March 2016

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Caesar:Who is it in the press that calls on me? I hear a tongue shriller than all the music Cry “Caesar!” Speak, Caesar is turn’d to hear.

Soothsayer:Beware the ides of March.

Caesar:What man is that?

Brutus:A soothsayer bids you beware the ides of March.

—Shakespeare, Julius Caesar Act 1, scene 2, 15–19

s many of you know, the Ides of March is a day on the Roman calendar that marks the middle of the month — it also marks the day that Julius Caesar met his grisly end at the hands of 60 or more men.

Hence, “Beware the Ides of March...”

The most interesting part of this tale to me is that while Caesar was stabbed 23 times, his autopsy showed that only one of those wounds would have been fatal — the stab wound that punctured his aorta.

While it is indeed a lugubrious metaphor, for our purposes, it does show the importance of being completely diversified. While you can certainly ride out some stock market losses, if you have all your money riding on one or two big stocks, your odds of a death blow are greatly increased.

I’ll take a few paper cuts versus a stab in the heart any day of the week...

Thankfully, this has always been our approach at The Crow’s Nest, and we are very diversified with a stable of tried-and-true dividend stocks, while still taking a few chances on some up-and-coming industries like the legal marijuana market.

That’s why we’re up over 10% while the market is practically flat for the year.

By the way things were heading for the first two months of the year, I was thinking that I’d be dreading the Ides of March. But there hasn’t been a Brutus in sight... in fact, our March has

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been great.

While the S&P dropped over 5% in January and stuttered to a 0.30% return in February, March has returned almost 7%.

Our portfolio has bounced back from a rough start, and we’re sitting well over that. Here are some of the portfolio highlights:

• 69% on Piedmont Natural Gas

• 66% on Collector’s Universe

• 45% on Canopy Growth Corp.

• 37% on General Electric

• 30% on Sovran Self-Storage

Overall, I’d say that spring has indeed sprung...

The Federal Reserve has — yet again — decided to hold tight on interest rate increases, and the jobs reports seem to suggest that while we’re not looking like the emperors of last year, we’re certainly not about to be stabbed in the back like Caesar...

Speaking of rate hikes, we have a great reader question about rate hikes and their effect on our REITs like HCP and Sovran Self Storage. We also have a great question about buying Canadian stocks... we’ll tackle those in the Tie Down the Mast section.

We also have some big news about one of our dividend aristocrats — Sherwin-Williams.

I’ll also be highlighting a couple of our major dividend positions and giving some updates. We also have some budding news from Canopy Growth Corp. and MassRoots.

Let’s get to it...

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Charting the Course

By now you know my love of dividend aristocrats — stocks that have raised their dividend consistently for at least 25 years running. We dedicate a lot of our portfolio to these stocks — and for good reason.

They are ironclad investments in times of uncertainty in the market. Dividend-paying stocks are the major sources of income for investors when returns from the equity market are either low or negative.

Dividend-focused stocks are safe not only because you still get dividend checks whether the market goes up or down, but also the sheer stability of dividend aristocrat companies makes them far more immune to the large swings in stock prices.

Many of you have written in asking about ETFs that focus on these companies. The most common concern folks have is that they do not want to buy a dozen stocks and keep track of them all. I can totally relate.

My only gripe with this approach is that I think enrolling in a solid company’s dividend reinvestment program is the best way to compound and grow your interest over many years. ETFs do not have dividend reinvestment programs (unless you have a broker that offers “synthetic DRIPS,” which I discussed in Outsider Club recently).

For those who just want an ETF to track dividend aristocrats, here are a couple solid choices to make your life a bit easier...

ProShares S&P 500 Aristocrats ETF (NYSE: NOBL)

This ETF provides exposure to 50 companies that raised dividend payments annually for at least 25 years by tracking the S&P 500 Dividend Aristocrats.

Consumer staples is the top sector, accounting for one-fourth of the portfolio while industrials, health care, consumer discretionary, and financials round off the next three spots. The fund has $1.7 billion in assets and an expense ratio of 0.35%.

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NOBL returned 4.1% over the past year and has an annual dividend yield of around 2%.

It’s returned 24% in the last five years, not including dividends.

You’ll notice several Crow’s Nest positions in its top holdings:

Top 10 Holdings (21.7% of Total Assets)Company Symbol % Assets

Nucor Corporation NUE 2.35

Illinois Tool Works Inc. ITW 2.18

Genuine Parts Company GPC 2.17

Leggett & Platt, Incorporated LEG 2.16

Target Corporation TGT 2.16

Emerson Electric EMR 2.16

W.W. Grainger, Inc. GWW 2.15

Cincinnati Financial Corporation CINF 2.15

McCormick & Company, Incorporated MKC 2.11

3M Company MMM 2.11

ProShares Russell 2000 Dividend Growers ETF (SMDV)

This is a more recent fund — it debuted last February — and it is currently managing around $30 million in assets. It follows the Russell 2000 Dividend Growth Index and offers exposure to 56 Russell 2000 companies that have increased dividends every year for at least 10 consecutive years. Not quite aristocrat material, but these companies may get there if they keep up their current rate.

