Wednesday, November 26, 2014

Added 200 of the Canadian REIT DIR_UN:CA at C$9.03/Sold 50 PBF at $29.81

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

The third quarter real GDP growth was revised up to 3.8% from 3.5%. News Release: Gross Domestic Product The consensus expectation was for a downward revision to 3.3%. The "current dollar" GDP, the non-inflation adjusted number, increased at an estimated 5.3% annualized rate.

Singapore's economy grew at 3.1% annualized in the third quarter. The consensus estimate was for 1.3%. The previous growth estimate for the third quarter was 1.2%. Bloomberg


1. Sold 50 PBF at $29.81 (see Disclaimer): This one turned into a quickie trade, take the money and run. I will do both short term trading and long term investing at the same time. I am not likely to hold a stock like PBF long term given the nature of its business.

Snapshot of Trade:

Yesterday's Closing Price (11/25/14): $29.8 +3.36%

Snapshot of Profit:

2014 PBF 100 Shares +$194.06

Item # 6 Bought Taxable Account: 50 PBF at $25.61 (9/20/14)

Snapshot of One Dividend Received:

Total Return Calculation: $209.06 (or 16.23% with a 2+ month holding period)

Security Description: PBF Energy Inc (PBF) is a company that owns refineries and has an interest, described below, in a publicly traded LP known as PBF Logistics.

Refinery specific information can be found at page 48-49 of the 2013 Annual Report, PBF-2013.12.31.10-K.

PBF Energy Profile Page at Reuters
PBF Energy Key Developments Page at Reuters
PBF Key Statistics Page at Yahoo Finance
PBF Analyst Estimates Page at Yahoo Finance

PBF-Bloomberg Data as of Date of Trade:
Based on $25.82 Closing Price and Then Current Estimates
Current TTM P/E 10.81
Estimated P/E 2014: 9.68
P/B: 1.46
P/S: .064

PBF Energy announced earlier this year that its Board approved the purchase of up to $200M in shares.

PBF Energy has an interest in another firm known as PBF Logistics that was recently spun out from PBF: PBF Logistics L.P. (PBFX) Announces Second Quarter 2014 Earnings Results and Declares Initial Quarterly Distribution

PBF Energy owns indirectly the PBFX general partner and 51.1% of the limited partnership units as of 9/30/14.  PBF Energy-2014/9/30.10-Q at page 12 PBFX currently owns some infrastructure assets associated with the refineries owned by PBF Energy, including a Delaware City rail terminal and a truck terminal at the Toledo refinery. Apparently, the intention is to expand into terminals, pipelines, storage facilities and similar logistic assets. PBF Logistics LP Website The PBFX second quarter earnings release refers to owning "modest" amount of infrastructure assets. Some would quibble with the use of the word "modest".

PBF Logistics LP Announces Closing of Initial Public Offering

PBFX Quote

Rationale: The last earnings report was good and explains the recent pop in the stock price.

However, refiners are benefiting from what may be a temporary condition, representing the increased spreads between the cost of crude and the price of refined products precipitated by the abrupt and significant decline in crude prices since June and the slower decline in refined product prices.

Refining is an inherently volatile business subject to massive swings in profitability. I would note that there is no rush to build large new refineries built in the U.S. anytime soon. The Energy Department shows 150 U.S. refineries in 2009 and 142 now. U.S. Number and Capacity of Petroleum Refineries The existing ones are running near their capacity limits. U.S. Percent Utilization of Refinery Operable Capacity (Percent)

PBF is a relatively new company. To highlight historic earnings volatility, I would refer to Valero, which I have owned in the past but have no position currently. I looked at the 2010 VLO Annual Report showing net income of $4.866B in 2006, a loss of $1.154B in 2008, a loss of $373M in 2009 and a profit of $923M in 2010, Page 22 10-K. That kind of earnings volatility creates risks, as well as significant problems in establishing a fair value for the company.

Refiners face numerous risks, as described by PBF in its last SEC filed Annual Report, PBF-2013.12.31.10K, starting at page 19 and continuing to page 35. I would highlight the environmental and regulatory risks (e.g. pages 26-29).

I will trade the refiners and have owned at various times, as discussed in this blog, Valero, Delek, and Alon. I have also owned Alon and Valero bonds. I view all of the foregoing as trades.

The one year price charts suggest to me at least that these companies are trades only and possibly trades that most individual investors may want to avoid.

DK Interactive Stock Chart

ALJ Interactive Stock Chart

VLO Interactive Stock Chart

2. Added 200 DIR_UN:CA at C$9.03 (see Disclaimer): This security was bought on the Toronto exchange using my existing CAD stash. This purchase was an average down.

With 500 shares currently owned, I am at my current risk limit for this security. A sector basket strategy will generally have a $5,000 limit for each component and a $1,000 minimum.

Snapshot of Trade (Toronto Exchange/Paid for in CADs): 

Closing Price Yesterday (11/25/14): DIR-UN.TO: C$9.10 +0.05 (+0.55%)

Ordinary Shares Priced In USDs-U.S. Grey Market

These units also trade on the U.S. Grey Market and can be bought with USDs in that dark market. DREUF Dream Industrial Real Estate Investment Trust (DREUF) When the symbol ends in "F", the investor is buying the ordinary shares rather than an ADR. The DREUF shares closed yesterday at $8.0581.

