October and November Update

This is somewhat late for October and close to November that I decided to include both months into one. In the future I'm considering posting quarterly updates rather than monthly, but I digress. Hopefully there are some non-Swedish readers who derive value from my writing here. Since I do not write as often here as I do on the Swedish version of my blog I try to summarize as much as possible and hopefully higher quality as well. Here is a chart with my portfolio development YTD (The numbers on the left are in SEK):

The financial markets have been in turmoil lately and my portfolio went down 15% only to rebound later on. ARCP did weight down heavily at the end of the month as well as Awilco Drilling. I'm not worried about my holdings, the importance of which was amplified during the month. I also learned that I need to keep a reserve of cash if good opportunities arise. I'm quite often to quick on the gun and bought way before bottom. The thing is, I did it more because I wanted to use capital than that the stocks were attractively valued so I will try to focus more on that in the future. Likewise I could have waited for more information from ARCP before increasing my position slightly. I'm currently looking forward to more ARCP news when they release their report for their third quarter.

Iron Mountain released their report in November. AFFO was 2 cents lower than estimates at 0.35$ which is still substantially higher than the regular dividend at 0.275, which gives a nice payout ratio of 78%. Income increased 4% y-o-y which is in line with management plans and the lower AFFO is mainly related to REIT related costs. Overall there wasn't much new. The share price has appreciated nicely and I intend to evaluate what I want to do with my holding at year-end. I imagine that the catalysts I've been waiting for will be done by then. I still expect an extra dividend to compensate for the lower dividend at the first two quarters of this year and a normal dividend before year-end. I'm also waiting to see if the price will appreciate more as funds and indices start to include IRM in their respective portfolios.

In November IRM announced their final dividends for the year as follows:
A catch up dividend of 0.255$ with an ex-dividend date the 25 November and payout on the 15th December, and a regular dividend of 0.475$ with an ex-dividend date at the third of December and payout on the 22nd of December. They also gave out the special dividend which for me meant 4 additional shares and 90$ in cash. The additional shares give me an extra 7.6$ in annual dividends.

Kinder Morgan also released their Q3 earnings. The dividend increased 7% y-o-y and 3% from the last quarter to a dividend of 0.44. They reported growth on all fronts which will support the aggressive dividend growth for the upcoming years which I'm looking forward to collecting. Unfortunately I did not have cash on hand to increase my position before the report but I shouldn't complain when they released such a good report. The merger also finalized which apparently was a trigger as the price appreciated somewhat.

Dividends YTD looks as follows and the projected anual dividend is at 1700$ (updated holdings can be found in the portfolio page on the menu):

For December I'm looking at BHP Billiton (BBL) and Main Street Capital Corporation (MAIN) which both seem like attractive option for 2015 at current prices.

How has the last quarter of the year been for you? See any attractive opportunities in the market?

ARCP making headlines

Reality Capital Properties (NYSE:ARCP) has been making a lot of noise lately as key members of management are suspected of committing fraud. There have been a lot of comments both negative and positive. One side says "Fraud! Sell!" and one says "Buy when people are pessimistic - WB". For me the voice of reason was the conference call where some important factors were mentioned. The Conference Call can be read in its entirety HERE.

So what happened?
The original announcement can be found HERE but in short review by the Audit Committee finds issues with the quarterly reports so far this year and says they should no longer be relied upon. The annual report for 2013 is also being looked at since it was signed of by the same people who are responsible for the first two quarters of this year. However, early indicators say that there is nothing wrong with the numbers from 2013.

What was the mistake?
2014 Q1 AFFO (a non-GAAP measure) was incorrectly calculated which resulted in a AFFO 3 cents higher than the actual. This lowers Q1 AFFO to 0.23$ from 0.26$, none of the items in SEC filings were incorrect just the AFFO numbers. AFFO is something that every rate calculates on their own and it can vary between different REITs. Investigation and forensics indicate that there was no intent to overstate AFFO and that it was characterized as an error.
The main issue is Q2 where they had found that a correction was intentionally put in to hide the error in the first quarter. David Kay had the following to say:

In the second quarter, the company changed its method of presentation to one -- that of a gross presentation. Perfectly acceptable to change it, and the numbers on a per share basis would be comparable under either method. Under the gross method, we used 100% of the net income, add back 100% of the add-backs to get to AFFO per share and divide it by the total weighted average shares outstanding, which would be the common as well as those of the OP holders, or the noncontrolling interest holders, to come to AFFO per share. That calculation included a number that went into there in order to conceal the error from the first quarter. The best way that I can describe what happened there is that we don't have bad people, we had some bad judgment there. And we had 2 employees which have resigned as a result of the effects of that calculation and the nondisclosure of the error in the first quarter.

