February, 2020 | Innovative Income Investor

Wow–Those Lodging REITs have Been Hammered

I haven’t seen much discussion on the site about the Lodging REITs (and their preferreds), but as I was looking at the ‘big loser’ spreadsheet it was totally littered with lodging preferreds getting hammered lower by 2-9%!!

Of course the hated Ashford Hospitality (AHT) preferreds took the biggest hits–you can see them here. This is a REIT with an extremely heavy debt load–there is not much room for poor business conditions–and between the corona virus and some softness in the industry this company could be facing a make or break situation.

Hersha Hospitality (HT) preferreds also came under heavy selling–see the issues here–as did the Summit Hospitality issues, Sotherly Park Hotels and others–the entire list of lodging REIT preferreds is here.

The point is that there may be bargains being created—and again maybe not. Not only will the corona virus play havoc with lodging REITs, but fundamentals appear to already be deteriorating in particular in New York City.

So What If a Crash Occurs??

So with the likelihood that we will see some kind of corona virus outbreak in the U.S. and further likelihood that folks will overreact to the news—then what?

From my own experience I can say 1st off don’t willy nilly sell your portfolio–there are folks that sold at the lows in 2009 that have still not reentered the markets–instead opting to bury their cash in the back yard in a mayonnaise jar. Do your upfront work NOW.

2ndly–have some available cash. I have 2 eTrade accounts and they are 90% invested. The FIDO account is around 50% cash—all in all I have 30% cash. If we were to get the giant plunge I would begin to plan to buy CEF preferreds–assuming they took massive tumbles as well. If we truly got the huge plunge it takes months and months for shares to recover – these things don’t happen overnight – if I remember the 2009 plunge it took a year to recoup share prices.

I remember in 2009 there were some solid insurance company investment grade preferreds that traded down in the $7/share area–I only wished I had the courage to buy lots of them instead of a taste–when plunges happen you are scared shitles-, you think the world is going to end and all you can think about is ‘let me out’. Resist the urge.

How do we know the bottom is in? We won’t know–no bells rung at the top–nor at the bottom. If a Gabelli CEF preferred with a 5% coupon is selling at $12.50/share would I be happy with a 10% current yield? Hell yes!! I would buy a part position and wait before committing more to the position.

So–get prepared. No time for panic, just rational behavior – have some cash – now!! We don’t know what the market close will bring today–let alone what happens next week.

It’s an Orderly Selloff

I was a bit surprised when stocks opened up higher today–with the soft close last night I thought it might move lower, before a bounce was attempted.

The good part about the stock selloff is that it is fairly ‘orderly’. No panic, just folks moving out of what was already an over valued marketplace. Of course it is unpredictable what will happen when a cluster of corona virus folks are found throughout the U.S.–hopefully rational behavior will rule.

Like interest rates we need slow moves lower in interest rates and stock prices–speed kills. While the talking heads on the boob tube want to make yesterdays and todays selloffs a ‘plunge’ they obviously weren’t around in 1987 when every news reader on the old Financial News Network (FNN) was literally green–they were truly scared shitl— (no cussing allowed). Down 23% in 1 day is truly a plunge–I remember it well.

I actually did a little speculative buying today–not my nature, but the risk reward seems ok. I bought a few hundred shares in the Golar LNG Partners 8.75% perpetual (GMLPP) and I added more shares of the pig UMH-D 6.375% perpetual–a dividend capture gone bad-but I am patient and have lots and lots of dry powder so am willing to hold it for a while. Lastly I added some shares of VER-F 6.70%–a monthly payor that I already have bought and sold a number of times. Hopefully I won’t regret these buys–but they are minor in the big picture of things and I will lose no sleep over them.

Average $25 preferreds and baby bonds are off today around 15-20 cents so we are at least getting pricing down to where it is more tolerable for us potential buyers.

MFA Financial to Sell New Fixed to Floating Preferred Issue

mREIT MFA Financial (MFA) has announced the issuance of a new fixed-to-floating rate preferred.

Yield talk is in the 6.50% to 6.25%.

The issue will be unrated and will trade on the OTC Grey market (ticker not yet announced).

MFA has a 8% baby bond outstanding (MFO) which is to be called with the proceeds. These baby bonds were at $26.00 yesterday and are at $25.38 ttoday. They have been redeemable since 2017.

The company also has a 7.50% preferred (MFA-B) which is currently redeemable and they potentially will call a portion or all of this issue. It was redeemable starting in 2018 and is trading at $25.40 after falling from the $25.95 area yesterday.

The preliminary prospectus can be read here.

mcg, If you Prefer, EarlyBird and Mickdog were on this right away.

Time to Evaluate Holdings

With a breather in the downdraft in stocks and interest rates on pause–for now–it is a great time to once again review holdings to see if there are issues that you are laying awake nights worrying about.

While most of the folks we hear from on the website are fairly seasoned in their investing we have many, many newer investors stopping in and reading comments and many of them likely panicked and sold yesterday–using the “buy high and sell low” technique which is pretty normal for newer folks.

It is very likely we will see some more downdrafts in these markets in the days and weeks ahead related to the corona virus, or affects on companies because of the virus, so better to have too much cash than to lay awake nights worrying.

