Wednesday, April 15, 2015

Eliminated VEU at 50.39 and VWO at 43.69 -Roth IRA/Added 50 ARESF at $11.86/Sold 2 Vanguard Resources 7.875% Senior Unsecured Bonds at $96.5-Bought at $86.59

Stable Vix Pattern (Bullish):
Links to SeekingAlpha Instablog, Articles and Comments:

South Gent's Instablog | Seeking Alpha

South Gent's Articles | Seeking Alpha

South Gent's Comments | Seeking Alpha

Recent Developments: I do not have time to discuss this topic now. 

Instead, I will just link some data and other material.

FRB: Beige Book - April 15, 2015

NAHB: Builder Confidence Rises Four Points in April

Industrial Production and Capacity Utilization for March (released on 4/15/15)

U.S. Energy Information Administration (EIA) press release (4/15/15)elas

I discuss some recent developments in a few recent SA comments:

Comments on Bullard's Opinion: U.S. Economy About to Enter a Boom Period

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Bond Duration Risks:

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Bond Fund Redemption Risks:

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New Home Construction: Variables in Favor of a Surge

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Comments Discussing the relevance of the Reinhardt and Rogoff analysis of long recovery cycles after a severe recessions precipitated by a financial crisis and American household debt numbers to excessive reliance on Shiller P/E Valuations for U.S. stocks:

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Borden Chemical elected to redeem its 8.375% senior bond, maturing on 4/15/16, early:


1. Sold 2 Vanguard Resource 7.875 Senior Unsecured Bonds Maturing in 2020 at 96.5 (high risk junk bond strategy)(see disclaimer): 

Snapshot of Order Page: 

Order Page

Snapshot of Trade: 

Order Execution

Snapshot of Profit: 

Profit +$180.78
Bought 2 Vanguard Natural Resources 7.875% Senior Unsecured Bonds Maturing 4/1/20 At 86.59 - Vanguard Natural Resources, LLC (NASDAQ:VNR) | Seeking Alpha

Interest Received Calculation: 

Interest Received 4/1/15=$78.75

Accrued Interest Paid by Buyer to Me: +$6.56
Interest Received: $78.75
Accrued Interest Paid By Me to Seller: -$56.44 (adjustment in 2015 Sch. B)

Total Net Interest: $28.87

Total Return: $209.65 or 12.01% (holding period about 2 months)

Just another example of small ball.

Rationale: As I have said here and at SA many times, I can not acquire any comfort level with junk E & P bonds, particularly those issue by MLPs that are paying out distributable cash flow to junior security owners, including the common unit owners and the equity preferred stock owners.

Consequently, I am in a trading mode for them. 

Future Buys: I will need a re-entry price below my last purchase with a material change in credit risk before considering another purchase.  

2. Added 50 ARTIS (ARESF) at $11.86 (Equity REIT Common and Preferred Stock Basket Strategy)(see Disclaimer): 

This add was part of my equity REIT basket strategy last updated in a SA Instablog: Update For REIT Basket Strategy As Of 3/19/15 - South Gent | Seeking Alpha A snapshot of my then current holdings can be found in that blog.

I frequently use basket strategies for industry sectors and rotated into both equity REIT common and preferred shares after they were plastered in 2013.

The Vanguard REIT ETF (VNQ) fell $.62 (4/15/15) to close at $81.97. I believe that most of my Canadian REITs rose in price looking at both the ordinary shares priced in CADs and as converted into USDs (one was unchanged and another lost C$.01, both gaining in USDs). The gains in USDs was significantly higher due to the CAD rising in value on 4/15/15 against the USD due most likely to a surge in crude prices. US crude rises 5%

I include a number of Canadian REITs in my REIT basket. All of them, except for Artis, were purchased in Toronto using my CAD stash. All Canadian REITs that I own now, and have owned in the past, make monthly distributions.

I have discussed a few purchases here at SA.

