Redeploying a Little Cash

As we have written about we personally held bunches of Arbor Realty 7.375% baby bonds (ABRN) which were redeemed in total last Friday.  The shares redeemed at $25 plus about 37 cents of accrued interest.

We also held 400 shares of them in the Medium Duration Portfolio.

Lacking better ideas we purchased an additional 200 shares of the Southerly Hotels 7.25% baby bonds (NASDAQ:SOHOK) which have a maturity date in 2021.  They also have a early call date starting in a year–thus we hope they are not early redeemed (although they would be redeemed at 101% plus accrued interest).  The shares went ex-dividend today.




This leaves the portfolio at 85% invested which is just fine at this moment. We await a bargain somewhere with the last 15%.

Checking Out Gladstone Investment (GAIN)

One of our readers had asked about what we thought about Gladstone Investment (NASDAQ:GAIN) so we thought we should do a quick run through of their recent financials since we own a substantial position in their term preferred shares.

Remember that given that we are interested primarily in their preferred stock we don’t feel a dramatic need to do a real deep dive on research of most issues. Certainly some like to do a deep dive in every case of investment, but for our needs and from experience we don’t need to do this deep of a dive on a Gladstone company.

Gladstone Investment is a business development company (BDC) and as a BDC they operate as a private equity fund looking to invest through debt or equity in market leaders in stable industries that are profitable with strong management.

The company has been around since 2005 and as such is becoming a fairly seasoned company, but as BDC’s go they are only a modest sized company with around $580 million in assets. As a BDC they are required to maintain an asset coverage ratio of 200% of their senior securities (debt and preferred stock). The company had $101 million of debt and $135 million in term preferred stock which means they easily are within requirements for a 200% coverage ratio. NOTE that the board of directors has voted to lower the asset coverage ratio to 150% effective in April, 2019 as allowed in recent legislation.  We disagree with this move, but all the BDC’s will go there so we may as well as get used to it.  We will simply have to keep our eyes on the financials in the future and certainly when the economy begins to soften at some point in the future.

Investors have to remember that assets of BDCs are valued by management as the investments are not in public companies–thus BDC investors have to “trust” management for the value of assets–of course we never fully trust the numbers, but David Gladstone, the chairman has been around quite a while and we tend to have a bit more trust in him.

The company has had increasing earnings and net asset value in recent quarters and they just announced an increase in the monthly distribution to common holders–from 6.5 cents/share to 6.7 cents/share. Additionally they declared a special dividend of 6 cents. The net investment income doesn’t quite cover the dividend, but the way they calculate the coverage is net investment income PLUS gains in net asset value. NAV gained 53 cents/share in the last reported quarter while net investment income was 23 cents/share for a total of 76 cents per share with dividends paid of 26 cents/share. The company paid two 6 cent special dividends last year.

As can be seen below the common shares have been strong and now carry a current yield of around 7.28%.




A quick review of the company financial statements show that GAIN is carrying little bad debt and we found no investment on non accrual.  The company targets to have 75% of their assets in debt with 25% in equity investments and all in all they have done an excellent job of managing assets.

From our quick review of the financials we think GAIN is in excellent financial condition and until such time as the economy softens it is likely their good performance will continue. It is noted that they will release 1st quarter results on 5/15/2018.

Of course we have no interest in owning GAIN as we don’t buy BDCs but we have a keen interest in the MONTHLY PAYING term preferreds.  Term preferreds, like debt, have a mandatory redemption date.

Term preferred GAINO had an early optional call date starting on 12/1/2017 and an ultimate mandatory redemption on 12/1/2021.  Shares carry a coupon of 6.75% and trade around $25.25 where we would expect they will continue to trade because of the potential of them being called at any time.




Term preferred GAINM carries a coupon of 6.25% and will have an optional redemption date starting 9/30/2018 with an ultimate mandatory redemption date of 9/30/2023. Shares are trading at $25.33 at this time which is where they will likely to continue to trade for now. With 5 years to mandatory redemption shares could trade below $25, but it is unlikely they will go massively below $25.





Term preferred GAINN has a coupon of 6.50% with an optional redemption period starting 5/31/2018 and a mandatory redemption date of 5/31/2022. Shares are trading at $25.36 and like the other 2 term preferreds is unlikely to trade higher because of the fear of redemption.




