Efficient Market Theory: Do Humans Really Behave Rationally-Seek out Relevant Information & Then Process Information With Good Judgment? (June 2009)

Short to Long Term: Slightly Bearish Based on Interest Rate Normalization

This forecast assumes that the market is correctly predicting the average annual CPI over the next ten years.

That forecast is reflected in the break-even spread, calculated as follows:

Subtract Current Yield on the Ten Year TIP:
Daily Treasury Real Yield Curve Rates

From the Yield of the Non-Inflation Protected 10 Year:
Daily Treasury Yield Curve Rates


Recent Developments: 

Foreign ownership of marketable U.S. treasuries, excluding those owned by the Federal Reserve, has risen to nearly 60%. Council on Foreign Relations Foreign ownership of U.S. equities has been increasing since 2008 and is near its 2000 peak. 

Housing starts increased at a seasonally adjusted rate of 1,093,000, 15.7% above June and up 21.7% Y-O-Y.

CPI increased by .1% in July on a seasonally adjusted basis. Consumer Price Index Summary For the 12 month period, CPI increased 2% on a non-seasonally adjusted basis.

Sales of previously owned homes rose 2.4% in July to a seasonally adjusted annual rate of 5.15M. This was the highest annualized pace in 2014.

Markit's flash manufacturing PMI rose to 58 in August, the highest reading in 4 years.

The Philly FED manufacturing survey rose to 28 in August, its highest reading since March 2011. August 2014 Business Outlook Survey - Manufacturers Report Continued Growth - Philadelphia Fed In that index, any number over zero indicates expansion.

Last week, the Census Bureau released its study on the distribution of household wealth. The data series starts in 2000 and ends in 2011. I can not explain why it takes the government three years to compile the 2011 data. Wealth distribution 2000 to 2011.pdf  Median household wealth decreased by $5,046 between 2000 and 2011. The lowest three quintiles experienced decreases in net worth, while net worth increased for the top two quintiles. Median household net worth for the 4th quintile increased by 9.8% or $18,433 to $205,985 and by $61,379 to $630,754 or 10.8% for the 5th quintile. (Figure 1 at page 12)

The second and third quintiles would have most of their net worth tied up in home equity, rather than financial assets, and the severed price deflation in home prices starting in 2006 hit them in a disproportionate amount compared to the top two quintiles.

Due to the rise in home prices, the amount of home equity has been increasing rapidly after bottoming in the 2009 second quarter:

Owners' Equity in Real Estate, Level -St. Louis Fed

Still, the decline in home equity was unprecedented in modern American history as shown in the preceding graph.

Zillow estimated that more than 9.7M homeowners still had negative equity as of the 2014 first quarter.

This is a link to a map by county showing the percentages of households with negative equity in their homes. Infographic-Zillow

That is less than the number of homeowners who own their home free and clear. More than 19.5 million mortgages owned by just Fannie and Freddie have been refinanced at abnormally low rates since 2009. Federal Housing Finance Agency

The federal deficit as a percentage of GDP has been declining after hitting 9.8% in 2009:

Federal Surplus or Deficit [-] as Percent of Gross Domestic Product-St. Louis Fed


In this post, I will be discussing some adds intended to replace income lost in my recently completed stock allocation reduction. 

1. Bought 200 BHK at $13.404 (see Disclaimer):

Snapshot of Trade:

Closing Price on Day of Trade 8/7/14: BHK: $13.40 -0.13 (-0.96%)

I strongly suspected that the net asset value per share increased on 8/7/14, which was later confirmed by the fund as noted below.  

Security Description: BlackRock Core Bond Trust (BHK) is a leveraged bond CEF that is weighted in investment grade bonds, but has a significant exposure to junk rated securities. As noted by the sponsor, the fund will generally have at least 75% of its assets in investment grade bonds.

