Saturday, November 29, 2014

SOLD 50 DPG at $22.42-Roth IRA/Bought 100 BRG at $12.85-Satellite Taxable Account/MOL Redemption at $10 Par Value and Mueller Bond Call

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

Both personal and disposable income income increased .2% in October. Personal consumption expenditures (PCE) also increased by .2%. Real disposable income increased by .01%.  The personal savings rate for October fell slightly to 5%. The PCE price index rose just .1% with the core increasing by .2%. The PCE price index increased just 1.4% Y-O-Y. News Release: Personal Income and Outlays

The ten year treasury yield has been drifting down throughout 2014. The yield started the year at 3% and closed last Wednesday at 2.24%. Daily Treasury Yield Curve Rates There has also been a decline in inflation expectations as reflected in the 10 year TIP pricing. The break-even spread was 2.26% on 1/2/14 and had fallen to 1.82% as of 11/26/14. The break-even spread is widely regarded as the market's prediction of the average annual rate of inflation until maturity. For the ten year TIP, the market's prediction is therefore an annual average CPI rate of 1.82% over the next ten years. The decline in inflation expectations is one reason for the decline in the ten year treasury yield this year.

Platts reported that China's oil demand decreased 2% in October compared to September, and was up only 2% for the first ten months compared to the period in 2013. China "has become exactly balanced in oil products trade over January to October" 2014, and "China could very well be a net exporter of oil products this year". China's oil product imports declined 22.2% Y-O-Y in October while oil product exports increased by 30.3%.

Crude oil prices were crushed last Friday after OPEC left its production limits unchanged at 30 million barrels a day. Several sources estimate that OPEC members have been exceeding that limit by 700,000 barrels per day. Cheating is common among cartel members. With the oil market saturated with supply, and OPEC unwilling to act as the swing producer, it may take anywhere from 6 months to 2 years before WTI and Brent crude can return to $80 per barrel, and the bottom has probably not be seen yet.

Non-OPEC production has increased from 52.76 million barrels per day in 2012 to an estimated 56.03 in 2014, while OPEC production is shrinking. Short-Term Energy Outlook-U.S. Energy Information Administration (EIA) Petroleum consumption in the U.S. has remained relatively steady since 2008 at close to 19 million barrels per day. (click consumption tab: International Energy Statistics - EIA) However, U.S. consumption is well below the peaks hit in 2005 and 2006 prior to the last recession even as oil production has substantially increased in the U.S.

The problem is that non-OPEC production, particularly in the U.S. and Canada, is accelerating when petroleum demand is mostly stagnant, and China's demand is slowing down.

Natural gas consumption is accelerating going from 22,910 (2009) to 26,037 last year (measured in billions of cubic feet)

India's GDP growth slowed to 5.3% in the third quarter, down from 5.7% in the second quarter.

Canada's economy slowed in the third quarter to 2.8% from 3.6% in the second quarter, but that was better than expected. The CAD and Canada's economy will take a hit from the current oil prices.


1. Sold 50 DPG at 22.42 (see Disclaimer):

Snapshot of Trade:

2014 Roth IRA Sold 50 DPG at $22.42

Snapshot of Profit: This snapshot includes the profit realized from a trade earlier this year. The total profit for 2014 is $528.06.

2014 DPG 50 Shares +$124.99
Item # 2 Bought Roth IRA: 50 DPG at $19.64 (10/20/14 Post)

Snapshot of History:

Company Description: The Duff & Phelps Global Utility Income Fund (DPG) is a leveraged CEF that invests in utility and telecommunication stocks as well as MLPs.

Sponsor's website: Duff & Phelps Global Utility Income Fund — Home

Holdings as of 7/31/14: Duff & Phelps Global Utility Income Fund (unrealized appreciation of $163.998+M)

Last SEC Filed Shareholder Report: Duff & Phelps Global Utility Income Fund

DPG Page at Morningstar

Data as of Date of Trade Friday 11/28/14:
Closing Net Asset Value Per Share: $24.59
Closing Market Price: $22.44
Discount: -8.74%
Average Discounts:
1 Year: -11.61%
3 Years: -8.1%

CEFConnect Page for DPG

When I bought this 50 share lot, the discount to net asset value was then -12.46%. I suspected that the discount had narrowed to below 9% last Friday which was the case.

Prior Trades: As noted in the preceding snapshot, I sold 113+ shares at $21.19 last June. Item # 8 Sold 113+ DPG at $21.19-Roth IRA (8/19/14 Post)(snapshot of profit=$403.07; total return= $662.61 or 38.1%)-Item # 3 Bought 100 DPG at $17.31 (12/12/12 Post)

I currently own 200 shares in a taxable account. 

