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Update For Equity REIT Basket Strategy As Of 7/1/16

|Includes: ARESF, STAG Industrial, Inc. (STAG)

This topic was last updated here: Update For Equity REIT Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha

I discussed reasons for maintaining an allocation to REITs here: Update For Equity REIT Basket Strategy As Of 7/24/15 - South Gent | Seeking Alpha (scroll to "Why Own Equity REITs")

I discussed interest rate cycles and REITs here: Update For REIT Basket Strategy As Of 8/11/15/Interest Rate Cycles And REIT Stock Prices - South Gent | Seeking Alpha (scroll to "Interest Rate Movements and REIT Stocks")

I am tracking realized gains and losses, along with annual dividend payments, here:Gateway Post: Equity REIT Common and Preferred Stock Basket Strategy

Total Net Realized Gain Since September 2013 Inception:

+$8,855.58 (of which $1,526.57 has been in REIT equity preferred stocks)

During the life of this basket, I believe that dividend income will swamp realized gains and will generate over 70% of my total return.

All of the Canadian REITs make monthly distributions as does BRG, IRT and STAG. The rest pay quarterly.

I do include REIT cumulative preferred stocks in this basket: Advantages and Disadvantages of REIT Cumulative Equity Preferred Stocks (9/25/2009 Post).

I am not tracking shares purchased with dividends in the following snapshot, but gains and losses from those shares are included in profit/loss snapshots. The snapshot contained in ITEM # 2 below, which shows the profit realized by selling 54 shares of STAG, includes some shares purchased with dividends. I quit reinvesting the dividend after the February 2016 payment.

Basket as of 7/1/16:

REIT ETF Closing Prices 7/1/16:

VNQ: $88.70 +0.03 (+0.03%): Vanguard REIT ETF

FREL: $24.85 -0.01 (-0.04%) : Fidelity MSCI Real Estate Index ETF

1. Added 100 ARESF at $10.09:

Closing USD Quote Day of Trade: ARESF: USD$10.10 +0.16 (+1.65%) : ARTIS REIT

Closing CAD Quote Day of Trade: CA:AX.UN C$13.14 +.13 (+1%)

Those two quotes tell me that the CAD rose against the USD.

When looking at this purchase alone, I now want the CAD/USD exchange rate to increase above the .7673 rate shown in the preceding snapshot as the ordinary shares priced in CADs rise as well.

2 Year Comparison Chart: ARESF vs. CA:AX-UN

This chart, which is unadjusted for monthly distributions, highlights two points: (1) the CAD has fallen in price against the USD over the past two years and consequently the ordinary shares priced in CADs have outperformed the ordinary shares priced in USDs and (2) the ordinary shares have performed poorly compared to U.S. REITs.

2 Year Comparison Chart: CA:AX-UN vs. Vanguard REIT ETF (NYSEARCA:VNQ):

This chart shows that VNQ has outperformed the Artis ordinary shares by about 30% over the past two years. Is that a reason to buy VNQ now rather than Artis? Look at when the difference in performance started? What started to happen in the summer of 2014?

Trade Snapshot:

USD Priced or CAD Priced Ordinary Shares/Withholding Tax:

The ARESF is traded on the U.S. pink sheet exchange and priced in USDs. I will receive monthly dividend payments in USDs after Canada's 15% tax withholding and the conversion from CADs into USDs.

If I bought the ordinary shares price in CADs, I would receive the monthly distributions in CADs after the 15% withholding tax.

A distribution paid by a Canadian REIT is not classified as a dividend by Canada under the U.S.-Canada tax treaty. The distributions from Canadian pass through entities like REITs will be subject to Canada's withholding tax when the stock is held in a U.S. retirement account.

I tested my understanding on that subject and found that it was correct. A prior ARESF purchase in a retirement account was one such test: Artis REIT ("I can now confirm that Fidelity withheld a 15% tax on the Artis monthly dividend recently paid into my Roth IRA", see snapshot) I sold those shares at a slight profit since I can not recover foreign taxes collected from dividends paid into a retirement account. It is just as well. I had bought that 100 share lot at $13.6: Roth IRA: Bought 100 ARESF at $13.6

In a prior round trip, I bought and sold a 300 share lot on the Toronto exchange: Item # 1 SOLD 300 AX-UN:CA at C$15.71 (9/26/14 Post)-Item # 1 Bought 300 of Artis REIT at C$14.36 (9/28/13 Post) As noted in the first link above, I realized a CAD gain of $367, but my tax reportable gain was U.S.D. $6.92 which is fine with me. The cost and proceeds have to be converted into USDs for tax reporting purposes, and the lower USD profit indicates that the CAD fell against the USD during my period of ownership.

I also flipped a 200 Artis lot twice in 2011, realizing a USD$281.27 gain (snapshot in previous links). I do not recall off hand the CAD/USD conversion rates during those brief ownership periods.

Item # 2 Sold 200 Artis Real Estate at C$14.09-Item # 1 Bought Back 200 Artis REIT at 13.21 CADs (9/8/2011 Post)

Item # 3 Sold 200 Artis REIT at C$13.88 (5/11/11 Post)-Item # 6 Bought 200 AX-UN.TO @ C$13.41 (10/22/2010 Post)

Trading Profits To Date: $288.19

Dividends: Artis is currently paying a monthly distribution of C$.09 per unit. Distribution History That penny rate has been in effect since June 2008. A continuation of this penny rate would result in an annual distribution of C$1.08 per unit.

Dividend growth prospects are viewed as nil or close to it. A dividend cut is more likely than a dividend hike. Currently, I anticipate that Artis will simply maintain that rate.

For ARESF share owners, the dividend yield before the Canadian withholding tax will depend on the applicable CAD/USD conversion rates.

