Some of the Heaviest Preferred Volumes Ever

Today I see there was massive volume–buying and selling–in preferred shares — the most that I have ever seen.

There were 132 issues we are showing with more than 300% of normal daily volume. Obvious there were a bunch of funds rebalancing–and the pricing is totally distorted both to the downside and upside.

You can see the high volume on the Preferred Stocks with High Volume page here. These numbers will ‘clear’ tomorrow morning at 8:30 am.

Ashford Hospitality-No Thanks

Below we ramble a bit on lodging REITs because we know lots of folks hold their preferreds and some like the Ashford Hospitality preferreds seem to have been “repriced” to a level reserved for risky issues.

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We notice that investors like to buy the various securities issued by lodging REIT Ashford Hospitality (NYSE:AHT), but have been dis-satisfied most recently. Even we have done a real short term “flip” of the common shares of AHT–but that is all we would do. Certainly with a current yield of around 10% the common shares (organized as a REIT) look attractive—for now.

I am a chicken investor and the first thing I look at prior to investing in anything is the balance sheet. NOT the income statement. In the end a company can have poor income for a very long time if they have a really conservative balance sheet. By a conservative balance sheet I mean low debt levels.

Does this mean that the balance sheet has to ‘sparkle’ for us to be an investor? No! It is about the risk/reward–by this we mean that as an investor what yield do we demand for the quality of the company behind the payments.

For instance we do hold, and have held, for a very long time the baby bonds from Sotherly Hospitality (NASDAQ:SOHO). The 7.25% baby bonds (NASDAQ:SOHOK) which were issued in 2018, mature in 2021. They become optionally callable on 2/15. The company does not have a stellar balance sheet, but the 7.25% coupon and the short time until maturity means we can likely hold this issue without laying awake at night.

So with the above being said let’s take a real quick look at 1 SINGLE ITEM from the lastest balance sheets of lodging REITs. The debt to equity ratios.

Debt to Equity ratios of some random lodging REITS

Ashford Hospitality 7.8

Pebblebrook Hotels 0.84

Sotherly Hospitality 4.38

Sunstone Hotels 0.36

Chesapeake Lodging 0.70

Hersha Hospitality 1.1

These are rates we calculated ourselves. We took the debt levels shown on the balance sheet and divided the equity into the debt.

Here you can see the latest balance sheet for Ashford Hospitality.

You can see AHT has debt of $3.9 billion against equity of $500 million–just shy of 8 times more debt than equity.

Now this level of debt looked at in a vacuum is scary–and relative to peer lodging REITs really is quite poor.

So after we see this level of debt we like to look at the cash flow statement to see where their cash is coming from. Actually we like to see how much depreciation is being charged against revenue. A shortcut cashflow is Net Income+Depreciation+Amortization=free cash. Of course it is more complex than this, but in a ‘real quick’ way it gives a hint of cash flow.

For AHT we see they had a net loss of $90 million for the 9 month period ending 9/30/2018. Add to this depreciation and amortization (which is a non cash charge taken on the income statement) which amounts to $215 million and you come up with ‘quicky cash flow’ of $125 million.

AHT had dividends for their preferreds and common shares for the 9 month period that totaled around $75 million. So we can see that the dividends are covered pretty well. Plus the company carries a huge cash horde of over $300 million.

So what is the problem with the AHT preferred issues pricing? It is simply a balance sheet that is VERY INFERIOR to its peers. If one charted the current yields of the outstanding preferred stocks on the lodging REITS we listed above you would see that they “lay out” almost perfectly–those with the lowest debt/equity trade really strong and those with the highest debt/equity trade poorly. Preferreds of Pebblebrook and Sunstone trade with current yields that are 2-3% below the AHT preferreds. The more marginal Sotherly preferreds are trading with current yields just below the AHT issues and the Hersha Hospitality preferreds trade with a current yield that is 1% below the AHT preferreds.

So are the AHT Preferreds dangerous to hold? NOT NOW–for the time being they are repriced lower to reflect the poor balance sheet. They generate plenty of cash to pay their dividends and they have a huge cash horde.

So just like we mention for baby bonds from BDC’s–when we hit the next recession (and it is coming someday, we just don’t know when) there are going to be some bloody messes. I don’t think I would want to hold shares in AHT issues when we hit a recession–cash could get very, very tight if the recession is long and deep we could see bankruptcies in some REIT sectors.

