Sunday, December 21, 2014

High Risk Junk Bond Strategy: Bought 2 Oasis Petroleum 7.25% Senior Unsecured Bonds Maturing on 2/1/19 at 89.347/Added 100 Northwest Healthcare Properties REIT at C$8.3/Sold 51 BHLB at $26.19

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

Markit's flash services PMI for the U.S. slowed to a 10 month low in December. The business activity index was reported at 53.6, down from 56.2 in November. Markit's economist opined that the simultaneous slowing in both the services and manufacturing sectors "suggests that economic growth in the fourth quarter could come in below 2%". There are two weasel words in that quote: "suggests" and "could".  I could say that the numbers suggest that GDP could increase by more than 2%.   


1. High Risk Bond Strategy: Bought 2 Oasis Petroleum 7.25% Senior Unsecured Notes Maturing on 2/1/19 at 89.357 (see Disclaimer):

Snapshot of Ask Order Book at Time of Trade: 

This snapshot shows that the seller at 89.295 required a minimum order of 5 bonds. Since I wanted to buy only two, I had to accept the 89.357 ask price.

Snapshot of Confirmation: The confirmation show the amount of accrued interest that I had to pay the seller. The brokerage commission is added to the purchase price of 89.347 to arrive at the 89.73 total cost per bond.

Security and Company Description: Oasis Petroleum (OAS) is an E & P company focused on natural gas and oil resources in the North Dakota and Montana regions of the Williston Basin.

Company Website: Oasis Petroleum

December 2014 Investor Presentation (as of 12/8/14, the company has drawn $500M of its $2B credit facility; and claims to have 53% of 2015 volumes hedged with a $89.13 floor)

The 2019 note was originally issued in a private placement and later exchanged for a note with the same terms that had been registered with the SEC. Prospectus

The following description of this senior unsecured bond was taken from pages 4-5 of that prospectus:

The company discusses risk factors starting at page 8 of the prospectus.

The confirmation notes that this bond is rated B+ by S & P and B2 by Moody's.

Those are the same ratings shown on the FINRA page for this bond.

The principal amount outstanding is $400M.

This bond will mature on 2/1/19 unless Oasis elects to redeem it early. As noted in the confirmation, Oasis has the option to call the bond at 103.625 next February. I seriously doubt that will happen, unless the company is acquired by high grade investment company who could easily pay off this note at the specified premium and then refinance at a much lower rate.

On or after 2/1/16, Oasis may redeem at 101.813 and than at par on or after 2/1/17 through maturity.

The confirmation shows  the current yield at 8.079% and the YTM at 10.379%. To realize the YTM, Oasis will need to make all interest payments and to pay the $1,000 par value per bond at maturity. If that happens, I have in effect locked in a 10.379% annualized return to the maturity date.

There are several senior unsecured notes that mature after the 2019 note.

Another outstanding senior unsecured note has a 6.5% coupon and matures in 2021. Prospectus; FINRA

In 2011, Oasis sold $400M in principal amount of a 6.875% senior unsecured note in 2023, Final Prospectus SupplementFINRA 

In December 2013, Oasis sold 7 million shares in a public offering, with the underwriting price set at $44.94. Prospectus,

In September 2013, Oasis sold $1B in principal amount of a 6.875% senior unsecured note maturing in 2022, Prospectus; FINRA.

Total long term debt stood at $2.55B as of 9/30/14: OAS-9/30/2014-Q3-10Q

Some of the economic problems facing Oasis and caused by the current low crude prices is discussed in this detailed Seeking Alpha article.

The common stock has cratered from over $57 last July to $11 a few days ago before recovering to $15.65 on the date I purchased this bond. OAS Interactive Stock Chart

In response to the crude oil price decline, Oasis has slashed its capital spending for 2015. Oasis Petroleum Inc. Announces Preliminary Ranges for 2015 and Provides an Operations Update The CapEx estimate for 2014 was given at $750M to $850M, down from an estimated $1.425B set aside for 2015. MarketWatch

Last Earnings Report: For the Q/E 9/30/14, Oasis reported net income of $121.587M or $1.21 per diluted share on revenues of $368.659M. There was a non-cash net gain of $103.426M on derivative instruments. Operating income was reported at $134+M.

