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Strategies & Market Trends : Value Investing

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To: Grommit who wrote (36508)	1/21/2010 3:13:05 PM
From: E_K_S	of 78717

Hi Grommit - The covered call for me is a method to protect my gain, continue to collect the dividend until the stock is called away and book a call premium now rather than later. To do this, I elected to give the short term upside away and protect me from any unexpected short term down side risk. I still am not convinced that the stock is w/o any possible downside surprise. I tried to set up the trade for a worst case where the benefit is in my favor if there is a sell off back down to the secondary IPO price offer of $21.50/share. I read the prospectus for the secondary that was filed with the SEC and did not like all the upfront fees that will be "front loaded" in Q1 2010. This was based on an offering of 6.5 million shares and now with a 30% increase in shares, these fees are higher with no new additional properties (other than those originally included in the offering) or associated increase in rental revenues. In the original prospectus they stated that $28 million will go to pay down long term debt (reducing interest expenses). It was not clear where the additional proceeds from the over subscription would go (about $43 million). I believe the majority of these "extra" funds are to be used to replenish their on going credit facility and not immediately applied to new properties that add new rental revenue streams. The prospectus and the proforma revenue estimates were based on 6.5 million shares offered. The properties identified and those in escrow are added to the 28 other facilities already in the REIT GOV portfolio. I am betting that there will be no increase in the "per share" dividend and it could even fall by $0.05/share (about 13%) depending on how they deploy the proceeds from the over-subscription of the secondary offering (2 million x $21.5/share) or $43 million. The upfront "loaded fees" could be 30% more than originally disclosed in the prospectus. Maybe they use the extra proceeds to pay down additional long term debt or is used to reduce the cost of carrying their credit facility thus GOV's operating expenses are lower. The money saved is distributed back to shareholders. However, the prospectus detailed none of these savings due to an over subscription of shares ONLY THE EXPENSES! It will be more clear to me after two dividend cycles. The final front loaded fees from the secondary will have been disclosed and management should have also update their 2010 proforma for any new properties added to their portfolio. ================================================================ It is interesting to see the First Industrial Preferred shares up 14% over the last few days to new recovery highs. This signals to me that secured debt yields are falling and the implied risk premiums are less. This trend should bode well for the common shares of many of these REITs. Therefore, HRP, BDN, FR & GOV common should participate in the rising value of their real estate holdings. The only issue with GOV is that they paid full market value for their properties with HRP being the beneficiary of receiving the long term capital gain. EKS

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