Financial Services Firm B Riley Financial Sells a Nice Baby Bond

Financial services firm B Riley Financial (NASDAQ:RILY) has sold a new baby bond issue.  The issue has a coupon of 7.5% and a maturity date in 2027 which are terms that are very enticing to us.

B Riley is a Los Angeles based financial services company that provides a full array of corporate finance, research, sales and trading services to corporate, institutional and high net worth worth clients.  B Riley came public in 1997 and by and large they have been reasonably profitable, although they had a bit of a slip in 2014 when they had a loss.  The company is not a large firm garnering revenue in 2016 of just $190 million.

B Riley recently announced the acquisition of regional financial services company Wunderlich Securities for total consideration of $67 million.  This follows on the announcement in March of the pending acquisition of FBR & Co. in a transaction valued at $160 million.  These deals are expected to close in early June.  With the pending acquisitions B Riley will more than double in size and will be the self proclaimed leader in small cap underwriting and research coverage.

Since this issue fits our needs having a shorter duration we plan to purchase this issue if we can buy it at around $25/share.  Note that B Riley has another 7.5% baby bond outstanding which has a maturity date of 2021 and is trading at around $25.75/share.  One reason we are interested in the new issue is because we should be able to buy it at around $25.

Being a debt issue this issue likely won’t trade on the OTC Grey Market, but should begin trading in the next week under the ticker symbol RILYZ on NASDAQ.

Details of this new issue can be found here.

To get more information on preferred stocks and exchange traded debt (baby bonds), screen them, set up your own portfolio and receive email alerts, go to now.

Preferred Stock and Baby Bond Bargains Tough to Find

While preferred stocks and baby bonds sold off quite significantly a couple of months ago those bargains are now gone and the continuation of redemptions of higher yielding issues continue.

On March 30th we wrote that the average preferred stock price which had hit a high of $26.25 and then proceeded to sell off to an average price of $25 before rebounding to $25.82.  As we are writing this article the average preferred share (all $25 issues–not including convertibles) has climbed further to $25.96/share–just 1% off the all time high.  No wonder bargains are tough to come by.

Patience is a word we have used often over the years. It is extremely difficult to be patient and await new issues that may have a bit of upside to them if you can buy them “wholesale”.  The new issue marketplace has been slow during the month of May with just 2 new issues coming to market.  1 of the 2 issues which was sold was a Arlington Asset Investment (NYSE:AI) preferred that was composed of a measly 135,000 shares and never traded on the OTC Grey Market.  The other issue was a GasLog Partners (NASDAQ:GLOP) fixed to floating rate preferred which came to market with a 8.625%.  We were able to buy the GasLog issue at “wholesale” at $24.97–the issue is now trading at around $25.40/share 10 days later.  We determined that the GLOP preferreds might have some capital gains shortly after shares began trading on the NASDAQ exchange based on a review of their very strong financials.  Who wouldn’t want a 8.625% coupon of a financially strong company.  It is true we are not fond of shipping companies, but hte LNG shippers, such as GasLog have had strong fundamentals and as long as crude oil remains above $40-$45 the LNG market should be strong (Asian countries in particular can burn crude oil or LNG and gravitate to the commodity which is most financially beneficial).

We have been carrying a 10-15% cash balance which has cost us some lost dividend/interest income and we finally accept that this is simply something we will have to live with.  We will have cash available if bargains come up or new issues are sold that are acceptable to us.  At this point in time we can’t imagine much other than fixed to floating rate issues being acceptable for purchase in the new issue arena. We would buy any of a wide selection of fixed to floating rate issues–even those that would appear to be ripe for a tumble with further Fed rate hikes.  It has been simply amazing to watch New York Community Bancorp 6.375% fixed to floating rate preferred (NYSE:NYCB-A) trade up to $28.40 in 2 1/2 months,  mREIT Two Harbors 8.125% fixed to floating rate preferred (NYSE:TWO-A) trade up to $27.16/share in 2 1/2 months and numerous other mediocre quality fixed to floating rate issues all trade higher.  The 1 sector of fixed to floating rate issues that are NOT trading too much higher are some of the ocean shipping sector issues.  Note that the financially strong LNG shippers are performing well as noted above.

So in summary we continue to wait patiently.  It is only a couple weeks before we have another potential Fed rate hike and it is possible, although we think unlikely, that the a rate hike alone would cause too much dislocation of pricing in preferreds and baby bonds.


Bargains, Bull Traps and Blood

Blood in the streets creates opportunity OR does it?  Maybe or maybe not.  Maybe a bull trap instead.

