Sock and Underwear Drawers

I think from time to time we confuse some newer readers/investors with our talk about various items–like “sock drawers”.

If I remember right Gridbird was one of the original users of the term ‘sock drawer’, which is where he ‘stashed’ his shares of various ‘illiquid’ (shares that very rarely trade) shares that were in his opinion safe and worthy of being put away and not ‘babysat’- for instance from obscure utilities etc.

From his use of the term many of us that have hung around message boards for years pretty much know that if someone says it is a “sock drawer” issue we know what that means. But not everyone knows the meaning of some of the terms that get tossed around–some folks see that term and wonder what the hell is the talk of socks. This is why I’m writing this little blurb on the various drawers.

I personally like to think of a lot of my holdings as those in my “underwear drawer“. These are issues that I hold for very long periods of time, but are not of the high quality of those in the “sock drawer”. For instance I own virtually all of the various Gladstone term preferred issues (Gladstone Land, Gladstone Capital and Gladstone Investment) and I have held their various issues for years. I consider these underwear issues because they are not the highest quality issues, but in a stable economy they perform well and I don’t have to ‘babysit’ them–just collect the monthly dividends.

In my ‘sock drawer‘ I have some Gabelli CEF preferreds such as Gabelli Utility Fund preferreds (GUT-A and C), AllianzGI CEF preferreds NCV-A and NVZ-A), Bancroft (BCV-A) and Ellsworth CEF preferred (ECF-A) , Kayne Anderson term preferred (KYN-F), Tricontinental preferred (TY-P) and others–super high quality, but not the higher coupons.

All issues in my sock and underwear drawers are pretty much ‘permanent’ base holdings and comprise 60-80% of our stock and bond investments. The balance of issues we hold are ‘here today and gone tomorrow’–if the price is right.

A blend of the sock drawer and underwear drawer hopefully provides with a 5.5-6.5% return on those fairly safe investments. Then it is hoped the balance of the accounts can provide a 7-8% return–so a blended return near my goal of 7% (while sleeping well at night).

We encourage readers to chime in on this topic (socks and underwear–I don’t mean boxers or briefs) to help the newer folks figure out our terms.

Brookfield to Buy Teekay Offshore Stake

Canadian partnership Brookfield Business Partners LP (NYSE:BBU) will buy the remaining holdings of TeeKay Corp. (NYSE:TK) in TeeKay Offshore Partners (NYSE:TOO). BBU is a unit of huge asset manager Brookfield.

TOO has 3 high yield preferred unit issues outstanding and they trade in the area of $18.80 to $21/share.

You can see the 3 outstanding issues here.

NOTE that this is not a buyout of TOO, but is a sale of the holdings of TeeKay Corp in TOO.

The details of the deal are thin at this moment, but it likely means good things for the preferred issues since TeeKay Offshore has had a rocky financial history. With Brookfield in the game the financials should become much less tenuous.

We had previous written about Brookfield and TeeKay Offshore in February.

Colony Capital Preferred Issues Moving Higher

The preferreds from REIT Colony Capital (NYSE:CLNY) have been moving higher this morning, likely based on reports that they have been in talks with Oaktree Capital about selling off some company units.

This giant REIT has under performed for years and the thoughts that they may actually do something about the under performance has no doubt ‘juiced’ the preferreds a bit.

The company has 6 preferred issues outstanding with current yields in the mid 8%’s.

Various issues from the company are up 2 to 70 cents this morning.

As far as high yield preferreds go these are likely as good as any. We have owned some off and on for quick profits–but have not owned them on a longer term basis.

The outstanding issues can be seen here.

Monday Morning Kickoff

Last week it looked like the “tension on the tape” was broken, but then the markets again settled into tight ranges of trading.

The S&P500 traded in a range of 2896 to 2940-closing at the high for the week. Tuesday the index moved up about 1% – this was the only day that showed much movement at all.

The 10 year treasury moved in a range of 2.50% to 2.59% closing the week at the low yield around 2.50%. This occurred despite the reported 3.2% growth in 1st quarter GDP which was reported Friday.

The FED balance sheet assets fell by about $3 billion last week. With the strong GDP you can be certain that the asset runoff will continue–and probably even some talk about a FED Funds rate hike will start. It is simply way too early to worry about any further rate hikes in 2019. I had originally (last year) predicted (guessed) that we would see a hike in June–but that won’t happen.

The average preferred stock and baby bond ended the week at $24.80/share a move higher of 8 cents over the previous week. There are now 231 issues trading at or below $25/share compared to 244 last week.

Last week we had new preferred stocks announced by Regions Financial (NYSE:RF) and KeyCorp (NYSE:KEY). RF sold an issue of fixed to floating rate preferred with an initial coupon of 5.70%–it is trading on the OTC Grey Market under ticker RXFCL and last traded at $25.44. KeyCorp sold a fixed rate, investment grade preferred with a 5.625% coupon. The issue is trading on the OTC Grey market under ticker KEYLL and last was priced at $24.92.

