Purchases and Sales in Model Portfolios

We had mentioned last week we would be making some purchases this week as well as executing a sale in the Blended Income Model Portfolio and we have done so yesterday.

We have purchased full positions in 2 fixed-to-floating rate perpetual preferreds.  We have been, and continue to be, reluctant to purchase perpetual preferreds up until this point, but a continuing stream of fixed-to-floating rate issues has helped us determine that adding a couple issues would be beneficial to our income stream.

We have added 500 shares of Spark Energy F-t-F perpetual preferred with a nice 8.75% initial coupon.  We have also added 500 shares of Chimera Investment fixed-to-floating preferred with an initial 8% coupon.  We were intending to purchase the FTF shares of mREIT Two Harbors (NYSE:TWO), but as we have noted before “when you snooze you lose” and we did just that on all of these issues.  The TWO issue raced higher before purchase and the 2 issues we did purchase could have been bought cheaper, but we wanted to get through the Fed rate hike last week.

Additionally we hope to buy more Independence Realty Trust (NYSE:IRT), but did not do so last week when we could have bought it lower–so we wait.  We are looking for an entry under $9/share.

Lastly we sold our part position in mega triple net lease REIT Realty Income (NYSE:O) today. We held a 7% capital gain so it was a reasonable time to exit.  We had mentioned that we had some concerns about various market segments–1 is the retail/triple net lease REIT segment and the other is the energy segment.  It would seem logical that the retail REIT space will have some amount of trouble growing in the next months and years ahead as the brick and mortar stores continue to hang “going out of business” signs in the window. There are no immediate worries here, but logically with all the bankruptcies (or potential bankruptcies) that are occurring it only makes sense that the pain will trickle down.  Given how conservative we are we simply find no reason to hang around for the fairly meager payout from Realty Income. If we held shopping center REIT shares we would exit, but we hold none.  If we held preferreds in any of these companies we would continue to hold them as the chances of them being affected are very remote at this time.

 

Global Indemnity LTD Floats a New Note Issue

Specialty insurer and reinsurer Global Indemnity LTD (NASDAQ:GBLI) has sold a new subordinated note issue with a long duration maturity.

GBLI is a Cayman Islands based insurer that insures specialty risks such as medical and professional liability insurance, collectibles insurance and property and casualty insurance for small businesses.  While the company is not a large company they are rated “A”, excellent, by AM Best.  Profits for the last year ended 12/31/2016 were strong with investment income contributing a large portion of their net income.

The new notes have a very nice coupon of 7.875% which is one of the highest available coupons in the baby bond arena and we would not be afraid to purchase this issue from a safety perspective.  However, because the maturity date of this new issue isn’t until 2047 we simply won’t be buying any issues with a maturity date this far out.  Over time if the interest rate hiking cycle continues this issue will drift lower.  GBLI currently has a 7.75% baby bond outstanding (NASDAQ:GBLIZ) with a 2045 maturity date and that issue is trading at $24.95, indicating the new issue should trade in the $25 to $25.25 area once it begins trading.

The company will use the proceeds from this offering for general corporate purposes, meaning they can use the money for almost any reason they would like.

Details of this issue can be found here.

Because it is a baby bond we would not expect OTC Grey market trading, but there is always a chance some brokers may have the ability to offer shares prior to NASDAQ trading.

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 www.preferred-stock.com now.

 

Plans for the Days Ahead

So the Fed meeting is happening today and tomorrow morning and we are awaiting the announce on the 1/4% rate hike.  Then for the big news–what Chair Yellen has to say after the meeting–will she sound hawkish on rates or will she give the typical dovish sounding drivel that would be the norm?

So here is how we think this will all play out.  Obviously we believe that there will be a 1/4% hike announced Wednesday at 1 p.m. (CDT)–we think there is ZERO change of a larger hike (such as 1/2%).  After the announcement Chair Yellen will have a press conference and will send a close to normal message but with a slightly more hawkish tone while sighting in particular the employment situation and the most recent inflation figures (such as todays PPI which was slightly hot at .3%).  If we are correct in the above we don’t expect any giant over-reaction of the marketplace, although we wouldn’t be surprised to see the 10 year treasury trade up to 2.65%–NOR would we be surprised to see it trade down to 2.55%.

