The announcement on Wednesday, October 3 (and continued reports this week), that refinances (and, as a result, prepayments) were increasing dramatically as a result of the Fed's implementation of QEternity was expected to cause a substantial rush to get rid of mREIT holdings, particularly those that were Agency-supported. To an extent, the predictions were correct, and some mREIT stocks saw some losses, although there didn't seem to be anything like a major sell-off. In fact, some mREITs have increased in value, particularly those dealing with non-Agency MBS and hybrids that have both Agency and non-Agency holdings.
I have written a couple of articles about mREITs over the past several weeks, and have received comments from many people, including a large number of retired or nearly-retired people who have put significant amounts of their investment money into mREITs. The attraction, of course, is the double-digit dividend yields these companies typically offer. Along with the ZIRP that has put a lid on interest rates and the absence of any great push to refinance (prior to October), there had been a feeling of security in mREITs. Companies such as American Capital Agency (AGNC) and Annaly Capital Management (NLY) seemed -- for the time being -- to be immune to the kind of interest shifts that would imperil their dividend yields.
With the prospect that QEternity may bring about an increase in refinances and prepayments, however, the comfy mREIT bubble may seem about to be popped. I feel somewhat obligated, given my support of mREITs, to provide some kind of guidance for those who may now see themselves as trapped with a bunch of high-yield mREIT stock that may come tumbling down.
Good investors ought not to get caught with their pants down, and it is a wise strategy to keep at hand a list of alternative investments to which one can turn if, indeed, the mREIT market were to go sour. I frequently examine companies mentioned by my associates here at Seeking Alpha, as well as checking out various other sources for good leads. After the announcement on the 3rd of October I did some research using my favorite source of information: FINVIZ.com. FINVIZ offers a very nice screener that lets you select as many filters as you want: basic data, fundamental data and even technical data. All you have to do is know what you want, and FINVIZ will help you find it.
Screening Criteria: The essence of effective screener use is to identify the proper set of criteria you want which will serve as the filters for the screener. Too few filters, and you end up with too many selections to be of any practical use; too many filters, and you will end up with no selections, which is also impractical. To properly identify the filters I would use, I determined the criteria I expected to have satisfied (please note that these criteria reflect my values and expectations; the reader may have differing opinions from mine with respect to one or all of them - in the end, however, I can only be responsible for myself):
- The company must be turning a profit;
- The company must be effectively managed;
- The company must be able to handle its debt load;
- The company must exhibit some level of sustained growth in terms of share value;
- The company must have a dividend yield of 10% or more.
Is that asking too much? Is there even an mREIT that would satisfy all of these expectations?
To satisfy the "profit" criterion I selected the "Net Profit Margin" filter from the "Fundamental" table in FINVIZ's screener. This filter offers a variety of choices, but - not wanting to put too great an emphasis on profitability at this point - I chose the simplest filter: a net profit margin that was greater than 0. [NPM > 0]
By way of satisfying the "effective management" criterion I chose three filters: Return on Equity, Return on Investment and Return on Assets. These returns are indicators of how effectively the management of a company is using the resources at its disposal; the greater the returns on any of the figures, the more effectively that element is being utilized by management. Again, so as not to put too great an emphasis on any particular return, I set all three filters to identify companies whose returns were positive (that is, > 0). [ROE > 0; ROI > 0; ROA > 0]
Debt is ubiquitous in the business world, so asking that a company have no debt is being a bit persnickety; however, one can ask that the company in which one invests be able to manage its debt. One possible filter would measure debt-to-equity ratio, but just because a company has low debt does not necessarily mean they can handle it. By the same token, a company with a larger debt load may be perfectly capable of paying those debts without difficulty. A measure of the ability to handle one's present debt load is the "Current Ratio," where current debt is weighed against the company's current assets (this is also called the "Liquidity Ratio"). A ratio of less than 1 means that a company would (likely) have to borrow in order to meet immediate debt obligations; therefore, I set the current ratio filter to > 1. [CR > 1]
The expectation that the company exhibit growth in its value may be pushing things, but even if one is primarily interested in dividend yield, one wants a company that is increasing in value; after all, if a company falls in value over the course of a year, it could quite deceptively end up offering a double-digit dividend by default, since dividend yield is inversely proportional to share value. Therefore, I chose the technical filter of performance, and used it twice: Performance Year-to-Date, and Performance over the most recent quarter. So as only to establish the requirement that performance in those two periods not be negative, I set both at "positive" (that is, > 0%). [PYTD > 0; PLQ > 0]
As it turns out, dividend yield is the killer, here. Set low enough, (0%) there are more than 1100 companies that satisfy our criteria. That is impractical (although I do find it reassuring). Setting the yield at 2% (I think this is rather low), over 800 companies get lopped off our list - including Apple (AAPL), investment juggernaut that it may be. Setting the yield at 4% (which is the minimum I tend to consider), and we are left with 90 companies. But we're trying to replace the double-digit yields of mREITs, which require us to go to 10%. [DY > 10%]
Screening Results: Only six companies satisfy the criteria outlined above: Alto Palermo S.A. (APSA); Capital Product Partners L.P. (CPLP); CreXus Investment Corporation (CXS); Mind C.T.I., Ltd. (MNDO); Navios Maritime Partners L.P. (NMM); Rentech Nitrogen Partners, L.P. (RNF).
