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October Overview in Income Investing

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Get Caught Up on the Income Security News You Missed In October
Recapping the important news in income securities in the last month. New issues, bankruptcies and major movers and dividend suspensions
 
New Issues in October of Preferred Stocks
 
There were 3 new preferred stock issues during October as well as 2 new ETD (exchange traded debt issues.
 
1st off apartment REIT Bluerock Residential Growth REIT (ticker:BRG) sold a new issue of preferred stock with some desirable features.  The shares have a high coupon  of 8.25% and asset coverage requirement of  200% and a put feature (you can force a redemption). The shares are now trading on the NYSE and are priced just above par at $25.18.

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2ndly manufactured home community REIT UMH  Properties (ticker:UMH) has sold a perpetual preferred issue with a good coupon of 8%.  In spite of what a person thinks about mobile homes this has been a pretty darned good business for UMH.  This is one we wished we owned as the issue has traded all the way up to $26.40–it is trading with thin volume, but if one was lucky enough to get some of this new issue they have done well in just 2 weeks.
 
 
Lastly Targa Resources Partners (ticker:NGLS) sold a Fixed to Floating issue with a fixed coupon of 9% until 11/2020.  This issue is trading just under par at $24.85 as investors are hesitant to wade into the MLP arena–even if it is a preferred issue.  NGLS is a solid natural gas midstream company, but just the same if it is energy related it is not highly sought after.

 
 
New Issues in October of Exchange Trade Debt 
 
The Southern Company (ticker:SO) sold a nice 6.25% subordinated note issue in October. Solid investment grade, but with a long dated maturity.  We are quite surprised that investors have gobbled this issue up and driven the price up to $26.40–wow!!!  With a maturity date of 2075 you would think this would be a dicier holding– BUT it goes to show that quality trumps coupon and maturity date at this point in time. We have written that income investors should not be expecting high yield issues to outperform quality like they did back in 2009-2010.  We wrote an article on September 29th addressing this issue–quality rules when fear is present.
 
 
TravelCenters of America (ticker:TA) sold a 8% senior note issue in October which is trading just above par at $25.13.  This was fairly predictable given that they already have a 8.25% and 8% issue outstanding.  While 1st call dates and maturities differ in these issues the terms are close to identical.
 
 
 
New REIT Issue for October
 
We had 1 new REIT issue of note come to market during October.  American Farmland Company  (ticker:AFCO) came to market at $8/share. The land owner was looking to come to market in a range of $8.50-$10.50—which was a lot of wishful thinking given that at the current price of $7.20 it has a current yield of 3.47%.  The share price has not seen $8 since trading began and has traded as low as $6.76. 
 
We don’t believe there is any reason to contemplate owning this company.  Farmland Partners(ticker:FPI) came public 18 months ago at $14 and closed last Friday at $10.26, but at least is now somewhat seasoned and carries a current yield of 4.97%  Honestly I don’t see why one would want American Farmland Company at a poor current yield when they could have Farmland Partners at a much better yield–they are pretty similar.
 
As we have stated before we would have an interest in Farmland Partners at $9/share. A ag land investment is a great long term (and we mean really long-maybe 10-15 years) investment, but there remain some challenges for FPI as they begin to renegotiate leases in a environment of very low commodity prices.  We may see $9/share in the next 3-4 months.
 
MLP Distribution Suspensions
 
October was a busy month for distribution suspensions in the Master Limited Partnership arena.
 
The following partnerships suspended their distributions–none of them are particularly surprising.
 
CVR Partners  (ticker:UAN)  is a fertilizer company.
 
Emerge Energy (ticker:EMES) is a frack sand and oil field service company.
 
Mid-Con Energy (ticker:MCEP) is a upstream oil and gas producer.
 
Hi-Crush Partners (ticker:HCLP) is a frack sand company.
 
 
MLP Merger
 
Refiner Northern Tier Energy (ticker:NTI) announced last week that they had received a buy out offer from Western Refining (ticker:WNR). Being an offer with just a 15% premium NTI may reject this offer or negotiate a higher price.  We shall see.
 
 
Interest Rates 
 
The 10 year treasury moved in a range of 1.91% early in October to a high of 2.18% late in the month, before closing the month at 2.15%.
 
Recall from prior learnings that the level of rates is not likely as concerning as it is the ‘rate of change’.  YTD the highest level we have seen on rates on the 10 year is 2.49% back in June with the low at 1.67% way back in January.  Only a very strong employment report is likely to move interest rates higher from here over the next couple of weeks. A strong report moving the 10 year by 20 basis points would knock stocks for a loop–more modest moves are not likely to cause stock disasters.
 
 
 
Economic News for the Coming Week
 
For this week we have a number of economic releases, but there are really just a few that are likely to have broad implications for stocks and interest rates.
 
On Wednesday we have the ADP employment report.  This will give us an indication of what the Employment Situation report may look like on Friday. For what it is worth the consensus is looking for 190,000 additional jobs–a number at or above this amount will no doubt send interest rates up–maybe 10 basis points on the 10 year treasury.
 
 
 
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Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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