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Update For Equity REIT Basket Strategy As Of 7/28/16

|Includes: BRG, CIO, HCP, Independence Realty Trust (IRT), SNR, STAG

This topic was last updated here: Update For Equity REIT Basket Strategy As Of 7/15/16 - 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:

+$9,602.36 (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.

Basket as of

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Rationale for Dispositions Discussed Below:

I am using the strong REIT rally to sell my highest cost positions.

For a large number of stocks, I am in a trading mode where I will average down in small lots and then sell higher cost lots profitably into strength.

This strategy works only when I buy on significant downdrafts and sell into strength which is what I have been doing with several REIT positions since August 2015.

After paring a position, I will then patiently wait for another opportunity to lower my average cost per share on another downdraft. If one does not occur, then I will simply go elsewhere somewhere in the world.

This is primarily a risk mitigation strategy. I harvest dividend payments and generate some profits through selling higher cost lots while lowering my average cost per share and raising my dividend yield at the lowered average cost numbers.

Since my last update, I have trimmed IRT, BRG, STAG and SNR by selling the highest cost shares into price strength.

The charts of these small REITs highlight the difficulty in earning a return in excess of their large dividend yields, which is another reason for having a pre-defined trading strategy for them that is designed to harvest the dividends without losing money on the shares:

IRT Stock Chart

BRG Stock Chart

SNR Stock Chart

STAG Stock Chart

There are reasons why IRT, BRG and SNR have high yields even after their recent strong price rallies.

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I do not track shares purchased with dividends in the following table:

Basket as of 7/28/16:

This basket provides a much higher dividend yield than a U.S. or international REIT ETF. The Vanguard REIT ETF (NYSEARCA:VNQ) has a trailing yield of 3.35% based on today's close at $91.29. While I have not calculated the yield of this basket at my cost numbers or at current prices in awhile, the yield at current prices is probably over 8% before the Canadian 15% withholding tax which I recover as a credit based on my income.

All of the Canadian REITs pay monthly distributions and all went ex distribution yesterday.

E.G.:

Dream Industrial Real Estate Investment Trust (DIR.UN:TOR)

Northwest Healthcare Properties Real Estate Investment Trust (NWH.UN:TOR)

Dream Global Real Estate Investment Trust (DRG.UN:TOR)

Cominar Real Estate Investment Trust (CUF.UN:TOR)

Agellan Commercial Real Estate Investment Trust (ACR.UN:TOR)

American Hotel Income Properties REIT (HOT.UN:TOR)

The "UN" stands for units.

The values for the Canadian REITs shown in the preceding snapshot are in Canadian Dollars.

CAD/USD= 0.7603 (1 CAD buys $.7603 USDs) or

USD/CAD = 1.3150 (1 USD buys C$1.315)

Hopefully the CAD will at some point return to par which last happened in January 2013. ($1CAD = $1USD)

Omega Healthcare Investors (NYSE:OHI) was ex dividend today for its quarterly distribution.

The table includes two purchases that will be discussed in the next update.

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1. Sold 200 IRT at $8.69 (highest cost shares in Schwab Taxable Account):

Most Recent Discussion: Item # 1. Averaged Down: Bought 50 IRT at $6.18: Update For The Equity REIT Basket Strategy As Of 2/22/16 - South Gent | Seeking Alpha

Trade Snapshot:

History:

I quit reinvesting the dividend after the April 2016 payment. The price will have to fall below my average cost per share before I would consider resuming reinvestment.

Profit: +$80.46

Average Cost of Remaining Shares in this Account: $7.536:

Company Description: IRT is an externally managed REIT that owns apartments. IRT Reit

Map of Apartment Locations: IRT Reit (click red tag for pictures)

IRT pays a monthly dividend at the current rate of $.06 per share: Independence Realty Trust Dividend History

The average cost per share for the 200 share lot that I sold was $8.25 rounded. At that cost, a monthly dividend rate of $.06 would produce a dividend yield of about 8.73% ($.06 per share x. 12 months = $.72 per share annually ÷ $8.25 cost per share= 8.7273%)

With these high yielding securities, the goals are to capture the dividend yield without losing money on the shares and to trade them profitably where I sell my highest cost lots and keep my lowest cost ones until I decide to eliminate the position. Any profit in addition to the dividend yield is viewed as a gravy. Given the high yields, a small profit can generate a total return in excess of 10% annualized.

The 200 share lot was purchased on 5/6/2015. I received 14 dividend payments totaling $336 and realized a gain of $80.46. The total return was $416.46 on a $1,649 cost basis or 25.25% in about 14 months. I also lowered my average cost per share. That is how this trading strategy can work and hopefully will work most of the time.

