Income Issues Disconnect From Common Stocks a Bit

For now, at least, the average preferred stock and baby bond has disconnected from the DJIA with the average share up a few pennies–and some like the hated Spark Energy are up over a dollar.

Certainly we don’t ever argue with an up day, but yesterday being up over 1% was just too good to be true.

Today we will be trying to buy some of the Brookfield Property REIT 6.375% perpetual (NASDAQ:BPRAP)–a small starter position.  The current yield is around 7.20%.

While we did not originally plan to sell any of our term preferreds we did let go of some of the Gladstone Investment 6.375% (NASDAQ:GAINL) term preferreds.  This was simply a ‘rebalancing’ sale.  As we noted earlier in the week we were way overloaded in some issues and we had over 1000 shares of this one.  We like this issue, but need to spread the risk a bit more.

25 thoughts on “Income Issues Disconnect From Common Stocks a Bit”

  1. I was looking to see my alternatives to holding cash in a money market account other than Kayne Anderson. I decided to do due diligence and look at ETF’s that invested in preferreds, as a holding area, until I saw issues I wanted. I found something that to me is a significant disconnect.

    And unlike the selloff that started in Sept 2018, this selloff started in Jan 2018 before any 2018 rate hikes started. I looked at 5 ETF’s specifically PFF, PGF, PSK, PFXF, and FPE. The 1st 4 became falling knives in Sept 2018. The last one became a falling knive in Jan 2018. FPE was the only ETF that I could not validate their holdings. Why? From their fact sheet.

    Fund Characteristics (as of 11/30/2018)
    Weighted Average Effective Duration 4.06 Years
    % Institutional Securities (e.g. $1000 par) 73.11%
    % Retail Securities (e.g. $25 par) 26.89%

    So did the institutional selloff start in Jan 2018 and have nothing to do with rate hikes? Interesting enough only 17% of this portfolio is fixed rate, everything else adjusts.

    Does anybody have insight into the institutional side? Is this just bad selection or is this market a leading indicator for the retail side.

    Any insights would be interesting

        1. with Tim’s new search function you can put in KYN-F and search… and see all the comments /articles related to said Energy Investment Management/Closed End Fund firm! (I put Bea in and thought.. shut up Bea..! lol.. can’t imagine what you’d get if you put Tim in or Girdbird…! )

  2. I wonder what’s wrong with preferreds issued by NYMT. They looked like a steal but came down a lot and finding so hard to recover. Are there specific risks to the company vs other mReits?

    1. Gabriele, I’m sure there are others here who could give you a better answer – but in a nutshell; mREITs borrow short-term at lower rates lend longer term at higher rates. mREIT leveraged is achieved through the use of Repo Agreements with a 3rd party. Basically it goes like this – the mREIT borrows $1,000 and offers the counter-party $1,050 of paper as collateral. This all works terrifically in a market with decent spreads between short-term and long-term rates or in a declining interest rate market. However, as the current yield curve is flat as a pancake, mREIT profit margins are taking a serious hit. Why lend at the same rate you’re borrowing right? One mREIT performing worse than another mREIT under these conditions is mostly a reflection of the market’s perception of the mREITs ability to hedge their risk. Also, as primarily a commercial lender in an Amazon world and only medium in size, NYMT is considered one of the riskier mREITs. If you’re interested in that mREIT space you might want to take a look at the NLY preferreds which invest primarily in agency (residential) backed paper. As anyone who obtained a mortgage both before 2008 and after 2010 can attest, agency (like FNMA and Freddie Mac) underwriting guidelines became very strict after the residential loan default debacle and as a result the default rates have gone down dramatically. Of course we also need to compare the other terms of the offerings. Hope this helps.

  3. Hi Tim – What a great website! I am new here, but have looked at a number of other sites in this general area and yours is tops! The comments from you and your more experienced associates really make the difference. I can see that there is much to learn.
    I am relatively new to preferreds, but I have done a great deal of lending in lower middle market for over 30 years. If our next downturn is half as bad as 2008, most if not all BDC’s active in this area (e.g., GAIN) will have significant portfolio problems. Things move quickly and the debt, secured and unsecured, as well as the equity the BDC’s have extended to troubled firms can go underwater before the Investor/lender is fully aware of the issues. Numbers like the 200% coverage ratio are going to become quickly suspect through no fault of the HBC. Things just happen too fast and they will find that they are not staffed nearly well enough to handle what comes up. Yes, everyone has issues if things go south, but I think all BDC’s will surprise on the downside and those BDC’s focused on the lower middle market will have the greatest challenge. The lower middle market is not where you want to live through a recession. Hope this is of value in your conversations.

