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Always Waiting it Seems

Once again we are awaiting inflation news on Friday with the personal consumption index (PCE) being released. Let’s face it – whether the number is hot or cold there is no rate cut coming soon–nor will there be a rate increase so ‘get on with it’.

I started looking at mREIT preferreds the last couple of days–honestly I haven’t owned an mREIT preferred for at least 5 years if not longer. I think it is time for a little bit of a nibble in this sector–just a little bit. I thought I would just add to current positions, but what the heck–a small nibble to be used as a furthering of my ‘education’ can’t be overly harmful. mREIT preferreds provide a ‘target rich’ environment with lots of fixed to floating rate issues now ‘floating’. An investor has a large selection of current yields–8% to 11% and many of these issues are trading UNDER $25–meaning there is further upside (YTM) if an issue is redeemed. We’ll see–I will buy a small nibble of one of these issues before the week is finished.

Yesterday was a bit of a green day in our accounts–not hugely green, but green nonetheless. The DJIA and S&P500 are up in premarket trading this morning–not much, but I am hoping for a quiet day today and through the week until Friday (PCE day). Interest rates remain tame–4.61% right now–just like equities quiet is good. It is interesting that there are virtually no Fed ‘yakkers’ this week–maybe they figure they have jerked markets around enough.

47 thoughts on “Always Waiting it Seems”

  1. Tim
    I don’t trust most SA authors but one good one is Colorado Wealth Mgmt Fund – who focuses mainly on Mreits. If you read him enough, you will know to generally avoid mReit common and stick to the preferreds. And that AGNC, NLY and DX are in his opinion the safest in the mReit universe.

    I myself used to hold a number of different mReit preferreds but these days the ones I hold are just from AGNC, NLY, DX and CIM

    That is where I would be looking for any new mReit preferred purchases as their higher safety has value to me

      1. You are conflating agency reits vs a servicer and originator reit as well as his opinion on what he may currently view as the better buy based on price

        I was simply pointing out what he views as the safest mReits. Unless you have and I missed his latest safety rating on RITM, the top three in terms of safety rating have remained AGNC, NLY and DX

      2. CWM update, AGNC not on his favorite list:
        “I tell readers frequently how much I’m not excited about AGNC Investment Corp (AGNC). I’ll do it again. That dividend yield looks great, but core EPS is propped up by old swaps lowering the cost of funds. Further, AGNC has been able to issue equity and invest it in new MBS at higher yields.

        That may seem great, but isn’t a sustainable path to generating wealth.

        As a rule of thumb, those dividend yields in mid teens are usually going with a share price that will decline over time. It has ups and downs, but you should expect more downs than ups.

    1. Thanks Maverick—yes I do follow him and will do some due diligence including him in the mix.

  2. If trading near par works for you (not much appreciation), consider NLY-NRG that is already callable and floating since Mar 2023. Currently yields a bit over 10%.

    It was trading bit below par many times last month or so…

  3. Hi Tim –
    Happy to provide some ideas. Do you have any preferences in terms of the following?

    fixed or float
    bond vs pref
    time to call

    1. I will guess Maine will not be picking SACH 😉

      I have been digging more into SACH myself. I have not put a position on, however, at 12/31 they were getting close to the 150% Total Assets/Debt ratio. I calculated it at 168%. There are two upcoming debt (baby bond) maturities on in June and one in December. This is well observed by Maine.
      Lots of moving parts here.

      What is interesting is that they have a line of credit with Needham which requires quarterly reporting and monthly disclosures about their mortgage book. As has been discussed on this board – their mortgage book is deteriorating.

      A question is what happens of they drop below the 150% threashold. Will they start to delay filings and negotiate with Needham?

      If I were to put a position on it would be from the short side and in the common, and I am interested in how ABR and RWT report this quarter.


      1. I own SCCC, SCCF, SACC, SCCG.
        IF a lot of ridiculous and full of debts companies can refinance THEN (and for sure) also SACH can refinance.

