mREIT Preferreds - Just The Facts, None Of The Fluff - II

Includes: AGNC, NLY, RAS, RSO
by: Rubicon Associates


I recently wrote an article about the mREIT preferred universe, this article culls the universe to the optimal issues.

Unlike common stocks, there are often multiple preferreds by the same issuer, and the "best" issues should only be considered.

In this "no fluff" note, I present only the optimal issues.

I recently wrote an article on mREIT preferred stocks where I listed the universe of mREIT preferreds in a fluff-free fashion. Upon the conclusion of the article, I stated that I would cull the universe to the optimal issues, or the "best" issue of each issuer.

This note is my attempt to do just that. The determination of optimal issue is based on stripped yield, yield-to-call, price and early redemption ("call") date. This note will follow the same order as the first note as the information was judged useful by most readers. The tables and charts are drawn from my spreadsheets with data believed to be accurate.

To begin, the universe of mREIT preferred stocks (same as the first article, but updated prices and yields):

Now, the "culled" selections:

The culled universe has a lower current and stripped yield than the broader universe, due in large part by the reduction in line items of Rait Financial (NYSE:RAS) and Resource Capital (NYSE:RSO). The reduction essentially reduces the weighting of multiple issue higher yielding preferred issuers. If higher yields are designed to compensate investors for higher risk, this (the culling) has the effect of reducing the risk in the universe as a REIT like RAIT is now equal weighted to a REIT like Annaly Capital (NYSE:NLY) or American Capital Agency (NASDAQ:AGNC), lower risk issuers.

As many investors do not like to pay above par, a look at the stripped price of the issues:

As the chart above shows, the culled universe has a lower average stripped price than the full universe. Par sensitive buyers will be relieved to see that all the issues trade below par on a stripped basis. As a result of the prices, we get the following yields:

The stripped yield of the culled universe is lower than the stripped yield of the original universe for the reasons mentioned earlier. As all of the issues trade below par, I will not graph the yield-to-call as it will be higher than the stripped yield and decidedly very positive (45% vs the original universe YTC of 40% - both home runs).

In the first note, I mentioned that the preferred stock of mortgage REITs are more stable than the equity of mortgage REITs and that is one of the primary reasons that investors should consider them instead of the equity. The following table shows the "cost of stability", or the equity dividend yield minus the preferred stock stripped yield.

Again, note the column that shows the equity-preferred spread plus/minus the average, to give a relative sense versus the group. Also, you will note that Resource Capital has slashed their common dividend as they exit a large number of positions, while their preferred keeps chugging along. And of course, I have a chart for that.

Another way to view these preferreds is their spread to the risk free rate. For this I will use the ten year Treasury. Keep in mind, this is a static look at the premium, not a judgment as to its historical value.

And yes, you guessed it, I have a chart as well:

Again, you will note that those REITs with the largest spread to risk free are also judged to be the higher risk mortgage REITs within this space.

In order to get a sense of the range the preferreds have traded in over the last year, here is a price table showing the year-end price, the 52 week high and low and the change from the high and low:

Note that the culled universe is further away from its high and closer to its low. And of course, a chart follows:

As the above chart shows, there have been some gains in the mREIT preferred space over the last year.

Finally, a look at some data on the underlying equities (in order to give a sense of what the equity market thinks - the market is obviously not infallible).

First an equity overview table:

And the chart:

A large dispersion among issuers, to be sure (note RSO - the preferred was a way better choice).

As I have stated before, the maintenance of book value points to the stability and portfolio management of a mortgage REIT. Here is the change in book value of the mREITs' equity:

In my first note, a reader (Be Here Now) made the following statement:

I would very much like a calculation of the ratio of the common dividend (total) to the preferred dividend (total) to get an idea of the safety provided to the preferred dividend by the common dividend.

Just so happens that I have done just that:

The table above shows that there is substantial cushion in the form of the common dividend before the preferred dividend would get cut.

Bottom Line: There are opportunities available within the mortgage REIT preferred market which can allow an investor to swap out of the equity and into the preferred stock while keeping a source of higher yield in the portfolio.

In my first note, I opined:

If investors find this "no fluff" approach useful, I might drill further into the universe, selecting the "best" preferred from each issuer in order to create an "optimized" universe to choose from which should out-yield the entire universe's 8.5% yield.

What I found interesting (although reasonable when thinking about it) was that the culled universe did not "out yield" the broader universe (again, for the reasons mentioned many charts/tables ago), although I would posit that the culled universe will be more stable and have a higher quality on average.

Hopefully you have found this "no-fluff" article useful.

Disclosure: I am/we are long NYMT, MITT, NLY, CYS, OAKS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: NLY and CYS are long common

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