Utilities dominate the fund’s portfolio with 30% of holdings, followed by 19% exposure each in financials and industrials. There is a 0.40% expense ratio.

The fund gained 6% over the past year and yields 1.78% in annual dividend.

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Here are their top holdings:

Company Symbol % Assets

SJW Corporation Common Stock SJW 2.21

Cracker Barrel Old Country Store CBRL 2.04

Laclede Gas Company Common Stock LG 1.99

Allete, Inc. ALE

SPDR S&P Dividend ETF (NYSE: SDY)

This is one of the most popular dividend ETFs out there, and it has more holdings than any other I mentioned above — by far. It holds net assets of $12.25 billion.

SDY provides exposure to the 109 U.S. stocks that have been consistently increasing their dividends every year for at least 25 years.

This can be done by tracking the S&P High Yield Dividend Aristocrats Index.

Sector wise, financial stocks lead with 22.7%. Industrials, utilities, consumer staples, and materials make up a nice balance for the portfolio with double-digit allocations each.

It currently yields 2.53% in annual dividend. It has added 2.9% so far this year.

SDY has returned an impressive 45% over the past five years.

Here are its primary holdings:

Top 10 Holdings (17.1% of Total Assets)

Company Symbol % Assets

AT&T Inc. T 2.07

Questar Corporation STR 1.93

Caterpillar, Inc. Common Stock CAT 1.78

Realty Income Corporation Common Stock O 1.76

Chevron Corporation Common Stock CVX 1.68

HCP, Inc. Common Stock HCP 1.67

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National Retail Properties NNN 1.62

Emerson Electric Company Common EMR 1.59

People's United Financial, Inc. PBCT 1.53

Consolidated Edison, Inc. Common Stock ED 1.47

So there you have it: three easy ways to build an immediate dividend portfolio.

Now let’s take a look at some of the individual companies in our portfolio...

Sherwin-Williams Company (NYSE: SHW)

Sherwin-Williams is the leader in the United States’ paint industry. It’s been churning out paint for over 150 years. It has a market cap of $22.3 billion.

Now, there are only a few paint companies in North America, and Sherwin-Williams is one of the largest. Another thing I look for in large companies like this is how easy it is for a competitor to come in and crash the party. With an industry like paint, there are rather high barriers to entry. Not too many companies can just build a paint factory themselves and start churning out a superior product.

You can see how much bigger it is than its competitors in this chart:

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And it just got bigger...

Sherwin-Williams has agreed to merge with Valspar for $11.3 billion.

Sherwin-Williams says the acquisition of Valspar gives the company the ability to expand its reach in the Asia-Pacific region, Europe, the Middle East, and Africa.

The deal is for $9.3 billion in cash and $2 billion in debt — and works out to around $113/share.

“Valspar is an excellent strategic fit with Sherwin-Williams,” John G. Morikis, President and Chief Executive Officer of The Sherwin-Williams Company, said in a statement, noting that the company has highly complementary paints and coating offerings.

“Customers of both companies will benefit from our increased product range, enhanced technology and innovation capabilities, and the transaction’s clearly defined cost synergies.”

The companies expect the deal to achieve $280 million in annual savings in the areas of sourcing, process, and efficiency within two years.

Valspar Overview

Valspar had a market cap of ~$5.3 billion and a long history of dividend increases. In fact, it has increased its dividend payments every year since 1992.

Valspar focuses on two segments: 70% of its business is coatings and 30% is in paints.

One big reason for the acquisition is that it will give Sherwin-Williams the top spot in the global coatings industry.

The acquisition will be especially crucial for Sherwin-Williams’ international business, as it should expect its international revenues to increase. While 16% of its revenue was generated internationally before the acquisition, it expects that number to increase to 24% after the acquisition is complete.

Here are some other highlights from the deal:

• Sherwin-Williams expects to realize $280 million in annual synergies by 2018. The company expects fully realized synergies to be around $320 million a year. Nearly 90% of synergy benefits will come from selling, general, and administrative expenses as well as from reductions in raw material costs.

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• The deal also increases the size and scale of Sherwin-Williams’ operations which will likely result in higher margins through greater economies of scale.

Should you buy it now?

While the deal looks like a long-term acquisition for Sherwin-Williams, the market seems to think it has overpaid for the company at this particular moment.

After news of the acquisition was released, Sherwin Williams dropped over 5%, while Valspar shares rose 28% above their previous all-time high.

Sherwin-Williams is a total buy for me right now, especially long term. But even short term, we should see some serious upside after this recent decline.

