Realty Income Added to Portfolio

Realty Income Corporation (O) was added to the portfolio in February.  Realty Income is a 44-year-old real estate investment trust, with over 3,500 commercial properties in 49 states, diversified across 44 industries and 150 companies. A majority of the properties are retail, with the greatest revenues coming from convenience stores, chain restaurants, movie theaters and health and fitness industries. The leases generally are "triple net," which means the tenant pays for the taxes, maintenance and insurance on the property.

Realty Income was a previous long term holding. I sold it in June, 2012 when it reached $37.80. The yield at that time was 4.6%, but by comparison the yield of National Retail Properties (NNN) was 5.9% and I thought O was a little ahead of itself.

Sometimes when you sell a stock you feel nothing but relief.  Sometimes when you sell a stock, you feel like you're missing part of the family. For the past few months I've been waiting for a pullback in Realty Income, looking for a new "entry point." Last fall, Realty Income announced a merger with American Realty Capital Trust, Inc.  As a result of the merger, in January, 2013, Realty Income announced a 19.2% increase in its monthly dividend, from $.15175 to $.1809167. This raised the annual dividend from $1.821 per share to $2.171. It also brought Realty Income's dividend yield back into the 5% range. As of February 21, NNN's yield was 4.7% and O's yield was 4.9%.

The target allocation for Realty Income is 4% of the portfolio.  Two other triple-net REITs in the portfolio are NNN and WP Carey (WPC), with a target allocation of 4% each.

Realty Income's excellent website provides a wealth of information. Since 1969, the company's mission  has been "to provide our shareholders with dependable monthly dividends that increase over time." The company has seven core principles:


1. Acquire properties for cash
2. Own properties with leases already in place that can consistently pay rent
3. Own properties that are critical to the generation of the revenue of the tenants
4. Hold the properties for long-term income production
5. Generate an enduring stream of lease revenue to pay monthly dividends
6. Maintain a strong financial position with adequate liquidity
7. Staff our company with employees committed to our mission.

Realty Income's 52-week price range has been $36.34 to $45.00. The closing price on February 21, 2013 was $44.30. Ordinarily, I would not purchase a stock this close to its 52-week high, but the merger with American Realty Capital Trust and the subsequent 19% dividend increase puts the 52-week price range in a new light.

From the company's website:
Adjusted Funds from Operations for 2012 were $2.06 per share, up from $2.01 in 2011.
Net Income for 2012 was $.86 per share, down from $1.05 in 2011.
Dividends paid in 2012 were $1.772 per share, up from $1.737.

The property occupancy rate was 97.2% in 2012 and 96.7% in 2011.

Realty Income has increased its dividend each year since 1995.

This is not a recommendation to buy Realty Income, but a suggestion for a stock to study. Everyone's situation is different.  Do your own due diligence.

Prospect Capital Added to Portfolio

Prospect Capital Corporation (PSEC) was added to the portfolio in February, 2013. PSEC is a business development company that provides private debt and equity capital to middle-market companies in the U.S. and Canada. Its initial public offering was in 2004. From the company’s website: “PSEC invests primarily in first-lien and second-lien senior loans and mezzanine debt, which in some cases include an equity component. We provide capital to middle-market companies and private equity financial sponsors for refinancings, leveraged buyouts, acquisitions, recapitalizations, later-stage growth investments, and capital expenditures.”

CEO John Francis Barry III has been involved in equity financing since 1990. Prior to that he was an investment banker and an attorney.  The management team has a 23-year history and has invested in more than 200 middle-market companies. The senior executives have worked together for more than a decade, through multiple economic and investing cycles.  From the company website:  “Prospect Capital targets attractive risk-adjusted and consistent, low-volatility returns. Our investment strategy focuses on current cash yields through interest payments and, in some cases, dividend payments. We also target capital appreciation from preferred equity, common equity and/or warrant positions that may be made alongside our debt investments.”

As of December 8, 2012, the portfolio consisted of 79 companies. Eleven companies sell durable consumer products, ten companies are in various aspects of financial services, nine companies are in the healthcare sector, eight are in manufacturing or machinery, five are in oil and gas production, five are in consumer or commercial services and three sell food products. Other represented industries include transportation, chemicals, media, energy, ecological, property management, minerals, metals, insurance, automotive, textiles and leather, software and computer services, business services, and contracting. As of December 31, 2012, PSEC reported investments in 106 companies. (Recent investments are listed in the 2013 Q2 report.)

From the company website:  “Prospect invests in a variety of businesses, industries, and geographic regions. We have expertise across multiple industries, including energy, industrials, media, manufacturing, industrials, business services, financial services, food, healthcare, and many other sectors.

“We focus on middle-market companies in the United States and Canada with EBITDA of $5 million to $150 million. We principally target companies with a history of stable revenues and profitability, strong market and competitive positions, and proven management. We analyze each investment with a primary focus on preserving capital and generating current cash yields.”

PSEC’s first quarterly dividend of $.10 was paid in December, 2004. The dividend was raised each quarter (sometimes by a fraction of a cent) through April, 2010.  Beginning in July, 2010, PSEC lowered its payout and began paying a monthly dividend of $.10.  Since then, the dividend has been increased in small, fraction-of-a-cent increments.  On February 7, 2013, the company announced upcoming dividends, payable on:

March 21 $.11005,  April 18 $.110075, and May 23 $.1101.