    1. Hi Chenny–glad you found us and happy to have you here.

      Yes I believe as you do that BDCs will be the center of trouble if/when we hit a recession. There is just not enough history with these vehicles for me to believe that they will skate easily when they are making almost all their loans to suspect companies. Over time as we get reads on the tea leaves folks would do well to pay close attention to their BDC related holdings-I know I will.

  4. I was wondering if utilities behave like muni’s in a rising rate market? I don’t have quite enough investing years to remember the mid/late 90’s. Suppose I could look at charts ;*)

    Tnx

    1. Tech, I have to agree the question is a bit vague. And out of my expertise. I only am concerned with preferreds…But I can tell you this with certainty…Historically when crap or recession hits the fan, utility preferreds hold up considerably better than any other preferreds….But if your assumption is higher long end yield curve rates, they will suffer too. Nobody is paying 5% par for a utility preferred if the 5 year Tbill is 5%. A 5% par ute would likely trade 25%-30% minimum below par if TBill was sniffing 5%.

    2. Tech asked: “I was wondering if utilities behave like muni’s in a rising rate market?”

      Tech, let me give you a three part answer
      1) In 1966 the Dow hit 1000, in 1982 the Dow climbed above 1000 again. In those 16 years, interest rates rose massively. Utility stocks along with most all other stocks recovered in 16 years, but on a real inflation adjusted basis were big losers.

      2) In the late 1990’s, utility stocks as well as most high yielding income stocks suffered. Growth was king and value/yield stocks were out of favor.

      3) Great Financial Crisis 2008- utility stocks performed MUCH worse than muni bonds. Common to see utilities off by 50%, where muni bonds in general had minimal losses.

      Utility stocks do fine when interest rates are flat or falling. They do poorly when interest rates are rising. So your personal forecast for the direction of long term interest rates should influence your strategy for utility stocks.

  5. I like the disconnect. I went pretty crazy buying stuff. Trying to sell into strength this week to cull the herd, take some profits, and restore my cash allocation. One buy was BPRAP and that one isn’t on the block. I like it too.

    1. P, I can see the allure to getting these where you got them at plus 7%. I just a bit too chicken. Went back to an old reliable play…Bought 300 shares of MAA-I in couple buys under $61. The liquidity dries up on this and then you can flip a few bucks higher. It is the same trick I do with PLDGP, but it has dried up. I just take turns playing these when ever a decent seller pops out. The back stop mandatory term date provides me a little comfort.
      Some weird stuff goes on in liquids…I bought 400 GJP at 21.12 and next thing you know someone just paid $21.51 right after I bought.

      1. I got a large position to average in 19.76. Not for sale. The SRC you recommended is way up off my buy. Not for sale. Thanks for that one.

      2. Could you please help me to understand those Notes – it says that the rate is variable paid monthly and yet it contains fixed rate paid twice a year. I can’t imagine that both are true.

          1. Vah, these are interesting complicated little creatures. They are synthetic adjustable preferreds. The backing instrument is the 5.95% senior note by Dominion with a 2035 maturity. It was issued essentially non callable because of the make whole provisions. The brokerage then through creates an adjustable rate preferred with counter party swaps to protect them. They in essence pocket the spread, as the issue trades on the short end of the yield curve because of the 3 month T bill float. It rates went sky high, they would redeem the preferred to avoid paying out yields way above the underlying coupon the bond generates. GJP has sagged to 52 week lows as the 3 month Tbill rise is losing steam. I trade this one often for small ball gains. But also my backside protection is the historical chart of issue, and the 3% minimum floor off par. At $21.12 the floor yield is 3.55% but allowing for current 3 month Tbill and 1.15 % kicker the yeild is over 4% now. Its YTM would be over 5%. The underlying bond last I checked this week traded at over $111 which put its YTM under 5%.
            I keep my fingers in all sorts of pots…Something like GJP…Canadian resets, term dated issues, fixed to floaters, live floaters, and some perpetuals. Always something moving that generates a flip opportunity. But the common baseline for most is quality and illiquidity. Though not always…I own a nice slug of NISOP that is not illiquid….But before I buy anything I generally want to be comfortable with company if I hold long term.
            Some people chase high yield for income and cap gains. I have found through the years I can get reasonable income and solid cap gains through lower yielding higher quality issues. But it is the illiquidity that has been the secret sauce for me. But as mentioned I do hold some for years and may never sell. CNIGO and FIISO are examples of holds…And I suspect EBBNF and EBRGF recently bought will be long term holds as I think the value will be better extracted longer term down the road on the next reset.

