Cash Flow Kingdom Income Stocks

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Includes: ACRE, AROC, BCRH, BRYFF, BXMT, CPLP, EGC, FSIC, GPMT, HT, JCP, KKR, KTP, LADR, MIND, MINDP, OFS, RICK, TCPC, TGP, USAC
by: Darren McCammon
Summary

Most of our public posts recently have been about growth stocks: Energy XXI Gulf Coast, RCI Hospitality, etc.

So I wanted to give some love to Cash Flow Kingdom income stocks.

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Cash Flow Kingdom 'CFK' tends to have the majority of its holdings in dividend stocks and other income-producing assets. However, recently we have mainly been focusing on the growth stocks like RCI Hospitality (RICK), Energy XXI Gulf Coast (EGC) and Bri-Chem (OTC:BRYFF) These stocks have had more going on of note recently, and by their very nature you have to watch them more closely. However, they are not our main focus, nor more important than the income investments. At our core, CFK remains a small-cap growth and income service with emphasis on cash flows.

I therefore thought I would remind readers Cash Flow Kingdom has a specific Income portfolio tracker in the CFK box.com folder, with income investments in it such as:

  • BDCs: OFS, FSIC, and TCPC.
    (Note: Now that BDC reporting season is over, I'll be updating the BDC file in the tracker tool, and have putting out a BDC specific article on my To Do list. New regulations allowing expanded leverage of BDCs is going to make choosing good ones all the more important.)
    • OFS: Saw a significant Q1 increase in portfolio size which should allow them to cover the dividend in Q2. Management fees are not great, but high inside ownership (22%) makes for alignment decent, and the large discount to NAV (20%+) here is unwarranted.
    • FSIC: Merger adds scale and makes permanent 1.5% of AUM fee plus changes the lookback to more attractive terms (no longer adding back management fee). Lower dividend should be achievable, discount to NAV should shrink. Insiders have been buying.
      New BDC regulations allowed FSIC to expand leverage; however, they recently recommended the board pulled back its previous approval to do so when a rating agency started putting those that did on negative watch.
      FSIC, a KKR company, is still going to want to use this leverage, but now they will probably ask for a shareholder approval. In doing so they will have to explain why this would be in shareholders' best interests and maybe offer some sort of enticement to get the vote (improved fee structure?).
      This was a very shareholder-friendly move by FSIC which they did not really have to do. They already had the board decision and could have pushed it through. If you like size, this when combined with the rest of parent KKR's other BDC children is also the largest single BDC platform.
    • TCPC: Is one of the "good" BDCs. It also had a strong Q1 earnings report. TCPC trades slightly below NAV, managed to increase that NAV last quarter, cover its dividend with NII, grow its portfolio size, has a stock buyback program which it actually uses, and has one of the more shareholder-friendly fee structures.
      There is a possibility they would issue new shares given they have achieved their targeted portfolio leverage, immediately following which would be a better time to add. However, I have my doubts on this given the recent regulation changes, and that they are still trading slightly under NAV. If it were me, I'd just wait until I could expand the portfolio via the higher leverage limit, and might go to a shareholder vote to get that approval early.
  • REITs: LADR, HT, ACRE, GPMT
    • LADR: Ladder Capital is probably my favorite mREIT (it is actually a mREIT/REIT hybrid). It makes for a good Buy and Hold stock because it has internal management with good capital allocation skills and high insider ownership (12%). These capital allocation skills have allowed it to grow its distribution about 9% annually since inception, and like most Commercial mREITs, it actually benefits from interest rate increases.
    • HT: Is my favorite hotel REIT because it has experienced "founding family" internal management with good capital allocation skills and high insider ownership. Hotel REITs tend to do well when the economy does well. This one also does well when the dollar is cheap relative to other currencies (well heeled overseas vacationers and visitors), and should be seeing significant EBITDA growth next year from South Florida hurricane damaged hotels coming back online later this year.
    • ACRE: Both benefits from increasing interest rates and was able to reduce its own borrowing rate, so the spread should improve. Its new CEO is an Ares insider who previously was very successful in growing ARCC to what it is today. His appointment signals to me that Ares is increasing its focus here and looking to grow the portfolio. While ACRE is externally managed, it has one of the more shareholder-friendly fee structures and fairly high insider ownership (9%).
    • GPMT also gets a special mention. It is progressing slowly in its quest to B like BXMT, but it is not quite there yet. I continue to watch it, and wait for a better price. It's close, but still haven't quite pulled the trigger.
  • Insurance: BCRH
