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Closing Out a Wild Year

Well markets are quiet today–as expected as everyone takes a holiday for the next 3-4 days.

After this year, who isn’t looking for a ‘fresh start’? But we all know that there are high odds that 2021 will hold just as much uncertainty as was presented in 2020.

The 10 year treasury will close the year out around .92%–never making the assault on 1% in a strong fashion the last few weeks–but I think it is coming–I only wish I knew when. I hear all the ‘smart people’ saying it will close 2021 in the 1.50%-2% area, but I know better than to make such silly predictions as no one knows what will happen. With the FED essentially being part of the MMT (modern monetary theory) camp we are heading down paths that have never been explored—well I shouldn’t say never–there was Germany in the 1920’s when Germany hired all the printers in the country to print money. Of course we don’t need ‘printers’–we have computers and a few key strokes will get us a trillion dollars.

So as we go into 2021 the country is laden with ‘zombie’ companies–airlines, the cruise industry, hospitality and lodging–kept alive only by printing helicopter money and spreading it far and wide. Long term most will not be helped by this money–most ‘zombies’ are piling debt on top of debt–I see lodging REIT Ashford Hospitality (AHT) has borrowed $200 million (with options for more) from Oaktree Capital–at the bargain rate of 16%–exactly how this helps a company that was darned near insolvent before the pandemic I will never know–but ‘Wall Street’ has always been able to spin a good yarn.

So we can see as we enter 2021 most anything is possible—cheap or free money cures all your ailments.

Back on a more personal note–investing was difficult in 2020, but I am happy with the 4%ish I earned during the year. Too much cash most of the time, but December ended up being an excellent month and for this I am thankful.

I can’t help but think of the nervous nellies that bought high and sold low. The folks that entered the pandemic fully invested and when the market tumble occurred they sold out at the bottom. It happens every time we have a sharp drop in share prices–unfortunately many times it is those that can least afford it that sell at the bottoms. These folks now have all the money in money markets at .023% interest (I have a little dab still in the Gabelli money market and noticed today I got a 24 cent payment).

It is tough to fight the FED so for 2021 I will be starting off going with the flow–the FED will try damned hard to juice markets every time there is a tiny setback so I have to go with them until they stop. I will without doubt have dry powder, because I am pretty darned certain buying opportunities will occur multiple times during the year–and I will be there.

Alta Equipment Group Sells Preferred Issue-Corrected

Corrected—I had the 1st call date wrong and now have corrected it. Also 2whiteroses mentioned this issue on 12/17/2020 which I missed–Bob in Thailand mentioned it last night which I saw–credit where credit is due.

Alta Equipment Group (ALTG) has sold a new cumulative preferred issue with a high yield coupon of 10%.

Please note that this one flew under the radar until Bob in Thailand noted it yesterday–actual issuance was on 12/18/2020. I can find no trading on the issue yet (although maybe you can).

They have sold 1.192 million $25 shares with an over allotment available of 10,000 shares.

The company sells construction equipment (primarily) and had revenue of near $600 million through the 1st 9 months of the year with a loss of around $20 million during this time.

I an not familiar with this company and I would encourage all to do some deep due diligence before any purchase.

The pricing term sheet is here.

The final prospectus can be read here.

Another Mid Quality Preferred Purchase

I continue to add mid level quality preferreds to our portfolios–some might say low quality for some of the issues–it is starting to feel like the ‘olden days’ after tending toward higher quality issues for the last 9 months. I will continue to hold plenty of dry powder–around 20 to 25%.

Today I added a 1/2 position in the Gladstone Commercial (GOOD) 6.625% monthly paying, cumulative, perpetual preferred (GOODN)

Gladstone Commercial is a triple net lease REIT focused office and industrial properties. I am not impressed by their financials, but they do cover their $1.50/share common stock dividend, which gives a nice level to safety for preferred shares. They have collected 99% of their lease payments in the most recent months–but personally one has to wonder about the future with ‘work from home’ likely to cut into office demand to some level.

The companies most recent earnings release can be read here.

These preferred shares trade up last month–a bunch, but now are back down to earth–seems like a good time to put a few shares in the portfolio.

Just a note that the REIT has a 7% issue outstanding (GOODM) as well which is trading at the same level as the 6.625% issue . An investor could well purchase this issue, but it has call protection only until 5/21 so the holding could be short term if bought–but either if fine.

Monday Morning Kickoff

Well we are going from one holiday week to the next–last week was relatively uneventful—suspect we may see more of the same, but one never knows what surprises may be in store for us.

Last week the S&P500 traded in a range of 3636 to 3711 before closing the week at 3703—a gain of only 6 s&P points on the week.

The 10 year treasury moved in a range of .9% to .97% closing the week at .96%. I am awaiting an assault on the 1% mark–but I think as long as we get the assault a few basis points at a time little market damage will be done–if we get a 1/8% (12.5 basis points) point move in a day we could have a rush to the exits in income issues (although probably short lived).

Last week the Federal Reserve balance sheet remained flat–since the numbers weren’t released because of the holiday–they will be released on Monday.

The average $25/share baby bond and preferred stock moved slightly higher by 5 cents. Investment grade moved higher by 14 cents. Banks, insurance and closed end fund issues moved lower by 4 cents.

Last week we had no new income issues priced–not unusual for a holiday shortened week.

Quick, Cautionary Note on Customers Bancorp Preferreds

Smaller bancorp Customer Bancorp (CUBI) has 4 fixed-to-floating rate preferreds outstanding of which 1 issue is currently floating–the 7% CUBI-C is floating.