Data on Date of Trade 8/7/14
Closing Net Asset Value Per Share: $15.02
Market Price: $13.4
Discount -10.79%
Average Discounts
1 Year:  -9.34%
3 Year: -5.44%
5 Year: -5.75%

CEFConnect Page for BHK

The discount was -9.62% on 8/6. The market price went down 13 cents on 8/7/14 as the net asset value per share increased by 5 cents per share.

Form N-Q (holdings as of 5/31/14 (unrealized gains $34+M)

Last SEC Filed Shareholder Report: SEC (period ending 2/28/14):

Credit Quality as of 2/28/14: Page 5
According to the sponsor, the option adjusted duration was 8.67 years as of 12/31/13.

Sponsor's Website: BlackRock

When I purchased BHK, the fund had a 4 star rating by Morningstar.

2012 BHK  217+ Shares +$68.58
I reinvested 17 monthly dividends and realized a profit on all shares purchased with dividends. 

Total Dividends: $224.67
Total Return: $293.25 or 10.63% 

Given the nature of this investment, I am content with harvesting the dividends and exiting the position at a profit. An annual total return of 8% would be viewed as good. Eventually, I am going to get caught holding one or more leveraged bond CEFs when there is a non-temporary, quick and significant share price decline.  

Rationale: The primary rationale is simply to replace some of the income lost by selling stock positions. Since many of those sold positions have lower yields than that provided by leveraged bond CEFs or BDCs, I do not need to spend as much buying those types of securities to replace the lost income.

Based on the current monthly dividend rate of $.0755 per share ($.906 annually), the current yield at a total cost of $13.4 per share is about 6.76%.

It is hard for me to generate much enthusiasm for that yield, given the risks, but the alternatives are really very thin almost six years after the FED launched its Jihad Against the Savings Class.

Risks: Over the past year or so, leveraged bond CEFs have seen their net asset values decline some as interest rates rose from an abnormally low level to a less abnormally low level.

While that decline was significant for many of them, the decline in the market price was at a faster rate.

When the market price declines at a faster percentage rate than the fall in net asset value per share, the discount to net asset value expands creating an even larger loss in value. A fairly typical result during periods of rising rates is for the market price to decline at nearly twice the rate of the net asset value per share decline. This phenomenon increases the yield, but that kind of decline can also easily wipe out the benefit of the dividend for a year or more.

At CEFConnect, an investor can explore this recent history for a particular CEF by clicking the "Pricing Information" tab and to change the one month history tab back to 5/1/13 when the 10 year treasury closed at a 1.66% yield. I will generally compare that data with 12/31/13 which was near the peak in that last interest rate spike.

BHK Historical Data:
Market Price: $15.06
Net Asset Value Per Share: $15.67
Discount: -3.89%

Market Price: $12.88
Net Asset Value Per Share: $14.1
Discount: -8.65

I can see right away that part of the market price loss was caused by an expansion of the discount from -3.89% to -8.65, more than a doubling.

Unadjusted for the dividends, the net asset value per share declined 10%, which should be a reminder to all investors that bond investing carries risks. The market price decline was greater at 14.48%. That additional loss is what I call a normal CEF risk. It can work both ways which gives investors both more risks than an ETF or a mutual fund investing in the same securities, and potentially greater benefits, depending on what happens to the discount after purchase. It is not a one way street.  

At the time of my purchase the discount stood at -10.79%. Ideally, I would want to see that discount shrink now as the net asset value per share drifts up. The less than desirable alternative is for the discount to expand at a greater rate than a decline in net asset value per share.

Interest rate risks is a significant risk at present. With a duration close to 9 years, a slightly more than 1% increase in rates could result in another 10% loss in net asset value per share.

Investor Alert - Duration—What an Interest Rate Hike Could Do to Your Bond Portfolio - FINRA

It would not take much of a rise in rates to wipe out a year's worth of dividends.