We find each of term preferred as buyable–at slightly lower prices–like 10 or 15 cents.. Whether GAIN is able to call these is kind of a close call. GAINO which is now callable has the 6.75% coupon and to make the early call worthwhile will require at least 1/4% and normally closer to 1/2% lower coupon and we are not certain they can achieve this level of coupon now–BUT investors need to realize that there is no clear and certain answer as to whether these can be redeemed. It is POSSIBLE that they would call them even if they had to issue 6.75% shares to do the redemption. While they would save nothing on the redemption the move would be a move to refinance at this level instead of waiting until 2021 and very possibly having to pay a much higher rate.

The GAINM and GAINN issues which become callable in later 2018 probably can’t be refinanced for a coupon saving–but again the longer term forecast will affect whether they are called or not.

Each of the term preferred will have 10 or 15 cents of call risk in them–but on a 1000 share purchase that is $100-$150—so it takes just 1 month of dividends to be at breakeven.  So does one buy the 6.75% issue, the 6.25% issue or the 6.50% issue?  Toss a coin and go with it.

As most readers know we like all term preferreds from the Gladstone Companies, which means Gladstone Investment, Gladstone Capital (both BDCs) and Gladstone Land (a REIT). We DON’T care for the Gladstone Commercial preferreds as they are perpetual preferreds and do not provide the level share price and monthly dividends that the term preferreds provide.

Monday Morning Kickoff

Ready to go for another week of excitement. Actually as we always write we can do without the excitement and have all stocks and bonds trade perfectly flat day after day.

The 10 year treasury opened last week around 2.97% and then spiked higher to 3.04% by Wednesday before closing the week back just below where the week opened at 2.96%. While closing the week at 2.96% the 10 year remains at the highest level in 3 1/2 years so now we will see if the rate goes above 3% and sticks.

The biggest item we have for the coming week economically is the FOMC meeting which starts Tuesday and ends Wednesday. No one is talking about any rate hike for May, but with a new Fed leader I don’t think one can count it out. A ‘surprise’ rate hike would be really disruptive to markets and honestly wouldn’t be warranted as the economy is fairly tepid, but the Fed is trying to ‘normalize’ interest rates and they might do something silly. We hope they wait until next month before moving again.

Today we have pending homes sales being announced as well as the Chicago purchasing managers index. Tuesday is the ISM Manufacturing index and the Purchasing Managers Index. Wednesday is the ADP Employment report–and while this could be meaningful, most will blow off any surprise number as it is not ‘official’ and wait for the ‘official’ number which comes on Friday. Thursday we have the Productivity and Costs index being released and this has some potential for moving interest rates as it has inflation components in the report–any inflationary indications will help to move the 10 year treasury above 3%. Lastly as mentioned above we have the Employment Situation report being released Friday and the expectations are for 190,000 new jobs with an unemployment rate of 4%. The expectations of wages is that they will remain flattish and any jump in the wage component of this report could also move the 10 year treasury.

The average $25 preferred and baby bond fell by 13 cents last week to end the week at $24.88 and there are now 217 preferred stocks trading under $25. This compares to $25.01 and 198 respectively last week–so pricing is getting more favorable for investors–slowly but surely. Investors sometimes think they are remaining flat in the shares, but over time–month by month they lose 1%—it is just a very slow drip lower. For buy and hold investors like us it is difficult to do much more than break even, but we see no reason to change our ways–it is for us the most comfortable way to invest and we will be happy with modest gains on the year.

We do note that the Fed ‘runoff’ started back on track last week with a $13 billion runoff–

Of course even at this rate it will take longer than most of us have on earth to run off the balance–but the point is that it is moving slowly in the right direction. This runoff when combined with new money being raised by the treasury will keep rates moving higher–regardless of economic vitality.

Mid Day Rambling

Nothing much to ramble about today as all markets (interest rates and stock markets) are pretty quiet—plus we are very busy–way too busy.

A quick skim of the $25 baby bonds and preferreds doesn’t show much at all–1/2 to 1% moves which are typical on any day of the week—illiquid stocks always move this way.