        1. Hi Peppino – certainly did not say or imply that SACH could not or would not be able to refinance. My question was a hypothetical scenario asking what will happen if Total Assets/Debt ratio falls below 150%. At year end 2023 it was at 168% so such an event is certainly something that any investor should consider.

          Let us hope that SACH never gets to this point and that your investments all return par and pay all of their interest and dividend payments.

          1. August – they will likely keep pumping out equity and prefs until they can’t.

            As a SACH skeptic, I would even consider their baby bonds at the right price.

            That’s the sadistic aspect of being a MREIT pref/ bond investor. You usually win at the expense of diluted common shareholders.

            The historical performance for MREIT pref / bonds is actually pretty good, especially for tactical investors…Common, not so much.

            1. Hi Maine – understood. Unlinke many mREITS, in the case of SACH the math is pretty simple. Summarizing from the 10K balance sheet:

              Total Assets = $625.5M, Total Debt = $371.6M, Ratio = 1.68%

              Of the assets $491.7 M are mortgage receivables. All else being equal a 15% impairment to the mortgages of $73.6M would bring the Ratio to 1.48%.

              Your point is that they could plug such a hole by issuing equity, and that is clearly the case. This is a $154M market cap company, however, so they would have to issue about half of their current market cap in new equity in this scanario. But the point that they will issue equity to plug holes in the balance sheet makes a lot of sense.

              I am not predicting a scenario where the mortgages are impaired by 15% at all. So far they have taken ~7M in CECL reserves, so a 15% ($73M impairment) would be 10X their reserves taken to date. Clearly management does not expect this scenario and either would I. However, we do know that credit quality is deteriorating in multi-family, BPL and office CRE loans. The direction of interest rates makes credit quality deteriorate at a faster rate.if So some further impariment(s) do seem likely.

              Your comment about the bonds reminds me of the saying “there are no bad bonds only bad prices” I certainly agree that at the right price the near in bonds Baby Bonds would make a lot of sense. Let’s take a look at that using the mortgages and the debt:

              Let’s assume a that the mortgage book is impaired by 20% (again not predicted, just a conservative assumption). This would bring the mortgages receivable to $393.4M. Sr Debt that is secured by the mortgage book is the repo line and the Neeham term loan. These total $88.3M.

              $393.4M – $88.3M = $305.1M. The $282M par value in baby bonds outstanding would appear to be covered in this scenario as well.

              None of this is particularly positive for the common, however. It is hard to impagine a scenario where the common does not continue to get diluted with ATM offerings below book value. Which, I think, is your point.

      2. RWT is a local Marin co. company. I would be interested too August, if only to get a feel for what is happening in the North bay. Not really interested in owning. As people have noted, going by the amount of traffic on the roads and the people in the stores it would seem the economy is humming along.

        1. Hey Charles – we will see what they report next week. I am down in Orange County.

  4. In the Mreit category you might also consider the common. For example ABR, currently yielding 14% and a long history of increasing dividends… Most of their loans are floating and they have positive net interest income overall. I also like PMT which is closer to 12%. The tax structure is also efficient.

      1. Tim, maybe I should do a lot of things. But instead, I do what I do. There are certain areas of market (ok 95% of it I admit) you cant beat me hard enough to change my mind. I accept for me investing is part emotional, it just is. If I buy something and it goes down, I want to be able to say, “great I get to buy more at a better price”. I dont want to buy something that goes down and then say, “Why in the $#!% #$%! did I buy that %$#!! in the first place.

      1. Thank you for the comment. I sold my ABR F because 18% YTC seems more risk than I want right now. I do note that the research piece was written by short sellers?

      2. You need to investigate Viceroy before you start believing what you’re reading, they have been sued and lost cases involving their statements. They have other questionable involvement and hide behind who they even are.

      3. Kid, thanks for the info, which I was unaware of and why I love this site. FWIW I am still reading the whole report… look anything in the 14% camp is high risk and should weighted accordingly in the portfolio.

        With that said some counter points to consider.

