Our Latest Preferred Share Trades
Summary
- During February, we placed a handful of trades in the mortgage REIT preferred shares.
- We recently picked up shares of ARR-C and NRZ-B. We'll highlight the index cards and commentary on those positions.
- In February, we also closed out positions in NYMTP, TWO-E (which was called) and NRZ-C.
- This idea was discussed in more depth with members of my private investing community, The REIT Forum. Get started today »
Get ready for charts, images, and tables because they are better than words.
The ratings and outlooks we highlight here come after Scott Kennedy provides his weekly updates in the REIT Forum.
Your continued feedback is greatly appreciated, so please leave a comment with suggestions.
The main section for this article comes from Preferred Shares Week 242.
Open Positions
All our open positions in preferred shares are shown below:
Source: The REIT Forum Google Sheets, “Returns” Tab
The green box highlights positions that were opened since our prior full update (01/26/2021).
We also provided a quick mid-month update (02/16/2021).
Before placing any trade (for any security at any time), verify the bid and ask prices through your broker. Sometimes prices swing quickly and the bid-ask spreads can widen. When investors can’t get the price they want, it is wise to simply wait for a buyer or seller to show up.
If you’re familiar with our work, it should come as no surprise that the positions we opened in ARR-C and NRZ-B were both listed as top picks in Preferred Shares Week 238. That article was published in late January and highlighted the top picks at that time.
Recently Closed Positions
Our recent sales are shown below:
Source: The REIT Forum Google Sheets, “Returns” Tab
These positions were each closed since the prior full update. You may notice the dates we closed positions, 2/4/2021 and 2/10/2021, align with the dates we purchased the other positions. These were simply adjustments to maximize our risk-adjusted returns.
- In the case of NYMTP, we decided we would rather have more ARR.PC. We were also interested in NYMTO, but the share price on NYMTO had climbed and made it less appealing for the swap at that time.
- In the case of TWO-E, shares were called and we wanted to redeploy the proceeds.
- In the case of NRZ-C, we simply wanted to own NRZ-B instead because it carried a slightly more favorable price.
Recent Adjustments
We adjusted price targets for the sector again. As a reminder, when we set the targets, we set the stripped price target (before the dividend) and then use the sheet to add in the amount of dividend accrual. Consequently, you’ll get price targets that already include the relevant adjustments for dividend accrual.
No adjustments were negative. The range of adjustments runs from 0% up to 6.43%. The highest values, those over 6%, were all for MITT following their Q4 earnings release and the conversion of more preferred shares leading to improved coverage. Despite higher targets, shares were still downgraded (from neutral to overpriced) as they now run fairly close to $25.00. That's too high for our taste since they carry a higher risk rating than peers.
The vast majority of increases were between 0.5% and 1.5%.
Other relatively large increases came for the preferred shares from New Residential (NRZ) and Two Harbors (TWO) where targets were increased between 2.0% and 3.6%.
Shares of TWO-D (TWO.PD) and TWO-E (TWO.PE) had a call announced. They haven’t ceased to exist quite yet, but they are expected to disappear soon and the result is improved coverage for the remaining preferred shares from Two Harbors.
A Few Index Cards
I'll include two of the index cards and the discussion from the update as well. These were two of our recent "top picks" for the preferred shares. We run much tighter price target ranges than many analysts, so it isn't unusual to see preferred share "top picks" that are within 2% to 3% of the target buy-under price.
There is plenty to like about ARR-C (ARR.PC). Shares have:
- About 4 years of call protection.
- A fixed-rate dividend that offers a solid yield.
- A modest discount to call value.
- A risk rating of only 2.0.
They’ve been floating at a similar price for the last few months and missed out on much of the rally in the sector. Now that many of the capital gains have occurred, it’s a nice time to catch a lower-risk share with a solid fixed-rate dividend. We couldn’t pick ARR-C a few months ago because we wanted shares with more upside in the price. That’s less important now because we already caught the swing higher in the share price of peers.
NRZ-B (NRZ.PB) still has a slight edge over the other preferred shares from NRZ. It isn’t a substantial edge though. Investors looking to buy into the NRZ preferred shares should really be checking the Google Sheets for targets and checking the bid-ask spread from their broker before placing an order. At the moment NRZ-B is leading, but it could easily swing.
Stock Table
We will close out the rest of the article with the tables and charts we provide for readers to help them track the sector for both common shares and preferred shares.
We’re including a quick table for the common shares that will be shown in our tables:
Type of REIT or BDC | ||||
Agency | Hybrid | Multipurpose | Commercial | BDC |
Let the images begin!
XAN (and XAN-C) will be renamed soon. The company changed tickers. We wait to swap it over until most data sources are using the new (updated) ticker. Ironically, that still takes a while after the change is official.
This is the reason XAN is showing a price-to-book ratio of 0.0, no dividend yield, and no earnings yield.
