Resource Capital: A Quick Trade To Boost Yields On Idle Cash

Summary

• Many investors are holding sizable cash positions which generate little to no return.
• Resource Capital's preferred stock redemption offers an opportunity to juice yields with little time commitment.
• Make 3-10% annualized return in 20 days.

Many cautious investors have trimmed equity market exposure during the euphoric run-up earlier this year. Agile traders were able to snag up bargains with their dry powder during the early February sell-off, but the short-lived correction likely left many still holding a sizable cash position. The market still feels expensive at close to all-time highs, the tech growth stories look fully-priced, and allocating to fixed income seems like a bad bet against the rising rate backdrop. I am one of these investors holding a larger-than-desired cash position, but hesitant to deploy capital due to the lack of bargain in the markets. One of my solutions is to look for short maturity income situations to boost my portfolio yield without sacrificing liquidity.

The Opportunity

Resource Capital Corporation’s (RSO) Series B preferred stock offers an attractive opportunity to put idle cash to work, and juice your yield with a short holding period of 20 days.

Resource Capital Corp is in the midst of a turnaround, where management is working to lower cost of capital while simplifying the core business. As part of this strategic initiative, they have been refinancing high cost capital via redemption of preferred stocks and bonds and re-issuing at lower rates. I am bullish on the common stock and have recently written about the company here and here.

Resource Capital announced the redemption of their series B preferred stock, which will take place on March 26, 2018. Holders of the preferred stocks will be paid the par value of $25.00, plus accrued dividend of $0.32083, for a total of $25.32083 on the redemption date.

Price Paid	$ 25.26	$ 25.27	$ 25.28	$ 25.29	$ 25.30
Return	0.24%	0.20%	0.16%	0.12%	0.08%
Annualized Return	7.2%	6.0%	4.8%	3.7%	2.5%

Click to enlarge

At the time of writing, the bid price is $25.21 and the ask is $25.26. Under the most pessimistic scenario, readers who purchase RSO-B stand to pocket a return of 0.24% (7.2% annualized). Not too shabby for a short-term CD.

Ability to comfortably repay

Resource Capital trades on the NYSE and has a $280 million market cap. The company reported more than $200 million of unrestricted cash as of year-end 2017. The cash balance is enough to comfortably repay the $115 million redemption in 20 days. Furthermore, the company has shown willingness and ability to pay off the same security recently, redeeming ~1 million shares of the series B preferred stock in December 2017.

Conclusion

Investors should note that this recommendation is not meant to replace any core fixed income holdings, but rather a "yield boost" for idle cash balances. A 20 basis points return may not be worth the friction cost of trading in and out of positions, but a 0.20% gain in 20 days sure beats tying up capital with a 3-month CD.

Analyst’s Disclosure: I am/we are long RSO, RSO/PB. 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.