REIT Basket Strategy: Added 100 Northwest Healthcare Properties REIT At C$8.3 - NorthWest Healthcare Properties REIT (OTCMKTS:NWHUF) | Seeking Alpha

Equity REIT Basket Strategy: Added 200 Of The Canadian REIT Dream Industrial At C$9.03 - Dundee Real Estate Investment Trust (OTCMKTS:DREUF) | Seeking Alpha

Equity REIT Basket Strategy: Bought 200 Agellan Commercial REIT At C$9.13-Toronto Exchange - South Gent | Seeking Alpha

Added 200 DRG:CA At C$8.92 - South Gent | Seeking Alpha

Of the foregoing securities, I currently own 500 shares of Northwest Healthcare, Dream Industrial and Dream Global and 200 of Agellan.

Snapshot of Trade: Unlike most other Canadian REITs whose ordinary shares are traded only in the U.S. Grey Market, where bid and ask prices are not displayed and volume is close to non-existent, the USD priced Artis shares trade on the U.S pink sheet exchange that has more volume and bid/ask prices are displayed to the investor. Artis Real Estate Investment Trust (ARESF) A symbol ending in "F", rather than "Y", indicates that the investor is buying the ordinary shares priced in USDs.

Added 50 ARESF at $11.86
This add brings me up to 100 ARESF shares. I will be dragging and dropping part of my earlier discussion here, updating the information where appropriate with developments since my last purchase: Bought 50 ARESF at $12-REIT Basket Strategy (12/13/14 Post).

That post was reproduced as a SA Instablog and then as an article: Equity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust (ARESF) At $12 - South Gent | Seeking AlphaEquity REIT Basket Strategy: Bought 50 Units Artis Real Estate Investment Trust At $12 | Seeking Alpha

The ordinary shares closed at C$14.9 on 4/10/15. That closing price converted into about $11.85 (4/10/15) and at $12.15 on 4/15/15, as the CAD gains some since my purchase.

Currency Converter

Security Description: Artis Real Estate Investment Trust  (ARESF) is a diversified Canadian REIT that owns office, retail and industrial properties in Canada and the U.S., with a focus on Western Canada. 

As of 12/31/14, Artis had 246 properties in its portfolio with 25.8M square feet of leasable space. Portfolio occupancy stood at 96%. Page 5 Q4-14 Investor-Presentation.pdf

On a net operating income basis, Artis had a 51.9% weighting in office buildings, 23.6% in industrial properties and 23.6% in retail properties. The U.S. properties provided 22.6% of net operating income.

U.S. properties are concentrated primarily in Minneapolis and Phoenix and a few other localities as noted below. Those properties accounted for  approximately 22.9% of net 2014 operating income. The company intends to grow its U.S. portfolio to 30% of net operating income. (pages 4-5 of 2014_Annual_Report.pdf)

It owns 44 properties in Minneapolis consisting of 5 office (100% leased), 7 retail (100% leased) and 32 industrial (100% leased) properties. Property-Listings-Q4-14/PDF 

The company owns 6 office and 1 industrial property in Phoenix.

Three office buildings were owned in Denver and one in NY and Florida both 100% leased. Two of the 3 Colorado offices are only 50% leased. 

For assets owned in the U.S., the U.S. funds are converted back into Canadian Dollars which produces "largely unpredictable foreign exchange gains and losses on our income statement" which impacts "results from operations, as well as the other comprehensive income".  For the three months ending 9/30/14, Artis booked an unrealized gain in "other comprehensive income of $32.5 million, a large number due to the size of our U.S. portfolio".

A list of properties, with occupancy rates can be found at pages 6-7, 2014_Financial_Report.pdf.

The weighted average rental increase on renewals was 7.2% in the 4th quarter, page 11 Q414_-Investor Presentation.pdf.  