For the quarter ending December 31, 2012 (PSEC’s 2013 Q2), net investment income was $.51 per share, compared with $.33 per share in the year-ago quarter. For the six months ending December 31, 2012 (the first six months of fiscal 2013), net investment income was $.97, compared with $.59 for the six months ending December, 2011.

Net asset value as of December 31, 2012 was $10.81.

PSEC’s February 7, 2013 quarterly earnings news release included this statement about its balance sheet:  “Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio stood at 47.8% (29.2% after subtraction of cash and cash equivalents) at December 31, 2012. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility as well as potentially add additional secured or unsecured term facilities, made more attractive by our investment-grade ratings at corporate, revolving facility, and term debt levels.”

Morningstar reports a price earnings ratio of 8.8 at the February 21 closing price of 11.06, with a five-year average P/E ratio of 13.9.  The 52-week high was $12.25 and the 52-week low was $9.80.  With an annual dividend of $1.32, at the February 21 closing price of $11.06, PSEC's yield was 11.9%.

PSEC and PennantPark (PNNT) are the two business development companies in the portfolio. The target allocation is for each to represent 5% of the portfolio, for a BDC total allocation of 10%.

This is not a recommendation to buy PSEC, but rather is presented to help you decide whether it is a stock you may want to study. Do your own due diligence.

PennantPark Added to Portfolio

Since the last update, PennantPark Investment Corporation (PNNT) has been added to the portfolio at an average price of $11.09. It currently comprises 4.9% of the portfolio. The purchase was part of a portfolio rebalance that included selling some shares of JNJ, NS, NRP, ETN and LNCO.

PennantPark is a business development company (BDC) headquartered in New York City, founded and led by Arthur Penn since its inception in January, 2007. The initial public offering was in April, 2007. PNNT invests primarily in U.S. middle-market companies. As of December 31, 2012, PNNT was invested in 56 companies, with an average investment of $19 million. Of these, 29% was in senior secured loans, 20% in second lien secured debt, 39% in subordinated debt, and 12% was in preferred and common equity investments.

The value of the portfolio on December 31, 2012 was $1,064.4 million. Of the debt portfolio, 66% was fixed-rate and 34% was variable-rate.

PNNT paid its first dividend of $.14 in June, 2007. The dividend was raised to $.22 in September, 2007, and it has been gradually raised to the current quarterly dividend of $.28. The dividend was last raised (from $.27) in January, 2012. The annual dividend is $1.12. At a February 8, 2013 price of $11.10, the yield was 10.1%. At December 31, 2012, the net asset value was $10.38. The stock traded at a 6.9% premium to NAV.

The company's 2012 Q4 earnings were $.28 per share, which was the same as the quarterly dividend. At the company's most recent conference call, on February 7, 2013, CEO Arthur Penn stated his commitment to maintaining the dividend. He reminded listeners that PNNT did not cut its dividend during the Great Recession and is committed to at least maintaining the present dividend. He said the company has a healthy cash position and is committed to cover any shortfall (between the EPS and the quarterly dividend) from cash reserves if necessary.

This was in the context of "Will the company make additional investments in order to maintain or grow the dividend?" Mr. Penn said the company would not make investments just for the sake of getting its earnings over $.28 per quarter. They will maintain strong liquidity and will invest the company's funds wisely. He said they would rather dip into the cash to cover part of the dividend rather than to invest in a company that otherwise does not meet their criteria. Mr. Penn's statement expressed both confidence and prudence.

PNNT was added to the portfolio because management seems to have a good business plan, a conservative approach, and has demonstrated a commitment to raising the dividend over time.

The conference call is archived at (888) 203-1112 and is available for replay through February 21, 2013.

As of February 8, 2013, the portfolio consisted of fourteen stocks and five closed end funds (CEFs):

Genuine Parts Company (GPC) 3.9%

Johnson & Johnson (JNJ) 5.2% (reduced from 5.5%)

National Retail Properties (NNN) 4.9%

W.P. Carey Inc (WPC) 5.0%

PennantPark Investment Corporation (PNNT) 4.9% (New to Portfolio)

Southern Company (SO) 4.9%

NuSTAR Energy L.P. (NS) 4.9% (reduced from 7.1%)

Natural Resource Partners L.P. (NRP) 5.7% (reduced from 7.5%)

Starwood Property Trust Inc. (STWD) 5.3%

Eaton Corp. P.L.C. (ETN) 5.1% (reduced from 5.4%)

LinnCo L.L.C. 5.1% (LNCO) (after a sell and a buy, reduced from 5.6%)

LTC Properties Inc. (LTC) 4.9%

PPL Corp. (PPL) 5.0%

Annaly Capital Management Inc. (NLY) 4.9%

BlackRock Utility & Infrastructure Trust (BUI) 5.1%

NFJ Dividend & Premium Strategy Fund (NFJ) 5.0%

Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV) 4.8%

Nuveen Equity Premium Advantage Fund (JLA) 4.9%

ING Global Advantage & Premium Opportunity Fund (IGA) 5.0%

Cash 5.6%

The portfolio yield as of February 8, 2013 was 6.7%.

This is not a recommendation to buy, but a suggestion for a stock to study for possible inclusion in a dividend portfolio. Everyone's situation is different. Please do your own due diligence.