Innovative Income Investor | Innovative Income Investor

Franchise Group Going Private

As most of you know – and certainly those holdings the common or preferred shares should know Franchise Group (FRG) is going private. Info is here.

FRG has 1 issue of 7.50% cumulative preferred (FRGAP) shares outstanding–4.5 million shares.

The apparent buying group includes B Riley (RILY) which immediately gets my attention–not that I know anything is wrong with the deal, but when RILY is involved you know that there will be financial engineering going on in the deal.

Should you sell your preferred shares? Good question.

The offering prospectus for the preferred can be found here. The change of control provisions etc are detailed and generally confusing.

My reading of this document leads me to believe the company is required to allow conversion of the preferred shares for an amount equivalent to $25 (plus accumulated dividends) under the change of control segment.

Now if I owned preferred shares they would be gone instantly at the current level (near $24). This company has debt to equity of at least 3 and some data has it at 6. Heavy debt a little equity–this is a typically RILY deal and they are going to likely take down much more debt. Do I want to have anything at all to do with a debt laden company?

We are yet to see the merger document–and I guarantee you if the company can wiggle out of a redemption or conversion they will do so. No way do they want to have to take down more high yield debt to hand over $100 million to preferred holders.

DO NOT take my writing as gospel–this stuff is confusing and written in such a way as to leave everyone saying ‘whats that say”.

We will await the merger document and see what it has to say.

It’s CPI Time

We all know that the consumer price index (CPI) is important to the Federal Reserve, even though the Fed Chair indicates a preference for the personal consumption expenditures (PCE) number.

Last week we had a hotter jobs number with the the unemployment rate falling to 3.4% with 290,000 new jobs created (although prior months were revised lower)–not what we want to see when I am hoping for a rate pause. Worse yet the market is priced for a rate pause–this spells a plunge in equity values next month if markets don’t readjust expectations prior to that time. Remember ‘data dependant’ which means we need a soft CPI report at 7:30 a.m. (central). We will have 1 more chance for soft job numbers before the next FOMC meeting in June (13th and 14th) so there is a chance to see softening numbers.

So I am ‘talking my book’ above–I want to see the banking ‘crisis’ be resolved and further raising of interest rates is not helpful in that regard. We have made progress on fixing the ‘crisis’ simply by getting the daily pounding of bank failure news off the ‘front page’ and hopefully banks are moving forward with fixing their balance sheets.

Ok–let’s go!! CPI is expected pretty much flat with last month-CPI at 5% year over year with core at 5.5% year over year. Substantial deviations from forecast will move markets sharply.

Headlines of Interest

Below are press releases from companys with preferred stock or baby bonds outstanding–or of just general interest.

UMH PROPERTIES, INC. REPORTS RESULTS FOR THE FIRST QUARTER ENDED MARCH 31, 2023

Runway Growth Finance Corp. Reports First Quarter 2023 Financial Results

Prospect Capital Announces March 2023 Financial Results and Declares Stable Monthly Dividends through August 2023 of $0.06 Per Share

Sachem Capital Sets Dates for First Quarter 2023 Earnings Release and Conference Call

GAMCO Investors, Inc. (“GAMI”) Reports Results for the First Quarter 2023

CNB Financial Corporation Announces Quarterly Dividend for Common Stock

Synchronoss Technologies Reports First Quarter 2023 Results

SuRo Capital Corp. Reports First Quarter 2023 Financial Results

UPDATE — NewtekOne, Inc. Reports First Quarter 2023 Net Income of $11.7 million, or $0.46 per Basic Share

XOMA Reports First Quarter 2023 Financial Results and Provides Update on the Acceleration of its Differentiated Royalty Monetization Strategy

Apollo Reports First Quarter 2023 Results

Jackson Announces First Quarter 2023 Results

Lincoln Financial Group Reports First Quarter 2023 Results

AmTrust Announces Quarterly Cash Dividends on Preferred Stock

Jackson Announces Second Quarter 2023 Common and Preferred Stock Dividends

Assured Guaranty Ltd. Reports Results for First Quarter 2023

Chicken Soup for the Soul Entertainment to Release First Quarter Earnings for Fiscal 2023 and Hold Analyst and Investor Conference Call After Market Close on Monday, May 15, 2023

2nd Nibble On a Lodging REIT Preferred

So today I went ahead and bought a starter position in the 2nd lodging REIT preferred shares–to accompany the Pebblebrook (PEB) position from yesterday.

I bought the RLJ-A 7.90% convertible preferred issue from RLJ lodging. While this is convertible there is virtually no chance that a conversion will ever occur. Shares are now at $23.58 with a current yield of 8.38%. Once again I chose this issue because of relative performance of the company AND importantly one of the best balance sheets in the sector–debt to equity ratio of around 1.

So for now this is all I want in the sector—I may put in some GTC orders in for additions at much lower levels in case of a ‘dump’, but like the smaller banks I want relatively small positions to begin to lock in some high current yields–am I way too early? I may be too early, but no one can buy the exact bottom nor sell at the exact top so the small position sizes protect me from massive losses.

A Quiet Economic News Day

Well it looks to be a quiet economic day with no real consequential economic news being released. Obviously this doesn’t mean that markets will be quiet–plenty of stuff going on with banks and the debt ceiling to keep things interesting.

Equity futures are off today to the tune of ⅓% while interest rates are off a few basis points with the 10 year treasury yield at 3.48%–off of the close yesterday of 3.52%. Plus and minus 5 basis points is a meaningless move.

As mentioned yesterday I nibbled on the Pebblebrook Hotels 6.37% perpetual (PEB-G)–current yield of 8.48%. I had mentioned many times I was looking for a buy in the lodging REIT sector and this is just a small starter position. Today it is likely I will buy another lodging REIT preferred – I will let everyone know when I do that. I have a giant sized position in CDs and treasuries and these buys will help to start to balance the approximately 5% average on the conservative part of the portfolio.

Watching the community bankers a bit I see the prices still a bit wild—some up a buck–others down a buck. I want bunches but not until this ‘crisis’ settles down–how long can I be patient? We’ll see.