As an aside, one of the six companies selected by the set of filters I used is a company with respect to which I am long, and about which I have written on this website: CreXus Investment. The selection of CreXus by FINVIZ on the basis of criteria I set up was, in all honesty, a complete surprise to me -- although, upon reflection, I never would have bought shares in the company unless I thought it was a good investment. I did not, however, choose CreXus because it met the criteria I describe above -- the results of the screening were completely unanticipated. I ran the screen on October 5 for the first time (I hint at the results on my Instablog written on that date), and I have owned shares in CreXus since August 16. I will not discuss CreXus in what follows (other than to place it in table 1); if you wish to read my detailed discussion of CreXus, you may do so by clicking this link.
Having identified the six companies satisfying our screening criteria, I thought it might be helpful to provide some sort of ranking to them, to help differentiate them with regard to their performance. The ranking system I used was purely arbitrary: companies were ranked from 1 to 8 on the basis of their total ratings over the eight criteria; to avoid situations where one company received a high total score by virtue of having gotten extremely high ratings for only a couple of criteria, I then rated each company on the same 1 to 8 scale for each criterion (in all cases, 1 = best performer, 8 = worst performer). I then totaled the eight rankings, the lowest score identifying the best overall performer, the highest score identifying the worst overall performer. The results are reflected in table 1:
(click image to enlarge)
(I must admit to feeling some level of validation that CreXus is the second highest ranked company on our list.)
Brief Descriptions of the Companies: In what follows I give a thumbnail sketch of each company and its fundamental data from its last complete year (2011), along with a chart representing the performance of its share price over the past twelve months. This is followed by a brief description of the company. I also mention any particular red flags that seem appropriate (and, to be fair, any particular and noteworthy steps the company has taken to limit any risks). Finally, I provide the most recent quote for the company's stock effective close-of-market, 10 October, 2012.
Rentech Nitrogen Partners has been in operation since 1965, and is in the business of manufacturing nitrogen fertilizer products. Located in East Dubuque, IL, Rentech is situated in the Mid Corn Belt region, and within 200 miles of most of the customers it serves. Over time, the company has regularly expanded its production and storage capacity, and is in the process of a major expansion to increase its capacity to produce ammonia (used in the production of nitrogen-based fertilizers). As noted in the thumbnail above, Rentech seems to be in solid financial shape, and will no doubt improve its position with the completion of its current expansion project.
Among the products manufactured at its plant are: UAN - a liquid fertilizer that is easier and safer to store and transport than pure ammonia (which must be compressed and refrigerated); Urea, which is used in the production of UAN, and can also be used in power, ethanol and diesel-emissions applications; Nitric Acid, which is used in the production of UAN; Diesel Exhaust Fluid, which can be used for agricultural purposes; and Carbon Dioxide (a side-product of the ammonia manufacturing process), which can be purified and sold as food-grade CO2.
Rentech does have substantial competition from five major nitrogen producers who together hold 79% of the North American market. In response to the challenges of having significant competition, Rentech has maintained its facilities with adequate on-site storage for all of its products. It permits its customers to purchase and transport products as needed, and does not maintain a fleet of trucks and rail cars; this enables Rentech to minimize overhead expenses and meet customer demand according to the customers' needs. Rentech also has a history of voluntarily meeting pollution standards, and has installed catalytic converters in its plant, reducing emissions by as much as 90%. The company's 3-year beta is 0.00.
