Ready Capital Corporation Prices Baby Bonds

mREIT Ready Capital Corporation (NYSE:RC) has priced a new baby bond issue with a fixed rate coupon of 6.20%.

While the coupon could be a bit more generous, at least the 2026 maturity date makes it a bit attractive.

The details of the issue are below–

This issue should trade sometime in the next week or two, although the timing will not be known in advance.

There is no OTC Grey market trading, but the bond desk of your brokerage firm may be able to secure for you prior to NYSE trading.

The pricing term sheet can be seen here.

WOW!! No Wonder We Can’t Find Bargains

We have a spreadsheet which we use–but it is not posted on the “preferred stock” page that is “$25 Preferreds At or Near New Highs” which is a listing of all preferred stocks and it compares current price to the 25 week high for the shares.

This spreadsheet is now showing 154 of 462 issues followed within 1% of a new high.

When I reset the formula to show all issues within 2% of a new high 250 issues show up. More than 1/2 the $25 preferred issues are within 2% (50 cents) of a new high–no wonder we search in vain for “bargains”.

Of course we see that in our own holdings–in particular in the investment grade CEF preferreds. Our AllianzGI Convertible and Income 5.62% Preferred (NCV-A) is now trading at $25.81. Some of this quality issue (rated AAA by Fitch) we purchased last December in the $23.50 area and more of it we purchased in March/April for around $24.50. Never dreamed we would have such capital gains in these issues.

I hate to wish for an “event” of some sort, but honestly we either need an event to set prices lower or we need to recalibrate our expectations. Patience I keep saying–patience.

We will try to post this “new high” spreadsheet in the next day or 2.

REIT Ready Capital to Offer Senior Notes

mREIT Ready Capital (NYSE:RC), which was formerly Sutherland Asset Management, has announced an offering of $25 senior notes.

The notes interest payment is an unqualified interest payment taxed at ordinary tax rates. The issue will be unrated.

The notes will have a maturity date in 2026, with an optional redemption date starting in 2022. The issue will offer 101% of principal, plus accrued and unpaid interest if redeemed early starting in 2022 until mid year 2025 (exact dates not announced) which will then go to 100% for part of 2025 until maturity.

The notes will trade on the NYSE under ticker RCB. There will be no OTC Grey market trading on these, although it is possible some brokers bond desk may trade these prior to NYSE listing.

The preliminary prospectus can be read here.

The company has 2 baby bonds outstanding already which can be seen here.

Strong Economic Reports Move Interest Rates Higher

The combination of a strong jobs report 2 Fridays ago and very strong retail sales being reported today have worked to move interest rates higher–for now. The 10 year treasury yield moved as high as 2.14% before settling back to around 2.11% right now. Remember it traded as low as 1.95% on 7/3/2019.

It seems to me that the most recent “data” would argue for the FED holding the Fed Funds rate steady–but from recent testimony to congress we think that once again the FED has backed themselves into a corner and will have to lower rates 1/4%.

“Talking our book” we would be quite happy to see no rate hike. Our money market right now is yielding 2.24% (Gabelli US Treasury money market-GABXX) and we are happy with that yield–to go back to the sub-2% area will certainly make our life a bit more difficult as we chase higher returns.

Of course when we look at the global economies–Europe in a slow motion slide and China slowing bringing many negative rates we know darned well the Fed will move rates lower.

Ag Coop CHS Releases Earnings

Giant ag cooperative CHS has released earnings for the quarter ending 5/31/2019.

Honestly the earnings were not very good–although they haven’t been stellar for quite a few quarters. The coop earned a net of $54 million on sales of $8.5 billion.

We only care about these earnings as the cooperative has 5 outstanding issues of preferred stock–all of which are unrated and which carry fairly high coupons. In spite of the marginal earnings, preferred shares are not reacting negatively–nor would we be overly concerned. Over time when the ag economy improves the general financials will improve.

The earnings release can be read here.

Monday Morning Kickoff

Here we go again–another week that is bound to be exciting as the stock markets are at record highs–party on!! Forget the massive debts of the U.S., the weak economy in Europe and now in China–all that matters is that the markets have a “Fed Put” to make sure all goes well (just joking here-kind of).

Last week the S&P 500 moved to record highs closing the week at 3014 which was the high of the week. The low for the week was 2963 so the index was up over 1% for the week.

The 10 year treasury traded in a range of 2.01% to 2.12% before closing the week near the high of 2.11%. The 10 year treasury had been trading under 2% the week before, but strong employment numbers that week put an end to the fall in rates-for now. Core consumer inflation numbers came in a bit hot last week at +.3% which helped to hold interest rates up from the prior week as well.

The Fed balance sheet rose by $2 billion last week, which is kind of the normal trend – fall for 3 weeks and then have 1 week of a slight rise.

The average $25/share preferred stock and baby bond moved higher by another 5 cents to close at $25.04. There are now 170 issues trading at $25 or below compared to 179 last week and 206 the week before.