What was the reaction?
CFO Brian Block was replaced by Michael Sodo, who previously was the director of financial reporting and treasury.  Chief Accounting Officer Lisa McAlister is being replaced by Gavin Brandon.
Reports for the first and second quarter will also be republished as soon as possible, the annual report for 2013 will also be looked at. According to David Kay, the cumulative effect for the Q1 adjustment for the entire year should be somewhere in the $0.02 to $0.025 range since the average number of shares as increased since then.

What about the feature?
Of primary interest was that the dividend is coverable for foreseeable feature and that the changed AFFO guidance will not change this as the changes in AFFO are one-time adjustments rather than something that will carry forward . In the CC David Kay said this:

Our annual dividend rate, not impacted by these adjustments, and we have laid out in our press release all the other items that are nonimpacted, including net operating income, net asset value, which as an aside, at $1.4 billion, at about 6.25% cap rate is about a $13.25 share price.

What I also was concerned about was if ARCP was still financially sound, i.e. do they still follow their loan covenants and making sure that they are keeping their investment grade rating as it is an important factor for feature borrowing. David Kay had this to say:

We are operating in good faith with the banks, and we'll continue to keep them with the constant flow of information. We have also had initial dialogue with the rating agencies, and there's an open dialogue there as well.

I should hope that they are keeping the banks informed and having open dialogues with banks and credit rating agencies.
Lastly, they still own a large amount of properties with a 6.25% cap rate and the NAV is still 13.25 per share as mentioned above and they are still collecting income from their properties which was one of my primary reasons for holding over the last week.

Plenty of ARCP insider buys have been going on over the year which might suggest that all of them weren't in on it.

Some of these statements are biased since they are coming from the CEO of ARCP so any additional sources in the future will be welcome. With NAV still at high levels David Kay has this to say about buybacks:

I've been asked about share buybacks, and would we sell assets? We do have a share buyback plan in place. I'm continuing evaluating the share price, which we believe is tremendously undervalued. We would look at selling assets, particularly high-valued ones, in order to buyback shares, if the shares continue to stay at these levels.

For me that sounded like a nice way of saying, we have the option but we would rather not. A pitfall with REITS and BDCs are that externelly managed assets carry a management fee which depends on the net value of the portfolio rather than share performance and returns.

If one is more speculative in nature there currently more than 50% potential in the price returning to NAV though I believe that the recent turmoil and earlier actions by management warrant a discount that we probably won't see disappear for a while. Since I'm mostly interested in the dividend this is more of a nice surprise if the price actually reaches NAV.

Are there risks?
Obviously there are still risks, the biggest one being uncertainty at this point and until at least the next quarterly report and probably longer. As mentioned with credit ratings and banks, even without current liabilities being affected much their future growth prospects are low as the cost of capital will  probably rise in the short to mid-term especially when raising capital with equity.

What does the cover up say about corporate culture at ARCP? Was it a mistake or did they do it for their own sake or where they pressured by the culture in the company. This is something that is hard to see when investing and with other questionable management actions that might not have shareholder value as it's primary concern.

I do not believe they will cut dividends next year but it is absolutely a concern that cannot be ignored and remains a risk as long as they continue with their high payout ratio. Guidance for 2015 suggests that the dividend is covered but without the track record to back it up it remains to be seen if ARCP are up for the task. Recently it was announced that the sale of Cole Capital is canceled which was not anticipated by ARCP, they are arguing to get the deal back on the table. At first I thought that keeping Cole Capital would be good but I hadn't thought of the possibility that investors might be more careful to invest with Cole Capital which would mean less income from Cole Capital then I thought. They still make money from Cole though and it's worth more than 0$ as it seems to be worth in the market today. With Cole Capital added into the mix the dividend should have better coverage than before. Though with the capital from Cole they could have bought back shares and lowered debt which would have been preferred at these levels.

Another issue for me is that recent management actions have been questionable. Why by Cole Capital last year only to sell it below par this year with a complex deal? (that benefits RCAP more than ARCP) The multi-tenant portfolio which was also sold for less than originally indicated when it was being spun off. They also issued equity below NAV earlier this summer. Putting all of these factors together one might question management and their priorities.
make money from Cole though and it's worth more than 0$ as it seems to be worth in the market today.