It has been a rough week or two for many income issues out there.  Fortunately preferred stocks and baby bonds held rock steady with the average share moving just a nickel over the course of the last week. On the other hand the baby bonds of TravelCenters of American (NASDAQ:TA) have gotten hammered hard as the company announced really poor earnings a week ago.  Honestly this is no real surprise to us as TA is simply a company not motivated to make money for the common shareholders.  More on that later.

Today with the SP500 off by over 1.5% retail and mall REITS began to bounce a bit which is totally contrary to the direction they have been heading for the last couple of weeks.  I guess every sector is entitled to a “dead cat bounce”.  The question of course is whether this is a “dead cat bounce” or is the sector bottoming?

So would we consider mall and retail REITS bargains or would buying them now simply be falling into a bull trap? Would buying the TA baby bonds be a smart move or would it be a high risk purchase?

1st off let’s take a look at the TA baby bonds.  There are currently 3 issues outstanding of baby bonds.  The TANNI issue has a coupon of 8.25% matures in 2028 and had a first early call date of 1/15/2016.  Shares are trading at $24.12 with a current yield of 8.63%.  The TANNL issue has a coupon of 8% and a maturity date of 12/15/2029. Shares are trading at $23.09 for a current yield of 8.66%.  The TANNZ issue has a coupon of 8% and trades at $23.30 for a current yield of 8.58%.  The issue matures in 2030.  We should note that these baby bonds comprise the vast majority of TA’s debt and have face value of $360 million.

Looking at TravelCenters finances we find that over the last 3 years revenue has fallen by around 30% as the price of fuel, which is by far and away their largest revenue generator, has fallen dramatically.  At the same time the number of gallons of fuel sold has increased as the company has continued to expand their travel center ownership and they have added convenience store ownership.  For the years 2014, 2015 and 2016 net income was $61 million, $22 million and -$2 million respectively.  Not very stellar for a company that had revenue of $7.7 billion, $5.9 billion and $5.6 billion respectively.  No doubt this is a low margin business.  NOW lets look at the “funds from operations” (FFO).   2014 had FFO of $126 million, 2015 FFO was $116 million and 2016 was $90 million.  In 2016 the company paid about $28 million in interest on their debt (mostly on the baby bonds).  This means that their interest payments were covered between about 4 and 5 times.  Now moving ahead to 2017 TA laid a giant egg in their 1st quarter earnings. While sales were up 10% over the same period in 2016 they managed to lose $29 million and FFO fell to a measly $2 million.  With this poor result investors rushed for the door the last 2 weeks and baby bond prices fell by $2/share.  The uneducated (in income securities) seem to think that TA is going out of business this year or that they will stop making interest payments—they aren’t and they won’t.  The long time income investor knows that placing too much emphasis on quarter to quarter movements in company financials  means you may well miss out on some of the best available bargains.  We declare TA baby bonds BARGAINS!  We know that many readers will disagree and we understand that some level of risk to earn a tidy reward is not for everyone.  We ran into the same disagreement when we wrote the 1st article on Glacier Water trust preferred shares over 6 years ago.  Glacier Water hardly ever makes money and had negative equity for years–yet the free cash flows continues to pay the interest on the trust preferreds (although they merged with another company last year the shares continue to trade at over $26/share).  These trust preferred shares carry a coupon of 9 1/16%.  The TA shares are similar in that they can make little to no money and yet it is highly likely that holders of these baby bonds will profit handsomely.  Of course there is no guarantee.  We personally hold 800 shares of the various TravelCenter baby bonds and may add 200 more.

One last note on TravelCenters.  Hospitality Properties Trust (NYSE:HPT) is the largest shareholder of TA. Additionally TA leases a large share of their properties from HPT.  HPT is a large and relatively profitable REIT with net income of $226 million in 2016.  Given these resources we believe that the vested interest HPT has in TA is a positive.

