I have many current issues of baby bonds and preferred stocks that I am watching for potential purchase—in general right now I am targeting a current yield of 7% for these issues.
I target mid-quality issues–of course mid quality is in the eyes of the beholder as many, if not most, of the issues I am watching are not rated by the major ratings agencies. I avoid shippers and MLP’s–I simply do not have long term faith in those companies although many would disagree I have found through experience that these issues may well be dangerous to your wealth (over years and years).
I consider few of the fixed-to-floating issues suitable at this time (for me) as the reset rates have generally been too meager and until short rates are in at least the 2.00% area most will not attain coupons in the 7% area, although there are some fixed rate reset issues which may well be attractive. No doubt readers will add their favorites and give more specifics.
Below is the start of what I am watching which includes 2 issues which I currently own. I will break this ‘watch list’ article into 3 pieces published in 3 weekly installments.
First of all a few issues I own and now are considering adding a little more are from mREITs. I like 2 issues from Arbor Realty Trust (ABR). The ABR-D 6.375% perpetual which is trading around $22.84 with a current yield of 6.98%. The ABR-E 6.25% perpetual is trading around $22.33 with a current yield right at 7%. I own the ‘D’ issue.
mREIT Ready Capital (RC) has 6.50% perpetual preferred that is trading at $23.10 with a current yield of 7.03%. I own this issue. RC has a number of other baby bonds available with current yields between 6 and 7% which may present opportunities, although I have not looked closely yet.
There are 2 other mREIT perpetual preferreds that I do NOT own, but may own in the future. These 2 are TPG Real Estate Finance 6.25% perpetual (TRTX-A) which currently trades at $22.74 for a current yield of 6.87% and the KKR Real Estate Finance 6.50% perpetual (KREF-A) trading at $24.89 and a current yield of 6.53%. These 2 commercial mortgage REITS hold many multifamily loans and I need to study their portfolios further before purchasing–the more multi family loans the better–office buildings are a negative–and they both hold a blend.
Brighthouse Financial (BHF) offers a 6.75% split investment grade preferred which is non cumulative (being an insurance company), but current trades at $25.68 for a current yield of 6.54% with a optional redemption being available to the company in 2025. This is excellent quality to carry a 6.54% current yield–of course the ‘yield to worst’ is lower There is 30 cents of accrued dividend in the price.
Triple net lease REIT Global Net Lease (GNL) offers 2 perpetual preferreds with coupons of 6.875% and 7.25% respectively, which have current yields of 6.88% and 7.15%. Obviously GNL is just ‘mid quality’, but they have $4.2 billion is assets and $1.6 billion is equity and shares are approaching a reasonable risk/reward.
No matter what an investor should try to do at this time of rising interest rates I would encourage them to ‘leg into’ positions. If you would normally buy 400 shares of a given issue instead of purchasing it in 1 purchase divide it into four 100 shares purchases over the course of months. In these days of no commissions there is no reason to go all in at once–none of us know where rates are headed in the next year and how much of the rate increases are already ‘built in’ to the price of a given issue–so why not average in?
This ends Part 1. I will be adding these to my ‘watch list‘–although some are already on it.
None of the above is a recommendation to purchase, but should be considered potential ideas for further due diligence.
The catch is it’s redeemed in less than 5 years for not much more than 3% YTC. AON is a solid company but that rate doesn’t sell in today’s market.
Who likes KTN?
Matures 2027, has dropped down to about $30.5, yielding almost 7%.
What’s the catch?
Dd – I just did a quickie calculation on KTN and I think the catch might be that you’re quoting the current yield when you say it’s yielding almost 7% and the more accurate yield to be using should be yield to maturity… AT 30.50, but taking out the accrued, I think at 30.50 yield to maturity is around 3.28%. And that’s not even going into whether or not there’s any possible way for the underlying 8.205% Junior Subordinated Deferrable Interest Debentures due 1/01/2027 to be called… I would assume there’s not really much of a chance otherwise it already would have been done, but I didn’t look into that at all… I bet historically, though, Grid has…. he knows (and remembers) the history of everything….. ha.
