Annaly Capital one of the best risk/return plays in the financial sector.!

Annaly Capital has performed remarkably well through the entire financial crisis of the last several years and has consistently paid quarterly dividends yielding above 15% per annum!

During last week U.S debt crisis I added to my holdings in NLY!

Annaly (NYSE: NLY) manages real estate related investment securities:

• mortgage pass-through certificates
• collateralized mortgage obligations
• agency callable debentures
• other interest earning securities backed by mortgage loans

NLY Principal business objective is todistribute income to stockholders from earnings on real estate securities. NLY is taxed as a real estate investment trust (REIT), so has no federal income tax on taxable income that is distributed to stockholders.

NLY should continue to perform well in a low interest rate, low inflation environment.

My Conclusion

•Very low probability of the Fed raising short-term rates
•The gov’t will do everything in their power to prevent another meltdown of MBS market-> good for NLY’s portfolio
•Very high dividends with low interest rate risk

NLY remains one of our favorite risk/return stories for 2011 - particularly given recent macroeconomic
weakness. Shares are attractively valued at 1.05x current book value, relative to the forward dividend yield of roughly 16% we expect in the year ahead.

Proposed changes related to the taxation of SIFTs and REITs.

This follows on the heels of announced changes only 7 months ago and continues along in a series that first began with the Oct-31-06 "Halloween Surprise".

Interest And Rent Paid Within A Stapled Structure Will No Longer Be Deductible For Tax Purposes – Broadly speaking, a stapled security involves two separate securities that are “stapled” together such that the securities are not freely transferable (tradable) independent of each other. Stapled structures in-place on or before July 19, 2011 will have a one-year transition period to July 19, 2012 before the amendments apply. During this transitory period, interest and rent payments between legal entities within the stapled structure will continue to be deductible expenses.

The proposals include changes in respect of:

· publicly-traded stapled securities of SIFTs, REITs and corporations;

· excluded subsidiary entities under the SIFT regime;

· non-portfolio property of a corporation under the SIFT regime; and,

· tax installments for SIFTs.

Depending upon the circumstances, eliminating these deductions could materially increase taxable income and cash taxes payable, thus diminishing the tax efficiency of the entire stapled structure.

For example , InnVest REIT is likely to face a growing cash tax expense, beginning in Q3/12. I expect the rate of growth in cash taxes to outstrip the rate of pre- and post-tax AFFO for a number of consecutive years. In the near-to-medium term, the effective cash tax rate (measured as a percentage of pre-tax AFFO) appears unlikely to exceed 20%, although over the long-term, I believe it could break above this level.

Time to Sell Cineplex Inc. (CGX-T)

Cineplex Inc. (CGX-T) has had a good run for me (up over 60% in two years) and now I believe it is due for a correction!

Despite hits such as The Hangover Part II and Kung Fu Panda 2, second-quarter industry box office sales fell short of high expectations. As a result, I am scaling back my financial forecasts for Cineplex Inc.

I purchased the stock when it's dividend yield was close to 8% - currently it is paying 5%. While Cineplex remains good core media holding for investors, other companies with higher yields serve up a better bang for a investor's buck.

Canadian industry box office for the final week of Q2/11 was released. The reported YoY increase for Q2/11 was +1.7%, which compares to revised Q2/11 box office revenue estimate for Cineplex of +2.1% on a “same-store” basis, or +3.1% on a total basis. Despite the modest YoY increase, industry box office performance in Q2/11 was disappointing considering high initial expectations for a more meaningful YoY increase, perhaps in the “low-teens”. Exhibit 1 provides a summary of weekly Canadian industry box office for Q2/11 as well as recent YoY quarterly box office trends for Canada and the “same-store” box office growth and “same-store” forecast for Cineplex through 2012E.

I see better returns elsewhere in the other sectors because;

 (i) relative returns within the coverage universe; is  at 9.1x FTM EV/EBITDA, a valuation premium to the U.S. peers that is at the high end of the historical range;

(ii) little room for further box office disappointment in H2/11 at current valuation levels; and

(iii) potential negative news flow related to premium VOD.

Questions About Dividend Have Spook New Flyer Investors. Why I'm Holding!