Saratoga Investment Re-Opens Baby Bond Issue

BDC Saratoga Investment (SAR) has reopened their 6.25% baby bonds due 2025 (NYSE:SAF).

This issue has traded strongly of late and we currently have a position in the baby bonds.

There is a chance they could go on sale on Friday (probably by just a little amount). Shares were off 20 cents today.

The press release can be found here.

Mid Day Ramble

As expected the 10 year treasury is tumbling today after ending lower yesterday–currently it is at 2.635%. If these rates continue we will see some modest housing stimulation in the spring market as mortgage rates move a bit lower–and in many markets value are falling a bit–a good combination to help the lethargic housing market.

Today the preferred and baby bond markets are firm to higher with the average share up around 3-4 cents. We have NO new lows today–the only 2 issues showing on the list today NEAR new lows are the 2 issues either being redeemed or expected to be redeemed–the 6.70% JPMorgan Chase perpetual (JPM-B) which has been called for redemption and the 6.375% Seaspan baby bonds (SSWN) which matures on 4/30.

The new JPMorgan Chase 6% preferred (JPM-C) is trading on the NYSE today–wow if we would have thought the issue would trade this strong we would have bought some–now at $25.86/share. Can’t imagine wanting a 6% issue this badly-oh well I guess that is what makes a market.

The clock is ticking on the government shutdown, the Chinese trade tariffs as well as the debt ceiling. It looks to us like these items will dominate much of the news over the course of the 4 weeks. If these were resolved we would have find something else to worry about.

NuStar Energy Reports

MLP NuStar Energy (NYSE:NS) has reported earnings from the 4th quarter and full year ended 12/31/2018.

We have only reviewed the ‘headline’ items and earnings, distributable cash flow and coverage ratios look pretty darned good.

Of course NS has 3 high yield fixed to floating rate preferreds issues outstanding as well as a high yield baby bond, which is why we mention this earnings report.

The earnings release can be read here.

Items We are Adding to the Site

In the course of the next week or 10 days we will add two new listings to the site.

1st for this weekend we will add a ‘Master List” of ex-dividend dates. This should be helpful to those who want to be apprised of ex-dividend dates–maybe for a dividend capture strategy. During the course of putting this together we found that good, timely and accurate data on ex-dividend dates is tough to come by and we have resorted to looking up each date individually, but we think we have a good plan to supply the data in an accurate way. We will present this “Master List” in a spreadsheet which readers can copy if they so desire, although if updates to the sheet are helpful one should simply have the original sheet in their google account so as we do weekly updates you will see the changes.

The 2nd listing we will do will be a ‘Master Listof all issues (baby bonds, preferreds etc) with investment gradeĀ ratings. I know some have desired such a list and right now we have ratings on just the CEF preferreds. It is likely this publication is 10 days away from now.

Pretty Dovish FED

As I expected the FED statement and the Jay Powell press conference show that the FED is turning neutral with a dovish tone.

As always the FED will be data dependant, but they are evaluating the need to change the ‘balance sheet’ runoff–I assume from the current $50 billion/month rate.

As I read the statement I see a dovish approach to further rate hikes–still with the June possibility, which we had forecast for 2019. We believe they will reduce the balance sheet ‘runoff’ to 1/2 the current rate (in the $25 billion/month range). Additionally I believe they will ultimate target a balance sheet level of $2 trillion. This contrasts with the $1 trillion balance sheet that we started quantitative easing with way back in 2008. The balance sheet topped out at the $4.5 trillion level and now stands around $4 trillion.

So in summary I believe that all the data that is released each month will very much drive the FED funds rate–more so than it already does, so we need to watch employment and inflation closely. Rate hikes will only occur if they are warranted, primarily by inflation. The balance sheet ‘runoff’ will change to a more dovish level.

All of this likely bodes well for investors–both common share owners as well as preferred and baby bond holders. With this dovish tone the 10 year treasury, which was up 2 basis points to 2.73% earlier today, is now falling and is off 1.3 basis points at 2.699% as we had surmised would happen.

With this now out of the way for the time being we can turn our attention (as investors) to the problems of Federal government deficits and trade policy.

GasLog Partners Reports Earnings

GasLog Partners (NASDAQ:GLOP) has report earnings for the quarter and year ending 12/31/2018.

On a non-GAAP basis revenue and earnings both climbed as did distributable cash flow.

The company also raised their common unit dividend by 2 cents to 55 cents/share. A small ($25 million) common share repurchase program was put in place as well.

