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A Little Risk for a 10% Reward

Never stopping in the search for a little extra yield without extraordinary high risk I stumbled across an old friend ( a security I held previously for some amount of time) that may well be worth a minor position in a portfolio generally characterized by conservative holdings.

I have been looking at the 6.50% $25 Senior Notes of REIT Ready Capital (RC) which trades under ticker RCP. This issue was originally issued by Sutherland Asset Management which was the company’s previous name.

These senior notes have been callable since 4/29/2019 and offered a early call bonus of 1% (callable at 101% of $25) until 4/30/2020–after which it is callable under more normal terms – $25 plus accrued interest.

The baby bonds closed at $24.13 today (Wednesday) and have been trading perfectly flat at this level for over 1 month.

Now the interesting part of this baby bond is that it will reach maturity on 4/30/21–about 10 1/2 months from now. The bond goes ex-dividend (interest) next Monday 7/12 (for a 7/31 payment) which means that an investor could garner 4 interest payments prior to maturity and additionally if bought at $24.13 there will be a capital gain of 87 cents. This means a gain of 10.3% is possible if held to maturity in 10.5 months.

Now as you might expect with the potential 10.3% return you will be taking more risk than a security with potential for a 5% return–that is what this game is all about–risk/reward.

Ready Capital is a mREIT and the lions share of the loans they make are in the small and medium sized commercial marketplace–honestly in the current environment this is a ‘dicey’ part of the market. RC is a company of $5.3 billion in assets with shareholder equity of $775 million. The company announced a loss of $50.4 million on the most recent quarterly earnings compared to profit of $29.4 million a year ago. It would not surprise me a bit if the company reported substantial losses for the next 2-3 (or more) quarters as the commercial end of the mortgage will be very messy as this recession unfolds.

The company recently cut their common dividend from 40 cents/share to 25 cents/share and may well cut again–or even suspend it.

We can’t recommend this security since every single reader has different needs–different risk tolerances–but I personally will get at least a starter position with consideration to adding in the future as economic conditions unfold.

For those wanting a position in these shares make sure to go through the SEC 10-Q below which provides data not only on the companies financials, but gives explanations about which segments of the marketplace the company operates in.

The latest 10-Q for the quarter ending 3/31/2020 can be read here.

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