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December 2014 Vol. 1 Issue 7 December 2014 Vol. 1 Issue 7

Have a Great Holiday Season and Enjoy

Those Dividend Checks

Fellow Investor,

write this over the Thanksgiving holiday weekend and it will be the

start of 2015 before The Dividend Hunter officially publishes our

next issue. So, I will take this time to wish all of our subscribers a

great holiday season. I live in the Mountain West and we are hoping for

a snowy winter and I hope you get the type of weather that helps fulfill

your holiday plans.

Last week I joined the full Investors Alley team at the Traders Expo in

Las Vegas. I was an invited speaker and covered some dividend trading

and trend analysis ideas in my presentation. Investors Alley also paid for

the beverages at a meet-and-greet in the afternoon of the first day of

the Expo. I enjoyed the chance to meet and talk dividends with a bunch

of existing, new and prospective subscribers. I believe that The Dividend

Hunter provides a unique service for investors looking for above

average yield and total returns out of dividend paying stocks.

On to the business of earning money.

Our dividend payments calendar shows five dividends to be paid from portfolio stocks in December. If you do not have

the current version of the calendar, you can download it from the Investors Alley website. Or you can just click here. If

you have trouble for any reason finding the calendar and any of the other reports you can access on the website, send

an email to our customer service manager, Jared, at subscriber@investorsalley.com and he’ll help you find what you

need.

The October stock market correction has passed for the large cap industrial stocks, but the income and dividend world is

still somewhat shaky. Property owning REITs are performing well, in terms of share price, financial REITs have started to

perk up here in the latter half of November, and the MLP sector is trying to absorb the impact of the much lower price of

crude oil.

I have a few thoughts about MLPs and energy prices. Midstream MLPs such as portfolio holding Arc Logistics Partners

generate fee based revenues that are not dependent on energy prices. These companies provide essential services that

will be needed no matter what the price of a barrel of oil. The unit prices of the upstream MLPs, such as portfolio

holdings Memorial Production Partners and Legacy Resources have, to put it bluntly, been hammered by the stock

market as the price of crude has fallen. What the market does not get is that these companies have hedged their energy

production well out into the future, with almost all of 2015 covered at better than $90 per barrel, and significant hedges

I In This Issue Starwood Property Trust (STWD) Revisited .. 3

A Visit to the Oil Patch – Not as Bad as the

Market Thinks ............................................ 5

ONEOK Partners (OKS) ............................... 6

Portfolio Update ........................................ 10

Portfolio Standings ..................................... 11

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December 2014 Vol. 1 Issue 7

going out to as far as 2019. Also, a significant portion of upstream MLP production is natural gas, which has been rising

in value.

I am closely monitoring the energy markets and the prices of oil and natural gas. I do not see a great change in the global

energy market compared to five months ago when oil was at $105. Much of the drop into the low $70's is a trading

market’s over reaction. My research into the market shows a probable recovery into the $90 per barrel range sometime

in 2015.

It stinks that the upstream MLPs in The Dividend Hunter portfolio are trading significantly below the values when these

units were first recommended. Yet I think the current distribution rates are secure, putting double digit yields on these

MLPs at current values. I also selected Memorial and Legacy due to the potential for these companies to add assets and

grow production. The current energy market poses a buying opportunity for those companies with dry powder that will

let them buy producing energy assets at much lower prices than were in effect earlier in 2014.

To close, here at The Dividend Hunter, the focus is on a stable and growing 7% income stream from dividend paying

stocks, REITs, MLPs and related exchange traded investments. Share prices will fluctuate, but I do not try to time the

market. As subscribers, you may find some great deals and higher yields when portfolio stock prices are driven down in a

general market sell-off. With this month's recommendations, I cover a finance REIT that would see a 3.5% profit increase

with every one percent increase in short term interest rates. The other recommendation is a solid, 6.6% yielding natural

gas focused midstream MLP growing distributions to investors by 1.5% every quarter.