The preferred shares are reacting well this morning with gains of 50 cents to a buck.

The companies press release can be found here on the Gaslog Partners website.

Added Info on CEF Preferred List

I was updating some info on the CEF preferred page and noticed that some months ago I had added the ‘coverage ratio’ to the list.

Us conservative people like to see really solid coverage ratios–the higher the better.

The list is here–and on the right hand side we have coverage ratios for the senior securities. The coverage ratio is the asset value divided by the senior securities liquidation amount.

While the current yields on these securities are modest I can really sleep well at night owning some of these issues.

Disclosure – we hold a number of these preferreds.

AllianzGI Convertible Fund 5.625% preferred (NCV-A) AllianzGI Convertible Fund II 5.50% (NCZ-A), Ellsworth 5.25% Preferred, Bancroft Fund 5.39% preferred (BCV-A), Gabelli Utility Trust 5.625% preferred (GUT-A) and the Tricontinental 5% preferred (TY-)–and I forgot Kayne Anderson MLP 3.5%.

Mid Day Ramble

Quiet day again in the income markets.

We are not seeing any preferred issues down more than a buck

We are seeing most of the regular ‘suspects’ near new lows–i.e. AmTrust Financial preferreds, a JPMorgan 6.70% perpetual (JPM-B) which is redeemable on 3/1/2019 and will undoubtably be called at that time (also it just went ex-dividend).

The 10 year treasury is now at 2.71% and we expect it to move into the 2.60’s if the FED gives a dovish statement tomorrow OR Jay Powell leans dovish during the press conference after the FED meeting announcement. This announcement and press conference are very important to the equity markets–although not too important to the income issue markets.

We will be rebalancing the Enhanced High Yield Income Portfolio which can be seen here.   While we have rebalanced our personal holdings we have left way too much risk in this model. It will end the 1st year with a gain of around 2%–will is totally unsatisfactory. The model is loaded with shipping issues as well as the hated Spark Energy 8.75% preferred. Needless to say if you have a portfolio dominated by these issues you have been spanked quite hard in capital losses–which fortunately have been balanced a bit with the high yield of the issues. While we are not totally negative on the shippers they need to be held in modest quantities–in this small portfolio we have 3 issues–just too much.

Consumer Confidence Continues to Grow Weaker

As we were expecting Consumer Confidence fell again during the month of January. With the partial government shutdown and the political acrimony this could hardly have been unexpected.

The reading of 120 in January follows a 126.6 in December and down from a 18 year high of 137.9 in October.

The economic key here is whether we see a rebound in the next couple of months–or does confidence continue to erode? With the consumer driving almost 70% of the economy confidence is key.

Additionally today housing prices in the Case-Shiller 20 city index came in with an increase in prices of 4.7% year over year which is the slowest rate of increase since 2015 and dovetails with the 3 year low in existing house prices we saw last week.

With the softness in these reading (and we think confidence and housing are joined at the hips) we see the 10 year treasury now trading at 2.72%–off a couple basis points. If we see a dovish tone to the FOMC meeting ending tomorrow I expect to see rates in the 2.6’s%.

A Couple Purchases Last Week

We made 2 purchases last week that we wanted to briefly mention.

1st off we bought a position in the new Citizens Financial Group (CFG) 6.35% fixed-to-floating preferred. The issue is a notch below investment grade, but the regional bankers with solid financials have traded relatively strong through the turmoil of the last few months. We believe the issue will move into the $25.50 area (or slightly better) in the next 30 days. This one may be sold for modest gains if they occur-but we are fine holding the issue as well. The issue is still trading on the OTC Grey market under ticker CFGLL.

The 2nd purchase we made was in the newer Algonquin Power and Utilities 6.875% fixed-to-floating rate subordinated notes (NYSE:AQNA). Algonquin is a Canadian utility focused on electricity and natural gas delivery as well as having a division which supplys water and sewage treatment. Virtually all of their operations are in the U.S. The company is a smaller utility with revenue in the $2 billion dollar area. The issue is 1 notch below investment grade at BB+ from Standard and Poors, but with a coupon of 6.875% the risk/reward proposition is pretty good.

With these purchases we move closer to be being fully invested and with moves we have written about in the past 4-6 weeks we are getting positioned in a way that is not overweight in any given area and with some coupons that are reasonably good for the quality level.