Recent Earnings Report:

Before turning to a discussion of IRT's quarterly report, I will need to reproduce what I would consider a proper reconciliation showing adjustments to net income to arrive at FFO, Core FFO and then AFFO or Funds Available for Distribution for comparison purposes with the IRT report. This snapshot comes from Mid-America Apartment Communities (NYSE:MAA) report for the Q/E 3/31/16:

Sourced: Exhibit

To arrive at an AFFO number, as normally defined, MAA deducted capital expenditures for the simple reason that those funds are not available for distribution.

Apartment complexes require a lot of recurring maintenance expenditures. MAA also deducted expenditures for redevelopment and revenue enhancing features that sometimes can properly be characterized as maintenance or recurring capital expenditures. In any event those expenditures were deducted along with recurring capital expenditures from the adjusted "Core FFO" to arrive at FAD (funds available for distribution or the closest calculation to free cash flow)

Now, let's take a look at IRT's report for comparison purposes:

Sourced: SEC Filed Press Release

IRT stops with a calculation of Core FFO. Where is the FAD calculation? It can not be found in that release or anywhere that I could find.

The company does mention that it had capital expenditures of $1.6M or $117 per unit during the first quarter which is actually a low number per unit number given the age of the apartment complexes.

I am left to my own devices to calculate FAD. I will deduct that $1.6M from the $10.349 CORE FFO number. That gives me $8.748M in FAD ÷ 50.114M shares = $.175 FAD per share. That is less than the $.18 per share in dividends paid during the quarter.

I have not seen anyone other than me discuss this issue. Cash used to replace a refrigerator is not available to be paid out again to shareholders. When FAD per share starts moving below the dividend per share number, dividend cuts frequently happen since the company can not continually pay shareholders more than it is generating in free cash flow.

2. Sold Highest Cost IRT Lot Roth IRA Accounts 200 Shares at $9.05

Vanguard Roth IRA History for IRT:

Sold 200 IRT of 250 at $9.051:

Profit Snapshot: +$86.28

I still own one 50 share lot in this account with a $7.7 per share cost that was bought in July 2015, which means that I can buy back some or all of the shares sold at prices below $7.7.

The 200 share lot with 150 of those shares bought in May 2015 generated $180 in dividend, creating a total return of $266.28 or a 15.5% total return on $1717.5. .

3. Sold Highest Cost IRT Lot Fidelity Roth IRA at $9.1:

Fidelity Roth IRA: Open Market Purchases:

Profit Snapshot: $31.2

This leaves me in this account with 50 shares at an average cost per share of $7.72 bought in July 2015. I can consequently average down at below $7.72 in this account.

Appendix Section: Update For Equity REIT Basket Strategy As Of 7/24/15 - South Gent | Seeking Alpha

Of the shares currently owned, the IB account still has 150 IRT shares at an average cost per share number of $6.61:

Snapshot During Trading Day 7/28/16 (far right hand column is unrealized profit at $8.86 on 150 shares):

1. Averaged Down: Bought 50 IRT at $6.18: Update For The Equity REIT Basket Strategy As Of 2/22/16 - South Gent | Seeking Alpha

2. Added 100 IRT at $6.8 as a Trade-IB Account: Update For EQUITY REIT Basket Strategy As Of 1/29/16 - South Gent | Seeking Alpha

I also own the following IRT shares in what I call a satellite trading account:

Snapshot During Trading Day:

A snapshot of a 50 lot purchase in that account can also be found in the Appendix section of the previously reference July 2015 REIT Update.

Those buys are as much a part of this trading strategy as the sells discussed in this post.

Remaining IRT Shares 532.1764

Total Cost =$3,923.93

Average Cost Per Share= $7.373

Yield at $7.373 per share (assuming monthly dividend of $.06 per share) = 9.7654%

Total IRT Trading Profits To Date: +$251.93 ($197.94 discussed in this post)

I have had to be patient with this stock to realize that total profit.

Closing Price Today: IRT $8.88 +$0.01 0.11%

5. Sold 100 BRG at $13.52 (highest cost shares in Schwab Taxable Account):

Trade Snapshot:

History:

Profit: $38.59

Average Cost Remaining Shares This Account: $12.08+

That lot would be the next one sold.