Land, fly or die,

Tim Plaehn

Editor

The Dividend Hunter

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December 2014 Vol. 1 Issue 7

Starwood Property Trust (NYSE: STWD) Revisited Commercial mortgage lender Starwood Property Trust

(NYSE: STWD) was an initial recommendation in the

first issue of The Dividend Hunter in June 2014. Over

the last six month's STWD's results have come in as

expected and I wanted to again review this high-yield

REIT since it is well positioned to increase profits when

interest rates start to increase.

Background

Starwood Property Trust was created by the private

equity firm Starwood Capital Group and launched with

an initial public offering in April 2009. At the time the

new REIT was the largest blind pool company ever listed

on the NYSE. A blind pool company is one with no assets

or business. It takes the cash from the IPO to fund start

up business operations. On its IPO date, STWD had a

market cap of $950 million. Now, five years later, the

company is approaching a market value of $5.3 billion,

an increase of greater than 500 percent.

The primary business of Starwood Capital Group is real

estate investing and SCG acts as the external manager

for Starwood Property Trust. The REIT focuses on

originating and investing in commercial mortgage loans

and other commercial real estate-related debt

investments. There exists a tremendous opportunity for

synergies between the Starwood Capital Group's global

real estate operations and the Starwood Property Trust

business of originating commercial real estate loans.

STWD management has stated several times in the past

that the company often gets first look at any financing

opportunities the other parts of SCG run into.

Competitors in the Market

There are a few other REITs focused on commercial

mortgages. In May of last year, Blackstone refocused

the separate, publicly-traded $1.6 billion market cap

Blackstone Mortgage Trust Inc. (NYSE: BXMT) to

operate in the commercial real estate lending space.

Also in 2013, residential mortgage REIT Annaly Capital

Management (NYSE: NLY) purchased the commercial

mortgage REIT, CreXus Investment, for which Annaly

had been acting as the investment advisor. The former

CreXus was a $1 billion market cap company. Other

competing REITs include Colony Financial Inc. (NYSE:

CLNY) with a $1.6 billion market cap and Apollo

Commercial Real Est. Finance Inc. (NYSE:ARI), currently

worth about $600 million.

Commercial banks ranging from local to regional to the

large money center banks also offer commercial real

estate loans.

Starwood Property Trust focuses on larger sized loans,

targeting finance amounts from $30 million, up to $500

million. Few lenders, REIT or bank, that want to

compete with Starwood are even able to handle the size

of loan this company targets. The Starwood

management team prides itself on the flexibility and

focus on customer needs the company brings to the

commercial real estate lending market. It bills itself as a

"one-stop shop", with the ability to commit and close

quickly, we lend seamlessly through the entire capital

stack:

1st Lien Mortgage Loans

Subordinate Debt

Mezzanine Loans

B Notes

Preferred Equity

Starwood originate loans on all property types

nationwide, in Canada and Europe, focusing on primary

and secondary markets. Underwriting, origination, asset

management, primary servicing, legal and accounting

are in-house.

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December 2014 Vol. 1 Issue 7

A Different Approach to Generating Yield

As a REIT, Starwood Property Trust has few if any

restrictions on how it manages its business model in

regards to the types of loans it makes, alternative

investments that can be purchased and sold, and how

new loans are structured. However, three factors

concerning how Starwood manages its business show

the methods used to generate secure double digit

returns on the company's capital base.

First, when making real estate loans, Starwood does not

put itself at risk from falling property values. The

maximum loan amount is 85% of the property's value,

and in most cases, Starwood makes loans for 65% to

75% of the commercial property value. The current

portfolio loan-to-value is 64.2%.

Second, Starwood Property Trusts primarily makes

floating rate loans. As of the 2014 third quarter, 78% of

the portfolio loans were floating rate. For the first three

quarter of 2014, over 90% of new originations have

carried variable interest rate. Starwood's financial

liabilities are matched with similar percentages of

floating rate and fixed obligations. The loans in the

STWD portfolio have an average maturity of 4.5 years.