        #1 I wouldn’t want to be short ABR with the size of that dividend and current margin rates for very long…
        #2If single family is now all but unaffordable more people will be renting which should help the fundamentals of multifamily.
        3# if most of these loans were issued circa 2020 collateral values must have increased 40% of so along with inflation. Rents and therefore NOI must also be going up albeit more slowly which should at least help offset increases on the cost side like interest, maintenance and insurance.
        #4 These guys are a public company, and their auditors being well aware of this report would be applying additional scrutiny to loan loss reserves…

      4. The Viceroy material is interesting.

        They (and others – Ninja – I think it was called) have been promoting this story for well over a year now. The think is that these outfits are looking into data for the various CLOs that everybody else also has access too – they have no special knowledge here. Viceroy and others have been very vocal about their line of thinking.

        So why hasn’t the idea worked? At least my assessment is that it has not worked.

        The problem is that all of this information is well known at this point and yet the common still trades at a premium to GAAP book value and ABR have raised the dividend since they started these supposed “short reports”. So either Viceroy or the market is wrong at this point to my way of thinking.

        It makes me wonder a couple of things –
        a)Is Viceroy actually short the stock – or are they being funded by somebody that is? My guess is that it is the latter.
        b)What about their other calls? Well there is not that many of them… but they are vocal about MPW. I am familiar with this story and I know that Viceroy were not first the party – lots of funds have been short this stock. I also know Hexagon professionally. I know it is not perfect and I wuld not invest in Hexagon, but I don’t see how Viceroy would have cleaned up on this call either.

        At some point during Q4 I came to the conclusion that ABR has been tested by these “short sellers” and they have managed to pass the test. I noted that the ABR D series had good value at that time I had some notes maturing, ABR preferred fit into the risk profile I was looking for, so I put on 1/2 a position at $18.00. I am willing to double it if it makes sense to do so.

        I am considering funding an addition to my position in ABR D by shorting SACH.

        I just think that these CLO structures are very complex and ABR also has an agency business as well Viceroy et al tend to ignore that. Mortgages are highly complex and non agency bridge loans on multi family buildings packaged into CLOs are even more complex. I have come to the conclusion that the market and ABR managment simply understand this situation far better than Viceroy does.

        Back in March 2023, when this all first surfaced, I gave these reports more credit. But there has been a lot of water over the bridge since the first Ninja report and I don’t think this has gone the way it was predicted.

        Of course, I could be wrong in this assessment. I will pay careful attention to the earnings report and the 10Q

    1. Dan – Last I checked, ABR was trading above book, which is rare for a credit mREIT. Does it still trade at a premium, and why over pay when all the other common credit mreits trade for discounts?

      1. They trade at a premium mostly because they finance multi family and have an exceptional management with heavy ownership in the stock. I believe they are highly regarded by those who understand their business model, as I do. Obviously you can tell I own it and have for many years and been a great source of income .

    2. If rates were being lowered… ABR could be an investment. Just listen to the last earnings call. It is good that they admit that it is going to be challenging time and they are experiencing delinquencies. Until rates are lowered, it is probably not wise to invest new money at this time.

    3. Another the purest multifamily MREIT: LFT
      Sells .67 of book. Yield close to 12%.
      Last quarter all loans were performing.

      1. 287 – Did you really mean Lument Finance Trust, Inc. (LFT)?

        Externally managed mREIT – but seems to be focused on CRE (?)
        QOL says
        “Lument Finance Trust, Inc. operates as a real estate investment finance company, which engages in investing, financing, and managing a portfolio of commercial real estate (CRE) debt investments. It primarily invests in transitional floating rate commercial mortgage and other CRE-related investments such as preferred equity, commercial mortgage-backed securities, mezzanine, fixed rate, and construction loans and, other CRE debt instruments.”

          1. From Berksire Hathaway Real-estate…

            “Multi-family dwellings are typically considered commercial real estate, so working with an experienced commercial agent is a great way to get to know what’s available in your area.”

            1. For mortgage purposes, 4 units and above is considered to be multifamily and requires commercial mortgages typically. 3 units and below can be done with more conventional financing. Multifamily can be defined differently in other arenas.