The other 3 issues all become floating in 2021 and based upon the current yield of the 7% issue it looks like all of the 3 issues are trading 3% to 7% too high and holders can expect to have no return during 2021 if held too long.

CUBI-D has just one more dividend at 6.50% before it begins to float in March. This issue should trade around $24 and currently trades at $24.74–current yield is 6.58%, but this will need to adjust to the 5.3% area–so look for it to drift lower over 3 months–or maybe take one quick plunge.

Anyone holding the D issue should consider moving to the C issue. The other 2 issues will drift lower as well over time.

Capital Southwest to Call Baby Bonds

BDC Capital Southwest (CSWC) will be calling their 5.95% Notes due 2022 (CSWCL).

The company had called 800,000 shares on 9/29/2020 and they will be calling the balance (about 1.485 million shares) on 1/21/2021 for $25 plus accrued interest.

This is another case of a good issue falling to the proceeds of a 4.50% $1,000 note issue.

No loss will be taken on the call as shares are trading at today at $25.10.

Even a Blind Monkey Can Earn a Good Return

For years (going back to at least 2013) I have posted model portfolios simply to see what happens to various quality portfolios of income securities over long periods of time–by long periods of time I mean 5 or 10 years.

I started the initial portfolios back in 2013 (I think) and kept tracks of a number of them until 2 years ago and then lost track of them as they were part of the original ‘Yield Hunter’ website which was sold about 5 years ago.

I always set these up to be ‘held’ – not traded – really ‘buy and hold’. I really wanted to see the results from portfolios that were held through thick and thin–through the big ups and downs. I know I had an ‘investment grade’ portfolio, another was ‘short duration’ and I think another was ‘high yield’.

So with the Innovative Income Investor I did the same–set up a couple of portfolios. 1 is ‘High Yield‘ which is all preferreds and baby bonds. I chose issues that at the time of initiation were high yield issues I would be comfortable holding–and in fact I did hold many of them at various times.

The issues in the High Yield Model were mREITs, many energy related issues (midstream, shipping, LNG etc) and some financial issues (BDCs, asset managers etc).

The model can be seen here.

On the portfolio page I make short notes to look at as time goes by. I see the original goal on 1/25/2018 for the annual return was 8.25% and then I see on 9/30/2019 I lowered the goal to a more realistic goal of 7.50% given the direction of interest rates.

On 3/19/2020 I wrote that the model was down 43% earlier in the week. and on 8/20/20 I wrote that the model was up 7.75% since inception.

Currently–just adding in recent dividends the model is up 18.83% with a month to go until the 3rd anniversary–so let’s say the model is likely to end around 19.50% for the 1st 3 years–an average of 6.5%/year.

And that is how a blind monkey earns a pretty good return without babysitting their pretty junky portfolio.

PS–no blind monkeys were actually used for this model–nor were any monkeys with sight.

Monday Morning Kickoff

Last week was a relatively quiet week in equity markets as Covid 19 vaccine began to be distributed and of course problems to be discovered–no one who has lived over 40 years could have believed it would come off without some difficulties. But thus far markets have digested news readily and I suspect that will mostly continue.

The S&P500 traded in a range of 3646 to3727 and closed the week at 3709 which is a gain of just over 1% on the week.

The 10 year treasury traded in a range of .89% to .95% and closed the week at .95% which is 5 basis points higher than the week before. With the Covid stimulus package finally on the verge of approval by congress will the package help put the 10 year treasury over 1%? With stock futures trading sharply lower this morning no challenge of 1% is likely today.

The Federal Reserve balance sheet exploded higher last week as the Fed bought huge amounts of mortgage securities and when added to a healthy dose of treasury purchases the balance sheet assets grew by $120 billion in the last week.

The average $25 preferred stock and baby bond rose last week 23 cents/share. Investment grade spiked higher by 27 cents , bank issue by 19 cents while the only loser was CEF preferreds which fell 14 cents/chare–mostly because of ex dividend dates.

Last week we had 2 new income issues price.

Annuity company Athene Holdings LTD (ATH) priced a new issue of non cumulative preferred stock. The issue priced at 4.875%. The issue is trading on the OTC grey market under ticker ATHDF and closed last Friday at $25.08.

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Triple net lease REIT American Finance Trust (AFIN) priced a cumulative preferred with a coupon of 7.375%. The issue is trading under OTC grey market ticker of AFINO (same as the permanent ticker) and closed Friday at $24.69.

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Started Adding Gladstone Land Preferred

This past week I added about a 1/2 position in the perpetual preferred issue from REIT Gladstone Land (LAND).

Gladstone Land 6% perpetual preferred (LANDO) differs from almost all other income issues that the various Gladstone companies have sold in the past in that it is a pure perpetual. Typically they have sold either ‘term’ preferreds (preferred with firm redemption dates) or they have sold short maturity baby bonds. To date only Gladstone Commercial (GOOD), another REIT, has used perpetual preferreds.

This issue was originally sold starting in 1/2018 by Gladstone Land in an continuous untraded offering, which was completed in 10/2020 at which time the shares were listed for exchange trading.

Now trading at $24.82 the issue provides up a current yield of just over 6%.

Net income of Gladstone Land is not impressive, but being a REIT we can focus on funds from operations (FFO) which is relatively solid.

We had held the term preferred LANDP which carries a 6.375% coupon but has a mandatory redemption date on 9/30/2021 which gives it a current yield of 6.06%–but a terrible yield to worst of around -5%. Trading at $26.30 right now, even if held to maturity, an investor can only look forward to earning 30 cents in the next 9.5 months. We have sold all of our LANDP.

Lastly we always like the monthly dividend payments that Gladstone companies tend to pay–I always say–“better in my pocket than their pocket”