Not Too Hot – Not Too Cold

Economic releases continue to show an economy that is just about right for income investors-but we all know too well that this can change in an instant.

Today GDP was released at a level that was slightly above estimates for the 4th quarter of 2018, but some below the 3rd quarter. This is after yesterday we had factory orders come in pretty weak, which is in contrast to the Chicago purchasing managers index which came in kind of hot today compared to forecast. All in all it is a Goldilocks economy.

As an income investor I like calmness–BUT after the excitement of December and January–and the ‘deals’ that popped up for a while it seems boring. Preferred stocks and baby bonds are now mostly treading water after the super gains of previous weeks.

I find myself in need of a bargain to use some available cash. We have peeled off parts of very profitable positions to lock in some gains that were more like ‘gifts’. For instance the GasLog Partners GLOP-C was partially sold after a strong rise in price. Same of American Homes 4 Rent AMH-D issue. We have considered a partial peel off the Brookfield Property REIT BPRAP issue as well, but have continued to hold the full position.

We have not done wholesale selling to lock down gains (the above sales mentioned were only sales of partial positions), because honestly we have no place to go with funds-although there are a few reasonable deals available (see below).

Just this morning we did buy some of the RLJ Lodging $1.95 (7.9%) issue at $25.09. This is a $25/share convertible. It will go ex-dividend late in March and is off 50 cents in the last 10 days of so. We had noted Gridbird (and others) yakking about the issue and he has been playing this issue for years so we followed him into the issue–for now.

35 thoughts on “Not Too Hot – Not Too Cold”

  1. RLJ-A conversion:
    Am I reading the filing correctly (please see below)? Does this mean RLJ- A cannot be converted or redeemed for cash unless the common hits $89.09/share for 20 trading days (vs. $18.57 at today’s close)?
    If so, I agree with Ken regarding RLJ Lodging buying back RLJ-A in the open market or maybe someday making a tender.
    Would be grateful if you could please give me your interpretation what the effective conversion price is for RLJ-A as I seem to be too stupid to clearly understand the description below. Call me functionally illiterate.
    Many thanks!
    RLJ may exercise its option to redeem the RLJ Series A Preferred Shares, in whole or in part, only if, for 20 trading days within any period of 30 consecutive trading day period, including the last trading day of that period, the closing price of the RLJ Common Shares on the NYSE equals or exceeds the conversion price per share (initially, $89.09 per share, subject to adjustment as described below). In order to exercise this redemption option, RLJ must issue a press release announcing the redemption prior to the opening of business on the second trading day after the foregoing conditions have been met. Notice of redemption will be given by mail or by publication in The Wall Street Journal or The New York Times or, if neither is then being published, in any other daily newspaper of national circulation (with subsequent prompt notice by mail) to the holders of RLJ Series A Preferred Shares not more than four business days after RLJ issues the press release.
    Upon redemption in accordance with this procedure, each RLJ Series A Preferred Shares so redeemed shall be, at the option of RLJ:

    converted into a number of shares of RLJ Common Shares equal to the liquidation preference (excluding any accrued and unpaid dividends) of the RLJ Series A Preferred Shares divided by the conversion price as of the opening of business on the call date; or

    redeemed in cash at a per share amount equal to the aggregate market value (determined as of the date of the notice of redemption) of such number of RLJ Common Shares into which the RLJ Series A Preferred Shares are then convertible divided by the then current conversion price.
    (Reference: RLJ Felcor merger proposal dated July 18, 2017, Pages 176-177)

    1. Dave, remember this was a legacy Felcor convertible (that was busted there, too). RLJ just basically changed the name and assumed the responsibility and provisions from their common stock… Preferred Stock Trader on SA wrote about it last fall and basically mirrors your bullets…
      Each share of RLJ-A can be converted into 0.362 common shares of RLJ which makes the conversion value virtually worthless. RLJ common stock would have to rise to more than $69 per share from its current price of $19.60 for it to make any sense to convert the preferred stock into common stock. Additionally, RLJ cannot force conversion of RLJ-A into its common stock unless the common stock trades at over $89 per share.
      In case you are curious and history minded here is the issue in original form from Quantum FCH-A.