This means Starwood receives a significant amount of

lent capital back each quarter that can be reinvested

into the current interest rate environment.

Finally, when a new loan is acquired, Starwood will

restructure the loan into a Senior note and a Junior

note. The senior note is backed by the first portion – for

example 50% – of the equity in the property and the

junior note has a claim on the remaining equity

percentages covered by the loan. The A note carries a

lower interest rate and is sold by Starwood, leveraging

the return on the retained B note. This chart from a

recent presentation illustrates the process.

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December 2014 Vol. 1 Issue 7

You can see that through the formation of the senior

note, Starwood Property Trusts turns a Libor + 5.25%

commercial mortgage into a note on the company's

books generating a 10.25% yield.

Rising Rates Would Increase Profits

The looming threat/potential of higher interest rates is

another reason to revisit Starwood Property Trust as a

portfolio recommendation. In a recent presentation,

the company laid out the effects of higher rates on the

company’s profit potential. As rates go higher both

investment income and interest expense will increase.

However, the former will go up faster than the latter. A

1.0% increase in Libor would generate $17.5 million

gain in net investment income. A 3.0% rise in the base

interest rate would produce a $58.5 million increase. As

rates rise, the rate of net income growth accelerates.

For a baseline, for the 2014 third quarter, STWD

reported core net income of $124.8 million, or about

$500 million annualized. Each 1% increase in short term

interest rates will generate a 3.5% increase in profits for

Starwood Property Trust.

These profit gains would be on top of the growth

generated from Starwood's ongoing plan to grow its

book of business.

Investment Expectations

In spite of the company's strength, stability, and leading

market position, Starwood Property Trust remains a

high-yield REIT. The current $0.48 quarterly dividend

puts the yield just below 8% with the share price at $24.

Management has forecast 2014 core earnings of $2.12

to $2.16 per share, which handily covers the current

$1.92 annual dividend rate. Over the last couple of

years, the dividend has been increased by about 4%

with the March distribution.

At the current $23.78 per share, STWD is very close to

the $24.39 trading level when the stock was first

recommended in The Dividend Hunter. Current yield is

8.1%. Our buy up to $25 remains in effect, and STWD

will be a stable force in a dividend investor's portfolio if

interest rates actually start to increase in 2015.

A Visit to the Oil Patch – Not

as Bad as the Market Thinks

With OPEC announcing on Thanksgiving Day that it had

not come to a production reduction agreement, the

price of a barrel of crude oil fell again, with the futures

price trading at about $67.40 per barrel compared to

$73 and change on the Wednesday before. As a result,

as I write this on the Friday after Thanksgiving the share

prices of energy stocks as a group have been driven

much lower – again. Here at The Dividend Hunter, the

recommendations portfolio includes a couple of

upstream MLP with unit prices that are down about

35% since the two were first added to the portfolio on

October 1.

I strongly believe that these upstream MLPs have sold

off far too far, and the distribution rates which now put

the yields at about 14% are secure. To show the logic

behind that belief I want to share some data with you.

First, the production of oil and natural gas can be

divided into two phases. The exploration phase involves

the drilling of new wells in the various energy plays to

bring in new added production. The cost of drilling wells

is recovered when the gas or oil is discovered and the

energy produced soon after a successful drilling is sold

to recoup costs. Exploration costs require relatively high

oil or gas prices to ensure an energy company can

recover its costs and net out a profit.

