I just spent 30 minutes going through comments which Matt had pulled out of the comment stream from yesterday.
I went through and removed a fair amount of the comment–I put a note in it–Tim removed the comment–or something like that.
In these crazy times we still need to avoid political commenting—all it makes is for ‘bad blood’–and in the end we end up being like the old Yahoo boards–totally out of control.
When Matt pulls out comments it temporarily ‘bans’ the person. As I went through and edited the comments the person is no longer banned.
As I mentioned before only 1 or 2 people have been permanently banned and I want to keep it that way–you folks are all too damned smart and we don’t want to lose your brain.
mREIT Invesco Mortgage Capital (IVR) announced they could not meet a margin call on borrowed funds.
With mREITS they finance the business with repurchase agreements–generally shorter term loans and they use their mortgage portfolio for collateral. If the value of the collateral falls they need to either come up with cash or addition collateral.
The company’s preferred shares tumbled and are trading in the $4’s right now. All dividends are suspended now.
Are the lodging REITs going out of business? Obviously with all the turmoil in the world we never know for sure, but honestly I don’t think most of them are going bankrupt. Some will go bankrupt without a doubt–and I would think that Sotherly Hospitality (SOHO) and Ashford Hospitality (AHT) would be the weaker companies. They simply have too much debt and while some debt relief will be secured I am not sure it will be sufficient.
On the other hand it seems reasonable that most of the others will survive–after a year or maybe 2 of extreme turmoil.
Based on purely what seems a reasonable risk/reward proposition I bought 100 shares of Hersha Hospitality 6.50% cumulative perpetual preferred (HR-E) for $3.20/share. The company suspended dividends on the preferreds a few days ago and I think the wise companies are immediately suspending common and preferred payouts–they are realist. The preferred shares are priced for bankruptcy-maybe I will have a 100% loss–or maybe I will have a 800% gain.
After looking at the lodging REITS I look over at the mortgage REIT preferreds–decimation. Two Harbors Investment 7.25% cumulative perpetual fell $7.25 today to close at $7.75. The mREITs have experienced massive stress as asset values had moved lower thus setting off some margins calls. I fully expect the mREITS to suspend common dividends this week with a likelihood of preferred dividend suspension as well. I didn’t buy any mREIT preferreds–but I am watching and may start some buying.
This may or may not be the start of a portfolio of decimated preferreds. When previously solvent companies see their preferreds down at $3 to $7 is it reasonable to believe some these companies will survive?
Even for a conservative income investors is the reward of 300% to maybe 1000% worth it. I think it may be – but only time will tell.
The baby, the bath water and the bath tub are all being tossed out the door. I would love to buy–but I can’t!
There is no use being a hero until we can see action relative to stopping the spread of Covid 19. I note that Wisconsin just went ‘shelter in place’ and I am certain within 72 hours Minnesota will do the same.
Forget about the Fed action and the clowns on capital hill. The Fed is keeping the financial system from imploding, but this does zip on arresting the virus spread and the government really seems more inept than I already thought they were.
I have been down this road with the Federal Government back during the Gulf Wars. 1 of the businesses I managed for Pillsbury was the production of MRE’s (meals ready to eat) for military use. 6-12 months or so before the war started the department of defense asked us to ramp up production–of course we had no capacity for increasing–so they threw millions of dollars at us for a new production line. Being specialized production equipment it took months and months to install the line. By the time we had the line installed they no longer needed it and they simply gave us the equipment. Later we donated the equipment to Rutgers University Nabisco Food Research Center.
So I expect by the time the Fed government is all ramped up we won’t need them anymore–can’t count on the Federal government for much.
Anyway I still watch the spreadsheets for bargains–just not taking the bait yet.
Here is the Lodging REIT preferred spreadsheet--huge bargains, but dividends are being suspended–they are cumulative. Thus far Hersha Hospitality (HT) and Sotherly (SOHO) have suspended common and preferred dividends. Pebblebrook (PEB) has reduced their common dividend to 1 cent and are monitoring preferred dividends going forward. RLJ Lodging has gone to 1 cent on the common. Is HT preferred worth the $3/share price right now? Don’t know but the risk reward is pretty juicy–we’ll see.
I am suspending the more normal Monday Morning Kickoff and just touching on more recent news for the day and week ahead.
The average $25 preferred stock and baby bond closed last week at $18.02 which is $1.52 higher than where it was on 3/18 (last Wednesday).
The Fed Balance Sheet has gone parabolic and was up over $300 billion last week. Of course at this point we know it is going massively higher.
Just 30 minutes ago the Fed announced quantatative easing of giant magnitude, buying muni bonds, commercial real estate mortgages and certain investment grade corporate bonds. The Fed took off any limits to the amount they may buy–ramp up those printing presses!!!
With the announcement from the Fed equity futures bounced nicely and right now are up about 1%–much better than overnight when futures were off 5%. I am highly suspect of any bounce as the uncertainty and unknowns are just too high–but just the same a bounce would be good (in spite of the lose I will take on my short position).
I expect to see a steady stream of companies everywhere either slashing or suspending their dividends–liquidity is king. Those companies that suspend now are likely to be around next year—those playing hero with their dividend are fools. As some have noted in comments some companies are going to pay dividends/distributions with stock issuance–seems like a reasonable alternative to cash.
So where do we go and what do we do?
I really doubt any buying should be done in here–there will probably be a number of better opportunities in the future–there are lots of potential bargains out there–but they may be better by the end of the week—no one really knows what 10-15% unemployment looks like—nor do they know what -15% GDP (or some such number) looks like.
Stay safe–lots of dry powder (and for some 100% dry powder). We are around 50% cash—and hope to remain there, but this can change rapidly, so we will see.