2wr,Robert,
Tx. So this means that actually KTN would only start to be attractive to IIIs if it drops a lot below $30, much closer to $25.
Then, why aren’t holders of KTN selling @ $30.5? In fact last trade now was $30.99. Some must like the security of AON much better than other preferreds, so they r happy to just get 3% for 5 years. Obviously at current inflation, this is not a good deal…
2wr,
While I absolutely agree with your numbers, you might get a better yield than that, if you sell ~24 months before maturity. In my experience a lot of these instruments hold up in price quite well until the last year or so.
Test – haven’t been able to answer because couldn’t get to Captcha – still now?
So Dd, I wouldn’t necessarily agree with that premise… As long as someone knows what KTN is and isn’t right now, meaning it’s now a 5 year debt instrument and not comparable to a long maturity bond or preferred or perpetual, then the case can easily be made that a 3.28% YTM right now is pretty attractive, even to IIIer”s… lol….
And Librero – Although I agree that one could possibly get a better yield if they do X, Y, or Z in the next 5 years while they have KTN, including your scenario, my problem is I just don’t know how to put “might” into a yield calculator.. ha…… Buy knowing what you’ve bot on a YTM basis and if you can goose that yield by nimble trading over the course of your owning it, than so much the better for you…. flipping can help in all cases if you’re into it…….
Another idea for “mid grade 7%” : CODI-A. $24.35 today. Is it mid grade? Their revenues, cash flow, and non GAAP earnings look o.k. GAAP earnings not so much. These do come. with a K-1. MLP yes, energy no
lucky…Compass Diversified converted to a “C” Corporation on 9/1/21 from a partnership so no loner issuing a K-1. Just be aware the CODI-A is non-cumulative whereas the CODI-B and CODI-C are cummulative.
Well,. I own a number of these that were purchased in the past right around par. Not planning on selling them as I think they will be ok in the long run. Nice to see them on a possible buy list as it reinforces my thoughts they will be fine long term. Not too nice though to see them fall in price recently but as long as the money flows that what counts now.
I would add 7% NRZ-D , which will float at 5 year Treasury Note +6.22% in 2027 . Trades today at $ 7.25 yield
Agreed. There are so many 7-9% quality preferreds available again. Great time to buy now that overreaction has set in. The Fed may rates to 2-3% over time. This is still so much lower than what you can get buying these income securities at current levels. I thought I would not see the day again when you could find such bargains.
Chris the first best option to buy is Ibonds, the second best is shove in your mattress. The third best I have no idea. But a 4th possible option that kinda falls in a quasi term (its not its perpetual) is something like LEVLP to watch.
This bank is being taken over by First Merchants Bancorp which has Baa1 credit, so the acquired preferred would slot Baa3. Im sure First Merchants will want to redeem a 7.5% preferred. If in 2025 IGs are plus 7% then it may stay outstanding. There were a few banks that had to raise capital right after covid and they got screwed like this bank did..
I got a great flip out of these recently and now been buying back at 25.90. They may drop lower so bears watching. I cant control pricing, but I can control what yield I will accept buying now….Last two days I have done a great job of increasing yield, increasing credit quality….and losing mark to market capital, too! 🙂
Grid,
I agree. Maxed out in IBonds for 2021 and 2022. Wish I could buy more, but you have to play by the rules. 🙂 I have also had the opportunity to increase yield and improve quality during this adjustment. Things can bounce back real quick so to be able to lock in quality investments above 7% is a great opportunity. I don’t want to wait around hoping to get a little more yield while risking prices shooting back up.
I’ll keep an eye out on LEVLP.
Grid,
I just adopted this quote of yours as my quote of the year:
” the first best option to buy is Ibonds, the second best is shove in your mattress. The third best I have no idea. ”
to which I agree 100%, although not sure if in that order!
It appears that First Merchants is redeeming the LEVLP issue… Schwab has marked the security as being subject to mandatory redemption
WTF. Call date is not til 2025.
