Michael R. Widner
We see a lot to like here, and while we say that about several of the agency REITs, Capstead Mortgage (CMO) has moved a bit higher on our near-term favorites list. While some investors may be put off by the slightly sub-10% yield, we expect the dividend has bottomed, we see potential for dividend recovery in 2Q’13 and beyond, and we like the price at an 8% discount to book.
The biggest uncertainty in our outlook is that we find it difficult to predict the prepayment behavior of highly seasoned current reset adjustable-rate mortgages (ARMs), which is a focus in CMO’s portfolio. But that’s an uncertainty we’re increasingly comfortable with, as we also value the protection they provide (relative to fixed-rate [mortgages] or longer-duration ARMs) in the event of a material steepening or surprise rising of the yield curve.
Our current expectation is for [prepay] speeds to peak in January based on the October peak in refinancing applications. We’re not expecting a big drop in speeds in Q1 based on refi applications remaining elevated and mortgage rates remaining near trough levels. But so far, the curve steepening, applications slowing, and mortgage rates ticking a bit higher are at least steps in the right direction.
We maintain our Buy rating on the shares with a $14.50 target price based on 1.07 times estimated current book value of $13.50.
Capstead has been grinding along with a short-duration approach, which we see as about the best protection an agency REIT can have against interest rate uncertainty.
SuperValu, one of the largest grocery store operators in the U.S. with 2,400 stores, announced the sale of five grocery brands encompassing 877 stores for $3.3 billion, $100 million cash and $3.2 billion of debt to a Cerberus-led investor consortium that includes Kimco Realty (KIM). The consortium will also conduct a tender offer for up to 30% of SuperValu’s common stock. KIM will own an approximate 15% interest in the investor group.
The consortium is acquiring five of the strongest SuperValu’s brands in more dense, infill markets, with stronger demographics; Albertsons ([in] Nevada, Northwest U.S., and Southern Calif.), Acme (Del., Md., N.J., and Pa.), Jewel-Osco (Chicago), Shaw’s and Star Market (Boston and New England).
KIM is joining the same group of investors, who in 2006 purchased 661 “non-core/underperforming” Albertsons stores in the SuperValu led acquisition of Albertsons. The group sold stores, closed underperforming stores, and improved operations at remaining stores. KIM has received $245 million in distributions from its original $51 million investment representing pre-tax income of $180 million.
KIM has a long successful history of investing in troubled retailers, including Montgomery Ward, Venture, Ames, Service Merchandise, Albertsons and Hechinger to unlock the value of the real estate controlled by these retailers and generate a profitable return for shareholders.
Albertson’s LLC, a majority-owned Cerberus company run by Robert Miller, will operate the newly acquired grocery locations. Albertson’s LLC currently operates 190 Albertsons stores and two Super Savers in eight states.
The new management team will first look to improve the performance of the stores, which have been undermanaged and undercapitalized for many years. While the traditional grocer model is facing strong competition on many fronts, there is likely a lot of low-hanging fruit which management will look to harvest.
Sandler O’Neill Partners
LTC Properties Inc.’s (LTC) surprise announcement of a nearly $100 million investment in an assisted-living and memory-care portfolio should be immediately accretive and continues to orient the company toward private pay communities.
LTC announced several acquisitions, most of which are expected to close before year end. (We note the potential change of tax law in 2013 as a possible motivation for the seller, who we believe had agreed to sell this portfolio to Care Investment Trust, CVTR, in a transaction that failed to close earlier this fall).