GDP, employment cost and consumer sentiment were all about as expected so these haven’t had a real impact on the markets.

Going into the weekend it is nice to see the N Korea/S Korea issue being handled in hopefully a sane manner–although longer term this remains to be seen–but regardless it is a nice respite from nasty tweets etc.

Mid Day Ramblings

All is good and kind of quiet in the interest rate markets today.  The 10 year is hanging around 3% without significant movements–this is good–we always love calm.

Today we added more shares of Spark Energy 8.75% fixed-to-floating  preferred to our personal holdings.  Again the sellers are out in force which kind of mystifies us–but we have now averaged down to a cost of $24/share.  The common shares have done well and the company has already declared dividends on the common and preferred for next quarter.  Obviously we could be wrong, but we think we will be right–eventually, but in the end the market is the market and we won’t buy more to add to our position after this latest add.  Sometimes stocks go down–there doesn’t have to be a good reason.  In this case we think a few big seller knocked it down and now we have to work our way back up.







The average preferred and baby bond is up 1 cent today so really quiet.

There are a number of new issues starting to trade (mostly baby bonds) and we hope to review those tonight.

 

Sutherland Asset Management Prices Baby Bonds

Sutherland Asset Management Corporation (NYSE:SLD) has priced a new short maturity baby bonds at 6.50%.

SLD is a specialty real estate lender and organized as a REIT.

This issue is of interest to us as we will have substantial cash after the Arbor Realty baby bond (NYSE:ABRN-CL) call tomorrow and with the very short maturity of this issue and reasonable coupon it fits right in with our goals.

The new issue has an early optional call date of 4/30/2019 and a maturity date of 4/30/2021.  The early call date carries a premium and is at 101%.

We will have to do more due diligence on the issue as we are not familiar with SLD–but if it passes muster we will be a buyer.

The pricing term sheet is here.

The pre-announced ticker on the new baby bond is SLDD–this is subject to change.

mREIT Two Harbors to Acquire CYS – Update

We have added further info on the assumption by TWO of CYS preferreds.

Here is a Reuters release.

SEC Filing Announcement

mREIT Two Harbors (NYSE:TWO) is going to acquire agency mREIT CYS Investment (NYSE:CYS).

TWO has 3 issues of fixed-to-floating rate preferreds outstanding and CYS has 2 fixed rate preferreds outstanding.  Both CYS preferreds are trading below $25 at this time by a fair amount.

Both CYS preferreds will be “assumed” by TWO.

A press release can be found here.

Mid Day Ramblings–3 Days in a Row for 6 Cent Losses

Just checking the average preferred price today we note that the average share is off 6 cents–if this holds that will make it 3 days in a row we have moved lower by 6 cents.  An orderly move lower–on average (for what averages are worth).

American Homes 4 Rent preferreds have been a bit “wild” lately and today the ‘E’ issue is off 2%.  This issue was over $26 just 6 weeks ago, but just has not been able to recover pricing after the 3/15 ex-div date.  This issue hit $27.50 at the start of the year—ouch.



REITs are off a 1/2% as are MLPs.  Guess that means we have somewhat of a clean sweep on all income issues falling just a bit.  We are happy for orderly selloffs–sure beats panics.

The 10 year is holdings at the 3.02% level which is plenty as far as we are concerned.  Our forecast for the end of year is 3.25% and we will hold onto this forecast–we will be like Wall Street Analysts–when our target is breached we will just move our target higher.

Let’s hope for a calm afternoon—calm is good.

 

Starting the Day Above 3%

So the 10 year treasury is above 3% at 3.02% and this far all is calm and quiet–no panic.  As always it is not the absolute level but is the speed of interest rate movements.  Honestly we didn’t think the rate would get above and hold the 3% level so quick, but we are fine with it as long as it pauses for digestion at this level–no further big moves higher.

Short/medium duration preferreds and baby bonds have held up well in the last few days so it will be interesting to see what happens today.

We will be simply watching today–certainly no buying or selling anything since we need to see some digestion of interest rate gains before proceeding.

Mid Day Rambling

Well the 10 year treasury breached 3% this morning for the 1st time in over 4 years, but has set back to 2.98% since that time.