Seems LEVLP is going to try to claim a “regulatory Capital Event” What BS
Redemption Following a Regulatory Capital Treatment Event
The Preferred Stock is redeemable by us, in whole but not in part, at any time within 90 days following a regulatory capital treatment event at a redemption price equal to the liquidation preference, plus any declared and unpaid dividends, without accumulation of any undeclared dividends. A “regulatory capital treatment event” means our good-faith determination that, as a result of (i) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision of or in the United States (including, for the avoidance of doubt, any agency or instrumentality of the United States, including the Federal Reserve and other appropriate federal bank regulatory agencies) that is enacted or becomes effective after the initial issuance of any share of the Preferred Stock; (ii) any proposed change in those laws, rules or regulations that is announced after the initial issuance of any share of the Preferred Stock; or (iii) any official administrative or judicial decision or administrative action or other official pronouncement interpreting or applying those laws, rules or regulations or policies with respect thereto that is announced or becomes effective after the initial issuance of the Preferred Stock, there is more than an insubstantial risk that we will not be entitled to treat the full liquidation preferences of the shares of Preferred Stock then outstanding as “Additional Tier 1 Capital” (or its equivalent) for purposes of the capital adequacy standards of Federal Reserve Regulation Q, 12 C.F.R. Part 217 (or, as and if applicable, the successor capital adequacy guidelines, rules or regulations of the Federal Reserve or the capital adequacy guidelines, rules or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Preferred Stock is outstanding.
Mav – What is it you’re quoting from and have you seen anything anywhere indicating the FRME is planning to use this clause to call the newly creat FRMEP which supposedly has the same language as the old LEVLP prospectus? FRMEP doesn’t seem to be trading yet, yes?
2WR – What I posted is from the IPO prospectus
No, I have not seen anything personally saying they are calling this. I was reacting to SNewman who noted his shares were marked for mandatory redemption. The only way they could call early is via this clause as call date is not til 2025.
Turns out after looking at other data I think SNewman was mistaken and mistook the transaction closing and the symbol changing for an early call / mandatory redemption.
I should have researched more before about what was actually happening before posting the info from the prospectus. I just assumed he was seeing something at Schwab that hadn’t hit the news yet. My bad
FRMEP is trading
No signs of FRMEP having traded at TDA, Fidelity, Yahoo finance or otcmarkets. Then again, at least on TDA, FRMEP must be an old symbol that they are re-using because it traces to a First Merchants Capital Trust I 8.75% issue that according to quantumonline was called in 2007. Where did you see FRMEP trading?
Looks like there were no trades in the name but it was quoting & available to trade for any takers. I looked in the morning but never circled back to it.
They are not. LEVLP is now FRMEP
Re: LEVLP – I was apparently mistaken about the mandatory redemption at Schwab. Schwab had applied a marking (“mandatory”) that they mainly use for mandatory redemptions. However, Schwab did not actually redeem the issue- instead they just changed the ticker symbol and then removed their “mandatory” marking. I’m not sure if they were mistaken in applying that marking or if I was mistaken in assuming that that marking always meant a redemption with them.
I wonder why people just mention Call Risk. It is obvious that the highest risk with climbing interest rates ist perpetuating with a low coupon. Convexity will just kill you. I just look at high coupons of minimum 7,5 % even slightly above or at par.
Does anyone have thoughts about NYMTM and NYMTN…?
Own them. Strong MReits in my opinion that are a great buy at these levels. Have been reliable payers over many years issued by a company with a strong balance sheet.
The bottom just fell out of MYMTZ on high volume, Now it pays a comoarable dividend and it’s fixed. Not sure what to make of it.
Wow I am buyer. 8.2% divi..The market is rebalancing and everyone is panicking. This Ukraine thing is also heating up. i am not loading the truck up yet but I am buying a few hundred shares here and there.
Did you get any? I only got 125 shares being too greedy with my limit orders. Looks like the fire sale is over now but still a decent price.
Yes i got 200 shares at $21.26
NYMTZ– I don’t see a reason for an almost 8% drop- any idea why?