After the well is completed, comes the production

phase. This involves years of pumping gas or oil from

the ground and selling the production into the energy

markets. The production phase of energy production

requires a lower cost structure to operate and maintain

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December 2014 Vol. 1 Issue 7

the wells. Since the production rate of a well declines

over time, a certain amount of capital must be spent on

either new wells or the rehabilitation of existing wells to

maintain a company's desired production level. The

upstream MLPs focus on the purchase and ownership of

producing wells, generating cash flow to pay

distributions out of the wells a partnership purchases

and manages. These MLPs do not assume the costs and

risks of drilling lots of new wells to meet their growth

and profit goals.

Second, the upstream MLPs hedge planned future

production to lock in the oil and gas prices they will

receive for the next several years. So even with oil at

$67 per barrel, these partnerships are receiving $90 or

more for each barrel produced. Another factor is the

mix of oil, gas and natural gas liquids produced. Natural

gas prices are stable to rising and NGLs have a pricing

structure somewhat independent of crude and natural

gas. With an understanding of these factors, let's take a

closer look at the hedging and costs for the two The

Dividend Hunter upstream MLPs.

According to a recent company presentation, Memorial

Production Partners LP (Nasdaq: MEMP) has 88% of

total production hedged through 2016 and 74% of total

production hedged through 2019. Here is the chart

showing hedging values by product:

Memorial converts all of its production to a natural gas

equivalent, and you can see for 2015, the company has

locked in 92% of its planned production for $8.36 per

Mcfe/equivalent.

The company's all-in production cost (lease operating

expenses, finding and development costs, general and

admin expenses) is $4.20 per Mcfe. On a crude oil

equivalent basis, that total cost works out to about $25

per barrel.

Legacy Reserves LP (Nasdaq: LGCY) historically has

been a crude oil producer, with a recent acquisition

resulting in close to a 50/50 oil and natural gas split in

proven reserves. Currently Legacy has hedged about

70% of its expected 2015 production.

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December 2014 Vol. 1 Issue 7

Here is a chart from Legacy:

Also, an important factor for Legacy Reserves is the

company's operating costs. For the 2014 third quarter

operating expense per barrel of oil equivalent was

$17.55. This expense metric was down almost $5 from

the $22.61 per BOE in the first quarter.

Both MEMP and LGCY produce oil and gas with cost

structures at a fraction of the current price of oil.

For years, investors have viewed the hedging practices

of the upstream MLPs as a safety net against falling

energy prices. Yet when those prices actually decline,

the market forgets the net is there and sells off these

high-yield MLPs.

In fact, the combination of price hedging, gross profit

margins, and some financial flexibility, the current

distribution rates are covered through at least 2015.

The current low price of oil will lead to a reduction of

spending on the exploration side, which will lead to

lower production growth and eventually the price of a

barrel will rise again.

Until that time, the patient upstream MLP unit investors

will continue to earn very attractive distributions and

yields.

ONEOK Partners (NYSE: OKS)

In the energy sector, midstream companies provide the

assets and services to gather, process, store and

transport energy products from the wellhead to the

refinery and then to the refined products customers.

This energy infrastructure is very large and varied and

the need for midstream services continues to grow as

North American energy production increases and how

we use energy products changes.

The quality midstream master limited partnerships–

MLPs – offer an attractive combination of current

distribution yield and growth of those distributions over

time.

ONEOK Partners LP (NYSE: OKS) is a large-cap

midstream MLP whose share price has been pushed

down to drive up the OKS yield. Now is a good time to

pick up units of this quality partnership and lock in the

current high yield to benefit from future distribution

growth.

Note: If you are not familiar with MLPs, I covered the

nuts and bolts of this publicly traded business structure

in the August 2014 issue of The Dividend Hunter. Click

here for a direct link to the August issue or here for a

link to all back issues.