SHARE PRICE: $34.95
MIND C.T.I. is a business software company based in Israel with offices in the United States, the United Kingdom and Romania; it has been in business since 1995. The software produced by MIND is focused on managing telecommunications services, producing a "convergence" of billing, customer care and accounting solutions. The company develops call-management systems to optimize network resources and manage costs. Its main target is to produce mediation, rating, billing and customer care solutions across a variety of services.
While software companies (and tech companies in general) tend to be volatile, MIND is currently operating with a beta of 1.34 - not excessive in comparison to the market as a whole. Its variety of products/services are aimed at hotels, hospitals, universities, sales organizations and managed services. It counts among its customers such companies as Microsoft (MSFT), Cisco (CSCO), AT&T (T) and Merrill Lynch. Although communications technology is a rapidly developing field, MIND has kept pace, its products usable on Mobile Virtual Network Operators (MVNO), VoIP, 3G mobile, broadband and cable systems, traditional land-line and mobile systems, and is even available for LTE/4G systems.
As you may note from the thumbnail above, its financial situation is noteworthy for a micro-cap. Again, for a technology company, it has a rather tame beta at 1.34.
SHARE PRICE: $1.91
Alto Palermo S.A. makes the rather audacious claim to have been in business since 1889, when it was founded as "Sociedad Anonima Mercado de Abasto Proveedor," or "Market Supply Corporation" which has been in continuous operation since then, except for a 10-year hiatus from 1984 to 1994. It was revived under its current name by IRSA, a major real-estate development firm in Argentina.
Alto Palermo owns and operates approximately 13 major shopping centers, primarily in Buenos Aires, but also in four other cities. It derives its revenue from the leasing of retail space in its centers, as well as management and operation of the centers themselves. It initiated a consumer financing operation which was sold to a regional bank, with Alto Palermo retaining a 20% holding in the financing operations. Recently, Alto Palermo has begun the acquisition and development of residential properties, primarily in the form of condominiums, some of which are close to, or associated with, its shopping centers.
With IRSA as a substantial shareholder in its operations, and with its retail holdings being bolstered by its residential properties and its holdings in consumer finance, one can understand the solid financial standing Alto Palermo displays in its thumbnail above. Although retail is a highly competitive sector, Alto Palermo seems well-positioned to maintain status as a major player. Its beta is .77
SHARE PRICE: $15.60.
Capital Product Partners L.P. is a shipping company specializing in the transportation of oil, oil products and chemicals. Operating out of Greece, it has been in business since 2007. Capital Product is sponsored by Capital Maritime & Trading Corp., a diversified shipping group which holds 30% of Capital Product.
Capital Product owns 25 vessels, all tankers, which are chartered to counterparties. At present, 87% of its vessels are chartered through 2012, with 63 % of its ships chartered through 2013; some charters are contracted through 2017. The average remaining charter duration at this time is 4.7 years. These figures play a large part in accounting for the total assets held by Capital Products, and the current charters help secure the net income they currently realize.
Based on its equity market capitalization, Capital Product is one of the largest tanker companies listed in the United States. Capital Product also has one of the youngest tanker fleets among U.S.-listed companies. Its current 3-year beta is 1.23, indicating a volatility that is not excessively greater than that of the market as a whole.
SHARE PRICE: $8.08.
Navios Maritime Partners L.P. is another Greek shipping company, although Navios specializes in dry bulk cargo. The company has been operating for 50 years, and is known as an innovator in maritime finance, mergers and acquisitions and risk management.
Navios currently operates 20 ships having an average age of 5.6 years, compared to the industry average of 15 years. These ships are chartered to counterparties (as with Capital Product, above); it currently has charters contracted to end from 2012 through 2022, with approximately 35% of its ships chartered through 2018 to 2022.
To limit risks of prematurely discontinued contracts, all of Navios' charters are insured. Charters on approximately 20% of its ships include payment by way of profit sharing, with Navios receiving approximately 50% of the profits on those ships. It has a beta of 1.4.
SHARE PRICE: $14.46.
Sources: My source for the data in table 1 was FINVIZ.com. My source for the data and charts in the thumbnail sketches was YCharts.com. The Motley Fool was an excellent source for beta data, as was FINVIZ.
Disclosure: I am long CXS.
Additional disclosure: I may initiate a position in RNF, MNDO and/or APSA over the next 72 hours.