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Month: March 2020

mREIT Invesco Mortgage Capital Can’t Meet Margin Call – All Dividends Suspended

mREIT Invesco Mortgage Capital (IVR) announced they could not meet a margin call on borrowed funds.

With mREITS they finance the business with repurchase agreements–generally shorter term loans and they use their mortgage portfolio for collateral. If the value of the collateral falls they need to either come up with cash or addition collateral.

The company’s preferred shares tumbled and are trading in the $4’s right now. All dividends are suspended now.

The preferreds can be seen here.

The company press release can be read here.

Are These Companies Going Out of Business??

Are the lodging REITs going out of business? Obviously with all the turmoil in the world we never know for sure, but honestly I don’t think most of them are going bankrupt. Some will go bankrupt without a doubt–and I would think that Sotherly Hospitality (SOHO) and Ashford Hospitality (AHT) would be the weaker companies. They simply have too much debt and while some debt relief will be secured I am not sure it will be sufficient.

On the other hand it seems reasonable that most of the others will survive–after a year or maybe 2 of extreme turmoil.

Based on purely what seems a reasonable risk/reward proposition I bought 100 shares of Hersha Hospitality 6.50% cumulative perpetual preferred (HR-E) for $3.20/share. The company suspended dividends on the preferreds a few days ago and I think the wise companies are immediately suspending common and preferred payouts–they are realist. The preferred shares are priced for bankruptcy-maybe I will have a 100% loss–or maybe I will have a 800% gain.

Here are the lodging REIT stocks.

After looking at the lodging REITS I look over at the mortgage REIT preferreds–decimation. Two Harbors Investment 7.25% cumulative perpetual fell $7.25 today to close at $7.75. The mREITs have experienced massive stress as asset values had moved lower thus setting off some margins calls. I fully expect the mREITS to suspend common dividends this week with a likelihood of preferred dividend suspension as well. I didn’t buy any mREIT preferreds–but I am watching and may start some buying.

mREIT preferreds are here.

This may or may not be the start of a portfolio of decimated preferreds. When previously solvent companies see their preferreds down at $3 to $7 is it reasonable to believe some these companies will survive?

Even for a conservative income investors is the reward of 300% to maybe 1000% worth it. I think it may be – but only time will tell.

Just food for thought.

Let the Beatings Continue Until Morale Improves

The baby, the bath water and the bath tub are all being tossed out the door. I would love to buy–but I can’t!

There is no use being a hero until we can see action relative to stopping the spread of Covid 19. I note that Wisconsin just went ‘shelter in place’ and I am certain within 72 hours Minnesota will do the same.

Forget about the Fed action and the clowns on capital hill. The Fed is keeping the financial system from imploding, but this does zip on arresting the virus spread and the government really seems more inept than I already thought they were.

I have been down this road with the Federal Government back during the Gulf Wars. 1 of the businesses I managed for Pillsbury was the production of MRE’s (meals ready to eat) for military use. 6-12 months or so before the war started the department of defense asked us to ramp up production–of course we had no capacity for increasing–so they threw millions of dollars at us for a new production line. Being specialized production equipment it took months and months to install the line. By the time we had the line installed they no longer needed it and they simply gave us the equipment. Later we donated the equipment to Rutgers University Nabisco Food Research Center.

So I expect by the time the Fed government is all ramped up we won’t need them anymore–can’t count on the Federal government for much.

Anyway I still watch the spreadsheets for bargains–just not taking the bait yet.

Here is the Lodging REIT preferred spreadsheet--huge bargains, but dividends are being suspended–they are cumulative. Thus far Hersha Hospitality (HT) and Sotherly (SOHO) have suspended common and preferred dividends. Pebblebrook (PEB) has reduced their common dividend to 1 cent and are monitoring preferred dividends going forward. RLJ Lodging has gone to 1 cent on the common. Is HT preferred worth the $3/share price right now? Don’t know but the risk reward is pretty juicy–we’ll see.

Monday Morning Kickoff

I am suspending the more normal Monday Morning Kickoff and just touching on more recent news for the day and week ahead.

The average $25 preferred stock and baby bond closed last week at $18.02 which is $1.52 higher than where it was on 3/18 (last Wednesday).

The Fed Balance Sheet has gone parabolic and was up over $300 billion last week. Of course at this point we know it is going massively higher.

Just 30 minutes ago the Fed announced quantatative easing of giant magnitude, buying muni bonds, commercial real estate mortgages and certain investment grade corporate bonds. The Fed took off any limits to the amount they may buy–ramp up those printing presses!!!