Kind of a Soft Close Today

The equity close today was kind of soft–but not in a panic sort of way. Tomorrow should see less movement, but I wouldn’t be surprised to see a mildly down opening–assuming we don’t have new reports of large virus outbreaks in the U.S., or Europe (or Africa) overnight in which case it’s anyone’s guess.

There were lots of preferreds down 1-2% today–in lodging REITs, energy shippers and even in the CHS (Cenex Harvest States) issues–which were over valued anyway.

Shippers were off 36 cents today–with LNG shippers really slammed. Golar LNG Partners 8.75% preferred (GMLPP) was off $1.08 to close at $20.97. Shares were at $26 only 3 weeks ago. I see the company announces earnings tomorrow. They had other negative news in late January which is buffeting these shares as they opened a large ‘at the market offering’ of these shares.

We end the day down 19 cents on the average $25 preferred and baby bond. Banks were off 19 cents, Investment grade off 16 cents, mREITs just 5 cents with CEF preferreds off just 7 cents.

$25 issue prices are now lower than anytime since late December.

Keeping Cool in a Rocky Market

Even though we have seen the DJIA off over 1000 points there is no reason to lose your cool. With the website down for 5 hours I lost my cool about the downtime, but I haven’t been excited at all about the DJIA fall. Like all security moves the ‘fear of the unknown’ is a big factor–and that is what we have now–lots of unknowns–about growth and about the progress of the corona virus.

I don’t like to see “red” in my accounts, but thus far today no significant damage has been done–down maybe a few 1/10’s%–but I hold almost no common stocks which is where I see some real damage being done. Cruise lines, shippers, container owners, oil and gas–real damage with many 8-10% losers.

I mentioned container owners Triton International (TRTN) and CAI International (CAI) last week and that if I owned those shares I would be studying my options. CAI is off around 8% today and Triton around 3-4%. TRTN preferreds are off 1-2% today, but the CAI preferred are hanging tough.

I am concerned with interest rates–the Fed has no real dry powder to help the economy (if it needs help–not sure it does). Today’s overnight REPO was normal at around $40 billion so no special overnight liquidity being announced–I suspect the Fed is watching closely, but resisting any extra REPOs–or maybe it is just that the primary dealers have not requested liquidity.

Today I did buy some of the new Priority Income Fund 6.625% term preferred (PRIFF) as it tumbled down into the low $24.30’s. I bought a full position and will see where we go from here–this would be a flip only as I already own the 7% PRIF-D issue.

Buckle up for the close today–if the markets fall into the close look for a weak open again tomorrow. If we get a bounce of a couple hundred points into the close we could see a bounce tomorrow morning. We need to watch for overnight news on any corona virus outbreaks in Africa where it would be a true disaster.

Website Outage

For the 2nd time in 2 days the website was down for 4-6 hours. This time I was working on the site at 6:46 am this morning when it went down–no word from the hosting company for hours after that, until a note came 3 hours later.

I understand that they may have maintenance needs, BUT the Sunday outage was ‘planned’ and no notice was given–if they would have let me know I would have posted a warning on the outage. The Monday outage was not planned–stuff happens.

Chad (who handles the tech end of things) has other hosts available, but for now I will stick with our smaller, local host–but if this happens again I will have to strongly consider a move.

Monday Midday Kickoff

This is abbreviated as the second outage on the website in 2 days makes it kind of irrelevant.

It looks like the week is going to start off with a bang as the corona virus spreads and is threatening to disrupt global economies in a big way.

The S&P futures are down between 2 and 3% and for the first time in quite a while stock movements to the downside should be getting everyone’s attention. Oil is down by $2 while gold is spiking up by $35.

We never advocate making rash moves (i.e. buying or selling) during these times of big equity moves–let’s sit back and observe the morning and see how it shakes out. There are high odds that most income securities will be just fine this morning–although we could be surprised.

Last week the S&P500 opened last week (which was a short holiday week) at 3369, hitting a low of 3328 on Friday and closing the week down 3338 off about 1% on the week.

The 10 year treasury has moved lower to closed last week at 1.47% after opening the week at 1.54% and hitting a high of 1.59%. Obviously global investors are piling into the safety of government debt as the corona virus spreads. This is in the face of the Fed slowly reducing liquidity–I guess the Fed will now reverse course in the face of falling equities. The 10 year treasury is now at 1.37%–near record lows.

The Fed balance sheet fell by $11 billion last week which continues to keep the balance sheet flattish for this entire year.

Last week we had only 2 new income issues sold.

Brookfield Renewable Partners LP (BEP) priced a new perpetual preferred unit offering with a meager 5.25% coupon. The issue is trading under OTC temporary ticker BKFRF. The issue opened for trading around $25.39 and is now at $25.80.

Priority Income Fund (non traded) priced a new issue of term preferred (PRIF-F) with a coupon of 6.625%. The issue is trading under OTC temporary ticker of PRYFP and last traded at $24.60.

My Apologies For the Website Being Down

I need to apologize for the website being down for 4-5 hours Sunday morning.

Unfortunately the hosting company was doing a server upgrade this morning, but gave no notice that this would be occurring. Fortunately for them this was only the 2nd outage in 27 months so I can’t be too hard on them–if this was a regular occurrence I would find a new host.