NOW if Yellen announces something such as a move to start reducing the Fed balance sheet by starting to sell holdings (such as mortgage securities) into the open market we could see an over-reaction.  We think this is remote as this would be a double whammy and we don’t think with the government discontent in Washington DC that Yellen would want to rock the boat this much.

On Friday we will make a few moves (assuming markets are relatively calm).  We will be making a couple of purchases.  We are looking to add some more shares of Independence Realty Trust (NYSE:IRT) as well as a full position of the Two Harbors 8.125% Fixed to Floating Preferred (NYSE:TWO-A or OTC:TWHBP).  We will also add a small position in Spark Energy 8.75% Fixed to Floating Preferred (NASDAQ:SPKEP or OTC:SKYQP).  While we continue to be leery of holding perpetuals the FTF feature will help to buffer bumps in the road and the high yields make the risk/reward proposition fair.

We will be making some sales next week from some of the portfolios as we have had a number of concerns pop up and we will explaining these concerns when we write on the sales.

 

Energy Retailer Spark Energy Inc. Sells a Fixed-to-Floating Rate Preferred

In what has become a continuing parade of companies stepping up and selling fixed-to-floating rate preferreds, energy retailer Spark Energy Inc (NASDAQ:SPKE) has joined with a new offering. The company has sold a 8.75% fixed-to-floating rate preferred issue that has a very lucrative base rate starting in 2022 when the coupon beings to float.

Spark Energy Inc. was formed in 1999 in Houston by W. Keith Maxwell to take advantage of deregulation of the energy markets in many large states and so far they have turned it into a business with $546 million in revenue, primarily from electricity and natural gas sales.  In many large states including California, New York and Texas customers are allowed to choose their own supplier for electricity and natural gas which opens opportunities for companies to come to the marketplace and compete for business.  This has spawned dozens of smaller companies that have garnered minor market shares in many markets and Spark Energy is now rolling up many of these small companies into a company with more market heft.  The company ended 2016 with 774,000 customers which is an increase of 359,000 year over year.  

It should be noted by investors that companies competing in the utility arena can have complicated financial statements and SPKE is no exception.  We have reviewed the financials fairly well and Spark looks like a fairly strong company, but the complicated financial statements and the large risks that they undertake competing against larger and stronger regulated utilities causes the coupon of this new issue to be large.  The reward you receive on this issue means that there is substantial risk in holding these shares, but just the same we are pondering taking a very small stake in the company. We expect shares to potentially trade down to $24-$24.25 after the Fed rate hike so we will be waiting before making a purchase

The new preferred shares carry a fixed coupon of 8.75% until 4/14/2022 at which time the coupon will “float” at 3 month Libor plus a fixed base of 6.578%.  This a solid enough base rate to help insure that in 2022 and after investors will be rewarded at a very nice rate.  Shares will be cumulative in respect to dividends and the dividend payment will be qualified for preferential tax treatment.  This particular issue has a “call protected” time frame of 5 years.

Details of this issue can be found here.

Shares are now trading on the OTC Grey Market under the symbol SKYQP and have been quoted at prices from $24.42 to $24.62.

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 www.preferred-stock.com now.

 

Anxiously Awaiting the Last Nail in the Coffin

It has been a rather rough ride the last 5-6 market days as investors finally figured out that interest rates will be raised by 1/4% next Wednesday when the FOMC meeting ends.  The hike isn’t our big  concern it is what Chair Yellen will say after the rate hike is announced.

On February 16th I wrote the article “The Coming Interest Rate Hike” .  This was right after Fed Chair Yellen testified to congress and honestly she waffled back and forth, just as she had tended to do almost everytime she opens her mouth.  We said in that article if we waited for each and every data point in the economy to come in “hot” we just as well admit that ZIRP (zero interest rate policy) is here forever.  At the time we wrote this article the CME Fed Tool was giving a 17% chance of an interest rate hike in March—17%!!!  We noted that either a) there would be no fed funds rate hike in March or b) there would be a lot of blood spilt in the next couple of weeks.  On  February 27th we wrote an article “Will Markets be Blindsided with an Interest Rate Hike”.  It is really seldom that we would write 2 interest rate articles in 2 weeks–in fact we are pretty certain that has never happened before.  This 2nd article was motivated by what we thought was a very complacent attitude by investors.  The CME Fed Tool had moved up the odds of a interest rate hike to 33% meaning that Fed Funds traders were still very much betting against an interest rate hike.  We had noted that it would be fun to watch investors as the interest rate scenario played out.