The stock is sitting around $283 as I write this, but most analysts see a healthy jump over the next year:

• RBC Capital just raised its one-year target from $315.00 to $337.00.

• Seaport Global Securities set an accumulate rating and a $295.00 price target.

• The company has a consensus rating of Buy and an average target price of $309.36.

I’d be happy buying Sherwin-Williams under $295 and dollar-cost averaging if we see any dips in the stock due to, say, rising oil prices or an economic downturn.

It currently offers a modest 1.05% dividend, but the key is that it is a dividend aristocrat, having increased its dividend every year since 1979. I’d rather have a low yield with a company that constantly increases its dividend than one with an unsustainable dividend that it may have to cut when times get tough.

You can learn more and join its dividend reinvestment program here.

Newtek Business Services (NASDAQ: NEWT)

Newtek Business Services Corp. is an internally managed, closed-end, non-diversified management investment company. The Company is focused on developing and marketing business and financial products and services aimed at the small- and medium-sized business (SMB) market and on developing a recognized brand for independent business owners.

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The Company’s brand, The Small Business Authority, is a national lender and owns and controls certain controlled portfolio companies that provide business and financial products to the SMB market.

I’ve gotten more questions regarding Newtek after the stock tumbled following its special dividend payout last year. Thankfully, the stock has rebounded nicely over the last month and is up over 20% during that time.

It also released encouraging Q4 financials that bode well for the company moving forward.

Here are some highlights:

• Adjusted net investment income1 for the year ended December 31, 2015 was $22.2 million, or $2.06 per share.

• Net asset value (“NAV”) was $203.9 million, or $14.06 per share, at December 31, 2015; an increase from NAV of $13.10 per share at October 1, 2015.

• Net increase in net assets for the year ended December 31, 2015 was $35.7 million.

• Total investment income for the year ended December 31, 2015 was $26.1 million.

• Funded $242.5 million of SBA 7(a) loans in 2015; an increase of 19.9% over 2014.

• Reaffirmed loan funding forecast of approximately $320 million in SBA 7(a) and SBA 504 loans, (SBA 504 loans are originated by one of Newtek’s controlled portfolio companies) which would represent an approximate 32% increase over 2015.

• Total investment portfolio was $266.9 million at December 31, 2015.

• Debt-to-equity ratio was approximately 66.5% at December 31, 2015.

• Announced a stock repurchase program under which the Company may repurchase up to 150,000 shares of common stock.

• Completed sixth securitization of $40.8 million of Standard and Poor’s AA rated Unguaranteed SBA 7(a) Loan-Backed Notes, the Company’s largest securitization to date.

• The Notes were priced and sold to investors at a yield of 2.5%, which represents

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an approximate 100 basis point improvement in the overall yield since the Company’s last securitization.

• Closed an underwritten offering in October 2015 of 2.3 million shares of common stock for total gross proceeds of approximately $38.0 million.

• Completed a public offering in September 2015 of $8.3 million in aggregate principal amount of 7.5% Notes due 2022. The Notes trade on the Nasdaq Global Market under the trading symbol “NEWTZ.”

• Acquired Premier Payments LLC in July 2015 as a controlled portfolio company, a national electronic payment processor, for approximately $16.5 million in cash and newly issued restricted Common Shares. Premier had double-digit revenue and Adjusted EBITDA year-over-year percentage growth in 2015.

2015 Dividend Payments:

• The Company declared $20.9 million, or $1.76(3) per share, in cash dividends during 2015, which represented approximately 94.0% of the RIC’s 2015 estimated taxable income.

• On December 31, 2015, the Company paid a special dividend of approximately $34.0 million, or $2.69 per share, to shareholders of record on November 18, 2015, with 27% paid in cash and 73% paid in newly issued shares.

• The Company issued 1.8 million new shares on December 31, 2015 in connection with the special dividend bringing the total outstanding share count to approximately 14.5 million at December 31, 2015.

2016 Dividend Payments:

• Anticipate paying an annual cash dividend of approximately $21.8 million, or $1.50(2) per share in 2016 (which does not include the fourth quarter 2015 dividend of $0.40 per share paid on January 19, 2016); which would represent a 4.3% increase over the $20.9 million in cash dividends declared for 2015.

• On February 25, 2016, the Company’s board of directors declared a first quarter dividend of approximately $5.1 million, or $0.35(2) per share, payable on March 31, 2016 to shareholders of record as of March 22, 2016.

You can read its entire earnings presentation right here.

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NEWTEK Business Services Corp has a consensus target price of $17.90.

We’re looking good on Newtek and buying more shares under $15. Keep in mind, we’re not in this position for a huge stock price increase. We’re happy collecting our 11.2% dividend.