Average daily production for the quarter was 45,873 barrels of oil equivalent, a 39% increase over the 2013 third quarter and a 5% sequential quarter increase.

The company placed into production 66 gross wells (52.4 net)

Revenues are heavily weighted in oil:

E.P.S. for the nine months ending was reported at $3.29 per diluted share on revenues of $1.09+B.

This is a snapshot of the derivative book as of 9/30/14:

I would note that most of the hedged 2015 production is concentrated in the first quarter and none after the second quarter, as of 12/8/14:

If crude prices remain low into the second quarter, this company is going to start feeling some pain. I view the hedge book to be inadequate under the circumstances and would give management a "C" for leaving too much production unhedged taking into account the high debt levels.

Rationale and Risks: Oasis only has to survive for a little more than 4 years and I will have a 10.379%. The risk is high, however, and a lot depends on a recovery in oil prices during 2015 and thereafter.

U.S. production of crude oil continues to increase on a weekly basis. Weekly U.S. Field Production of Crude Oil (Thousand Barrels per Day)

The credit facility may be reduced based on valuation changes in proved reserves. Borrowings under the secured credit facility have a superior claim on assets to unsecured senior creditors.

A liquidity event could occur with crude prices remaining low for an extended period.  If that event occurs after a major increase in borrowings under the credit facility, the unsecured senior bonds will likely go done significantly in price.

Oasis is probably large enough that a larger, more financially secure company, may acquire it at a distressed price before a liquidity event has unpleasant consequences on both the common stock and senior unsecured bond owners. That is pure speculation at the present time however.

As I have said in the past, when I start to believe that I can actually predict the future, I hope that someone else is then managing my money.

Future Buys/Sells: I view this bond as high risk and will not buy more. I may sell when and if the bond price returns to a premium over par value, or I see supply and demand moving further out of balance in the coming weeks and months.

2.  Added 100 Northwest Healthcare Properties REIT at C$8.3 (Equity REIT Common and Preferred Stock Basket)(see Disclaimer):

Snapshot of Trade: This trade brings my position to 500 units. I am in a hole and unwilling to comply with the first law of holes. Quit digging when you find yourself in one. I view this REIT to be undervalued, and consequently I will stay with my position.

I bought the ordinary units traded in Toronto using my CAD stash. The closing price that day was C$8.44 with a range between C$8.2 and C$8.55. NWH-UN.TO Historical Prices

The C$8.2 intra-day price was both a 52 week low and an all time low: NWH-UN.TO Interactive Stock Chart

The ordinary units can be purchased using USDs in the U.S. Grey Market, an illiquid and dark market where no bid and ask quotes are displayed to investors. Northwest Healthcare Properties Real Estate Investment (NWHUF) A symbol that ends in "F" denotes ordinary shares rather than an ADR. The symbols for ADR listings, which are traded on the pink sheet exchange or the grey market, will end in "Y".

I will generally avoid the U.S. Grey Market whenever possible. If I decide to trade there using USDs, I will first convert the ordinary share price in the local currency into USDs, using a currency converter and then enter a AON day limit order.

When I bought the shares on 12/16/14, there was a small number of shares traded in the Grey Market with a closing price that day at USD$7.18. NWHUF Historical Prices

I just plugged in my purchase price in Toronto and then converted that number into USDs:

With the shares trading at C$8.3 on 12/16/14, I would not personally want to pay more than USD$7.12 for the shares, and my AON limit order would consequently be $7.12 for an order placed in the Grey Market at that point in time.

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", and its "portfolio of 74 properties makes it the largest non-government Canadian owner of this property type". The company has approximately 4.6M square feet of leasable space and has approximately 1,500 tenants. Corporate Profile-Northwest Healthcare Properties

The initial public offering occurred in March 2010 with 17.5M units sold at C$10. The underwriters later exercised their option to purchase an additional 1.25M shares at C$10.

In 2011, Northwest sold another 6.4M unit at C$11.75. The underwriters exercised their option to purchase 960,000 units at C$11.75.

