Colony Capital – in the discards pile

Over the past couple weeks, I did some research on Colony Capital (NYSE: CLNY) as it appeared to hit a few of my target spots for investment criteria.

Unfortunately, due to having a minority or bare majority investment in a ton of joint ventures and a myriad of various recourse and non-recourse loans, the consolidated financial statements are completely useless for the purpose of financial analysis, which takes quite a bit of digging to get the proper numbers.

I’ve put this stock into my “have a reasonable idea of the valuation, but the underlying is beyond my core competence” category. In terms of valuation it seems relatively cheap (and dividend investors also have a good reason to throw some money in it), but I’m not pulling the trigger on it.

So this ends up in the discards pile – one of you out there might wish to take a second sober look at it.

Exited my Genworth MI position

The trading in Genworth MI (TSX: MIC) feels like it is in the middle of unwinding a short sale position in Genworth MI. Short investors (2,276,672 shares as of July 13, 2018) are obviously losing money. The quarterly reports have usually been positive news events for the company as they report record low loss ratios and insanely high profit margins. Everything is as rosy as it can get – high profit margins, low unemployment, low default rates, and people paying their mortgages. The stock is trading above tangible book value for the first time, ever.

Sounds like a good time to sell.

I’ve sold the last of my position today. The last block of shares went off at $46.06. This has been my longest held position, initiated in 2012, and partially sold and partially added on at opportunistic prices. For a considerable length of time between 2012 to 2016, it was my largest position.

I will still continue tracking the stock as my accumulated research (I have written more about Genworth MI than any other person on the entire internet) will come in handy if the price range descends into a more opportunistic range.

There’s probably a bit of upside remaining in the stock (in a good case could go to $50), especially if the short sentiment decides to cover up in a hurry. But I’m not one to play these types of guessing games and getting out at a 5% premium to book is sufficient for my investment purposes.

The cash will be parked – I still don’t see much compelling opportunity out there.

Invitation to Spam – Canadian Finance Links

If you run a website that is materially (let’s define this as 75%+) about Canadian finance, please feel free to comment with a link below. I’m refreshing the links on the right-hand side of the desktop screen. I’m always curious as to who is writing and today’s highlight for me was the guy running Reminiscences of a Stockblogger. Judging by his writing, I think he is an excellent analyst.

TC Pipelines (Trans-Canada Pipelines) MLP and FERC Ruling

Today was a very interesting day for TC Pipelines MLP (NYSE: TCP) which is the USA MLP arm of TransCanada Corporation (TSX: TRP).

They were heavily impacted by a March 2018 FERC ruling concerning the calculation of regulatory revenue rates for oil and gas pipelines – essentially they were not allowed to incorporate the income tax expense of their unitholders into their rate calculations. Not surprisingly, the stock crashed in March (along with most other MLPs) and when TCP announced the subsequent consequence in their next quarterly report (May) they crashed even further. It is fairly evident by the stock chart when these moments occurred:

Today, the FERC partially backpedaled on this change announced in March for natural gas pipelines only (nothing mentioned on oil pipelines). According to my read of the commissioner’s details, they came to the conclusion that the underlying natural gas pipeline legislation had technical issues which did not allow them to enforce the previous order. Putting a long story short, they came to the conclusion that this change would be considered retroactive rule-making and hence they did not have the authority to implement the change. They provided a mechanism where gas pipelines could voluntarily consent to changes in exchange for the commission to not review their rates within a certain time period, but I doubt MLPs will exercise this if such changes are adverse.

This is effectively a reversal of the decision unless if Congress decides to intervene in the matter. Considering the perpetual dysfunctional mess in Congress and them not touching the underlying legislation to correct this matter, this is a huge victory for natural gas MLPs.

Finally, the rationale for TCP MLP dropping from $50 to $25 in the first place has completely evaporated – although interest rates have increased somewhat (causing some headwinds in the MLP price due to simple spreads over the risk-free rate), one can make an argument that the price should be restored close to previous levels. In other words, there is an argument to be made that the price should go even higher.

The FERC ruling does not appear to affect crude oil pipelines (this is a very loaded sentence).

The disclosure I will make is that I own call options in TCP, which bypasses messy taxation issues of foreigners owning USA MLPs.

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Addenda:
Very quick valuation notes, TC Pipelines (NYSE: TCP)

Units outstanding: 71.3 million
General Partner: (TSX: TRP), owning approx. 23% of the entity
Distributable cash flows, 2015/16/17: $290/313/310

GP/Incentive Distribution Rights: 2% below $0.81/quarter, 15% to $0.88/quarter, 25% above $0.88/quarter

Top-line Revenues/Equity earnings (2017): US$446 million.

Debt: $2.3 billion, staggered across various term facilities/bonds. Refinancing available, will pay slightly more interest in rising-rate environment when rolling over debt. YTM on May 2027 unsecureds: 4.7%

Paper napkin valuation: $310 million / 71.3 million units, $4.35/unit, $35@12%, $42@10%. Does this warrant a 700bps or 500bps spread over debt? Historically was trading around $45-$50 (MLP sector was ‘more sexy’, perceived as ‘ultimately safe’, etc.)

Previous distributions were $1.00/quarter, but post-FERC, reduced to $0.65/quarter, citing debt ratios and anticipated reduction of revenues.