Marijuana Stocks

Canopy Growth Corp (TSX-V: CGC)

Canopy Growth Corp. (TSX-V: CGC) is living up to its name: it’s growing at a rapid clip. It has just released impressive Q3 financials that have exceeded projections, and it has also launched a promising “Tweed Pantry Line” that targets the massive edible marijuana market.

Edible marijuana products are so popular that Bloomberg just reported edibles will make up at least half of the current $5.4 billion legal marijuana industry. We’ll explore that below.

Let’s get to some of the highlights (emphasis mine)...

Third Quarter Fiscal 2016 Highlights

Revenues of $3.5 million, representing a 41% increase over Q2 2016 and a greater than 400% increase over the three-month period ended December 31, 2014

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462,000 grams sold, representing an increase of 45% over Q2 2016 and a greater than 430% increase over the three-month period ended December 31, 2014

Adjusted Product Contribution of $2.4 million or 70% of sales

Over 8,200 registered patients at December 31, 2015 compared to 6,200 at the end of Q2 2016 and 1,800 at the end of December 31, 2014

Cash position of $19.7 million

Subsequent to Third Quarter Fiscal 2016

Tweed Inc. (“Tweed”) granted license by Health Canada to produce and sell Cannabis Oil Extracts

Tweed launched sale of 10:1 Cannabis OilsTM

Completed acquisition of MedCannAccess, providing the Company three physical community engagement centres in the highly populous Southern Ontario region

All of these numbers are headed in the right direction at an impressive rate. Most importantly, the company exceeded a million dollars a month during the third quarter.

Here’s how the product sales shook out:

• Total product sold in third quarter Fiscal 2016 was approximately 462,000 grams at an average price of $7.34 per gram. In comparison, approximately 319,000 grams at an average price of $7.54 per gram were sold in the second quarter Fiscal 2016 and approximately 216,000 grams at an average price of $7.74 per gram were sold in the first quarter of 2016. In the three months ended December 31, 2014, the Company sold approximately 87,000 grams at an average price of $7.04 per gram.

• Over the nine months of fiscal 2016 ended December 31, 2015, Canopy Growth has sold almost 1 million grams of Cannabis product.

Third Quarter Fiscal 2016 Operating Expense Review

• For the three-month period ended December 31, 2015, sales, branding and medical outreach and education costs were $1.4 million (three months ended December

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31, 2014 - $729,000).

• General and Administrative (“G&A”) expenses were $2.0 million in the three-month period ended December 31, 2015 compared to $1.0 million in the comparison period ended December 31, 2014. The increase in G&A reflects the Company’s growth from the early start-up of last year, building commercial capacity and capability as a public company and meeting all compliance requirements with Health Canada.

Third Quarter Fiscal 2016 Earnings Review

• The Company reported a net loss of $3.3 million or $0.04 per basic share for the three months ended December 31, 2015, compared to a net loss of $2.6 million or $0.07 per basic share in the comparison quarter last year.

• For the nine months ended December 31, 2015, net income was $1.6 million or $0.02 per basic share, compared to a net loss of $6.2 million or $0.15 per basic share in the nine months ended December 31, 2014. The net income or loss was inclusive of the non-cash unrealized gain on changes in fair value of biological assets described above.

Those losses can be attributed to a few things:

• Net proceeds from financings, including the “bought deal” common share offering in Q3 and the exercise of warrants and options, together totaling $20.6 million, primarily offset by $2.1 million used to repay a loan, $11.1 million used to fund operations, and investments in facility enhancements totaling $10 million.

• Investments in facility enhancements include the build out of our Tweed Farms facility and the installation of equipment in our Tweed facility, in part required for the production of cannabis oil extracts.

You can read the entire financial report here.

Let’s move on to the new projects, which should be a huge driver going forward.

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10:1 Cannabis Oils Launches

As I mentioned earlier, the edible marijuana market is a huge part of the industry’s growth. That is why Canopy has been eyeing it up ever since it started and has now launched its oils business. On February 23, 2016, Tweed was granted a supplemental license by Health Canada to sell up to 350 kilograms of cannabis oil extracts during the license period, which ends January 19, 2017.

Here’s the press release:

Tweed announced that the company had launched the sale of high-quality 10:1 Cannabis Oils made with GMO-free, organic sunflower oil. Starting with oils made from single strains and slowly introducing high-quality oil products, Tweed’s product line will meet the needs of Canadians managing a variety of symptoms.

Starting with popular offerings of Argyle, Princeton and Birds Eye, Tweed will introduce new strain-specific 10:1 Cannabis Oils on an ongoing basis.

The new product line, 10:1 Cannabis Oils, will be sold in 100ml bottles equivalent to 10 dried grams of the same dried flower. Each 10 ml will contain the equivalent of 1 gram of the corresponding Tweed dried-flower variety.