Just for purposes of illustration, a conversion of C$1.08 into USDs last Friday would produce $.8362. The dividend yield based on the receipt of $.8362 per unit would be 8.29% at total cost of USD$10.09.

The CAD/USD was last at par on 2/4/13. When 1 CAD buys 1 USD, the dividend would then be C$1.08 and USD$1.08, and the dividend yield would rise to 10.7%, so currency exchange will be an important variable on dividend yield for the ARESF owner.

Properties: As of 3/31/16, Artis owns office, retail and industrial properties consisting of 194 properties in both Canada and the U.S. containing approximately 25.686 million gross leasable square feet.

Portfolio Overview

Artis owns property in Alberta: Portfolio Map and Property Listings Q1-16.pdf Most of those properties are in Calgary and Edmonton.

Property net operating income by category was 50% office, 25.4% industrial and 24.6% retail.

U.S. properties are concentrated in Minnesota and Arizona with some properties located in Colorado and one in NY.

Property Operating Income By Region:

Capital Raises: In June 2016, Artis raised gross proceeds of C$115M by selling units at $13.2. News 6/17/16.pdf

Last Earnings Report:

FFO/AFFO Reconciliation

I would use the AFFO number for purposes of evaluating the dividend since it is closer than FFO to funds available for distribution. I also view the AFFO number to be better when looking a price to cash flow.

If I annualized the quarterly AFFO number of C$.32 per unit, the annual run rate would be C$1.28 per unit. Converting that sum into USDs based on last Friday's conversion rate, I arrive at USD$.9878. Using a $10.09 price for ARESF, that gives me a P/AFFO at 9.79. However, I would emphasis that AFFO was stagnant as shown in the preceding snapshot Y-O-Y. Conditions can change for the better or the worse, so a lot depends on an investors outlook for energy prices and the Canadian economy in general.

ARESF did piece $17 back in early 2012 but it has mostly been a down hill ride with occasional rallies since that time: ARESF Stock Chart

Rationale: The general idea with a stock like Artis is to trade it, hoping to net a total return in excess of the dividend yield.

The hoped for objective would be an annualized return of 10%.

There are several avenues available to achieve that objective with the dividend being the most certain. A rise in the CAD/USD and/or the ordinary shares priced in CADs could take the return over 10% over a shorter time span theoretically even without the dividend.

Artis has performed poorly since crude oil started to collapse. The large concentration of properties in Alberta has been a negative.

The recent earnings reports have shown stagnation in FFO/AFFO as a result.

The collapse in energy prices, which may have bottomed earlier in the year, caused a collapse in the CAD's value against the USD that flows through into the ARESF price.

The CAD appears to have stabilized in the .75 to .77 area.

The USD priced ARESF is consequently a play on the potential rise in the CAD's value. The timing of that rise will in large part depend on a continued improvement in energy prices.

The economic recession in oil producing regions that have depressed property values and rents may have already ended as well. If economic conditions improve in those regions, the ARTIS ordinary shares priced in CADs should respond favorably.

If the ordinary shares priced in CADs can gain in value as the CAD rise in value against the U.S.D., that is what I call a twofer. The Double Whammy is the opposite scenario: CAD/USD declines and the CAD price ordinary shares fall too.

The value of the dividend would go up as the CAD increases in value after purchase. A rise in the CAD/USD after purchase operates as a dividend increase for the ARESF owner even when Artis maintains its penny rate constant in CADs.

Last Traded 6/30/16 at $10.41.

2. Pared STAG Again: Sold 54 Shares at $23.81:

Profit Snapshot: +$318.54 ($316.77 Long Term Gain)

Remaining Shares in Schwab Account: Average Cost Per Share=$17.094.

I am selling my highest cost shares into strength.

Last Discussed: 2. Sold 50 of 240 STAG at $22.74-Highest Cost Lot: Update For Equity REIT Basket Strategy As Of 6/24/16 - South Gent | Seeking Alpha

Note the purchase at a total cost of $15.93 on 2/8/16. Item # 2 Bought 50 STAG at $15.75: UPDATE For Equity REIT Basket Strategy As Of 2/12/16 - South Gent | Seeking Alpha The purchase price was at $15.75 and the price had increased by 51.17% to $23.81 over less than five months.

STAG's monthly dividend rate is currently $.1158 per share or $1.3896 annually. STAG Industrial - Dividends At a $23.81 price, the dividend yield is about 5.84%. That explains IMO the surge in the price. The emphasis has shifted from valuation concerns and metrics to dividend yield as the primary criteria for buying a stock.

The dividend yield for my remaining shares held in this taxable account is about 8.13%.

I also own 50 shares bought in my IB taxable account earlier this year: 2. Averaged Down: Added 50 STAG at $17.55: Update For Equity REIT Basket Strategy As Of 1/21/16 - South Gent | Seeking Alpha I may sell that lot when and if the price clear $25.

STAG reported core FFO per share of $.39 for the first quarter, up from $.35 in the 2015 first quarter. The consensus number for 2016, which appears to be based on core FFO, is currently $1.56 and $1.68 for 2017: STAG Analyst Estimates Using the $23.81 price and the 2017 estimate of $1.68, the Price/CORE FFO number would be 14.17.

REIT valuations are becoming more of a serious issue for me as yield stocks are bid up by investors.

Trading Profits to DATE in STAG: $492.12

The unrealized profit based on the $23.81 price is about $928 with 130 share bought in the open market.

Closing Price Last Friday: STAG: $23.75 -0.06 (-0.25%)

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics:ERROR CREEP and the INVESTING PROCESS.Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.

Disclosure: I am/we are long ARESF, STAG.