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December 2014 Vol. 1 Issue 7

Business Overview

ONEOK (pronounced "one oak") Partners focuses on

midstream natural gas and natural gas liquids – NGLs –

operations and services. These services are necessary

for companies operating in the natural gas and NGLs

supply chain. The ONEOK business can be broken down

into several sectors:

Natural gas gathering and processing services support

energy producers in the various energy plays. ONEOK

Partners gathers gas from the wellhead, compresses the

gas for transportation and processes the raw natural

gas product to produce the natural gas used for energy

and the various NGLs derived from the gas stream. To

provide these services ONEOK owns 18,500 miles of

pipeline and 19 processing plants. The company has

2,000 contracts with energy producers in four energy

plays strung from southern Oklahoma to Montana and

North Dakota. Contract revenues are a combination of

fee based and percent of proceeds.

With its natural gas liquids business, ONEOK provides

gathering, fractionation, transportation, storage and

marketing services. ONEOK connects to over 130

natural gas processing plants to provide the in between

services to the NGL end users. These are fee-based

services.

Under its pipelines business ONEOK owns 6,600 miles of

intra and interstate natural gas transmission pipelines.

The company also owns 53 billion cubic feet of storage

capacity. The pipeline services transport natural gas to

the end users such as natural gas utilities, power

generation companies, and large industrial users of

natural gas. The pipeline revenues come from long term

fee-based contracts.

Note how the ONEOK services integrate into the natural

gas infrastructure, allowing the company to generate

revenue at multiple stages as gas moves from the well

to the end user. Overall, 65% of ONEOK's revenues are

fee based, 22% carry commodity price risk and 13%

depend on product price differentials between the

different natural gas and NGL production and end-use

regions.

Risks are mitigated by commodity hedging activities and

ONEOK's broad coverage in the natural gas and NGLs

sectors.

A midstream MLP like ONEOK Partners grows through

the construction of new projects and strategic

acquisitions. For the period of 2010 through 2016

expects to complete between $8.3 and $9 billion of

growth capital spending. Of that amount, $3.6 to $4.3

billion of growth capex will be completed between now

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December 2014 Vol. 1 Issue 7

and the end of 2016. The company added $2 billion of

new projects during the first nine months of 2014 and is

evaluating another $4 to $5 billion of future,

unannounced projects. The bottom line is that ONEOK

Partners is a growth focused large-cap MLP that

continues to add assets and services which allow the

company to generate revenues across the natural gas

and NGL markets.

The OKS distribution has been increased for 21

consecutive quarters. The payout per unit was flat for

four quarters in 2008 and 2009, the last time the energy

markets experienced rapidly falling prices, and there

was an additional three years of quarterly growth prior

to 2008.

Our Investment Outlook for OKS

The OKS unit price has been basically flat, or range

bound since early in 2012. In that year and into the first

half of 2013, the OKS distribution was growing at about

a 12% annual rate. In the latter half of 2013, price

corrections in the NGL markets slowed the cash flow

and distribution growth to a 5% to 6% growth rate. That

market correction forced the ONEOK management to

rethink its growth plans and the company closed out a

not profitable division and changed the focus of its

growth projects plans. The partnership has maintained

a steady 1.5 cents quarterly distribution growth rate

while positioning itself for accelerating growth starting

in late 2015 or in 2016.

ONEOK is almost completely focused on natural gas and

NGLs, yet the OKS unit price has been driven down with

the rest of the energy sector on the falling price of

crude oil. Historically, OKS has been priced to yield

between 5.0% and 5.75%. However, the continued

growth of the distribution rate and the recent energy

sector sell off has pushed the OKS yield up to 7%. This is

an excellent value for a large cap MLP with visible

growth prospects. In fact, it is like buying a large cap

MLP at a small cap value.

Recommendation: Buy OKS up to $45.60 to lock in a minimum 6.8% and growing yield.

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December 2014 Vol. 1 Issue 7

Portfolio Update

In spite of the problems with upstream MLP values due to the drop in crude, overall The Dividend Hunter portfolio

recommendations are performing as expected.

In general, the REITs and financials performed well, with all of them in positive territory for the last 30 days.