Yesterday the 10 year was in the high 2.90’s and preferred stocks and baby bonds fell by 6 cents/share.  Today they have fallen by another 6 cents/share.  It has been a long, long time since they have reached an average price in the $24.80’s which is where they are at this time.  This means that in the last 18 months shares of the average $25 preferred or baby bond has fallen about $1.25/share.

As we write the DJIA is off 280 points as inflation scares continue in the market.  Oil prices remain high and all building materials are off the charts high–as anyone trying to build a custom built house knows.

Consumer confidence remains extremely high–much higher than we think it should be, but ignorance is bliss and most folks don’t walk around all day long worrying about interest rates and the national debt like we do–some days we wish we were ignorant of the underlying fundamentals of the these items.

We did notice today that Rick Santelli on CNBC was talking about the next resistance on the 10 year treasury yield is 3.37%.  That is a scary number that we would hope wouldn’t show up until next year.

We keep our seat belt fastened as these markets present more scary times.

Hercules Capital Prices Baby Bonds

As expected BDC Hercules Capital has priced their new baby bonds with a low coupon of 5.25%.

The most attractive item of these baby bonds is the maturity that will occur in 2025.

Hercules is a larger business development company focusing on technology startups and is a quality company.  Regardless of the quality of the company at a 5.25% coupon and 7 years to maturity we have no interest.  Low coupon issues have not traded well in the last year and there is no reason to own this issue at the issue price.

The pricing announcement is here.

Added New OFS Capital Baby Bonds to Medium Duration Portfolio.

After trying to buy the new 6.375% baby bonds from OFS Capital last Friday at $24.80 and failing we did snag shares this morning for $24.90/share (bond).

These shares go into the Medium Duration Portfolio which brings the portfolio to 91% invested.  Unfortunately on Friday 4/27 our long held Arbor Realty baby bonds (ABRN) will be called in which will generate $10,188 in proceeds.  Buying the OFS shares while losing the Arbor Realty bonds means we lose a full percentage point in coupon as the ARBN bonds had a 7.375% coupon.  This means that when the week ends we will be back to around 80% invested–10% under where we want to be as we plan to hold at around 90% awaiting a super bargain (from where I don’t know, but we want a little dry powder).

Recall that this portfolio is very close to how we handle our own personal holdings.  We have many more issues overall, but that is a function of the size of the portfolio.  This portfolio is a $100,000 model and because of the modest size it is easy to monitor.  The model currently contains 10 issues.  Since the portfolio was conceived on February 8th it is just now beginning to break into the “black”.

No flipping or trading occurs in this portfolio. Our preference is to be “buy and hold” as we don’t have time to monitor and make changes on a constant basis.

 

Large BDC Hercules Capital to Sell Baby Bonds

Business development company Hercules Capital (NASDAQ:HTGC) will be selling a new baby bond with a maturity date in 2025.  It is likely the company will use some of the proceeds to retire the 2024 baby bonds, which had already had a partial call and which carry a coupon of 6.25%.

The terms are fairly normal with quarterly interest payments and an early optional redemption becoming available to the company in 2021.

The issue has not yet been priced, but it is expected to be in the low 5’s—too low to be of interest to us.

The preliminary prospectus for the issue is here.

The anticipated ticker for the new issue will be HCXZ–but this may change.

Monday Morning Kickoff

Whew! Last week was a bit wild and woolly, but we got through it as you all did and likely in fine style. Even though the 10 year treasury popped to end the week at the highest yield in 3 1/2 years at 2.95% most well positioned income portfolios suffered losses measured in $100’s not in $1,000’s. Anytime you can get through the week with tiny losses on a 14 basis point interest rate move higher you should count yourself fortunate.

So the 10 year treasury traded in a range of 2.81% to 2.95% ending the week at the high point.  The higher rates can only be blamed on 2 things–a heightened fear of inflation and a bunch of yakking out of Fed presidents as they mainly talked hawkish relative to fed funds interest rate hikes through the balance of the year and in to 2019.  Our suspicion is that we likely will see long rates temper a bit as the coming week wears on.  As we all know it isn’t pure interest rate levels that are deadly to income investors it is the speed of the movement.

So for the coming week we have exactly ZERO Fed presidents scheduled to speak.  We are always best to have no conflicting data spewing from their mouths since their economic guesses are no better than yours or mine.