              This has been my experience anyway.

      2. I only invest in the preferreds of mREITs. Been burned a couple of times by the common, even though I thought I’d entered at a good price. Once read an article explaining why mREIT common is riskier than it seems. Had something to do with them giving such a large yield while being highly leveraged. Pull up the long term chart of most any mREIT common, and decide for yourself.

      1. Citadel – think Gary is referring to the move post earnings, not just today.

        BTW, have you heard whether Sachem is in the market for a new baby bond?

        1. Maine – Are they in the market for a new baby bond or was that a rhetorical comment?

        2. Interestingly, SACH Needam secured Sr Term Loan has an interest rate of prime -.25% or 8.25%. Given that and MFA notes coupon, SACH would seem to require a coupon north of 10% on 5 year notes if they can get it.

          1. Hey August. No, I was genuinely asking. My guess is that they have tried to issue a new bond but don’t like the terms. Yes, that Needham line is their last source of financing. It’s expensive and more restrictive then the baby bonds. This is a classic asset / liability mismatch. Luckily for the bond holders, they are serial issuers of the common and preferred… of course, issuing below book and par is costly over time and the most likely outcome is further dividend reductions.

            at the end of the day, I am guessing they issue a bond soon, even if it’s 10%… better than the alternatives.

            1. Maine – In reading the 10K, noted that last year SACH financed the common dividend with common stock issuance.

              Looking at the Cash Flow statement
              Cash inflow from issuance of common equity $20.45M
              Cash outflow from dividends on common equity $21.93M

              So yes they are selling stock below book value and paying dividends with it.
              Shareholders don’t seem to care, in fact they seem to like it for some reason.

              I still have no position in the name and am waiting for RWT and ABR to report. The CIM call might be interesting as well. RWT call is next week. CIM is 5/9 and ABR is 5/3 (next week as well). Looking for credit peformance information on these calls.

              1. Hi August – every day that passes with no bond issuance is an ominous sign. Sach is playing a dangerous game with shorter term debt and less liquid assets. At least with RWT, they have very good partners with the Canadian pension fund and OAKTREE. They have been able to issue new debt and prefs recently, albeit costly.

                CIM has some issues but I can see light at the end of the tunnel. I think CIM-C has some value here in the 20’s.

                SACH, on the other hand, is a small hard $ lender that has strayed far from its original investment strategy, raised tons of debt and high cost equity, and will now have to pay the piper. Compare this to their peer, LOAN. LOAN has continued to keep it simple by sticking to hard $ lending and very little debt. SACH has ventured into other states far away, CRE development and lending, venture capital investing, SPACs, and investing in prefs with spare cash. And oh, every single high level executive has left (except for
                remaining CEO/CFO) with no reasonable explanation provided.

                SACH is an anomaly for MREITs with over 50% of their financing coming from these shorter maturity baby bonds. They pumped them out when rates were low and demand was high from the retail flock. Well, now these notes are coming due. Can villano pull it off? Absolutely.. Herbalife lasted for many many years. We shall see… but this could absolutely turn into an mREIT gone bad!


                1. I keep a microscopic allocation to RWT – A and may add to it. I agree on the patnerships, but I would note that RWT do have some VC like activities as well. I recall they were highlighting blockchain research at some point. I don’t mind it, but don’t love it. For RWT things like Goodwill, intangibles and “other investments” total $395M which is a much smaller % of total assets than SACH partnerships.

                  SACH has various partnerships on their BS “valued” at $43M. I have been thinking these the same way I view goodwill. I could be wrong, but I would doubt they would see an impairment until the next 10K (April 2025…) A lot of other things could happen before then.

                  We have discussed the Sr management issues at SACH in the past as well. The one that troubles me is the fact that CEO is also Chairman *and* CFO. I view this as a major governance issue which one should not overlook.