Mid Day Ramble

With the DJIA down all day long between 250 and 400 points income issues are trading normally with very little movement–except the usuals.

The new lows list for preferred stocks includes some of the usual suspects such as some of the AmTrust Financial preferreds as well as the Seaspan 6.375% baby bonds (SSWN) which mature on 4/30/2019 so the bonds are sticking around $25. 1 Chimera issue (CIM-D) and 1 AGNC Mortgage issue (AGNCB) are showing up on the new low list, but are hanging around $25.

Preferreds with large share price losses include the Dynagas LNG 9% preferred (DNLG-A) which is off $2.38/share on 300% or normal volume. The Global Ship Lease 8.75% perpetual (GSL-B) is off $1.20/share. Other shippers–Diana, Teekay Offshore and Tsakos issues are all weak. All shipper have become the most heavily hated group, along with previous contenders in the insurance sector (AmTrust and Maiden Holdings).

The new lows list can be found here.

Large share price loss listing can be seen here.

Monday Morning Kickoff

In a holiday shortened week the DJIA traded in a range 24,244 to 24,860 before closing at 24,737. Even thought the end of the partial government shutdown was known before the market close there was little to no reaction to the development.

The 10 year treasury traded in a range of 2.70% to 2.78% before closing at 2.75% for the week.

Last week we had existing home sales announced on Tuesday at 4.99 million against a forecast of 5.1 million and 5.33 million against the year ago period. This is the lowest rate in over 3 years. On Thursday we had the PMI manufacturing report come in at 54.9 against a forecast of 53.8 while the PMI services report came in at 54.2 against a forecast of 54.4. Also Thursday we had the leading economic indicators released at -.1% versus the previous reading of .2%. Friday there were a number of economic releases originally scheduled (durable goods, capital equipment order and new home sales) which were all delayed.

For this week we have lots of economic news–ALTHOUGH THERE IS A HIGH LIKLIHOOD THE ECONOMIC DATA WE REVIEW BELOW WILL BE DELAYED because of the government shutdown (ended, but obviously behind in data)

On Tuesday we have Case-Shiller home prices being released. This will be interesting to see if it validated sales weaknesses. We also have the consumer confidence index for January being released with a forecast of 124 versus 128.1 in the prior month-we need to see if this number comes in weak reflecting the government shutdown and political acrimony. Wednesday we have the ADP employment report for January. We also are slated to have GDP for the 4th quarter. Also pending home sales for December are to be released Wednesday. Lastly Wednesday we have the FOMC meeting announcement – highly likely to indicate no Fed Funds rate increase. More importantly is the Powell press conference after the announcement. Thursday we have the employment cost index, personal income, consumer spending and core inflation. Friday we have many more reports. Non farm payrolls are forecast at 177,000 new jobs being added–of course after the forecast missed by 100,000 or so last month who can trust any forecast. With the employment report we have hourly earnings released. We also have consumer sentiment being announced Friday.

Last week the Fed Balance Sheet fell by $3 billion–which is a total for the last 3 weeks of $9 billion. This means we could see a big drop in the balance sheet either this week or next OR we might see the Fed back off in the balance sheet reduction schedule (currently in the $50 billion/month area). There have been hints that the Fed will be backing off the the balance sheet reduction schedule previously announced-we may hear more info from Fed Chair Powell on Wednesday.

We had 1 new income issue announced last week from Citizens Financial Group (NYSE:CFG) sold a 6.35% fixed to floating rate preferred with the floating rate beginning in 2024 with a spread of 3.642% added to 3 month Libor. The issue is now trading on the OTC Grey market under ticker CFGLL and last traded at $25.33. The issue is rated BB+ by Standarf and Poors–1 notch below investment grade. We purchased a position in this issue.

There are now 243 $25 preferred issues trading at $25 or below and they are trading at an average price of $23.73.

Targa Resource Partners Investor Presentation

Strong midstream energy MLP Targa Resource Partners (NYSE:NGLS) has recently released a investor presentation.

NGLS has a high yield 9% fixed-to-floating rate preferred outstanding (NGLS-A) which pays a monthly dividend. Currently the issue is priced at $26.30 as the company is a strong master limited partnership. The issue is redeemable 11/2020 and shouldn’t be bought unless the price sets back a bunch (like a dollar). We believe there are high odds this issue will be redeemed as it has a spread of 7.71% (plus 1 month Libor) which will put the coupon at 10% or greater (with todays Libor rates).

The presentation can be seen here.