I try to avoid the Grey Market, since bids and ask prices are not displayed and volume is usually skimpy or non-existent. If I had no choice but to trade in that market, I would find out the current ordinary share price in its local currency and then do a currency conversion to determine the USD equivalent number. Currency Converter I would then decide on the bid price using only a limit order, probably an AON one.

If an investor elects to buy the ordinary shares traded in USDs, the dividends will be paid in USDs after being converted from CADs and after Canada's withholding tax. While there is a tax treaty between Canada and the U.S. that exempts "dividends" from Canadian tax withholding when paid into a U.S. investor's retirement account,  a REIT distribution is not viewed as a dividend subject to that exemption. While many brokerage firms will secure a 15% tax rate for their customers, some will not file the appropriate documents with the Canadian tax authority which results in a 25% tax rate. "New Canadian Withholding Tax Documentation Requirements": Thomson Reuters Tax & Accounting

Prior Trade: I bought 300 shares earlier this year. Item # 5 Bought: 300 DIR_UN:CA at C$9.53(6/7/14 Post)

Company Description: Dream Industrial Real Estate Investment Trust (DIR.UN:TOR) is a Canadian REIT that owns light industrial properties across Canada totaling approximately 17M square feet of gross leasable space. As of 9/30/14, the company owned 220 light industrial properties. A list of those properties can be found at Dream Industrial Properties.

Occupancy stood at 95.5% as of 9/30/14.

Company Website: Dream Industrial REIT

Investor Presentation October 2014.pdf (includes pictures of some properties)

Distribution History: This REIT is currently paying a monthly distribution of C$.05833 per share. Investors-Dream Industrial REIT That penny rate was last raised from C$.05625 per share effective for the April 2013 monthly distribution. The company went public in 2012, and its first monthly dividend payment was at $.05081. So, at least there have been increases and no decreases yet, though I would have to admit that the raises so far are not going to pay for my nursing home expenses.

At the current penny rate, and assuming a total cost of C$9.03, the current distribution yield would be about 7.75%.

While it is immaterial, this security went ex distribution the day after my purchase, so I will be receiving that monthly payment on the entire 500 shares.

I received a comment yesterday that my total cost per share was not the purchase price. Instead, I was informed that the total cost number included the brokerage commission. I am still more or less compos mentis and somehow, possibly through divine intervention, recognize that the total cost number includes the commission cost, at least I was so aware earlier this morning when writing this post.

Since I started to write a blog back in October 2008, I have expressed dividend yield at the purchase price when discussing a stock, exactly what you would see when looking at a brokerage quote or at a financial website which does not factor in a commission rate. When I take a snapshot of the profit or loss, then that number will include the impact of the round trip commission cost.

Last Earnings Report: All amounts are in Canadian Dollars. Q3-Press Release.pdf

FFO Per Diluted Share: $.233
AFFO Per Diluted Share: $.196
Distributions During Quarter: $.196
FFO Payout Ratio: 73.2%
AFFO Payout Ratio: 89.3%

For the first nine months, the AFFO number was $.592 and the FFO number was reported at $.704 on a diluted basis.

When there is that much difference between the FFO and AFFO number, I will use the lower number in calculating dividend coverage and the price to funds from operations. For ease of calculation, I will use in the P/AFFO calculation an assumed $.20 AFFO number for the current quarter, bringing the yearly number up to $.792. At a C$9.03 price, the P/AFFO is reasonable in my opinion at 11.4.

There has been some growth in AFFO per share over the first nine months compared to the same period in 2013:

2014: $.592
2013: $.551
Up 7.44% which I view favorably

As of 9/30/14, leverage was at 52.8% "with interest coverage of 3 times and a weighted average term to maturity on debt of 4.1 years". The weighted average "face" rate on all debt was 4.11%, with an effective weighted average rate of 3.86%.

REITs have benefited from the abnormally low interest rates when refinancing their mortgage obligations or their debt at the corporate level. Commercial mortgages tend to be around 5 years so the worm will turn the other way down the line.

Canadian REITs will release a comprehensive quarterly report that will be filled with information. This is Dream Industrial's detailed report for the third quarter: Q3-Report.pdf

I took a snapshot of page 31 that shows the adjustments made in FFO to arrive at the lower AFFO number:

One important deduction is the amount set aside for recurring capital expenditures. I would not want to see a REIT funding a dividend out of that money.

Rationale: I have raised my Canadian cash stash to over C$30,000 after harvesting profits on a number of Canadian securities earlier this year, including some Canadian REITs. Those funds earn nothing until I invest them. One purpose in my Canadian Dollar Strategy is to increase my CAD stash through dividends paid in CADs and profits realized in CADs. I am also diversifying my assets some out of USD priced securities for diversification purposes.  I do not want to incur another 1% fee for converting USDs into CADs so I am building up my CAD position through profits realized in CADs and in dividends paid in CADS.