Volume was very high. probably a large seller driving the price down and continuing to sell into low volume. Happens at times and can be a great buying opportunity if you see it and don’t hesitate.
Partially recovered. Down big for the day partially for the same old reason anticipating rate hikes so 7% is less desirable, Also people may be spooked by the big drop or waiting to see if there woud be more selling.
Those are my guesses. If it were a widespread NYMT problem I would expect their other preferreds to fall a lot more than they did..
I trade them but don’t consider them one of the best REITs. Nice dividends. I swapped into NYMTN for the higher div when the price went lower. Now it’s a lot lower, probably because of the somewhat lower floating rate in a few years. Priorities are changing in front of our eyes. I’d buy NYMTN at that price if I didn’t already own enough.
You should give some consideration to MDV-A. This is a property reit preferred with a 7.375% coupon and call protection until Sept 2026.
It has traded down to $25.20 today.
The parent just had an IPO last week. It was previously a private company
I like ATCO/H Preferreds at these levels. Basically trading at par when you add in accrued interest. Yields at 7.85 and 7.95 percent. They have been calling in their preferreds over the past year, but these are a great place to park money and collect a high rate until they get called…if they don’t, you still enjoy nearly 8% on a strong shipping company.
I moved my SB preferreds into the H shares.
Tim, thanks for your thoughts. Looking forward to the additional articles.
Question about GNL’s Accumulated Deficit (admittedly an Investor 101 question):
In the Income Statement from the latest 10-Q (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001526113/15b9925b-5007-4ae0-8b51-ee917202b3c2.pdf) and 10-K, I see that Accumulated Deficit has increased from ($733M) at the end of fiscal 2019, to ($856M) in 2020, to ($1.022B) in Q1-Q3 2021. Why is that not alarming?
it is but paid in capital is also increasing, giving a cushion.
MITT-C traded down to 23 a couple of days ago and, at that price, would give a current yield of 7.0% after the reset in 9/2024 with libor at 0%. They did suspend the dividend for 3 quarters in 2020, but they got reinstated by the end of 2020. Not sure if they qualify as mid grade, but they would reset at 7% @ $23.00
MITT-B pays the same 8% coupon a dollar under par with no float, it’s fixed rate. MITT-A also fixed but with a bit more call risk if prices ever go back up. MITT is not the safest REIT that’s why preferreds pay over 8%
Martin : I agree with you that the other series of MITT preferred are more attractive than MITT-C at this point. I brought it up in response to Tim’s statement that few fixed/float issues met his requirement of 7% after reset, but, yes, as I mentioned, referring to MITT-C as mid grade might be a bit optimistic.
ARR-C FBRT-E ATLCP SACH-A BW-A all fixed rate 7+%. CIM-A over 8%.
Don’t be afraid of floaters near 7% if rates rise they’ll be over 7% and if rates don’t rise they’ll be fine where they are.
I’m looking at safer preferreds approaching 6% with Qualified dividends for taxable account.
Thanks Tim. Very helpful. A also own several of these issues. I did add a little more of the RC 6.5% preferred this past week. I have not followed KKR or Brighthouse but will do so now.
RC-E 7.08% $22.88
Must be close to bottom now!
Thanks Tim, I own and am looking at some of the issues you mentioned. I especially like 7%+ coupon fixed rates that are trading below (or near par), with the added benefit of no risk of a loss if called. Having a YTC greater than the coupon is an added plus for me and something I am not used to seeing on the issues I like to hold. Of course I am always looking at the credit risk of the underlying companies and am under no illusion that things have bottomed yet.
Tim-
I am more than a bit concerned/confused. For the last few months I have been getting the impression that because of the higher rates coming, it would be better to get out of profitable fixed and into fairly high / good F-2-F types, terms, and notes. Did I totally miss something?
