April, 2020 | Innovative Income Investor

Buy? Sell? Hold? Darned Good Question

Should one be buying, selling or simply still just sitting tight?

Great question with no answer – 1 size doesn’t fit all.

My goal for this time is simply to come out of the virus situation with an average portfolio yield somewhat over the 7% area–maybe 7.5%–and to have 80-90% of my cash invested. The primary difference in what I hope to end up with is a portfolio that is much higher in quality overall–loaded up pretty good with utility preferreds and baby bonds of investment grade quality (or a notch under IG) bought at nicely favorable prices.

I will sprinkle in some mREIT preferreds–which in spite of the huge bounces in recent days are still providing 8-12% current yields. And when the time is right a few lodging REIT issues.

Also I have been looking at the regional and community banks today. Seems like Customers Bancorp (CUBI) and Tristate Capital (TSCAP) have some decent issues available at still decent prices.

Also the Affiliated Managers 5.15% convertible trust preferred (AATRL) is giving us another shot at a investment grade issue with a current yield at 8.00%–I just added a little more at $32.75 (it is a $50 issue). This issue trade consistently in the $50/share area through most of this year. As I have mentioned before this one is a true gift.

So I am around 60% invested and will likely move a bit higher–but I really question whether we won’t have another shot at better prices–I though so, but so far I have been wrong–we’ll see. I don’t mind being wrong if I can get that 7-8% portfolio yield with decent quality.

Gabelli Dividend and Income Trust Announces Redemption

In what almost seems like a ‘return to normalcy’, CEF Gabelli Dividend and Income (GDV) has announced a partial redemption of their 5.875% perpetual preferred (GDV-A). The redemption is for 5/6/2020.

The company will redeem 50% of the outstanding shares–shares that have traded very nicely during the recent market drop.

The announcement can be read here.

The CEF is a relatively decent sized fund with over $2 billion in net assets (as of 12/31/2020) and this redemption of 1.542 million shares is relatively easy for the company.

This partial redemption may make the other half of the shares remaining outstanding a decent buy at around $25–of course they could announce redemption at any time.

In Case You Missed It. Two Harbors Reinstates Dividend

A couple of weeks after suspending all dividends (common and preferreds) mREIT Two Harbors Investment (TWO) announced reinstatement of their dividends.

On 3/24 the company announced the suspension.

On 3/25 they announced the sale of their non-agency residential mortgage portfolio to reduce risk and potential margin calls.

Last Friday they had an update and made no mention of the reinstatement.

With todays announcement the company is stating $1.2 billion in unrestricted cash–guess the folks are pretty damned smart.

Disclosure–I owned a modest position in TWO-D 7.75% perpetual which I bought last week and sold on the early pop of $3-4/share this morning. I expect to repurchase at lower levels.

Articles of Note

There are a few articles of note worth reading.

Reuters published a story on a bail out for mortgage servicers.

Supposed billionaire Tilman Fertitta is offering 15% for a term loan. You can be sure that this is going to be a common theme in the months ahead–we all know how leveraged these companies have been–and any disruption would cause problems–certainly the mother of all disruptions will bankrupt many.

Back to Nibbling

The sharp rise in equities seems to be pretty premature–but markets do what they do and if investors think the pain of Covid 19 will be gone in 3 months they are going to be buyers now.

Unfortunately the pain is just beginning and will likely be with us for the next year-maybe more. Certainly some sectors will be living with the financial repercussions for years.

Many preferreds and baby bonds had big moves yesterday and so I will do some buying today–I am 55% invested and will add 5% more today. The 55% I have invested are almost all investment grade utility and CEF preferred bought at nice discounts–now I will spread out into some junkier issues.

Here is some of my shopping list for today.

I am looking at buying one of the Annaly Capital (NLY) preferred issues giving current yields in the 10% area.

I am going to buy some Brookfield Property REIT (BPYUP) preferreds – BPYUP with a current yield in the 12.49% area.

I will add some more of the American Homes 4 Rent (AMH) issues–in the 6.75% current yield area.

I am buying some Compass Diversified (CODI) preferred with current yields in the 11.41% area.

I have already been trying to place some orders and the spreads are so wide as to be ridiculous–but I am certain by days end I will have bought some of the issues mentioned above–if not all of them.

Hersha Hospitality Makes Moves

Lodging REIT Hersha Hospitality (HT), which wisely suspended their common and preferred dividends last month, has announced further moves to strengthen their financials.

The company drew down an extra $100 million on their revolver. Additionally, and importantly, they negotiated waivers on their debt covenants for the next year.

These are very wise moves and give me confidence they can be a survivor.

The company press release is here.

Monday Morning Kickoff

Last week opened with the SP500 at 2558 and hit a high of 2641 before closing the week at 2488–around a 3% loss on the week.

The 10 year treasury traded in a range of .57% to .72% before closing the week at .59%.

The Fed Balance sheet grew by $600 billion last week–a 3 week total of $1.5 trillion to a new highest balance ever of $5.8 trillion. The printing presses are running as fast as they can run.

The average $25 issue of preferred stock and baby bonds fell by about $1.50/share last week to $18.90.

Banking issues were exactly flat last week at $22.89. mREIT issues were hammered much lower–by $5.50 per share and this remains a very dangerous sector. CEF, Utility and investment grade issues were all lower, but only by 1-2%.