Conlusion
The Dividend Growth Investor states the options very well HERE. I'm of the opinion of holding since besides dividends I do look for Value but I'm not sure if I am comfortable with increasing my position considering the size it already has in my portfolio (5.5%). I also think there are many unpredictable factors which makes me hesitate and if that's the case there are probably better opportunities we're I'm more comfortable. I am still unsure though and I do believe there is a lot of value to be unlocked, I'm just not sure if they have the key.

Full disclosure: Long ARCP, I increased my positions at 9.38$ and might buy more depending on more information coming in and where the price goes next.

September and Q3 Update

September is over. My portfolio lost some market value this month for the first time this year. I never thought it would go as well as it has and I have to keep reminding myself that I shouldn't expect these kinds of return all the time. So far I'm up 22% YTD and since I started investing last year. I'm happy about it but shouldn't let it go to my head :) This month has already kicked my but somewhat but I'm not particularly worried. I now get to buy more companies with cheap valuations.

The Phoenix Group and Iron Mountain had their ex-dates during the month so I won't see that income until next month. This means that there is a lag or dip in total portfolio value. Since I do, in fact, sell securities at some point in time, I think it's is a good measurement for me to track progress in total portfolio value. I also use total return in order to compare it to a funds to see if it was worth investing privately or not. Now I've found I enjoy investing a lot as a hobby besides the added benefit of long term economic security. Back to the dividends, Iron Mountian had one regular dividend and one special dividend. The special dividend is in the form of 80% shares and 20% cash or 100% cash. I did not have the option of choosing shares through my Swedish broker which I would have liked. I'm still considering adding to my position in IRM with the dividends combined with some fresh capital but we will see what looks attractive at the end of the month.

The dividends recieved during September are the following:

Date	Ticker	Shares	Amount (SEK)	Amount (USD)
2014-09-16	ARCP	190	112.96	15.59
2014-09-22	Awilco Drilling	225	1852.17	255.64

With current exchange rates my dividend for the year are the following:

March 199$

April 267$

May 384$

June 578$

July 15$

August 35$

September 271$

Total: 1750$

As I mentioned above I aim for total return, dividends are a big contributor but not the only source of return. My "trading return" YTD is 1127$, i.e. what I've gained or lost from selling securities over the year. I aim to earn more from this type of return by buying undervalued stock. My one disappointment for the year so far is that I've bought and sold way more than planned, around 40 transactions. Some of the transactions have been dollar cost averaging but I'm not satisfied with some of the companies I've bought in the past and aim to be more selective with what companies I choose to own in the future.

This year I've collected 1750$ in dividends (12668SEK) which amounts to a yield of 7% with my currents holdings. My expected yearly dividend (i.e. for next year) with current holdings is 2600$ excluding potential dividend increases and special dividends. Awilco Drilling does have power to offset the dividend quite a bit as they are expected to lower their dividend in Q4 2015. Unfortunately they stand for 37% of my dividend income which I hope to remedy in the future.

During the month my only purchase was Kinder Morgan Inc which I wrote about HERE. I feel that KMI will be a good and solid holding for many years to come and still think it's cheap with a >5% dividend and ample growth. I have updated my portfolio page to reflect the changes of this month, as well as sector allocation and currency allocation. Worth to mention; I do believe that KMI with their pipelines are more secure against the recent fall in oil prices because no matter the price of oil it still needs to be transported.

In the future I'm looking to add some BDCs, namely FSIC. MAIN and NMFC are also options I'm considering depending on pricing. In the Nordic markets I'm considering adding to my holdings in Atea or too some of my Norwegian insurance companies. A fellow Swedish blogger also made me notice Admiral (ADM) which is a British car insurer with high margins and a high sustainable dividend which sounded interesting.

Recent buy: Kinder Morgan

Last week I bought 55 shares of Kinder Morgan at 40.22$ per share including commission for a total of 2212$. This purchase adds ~95$ to my yearly dividend based on today's dividend. I'm expecting the increase to 0.5$ per share per quarter in 2015 so I'm expecting to have added 110$ to my yearly dividend with further growth in the future.

Kinder Morgan is a holding company that owns, for now, parts of several pipeline systems. In August they declared that they would buy all shares of KMP, KMR, and EPB. The purpose of the "merger" is to decrease the cost of capital. Since with the current structure the cost of getting more capital, in the form of issuing more shares, is costly, both with regards to fees and the high distributions. The MLP structure will still be in effect so KMI will still receive lower tax on income and it will be easier for KMI to take in new capital. The merger makes them into the largest energy infrastructure company in North America and the third largest energy company overall.