Moving on to look at a few potential retail or mall REITS bargains.  Well actually we don’t consider the common shares of retail and mall REITS to be bargains we think the shares are Bull Traps.  The shares of companies such as Realty Income (NYSE:O), Kimco (NYSE:KIM), Store Capital (NYSE:STOR) have been bloodied beyond what we have seen for years and are trading at their 52 week lows.  For instance Kimco, which is considered a quality holder of retail properties, closed at $18.22 with a 52 week low of $17.91 and a 52 week high of $32.24.  If you had a $10,000 position in KIM a year ago it would now be worth $6,000.  STOR has traded very similar to KIM and Realty Income closed today at $53.36 down from a 52 week high of $72.29.  Another to get roundly spanked is Tanger Outlets (NYSE:SKT) trading around $25.64 down from a high of $42.  Fundamentally here is what we think is happening and more importantly what will continue to happen in the years ahead.  Retail bankruptcies which have picked up in the last 12 months will continue.  Amazon as well as Walmart will continue to put the pressures on more and more sectors–you may have heard just today that Amazon is now going to try to move into the pharmacy business.  Walmart is putting massive resources into their online business and will do there best to stay relevant. Can you imagine the pressure Walgreens and CVS will be under when Amazon gains traction in the pharmacy business?  Do you know how important this segment is to the retail REIT segment?  It is huge.  Yes we hear the refrain that bricks and mortar account for 91% of all sales, yet online sales are projected to double again in the next 5 years. Add to this that the U.S. is already over stored according to any global measurement.  We have 40% more square feet than Canada (per capita), 400% more than the UK and 600% more than Japan.  Yikes!!

So do we think these REITs are going broke?  No not anytime soon if ever.  In fact we think that there is a fair chance that a buyer of these shares now could garner a nice short term gain as shares bounce from the shellacking they have taken.  We believe over the next year and years that these shares are dead money and God forbid we fall into recession in the next year to 24 months as a recession would likely hit the restaurant sector which would simply add insult to injury to these REITs.

In summary the blood in the streets has brought opportunity as well as potential traps.  Investors determined to buy these REITs should “leg in” to positions.  Better to leg in to a position than trying to catch a falling knife and being wrong.

To get more information on preferred stocks and exchange traded debt (baby bonds), screen them, set up your own portfolio and receive email alerts, go to now.


Added Gaslog Partners to the Blended Income Portfolio

As we had noted last week when we published details on the Gaslog Partners LP (NYSE:GLOP) new fixed to floating rate preferred we planned to purchase shares in the issue.  On 5/10/2017 we purchased what to us is a full position of 500 shares of the issue at $24.97/share.  The issue is still listed on the OTC Grey Market and is now trading in the $25.10 to $25.15 area.

Details on the new issue can be found here.

While most long time readers know we are negative on any perpetual preferreds we have decided that we have to move into an occasional issue when they are attractively priced–such as in this case a 8.625% coupon.  Adding to the attractiveness of this issue is the fact that it is a fixed-to-floating rate issue.  F-to-f issues have performed quite well in the last 6 months with issues trading much higher than we would have guessed at the time of issue.  Apparently investors believe that even in the rising interest rate environment that these issues will protect them–we believe actually they are unlikely to protect investors over the long term.

Additionally we have carried plenty of cash in this portfolio for the last 18 months and it isn’t financially smart to continue holding too much cash.  With the above purchase we move our cash position down to the 11.9%, which is more than adequate to purchase bargains when/if they appear in the near future.

At this point in time it is not our intent to add substantial numbers of perpetual preferred stocks as it still appears that interest rates are likely to move higher in the years ahead.



LNG Shipper GasLog Partners L.P. Sells a Nice Fixed to Floating Preferred

Added–GasLog Partners is taxed as a C Corp–as such a 1099 is issued.


LNG ocean shipper GasLog Partners L.P. has sold a new fixed-to-floating rate preferred with a nice coupon of 8.625%.  While the issue is perpetual we have an interest in this issue.

GasLog Partners is a rather small partnership with a fleet of 10 LNG carriers. Unlike ocean shippers, such as dry bulk carriers, ownership of LNG ships has been highly profitable in recent times and is it is believed it will remain robust for the next 5 years.  With the construction of new export capacity and reliquefaction facilities there is a need for carriers to move the liquid natural gas around the globe.  Unfortunately in the future, as in all ocean shipping businesses, there will be ship oversupply, but it will be years from now before that occurs.  Additionally, the demand for LNG is dependant upon the price of crude oil holding up and not plunging back into the $30/barrel area.

GasLog Partners has attempted to gain long term contracts for their ships which would be a positive for the profit stream.  They have just recently purchased a ship from their sponsor, GasLog LTD, and it immediately went into the employ of Royal Dutch Shell for a period of 10 years.

We are interested in and will purchase shares of this issue.  Like all shippers we will watch the financials closely and exit if we believe fundamentals are weakening in this shipping segment.

The coupon is fixed until 2027 after which it will float at 3 month Libor plus 6.31%.  Fixed-to-floating rate issues have done quite well recently and we believe this issue will gain 2-4% in the next 3-6 months.