Energy Transfer which had an new issue trading on the Grey Market under ticker ETPEP has seen the units now moved to trading on the NYSE. This is a fixed-to-floating rate (7.60% initial coupon) which starts trading under ETP-E immediately. The shares last traded hands at $24.95.

Also the Sotherly Hotels (NASDAQ:SOHO) has seen their new 8.25% preferred move to their permanent market for trading. It last changed hands at $25.23 under ticker SOHON.

Lastly REIT UMH Properties announced a re-opening of their 6.75% UMH-C preferred. They initially announced a sale of 2 million shares, but that was upsized to 3.6 million shares which put plenty of pressure on the issue. Shares fell from the $25.70 area all the way back to the $24.80 area and closed the week at $24.86. I took a position on the fall and I am looking to exit with a 1-2% gain (we hope) in the next few weeks. NOTE the issue goes ex-dividend on 5/14/2019 so we would be comfortable holding through the ex date prior to exiting.

Wow-GDP Unexpectedly Strong

As happens on a continual basis forecasters of economic data were wrong–GDP did not crater in the 1st quarter even though some forecasters had it forecast to come in as low as 1% growth. The 3.2% growth reported (this just the 1st reading–there will be a couple revisions down the line) was above even the most optimistic forecasts.

The other thing you can be certain of is that folks like us like to ponder what will happen to interest rates if a high (or low) number is reported–almost always wrongly. I speculated a number higher than 3% would send rates higher–so what happens? The 10 year treasury fell by 2-3 basis points on the announcement.

So this announcement has made the FED look like smart folks and has set off talk of a need for a potential interest rate hike later in the year–maybe, but who really knows–no one!

For now I will just continue to enjoy the relatively Goldilocks markets and interest rates, hunt for bargains, build our base investments (the sock drawer issues) and do some short term flipping and let the talking heads dissect every little detail.

UMH Upsizes Preferred Stock Reopening

Yesterday REIT UMH Properties (NYSE:UMH) announced a reopening of the 6.75% perpetual preferred issue (UNH-C) with the intention to sell 2 million new shares.

Today we see the SEC final prospectus document shows they upsized the issuance to 3.6 million shares (with 400,000 additional available for over allotment). The filing is here.

This increase in supply no doubt will delay shares price recovery somewhat as the underwriter got the shares at $24.2125–so they will be shoveling them out the door quickly.

Shares thus far are taking the news in stride at the $24.90/share area on heavy volume.

The stock chart is here.

For the New Preferred Investor – Buying on the OTC Grey Market

As we were writing another article today we had a need to reference an old article we wrote in 2013 on trading on the OTC Grey Market.

The article is over on the DividendInvestor.com site (owned by the company that bought the old Yield Hunter website I owned).

While most of us are familiar with the process of OTC trading I guarantee you there are hundreds of folks visiting daily that are searching for further info on the process — which is why we are posting this link.

Buying On the OTC Grey Market

Standard and Poors Downgrades NuStar Issues

It has been brought to our attention by reader ‘D’ that S&P has downgraded virtually all equity and debt issues of NuStar Energy (NYSE:NS).

NS has 3 high yield preferreds outstanding as well as the baby bonds from NuStar Logistics.

The preferred issues which were rated B have been moved lower to B-. A B- is a really junky rating, but shares today did not seem to react (assuming they know of the downgrade).

The move to downgrade all the Nustar issues is based upon the amount of leverage the company is carrying (6.9x) for 2019. Fortunately S&P expects the leverage ratio to improve from this point forward.

If you have eTrade or Fido you can read the report on NuStar there–I can’t publish it here as they are vigilant on unauthorized reprinting.

All of the NuStar issues can be seen here.

We have updated our listings and individual security pages to reflect the most recent ratings changes.

UMH Properties Re-opens Preferred Issue

As noted by Eugene in reader alerts REIT UMH Properties (NYSE:UMH) has re-opened the 6.75% perpetual preferred issue with the selling of 2 million new shares.

The issue can be seen here. The issue has taken quite a little tumble with the reopening–around 3%.

The company SEC filing can be seen here.

Disclosure–we did take a position on this drop at $24.91. I am looking to hold for 1-2% gain when investors come to their senses.

Regions Financial Prices Preferred Issue

Regional banker Regions Financial (NYSE:RF) has priced their new issue of fixed-to-floating rate preferred stock with an initial coupon of 5.70%.

Of course this low coupon is disappointing to me, but was kind of expected as a number of readers had some early indications of this low coupon.

Honestly I just wish that 1 time the marketplace would reject low coupons that are junk rated–just once. Of course I “talk my book” as I would like to find something decent to buy. For now I will continue to reject low coupons and patiently wait for a higher coupon new issue–or a tumble in markets to provide the current yield I want to buy (6.25% to 7% depending on the issue).

This issue is rated BB+ by S&P, Ba1 by Moody’s and BB- by Fitch–solidly non investment grade.

The new RF issue will begin to float on August 15, 2029 at a rate of 3 month Libor plus a spread of 3.148%.

Shares will be non-cumulative, but will be qualified for lower tax treatment.

