- Bags of coins sit there like a Ford going uphill.
- COLD has the blueprint for success; who says ethics don’t pay?
- AGNC preferred shares fall into our buy range again. Lock in a fat yield.
- MITT traders await an opportunistic dip.
- Looking for a helping hand in the market? Members of The REIT Forum get exclusive ideas and guidance to navigate any climate. Get started today »
When the market starts falling, many investors get the wrong idea.
You shouldn’t be running from the market.
Bags of coins don’t make a comfortable pillow.
They don’t emit dividends.
They will not expand like the coronavirus.
They will sit there like a Ford (F) trying to go uphill.
Investors should be looking to invest more defensively. At The REIT Forum, we’ve been urging investors to focus more on preferred shares and lower-risk REITs.
We’d like to cover some investments in the REIT space which include an equity REIT, a preferred share, and a mortgage REIT. Let’s start with the equity REIT!
Taking a look at COLD
Americold Realty Trust (COLD) looks great. We did the fundamental research during their last big dive. Then shares rallied hard and we tossed it all on the back burner. Now, they are on sale. They carry a risk rating of 1.5 and land in our strong buy range:
We should caution investors that the share price has been more volatile than we expect for a risk rating of 1.5 On the other hand, the balance sheet is better than a risk rating of 2.0. We’re splitting the difference and assigning the 1.5 risk rating. It’s a solid balance sheet:
Equity made up more than 80% of their total market capitalization. Granted, that’s when their equity was priced higher, but getting past 80% is exceptional. Most REITs with 80% in equity get a risk rating of 1.0. They have a very strong position in a highly segmented sector:
We expect a great deal of consolidation over the next decade. We wouldn’t be surprised if the top 20 combined for over 20% of the global market share in a decade. They have economies of scale and the ability to issue new shares when it would enable an accretive acquisition. That’s a huge advantage for growth. Acquisitions should continue to drive margins higher and as the REIT grows, the same leverage ratios would enable them to get even better credit ratings.
Seeing net debt to EBITDA at 4.1x is excellent. This is a management team that sees the value of low leverage. Why do we love low leverage so much? The simplest reason is that it allows them to get debt with a lower interest rate. However, it also enables COLD to put their balance sheet to work. If we actually enter a recession, some of those smaller companies (not publicly traded) in the cold storage space (which we’re classifying as semi-industrial) could find themselves needing capital. COLD has the balance sheet to acquire those companies when they are ready to accept fire-sale prices.
Why don’t analysts like COLD now? One reason is that their earnings can be a bit lumpy. The company operates some warehouses and has labor expenses. They self-insure for their workers. When workers have abnormally high claims for health insurance, it can hurt COLD’s quarterly earnings. Management was pretty clear about the impact, it can still scare investors. We aren’t interested in the short-term movement as much as the long-term potential. COLD is positioning themselves right for growth:
Many investors don’t know how much those factors at the bottom matter. When we find something to hit with a risk rating of 5 or 6, you shouldn’t expect to see many of those features. Even many of the “better” REITs haven’t committed to corporate governance at this level. We want to see COLD grow. They picked policies that help them grow:
The technique has worked, COLD has regularly traded at a premium to net asset value. However, investors should take this with a grain of salt. There simply aren’t other publicly-traded REITs within this space. There isn’t enough readily accessible information about real estate transactions, so analyst estimates on net asset value are going to be pretty rough. However, the chart is still helpful:
The green line on the left shows the price to NAV ratio. As you can see, it hasn’t spent much time near this low. We don’t have a long history of data because COLD’s IPO wasn’t that long ago. However, we’ve been listening to their calls and presentations and waiting for an opportunity to bring out this buy rating.
When you’re looking at this kind of chart, the angle of the black line is important. Regardless of the price activity, a line that climbs as it moves to the right suggests that the fundamentals are favorable for the underlying real estate. Taking a look at their fundamentals for the quarters we’ve had so far, a boost to recurring capital expenditures over the last 2 quarters pushed the payout ratio higher:
We expect the recurring capital expenditures element to decrease. We also expect COLD to leverage their investment-grade credit rating to access cheap debt to assist in financing any upcoming acquisitions. Consequently, we see a few favorable factors to help COLD continue the growth. This is a case of a “great REIT at a good price.” Sure, we’d love to get a great REIT at a great price, but that’s extremely rare. This is a nice REIT to start building into the long-term growth portfolios.