      3. Hi GB, is your aim to flip MAA-I and PLDGP rather than hold ? Investment Graded so one could consider holding for portfolio diversification though YTM does not seem too compelling (but I may be mistaken). Thank you!

        1. Aarod, I already flipped out of PLDGP, about a month ago I bought several hundred around $60.50 on some liquidity. Then flipped them all at $62.50 and pocked the dividend also. So about $3 a share holding about 3 weeks. Kind of a lay up with this issue. But it only happens 3-4 times times a year when its a no brainer trade. But…If things go to hell, psychologically I am fine with it as it is high quality and has a backstopping maturity date behind it.
          MAA-I at my purchase price is a very modest barely plus 5% YTM. But selling already appears exhausted and ask was back to $63. I will sit on it a bit but if history works it will be flipped around next exD date depending on liquidity. These are just in my approx 50 preferreds I follow (Outside of NISOP which I own, new preferreds need not apply). I buy illiquids, when they are liquid (price drops from buy/sell imbalance) and sell into illiquidity (when sellers are gone and buyers are there)….

  6. Rubicon Assoc has a nice write up on GLOP-PC and related today on SA, I see Tim saw it.
    w the 10yr yield so low, I guess there is some nibbling on pfds and related.

    PFF, PGX move the markets and they are up slightly..

    I have BPR-PA on my watch list too..I am greedier than most on pfds, I treat them- right or wrong-like h/y bonds and want 8-10%.. the GLOP-pfds certainly meet that. Thinking of putting a few low ball GTC limit orders in on some pfds in hopes of grabbing previous or new lows.

    mmkt rates ticking up a little more.. strong ADP jobs report, if tomorrows job report and wage component are strong, that will probably add to volatility… while LIBOR has stabilized, short rates are still high..

    crazy times but that is usually when you grab the best bargains..

  7. Hi, Tim and Happy new year!

    I like BPRAP a lot too and it is my biggest position in my portfolio. In my opinion there is huge potential in this particular preferred stock.
    One more thing, there is positive news for MHLD today:

    Maiden Holdings, Ltd. (NASDAQ:MHLD) (“Maiden” or “the Company”) today announced that it mutually agreed with AmTrust Financial Services, Inc. (“AmTrust”) to a partial termination amendment to the Maiden Quota Share Agreement that is currently in-force and is set to expire on June 30, 2019. The amendment provides, effective January 1, 2019, for the cut-off of the ongoing and unearned premium of AmTrust’s Small Commercial Business and US Extended Warranty and Specialty Risk as of December 31, 2018, with the remainder of the Maiden Quota Share Agreement remaining in place. The amendment will result in Maiden returning approximately $700 million in gross unearned premium to AmTrust, which will net to approximately $480 million after consideration of ceding commission and brokerage.

    “This amendment to our quota share agreement with AmTrust further strengthens Maiden’s capital position while continuing to position Maiden for the future,” said Lawrence F. Metz, Maiden’s President and Chief Executive Officer. “This amendment partially terminates specific lines of business in our AmTrust quota share agreement, including Small Commercial Business and US Extended Warranty and Specialty Risk. The remainder of our AmTrust quota share agreement remains in-force and we continue to work with AmTrust towards a potential new, smaller agreement.”

    1. Thanks for the info Eugene. I think there is potential upside to the BPRAP issue from the $22 current price.

    2. Eugene, thanks for the update on Maiden. I have positions in Maiden preferreds + small baby bond AND sizeable positions of AmTrust International Inc. (the reorganized entity of AFSI). I signed up for alert from AmTrust and have just received their alert on Form 8. Amtrust will receive approximately $480 million from Maiden.
      http://ir.amtrustfinancial.com/node/15951/html
      I thought that was bad for Maiden. Perhaps I read it wrong. It seems that this is good for Amtrust or at least neutral; they would be seeking another reinsurer.

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