      1. Gridbird:
        Thank you for the explanation and the quantum online description including the note about the dividend suspension in 2009-11. Now I understand better. The conversion is at the HOLDERS option, not RLJ’s unless the stock trades over $89/share. So it is essentially a de facto 7.75% current yield non redeemable preferred (at today’s price) paying an ordinary cumulative dividend (Some Section 199A income but obviously no QDI for REITs) from a leveraged hotel REIT.

        BTW, in another matter I should receive a dividend from EBBNF on March 1 and can tell you and Joel when I receive the dividend whether or not there was a withholding adjustment for a tax-exempt account which there should NOT be. Was told by the broker 2x that a form was not necessary. Will let you know what I learn. Keeping my fingers crossed.
        – Dave

        1. Dave, good luck with divi…I have EBBNF in taxable so I already know 15% is coming out. Dont be surprised if your divi doesnt come tomorrow. My ERRAF lagged a couple days. TD said it might take a week or two being it was a true Canadian issue, but I think the delay for me was 2 or 3 days from when it was paid out.

        2. Dave, I received my divis from EBBNF and EBGRF yesterday in one brokerage. The 15% in taxable was dutifully withheld. My Fortis issue should be kicking out also, but it is in TD and they appear to be a few days late on these type of issues.

          1. Gridbird:
            Received my “EBBNF” dividend and, yes, a 15% withholding tax was applied for a retirement account. Have been informed by Schwab that whether or not there is withholding depends upon who the custodian is. Was also advised that, since Citibank is the custodian, the 15% withholding applies whereas if DTC was the custodian 15% would NOT be withheld. Something to think about regarding holding Canadian preferreds. Your earlier comments about the investment banker may well be correct.
            Has anyone been successful in realizing a 0% Canadian withholding tax for US residents in retirement accounts?
            – Dave

            1. Dave, I only had one other Canadian issue in tax free at the time FTRSF, The Fortis Series G. No withholding occured on it. So for me it was ERRAF was withheld and FTRSF wasnt.
              I have another online friend from SA that I correspond with and this was his scorecard so far…
              ok, so I was paid the dividends from Fortis and Enbridge and NO foreign taxes were taken out. So I have no received dividends from 3 of the 6 Canadian reset preferred’s I own:

              Emera (15% Foreign Tax taken)
              Enbridge (full amount, no taxes taken out)
              Fortis (full amount, no taxes taken out)
              Like me he also owns an Altagas and Canadian Utilites preferred but he hasnt had a payment. Mine is in taxable and dutifully got the 15% whacked.
              So as you can see his Enbridge did not have a withholding. His are all through TD. He actually has been emailing about the Emera issue, but both sides are blaming the other….But as you figured out neither the company nor the brokerage knew about the intermediary bank custodian…That is where the problem is…And good look with that. I suspect they are getting 15% witheld and they dont want to get stuck with the withholding cost. They have no incentive to find out what account a purchaser has it in.
              It appears to be a random mess and one Im not willing to get mad over. Im having them all in taxable to make sure I get my money back. But each persons tax situation is different though and that is something that needs to be pondered also.

              1. Thank you Gridbird and thank you Timdman.
                The information from each of you was informative and helpful.
                I am not mad about it but curious what the standards of practice are. It sounds like something between the brokerage houses and the custodian and, as Gridbird says, no incentive for either to differentiate between taxable accounts and tax-exempt accounts. I agree. Am grateful for the dividend I did received and say thank you to Gridbird for the Enbridge preferred referral during the Christmas meltdown. You have a keen intellect and have helped many. Good job Grid!
                – Dave

                1. Dave my online friend is still trying to push to resolve issue. If he gets anywhere I will update you.
                  Now this link is the form that is used to undue this. But the process and what assistance your brokerage would provide I dont know.
                  If one was keeping long term and in tax free, it may be worth your time to pursue this somehow. I just have the fatalistic attitude no matter what I would do, someone would screw it up anyways and I would be left spinning my wheels. So I will eventually get them all in taxable once I get brokerage money moved around in a manner that they can be bought in taxable.