                  I noted that there was an acquisition of a construction related firm. From reading, this was billed as highly synergistic at the time. I would give them the benefit of the doubt on this, but I generally do not like horizontal acquisistions. I certainly wonder why the CFO of that acquired company could not be CFO of SACH… A single person occupying that role and signing off on finanicals is a problem particularly in a time of predictable deterioration in the core assets.

                  I will take a look at LOAN more closely, but didn’t include it before as it does not have the preferred/baby bond capital structure that other mREITS have. Interestingly enough – LOAN has a Total Assets/Debt ratio of 246%. Different from SACH at 168%.

                    1. At a high level I like Bank Loans (I like variable rates) , Residential Mortgages (industry restructing and high rates) and Oil & Gas (dividend policy & inflation hedge).

                      For Bank Loans I like keep an open ended T Rowe price fund and ECCC and OXLCN term preferred. I put all these on when the tightening cycle started and continue to add to them from time to time.

                      For Mortgages I have been in and out of NLY since the Mike Farrell days. Most recently purchased F & G in 2022. These 2 together are an outsized postion. This is not Mike’s NLY as it now takes on credit risk, but I am still happy with the F&G. I have a small additional position in ARB-D and RWT-A. I plan to expand one of these and kill the other after this quarter earnings reports. I hold these in a tax deferred account but expect to short SACH common in a taxable account as a partial hedge. I also hold agency 5.5% and 6.0% coupon MBS. I don’t intend to add to MBS until we see a sub-par value 6.5% issue which might be on its way they currently trade 101 handle at least last I looked.

                      For oil and gas I like dividend paying common stock in US E&P firms with large exposure to the Permian Basin as well as XOM. Having said that, most of my Permian plays got bought out during the recent merger wave, but I still have a couple (FANG and PR). I certainly expect to reset allocation in this space when WTI corrects to the downside again. I also have ET and EPD common units (this is over sized postion). The latter is a tax advantaged inflation hedge in two companies that I like a lot.

                      Most of my other fixed income is in a 5 IG year ladder, which I review quarterly looking for opportunities. This ladder has mostly of Agencies, TBTF banks, CDs, Pipelines and Property REITs with some industrials.

                      I generally don’t like long dated fixed coupon bonds or fixed coupon perpectuals as I have a very negative outlook for long term interest rates. Short term, I still think they are going to loosen in 2024 call me crazy, I just don’t seem them risking a Biden loss just becasue of fear of inflation.

                      What are your thoughts?

                    2. Hey August. Sorry for the late reply!

                      My portfolios are scattered. Some of it has to do with taxes and the other part is simply a reflection of being able to lock in high yields/returns and not worrying if their is MtM risk as I know I will get the income / pull to par.

                      With that said, here are some of my scattered positions:

                      1) some longer term muni bonds. I esp like the names with YTW of 4% (with call 5 years out) but YTM of 5%… i.e. some protection if rates increase a lot.
                      2) medium term corp and baby bonds of either REITs or BDCs. this includes bodns from BBDC, MAIN, and VNO
                      3) some longer term bonds mentioned on this board, including the LNC floater and SJIJ 2031.
                      4) new purchases have included the REIT prefs which have sold off including: REGCP, SITC-A, BFS issues, REXR-B
                      5) lots of mREIT prefs, all at $24 or below. I don’t like the negative convexity associated with the names near $25. My thesis is these gravitate closer to par as their balance sheets heal. I have too many to list and the list changes day by day based on rel value.
                      6) Slowly selling off the Eversource (CNL) prefs as rates rise and other names offer better rel val

        1. In context, SACH took a tumble almost a month ago on poorer than expected earnings/outlook *after* making a 30+% gain in the weeks leading up to the report. Now it trades a little below where it did November, which depending on your outlook seems oversold…ymmv

  5. Speaking of mReits, thanks to Peppino for mentioning SCCF the other day. There must have been a big seller in the issue as it was moving out of step with the other SACH issues. I grabbed what I could in several tranches with an all-end cost of 21.76 and IRR of 12.94% and 1.41x. I’ll be looking at it again today in hopes of getting to a 1% position.

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