Once again we had no income issues announced for the 2nd week in a row.

Bank of America did announced the redemption of their BAC-W non cumulative preferred issue on 9/9/2019–the 1st date it is callable. This issue has a 6.625% coupon–no surprise they would redeem this issue.

Spirited Conversation on Site

I have followed the conversation in the last 24 hours on the site and it has been “spirited”—that is good, in my opinion, and really should serve to teach “newbies” that follow the conversation that there is more than 1 way to skin a cat.

We know that some investors have strong opinions on how to invest, while personally we are very open to all sorts of methods–really we are open to “whatever works”.

Talking about “flipping” and “dividend captures” helps to share different methods of individuals. Personally I like to “buy and hold”–on the other hand I like to have some dry powder available and utilizing that dry powder from time to time to add a little to the portfolio is just fine–as we all know, it works until it doesn’t (i.e. Ashford Hospitality – AHT – worked for years and now really didn’t work).

This year we have probably executed 30 different captures and flips–all but 3-4 worked well and the 3-4 that didn’t work were only mildly negative. We hold a Colony Northstar issue now that is off about $100 net on a dividend capture attempt–so they don’t all work.

Civil disagreement on the site is good–let’s just keep it civil and accept that there are all types of opinions–and none are right or wrong.

Out of New Residential Investment Preferred

As holders of the new 7.50% fixed-to-floating rate issue from mREIT New Residential Investment (NYSE:NRZ-A) already know the issue has been heading strongly higher. Today closing at $25.80 after trading as high as $26.05.

Our personal holding of a full position at $24.94 has now been sold. This position was bought on the OTC Grey market on 6/26 with the clear intention to hold for at least 1-2% of capital appreciation–fortunately with a spike the last couple days we exited with a strong 3%+ profit.

This does not mean we think it has peaked—it simply means that we bought with the intention to sell within a month—the goal was reached and we exited.

Additionally today we locked down a nice gain in the Pebblebrook Hotels 6.375% perpetual preferred shares (NYSE:PEB-E). We had bought this in a “dividend capture” trade. We purchased 1/2 the position on 6/10 for $25.29 and the second 1/2 on 6/19 for $25.20. Shares went ex-dividend on 6/27 and we let our shares go today for $25.20. This gives us about a 36 cent profit in about a month.

So now we go back to looking for the next couple of issues to buy.

Model Portfolio Adjustments

We had mentioned a week or so ago that we needed to broaden the model portfolios to include more total issues as well as adding representation from a wider variety of businesses.

To begin to accomplish our goals we had to adjust the “rules” of our model to allow up to 25% of the holdings to be in securities that are long dated in maturity–after 2029. Originally to reduce interest rate risk we wanted to own only shorter dated maturities, but this leaves us with a very small pool of potential investments and a high percentage of those are Business Development Company (BDC) related.

We had written–here–that the Medium Duration Income Portfolio only had 11 issues in it and a large share of the issues were Business Development Company related. Some were term preferreds while a larger portion of the holdings were baby bonds. Very simply, 11 issues in a $103,000 portfolio is probably too few–only 1 mistake (as we learned) and quite a bit of pain can be inflicted on net asset value. Of course most of us use 1-3% in our real life portfolios so to make these models more useful they should be less concentrated.

Since this model had 400 shares of the OFS Capital 6.375% (NASDAQ:OFSSL) in it we went ahead and sold 200 of the shares. We then purchased 200 shares in the newer First Internet Bancorp 6% baby bonds (NASDQ:INBKZ) and since we had plenty of cash on hand we also added 300 shares of the Affiliated Managers 5.875% baby bonds (NYSE:MGR).

This move reduces our BDC exposure while adding a banking issue as well as an asset manager to the mix. This is a good start and I will be making further adjustments in the weeks and months ahead.

RAIT Financial – Ready To Crash and Burn?

mREIT RAIT Financial (OTC:RASF) appears to be heading for a pivotal moment. The junky company already had suspended dividends on the 3 preferred issues outstanding and each of them trades under $1/share.

The company has some baby bonds that mature on 8/30/2019. The issue that we refer to is the 7.12% senior notes (OTC:RFTA). The company has not filed their 10-Q for the period ending 3/31/2019 as of yet–so new financials are know since 2018. Additionally they have baby bonds maturing in 2024.

If one looks at the most recent balance sheet (from 12/31/2018) it would show that assets cover their debt–BUT that is probably meaningless at this time since they need to liquidate some assets or con a lender into “refinancing” the debt. The debt coming due is unsecured debt.

Originally the company sold $70 million dollars worth of the offering with another $10 million or so available for over allotments.

With no new financials or news to speak of since 2018 holding any of the companies baby bonds is pure gambling.

With the bonds due next month it is obvious that there are plenty of folks betting on a redemption as the RFTA baby bonds are now trading at $21.50–you can see them here.

What is going to happen?

Monday Morning Kickoff

The S&P500 opened last week at 2971 level and ended the week at 2990–darned quiet overall.