This fund's leverage increases the risks. A rise in short term rates will cause the borrowing costs to rise. If intermediate and longer term rates are also rising, then the value of securities bought with that borrowed money would be going down in value. Anyone investing in leveraged bond funds needs to understand that risk which would likely be compounded by an increase in the discount in that scenario of rising short to long term rates.

At the moment, short term rates are near zero and bonds have been doing well so far in 2014. That is an ideal scenario for leveraged bond funds who can generate a higher dividend for their investors due to the spread compared to an unleveraged fund investing in the same securities. Conditions will change, most likely for the worse. So these funds are not viewed as long term holdings but simply as trading vehicles that produce some income for funds otherwise earnings .01% in a brokerage money market fund.

Future Buys/Sells: I am not likely to buy more. I will certainly consider selling when and if I hit an total return of 8%, hopefully within a year. After collecting 12 months of dividends, it would only be necessary to capture a small profit on the shares to achieve that objective.

I may sell the 200 share lot of BHK much sooner and add 200 shares to my existing position in BTZ. The funds are similar except BTZ has a slightly higher weighting in junk. BTZ has a higher yield and sells at a significantly greater discount to its net asset value.

BTZ Page at CEFConnect: CEFConnect

I recently discussed BTZ: Item # 8 Bought 100 BTZ at $13.7-Roth IRA (7/26/14 Post)

Closing Price Last Friday BHK: BHK: $13.71 +0.03 (+0.22%)

2. Sold 50 IPB at $26.5-Roth IRA (see Disclaimer):

Snapshot of Trade:

Snapshot of Recent Roth IRA History:

Snapshot of Profit:

2014 Roth IRA IPB 50 Shares +$217.97
Interest payments: I did not calculate the total. I received $37.82 semi-annually with the ex interest dates in June and December.

Prior Trade: Bought 100 of the TC IPB at $16.99 August 2009-Item # 1 Sold 100 of 150 of the TC IPB at $26.82 ( 1/9/13 Post)(snapshot of realized gain=$968.23)

Security Description: The Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1 (IPB) is an Exchange Traded Bond in the Trust Certificate form of ownership.

Unlike other trust certificates that represent a beneficial interest in a bond from one issuer, the Merrill Lynch Depositor Inc. 6.0518% Index Plus Trust Series 2003-1 (IPB) has as its underlying securities 15 long term corporate bonds with make whole provisions and U.S. treasury strips. There is no call warrant attached to the Trust Certificate. Prospectus The treasury strips do not pay any cash interest which reduces the current yield of this TC. The current coupon is 6.0518% on a $25 par value.  As the bonds mature, the trustee will pay out the proceeds to the IPB owners, and the interest coupon would decline as a result.

Trust Certificates: New Gateway Post

Rationale: It is also important to keep the current low interest rates in perspective and recognize that the long term bull market in bonds started in 1982. Unless anyone has forgotten or did not know, the current year is 2014. The Bible has some investment advice on that topic, found at Ecclesiastes 3. For those who are not likely to have a bible at hand, downloading Pete Seeger's version, "Turn! Turn! Turn!" may be just as good. I prefer the Byrds' version: YouTube

I realized a good tax free total return for the 150 shares bought in a Roth IRA. The total realized gain on the 150 shares was $1,186.2 plus several years of interest payments. Time to declare victory and move on.

Future Buys: I am simply not interested in this security at anywhere near its current price. Perhaps, I will consider buying it back on a slide below $23.5, provided I do not have significant concerns about a rise in interest rates.

Closing Price Last Friday: IPB: $26.64 -0.31 (-1.15%)

3. Bought 100 LXP at $10.64-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 100 LXP at $10.64
Security Description: Lexington Realty Trust (LXP) is an internally managed REIT that owns single tenanted office, industrial and retail properties that are primarily subject to triple net leases.