I find the pipeline business somewhat more attractive in the doorman position they have. They get paid regardless of oil and gas prices and the only time that  these prices might affect are if they drop significantly which I don't believe they will.

I am somewhat unsure about how long it takes before gas and oil wells are depleted and if pipelines can be reused once a well empties and the pipeline is no longer needed there. With the recent oil and gas boom in America I anticipate that Kinder Morgan's pipelines will be used for a long time yet and bring an increasing profit to shareholders. It seems there is demand for more infrastructure until 2035 and contracts are on avereage of 16 years which is comforting.

KMI has always, to me, seemed like the best option of the oil and gas companies. Statoil was at the top before but has since rallied. KMI on the other hand after its recent merger news and plans to raise dividends significantly with a current yield of around 5% looks very attractive unlike most S&P companies. The plans to raise dividends by 10% per year until 2020 is also good news. Even if the market does not realize the value that lies here I believe I will receive ample return on my investment. But the question is, can they do what they promise?

In the past KMP has been able to achieve more than promised in 13 out of 14 years. EPB and KMI has also been able to distribute more than management had expected from the beginning which speaks to the possibility of an even more aggressive growth of dividend. It seems they have historically been conservative in their estimates and more often surprise on the upside rather than on the downside. They have also managed to grow both organically as well as through acquisitions.

For current dividend stability one must look at KMI financials, after the merge is complete KMI management anticipates an investment grade rating. KMI has recent years enjoyed some of the lowest interest levels on bond issues fighting with Berkshire Hathaway (BRK) about being able to issue the lowest yielding bond. Which means they are deemed to be able to pay back their money (low risk of capital loss for buyers) in such away to achieve such a low interest expense rate.

In the feature synergies received from the merger as well as the cheaper cost of capital for further expansion should enable a steadily increasing dividend. As mentioned at KMI's past predictions they have been spot on or distributing more than forecasts most of their active years. Management project an 10% annual growth rate until 2020 with a 10% coverage margin.

Some of the main risks involve regulatory risk, crude oil production volumes and commodity prices. Even though I'm hoping people will start using less fuel I see that it is a slow process and anticipate oil/gas to be important for a long time ahead. Some other risk factors are environmental (e.g. pipeline/asset failures), terrorism and economically sensitive business (e.g. steel terminals). Higher interest rates would of course also affect but as mentioned earlier KMI enjoys low interest rates on debt and an <5.5 debt /EBITA leverage ratio as to enjoy investment grade rating. I do find the business somewhat complicated and will try to keep myself informed. Usually the biggest risk are the ones that you aren't aware of.

Thoughts on KMI? Have I made any incorrect assumptions?

Full disclosure: Long KMI

Sources used: Merger presentation and press realease.

August Uppdate

This will be a brief review of the past month. I'm not sure how I want these updates to look and will figure it out as I go along. My portfolio as a whole went sideways similar to the swedish market. All my nordic holdings took a beating while the american ones rallied somewhat.

Dividends received in August:

Ticker	Shares	Dividend (SEK)	Amount (SEK)	Amount (USD)
ARCP	190	0.57	108.44	15.51
STL	70	2.03	142.1	20.33

Transactions in August:

Transaction type	Ticker	Shares
Sell	GRO	110
Buy	AWLCF	75
Sell	STL	70
Buy	VARDIA	400

These transactions give me an additional 95$ per year for a total yearly dividend of 2608$. The value of my portfolio is 37500$ and my current holdings are seen in the piechart below. Sector composition and currency have been uppdated on my portfoliopage.

For september I'm looking at Kinder Morgan (KMI) and FS Investment Corp (FISC) in the US market and will probably invest in one or the other. Unfortunatly KMI rallied somewhat as I would like to add them to my portfolio at a price below 40$. How was your month? 

Pheonix Group Results Q2 2014

The Phoenix Group (PHNX) recently released their earnings for the second quarter of 2014 and the first half year. It was a very busy half year starting with their divestment of Ignis Asset Management which is the investment branch of the Phoenix Group. The divestment lowers their gearing to 35% on a pro forma basis which is in line with their aspirations to receive investment grade rating. The focus of the second half year of 2014 will be in talking to rating agencies to do just that. With the divestment they paid down 250 million pounds of debt which contributed to the lower gearing substantially. Another factor for the lower gearing was the issuing of a seven year bond as well as combining current bank facilities into one bigger facility. All of the new debt have longer expiration dates as well as lower interest rates.