Preferred share from AGNC
If you’re looking to build a position in the preferred shares from AGNC Investment Corp. (AGNC), this is a great time to start shopping. AGNC Investment Corp. 6.5% DPRP PFD E (AGNCO) is on a very nice sale:
Try to find something to dislike about these shares. Low-risk rating. Trading $.29 under call value despite having $.28 in dividend accrual already. That gives us a stripped price under $24.50. Did you want a sale on solid income securities? You got it! AGNCO is 3.44% of our portfolio.
We purchased shares of AGNCO when they were on a great sale on 2/28/2020:
Source: The REIT Forum
Our buy order
Our purchase is shown below:
Our thesis on AGNCO
We’re going to go over it very quickly so investors know why we’re grabbing these shares right now. When we set our target prices throughout the sector, we consider multiple factors. Those factors include the fundamental factors for valuation (stripped yield, yield to call, and so forth). However, we also include the historical values of the shares. This is where AGNCO is absolutely destroying the competition.
We track the price history, adjusted for dividends, in a large spreadsheet. This spreadsheet isn’t posted anywhere. We took a screenshot of the latest reading:
Source: The REIT Forum
You can see that AGNCO is trading down about 4% from last week and about 3.17% from its average price over the last 18 months. That’s incredible for a preferred share with a risk rating of 1. The current panic is not about increasing interest rates, it is about fear of a recession. In that scenario, the shares with the highest risk ratings should fall the hardest. Yet we see AGNCO took one of the hardest hits.
There should be some extra support around $25.00. Many investors screen for shares under $25.00, so the round number can help to provide a little support. We also have about two-thirds of a quarterly dividend already accrued. So the stripped price is around $24.66.
We intend to remain cautious. We don’t know when the fear will stop and we believe that this fear event (COVID-19) looks much scarier than the prior fear events (potential for larger declines). We went into more depth in a market update to subscribers.
Investors running for the door are allowing us to get in, but investors should be wary of running too hard in the other direction. We simply set a limit-buy order at $24.95 and the market quickly came to us (prices were running at $24.93 to $24.94 just prior to our order). Investors may decide to go a few pennies higher, but there should be plenty of sellers available around $25.00 (round number impact, again).
Adjusted for dividends, this is the lowest we’ve ever seen shares of AGNCO:
The only time they were close to this level was right when they started trading.
Final thoughts about AGNCO
We are staying defensive, but we are still happy to grab some of the lowest-risk preferred shares. We will still have a moderate cash allocation after this purchase, over 11%.
As we have discussed recently, we’re focusing on positioning the portfolio defensively. To that end, we decided to close out a few positions. Closing these higher-risk positions gives us more room to invest in lower-risk shares.
We sold all 1,300 shares of AG Mortgage (MITT) at $15.8015
We initially purchased MITT on 10/31/2019:
The trade worked out decently for us as we still came out with a 5.46% return. MITT is just barely in our neutral range. If it dipped, we might upgrade it and buy shares again.
As we move through a more volatile market, investors should be looking to cut more risk out of their portfolio. Mortgage REITs carry more risk than the equity REITs and preferred shares we cover. Therefore, we have been moving more of our portfolio to equity REITs with excellent balance sheets and lower-risk preferred shares.
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This article was written by
Colorado Wealth Management is a REIT specialist who began his decades-long investment career in a family-owned realtor office before launching his own company and embracing his drive for deep-dive REIT analysis. He holds an MBA and has passed all 3 CFA exams. He focuses on Equity REITs, Mortgage REITs, and preferred shares.He leads the investing group The REIT Forum. Features of the group include: Exclusive REIT focus analysis, proprietary charts and data models, real-time trade alerts posted multiple times a month, multiple subscriber-only portfolios, and access to the service's team of analysts and support staff for dialogue and questions on the REIT space. Learn more.
Analyst’s Disclosure: I am/we are long COLD, AGNCO, ANGCP. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.