Category: Ideas

Earlier today I had seen a press release from CenturyLink which carried within it an announcement of a ‘call’ on some baby bonds. Gary had also mentioned this in the ‘reader initiated alert‘ section of the website.

The press release is here and the paragraph on the call is at the bottom.

The baby bonds they are calling are the Qwest 6.875% Notes (CTV). The company is calling just $200 million of the $500 million originally issued. The call happens on 6/29/2020 which is the ex-dividend date and should be made at $25.42 (+/-).

I jumped in right away for a part position to minimally capture the interest payment (42.97 cents) that will be made on 7/1/2020. I paid $25.07 and shares closed the day at $25.14.

So after this call $300 million in baby bonds remain outstanding (12 million shares).

Historically–and never a promise made–this should put a floor under the price right in the $25 area. The floor is maintained by the speculation that the balance of the issue will be called soon. Maybe it is called soon and maybe it isn’t, but the point is that the call risk will be minimal–if any.

This issue remains split investment grade–BBB- from S&P and Ba2 from Moodys.

Yesterday I made a purchase of a 1/2 position in the South Jersey Industries 5.625% Junior Subordinated notes (SJIJ).

While the issue is a notch under investment grade it appears that the risk/reward was about right for the price I paid–$24.80–a current yield of around 5.70%. These shares had traded solidly in the $26.50 area prior to the pandemic.

As I have mentioned I am pretty loaded up with utility issues–mainly electric utility baby bonds and with closed end funds (CEF) preferreds–most bought at bargain prices last month so have been mostly lying in the weeds in the last couple of weeks around 70% and watching for reasonable buys.

I am quite convinced we will see lower prices in many preferreds and baby bonds–but when? In the meantime I really want to get back on the dividend train so will get some decent quality issues here and there to get the dividends and interest rolling.

South Jersey Industries is the natural gas supplier for a portion of New Jersey and recently reported solid earnings for Q1 ending 3/31/2020. More importantly they affirmed their forecast for the balance of the year–very solid numbers (of course who can totally forecast in this environment).

The shares go ex dividend on 5/29/2020.

I bought a 150 shares in total in this ‘gift’ today at $30.97 (a 100 share buy and then a 50 share buy) to add to my 100 in the sock drawer. AATRL which is a $50 trust convertible issue from Affiliated Managers (AMG)—the yield at my cost was 8.3% for an investment grade issue.

I had wrote ‘mark my word this will trade much higher in the month or two ahead“. Looks like I should have written much higher in the next hour or two as shares are now at $36.59. Sometimes it is better to be lucky than good and we are lucky today. Thanks to all discussing this issue–gave me something to buy and write about.

Hope you all got the sock drawer stuffed down at $30 (or below for those that were in early).

As you all know many of the mortgage REIT preferreds fell fast and hard this week—either devasting investors or presenting a huge opportunity. We have seen large bounces the last 2 trading days, but prices remain very low.

Regardless of what these preferred stocks did this week and last this is a fluid situation and could change for the better or worse any day now so pay attention to your buys and sells.

I am suggesting that some investors with risk capital to devote to a more risky play look through these preferreds–the risk reward on many shares is very attractive–as long as one recognizes the risk. Remember all of these preferreds are cumulative dividends.

As most of you know mREITs leverage their mortgage portfolios with relatively short term repurchase agreements–using mortgages as collateral with an agreement to repurchase. If the collateral loses value the company must put up more collateral (per whatever the terms are in the agreement). This is where the counter party to the repurchase agreement demands more collateral–a margin call. If the mREIT can’t meet the margin call they try to negotiate a ‘forbearance agreement’ (an agreement to change the terms of the repurchase agreement for a while).

This week the Royal Bank of Canada has begun selling collateral from some of the mREITs below–apparently deciding not to agree to forbearance.

Let’s go through the line-up of companies and see where they are at as of this minute. The news flow is pretty active on these companies.

The mREIT preferred listing is here.

AG Mortgage Investment (MITT)

Preferred shares now in the $4.xx range. The company has announced they can NOT meet margin calls. Their press release.

AGNC Investment (AGNC)

This company hasn’t made any statements as of yet so it is assumed they met any margins calls made by counter parties. The company declared preferred shares on 3/13.

Preferred shares are in the $16-$19/share range.

Annaly Capital Management (NLY)

Preferred shares are trading in the $15-$18 area. The company has made no announcements so it is assumed they met margin calls if necessary.

Anworth Mortgage Asset Corp (ANH)

Anworth says they have ‘delayed’ declaring common share dividends–no mention of the preferred dividends. Their press release is here.

The preferred shares closed today in the $9-$10/share range.

Arbor Realty Trust (ABR)

No word from commercial and multifamily mREIT ABR. They have announced a $100 million in common buybacks.

Preferreds are trading in the $16-$17 area.

Arlington Asset Investment (AI)

No word out of AI. Preferred shares are trading in the $11-$12/share range.

Armour Residential REIT (ARR)

No word out of ARMOUR. Their monthly paying preferred is trading around $14.

Capstead Mortgage Corp (CMO)

Capstead made a statement on 3/18 but nothing since–statement at that time was positive.

Their preferred stock is trading around $18.

Cherry Hill Mortgage (CHMI)

No further word out of Cherry Hill since a 3/13 announcement of dividends declared.

The companies preferred stock is trading around $11-$12/share.

Chimera Investment (CIM)

No new word from CIM since 3/18 when they made an announcement of stock buybacks and successful ‘rolling’ of their repurchase agreements.

The companies preferred shares are trading in the $10.xx area.

Dynex Capital (DX)

No word from the company since the declaration of dividends on 3/19.

Preferred shares are trading in the $17 area.

Ellington Financial (EFC)

No word out of EFC at this point. Their 1 preferred issue is trading around $9.

Exantus Capital (XAN)

The company did NOT meet margin calls and default notices have been issued by one of their counter parties–Royal Bank of Canada. The company has rescinded previously declared dividends. The notice is here.

The company’s preferred stock is trading at $4.40.

Invesco Mortgage Capital (IVR)

The company did NOT meet margins calls and has suspended the dividend of both common and preferred shares.

The preferred shares are trading in the $7-$8 range.

MFA Financial (MFA)

MFA could NOT meet margins calls and has suspended all common and preferred dividends. The preferred shares are trading at $4.25.

New Residential Investment (NRZ)

No word out of the company. Preferred shares at trading around $9-$10.

New York Mortgage Trust (NYMT)

The company could NOT meet margin calls. All common and preferred stock dividends are suspended.

Preferred shares are trading at in the $4.xx area.

PennyMac Mortgage Trust (PMT)

The company has declared a reduced dividend on the common and plans to pay preferred dividends. The company has had no margin calls.

The preferred shares are trading in the $16 area.

Two Harbors Investment (TWO)

TWO announced the suspension of common and preferred stock dividends. The company met all margin calls.

Today the company announced the sale of all their non-agency mortgages.

Disclosure – I bought 100 share of the Chimera 8% perpetual (CIM-B) @ $8.80 and 100 shares of the Invesco Mortgage Capital 7.75% perpetual (IVR-B) at $4.60 earlier this week. I plan to build a small portfolio (maybe 1000-2000 shares) of mREIT preferreds over the course of the next week.

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.

Here are the lodging REIT stocks.

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.

mREIT preferreds are here.

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.

Just food for thought.