The Payout

The New Flyer income deposit security (“IDS”) consists of one common share and a C$5.53 principal 14% subordinated note.  The monthly distribution currently consists of a C$0.03298 cash dividend and a C$0.06453 interest payment on the note, for a total monthly distribution of C$0.0975.  At the closing share price $7.79 on June 10th, that's a 15% yield. 

Unfortunately, the increasingly competitive environment means the company will need to cut payments to IDS holders.  Investor worries surrounding the upcoming decision seem to have driven the recent price drop from the C$11.50-12.00 range to the current price below C$8.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic options, both to better cope with the cyclical nature of the industry and the unsustainable distributions. 

No matter what the structure, New Flyer is an excellent value company at the current price.  I like the income security nature of the current structure, and would be happy to hold the New Flyer IDS at current prices even if the dividend is reduced to zero, but I'd also be comfortable if New Flyer converts to a more traditional equity structure. 

If the current IDS were somehow converted into straight equity trading at the same price (C$7.79), the P/E ratio would be about 8, after taking into account the reduced earnings due to the loss of the interest tax shelter!


The Q1 2011 book value per share was US$2.36 or C$2.32, so the combined book and principal value of an IDS is C$7.85, above the current stock price.  For a company that will almost certainly continue to pay the interest on the subordinated note until the notes are called,  this seems like a bargain.  The interest payment alone amounts to a 10% yield at C$7.79!

Cover yourself with call options on the Canadian banks!

The stocks of the Big Six Canadian banks as a whole have experienced a good run after recently posting solid quarterly earnings. The S&P/TSX Canadian Banks Index, an Index that tracks the Canadian banks, recently broke above its pre-crisis high. While this could be bullish for the group, a failure to hold above this level could potentially send the index lower. Its Relative Strength Index (RSI), a technical indicator, has moved slightly beyond a 70 reading, which tends to indicate that, near-term, it’s overbought.

A Canadian bank covered call strategy can protect some of the downside protection, while still maintaining exposure to the Big-Six Canadian banks!

For hedging purpose in flat and down markets I purchased the BMO Covered Call Canadian Banks ETF (ZWB/TSX), which carries a management fee of 0.65% and an annualized yield of about 10 %.  A  covered call is generally attractive to investors bullish on an equity or sector but who expect the security to trade within a narrow range while the covered call is in place.  Utilizing a covered-call strategy on the Canadian banks allows investors to retain exposure to Canadian banks while also maintaining some downside protection. Potential weakness in the performance of the stocks of Canadian banks will be partially offset by the premium earned selling call options. In addition to the underlying dividend yield of the banks, call option premiums collected will also enhance the overall yield of the strategy.

The BMO Covered Call Canadian Banks ETF (ZWB) is an actively managed fund that holds Canadian bank stocks or units of the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and writes covered call options on the underlying securities depending on market conditions. The call options written are slightly out of the money and are rolled forward every month upon expiry. The underlying portfolio is rebalanced twice annually.

Since its inception in January 2011, the fund has made monthly distributions totalling $0.512. Tax advantaged distributions are a mixture of dividends from the underlying portfolio and option premiums, which are taxed as capital gains.

I expect Canadian banks to stay rangebound. Valuations and returns for the next year or so will be driven by dividend increases because the underlying valuations have largely returned to pre-crisis levels. Therefore I would expect ZWB to outperform in flat and down markets and ZEB to outperform when bank shares are advancing sharply.

  

Time to eliminate my position in TransAlta !

I eliminated my position in TransAlta because I am concerned that investors in the stock were more bullish lately on Alberta power prices, and not on the force majeure/PPA termination proceeding. The stock had appreciated considerably and I felt that this was a good time to exit the remainder of my position. The dividend yield of 5.5%, which is below some of the former income trusts/high dividend-paying corporations that I cover, I feel there is better prospects available for near-term dividend growth for my portfolio.

Company Description

TransAlta is a non-regulated electric generation and marketing company with operations in Canada, Australia, and the U.S. Net generating capacity is approximately 8,700 MW. About 55% of the company's generating capacity is coal-fired, with about 20% gas-fired, and 25% from renewables (wind, hydro, biomass and geothermal).