Lexington Realty Trust Profile Page at Reuters

Lexington Realty Trust Key Developments Page at Reuters

Company Website: Lexington Realty Trust - Main Page

Lexington Realty recently increased its quarterly dividend from $.165 to $.17 per share. That is about a 3% raise. While that is better than no increase, a dividend growth rate of 3% will take about 23.45 to double the dividend rate. Inflation has historically increased in the U.S. at about a 3% rate. While the future inflation rate may average 2.25% to 2.5% over the next 20 years, the real value of a 3% annual increase is minimal under either long term scenario.

Many REITs slashed their dividends in response to the last recession. LXP reduced its quarterly dividend rate in stages, going from a $.375 quarterly rate in 2007 to $.1 in 2010. Lexington Realty Trust (LXP) Dividend History Needless to say, that is not a recommendation for the stock, and many investors do not forgive or forget.

That kind of history is an automatic disqualification under a dividend growth strategy. Instead, I bought LXP shares based on valuation and current income considerations, the same reasons given for the recent prior purchases.

Since 2010, LXP has gradually been raising the quarterly rate. The last raise has not even returned the rate to 50% of its 2007 level. At a 3% annualized rate, it is unlikely, though conceivable, that I will live to see the dividend restored to its 2007 quarterly rate.

How does one measure a dividend increase? I would not call a rise from $.165 to $.17 a dividend increase when the firm was paying $.375 per share a few years ago.

When and if LXP returns to the $.375 rate, and assuming I am still among the living, I will call a raise above that amount a dividend raise, the first since LXP increased its rate from $.365 to $.375 back in the 2007 first quarter.

I can be forgiving of LXP's past, as a new owner who did not suffer financially for what happened to this REIT during the last recession. Both the share price and the dividend have a long, long way to go before being restored to their respective highs prior to 2008. LXP Interactive Chart

One major transaction was mentioned in the 2013 third quarter's earnings press release. LXP 9/30/1310-Q

LXP acquired .6 acres of land in NYC for $306M. There are three hotels sitting on that land (DoubleTree by Hilton; the Sheraton Tribeca NY; and Element New York Times Square West). The improvements on these three parcels are owned by the tenants under non-cancellable 99 year land leases. The annual initial rent under the leases is approximately $14.9M or 4.9% of the aggregate purchase price. The rent will increase at a minimum 2% per year and up to 3% based on CPI. Lexington Realty Trust Acquires $302 Million Manhattan Land Portfolio Subject to Long-Term Leases

Subsequent to that announcement, LXP sold 10M shares at $11.17 with an over allotment option of another 1.5M shares. Lexington Realty Trust Announces Pricing of Public Offering of Common Shares The net proceeds were use to pay down amounts outstanding under LXP's unsecured revolving credit facility, a portion of which was used to buy the aforementioned NYC land parcels.

Seeking Alpha published a bullish LXP article written by Brad Thomas back in April 2014.

Prior Trades: I also own 50 shares in another Roth IRA where I am reinvesting the dividends. Added 50 LXP at $9.95-ROTH IRA (1/31/14 Post)

I own 100 shares in a taxable account where I am taking the dividends in cash. Bought:  100 LXP at $10.32 (12/3/13 Post)

Recent Earnings Report: For the 2014 second quarter, Lexington reported AFFO of $67.6M or $.28 per share, up from $.25 in the year ago quarter. The portfolio was 97.8% leased at quarter's end. During the quarter, LXP obtained $277.8M in new financing at a weighted average interest cost of 4.2% and a term to maturity of 9.5 years. Of that amount, the company sold senior unsecured notes maturing in 10 years with a 4.4% coupon. The company guided 2014 AFFO to a range between $1.08 and $1.11.

SEC Filed Earnings and Supplemental Data for Q/E 6/30/14
SEC Filed Earnings Call Transcript
LXP 2014.6.31 10Q

Rationale: Based on the 2014 AFFO guidance, the P/AFFO is about 10. The dividend yield at the current quarterly rate is about 6.39% based on a total cost of $10.64 per share which is tax free in the Roth IRA. REIT dividends are not tax advantaged so I will frequently buy those stocks in an IRA.