Details of this issue can be found here.

Shares are now trading on the OTC Grey market under the temporary ticker symbol of GSLGF.  For those not familiar with the OTC Grey market we have a short primer here.

To get more information on preferred stocks and exchange traded debt (baby bonds), screen them, set up your own portfolio and receive email alerts, go to now.


Looking Ahead to May Events

So here we are heading into May tomorrow and we wanted to take a quick look at the May “events” that could be critical drivers of income portfolios during the month.

Starting on Tuesday, May 2nd, we have the Federal Open Market Committee (FOMC) meeting.  Of course these meetings are always important, but this year they will be of the greatest importance that we have really seen in the last 5 years.    The importance is because the FED starting their interest rate tightening cycle in earnest in December 2016 with a 1/4% rate hike and then followed that up with a rate increase in March, 2017.  We now have a Fed Funds target of 3/4% to 1%.

So with the meeting starting on Tuesday there is always a chance that a rate hike could be announced on Wednesday when the meeting concludes.  We rate the odds of a hike on Wednesday as ZERO.  After the pathetic GDP announcement last Friday–1st quarter GDP at .7%, it would make no sense whatsoever, to any sane person, to push short term rates higher.  Certainly GDP is only one of many pieces of data that the FED watches closely, but it is important.  The other most critical data that the FED is watching is employment and inflation.  These are “the” items that will make a difference in the interest rate path that the FED will take on the Fed Funds rate.  It is critical that it is understood that the Fed Funds rate is a very short term interest rate–typically overnight.  While investors seem to believe that this very short term rate drives long term interest rates (10 year to 30 year rates) we have seen recently that these longer term interest rates are purely market driven.  Shortly after the Fed increased short term rates in March the 10 year treasury hit a yield of 2.6%, but rates have moved persistently lower ever since hitting 2.16% 2 weeks ago.  Some discussion of a tapering of quantitative easing a couple of weeks ago spooked the 10 year rate back up to 2.3% in the last week.

Let’s look at what we think is the most important item likely to potentially cause a  crash of sorts to the income securities marketplace.  Sure something like a surprise interest rate hike by the Fed of 1/2% would most certainly cause a panic, but the item that we think is mose likely to cause an uncalled for panic would be quantitative tightening–the reversal of present Fed policy.  The FED started quantitative easing with a balance sheet of $900 billion and that has now grown to over $4 trillion.  With maturities of Fed holdings occurring at a approximate rate of $40 billion per month even if the Fed started letting the maturities “roll off” the balance sheet it would take 7 years to get back where we started at years ago–yikes!!  Worse yet the Bank of Japan, the European Central Bank and the U.S. Fed have over $13 trillion worth of assets they have accumulated during the various QE programs–it would seem to me that the odds that this whole issue will be resolved over the next 10 years (or more) is extremely remote.  We believe that the Fed may try to “taper” some of the maturing assets as early as June and that the amount they let go to maturity without reinvestment of the proceeds could be in the $5-$10 billion range.  While at this pace it will literally take forever to run off the balance sheet it is not so important that the balance sheet return to prior levels it is only important to move in the right direction and we have said since last year that the removal of QE is as important as returning the Fed Funds rate to normal levels and the only reason to be concerned with either is simply to get ready for the next recession–so there is dry powder to fight the recession with lower rates and stimulus.  On the other hand it is important to not cause the next recession by raising rates too much, too soon—a tightrope walk it is for sure.

So back to May data.  On Friday of the coming week the employment report will be released.  Honestly we are skeptical of the accuracy of this number–but it is what it is and as long as the Fed is paying attention to it we have to do the same. The report from April showed a shockingly low job creation number of 98,000 which was about 50% of the consensus number.  The consensus for April to be released Friday is 185,000.  This is a critical number to watch to help determine whether the Fed will move rates higher in June.  Will it be a “blowout” number to compensate for last months poor results or will it be another disappointment.  Who knows?

Now in addition to the above most important data we have potential for geopolitical events that will drive markets into a panic.  What will happen with China relative to North Korea and what will be the reaction of the President to another nuclear bomb test in North Korea?  Does it matter?  We learned long ago that worrying about geopolitical events and investing based on personal worries is a losing game-you can’t sell out and crawl in a hole.

Investors should continue to invest and should realize that the short term information (data) may make a difference in how much “dry powder” you keep on hand, but generally you have to be invested and that is what we plan to be doing.