200 DPG Unrealized Gain +$939.76
Item # 1 Bought 100 of the CEF DPG at $17.3 (12/29/12 Post)Item # 7 Added 100 DPG at $18.58 (2/3/14 Post)


Rationale: The primary reason for selling this security is profit taking. There is a strong emphasis on capital preservation in the IRA accounts due to my personal financial circumstances. I am also concerned about the current market price levels of MLP infrastructure companies.

2. Added 100 BRG at $12.85 (Equity REIT Common and Preferred Stock Basket)(see Disclaimer): This purchase will be part of my Equity REIT Basket that was last updated in October: Stocks, Bonds & Politics: Update for Equity REIT Common and Preferred Stock Basket Strategy/OHI Earnings Report and Dividend Increase (10/27/14 Post)

Snapshot of Trade:

2014 Added 100 BRG at $12.85
Security Description: The Bluerock Residential Growth REIT (BRG) is an externally managed REIT that owns apartment buildings.

I view the external management structure as a negative, though it is understandable for small REITs in their early years as public companies.

Bluerock is a new REIT that was formed in 2008 and had its IPO earlier this year, selling 3,448,276 shares at a public offering price of $14.5 per share. The underwriters paid $13.485 per share: Prospectus (risk factors are discussed starting at page 27 and include a long discussion of potential conflicts between the external managers and the shareholders)

It is a small REIT that owned 10 apartment complexes as of 9/30/14 with two under development:

The ownership interest in 9 out of the 10 stabilized complexes was less than 100% as of 9/30/14:

Two of those complexes are located in the Nashville Metropolitan area. I am familiar with 23Hundred At Berry Hill that is a nice complex located in the Berry Hill area of Nashville. A resident could take Franklin Road and arrive in downtown Nashville in about 10 minutes. There is a map at that website. That area of town is in the process of being redeveloped with older structures being torn down.

I am not familiar with the other complex, located in Hendersonville, that is north of downtown Nashville. The Grove at Waterford Crossing - Hendersonville, TN That complex is within a few hundred feet of a Cumberland River tributary. Nashville has several lakes and a river.

I also looked at the Villas at Oak Crest  in Chattanooga, TN; the Estates at Perimeter Apartments in Augusta GA; and the Enders Place at Baldwin Park in Orlando, FL.

Bluerock has two complexes under development at Alexan CityCentre in Houston (340 units) and a complex near the University of Central Florida and the Central Florida Research Park referred to as a "296 unit class A multifamily community in Orlando, Florida".

Subsequent to the end of the third quarter, Bluerock acquired a 95% interest in Grande Lakes, a 306 unit complex located in Orlando. SEC Filing

I became aware of this REIT last September after reading an article published at Benzinga. The other two REITs, Independence Realty (IRT) and Preferred Apartment Communities (APTS), mentioned in that article, were already owned, and were consequently included in my Yahoo Finance portfolio for that sector basket strategy. That website includes links to articles that are linked to a portfolio's symbols.

Bluerock recently sold stock in a public offering at $11.9 per share, with the underwriters paying $11.2455. Prospectus

Mortgages Payable as of 9/30/14:

Sourced: 10-Q at page 20

Prior Trade: I nibbled at 50 shares in an IRA a few weeks ago. My discussion of that purchase was deleted by Google's software program when I opened the draft for editing. I did not rewrite that blog but simply reproduced snapshots of the trades that were discussed in that deleted blog. Bought 50 BRG at $11.98-Roth IRA

Snapshot of Prior Trade:

2014 Roth IRA Bought 50 BRG at $11.98

Dividends: Since the IPO was earlier this year, there is not a long dividend history to public shareholders. Bluerock is currently paying a monthly dividend of $.096667 per share. Bluerock Residential Growth REIT Dividend It remains to be see how long that rate will remain in existence. Assuming that it continues, which is in no way assured, the dividend yield at a total cost of $12.85 is about 9.03%. 

Last Earnings Report: One problem in evaluating this new REIT is that there is a lot of noise in its earnings reports. Acquisition and other one time costs are recurring and distorting the FFO and AFFO numbers.

I took a snapshot of the 2014 third quarter results compared tot he 2013 third quarter:

SEC Filed Press Release

For the 2014 third quarter, AFFO per share was reported at $.22 vs. $.14 per share in FFO.

Same store NOI increased by 5.7% from the same period in 2013.