Risks: (1) Interest Rate Risks: Many investors view REITs as bond substitutes and consequently will be conditioned to sell when interest rates start to rise.

Part of the decline in equity REIT share prices last year was related to the interest rate rise starting in early May. That rise has made investment grade bond yields more competitive with the dividend yields of REITs. Those dividend yields had fallen considerably with the robust rally in REITs since March 2009.

2. Potential Valuation Reset: The average price to FFO has historically been around 15, with buying opportunities generally occurring when the P/FFO was in the 10-12 range. Chart at Page 3 of Lazard Newsletter July 2014 Lazard calculates the long average at 15.7 through July, with July's average P/FFO being about 17.5.

Of course, some REITs deserve to sell at a higher P/FFO than others based on a number of factors, including past performance, competency of management, diversity of holdings and tenants, the overall desirability of the owned property including its location and the competitive landscape, and issues relating to debt.  It is one thing to own Class A office buildings in downtown Boston, San Francisco or New York and another to own office buildings in the suburbs of Nashville where land and construction costs are cheap and barriers to entry are practically non-existent.

Many investors argue that LXP is undervalued since it has been selling significantly below the average P/FFO valuations of other triple net leased REITs. (e.g. Seeking Alpha)

The other valuation metric is the historic premium/discount to net asset value which is a more mushy number than P/FFO. REITs in the aggregate were selling at an estimated 4% premium to their collective net asset value (see Lazard Chart at the top of page 3).

As I noted earlier, REITs became overvalued last year using either valuation metric. A great deal of that excess was taken out in the price action between May and December 2013, with many securities hitting new 52 week lows including the better ones like Realty Income (O) which declined from $55 in early May 2013 to $36+ in December. O Interactive Chart However, with the decline in interest rates this year, market prices have recovered to varying degrees, depending on the REIT, and are currently significantly above the long term P/FFO average for this sector in the aggregate.

(3) Company Discussion of Risks: The company discusses risks relating to its business starting at page 10 of its 2013 Annual Report filed with the SEC: LXP 2013.12.31 10K

Future Buys/Sells: I am not likely to buy more. I do not currently have a price target, but would consider selling some shares at over $13, or after a dividend cut or a long period with no dividend increases.

Closing Price Last Friday: LXP: $10.89 -0.08 (-0.73%)

4. Bought 50 EMQ at $25.11-Roth IRA (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Bought 50 EMQ at $25.11
Security Description: The Entergy Mississippi Inc. 6.00% Series First Mortgage Bonds 2032 (EMQ) is a first lien bond issued by Entergy Mississippi, a wholly owned subsidiary of Entergy Corp. (ETR). Entergy Misssissippi is engaged in the distribution and transmission of electricity that serves 440,000 or so customers in 45 of Mississippi's 82 counties. A map of its service area can be found at Entergy Mississippi - Service Area.

EMQ is a first lien bond on "substantially all" of Entergy Mississippi's property. The coupon is 6% on a $25 par value. EMQ mature on 11/1/2032, but may be called now at par value plus accrued interest. This security just went ex interest on 7/29/13 for its quarterly  interest distribution. The secured interest is described starting at page 5 of the Prospectus. Prospectus

Moody's recently upgraded this bond to A3 from Baa1.

Prior Trades: I currently own 50 shares in a taxable account. Item # 2 Bought: 50 EMQ at $24.93 (2/10/14 Post)

I did a paired trade involving EMQ when the share price popped, swapping EMQ for the functionally equivalent EFM: Item # 2 Paired Trade: Sold 50 EMQ at $26.49 and Bought 50 EFM at $24.99-Item # 5 Roth IRA:  Bought 50 EMQ at $24.83 (8/31/13 Post)

Recent Earnings Report: Entergy Mississippi's results are included in the Entergy (ETR) filings. ETR-06-30-2014-10Q

Q/E 3/31/14 at page 148
Revenues  $370.638M
Net Income: $26.564M
Preferred Dividends: $.707M
Net Income Available To Common Shareholders: $25.857M

Rationale and Risks: I will at least generate a positive after tax real return with this bond, which is certainly not happening now, or most likely for the next two years or so, for the funds idled in a money market account, currently yielding .01%.