Creating a universal equivalency factor between flower and oil is a logical and simple way to ensure that Tweed customers can manage their dosing confidently. Tweed chose to balance 10:1 Cannabis Oils with organic, non-genetically modified sunflower oil because it is versatile enough to cook or bake with, hypoallergenic, and even good to ingest on its own.

Since customers have overwhelmingly flocked to non-smoke cannabis products, Tweed has really gone after them with its new “Pantry Line,” which pairs its 10:1 Cannabis Oil with common baking products.

As anyone who has made pot brownies before knows, it can be mighty difficult to get the right “dose” in a baked batch without either overdoing it and causing a freak-out or not using enough and being stuck with a batch of brownies that taste weird and do not offer any of the intended effects.

In fact, there is a hot new cookbook out called The Cannabis Kitchen Cookbook by Robyn Griggs Lawrence that is getting a lot of media attention. She offers recipes like Baked Artichoke, Crab, and Cannabis Dip, Cannabis Ceviche, and Cannabis Olive Oil.

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As a testament to how popular this is getting, Barnes & Noble has agreed to carry cannabis cookbooks and now offers 14 on its website.

You can read more about that and try three of the recipes here.

That’s why these new Tweed products should work out well — especially considering their location in the old Hershey Chocolate Factory in Smiths Falls, Ontario. That fascinating PR angle goes very well with the new endeavor...

For $5, customers can purchase a gluten-free muffin mix and a rich chocolate cupcake offering, both specifically designed to be used with Tweed’s 10:1 Cannabis Oils.

Each kit comes with a dosing guideline to help manage each individual customer’s dosing needs. You can check out the products here.

Introducing Tweed Main Street

Tweed has unveiled a new look for its “brick-and-mortar” operations and has announced plans to open its newest site in Barrie, Ontario. This could be a great part of the business — especially once legalization takes hold in Canada, which seems very likely. Tweed will already have actual stores in place to showcase its award-winning products.

And it looks mighty slick:

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From the press release:

“Canada is having a national conversation about cannabis and it is important that the conversation about regulated, reliable cannabis be accessible to all Canadians,” said Mark Zekulin, Tweed’s President. “That is what Tweed Main Street will be all about. A comfortable, welcoming environment where Canadians can walk in to learn more and simply have a dialogue.”

Starting in Southwestern Ontario and expanding strategically into other Canadian markets, Tweed Main Street will showcase the Tweed story to the public and create a space where Canadians can learn more about the regulated producers in the country. Whether visitors are interested in medical use or just curious about the evolution of the sector, Tweed Main Street will be a welcoming environment designed to engage people in appropriate adult demographics.

Concurrently, Tweed will license its brand and provide training to an external partner, overseen by Justin Whitehall. Mr. Whitehall is a founder and former operator of Simcoe Holistic Health, a successful cannabis clinic that has operated in Barrie for the last three years. Tweed is excited to expand its brand through passionate individuals who see the value of regulated production and distribution.

“This is a dream come true for me,” commented Whitehall.

“I have experience running a cannabis clinic over the last three years, to me this is the most patient focused framework in Canada. I am thrilled to now be a part of Canada’s largest and most innovative cannabis company and to introduce Tweed to Canadians looking to learn more.”

Existing brick and mortar locations in Guelph, Etobicoke, and Hamilton will be rebranded in the coming months.

Customers visiting Tweed Main Street locations will be able to purchase merchandise and Tweed Pantry items, and learn about the products and services Tweed and its affiliates offer to medical patients.

Overall, Canopy is doing all of the right things to make it the leader in both recreational and medicinal cannabis.

That’s why we’re up over 60% now and plan on riding this company for quite a while.

We’re still buying under $4.00 for now.

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That does bring me to another question I got last week, concerning the difference between buying Canopy Growth Corp. on the Canadian TSX Exchange and on the U.S. over-the-counter market.

You’ve recommended Canopy Growth Corp (TSX-V:CGC). This is in the Canadian Market, and I can not buy it this way. Is the US Market version (TWMJF) the same? And would you have the same recommendation to buy? Thank you for your time.

— Matthew

Thanks for the question, Matthew — it is a very good one. I have written about this distinction in the past, but I get questions about it often, so let’s get into it again today.

Matthew made mention of TWMJF — which is the “over-the-counter” stock ticker for the American version of the stock that trades in U.S. dollars. CGC is traded on TSX-Venture Exchange in Canada and trades in Canadian dollars.

The short answer is that I always like to buy stocks through the actual exchanges that they are listed on.

When companies are trading through over-the-counter exchanges, they are usually very small, tightly held, and may also be thinly traded. That means the OTC listing is less liquid and more prone to larger and wilder fluctuation. For example, CGC.V has an average trading volume of 247,190 shares over the past three months.

TWMJF, however, only averages around 31,025.