Well we have our answer to the speculation noted above as preferreds, baby bonds and in particular REITs have been slapped down pretty hard this week as investors came out of their self induced stupor to figure out rates are heading higher.   Preferreds and baby bonds have on average lost 1.5% this week, while REITs have been knocked down by a staggering 4%.  If you are holding a potful of perpetual preferreds you have had some pain which is exactly the way these things work–NO surprise here.  We have had about a 1% knock to our personal holdings, but we hold a higher percentage of shorter maturity instruments than many, but we took the largest knocks to positions in Independence Realty Trust (NYSE:IRT) and Whitestone REIT (NYSE:WSR)–in fact the hits were large enough to make us lick our chops pondering further purchases.

So tomorrow we get the employment situation report and consensus is for the addition of 200,000 jobs with a drop in the unemployment rate to 4.7%.  Earlier this week the ADP employment report showed a massive job growth of 298,000 jobs against a consensus of 183,000.  If we get this kind of blowout number tomorrow the talk will not be a 1/4% interest rate hike in the summer but of a 1/2% hike and it is this talk that could cause further problems for income investors.

It is too late to shift your investments now to shelter your holdings from further net asset value erosion—and we may have seen the worst of the erosion already so you just as well sit back and study market movements for your own education.  We will not be buying tomorrow, but we will watch IRT and WSR to see if they are worthy buys next week.  We would avoid most Retail and Mall REITs as there appears to be a potential fundamental change happening in the marketplace with store closures.  Whitestone REIT is a retail REIT, but totally different than say a Realty Income (NYSE:O) in that their tenants are small law offices, accountants, and small mom and pop local businesses so we are not deterred from owning them right now.

 

Another Fixed-to-Floating Preferred Sold by a Mortgage REIT

Two Harbors Investment Corp (NYSE:TWO) becomes the 3rd mREIT in as many weeks to sell a fixed to floating rate preferred issue.  Interestingly all 3 issues have very similar terms.

TWO has sold 5,000,000 shares of 8.125% fixed-to-floating rate preferreds with the typical preferred stock terms. Shares are cumulative in respect to dividends,  redeemable at the issuer’s option and dividends are non qualified for preferential income tax treatment (all dividends from REIT preferred stocks are non qualified). 1 twist with the new shares from TWO is the “call protected” term is a full 10 years, meaning they are not allowed to call the issue until 2027.  The coupon will be fixed until 8.125% until April of 2027 and then will float at 3 month Libor plus 5.66%

Recall that last week PennyMac Mortgage (NYSE:PMT) sold a 8.125% fixed-to-floating rate preferred issue.   The terms of this issue are very similar to the TWO issue, except the call protection period ends in 2024 (3 years shorter than the Two Harbors issue) and the base coupon rate that is added to 3 month Libor is slightly higher at 5.831%.

A couple of weeks previous Chimera Investment Group (NYSE:CIM)  sold a 8% fixed-to-floating rate issue with a base coupon rate of 5.791% that will be added to 3 month Libor starting in 2024.

It should be noted by investors that neither the PennyMac issue nor the Chimera issue are trading very strongly. Both have been bouncing around the $24.50 – $24.65 area and I have a suspicion that even when the issues move from the OTC Grey Market to the NYSE they are going to be stuck in the $24’s as there is now anticipation of a Fed rate hike next week and income issues are pausing to ponder the future.

We will not be buying anything at all for the next week as it doesn’t make sense to move before we get the rate hike behind us.  We think that if the Fed raises rates next week it won’t be the hike that will be painful, as the market is now anticipating a raise, but it could be the Fed statement that hurts.  A post meeting statement that sounds too bullish could spook the market and send everyone off to talk about maybe a ½% hike mid year–and talk like that would send markets lower quickly.  So why buy now?  We will revisit potential purchases later next week,

Details on the new issue from Two Harbors can be found here.   The issue will begin trading on the OTC Grey market soon under the temporary ticker TWHBP.                                                                                                                  
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 towww.preferred-stock.com now.