My lost cost lot was bought in my IB account. The total cost per share is $9.38:

Snapshot Intra-Day: $191 unrealized profit at $13.22

2. Averaged Down: Bought 50 BRG at $9.36: Update For The Equity REIT Basket Strategy As Of 2/22/16 - South Gent | Seeking Alpha

This is the next lowest cost remaining lot at $10.77 per share. (snapshot before the close):

The next liquidation will come from this satellite trading account where 220+ shares have a total cost per share of $12.08 (200 shares bought in the open market, the rest with dividends):

Trading Profits to Date: $193.46 and hard to come by (requires as much patience as IRT)

Earlier Transaction: Eliminated BRG Selling 151+ Shares at $13.77 And Added To LXP-Roth IRA-Small Adjustment In The REIT Basket Strategy - South Gent | Seeking Alpha (+$154.87)

Closing Price Today: BRG $13.17 +$0.04 0.30%

6. Sold 108+ SNR at $11.76:

I included the shares bought with two quarterly dividend payments. Schwab is unusual in that the broker allows the customer to sell fractional shares without liquidating the entire position.

Lot Details in This Account:

The 50 share lot purchased on 2/11/16 was discussed here: 5. Added 50 SNR at $8.41+: UPDATE For Equity REIT Basket Strategy As Of 2/12/16 - South Gent | Seeking Alpha

Profit Snapshot: +$38.79

Average Cost Per Share of $8.79-Remaining Shares

7. SOLD Highest Cost Lot SNR Lot in Another Taxable Account-Sold 50 at $11.85:

Trade Snapshot:

Profit Snapshot: $23.27

Remaining Share position-Average Cost Per Share $10.2:

I also own this 100 share lot, bought in my IB account, that has an average cost per share at $9.57:

Remaining Shares:

Total Cost: $2,855.65

Average Cost Per share: $9.52

Dividend Yield at Average Total Cost Per Share (assumes $.26 quarterly dividend per share) = 10.92%

Closing Price Today: SNR $11.86 +0.03 0.25%

8. Eliminated CIO: Sold 100 at $13.5: Office building and nursing homes REITs are my two least favorite sectors, though I am mostly referring to office REITs that do not primarily own prime properties in major downtown cities.

City Office REIT (NYSE:CIO)

Trade Snapshot ($1 Commission):

Profit Snapshot: +$207.97

Item # 5. Bought 100 CIO at $11.4: Update For Equity REIT Basket Strategy As Of 4/6/16 - South Gent | Seeking Alpha

I bought a day before the 4/1 ex dividend date and also received the $.235 quarterly dividend that just went ex dividend. City Office REIT Dividend History

Dividends: $47

Total Return: $254.97 or 22.35% with <4 month holding period

I bought after a common stock offering knocked down the price:

"The shares had declined from a $12.78 close on 3/28/16: CIO Historical Prices The decline to my purchase price from that close was 10.8%.

The price decline was caused by a common stock public offering priced at $11.4. City Office REIT, Inc. Announces Pricing of Public Offering of Common Stock The underwriters sold 7.7M shares at $11.4 and may exercise an over allotment option for up to another 1.05M shares. The company is using the proceeds mostly to pay down debt."

Prior Trade: 1. Sold 50 CIO at $12.38: Update For Equity REIT Basket Strategy As Of 3/7/16 - South Gent | Seeking Alpha (profit snapshot $61.04 plus one dividend)-Scroll to 2. BOUGHT CIO at $11.12) Update For REIT Basket Strategy As Of 11/24/15 - South Gent | Seeking Alpha

Trading Profits: $269.01

City Office REIT Announces Closing of Office Property in Orlando, Florida "acquisition of the Research Park Collection in Orlando, Florida for a purchase price of $49.8 million, exclusive of closing costs. The property includes five Class A office buildings and a 10 acre land parcel within the Central Florida Research Park, the fourth largest research park in America. The Research Park Collection's five buildings total 272,192 square feet of net rentable area and are 93% leased to a strong and diversified tenant roster, including various military entities and defense contractors. The acquisition is anticipated to generate an initial full-year net operating income yield of approximately 8.4% based on the purchase price and the estimated cost of planned capital improvements.")

2015 Dividend Sourcing

9. Sold HCP:

Loss Snapshots: Total Loss=-$75.03

My total return was slightly positive.

HCP just has too many problems IMO. I am tired of fooling with it.

10. Pared STAG For The Last Time-Sold 42 Shares at $25.2:

Trade Snapshot:

Position Snapshot Before Pare:

Position Snapshot After Pare:

Total Average Cost Per Share= $15.93

Monthly Dividend Rate= $.1158 or $1.3896 Annually STAG Industrial - Dividends

Current Dividend Yield at Average Total Cost= 8.72%

Yield at a Total $25.2 Total Cost= 5.51%

Profit Snapshot: +$271.31

Trading Profits To Date: $763.43

Last Pare: 2. Pared STAG Again: Sold 54 Shares at $23.81:Update For Equity REIT Basket Strategy As Of 7/1/16 - South Gent | Seeking Alpha (profit snapshot $318.54)

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 IRT, BRG, SNR, STAG.