The 10 year treasury opened the week around 2.03% and then drifted lower for the next couple days all the way down to 1.94% on Wednesday. Friday brought the strong jobs report which launched the yield back to 2.07% before finally closing the week at 2.05%.

The Fed Balance Sheet data for last week was not released because of the July 4th holiday. We should see this data sometime today.

The average $25 preferred stock and baby bond rose by 7 cents last week and is now at $24.99/share. The previous week we had seen the average price drop as huge numbers of issues went ex-dividend so we bounced back a bit as one might expect. There are now 179 issues trading at $25 or less as compared to 206 last week–bargains are becoming more and more difficult to find (as we all know) as these prices rise.

We had no new income issues announced last week–not unusual for a holiday week as folks are on vacation many times.

Interest Rates Pop on Jobs Report

The 10 year treasury popped fairly hard today on the back of a strong jobs report. The yield traded as high as 2.07% before settling back a bit to 2.05%–this is up a strong 10-12 basis points from the close on Wednesday.

This jobs report, with a supposedly 224,000 new jobs created, goes to show why I don’t make any investment decisions whatsoever based on our “gut feel” for a single data point. Our gut feel was for less than 170,000 jobs being created.

Even with interest rates popping kind of hard preferred stocks and baby bonds are off just a couple pennies (on average) for the day–not exactly a panic.

The talking heads on TV are now arguing why there should still be a rate cut later this month–“talking their books” obviously. It’s a sad time when the Fed lets the stock market dictate the level of interest rates.

We will wait and see what happens–I am not hanging my hat on either a cut in rates or no cut. It has been a long time since I have let those fears dictate the buys or sells that I make–holding a bunch of shorter dated maturity securities helps to relief any stress based on these short term rate cuts (or hikes).

A Short Day Today, a Holiday and Employment Report Friday

Obviously with markets closing today at noon (CDT) it will be a rather quiet day–minds are elsewhere as we wind down into the 4th.

Friday we have the employment report for June and outside of something really crazy being reported, such as a loss of 100,000 jobs, there is likely to be no major reaction to the the report. With the 10 year treasury now trading under 2%, at 1.96%, certainly the direction could be confirmed, but I would think we are near the point where interest rates would stabilize and await further data.

The median forecast for jobs is 170,000–I think it will be softer than that–no scientific data on that guess–just a gut feel.

Wishing everyone an enjoyable 4th. Hope you are able to enjoy a little family time and get away from your computers and the markets.

Decisions to Make as “Base Holdings” Climb Higher

I think most all of us are in the same predicament. Shares in the preferreds and baby bonds that we hold as “sock drawer” holdings have climbed higher and higher. The question one always asks is “when should I sell my position?”

Our sock drawer holds the positions that we intend to hold for a very long time–of course we never imagined that they would climb as high in prices as they have during this time of falling interest rates.

In particular some of the base holdings we have they we are eyeing are the following—

  • National Rural Utilities 5.50% Subordinated Notes (NRUC) which is trading at a crazy $26.69. We bought these on 5/16 for $25.35.
  • Nextera Energy 5.65% Subordinated Debentures (NEE-N) which is trading at $26.10. We bought these 4/3 for $25.31.
  • Gladstone Investment 6.375% term preferred (GAINL) which is now at $25.87, but has been popping above $26 many days.

Many of you are in the same situation. The problem is simply one in which there are few better options out there to buy and with interest rates falling it is not likely to get easier in the near future.

I think it is likely I will sell the National Rural Utilities issue as it simply has gone too far too fast–a years worth of interest is a pretty good premium to capture. The others we will hold as their price isn’t crazy high–yet.

If Ashford Hospitality Preferreds Were a Bargain Last Week–they are a Steal this Week

Last Thursday the Ashford Hospitality preferreds were marked down as the shares went ex-dividend–they drifted on Friday and today they are seeing kind of a big dump.

The AHT-G 7.375% issue is down 91 cents right at this moment on darned near 50,000 shares of volume–more than 3 times normal volume. The AHT-F 7.375% issue is off 86 cents on more normal volume. Both are trading in the $20.50-$21.00 area.

When you are dealing with a company that has lost the faith of the common share owners it is usually just a matter of time before the preferreds get hit hard. The common shares are now at $2.83. We have almost no doubt that over time—years—the preferreds will survive, but if I was (and I wouldn’t be) a holder I would be real concerned about the future. The ride could be very bumpy over the next couple of years if we hit a soft economy.

Additionally, I would be concerned with management taking the company private. The market cap on AHT is now a measly $289 million and the company has hinted, in a roundabout way, that maybe they will go private. No, they have not said it directly, but in their presentations they present possibilities of buying the common shares.

In their June presentation–which can be seen here–on page 12 they present some history, and hints.

Preferred Holders should be cautious. We are NOT predicting they go private, but something fishy is going on here. Even though dividends on the preferred are cumulative, there could be massive turbulence ahead.

Food for thought.