There is also some potential for exiting the position at a small profit, as shown by the inexplicable pop to the mid-26 level late last year. EMQ Stock Chart I sold the previously owned 50 EMQ shares at $26.49 on 10/25/13 and would do so again if given that opportunity.

Interest rate risk is the dominant risk.

That risk is asymmetric between the owner of this bond and its issuer. Entergy Mississippi could redeem it at anytime now when it is in its interest to do so. The reason for a redemption would be that the issuer could refinance this debt at a lower coupon rate and possibly even extend the maturity.

On the other hand, if rates rise, the owner of the security would be stuck with the two undesirable options: sell at a loss and then reinvest the proceeds into a higher yielding security or keep EMQ as the price falls and forego the increased income from another security that could have been acquired with the funds tied up in EMQ.  In this kind of heads the issuer wins, tails the owner loses, there is not much upside when buying near par value but the downside risk could be considerable with a significant spike in long term rates given the long duration of this bond.

This buy has a chance of being productive with longer term interest rates and inflation remaining about where they are now for several years. A 1% rise in long term rates would cause this security to decline significantly in value. I would roughly estimate that a 1% increase in rates for similar quality and maturity bonds would cause about a 10% to 12% slide in EMQ's price using a Bond Calculator available at SIFMA to formulate a reasonable range. The duration is slightly more than 11 years. The rise in rates starting in May 2013 resulted in a slide from over $26 to below $25. EMQ Interactive Chart If this bond was not subject to being called, it would likely have been trading well over the prevailing prices in May 2013.

I will frequently accept a lower yield for more security and safety.

By buying near par value, I will not lose much in the event of an optional redemption which could occur any day now.

Entergy Mississippi last refinanced its first mortgage bonds at 3.75% last March. Prospectus

I would not want to pay more than $25 plus accrued interest given the likelihood of a redemption. That likelihood also decreases the current interest rate risk. The interest rate risk becomes important when rates start to rise and the issuer has not redeemed this security.  

Future Buys/Sells: I am not likely to buy more and will consider selling the 50 shares held in a taxable account, bought at $24.93, when and if the price spikes above $25.5. I am more likely to hold the shares in the Roth IRA, where the nearly 6% current yield is at least tax free.

Closing Price Last Friday: EMQ: $25.55 +0.04 (+0.15%)

5. Bought 50 RFT at $24.28-Roth IRA (see Disclaimer): This security fell some price when the issuer offered on 8/11/14 another senior note maturing earlier in 2019. I knew that the 2019 would be a $25 exchange traded baby bond, but the 2019 senior unsecured note had not yet been priced when I bought RFT. On the next day, 98/12/14), RAIT filed the pricing information with the SEC. Prospectus The 2019 note was sold with a 7.125% coupon.

Snapshot of Trade: 

2014 Roth IRA Bought 50 RFT at $24.28
Security Description: RAIT Financial Trust 7.625% Notes (RFT) is a senior unsecured Exchange Traded Bond issued by RAIT Financial Trust (RAS). This security is viewed as too risky for an IRA by Headknocker, but I went ahead and bought just 50 shares anyway.

This bond may be called on or after 4/15/2017 at the issuer's option. If not called early, the bond will mature on 4/15/2024. Interest is payable quarterly.


RAIT is a self managed REIT that originates commercial real estate loans and commercial real estate backed securities and invests commercial real estate. RAIT has a significant investment in Independence Realty (IRT) which I also own.