So one big buyer or seller could really move the needle on that smaller exchange.

While many brokerages don’t allow U.S. citizens to trade on the TSX, there are many that do. Fidelity, Interactive Brokers, and Charles Schwab all come to mind.

If you don’t feel like opening a new brokerage account for just one or two TSX trades, then you can certainly buy the OTC listing if you believe strongly enough in the stock. Personally, however, I’d recommend getting the stock on the proper exchange if at all possible.

Thanks for the question, Matthew.

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MassRoots (OTC: MSRT)

MassRoots is one of the largest and most active technology platforms for cannabis consumers and businesses with over 775,000 users.

Piggybacking on the previous question, MassRoots, Inc. trades on the OTC exchange. But rumors are swirling that it may become the very first marijuana company to trade on the Nasdaq. If that takes place, it would be a major boon for the stock and help legitimize the whole industry as a serious player.

The company just completed a $1.4+ million capital raise, which should allow it to meet all Nasdaq listing requirements. According to the Nasdaq’s listing requirement, MassRoots had to have more than $3 million in shareholder equity, and this recent raise may put it there.

We’re expecting that over the next week or so, MassRoots will file an S-1 with the Nasdaq. (Form S-1 is an SEC filing used by companies planning on going public to register their securities with the U.S. Securities and Exchange Commission (SEC) as the “registration statement by the Securities Act of 1933.”)

Time will tell… but that would be huge.

Shareholders have been quietly piling in, as we’ve seen a 17% upward move for MassRoots in the last month.

Now is a great time to buy. Once other states start legalizing recreational marijuana, MassRoots is in a firm position to continue growing each and every time.

We’re buying shares of MassRoots, Inc. (OTC: MSRT) under $1.75.

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Tying Down the MastI also got a great — and timely — question from Andrew T., who had written in about real estate investment trusts (REITS) in the face of rising interest rates.

It works as a great segue into updates on HCP (the only REIT on the dividend aristocrats list) and my preferred REIT for the coming year, Sovran Self Storage.

Here we go...

Ahoy Jimmy,

I am a long time follower of The Crow’s Nest. I love this newsletter, from the insight and research to the healthy living tips, it’s all been extremely helpful to me and my family. I have a question about REITS. I have followed the Crow’s Nest Portfolio closely but I do not as of now have any REITs such as HCP or CSU in my portfolio.

Do you think that with the recent downturn in the share prices that this would make a good entry point with either of these companies?

Thank you, Andrew T.

Hey Andrew, thanks for reading, and thanks for the great question.

For those readers who aren’t familiar with REITs, the term stands for real estate investment trust. These companies make money by owning or financing income-producing real estate. Examples include apartment complexes, hospitals, hotels, storage centers, and shopping malls.

REITs and interest rates are pretty interlinked.

Since REITs are well known as an investment that pays huge dividends — they are actually required to pay out 90% of their taxable income in dividends every year — they are certainly sensitive to higher interest rates.

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Basically, when interest rates rise, investors have more options for yield.

REITs also have higher interest rates to pay when they acquire more real estate, which is pretty much the name of the game. When you make your money by acquiring properties, you typically borrow that money to do so. And with that borrowing comes higher costs.

So while rising interest rates sound like a double whammy for REITs, it doesn’t necessarily mean that they are a bad investment in higher interest rate environments. Smart companies bake those costs in and anticipate future hikes.

And while we’re talking about interest rates, they are still at historic lows, so it’s not like the Fed is going to raise rates to, say, the 4–5% they were in 2007 anytime soon.

And as far as other options go, REITs still pay a WAY higher yield than safer prospects like Treasuries, CDs, or normal dividend stocks. So say your investment in a REIT pays a 10% dividend, but the stock doesn’t go up in the next couple of years. Personally, I’ll take 10% of my money any day of the week.

If you’ve looked around the broader market so far this year, 10% seems like a million bucks. I am relying heavily on dividends to get through this year. Most analysts agree that it will continue to be a very volatile year in the market.

The first company Andrew brought up is HCP, Inc. (NYSE: HCP), which we have in the portfolio. HCP primarily invests in properties serving the health care industry, including sectors of health care such as senior housing, life science, medical office, hospital, and skilled nursing.

As Andrew alluded to, HCP does have its own set of issues. For one, there was chatter about its risk for lowering its dividend, which I hate to see with any stock. As long time readers will know, one of the major aspects I look for in a long-term stock is the ability to continue raising its dividend.

HCP has raised its dividend every year for 31 years — making it the only REIT on the dividend aristocrat list. It’s also the highest-yielding dividend aristocrat on the list.

Now, many thought that dividend would be in jeopardy after fourth-quarter earnings came up pretty short. In fact, the shares fell from $34 to $28 in one day...