    2. This very same situation exists for WFC-PL ( and BAC-PL ). The price of WFC common would have to double and then some, for any conversion to be forced – likely not going to happen in my lifetime.

      That is why I have no concern about conversion of WFC-L, and can accept buying this at such a high premium over par. Same reasoning for BAC-PL.

  2. Bought FBP-PN yesterday at $23.30 for a 7.78% yield. This is a monthly payer.

    FBP is in a weak geographic area (Puerto Rico) but has strong capital levels and just restarted the common dividend.

    Wish there were more monthly payers.

  3. We will have get used to some weird month-end moves in a lot of Preferreds due to PFF buying and selling up until November. I did get a glance at the ICE Index a couple weeks back and RLJ-A was about .237% of the index. It was close to .25% of PFF as of yesterday, so they had some more selling to do. I think they have been selling slowly but maybe decided to get to their target today. This is a great Preferred to flip. When it is near par and rates are low, it is a no-brainer, especially as it approaches Ex Date. If you look at the terms, this Preferred will never convert. You have ultimate call protection with this one.

    I wouldn’t be surprised if RLJ decides to either buy shares at market or announce some sort of tender offer in the future to try and get rid of this one somehow.

    1. I hope you are right Ken. I was busy whipping around the SCE preferreds again today selling the spikes and buying others on dips and had enough left over in one account to buy an additional 200 more RLJ-A for 25.09 near end of day. Looks like about double the last 10 day share volume traded today.

      1. As I suspected, PFF sold a chunk of RLJ-A yesterday and is down to their target percentage to match the ICE Index. Shouldn’t see anymore major selling pressure on this one from PFF.

  4. Today was an unusual bounce day in the Canadian resets today on TSX…ALTGF was up 68 cents FTRSF up 46 cents CDUTF up 41 cents and ERRAF up 40 cents. None had any action on OTC. Im not selling mine so its largely immaterial but interesting how they jumped today though.

  5. PCF – I’m not sure where to ask this so apologies if I’m in the wrong area BUT, anyone follow or understand why PCF has been trading where it is? PCF is essentially 100% in cash and they’re having a tender for 55% or more of the outstanding on 3/15 at 99% of NAV which is 9.33… That means I think that you’re guaranteed to get 9.24 approx for no less than 55% of your tendered amount with likelihood of it being 57% or more. They have the right to take all shares tendered but only if they amend in some way. So that means you get something over 35% annualized return on your tendered amount and at worst, your remaining shares should still be at 97.5% after the fact NAV. On top of that, I bet Bulldog’s true expectation is to liquidate the entire fund rapidly soon after the tended. What am I missing? PCF is at 9.11 now as I write…

  6. I have a more than full position in RLJ-A. It seems to have missed the general run up in preferred stock prices from the previous few weeks, but not sure why.

    1. Gum, I am going to find out myself. I got back in it for a modest purchase today at 25.10 when someone on SI jogged my memory of it, as I have flipped it a few times in the Felcor days. A modest leveraged reit, but no credit rating darling nonetheless. About B- for those scoring. Goes exD end of March.

      1. Grid–I’m looking for a couple steak dinners from my RLJ-A buy today–will likely flip out of it if I can get good gains in the next 30 days.

        1. Im with you, Tim. I bought pancake mix with this purchase. A total flipper here. An alarm went off when it tried to sneak into the sock drawer after I bought it.

          1. Grid,
            Why do you think it’s only good for a flipper? Net Debt to EBITDA of 3.5 and pays annual stock dividend of $1.32, which I would think would be reasonably protective for preferred stock shareholders.