The company will sell 20 million shares–no over allotment shares are going to be available.

Shares will trade tomorrow under the OTC Temporary ticker RXFCL which will change to permanent ticker of RF-C once the issue moves to the big board.

The pricing term sheet can be read here.

Tension Off the Stock Market Tape

Well it appears the tension is off the stock market tape with the SP500 up almost 1% today. The interest rate “tension” is still there with the 10 year treasury off about 2 basis points today at 2.57%.

We think it is likely that it will take the 1st quarter GDP announcement on Friday to move the needle on interest rates. There is quite a wide range of estimates of GDP from 1% all the way up to 3%. Certainly anything outside of this range would move the markets–anything in the range can move interest rates a little bit–5 basis points–but probably not a big breakout higher or lower.

Through the 1st day and a half of the trading week we see the average preferred stock and baby bond has moved 2 pennies higher. In over 2 weeks the average price has moved in a range of 5-6 cents–I guess the tension on the tape is in the preferred stock arena.

Volume is low today in preferreds with the Citigroup N issue leading the way with 105,000 shares traded followed by NextEra Energy N issue trading 92,000 shares. This is much lower than recent volumes which hit 2 or 3 times this amount by midday. These 2 issues have moved 7 cents and 4 cents respectively–yawn.

The new 5.625% KeyCorp preferred is trading OTC Grey Market under ticker KEYLL and is pricing right now around $24.85/share on over 2 million shares of volume. Not going to drive this one higher too fast.

We are awaiting pricing for the new Regions Financial preferred which will come after the market closes–we are hopeful for something in the 6.25% area since it has a 10 year fixed rate period–but we have been disappointed continually with low coupons so maybe it will come lower–maybe our expectations are purely selfish hoping.

Regions Financial To Sell New Preferred

Regions Financial Corporation (NYSE:RF) will be selling a new preferred issue.

The issue will be a fixed-to-floating rate issue and will have the normal terms for a banking preferred stock. It will be non-cumulative, but qualified for preferential tax treatment.

This issue will likely NOT be investment grade – the other issues RF has outstanding are a couple notches below investment grade.

There is 1 change and that will be that the issue will be fixed for 10 years (2029) before it moves to the floating rate period. Maybe 3-5 years ago most of the f-t-f issues had fixed rate periods of 10 years, but in more recent years that has moved to a 5 year fixed period–maybe we are going to move back to 10 year fixed periods. In theory the longer the fixed rate period the higher the fixed coupon should be–we shall have to wait and see. We do note that RF sold a F-t-F issue in 2014 and it has a 10 year fixed period at 6.375% and it has traded strongly in the $27.80/share area. You can see it here.

The preliminary prospectus can be read here.

KeyCorp Prices New Preferred

Regional banker KeyCorp (NYSE:KEY) has priced their new fixed rate preferred with an rate of 5.625%.

The issue is rated Baa3 by Moody’s, BB+ by S&P and BB by Fitch–so a split rating either low investment grade or very highly rated non investment grade.

The issue is non-cumulative since it is a bank, but the dividends will be qualified for special tax treatment.

The company is selling 18 million shares and they will become optionally redeemable on 9/15/2024.

The pricing term sheet is here.

Shares are set up to begin trading tomorrow on the OTC Grey market under the temporary ticker KEYLL.

KeyCorp To Sell New Preferred-Updated and Corrected

Banker KeyCorp (NYSE:KEY) has announced a new fixed rate preferred issue is being sold.

Details of this issue have not been announced except that it will be non-cumulative (which of course we all know since it is a bank) and will have an early redemption period starting in 9/2024.

The preliminary prospectus can be read here.

KEY has 1 other fixed rate issue with a coupon of 5.65% which trades at $25.25/share. You can see it here.

Monday Morning Kickoff

Once again we start a week wondering if we will see some market movement of magnitude–one way or the other. We do note that 1st quarter GDP will be released on Friday and the Atlanta FED GDPNow forecast is now at 2.8% while the range of forecast from economist is between and 1 and 2% which is quite a contrast to the GDPNow forecast.

The SP500 traded in a range of 2891 to 2918 before closing the week at 2905–a range of less than 1% for the Good Friday shortened trading week. The 10 year treasury traded in a range of 2.54% to 2.61% before closing out the week at 2.56%.

The FED balance sheet assets fell by about $5 billion last week which gives us a drop of about $30 billion for the last month and leaves the balance sheet with $3.931 trillion in assets.

The average preferred stock and baby bond is trading at $24.72 which is 5 cents above the previous week. This leaves us with 244 issues trading at $25 or less which is virtually unchanged from the previous week (242 were at this level the previous week).

MLP giant Energy Transfer (NYSE:ET) was the only company to announced a new issue last week. The partnership announced a 7.60% fixed-to-floating rate issue which is currently trading on the OTC Grey Market under ticker ETPEP and last changed hands at $24.90/share. We did purchase a position in this one although we won’t likely hold long term.

The Sotherly Hotels new 8.25% preferred issue is still trading on the OTC under ticker SOHEP and closed last week at $25.20.