Newer holding TCP Capital Corp (Nasdaq: TCPC) announced a 5 cent special dividend on top of the regular $0.36

quarterly to be paid in December. Main Street Capital Corp (NYSE: MAIN) investors will also earn in December the

$0.275 bonus dividend declared at the end of October.

Macquarie Infrastructure Company LLC (NYSE: MIC) remains the poster child of how our portfolio recommendations

will operate as these companies growth their dividends. Since its addition to The Dividend Hunter portfolio on June 1,

2014, MIC has produced a 17.5% total return for investors, including 3.14% in cash distributions.

Our upstream and midstream MLP investments continue to suffer in terms of share price due to the falling price of

crude. It will be February before quarterly distribution announcements will show the longer-term value of these high

yield investments. In the meantime, keep in mind The Dividend Hunter focus on a steady income stream, and we will let

that growing stream of cash take care of the share and unit prices over the longer term.

With the big sell off of Memorial Production Partners (Nasdaq: MEMP) and Legacy Reserves (Nasdaq: LGCY) on Friday,

November 28 adding a small amount to an existing position or taking a small entry investment into these may produce

both a nice capital gain as well as an ongoing 13% yield. My only thought is that the drop in crude is not yet done, and

these units may get even cheaper.

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December 2014 Vol. 1 Issue 7

Current Portfolio

Company

Entry

Date

Entry

Price

Recent

Price

Buy Up

To

Annual

Div

Proj.

Yield

Cash

Return

ONEOK (OKS) 11/28/14 $44.08 $44.08 $45.60 $3.10 6.80% N/A

TCP Capital Corp. (TCPC) 10/30/14 $16.51 $17.06 $17.00 $1.44 8.80%

EPR Properties (EPR) 10/30/14 $55.64 $55.99 $57.00 $3.42 6.00% 0.51%

Memorial Production (MEMP) 09/30/14 $22.02 $13.76 $23.00 $2.20 9.50% 2.50%

Legacy Reserves (LGCY) 09/30/14 $29.68 $17.83 $30.00 $2.44 8.00% 2.06%

Salient Midstream & MLP Fund (SMM) 08/28/14 $31.23 $26.20 See 09/14 issue 4.70% 1.17%

Hannon Armstrong Sustainable

Infrastructure Capital (HASI)

08/28/14 $14.49 $14.09 $15.00 $0.88 6.00% 1.52%

New Residential Investment (NRZ) 07/30/14 $6.08 $12.96 $6.25 $0.70 11.00% 2.88%

Arc Logistics Partners (ARCX) 07/30/14 $25.10 $21.91 $28.00 $1.55 8.00% 3.23%

Main Street Capital (MAIN) 06/27/14 $32.51 $32.47 $32.50 $1.98 6.00% 2.58%

Starwood Property Trust (STWD) 05/30/14 $24.39 $24.06 $25.00 $1.92 7.80% 3.94%

Ship Finance International (SFL) 05/30/14 $18.46 $16.60 $19.00 $1.64 8.50% 4.43%

Oaktree Capital Group (OAK) 05/30/14 $50.66 $46.31 $56.00 $3.92 6.50% 2.34%

Macquarie Infras. Company (MIC) 05/30/14 $61.48 $70.30 $63.50 $3.75 6.00% 3.14%

Ventas (VTR) 05/30/14 $64.94 $71.55 $65.00 $2.90 4.50% 2.17%

Notes:

Entry price is determined by the last "Ask" price at the closing of the market on the day before publication. Recent price is determined by the last "Ask" price at the

closing of the market on the day before publication; most recent update 10/30/14. Annual Div is the dividend payment as declared by the company and made publicly

available. It is as of the closing of the market on the day before publication. Total Returns include share price appreciation and dividend payments to provide a more

accurate assessment of returns in that investment. We make no guarantee that any company in the portfolio will continue dividend payments. For a more detailed

look at the portfolio, log on at www.investorsalley.com.

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December 2014 Vol. 1 Issue 7

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