We do have what I call minor data points being released this coming week.  Monday we have the Purchasing Managers Index being released as well as Existing Home Sales.  We see neither report being meaningful.  Housing sales will be flattish as there is little to be bought as inventories remain extremely tight everywhere.

Tuesday brings bunches of housing information as the Case Schiller housing price index will be released.  The Federal Housing Finance Agency will also release their housing price index.  Both will likely continue to show continued movement higher in prices.  Additionally New Homes Sales data will be released.  As we see it buyers are chasing fewer available properties and driving prices up—with lenders such as Fannie Mae and Freddie Mac helping to fuel the fire of higher prices.  Everyone talks affordable housing so they continue to lower credit standards and down payment requirements.  Quasi government agencies compete against each other to see who can write the most risky loans–more and more conventional loans are being written with 3% down.  To us a 3% down payment is equivalent to ZERO down–a job loss, divorce or medical emergency is plenty for these folks to fold their tents and walk away from the loans.

On Thursday we have the Durable Goods Orders for March being released and we expect it will be a meaningless report to the markets.  Additionally both retail and wholesale inventories will be released–again not important.

Friday we have the 1st estimate for 1st quarter GDP and the expectation is for a modest 2% annual growth rate.  Major surprises below 1.5% or above 2.5% could cause movements in interest rates and equity markets.  We also have the Employment Cost Index being released and again this could cause movement if the number comes in hot with gains in wages and benefits–confirming potential inflationary times ahead.

Of course there are other economic reports all week long but in any given week there is little that is meaningful to day to day trading in equities and interest rates.

Relative to interest rates moving higher we watch the Fed balance sheet runoff closely and there was no run off last week.  This leaves the Fed further behind the curve on the runoff–which is ok as they likely would not be able to meet their announced schedule of $30 billion a month – of course their announced schedule of $50 billion/month later in the year was always a joke, but we shall see.  If they all of a sudden meet their goals we will see interest rates, on the long end, shoot sharply higher–very quickly.

Last week we see that 198 $25/share preferred stocks ended the week selling for less than $25 compared to the same, 198, a week ago and the average preferred stock ended the week ended the week at $25.01—a gain of a penny from a week ago.  This is in a week which saw the 10 year sprint higher.

We had just 2 new issues being priced last week.  Eagle Point Credit Company (NYSE:ECC) priced a 6.6875% baby bond issue.  This issue will trade under the ticker of ECCX, but has not yet begun to trade.  Giant MLP Energy Transfer Partners (NYSE:ETP) priced a fixed-to-floating rate preferred at 7.375% initially.  The issue will be fixed until 4/2023.  The issue is trading under the temporary ticker ETPPP on the OTC Grey Market right now (with the wrong name on the chart–Sunoco who they recently merged with).



The baby bonds from OFS Capital (NASDAQ:OFS) which were issued 2 weeks ago began trading last week–we attempted to buy this issue at $24.80 on Friday, but our order was not filled–we will try again today at $24.90 and likely will succeed.



At this moment as we write the 10 year treasury is trading at 2.98%, but if the notes traded with a yield much higher this week we would be surprised. Of course no one knows for sure so investors should have their seat belts fastened in case it spikes as a potential mini-panic is possible in preferred stocks and baby bonds.

 

Retail REITs fall to Multi Year Lows–Most Income Issues Hold Up Well

We had to be out of the office for 4 hours today and certainly we missed some exciting times (although not of huge meaning to us).

What we noticed today was the beat down many of the Retail related REITs took. KIMCO was slapped down to a low not seen since 2009. But as some on Seeking Alpha claim–no problem because you haven’t lost anything until you sell.




Tanger Outlet Centers (NYSE:SKT) is almost in the same boat—bouncing on lows that they hit earlier this year, but previously not seen since 2010.




Believe it or not the average preferred stock and baby bond today was dead flat. We’ll take that given the direction of interest rates.

There was some interesting trading going on in individual preferred issues today. Below you can see that the GDL Fund preferred (a $50 issue) fell big yesterday and gained it all back today–happened so fast we couldn’t react.





We will write more when we have time to digest all the data.