As of 12/31/14, the weighted average interest rate was 4.04%. The weighted average term was 3.9 years. Total debt to gross book value stood at 48.4%. The interest coverage ratio was 2.8 times. Page 12, Q4-14 Investor-Presentation.pdf

Q4-14_-Investor-Presentation .pdf

Distributions: The monthly distribution rate is currently C$0.09 per share. It is not accurate to call the distribution a dividend. A distribution paid by a Canadian REIT into a U.S. investor's IRA is not eligible for the "dividend" exemption under the U.S.-Canadian Tax Treaty. 

The distribution will be converted from CADs to USDs after a 15% Canadian withholding tax. At the exchange rate from 4/10/15,  C$.09 would buy $.0716 before the adjustment for the Canadian tax.

For owners of ARESF, and assuming the distribution rate remains constant at C$.09, it is important to keep in mind that a decline in the CAD after a purchase results in a dividend cut, while an increase in the CAD's value operates as a dividend increase.

Given the currency fluctuations, it is impossible to compute a dividend yield. The dividend yield would be about 7.24% at a total cost per unit of $11.86, assuming no dividend change and a constant currency exchange rate that produces a $.0716 monthly rate for ARESF unit holders. The actual annualized yield will depend on the conversion rate for each monthly dividend payment.

It is a futile exercise to actually calculate the yield for ARESF due to the fluctuations in the exchange rate. Last Wednesday (4/15/15), the CAD rallied as oil prices surged and the C$.09 closed that day at USD$.0732 raising the yield to 7.4% assuming a total constant cost at $11.86 per unit and a constant exchange rate as of 4/15/15.

Prior Trades: My prior trades were made on the Toronto exchange which requires an explanation of how profits are reported by my broker, an issue that is avoided when the investor buys the ordinary shares using USDs on the U.S. pink sheet exchange.

For a U.S. taxpayer, the taxable profit reportable on a 1099 by the broker will not be determined by the investor's profits in CADs. Instead, both the cost basis and the proceeds will be converted from CADs into USDs. If the CAD declines in value against the USD during the period of ownership, the U.S. taxpayer will realize a lower taxable profit than the amount actually realized in CADs. Different permutations of that scenario could also apply. The investor might have a profit in CADs and a loss in USDs, for example, or a loss in CADs and a profit in USDs.

Since I sold a number of Canadian REITs earlier this year, my reportable tax profit was less than my CAD profit due to the decline in the CAD during my ownership period.

One example is provided by my disposition of 300 Artis shares bought on the Toronto exchange using my CADs. I sold those shares in Toronto and received C$397 more than I used in CADs to make that purchase. My reportable USD profit was $6.92. The accounting related to currency conversion for tax reporting purposes eliminated about C$390 in profits.

Prior to the foregoing round trip, I had flipped two 100 share units back in 2011, realizing a total gain of $281.27 (snapshot in both prior linked posts).

Annual 2014 Earnings: All amounts are in Canadian Dollars.

For 2014, FFO was reported at C$1.41 and AFFO was $1.23 with an AFFO payout ratio at 87.8% down from 89.3% in 2013.  That 2014 payout ratio is still high but moving in the right direction for a distribution increase at some future time. Property net operating income increased 5.4% and revenues rose by 8% compared to 2013.

Rationale: Both the dividend yield and valuations are good in my opinion, particularly compared to U.S. REITs which do not have the currency risk for U.S. investors.

Using the CAD closing price on 4/10/14 of C$14.9, and based on 2014 annual results, the TTM P/FFO was at the time of purchase 10.49 and the P/AFFO was 12.11.

I would use the P/AFFO number since that is a better measure of free cash flow than FFO.

The average P/FFO for American REITs was 19.4 in February 2015, page 3 Lazard_US RealEstate Indicators Report

Risks: (1) Currency Conversion Issues: The following discussion is fairly typical whenever I buy a foreign security.