Since I am a long term owner of CADs, I am not concerned about the currency risk. If and when 1 CAD buys $1.25+ USDs, then I will consider transferring some of those CADs back into USDs. Until that time happens, and it may never happen in my lifetime, I am concerned about generating a return on my Canadian Dollar position rather than how many USDs can be bought with those CADs at a particular point in time.

Dream Industrial seems like a well run REIT to me. The dividend yield is good at close to 7.75%, even without any additional raises. The P/FFO is reasonable in my opinion. I have some rational prospect for a capital gain in addition to the dividend stream.

In the following risk discussion, I mention the currency risk issue. Many investors may prefer to avoid that risk altogether and focus solely on U.S. REITs. While currency exposure adds a layer of risk, without question, there is also a potential benefit. The CAD may rise against the USD above where it was yesterday, and consequently contribute to the total return. If one CAD bought 1 USD, a level exceeded slightly back in January 2013, CAD/USD, then the value of the USD price DREUF would be about 12% higher than now with no change in the ordinary share price of C$9.1 as of 11/25/14.

Generally, and it usually depends on a variety of factors, I will become more interested in buying foreign securities when both of the following conditions coalesce: (1) a significant rise in the value of the USD against the foreign currency which makes the foreign asset cheaper to me (assuming I am using USDs to buy the security); and (2) a decline in the value of the foreign security in its local currency for non-fundamental reasons. Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post); Stocks, Bonds & Politics: International Trading and Currency Risks (7/11/10 Post)

I described in 2010 how the purchase of AXA's ADR met both of those conditions. The ordinary shares priced in Euros had declined 27.2% and the Euro had declined in value against the USD, creating an overall 43.33% decline for the period measured in that post.  Stocks, Bonds & Politics: Bought 100 AXAHY at $14.69. If you look at a five year chart of the EUR/USD, then you will see what I saw in the 2010 summer. The Euro had declined from around 1.49 in November 2009 to approximately 1.22 in late May/early June 2010.

Since currency trends can last for awhile, hard to say when there will be a reversal in favor of the foreign currency, I will generally slowly accumulate those foreign securities, possibly averaging down when I view it to be both rational and prudent.


Risks Highlighted by the Chart : The stock has been weak for several weeks and has never really recovered from the downdraft in REIT stocks that occurred last year when interest rates started to rise.

The stock was selling below its 200 and 50 day SMA lines when I purchased shares, though the 50 day SMA line was just slightly above the closing price on the day of purchase. (C$9.16 vs. C$9.10 close on 11/25).

Currency Risks: For anyone buying the USD priced DREUF, currency exchange risk is always an issue. The CAD has been weak against the USD over the past year or so. That negative currency conversion flows into the price of DREUF which has consequently underperformed the ordinary shares priced in CADs by about 11% over the past 52 weeks:

That risk would also apply to an investor who exchanges USDs to buy CADs in order to complete a purchase in Toronto, unless there was the intent and the wherewithal to convert back when there was a profit to be made on the exchange after fees.

Normal Risks for Stocks: Needless to say, the potential for a 10% annualized return, achieved mostly with a 7.75% distribution yield, is not a risk free endeavor. I could lose money on the stock even after holding for a long period of time. The dividend could be cut during a recession or even eliminated during a Depression. Generally, though, I believe that it is probable, though not certain of course, that I can achieve that bogey by simply waiting for the stock to pop after collecting several dividend payments, assuming that I wish to harvest the gain at such a propitious time. Prior to last year's downdraft in the REIT sector, Dream Industrial did hit C$11.6 back in January 2013 or 28.46% above my last purchase price. If I harvested say 3 years of dividends and then could sell anywhere between C$11 to C$11.6, that would be a satisfactory outcome.

Company Discussion of Risk: Corporations will generally describe the risks incident to their operations in an Annual Report. The Dream Industrial 2013 Annual Report has a section, starting at page 32, titled "Risks and Our Strategy to Manage Them".

Tax Risk Issues For Lack of a Better Description: I only know what I have been told by my broker and by those who appear to know the answers. I am buying a Canadian security on the Toronto Exchange using CADs to buy the shares and receiving CADs when I sell the shares. My dividends are paid in CADs. I am a U.S. citizen and taxpayer. The I.R.S. is not interested in reporting profits and income in CADs. Instead, the broker converts the value of the CAD into USDs when I buy and sell. If the value of the CAD declines between those periods, I will have a greater profit in CADs than what is reportable on my tax return, or possibly more of a loss, or somewhere in between including a profit in CADs and a loss for U.S. tax reporting purposes. The CAD dividend is likewise converted into USDs.

The practical implications are shown when I sold two Canadian REITs recently. SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71 In both cases, my reportable tax profit was less than the profit actually realized in CADs. That is just one nit. I also apparently create a tax event when I sell CADs, which now have differing USD costs, to buy a security on the Toronto exchange. So I am creating some issues by electing to buy securities using a foreign currency: 1. the commission rate is higher, 2. there are several tax issues, and 3. fees are normally charged for the initial conversion of USDs into the foreign currency. 

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