They announced a dividend of 26.7 pence per share in line with last year's interim dividend. I was a bit disappointed at that, but I saw a good comment which was something similar to this; It is a zero sum game, they do have the cash for a larger dividend but on the other hand they need the cash for growth. The current yield is still quite substantial at 7.24%, so I'm actually liking the potential for growth. The groups goal is a stable and sustainable dividend which they seem to be able to deliver on even without future acquisitions. Potential acquisitions could enable future dividend increases and Analysis consensus believe that the dividend might increase for the final dividend of 2014.

The earnings per share as always been a bad measure when looking at the Phoenix Group. Cash flow remains strong even with the major lowering of debt. The total decrease of debt amounts to 450 MGBP both from the divestment and debt refinancing. As they look to acquire investment grade rating, interest expenses should lower even more. Their bond offering was oversubscribed which speaks to that effect. The oversubscription also allowed them to get the lowest interest rate in their target range. The group now have £0.6 B of headway above ICA surplus requirements and £0.4 B headway with regards to IGD. The group also holds close to a billion pounds in cash which equates to £4.4/share. The total embedded value of the company (MCEV) is at £11.57/share. My interpretation of MCEV is the enterprise value of an insurance company and in the calculations of MCEV, future foreseeable cash inflow is also included.

Thoughts on the report? MCEV?

Source:
Slides, Webcast and transcript

Full disclosure: Long PHNX
Note: I wrote an analysis here (in Swedish)

Introduction

Time for another investing blog. I usually write in Swedish (as seen here) but I enjoy writing in English more and some of what I write about I believe will be more relevant to investors across the pond and likewise I'll hopefully be able to receive some feedback as well.

About me
I am an engineering student who received some money to invest when I turned 18. Student loans and grants are quite favorable in Sweden which makes it easier to get by with investing capital at a young age. I think it's good to start as soon as possible to get the ball to start rolling. I love dividends but have realized that total return is the thing for me. Luckily some companies in Scandinavia embellish this fully and give both growth and dividend without losing quality. I don't follow and probably will not follow a purely DGI strategy even though DGI companies will be present in my portfolio. What's nice with DGI companies is the appreciation that comes with it and the dividends that come while I wait for my investments to mature.

To be clear. I will sell when I think a stock is overpriced. Preferably the stock will appreciate as the company evolves but alas, Mr Market has a mind of it's own. So what I look for is Dividends and Value and if possible growth. Most of what I own are now or have been undervalued even thought my Blue Chip companies have appreciated so far that I'm considering selling even though I try to keep my transactions to a minimum. All my holdings give dividends as seen in my portfolio in the bar at the top of the page. The only exception is Vardia, which is a Norwegian insurance company that went public this spring, I think the company has a lot of potential and follow it closely.

Portfolio
Stable DGI holdings:
Fortum Ojy (HEL:FUM1V)
Statoil ASA (STO:STL)

Growth:
Mr Green & Co AB (STO:MRG)
Bahnhof AB Series B (STO:BAHN B)
Protector Forsikring ASA (STO:PROCT)
Vardia Insurance Group ASA (STO:VARDIA)

High Yeild:
Awilco Drilling ASA (STO:AWLCF)
American Reality Capital Properties (NASDAQ:ARCP)
Iron Mountain Inc. (NYSE:IRM)
Pheonix Group Holdings (LON:PHNX)
Atea ASA (STO:ATEA)

Turn-Around:
Ganger Rolf  ASA (STO:GRO)

Both ARCP and PHNX could fit into the Stable DGI territory but since they both, only have four years of history and their high yeild they fit more inte to high yeild category for now. I only have one turn around and I'm not sure I'm keeping it. Atea could also fit into the Stable DGI territory but it lacks the size I would like to be more stable. I see potential for all stocks mentioned to appreciate. For sector and currency allocation check out the tab Portfolio in the menu.

Contents of the blog
That was all for introductory remarks, if there are any questions, feel free to ask. I'll try to write more of my thoughts of each company and what I see for them in the future as well as thoughts on investing and how I like to Invest. Companies I'll try to cover will mostly be US stocks but I'll try to get into my other investments as well.

Full Disclosure: Long all stocks mentioned