Subsequent to that transaction, there have been no further public unit offerings, but Northwest did sell C$40.25M in a 5.25% convertible unsecured and subordinated bond maturing in 2020. The conversion price is C$14.7 per unit.

This REIT is currently paying a monthly distribution of C$.06667 or C$.8 annually. Press Release Assuming a continuation of that rate, the yield would be about 9.64%, assuming a total cost of C$8.3. This distribution rate has been in effect since May 2010.

Link to Press Releases

Pictures of Properties:

Western Portfolio

Ontario Portfolio

Québec Portfolio

Atlantic Portfolio

The Fidelity Low Price Stock (FLPSX)  mutual fund is the largest fund owner at 3.24%. The fund last reported owning 1,263,400 units as of 7/31/14 (annual report)

Recent Earnings Report: All amounts are in Canadian dollars.

For the 2014 third quarter, Northwest reported FFO per unit of $.25 and AFFO basic per unit of $.21 ($.01 less diluted). The AFFO payout ratio was uncomfortably high at 97% for the quarter. Debt to gross book value was reported at 55.1%, which is also viewed as high by me.

As with other Canadian REITs, Northwest Healthcare provides a detailed earnings report in addition to a press releases. Unlike other Canadian REITs, the detailed report can not be linked here, but can be accessed in PDF format at Quarterly & Other Reports. Before making an investment decision, I will review the latest quarterly report and the last annual report. The following information is taken from the more detailed quarterly report.

The following calculation shows how this REIT arrives at AFFO, with the most important deduction from FFO being reserves for stabilizing leasing costs, tenant improvements and growth capital expenditures. I would exclude those costs when valuing the company and consequently would use AFFO in my valuation analysis rather than FFO.

A negative is a lack of FFO and AFFO growth quarter-over-quarter and for the nine month period ending 9/30/14 Y-O-Y.

The nine month diluted AFFO per unit is shown at $.61. For the 4th quarter, I am going to assume a consistent AFFO per unit at $.21 which gives me $.82 for 2014. With that assumption, the P/AFFO is 10.1 at a C$8.3 total cost per unit. I view that as an attractive valuation that hopefully will become more attractive with some future growth in AFFO.

Northwest has benefited by a decline in interest rates through lower borrowing costs. During the quarter, the company refinanced a $15M dollar mortgage at 3.22% replacing a previous mortgage of $10.495M with a 5.76% interest rate.

The preceding charts show higher interest rate mortgages coming due in 2015 and 2016 which Northwest may be able to refinance at lower rates.

Northwest made no acquisition during the quarter and sold one non-core property. Three other non-core properties were sold in the first and second quarters (page 17)

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% before taxes. I view that kind of a result as a victory. Northwest's dividend will provide me with most of that return, provided their shares recover sufficiently to allow for a small percentage profit.

My average cost for the 500 units is C$9.75, so I will need a price recovery above that number. My current yield based on that total cost number is 8.2%. I am content to hold long term.

At a total average cost of C$9.75 per unit,  a 2014 AFFO C$.82 per unit would produce a P/AFFO of 11.89. I could reduce that number some by selling my highest cost 200 units.

Price to book is about .7. Morningstar

Physicians Realty Trust (DOC) may be the most comparable U.S. REIT to Northwest. Item # 2 Bought 100 DOC at $13.75 (10/11/14 Post) One major difference is that Physicians Realty is a triple net lease REIT (91% of annualized base rent payment were from triple net leases as of 9/30/14, page 22) For that REIT, the nine month "normalized" Funds Available for Distribution was $.46 per share, which is comparable to Northwest's AFFO number. I will assume a $.18 FAD for the 4th quarter bringing the annual total up to $.64. Based on last Friday's closing price of $16.49, the P/FAD ratio would be 25.76 and the current dividend yield at that price is about 5.46%. DOC is expected to grow FFO much faster than Northwest and is an overall smaller REIT with 2.524+M leasable square feet as of 9/30/14, up 46.4% from 6/30/14.

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

Since the CAD has been declining in value against the USD, the USD priced shares have underperformed the CAD priced ordinary shares traded in Toronto.