At the time of my purchase, the consensus number was -.2 per share for 2014 and $1 for 2015.  BRG Analyst Estimates While I am not positive, I believe that the estimate is an AFFO number. If that $1 AFFO per share is achieved in 2015, the P/AFFO would be reasonable at 12.85. The dividend rate is currently $1.16 per share annually, more than that annual estimate for 2015.

10-Q for Q/E 9/30/14

For comparison purposes, I would refer to Associated Estates Realty (AEC) that closed at $22.42 last Friday, creating a forward price to funds from operation of about 16.6 using the current 2015 consensus estimate of $1.35: AEC Analyst Estimates AEC is more seasoned apartment REIT.

Two newer apartment REITs are also owned by me, and I have linked their analyst estimates below:

APTS Analyst Estimates | Preferred Apartment Communities

IRT Analyst Estimates | Independence Realty Trust

Both have similar forward P/Es to BRG. IRT had a forward price to funds from operations of 10.37 based on last Friday's closing price of $9.44 and a 2015 consensus of $.91 per share.

In its press release announcing third quarter results, Bluerock affirmed guidance in the $15 to $.17 AFFO range for the current quarter, based on the higher share count due to the October public stock offering. SEC Filed Press Release

Chart: The stock has drifted down after its IPO price of $14.5: BRG Interactive Stock Chart There was a rally in the shares starting around $11.5 that took the price up to $14+ (early September), but the rally failed as the stock drifted back down to $11.9 before recovering some to its current level.

Rationale: Based on the analyst consensus estimate, this REIT is fairly valued and certainly has a good monthly dividend-though it is far from certain for how long the current rate will be maintained by Bluerock.

I am primarily an income oriented investor. The income generated by a single security is not relevant. I am interested in the total aggregate cash flow generated by all owned income producing securities, and prefer to see a security pay monthly income that can be aggregated quicker for reinvestment into whatever security hopefully provides the best risk/reward for income generation.

Risks: External management structures are disfavored by many REIT investors, including me, and they create a variety of potential conflicts that can work to the detriment of shareholders.

The company has an unusually long discussion of risks in a recent SEC Filing. Those risks include the conflict of interest issues created by the external management structure. I do not summarize that discussion of risks since I view it as incumbent on every investor to read that summary for themselves.

Until I see several more earnings results, and concrete proof that its recent acquisitions are beneficial to shareholders, I will maintain a light exposure to this stock.

The company may continue to issue more stock to fund expansion that will generally cause downside pressure on the price. I view further stock offerings as likely.

Future Buys/Sells: I do not have a target price. A rise to $14-$15 within twelve to eighteen months would cause me to consider selling this small lot. I would have to evaluate the then existing conditions.

I bought this security in a satellite brokerage account where my default option is to reinvest the dividends to buy more shares. Until further notice, I will be reinvesting the dividend.

3. MOL Matured: Redeemed at $10 Par Value: This is my last Citigroup Funding principal protected note. To simply greatly, MOL was an unsecured senior exchange traded bond, with a $10 par value, that paid a coupon at the greater of 2% or up to 19% based on the price of gold.

Some of these notes worked better than others. The best ones were probably those linked to the Russell 2000, such as MOU, that had several good coupons before maturing earlier this year: Received MOU Redemption Proceeds This Afternoon-28.4% Annual Coupon ConfirmedMOU-Received 27.93% coupon (3/3/11 Post); MOU-Received 10.48% coupon (3/15/13 Post). Another one that worked was tied to a commodity index. (formerly traded under the symbol MKN=25.53% and 18+%, snapshots at Item 5 MKN Redemption at $10 Par Value Plus Interest)

Snapshot of Redemptions:

I received a total of $40 in annual interest payments with the redemption proceeds.

Item # 1 Added 100 MOL at $9.78 (8/29/12 Post)Bought 200 MOL at $9.95 (8/27/10 Post)-Sold 100 MOL @ $10.3 (11/5/2010 Post)

4. Mueller Water Products Bond Call: The prospectus permitted the issuer to redeem this bond at 101.229% on or after 6/1/14 and prior to 6/1/15. Page 44 Form S-4 Registration Statement

Bought Back 1 Mueller Water 7.375% Senior Subordinated Bond Maturing on 6/1/2017 at 94.5 (6/9/2011 Post)

When I bought this subordinated "senior bond", it was rated CCC+ by S & P and at B3 by Moodys. At the time of redemption, Moodys still had the bond rated at B3, while S & P had upgraded this bond to B in 2013.

Prior Trade: Sold 1 Mueller Water Sen Sub Bond at 100.625-Bought 1 Mueller Water Bond

I have bought the common shares several times as part of the Lottery Ticket Basket strategy, but do not currently have a position.

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