Ramco-Gershenson Properties Trust
It's hard to believe it was just four months ago when the portfolio purchased the convertible preferreds of Ramco. The intent behind the purchase was to have a cash-generating security with some potential for upside and limited downside. And buying the convertibles with their higher yield offered that opportunity. They had a higher yield than the common while still offering upside via their convertible feature, allowing the holder to exchange the preferred for common stock.
In total, the purchase provided more than a 20% return in about four months. That's about $1.81 in dividends plus capital appreciation from $51.93 to $60.75 (as I write).
While the dividend still looks nice, at nearly 6% (compared to the common stock's 4.2% yield), I think the common stock -- the key driver of the convertible preferreds -- is reasonably valued now. In its latest annual guidance, the company predicted a midpoint of $1.07 per share in funds from operations (FFO), compared to $1.04 for 2012. That's modest growth for a stock trading at 15 times forward FFO.
But could there be more FFO growth on the way? The company announced a new deal recently to buy the remaining 70% in a joint venture of properties that it didn't already own. While the properties look to be higher quality and at a decent cap rate (7.4%), the financing and the constraints of Ramco's deleveraging mean that not much of the immediate value accrues to the common stock. For example, I estimate that revenue will go up 16%, while the number of common shares increases 14%. Admittedly, there's operating leverage in this type of business, but I'm not sure how much further FFO could grow.
Another source of increasing stock price would be dividend growth, but for now, I do not expect above-normal growth as the company continues working to deleverage. The recent payout increased just 3%.
So after a nice run, I'm saying goodbye to the Series D preferreds of Ramco-Gershenson.
In addition, my Special Situations portfolio is selling Annaly. I purchased two different lots back in 2011, at prices of $18.11 and $17.75, largely as a hedge against a declining or exploding economy and Congressional disability. Including dividends, those positions came out with a 7% gain and a 6% gain.
While the company continues to expand into new lines to help boost its interest rate spread, it's also adding new risk. Formerly, Annaly was exclusively focused on agency-backed securities, meaning it had no credit risk. Now, its future plans include assuming new risks in exchange for greater reward.
Annaly's dividend has declined markedly in recent quarters, and book value dropped quickly in the most recent quarter, down 4.5%. With book value now at $15.85 per share and the stock hovering just below that, at $15.62, I think it's time to sell.
So, my Special Situations portfolio will make these two sales as soon as practicable.