    • BCRH: I keep this reinsurance company as a core holding, but I've admittedly been long and wrong so far, thanks to Hurricane Irma-related losses. This company has low correlation with the rest of most people's portfolios (including mine), and currently offers a double-digit dividend. Thus, while the company itself is not low risk, investment theory tells us it lowers the risk of our overall portfolio through low correlation and increased diversity. Historic multiples would value BCRH at .9x book. I intend to overweight at less than .9x book and underweight at more than 1.1x book.
  • Energy Transport and Services: CPLP, AROC
    • CPLP: Capital Product Partners is a diversified ship leasing company with strong cash flow and positive macro potential in 2018.
      They unfortunately sandbag DCF (it actually covers the dividend more than they imply), have issued a small amount of shares via an ATM below NAV, and apparently have no intention of increasing the dividend meaningfully (though they could).
      On the other hand, management knows the shipping business, and we collect a well-covered double-digit tax advantage dividend with no K-1 reporting (only 33% of it was immediately taxable last year).
    • AROC: ArchRock is more a dividend growth stock than a high dividend stock. With a recent merger, it is essentially the classic DGI stock offering a very well-covered 4% yield with high expectation that dividend is going to grow 10%+ for the next couple years.
      The Energy Information Administration notes some of the highest increases in North American natural gas volumes in history are occurring and expected to continue. This natural gas volume needs compressors to move to market creating high demand. Additionally, the compressor market has become an effective duopoly between Archrock and USAC, implying ongoing pricing power. Earnings reports have been increasingly strong as has forward guidance.
  • Preferred: MINDP, KTP, special mention TGP-pB
    • MINDP: Mitchum is the preferred of a small obscure seismic and oceanographic equipment provider, servicer, and leasor. With oil prices rising, they may start to see increasing demand from offshore oil exploration. In the meantime, they have no debt (putting this preferred in first position), positive cash flow, and have been successfully diversifying including a recently signed Mitsubishi deal. I consider this one of my safer income investments.
    • TGP-pB: I don't actually own TGP's preferred as I'd rather move up the risk spectrum to TGP itself. However, this preferred offers a lot of bang for the buck. LNG transportation is a growing, high demand industry (a paradigm shift in LNG worldwide transportation is occurring as a clean fuel for worldwide electricity production). TGP enjoys long-term lease contracts on its ships which helps to ensure cash flow and will be growing that cash flow as already scheduled ship new builds come online.
      TGP, however, also pays out much less in dividend than the cash flow it brings in would warrant. This helps reduce risk for the preferred, while this preferred's fixed to floating feature also reduces interest rate risk. Like MINDP, I consider this a low risk preferred paying out a very attractive distribution.
    • KTP: KTP is actually the baby bonds of J.C.Penney (NYSE:JCP) placed in a preferred wrapper. So importantly, its payouts can't be canceled short of bankruptcy.
      KTP is clearly riskier than the previous two mentioned preferreds; however, it also pays out a lot more, and has significant capital gain potential. J.C.Penney only needs to survive for this to be a good investment (which I think it will do).
      Recent refinance of JCP near-term unsecured to 2025 buys time. Time which helps ensure ongoing survival and allows you to collect this attractive double-digit dividend that much longer. JCP had a decent Christmas season, enjoys a much more survivable debt structure than rival Sears (SHLD), and is showing various spots of strength (salon, Sephora, appliances, etc.). It is one of the companies most likely to gain customers when a Sears closes. Recently Macy's (NYSE:M) Q1 earnings pointed to healthy consumer spending, while JCP's Q1 earnings showed "J.C. Penney Is Just Treading Water." Luckily, just treading water is probably good enough for KTP.

Diversification is important.

This is why these are just some of the income-producing equities Cash Flow Kingdom follows. We try to maintain picks in all five of these categories: BDCs, REITs, Energy Transportation and Services (formerly called MLPs), Insurance, and Preferred; plus offer a growth pick here and there. In all cases, underlying cash flows, management alignment, and capital allocation skills are key considerations we cover.

Cash Flow Kingdom, the investment community where Cash Flow is King!

Disclosure: I am/we are long ALL INVESTMENTS AS LISTED IN THE ARTICLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article discusses risky investments including investments tied to a specific sector and thinly traded investments. I do not know your goals, risk tolerance, or particular situation; therefore, I cannot recommend any investment to you. Please do your own additional due diligence. Some positions listed may be relatively minor "token" positions encompassing less than 1% of the portfolio.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.