But despite weak financials, the company just raised it yet again in February. It increased the quarterly cash dividend of $0.575 per share on its common stock, compared with $0.565 per share in the previous quarter. This is the 31st consecutive year that HCP has increased its dividend per share.

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It now yields a very juicy 7.69%.

While that isn’t a massive hike, I prefer when companies slowly raise their dividends over time, instead of overpaying and having to scale it back.

Here’s why you may want to add HCP to your long-term portfolio at a discount...

Most of HCP’s troubles can be attributed to HCS ManorCare, which makes up around 25% of HCP’s income. ManorCare is one of the nation’s largest health care providers and operates around 280 skilled nursing facilities in 30 states. As I’ve written before, ManorCare was sued by the government last year for “knowingly and routinely submitted false claims to Medicare and Tricare for rehabilitation therapy services that were not medically reasonable and necessary.”

Being sued by the government is rarely a positive sign...

Even worse, ManorCare is actually no longer profitable for HCP. Part of the reason for that is that changes in payments from traditional Medicare to “Managed Care” plans have reduced both rates and patients to skilled nursing facilities like ManorCare. Citing all of these issues, HCP management has said that it is currently seeking to reduce its concentration with ManorCare.

Until it figures out what to do about that exposure, I am somewhat up in the air about HCP.

In order to really “move the needle,” HCP would have to come up with more large acquisitions to replace that ManorCare income. It has noted that there’s still a $1 trillion market for health care real estate, but only 14% of that is currently owned by REITs. So while there seems to be plenty of opportunities out there, HCP will just have to do a better job with the next round of acquisitions than it did with ManorCare.

The long and the short of it is that HCP appears to be trading at a discount right now, so you could think of it as a “blood in the streets” type trade. If you already own it, I certainly wouldn’t unload the position. If you are a firm believer in the long-term prospects, I would even consider slowly adding to it at these prices.

However, if you are thinking of starting a new position, I would caution that you may have to wait a while before seeing any significant returns while the company irons all of these issues out.

The consensus price target for the next year is ~$30, and it’s currently trading at ~$31.

If you do decide to add HCP, I would seriously consider investing through its dividend

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reinvestment program, as HCP will often give you a discount on shares purchased that way:

The purchase price for newly issued shares of common stock purchased directly from us will be the market price less a discount ranging from 0% to 5%, determined from time to time by us in accordance with the plan. As of the date of this prospectus supplement, the discount is 1%.

We may adjust the discount at our discretion at any time. This discount applies to either optional cash purchases or reinvested dividends.

However, no discount will be available for common stock purchased in the open market or in privately negotiated transactions.

You can check out its prospectus and other plan details here.

So between the 7% dividend and the possible discount through the DRIP, HCP isn’t a terrible investment even if it doesn’t move much this year.

Andrew also brought up Capital Senior Living Space (NYSE: CSU). Capital Senior Living Space owns, operates, develops, and manages senior living communities in the United States. The company provides senior living services to the elderly, including independent living, assisted living, and home care services.

There are two issues: it’s not a REIT, and it doesn’t pay a dividend.

In short, I’m not really interested for those reasons alone.

However, if you are interested in the company as a pure growth stock, you may be looking at a good time to add it. CSU just posted a $6 million fourth-quarter loss and is down 18% on the year. It’s trading around $17 as I write this, which is near 52-week lows.

Among analysts that cover the stock regularly, Capital Senior Living has an average rating of “Buy” and an average target price of $28.75. So there is certainly some upside potential there.

One reason is that CSU doesn’t have the problem of trying to unload weak assets like HCP does. It also seems to have plenty of capital for acquisitions.

“We always have hundreds of millions of dollars of acquisition opportunity in the pipeline,” according to CEO Larry Cohen. “Unlike our largest competitors, we don’t need to make large portfolio acquisitions to move the needle.”

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I’ll let you make your own decision about CSU. I won’t be recommending or covering it in The Crow’s Nest, though.

One REIT I do recommend is Sovran Self Storage (NYSE: SSS). Sovran acquires, owns, and manages self-storage properties in the United States. It currently owns or operates over 500 self-storage facilities encompassing over 30 million square feet, making it one of the largest self-storage companies in the United States.

In total, the company serves 250,000 storage customers in 25 states.

I like SSS for a couple of reasons...

1. It’s an easy business to understand: you put up a building, slap some locks on it, and charge people monthly fees to stash their extra stuff. And god knows Americans have plenty of extra stuff to store...

2. It pays a solid 3.3% dividend.

3. If you enroll in its DRIP, it will give you a generous 2% discount on any stock purchased that way.

Again, that’s an easy 5% or more that will compound for as long as you hold it in the DRIP. You can start a DRIP with Sovran Self Storage by checking out the plan’s prospectus here.