            1. Gum, the simplest reason is I bought this with my segregated flipping money. :)…I had overflow allotment of SCE-L preferreds that I bought at 20.25 and 35 last week that was hogging some flip money up so I flipped them out at 20.90 today. Some of that money went into RLJ-A. My own personal preference is to hold stronger utility type preferrerds for long term holds. The credit rating isnt real strong at about B-, and industry is cyclical….But I know successful investors who hold issues with worse financial strength than RLJ for long term holds and sleep fine. Im like Tim, just trying to play for a pre divi spike as it just sits outside that notice period. Somebody is definitely a seller as it had major volume today. Earnings out today, but that usually wouldnt cause this since common was narrow today also.

          2. Grid, big news over the wire. March 12th is Free Pancake Day at IHOP. I think the markets are staying open that day but you should take the girlfriend out. Cheap date. Tell her it’s National Holiday for flippers.

            1. P, I guess I should have sold everything I had flipped into RLJ-A yesterday instead of just 700 shares. It had a nice 42 cent bounce from purchase price in one day. Based on that Im skipping the IHOP and heading to the steakhouse this weekend, and yes I can pay for her meal, too! 🙂 Heck even NI-B jumped 20 cents from purchase today, so dessert is now in my plans too!

              1. Grid, good for you. You got the knack for flipping that’s for sure. My flip attempt was like watching a glacier recede. Buying several different CHK $1000’s for $500. Very slow but eventually got all I wanted. Now I’m wondering why I did it and what to do with them, lol.

                1. P, Well hopefully the plan is for them to recover closer to par and you sell for a nice profit! 🙂

                  1. I don’t know much but they looked cheap to me at $500 so I bought them. The master plan didn’t include thinking beyond that. But you’re right, I would probably sell if the yield dropped enough. My only obstacle right now being price recovery needs to happen. I’m hoping to know more about it within the next six months, or maybe a year. Everything else I own is sooooo boring.

        2. Tim it looks like the baked potato and the glass of water are paid for from RLJ-A today so far…Now we need it to keep rising to pay for the 8oz strip and maybe an upgrade to a 12 oz that needs to go with the meal.

    2. General rotation Gumfighter—folks are looking for buys so I hope we see a runup in the next 30 days.

  7. Anyone who jumped in on ALTGF are getting a nice bump today on TSX. Up 2.66% today. Their earnings were announced good today and common has popped more. I bought a 1000 and should have bought more last week when laying there at $19 for the taking.

  8. Don’t want to sell. Looking for good buys but couldn’t turn down 3.8 % in a few weeks from JPM-C.

  9. Tim, Not sure if this is a true harbinger, but we’ve noticed a marked slow down in home sales/prices and in some cases substantial mark down of home sale prices in So CA despite the recent reduction in rates. Also visible is a slow but steady increase in empty commercial spaces over the last 9-12 months.

    1. Alpha 8–I think it potentially could be a harbinger–but of course we won’t know until we look in the rear view mirror. I will say the real estate business is very slow in Minnesota and has been for 6 months. While the winter is always slow I think ridiculously high prices have simply priced out folks–there is little for sale and those that list think they can price higher than heck.

  10. Last year, I made a mistake not booking profits when my objective was obtained. I also brought investment grades with low coupons and bank loan funds.

    This year, each of my holdings has a good until cancel limit sale order. No more low coupon investment grades and no more bank loan funds. My threshold is high ranging from a years dividend to 2 years dividend profit depending on my view of the issue. Some have already triggered and sold. Many have not but are getting close. The dividend payments have given some, a little more space.

    Yes finding something to buy is challenging. My solution is to take sale procceds and put them in ETF or CEF “holding tanks” waiting for issues like Citizens Financial that I want to own. Using PSK, PFF, and even FFC as those holding tanks. Of course FFC as a CEF is leveraged and carries more risk.

    I am not sure if this will work out better, time will tell. But I agree with you, challenging to find issues I want at a good price

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