mREIT Preferred No Fluff Update - September 8, 2017

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About: AGNC Investment Corp. (AGNC), Includes: RASF
by: Rubicon Associates
Summary

Universe yields 7.84% (excluding RAS), optimal yields 7.82% (again, excluding RAS). Yields remain attractive.

The cost of stability is 221 bps (434 bps with RAS), spread to risk-free is 579 bps (684 bps with RAS).

Preferred stocks outperformed equities on a price basis.

It has been a while since I did the last no fluff update on mortgage REIT preferred stocks. There hasn't been a significant movement in the space with the exception of RAIT Financial (RAS) which has continued to be under pressure, falling below a dollar and continuing to set new lows. In the bullet summary, I have pulled RAS out of much of the metrics as it has been skewing the results (multiple issues getting hammered).

Thoughts going out to those who have been (and are getting) hit by the force of nature.

Without further ado, the universe:

The universe yield 8.89% as of this writing (again, 7.84% without RAS), with prices generally around par (as shown in the graph below).

I will have to begin stripping out RAS as it makes a graphical depiction of the universe less useful than it might be normally.

The stripped yield of the universe:

The "optimal list", where one security is chosen from each issuer based on price, yield and yield-to-call:

The optimal list has a stripped yield of 8.36%, well below the universe, but this is, again, due to the multiple RAS issues. The optimal list is only 2 bps lower than the universe when RAIT is stripped out.

The cost of stability - the equity's dividend yield less the preferred stripped yield - or the amount of yield foregone in order to be in the more stable preferred shares is 434 basis point, 221 basis points without RAS.

Graphically:

The spread to the risk-free rate is yet another way of determining the perceived risk of an issue or issuer. Going forward, RAS will be stripped from this as well as it skews the over/under average column.

Graphically:

Equities were solidly in the red last week, while the majority of preferred stocks were treading water.

Graphically, the distance from the high and low of each issue - the greater the band, the greater the volatility.

The range from high to low (the "band"). Smaller is better for an investor, larger is better for a trader.

A brief equity overview of the preferred issuers:

Return graphically:

One factor in the safety of preferred stock issues is the size of the equity dividend relative to the preferred (cushion) and the size of the equity value (at market), relative to the preferred at liquidation value. Note that RAIT is below 1 on both measures - not reassuring.

One of the more attractive issues from all of the above data is the AGNC Investment (AGNC) issue, AGNCP. AGNC has a strong equity cushion (26x), an above-average spread to risk-free (5.97%) and a reasonable cost of stability at 209 bps (as an example of how the above data can be used to find securities that are attractive on multiple fronts)

Swaps have been trending lower - as one might expect as rates have fallen and swap spreads have not materially increased.

Current coupon rates have also fallen with Treasuries - potentially increasing prepayment rates on securities while helping elevate the mark-to-market value of the portfolio.

A lot of talk of RAIT in this issue, here are some SA opinions:

Colorado Wealth (8/30/17) here

Sam Lin (8/29/17) here,

Noam Ganel (8/28/17) here

Norm Roberts (8/10/17) here

Some of the week's mREIT and preferred notes:

Colorado Wealth on Annaly here

Sam Lin on Resource Capital here

Colorado Wealth on AGNC here

Achilles Research on VEREIT preferred here

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AGNC over the next 72 hours. 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: looking at the AGNCP

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.