RAIT Financial Trust (RAS) Key Developments Page at Reuters

Company Website: RAIT Financial Trust

RAIT Financial (RAS) had a 1 for 3 reverse stock split in 2010. Adjusted for that split, the stock price traded over $112 back in 2007, which simply highlights the risk for both the stock and the exchange traded bond in my opinion.

Prior and Related Trades: None. I recently bought the common shares as a Lottery Ticket purchase. Currently, the common shares have a greater yield than this bond, but the common share dividend is of course at risk (see dividend history at RAIT Financial Trust (RAS) Dividend Date & History - A failure to pay the interest on a senior bond occurs most often shortly before or after a BK filing.

Recent Earnings Report: RAIT reported that cash available for distribution increased to $19.7M or $.24 per share from $.17 in the 2013 second quarter. Revenues increased 25.1% to $73.3M. Investments in mortgages and loans increased 17.9% to $1.32B. For RAIT's multifamily portfolio, average effective rent per unit increased 7.5% to $799, up from $743 in the year ago quarter. The multifamily portfolio is shown to consist of 12,388 units, which includes 19 apartment properties with 5,342 units owned by RAIT's consolidated and publicly traded subsidiary Independence Realty  (IRT). RAIT owns 28% of IRT's common stock as of 6/30/14. (I own 150 shares of IRT). The commercial real estate portfolio also includes 1,42M square feet of retail space and 2.248M square feet of offices. Assets under management increased 47% to $5.3B. RAIT is the external manager for IRT: Asset Manager

An interactive map of RAIT's real estate can be found at RAIT Financial Trust.

Rationale: In the Roth IRA, this senior unsecured bond maturing in 2024 becomes a tax free bond. The current yield of that "tax free" bond is about 7.85% at a total cost of $24.28.

Risks: I view credit risk to be more substantial than interest rate risk. I view this bond to be high risk. If it was rated by a credit agency, the rating would probably be well into junk territory in my opinion. I could not find any ratings for this debt.

The company has a lot of debt: Note 6 at page 17, Form 10-Q. The debt is described in more detail starting at page 19

This is a complicated company for an individual investor to understand.

As a REIT, money is flying out the door every quarter to the common shareholders, leaving bondholders with less of a cushion.

The long term stock chart highlights the significant credit risk. Interest rate risk is mitigated by the 2024 maturity date. I can always have the option to hold this 50 share lot another 10 years or so when and if there is a spike in rates that causes a loss in value. Another cause for a loss would be the credit risk side of the equation; and hopefully I may see that one developing before losing too much on the share price.

The company summarizes the many and substantial risks incident to its operations starting at page 11 of its 2013 Annual Report: 10-K That summary ends at page 40. When it takes that many dense single spaced pages to summarize risks, then the investor needs to have their eyes open and remember the old saw about no free lunches. Every investor is responsible for analyzing and understanding the risks of each investment made by him or her. The fact that things can going wrong is demonstrated by the history during the recent Near Depression: See 2009-2011 financial summary at page 82, Form 10-K (2009 E.P.S. -20.3)

Future Buys/Sells: I am not likely to buy more. I did buy some common shares as a LOTTO, which will be briefly mentioned in Monday's post.

Closing Price Last Friday: RFT: $24.63 -0.05 (-0.20%)

6. Sold 148+ FMIHX at $22.16 (see Disclaimer): I bought $2,500 in shares back in May 2013. Item # 1 BOUGHT FMIHX (5/13/13 Post) I added $250 in January 2014, buying shares at $20.6. My total investment, excluding dividends, was $2,750.

Snapshot of Profit: 

2014 FMIHX 148+ Shares +$368.28 ($316.24 LT)
2013 Capital Gain Distributions Reinvested:

Ordinary Dividend Reinvested December 2013: $22.62

Total Return with Dividends: $550.05 or 20% based on $2,750.  