Westshore Terminals is my favorite name in the industrial sector!

Westshore Terminals is my favorite name in the industrial sector because of:

1. Steady cash flow: Westshore's loading rate has moved substantially from a variable to a fixed rate, resulting in a significant increase in cash flow stability. Estimate of 2011 free cash flow of $1.30/unit (post-conversion) -which represents a very attractive 8.6% free cash flow yield.

2. Virtually no competition: Westshore's main competitor, Neptune, is capacity constrained at 6MMt (2009 shipments were 4.3MMt). Accordingly, Westshore benefits from a very attractive competitive dynamic.

3. Captive customer with long-lived asset: Teck plans to eventually increase tonnage to eventually 30MMt. Given the scarcity of port capacity, Teck will be motivated to use capacity at Westshore and not risk having that capacity allocated to other potential customers.

4. Clean balance sheet: Due to very strong cash flow historically, Westshore is in a very strong financial position. Westshore has paid out $479MM ($6.57/unit) in cash over the past 5 years, has zero debt and $94MM ($1.27/unit) in cash.

5. Take-out candidate: Westshore is an ideal candidate for a pension fund – as Westshore's long-term cash flow profile match well with a pension fund's long-term liabilities. I consider a joint bid between a pension fund, infrastructure player and a strategic player (i.e. Teck or CP) as highly likely.

 

Company Profile

Westshore Terminals Ltd. has been in business since 1970 and operates the largest coal loading facility on the west coast of North and South America, located at Roberts Bank, British Columbia. Westshore generates revenues on a throughput basis and receives a handling charge from customers based on volumes of coal exported through the Terminal. Westshore does not assume ownership of the coal and is therefore not directly exposed to the price of the commodity.

Recently Westshore Terminals released Q1 results that were below m yestimates as known issues, including harsh winter weather and equipment failures, impacted coal shipments more than expected. Coal shipments were 5.9MM tonnes in the quarter vs. our 6.5MM tonnes estimate leading to EBITDAR of $23MM vs. our $30MM estimate and revenue of $50MM vs. our $55MM.

Maintaining distributions. Westshore’s distribution of $0.27/unit was as expected and I note that the Board tends to make Q1 on the low side and ramp distributions through the year. Therefore maintaining the full year distribution estimates which reflects this seasonality. I  also note that the $43MM double dumper project and $10MM chute refurbishment project will be funded out of cash on hand and term bank debt and will not impact distributions.

No change in outlook. Although there is a fair amount of room to exceed the provided guidance, I note that management did not change their outlook despite the difficult Q1 operating environment. Management continues to expect 2011 volumes to exceed 2010 levels which came in at 24.7MM tonnes. I also note that Teck Resources reiterated their FY11 sales guidance for 24.5-25.5MM tonnes after revising Q1 sales lower giving us further confidence in our expected full year shipping volumes.

Costs set to decline. I note that it took Westshore approximately two weeks to replace a damaged gearbox and complete repairs in order to resume regular operations. Coupled with increasing levels of trained employees on automation and higher overtime costs to combat the harsh winter weather, I expect these costs to decline in the coming quarters leading to margin improvements.

Volume locked-in with long-term contract. Westshore announced at the end of Q1 an agreement with Grande Cache Coal to exclusively handle its annual coal tonnages that it ships through West Coast ports through to 2022. Although little detail was provided, I believe that the 1.3MM tonnes that Grande Cache Coal shipped in 2010 will likely expand as there are positive indications that they will look to increase their coal production to over 3MM tonnes in the next few years.

Capacity set to increase. In an indication of overwhelming demand, WTE will be proceeding with the capital upgrades involving the change out of the existing single dumper with a double dumper. The anticipated costs for this project will be approximately $43MM (to be financed by term bank debt) and will take until the end of 2012 to complete. Once complete, it is anticipated that the rated terminal throughput capacity will be approximately 33MM tonnes, up from the current capacity levels of approximately 28-29MM tonnes. Ensuring sufficient liquidity,  management noted that there will be no large principle repayments required until maturity on the anticipated term bank debt.