I’d appreciate your thinking ( other than buying low prices).
thanks
Anyone ? Grid, 2WR ?
thanks
Gary – Why are you thinking you might have missed something? Has your strategy not worked for you? It sounds as though it should…. personally, I’ve not felt the pain mostly on the preferreds/BBs I own, mostly because of a concentration on shorter maturities which gives me the comfort of knowing that even if they tank, if I just hold the course, at the very worst, I will have accomplished what I expected to accomplish when I bot them originally even if I do end up paying an opportunity cost for not having cashed out… That can’t be said with perpetuals as there’s no guaranteed recovery of principal into the equation for them… this of course, also assumes no default anywhere along the line…. as per usual, the more active trader can potentially do far better than following this strategy, but I guess I’m a plodder by nature, looking for one decision positions.
Grid-
It just seems like Tim is mainly looking at perpetuals- which seems contrary to what has been talked about here and elsewhere- that the other categories I mentioned are the places to be. Maybe he can fill in some blanks.
I realize that in some cases, there are likely to be better buy-in or buy-back points if the perpetuals keep falling. I have sold some, but am wondering if the near future ( re: rising rates) is too soon to jump back in.
thanks
Gary, its hard to tell. A lot of variables now. Past few years it was simple. You knew the 10 year was low and stable, Fed was mute, inflation low, investors confident. All you had to do was trade the wobbles and returns were easily goosed… We have a most unusual situation, with Fed barking, inflation at 40 yr high, credit spreads may be widening, and investors may or could be spooked easily holding income issues.
And it depends what you want income wise (protection, credit rating, yield, etc.). If cap preservation is king, 2WR is spot on.
I kinda play all angles. Like 2WR said, my floaters and term dated have done fine along with the ones that never trade, ha. (Except a small amount of QRTEP I just have held and rode down)
There are a lot of floaters so in time they may diverge too. You may have to watch issues that reset lower with low adjustment yields, as they could drop more.
As far as quality perpetuals issues go, you can go low below par and get 5% issues, or go 6% in some and pay above par. My plays have been the latter but that doesnt make it right. If some of the former drop more, my interest level would increase.
I bought LEVLP today at $25.90 and some at $26 under expectations top 15 rated US Bank First Merchants will finish off the acquisition and ultimately provide a ballast as it drifts towards 2025 probable redemption.
Timing is key no doubt, but ultimately they were largely meant for dividend income to collect. The absolute worst thing is to stretch for yield in a dubious issue and not only lose capital, but also lose the dividend too.
….And waiting and watching holding your cash is a good idea too. You just have to have a plan in mind. Maybe even consider putting some low bids in and watch.
Variables indeed- add to the above – I have 4 issues hitting call dates this yr- all are Sr notes- argghh – two are a little under water, two slightly above. Prob time to cut them loose before more damage near term- with the way the mkt is going.
thanks!
Gary, I wish investing was all intellect, but its part emotion too. Or at least a never ending battle to control emotions. There wont be a ringing bell to buy, so you have to be disciplined and also appreciate you will not time the bottom. Fixed perpetuals tend to front run movement of rates and their expected terminal rate.
For me, I find it easier to trade around issues to get better long term yield or appreciation, than I do selling outright, holding cash, and then trying to get back in. Thats just my personal preference.
Sometimes you have to sit back and evaluate your decisions. Take for example a fictitious person who bought those 4.5% issues just a couple months ago, and are down 15% and dont want them now. What has really changed in 2 months? Nothing really. Inflation was already high, Fed had already communicated rate hikes, etc. So why would that person not like them now 15% cheaper? If it was determined a mistake was buying to begin with, analyze why the decision was made to buy then.
Personally, I dont get too worked up over generic “senior note” versus “preferreds” across various companies. Unless its a high quality senior note ute type IG issue, many lowly preferreds are considerably safer (in terms of interest/dividend payment) than senior notes from financially dubious outfits.
Good advice.
I decided the chances of not being called are as likely as a call – so why not hold the two slightly underwater & the others.
I’ve sold some others that I can buy back lower now or later. No real harm.
Holding my highest cash level ever- so am ready for some buys.
thanks again
oops- put 2 Rs in my name- surprised it took it.