So we are kicking off the week with strong futures markets–in my opinion too strong (but maybe I’m wrong) and I know that I won’t be buying today–as shown by last weeks action in preferreds and baby bonds it remains ‘early in the game’. While it is so tempting to start to pick up shares investors have to be very careful to not get carried away and instead to ‘leg in’ to positions.

I am about 55% invested so I remain with high levels of dry powder–most of my holdings are utility and CEF preferreds and baby bonds bought at lower levels–this is where I prefer to be now–but I am chomping at the bit to buy some lodging and housing REIT issues, but it is too early for these segments. I am trying to be patient.

Here We Go–Another Week–Worried??

FUTURES TRADING BEGINS IN 10 MINUTES AND WHETHER SHARES MOVE HIGHER OR LOWER I WILL BE DOING NO BUYING.

Off and on all weekend I have been pulling up 10K’s and 10Q’s to look at balance sheets–I always look a the balance sheet 1st–then I review the income statements.

Honestly when the company has massive debt relative to equity I don’t even have to look at the income statement.

After fishing around I think it is fair to say I will do no buying this week. I have looked at many, many REITs and by their very nature they have total crap balance sheets for the most part–that’s what happens when you have little of no GAAP net income, but you continue to pay out 75% or 100% of your funds from operations (FFO)–never building up a stash of cash for emergencies.

A couple notes from my research. Lodging REITs where I will do some buying (someday) have drawn down their revolvers where they can–of course some are likely maxed out already and no one is going to extend credit. For the more solid issues they have built giant ‘war chests’.

Pebble Brook Hotels (PEB) has drawn down their revolver and now they have a giant war chest–now at $740 million after drawing down $643 million on their revolver.

RLJ Lodging (RLJ) drew down part of their revolver and now has a massive $1.2 billion in the till.

Sunstone Hotels (SHO) drew down $300 million of their revolver–they have a very solid balance sheet.

Summit Hotels (INN) drew down $125 million on their revolver.

RLJ and PEB have reduced common payouts to 1 cent/shares INN will suspend their common dividend.

Little word out of Ashford Hotels (AHT) and Braemar (BHR) except they both declared their preferred dividend payments with payment on 4/15. Fools–these 2 companies have cash for a quarter or two—I think these 2 will end up being bankruptcy candidates before this is over. At least they both suspended their common payments.

We have some strong lodging companies and a number of them that will not be with us next year at this time–the key is to separate the wheat from the chaff and use extreme patience.

A Weekend Ahead. What Will Next Week Bring?

It is always dicey to try to guess what the weekend ahead–and then the next trading week will bring us, but I always try–usually unsuccessfully.

Markets are pretty calm today–of course the employment report was bad, but everyone knew it would be and it will pale when it is compared with what is to come next month.

Logic would seem to tell one that the equity markets will sell off this afternoon, but that may be completely wrong–maybe they will skyrocket late in the day–maybe they will close unchanged since no one knows anything at all.

Markets have moved higher on days when they expected bailout bills to be passed–but then they settle back when reality sets in. There is always a lot of loose talk on how fast money will be sent from bailouts and unemployment–then reality sets in–well maybe a few folks will get something fast, but 75% of the folks will be waiting weeks if not months.

In Minnesota the director of employment services popped off a number of times about how many unemployment claims they were processing. Well the fact of the matter is only 15% of the claims were being processed while the other 85% couldn’t be processed because the state didn’t have data on the applicants (i.e. incomes). Honestly the system is a train wreck—of course I would expect a system under this much stress to break—but don’t BS the people how great things are going.

Today I see that many of the mREIT preferreds have been taken out and beaten. 1st they dropped like a rock a few weeks ago–then many of them bounced and then today they are being beaten. Of course I thought I was smart buying a part position in New Residential Investment perpetual (NRZ-B) at a low price–NOT–cheap gets cheaper–the lesson is simply patience.

I did take a modest sized position in Proshares Ultrashort SP500 (SDS) late Wednesday which is easing the pain from yesterday and today. I don’t want to get carried away with this position as shares can pivot quick and hammer you hard.

At this point I think that using bunches of patience will pay off–there will be lots of time to buy at low prices and this economic damage will be with us for a long while–and shares are not likely to head higher until we can have more definition on the total damage.

I’m Not Tempted by This Rally

There is no reason to have stocks up today–or any day really, as we have no new news and the economic damage being done is way beyond anything priced into equity markets.

I am aware of the rumored oil production cuts in Saudi Arabia and Russia–and all I can say is that this is pure BS. Maybe they cut a little–but no way they are cutting 10-15 million barrels a day–to help the U.S.? Not a chance.

Finally I did start to hear a little realism out of a airline analyst today–air travel won’t recover for at least 18-24 months (he said). I agree–and furthermore there are bunches of industries and sectors that will experience waves of bankruptcies–no printing press is big enough to bail out everyone forever.

Beyond various sectors going BK the U.S. consumer is going to be hindered for a couple years. When a huge segment of the population has no cash reserves for hard times they are going to max out their credit cards, default on their mortgages, and return their new trucks to lenders in giant numbers–to think they will have any money available to restart the economy is pure fantasy.

Sorry for the negative vibes today–I keep looking for the good news—any good news—to think we may be at a buying time–but it evades me. I am just too damned logical. Maybe I should just go illogical and declare a ‘bottom’ to the strife–but I don’t want to join those in the soup line so it isn’t going to happen.

Oh well–I wait–wait for some good news–treatments, peaking in NY, a vaccine–I could be waiting awhile.