Category: Ideas

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.

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.

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.

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”

We all have a different level of risk we are willing to take to garner some portfolio income and I have tried hard to push myself to buy some riskier assets. I still have plenty of dry powder–which I want to maintain at a healthy level, but I need to see some dividends and income flowing, or at least more–those $200-$500 payments hitting the account help motivate me.

Last week I wrote a bit about Oxford Lane (OXLC) and Eagle Point (ECC) issues I have bought—and folks chimed in with other suggestions.

Earlier this week I bought some of the term preferred shares issued by CLO owner Priority Income Fund (not traded). This collateralized loan obligation owner (organized as a closed end fund) is controlled by the hated (at least by many) business development company Prospect Capital (PSEC).

Priority Income Fund has 6 term preferred issues outstanding. The company became a ‘serial’ issuer of shares starting in 2018 and continued to sell new issues right through 2/2020. When the pandemic hit the company had registered to sell a another new issue, but it never happened.

Of the 6 issues outstanding only one is currently redeemable and 3 more issues will become redeemable in 2021—all but 1 issue trades under $25/share so they carry little to no call risk.

Below you can see a financial summary for the fund as of 6/30 for the last number of years. Really huge investment income, but pretty high expenses. High payouts to common holders with a slowly decaying net asset value (NAV)–on a per share basis. Generally the company pays out most of their investment income irrespective of unrealized losses.

Just remember with these closed end funds we care about the total asset value in dollars–not per common share. Funds like Priority Income Fund are always selling more common shares and below you can see that while the per share NAV is eroding the total assets continue to rise–at least until this year. The total asset value is what is used to provide our coverage ratio–closed end funds must have at least 200% coverage on the senior securities (i.e. preferred shares).

Below are the common shares the fund has sold over the last many years. These funds help keep the leverage ratio up–even if the common per share amount is falling.

As long as the total assets remain flattish I will feel comfortable holding some of the preferred shares assuming this economy doesn’t crash lower again. If the economy softens dramatically I will have to re-evaluate this one.