The decline in the CADs value against the USD will flow directly into the USD priced ordinary shares. The flip side is also true.

A rise in the CADs value will cause the ordinary shares priced in USDs to outperform the same ordinary shares priced in CADs and traded in Toronto.

The potential exists for both a benefit or a detriment flowing from the currency exchange that will either enhance or detract from returns respectively.

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 AFFO payout ratio is high and would not prudently allow for any distribution increase. AFFO per unit growth has recently been disappointing which is a negative. The company did have 4 more properties at the end of 2013 (78), compared to the 74 properties owned as of 9/30/14. Northwest has grown from 11 owned properties in 2004.

There was a $.02 per unit increase in AFFO between 2012 and 2013 which is anemic.

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 need of refinancing as shown in a preceding snapshot. While refinancing has benefited this REIT and others as well, the worm will turn.

Closing Price Last Friday 12/19/14: NWH-UN.TO: C$8.82 +0.12 (+1.38%)

3. Sold 51 BHLB at $26.19 (REGIONAL BANK BASKET STRATEGY)(see Disclaimer)

Snapshot of Trade: 

Snapshot of Profit: This snapshot includes a 50 share lot sold earlier this year.

2014 BHLB 51 Shares +$107.61
Item # 5 Added 50 BHLB at $23.75 (7/19/14 Post)

Prior Trades: 

Item # 4 Sold 50 BHLB at $25.75 (11/1/14 Post)(profit=$45.82)-Item # 3 Bought: 50 BHLB at $24.51 (2/17/14 Post)

Item # 1 Sold 50 BHLB at $28.74+ (7/13/13 Post)(profit snapshot=$383.94)-Item # 2 Bought 50 BHLB AT $21.66 (3/12/12 Post)

Total Realized Gains=$537.37

Company Description: Berkshire Hills Bancorp (BHLB) is a small bank, headquartered in Pittsfield, Massachusetts that is expanding its geographic footprint through acquisitions.

BHLB announced an agreement to purchase 20 Bank of America branches in NY back in July 2013 SEC Filed Press Release July 2013

Other acquisitions include Rome Bancorp (Rome, N.Y.) in 2011; Legacy Bancorp (Pittsfield, MA) in 2011; Connecticut Bank and Trust (Hartford, CT) in 2012; and Beacon Federal (Syracuse, NY) in 2012

BHLB Key Statistics

A long term chart shows a steady rise from around $12 in 2000 to a double top formation at close to $38 occurring first in 2004 and again in 2006. In October 2007, the shares were changing hands at close to $30 and thereafter declined to $17 before bottoming. For the most part, the shares have been in an uptrend with chop since early 2010. BHLB Interactive Long Term Stock Chart

The most recent correction started last July after the shares crossed $29, hitting $29.2 on 7/5/13. BHLB Two Year Interactive Stock Chart The stock then dipped to around $22.5 four times between May and July 2014, rallied to $25 in September, dropped back to $23 in early October and has been in an uptrend with recent chop throughout November and December mostly in the $25 to $26 range.

The current consensus E.P.S. estimate is $1.79 in 2014 and $1.94 in 2015. BHLB Analyst Estimates

The forward P/E at a $26.19 market price is a reasonable 13.5 based on that $1.94 consensus estimate.

The bank is currently paying a $.18 per share quarterly dividend and has not been raised for 9 quarters. Dividends | Berkshire Hills Bancorp

The dividend was not cut during the recent Near Depression, but was maintained at $.16 per share for 14 quarters.

Rationale: I am in a trading mode for this bank stock based on its frequent chop shown in the two year chart referenced above. While this bank has many positive attributes, I am disappointed with the lack of dividend growth. BHLB was my second lowest yielding bank stock in the regional bank basket based on current market prices. The yield at a $26.19 price is about 2.75%. The lowest is Boston Private Financial Holdings (BPFH) at around 2.5% based on last Friday's closing price.

Future Buys: Eventually there will be a correction in the market or the regional bank sector that will hopefully provide me with a better entry point, closer to my first buy at $21.66 than to my last one at $23.75.

No comments:

Post a Comment