With the announcement from the Fed equity futures bounced nicely and right now are up about 1%–much better than overnight when futures were off 5%. I am highly suspect of any bounce as the uncertainty and unknowns are just too high–but just the same a bounce would be good (in spite of the lose I will take on my short position).

I expect to see a steady stream of companies everywhere either slashing or suspending their dividends–liquidity is king. Those companies that suspend now are likely to be around next year—those playing hero with their dividend are fools. As some have noted in comments some companies are going to pay dividends/distributions with stock issuance–seems like a reasonable alternative to cash.

So where do we go and what do we do?

I really doubt any buying should be done in here–there will probably be a number of better opportunities in the future–there are lots of potential bargains out there–but they may be better by the end of the week—no one really knows what 10-15% unemployment looks like—nor do they know what -15% GDP (or some such number) looks like.

Stay safe–lots of dry powder (and for some 100% dry powder). We are around 50% cash—and hope to remain there, but this can change rapidly, so we will see.

Looking Back and Looking Ahead

1st off I am thankful to all for keeping the comments throughout the website fairly civil–a little bit of testiness here and there, but not terrible given our current situation. Thanks all. I did find out that my spam parameters for ‘four letter words’ doesn’t include ‘shitstorm’–it seems pretty descriptive so I will let that go.

Last Friday morning–very early (I was up at 3 a.m.) I looked at the futures market and smelled opportunity as it was up 900 points–again. The market had been yo yoing fairly predictably but I ‘felt’ (a technical term–meaning a gut feeling) that this was not to last this time–which is why I wrote on Friday morning to ‘get your portfolio’ in order.

In a ‘even a blind squirrel finds a nut’ moment the market did exactly what I thought would happen–in particular leading into a weekend and with the day being a quadruple witching day.

I unloaded everything I wanted to be rid of in the 1st couple hours and then I went ‘short’ via the Proshares SP500 Ultra Short EFT (SDS). Then each little bounce I added to my short–by the time the day ended I was up 1.5% on day. At this point I am mainly holding utility baby bonds and preferreds and CEF preferreds. I held my short right into the close as I would be shocked to see market shoot higher Monday–if it does I am going to get spanked–but I will take the risk. My cash level is now around 50%.

Here is what I see happening in the days ahead. Continuing shutdowns throughout the country–I see no reason whatsoever for this to change. A continuing economic high stress level–everywhere. Yes there are some businesses that are benefiting from the Covid 19 outbreak, but unemployment and business shutdowns will overwhelm any benefits. There is no immediate relief with potential treatments–yes they are out there, but not close to being a known effective treatment.

Yes–for the time being I am very negative–on markets–but I am very optimistic on the future. Remember the $7-8/share preferreds back in 2009? I think we will see more chances for them in the next 2 weeks to 30 days.

So my plan is–watch–no buying and determine if I have to start backing out of some utility positions–I hope not but we all need to have cash–which means we have to preserve the stash–one way or the other.

If we get a sharp market run higher tomorrow I am going to have some losses on my short position–but I don’t think that will happen, but we will have more of an idea in an hour when the futures markets open up.

Use Friday Wisely to Position Portfolios

Very early (4 a.m.) in the day it looks like we will have a strong opening to equity markets–too strong as far as I am concerned. But we can use Friday to continue to do work on our portfolios.

I did do a bit a nibbling yesterday on investment grade issues–but I did no selling and I still have a few perpetuals that I would like to sell–so I will consider doing it today.

Using the S&P500 as a reference I have to believe that we are a long way from the bottom of the market. If one was to assume that we had down GDP in the 1st quarter of say a few percent, but then a fairly massive drop in the 2nd quarter of 10% or even more–is there anyone out there that truly believes that we will have anything short of a substantial recession?

Why are airlines still priced high–relative to the situation? Delta is $24/share this early a.m.–shouldn’t it go to $5 or $10? I think the only reason is because of government bailouts–not sure that should hold shares prices up–these bailouts are going to come with many strings attached. As a side note Compass Airlines, who is a regional air carrier for Delta and American Airlines announced yesterday that they are closing down.

Why are all the indexes off just 30%? Is there really going to be a V bottom? Not sure that is possible–it makes no sense. I know in my small town I expect maybe 25% of the small businesses to fold–they were mostly making it just day to day prior to Covid 19.

Anyway there are no answers to my questions–but it would seem that equity markets will take a turn lower soon because economic slowdowns of the magnitude I think are coming are not baked into these markets.