The CAD has already lost a lot of its value against the USD over sdthe past 2+ years as shown in this 5 year CAD/USD chart: CAD/USD Interactive Chart In July 2011, 1 CAD bought USD$1.05 for awhile. On 4/10/15, 1 CAD would buy about $.79, roughly a 25% decline in the CAD's value since that peak exchange rate in July 2011. That decline flows through into the USD price of a Canadian stock traded on U.S. exchanges.

The ARESF price is linked to the ordinary share price priced in CADs as converted into USDs. If the CAD continues to decline against the USD, the ARESF shares will underperform the ordinary shares traded in Toronto and priced in CADs. The CAD has been declining in value, so I would expect to see ARESF underperforming the Toronto listed shares priced in CADs which is the case as shown by this two year chart:

Putting side all other currency conversion issues, the buyer of ARESF would want the CAD to rise against the USD after purchasing shares.

The worst scenario for the ARESF owner, which I simply call the double whammy, is for the CAD to continue declining against the USD and for the ordinary shares priced in CADs to decline in price at the same time.

The best scenario is for the CAD to increase in value after the purchase and for the ordinary shares priced in CADs to increase in price at the same time.

In my opinion, I prefer to buy foreign securities when the USD has significantly risen in value against the relevant foreign currency and the ordinary shares have declined significantly in local currency terms for non-fundamental reasons.

Both of those conditions have now occurred with ARESF, unless one believes that Canada is in for a long term economic decline.

Comparison Chart ARESF vs. AX-UN.TO 

The two shares are both the same ordinary shares. The difference is that the shares traded in Canada are priced in CADs and ARESF is priced in USDs.

The current declines in the CAD and the ordinary shares priced in CADs may not be over too. I can not predict the future. When and if I believe that I can, I would hope my family appoints a conservator to manage the money. 

(2) Investor Perception about the Canadian Economy: As noted earlier, the Canadian REIT sector decline gathered momentum as energy prices accelerated their decline. A persistent long term decline in crude oil prices will have a negative impact on Canada's GDP. I suspect more of that negative impact would be felt in the Alberta and Saskatchewan provinces.

It is just hard to say whether the recent energy price spurt is the real deal or another head fake. 

For the Ontario and Quebec provinces, the overall impact would probably be positive as consumers have more money to spend due to lower heating and gasoline costs.  

Recessions will take a toll on REITs. It remains to be seen whether Canada will slip into a recession. Recent economic numbers are generally positive but not exciting:  Canada | Economic Indicators

3. Company Description of Risks: Every company that I buy regularly produces a summary of risk incident to its operations. Generally, an investor can find those risks in an Annual Report. Artis describes those risks in its 2014 annual report: 2014_Annual_Report.pdf

Future Buys: I may buy up to 100 more ARESF shares at or below $11. 

3. Sold 25 VWO at $43.69 and 25 VEU at $50.39-Commission Free in Roth IRA (see Disclaimer): 

Snapshots of Trades:

2015 ROTH IRA SOLD 25 at $43.69

2015 Roth IRA Sold 25 VWO at $50.39
Snapshot of Profits: 

VEU +$52.73 and VWO +$34.55
Security Description: I am not going to discuss these low cost Vanguard ETFs again until I elect to buy them back. 

I did recently discuss VEU in a 2/2015 blog: Bought Roth IRA: The ETF VEU (Commission Free at Vanguard) at $46.96 (2/3/2015 Post)(snapshots of prior realized gains=$1,614.39)

Sponsor's VEU Page: Vanguard 

Rationale: I decided to transition Vanguard stock ETFs solely to a Vanguard taxable account due to risk assessment considerations and the frequently discussed strong emphasis on preservation of capital and income generation through non-taxed favored securities in those accounts, particularly the ROTH IRA accounts where there is no tax on income either when received or when withdrawn.

Future Buys: I will simply look for a mild dip from the current prices before initiating a position in VWO and VEU in a taxable account. I will need a 20% decline before considering a repurchase in the Roth IRA where capital preservation considerations are a dominant and overriding goal.