After reviewing the details, you can fill out the Enrollment Form here and mail it to:

American Stock Transfer & Trust Company LLC 6201 15th Avenue Brooklyn, NY 11219 Phone: 877-476-4394

You can also do so online here.

To be clear: this isn’t a get-rich-overnight stock; this is a slow burn, dividend reinvesting vehicle.

The 12-month consensus target price for the stock is $115, which reflects an upside potential of around 6% over current prices.

Here are the most recent financial results:

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Fourth Quarter 2015 Highlights:

• Achieved adjusted funds from operations per fully diluted common share of $1.28, representing a 13.3% increase over the same period last year.

• Increased same store revenue by 6.7% and net operating income (“NOI”)(1) by 7.8% as compared to the fourth quarter of 2014.

• Grew same store average occupancy for the quarter by 120 basis points to 90.5% compared to the same period in 2014. Same store occupancy at December 31, 2015, was 90.1%; a full 120 basis points over December 31, 2014.

• Paid a quarterly dividend of $0.85 per share of common stock.

• Achieved full year adjusted funds from operations per fully diluted common share of $4.94, representing a 13.3% increase over full year 2014 results. This is the Company’s fifth consecutive year of double digit percentage adjusted FFO growth.

• Attained credit rating upgrades from both Standard and Poor’s and Fitch (to BBB from BBB-). Moody’s Investors Service also initiated coverage with a ‘Baa2’ credit rating on the Company’s corporate credit and issue-level ratings.

• Net income available to common shareholders for the fourth quarter of 2015 was $30.0 million or $0.83 per fully diluted common share. For the same period in 2014, net income available to common shareholders was $25.7 million or $0.76 per fully diluted common share.

• Funds from operations (“FFO”)(2) for the quarter were $1.26 per fully diluted common share compared to $1.08 for the same period last year. Absent $0.6 million of acquisition costs incurred in the fourth quarter of 2015 and $1.9 million of acquisition costs and straight-line rent adjustments in the fourth quarter of 2014, adjusted FFO per fully diluted common share was $1.28 and $1.13 for the fourth quarter of 2015 and 2014, respectively.

• Increased occupancy and rental rates were the primary contributors to the Company’s strong growth during the quarter.

OPERATIONS:

• Total revenues increased 11.9% over last year’s fourth quarter while operating

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costs increased 10.6%, resulting in an NOI increase of 12.5%. Overall occupancy averaged 89.8% for the period, and rental rates averaged $12.83 per sq. ft.

• Revenues for the 399 stores wholly owned by the Company since January 1, 2014 increased 6.7% from those of the fourth quarter of 2014, the result of a 120 basis point increase in average occupancy, a 5.0% increase in rental rates and increases in tenant insurance administrative fees and other income.

• Same store operating expenses increased 4.6% for the fourth quarter of 2015 compared to the prior year period, primarily the result of increased real estate taxes.

• Consequently, same store net operating income increased 7.8% this period over the fourth quarter of 2014.

• General and administrative expenses increased by approximately $1.1 million over the same period in 2014, primarily due to increases in personnel costs associated with operating 24 more stores during the quarter than at this time last year, and legal fees. Beginning with the first quarter of 2015, the company reclassified internet marketing costs from general and administrative expenses to property operations expense for all periods presented so as to be consistent with industry practices.

• During the fourth quarter of 2015, the Company experienced same store revenue growth in 28 of its 29 major markets in the same store pool. Overall, the markets with the strongest revenue impact include those in Florida, New York and Georgia.

• For the full year 2015, same store revenues increased by 6.2% and same store NOI improved by 7.9%. Same store occupancy at December 31, 2015 increased by 120 basis points over that of December 31, 2014 to 90.1%.

CAPITAL TRANSACTIONS:

Illustrated below are key financial ratios at December 31, 2015:

• Debt to Enterprise Value (at $107.31/share) 17.4%

• Debt to Book Cost of Storage Facilities 33.4%

• Debt to EBITDA Ratio 3.8x

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• Debt Service Coverage 6.1x

At December 31, 2015, the Company had approximately $7.0 million of cash on hand, and $221 million available on its line of credit, excluding its expansion feature.

COMMON STOCK DIVIDEND:

Subsequent to quarter-end, the Company’s Board of Directors approved a quarterly dividend of $0.85 per share or $3.40 annualized.

I’m comfortable paying under $110 to add Sovran Self Storage (NYSE: SSS) as a dividend reinvestment program.

If you want some more background on the company, you can read my entire breakdown in this report.

That is it for this month, crew.

As always, keep those questions coming to customerservice@angelpub.com, and I’ll consider them for the next issue.

We’ll also have a couple of new recommendations next month, so stay tuned.

Godspeed,

Jimmy Mengel Investment Director, The Crow’s Nest

The Crow’s Nest, Outsider Club LLC Copyright © 2016, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Crow’s Nest or Outsider Club LLC does not provide

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