I will continue to position and nibble as opportunities present themselves–but I will keep plenty of powder available.

Hope This Finds All Well

I would call this the ‘pause that refreshes’–refreshes a lot!!

Likely you all have good gains today, but have a long way to go to recoup losses from the last week or so. I was very happy to see some nice gains–and right after the market opened today I was able to nibble the utility issues as well as the CEF preferreds. Not big buys – just small adds. No sales at all as I have been out of the office most of the day.

Certainly trading today seems a bit more normalized–no one knows if it will last.

BUT you know there will be plenty of turmoil–we will still be sorting out the companies that survive and those that are ‘dead ducks‘–and there are going to be plenty of dead ducks. Maybe though we will get to those 1-2% movements in the market instead of 4-8% moves–speed kills.

Who knows–maybe we will start to see new issues in a couple weeks–maybe I am overly optimistic–one day at a time.

Incredible Move Lower Yesterday!!

NOTE–I would very much like to participate more in comments etc., but I have never been more busy with my real business (appraising) so am forced to be out of the office most of the day.

I don’t remember a move like today in preferreds and baby bonds–not just the out and out drops, but the moves lower with giant bounces in some issues. Absolutely crazy.

Now I do remember very scary times in 2008-2009, but totally different in terms of the causes–at least we could identify the causes and over the course of weeks and months a fix could be implemented. NOW we know the root cause of the decimation, but the fix will take a very long time. Blood will continue to run in the street until we can ‘corner the beast’ and kill it (or at least treat it).

As you all know–simply by looking at any number of the spreadsheets on this site that there are dozens of preferred issues trading at $10/share and under–all of which were $25 just a couple weeks ago. It is your job, and mine, to figure out who is going to survive–and which of the companies are going to go broke. All made more complicated by the knowledge that the Federal government will bail some out–while others are left to be liquidated.

I want to believe that some or all the mREITs will survive–this is where much of the potential opportunity lies. In this list of mREIT preferreds.

Of course I have mentioned the CEF preferreds and CEF preferreds–and have nibbled with starter positions–now all are at lower prices than just a couple days ago–but it is just a nibble, nibble.

For some folks wondering about coverage ratios on CEF preferreds I just did 1 spot check tonight–on Gabelli Equity (GAB) and even after all the down draft in assets (commons stocks) the CEF has a coverage ratio of well over 300% (as of 3/17/20)–so coverage ratios on the various Gabelli funds are holding up, but based on history I fully expect Mario Gabelli to file shelf registrations for all their CEFs to be ready to sell wheelbarrows full of common shares.

I think that some nice money will be made on mid quality preferred issues – as I have mentioned American Homes 4 Rent (AMH) comes to mind–they have 5 preferreds outstanding. There is a 6.5% coupon issue trading at $17.95–some time soon nibble, nibble. Single family housing–rentals–there could be short term pain but in the end they will thrive.

Annaly Capital (NLY) the giant mREIT has a 6.95% issue trading down around $10.95–some time soon nibble, nibble.

One last note–nibble, nibble can be 25, 50 or 75 shares–most of us are used to buying 200 to 1000 shares (some much more)–remember since we are not paying commissions we can buy any amount–buy small and spread it around–you can come back time and time again for a small nibble.

The Losses are Out of This World–Update

UPDATE–the average $25 baby bond and preferred is now at $16.50/share.

Leave the office for 90 minutes and come back to dramatic destruction–I mean my little bit of New Residential NRZ-C down 40%–yikes!! I had a sell in, but obviously it didn’t trigger.

Utilities preferreds and baby bonds off 20%–the portfolio looks like swiss cheese (no disrespect to the Swiss people).

I would say there are massive bargains out there–but WHO can define todays bargains.

While we are off 10% for the year I feel fortunate–lots of cash on hand in accounts and some very successful hedging (until the last few days) have minimized losses.

Unfortunately the writers on Seeking Alpha are all playing the hero roll and continue to write ‘buy, buy, buy’—what fools. Folks that interpreted their (the writers) success over the last few years as skill and wisdom will be down 75% before this is over–it may take a lifetime to recoup their loses–but most will liquidate and never ever invest again–instead opting for a mayonnaise jar in the back yard as a safe haven.

Early this morning I sold some of my VER-F 6.70% preferred and my AMH-F 5.875% perpetual–put the money in the cash stash.

Now I wait–obviously I am still heavily exposed to utility baby bonds, preferreds and CEF preferreds. I want more–but I guess I want them cheap–I mean really cheap.