Rationale: Profit Taking/Stock allocation reduction

7. Added 200 Northwest Healthcare REIT at C$10.16 (Canadian Dollar (CAD) Strategy)(see Disclaimer): I intend to sell my 300 of Healthlease units, harvesting a good gain after that REIT agreed to be acquired for C$14.2. In anticipation of that sell, I added to Northwest Healthcare.

I now own 400 of Northwest.

Snapshot of Trade:

I took this quote snapshot later in the day:

Closing Price 8/13/14: NWH-UN.TO: C$10.21 +0.19 (+1.90%)

Company Description: Northwest Healthcare Properties REIT (NWH.UN:TOR) is a Canadian REIT that is "primarily focused on the medical office building and healthcare real estate sector". NorthWest Healthcare Properties - Investor Relations - Corporate Profile

The company operates in 7 Canadian provinces and owns 75 properties with approximately 4.6M square feet. This REIT is the largest non-government owner of medical office buildings and healthcare focused real estate in Canada. NorthWest Healthcare Properties

This REIT started to tumble back in May 2013, when interest rates started to rise in the U.S. Interactive Chart  The price closed at C$13.21 on 4/29/13 and has been sliding down since that time, making a series of lower lows after failed rally attempts. From 4/29/13 to the date of my first purchase on 4/8/14, the stock was still in descent and had made no successful rally attempts unlike many other Canadian and U.S. REITs. After reviewing the recent earnings reports, I came to an opinion that the market has just pummeled this stock too much.

This REIT is currently paying a monthly distribution of C$.06667 or C$.8 annually. Assuming a continuation of that rate, the yield would be about 7.87% at a total cost of C$10.16.

In 2013, 100% of the distributions were classified as a return of capital "by reason of the REIT's ability to claim capital costs allowance". Taxation of Unitholders

Prior Trade: Item # 6 Bought 200 Northwest Healthcare REIT at C$9.79 (4/18/14)

Recent Earnings Report: NorthWest Healthcare Properties reported 2nd quarter AFFO of C$.21 per unit on revenues of C$37.411M (FFO at C$.25). The AFFO payout ratio was 93% during the quarter, down from 97% in the year ago second quarter. Debt to gross book value was 54.9%. Occupancy improved to 92.1% from 91.8% in the prior quarter. Tenant renewals were completed at an average rent of C$11.95 per square foot, a 6.8% increase from expiring net rent per square foot.

Based on the REIT's fair value estimate of its properties of C$1.226+B, the implied capitalization rate was 6.8%. Capitalization is the ratio of net operating income to asset value.

CBRE publishes semi-annually average cap rates for U.S. properties. Second Half 2013.pdf

Link to Articles on CAP rates and Interest Rates: Capitalization Rates-Interest

Interest coverage: 2.33X

Mortgage Debt Maturities:

During the quarter, Northwest refinanced a medical center with a C$15.5M fixed rate mortgage at 3.36% (5 year term). Two other properties were refinanced with a 10 year mortgage at 4.53%, down from 4.91%. The weighted average interest rate was 4.67% at quarter's end with a term to maturity of 5 years.

Lease Maturity Profile:

Geographic Profile:

Rationale and Risks: The primary reason for investing in any REIT is to generate income. My general goal is to harvest an annualize total return of 10%. I view that kind of a result as a victory. With a dividend yield close to 8%, a 2% annual share price increase after receiving 12 monthly dividends will achieve that goal before brokerage commissions and taxes.

A major risk for a U.S. investor, who converts USDs into CADs to buy this security, is a decline in the value of the CAD after purchase.

As with all REITs, money is flying out the door in dividends and little is being retained to grow the business. That is the major downside that the investor pays in exchange for the high dividend.

The REIT discusses risks incident to its operation starting at page 38 of the Annual Report (which will not link here) There is a lot of debt that is in constant of refinancing as shown in a preceding snapshot.

Closing Price Last Friday: NWH-UN.TO: C$10.27 -0.01 (-0.10%)