Residential Mortgage REIT Charts
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Source: The REIT Forum
Commercial Mortgage REIT Charts
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BDC Charts
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Notes on Price-to-Trailing Book Ratios - Using Q3 2020 Book Value
Remember that these are price-to-trailing-book ratios. They are not using estimates of current book value. Book values continue to change every day. Scott Kennedy provides frequent updates on estimated book value, ratings, and price targets through The REIT Forum.
Repeated Note: There are two mortgage REITs we need to highlight here:
- AG Mortgage Investment Trust (MITT) - We are using the Q3 2020 book value reported by management, which does not deduct the value of accrued dividends for preferred shares. If the preferred dividends were paid, it would reduce common book value under these calculations. This method is accepted under GAAP.
- MFA Financial (MFA) reports “GAAP book value” and “economic book value”. We’ve chosen to use the GAAP book value to remain consistent.
Unfortunately, we have to repeat those bullet points every time we publish because it regularly comes up if we don’t mention it.
I'll be switching this series over to using Q4 2020 book values shortly. We have enough REITs reporting. I opted not to do it for today because the focus is on the preferred shares.
The common shares are simply being added in as a bonus for our viewers who have come to expect the charts.
Notes on Common Share Dividend Yield
Dividend yield often comes up in the comments, but picking based on dividend yield is stupid and regularly results in terrible performance. Don’t do it.
This chart is still in the same order as the prior charts. Consequently, you know the highest price-to-book ratios (using trailing GAAP book value) for each segment will be at the top. If you see a mistake, please feel free to say something. Occasionally, the data for dividend rates requires a manual update.
Notes on Earning Yields
One of the next things investors may ask about is the yield using core earnings. This chart puts together the core earnings based on the consensus analyst estimate. Beware that the consensus estimate may not always be the best estimate. Further, there are ways to increase “Core Earnings” through accounting decisions or modifying hedges. Consequently, investors should still take these values cautiously. We do not depend on the consensus estimate to make decisions.
Preferred Share Charts
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Notes on Preferred Share Prices
This chart gives you a pretty quick feel for which shares are trading at a discount to call value. Each of these preferred shares has a call value of $25.00, but that doesn’t mean a share will be called. The company decides if they want to issue a call or not.
Notes on Dividend Yield/Stripped Yield
Stripped yields are vastly more useful than “current” yields for preferred shares. The stripped yield uses the stripped price. That’s different from using the current price because it means we already adjusted for dividend accrual. This makes the process easier for investors.
We can talk about shares using “regular prices.” Those are the prices an investor would actually use when entering an order.
However, we will provide the stripped yield to adjust for the dividend accrual. In the spreadsheets we host for subscribers, we include the actual ex-dividend date, or the projected ex-dividend date if the actual date isn’t yet known. If you’re planning to buy a share, it’s always wise to check if the shares just went ex-dividend so you can adjust your targets accordingly.
Notes on Floating Yield on Price
Since many of these shares switch over to floating rates, we also want to consider what the yield would be if the floating rate was in effect and shares were still at the current price. To demonstrate that, we use the “Floating Yield On Price”. If the share remains at a fixed-rate indefinitely, then the value doesn’t change.
One point we need to emphasize here is that we are dealing with yields. A yield must involve the share price. We aren’t simply showing the new “rate” if the share began floating, we are adjusting the new rate for the stripped price.
Floor
XAN-C has a floor that interferes with the eventual floating rate. The floor prevents the floating rate from being less than the initial fixed-rate. Consequently, while XAN-C is one of the FTF shares, it doesn’t exhibit the same decrease as other FTF shares when we switch over to the “Floating Yield on Price”. However, it remains a higher-risk share because of the type of assets the REIT owns.
Preferred Share Data
Beyond the charts, we’re also providing our readers with access to several other metrics for the preferred shares.
After testing out a series on preferred shares, we decided to try merging it into the series on common shares. After all, we are still talking about positions in mortgage REITs. We don’t have any desire to cover preferred shares without cumulative dividends, so any preferred shares you see in our column will have cumulative dividends. You can verify that by using Quantum Online. We’ve included the links in the table below.
To better organize the table, we needed to abbreviate column names as follows:
- Price = Recent Share Price - Shown in Charts
- BoF = Bond or FTF (Fixed-to-Floating)
- S-Yield = Stripped Yield - Shown in Charts
- Coupon = Initial Fixed-Rate Coupon
- FYoP = Floating Yield on Price - Shown in Charts
- NCD = Next Call Date (the soonest shares could be called)
- Note: For all FTF issues, the floating rate would start on NCD.
- WCC = Worst Cash to Call (lowest net cash return possible from a call)
- QO Link = Link to Quantum Online Page
Ticker | Price | BoF | S-Yield | Coupon | FYoP | NCD | WCC | QO Link | P-Link |
$24.98 | FTF | 6.96% | 6.88% | 4.58% | 4/15/2024 | $5.61 | |||
$25.54 | FTF | 6.93% | 7.00% | 5.25% | 10/15/2022 | $2.52 | |||
$24.45 | FTF | 6.72% | 6.50% | 5.36% | 10/15/2024 | $6.65 | |||
$23.45 | FTF | 6.60% | 6.13% | 5.27% | 4/15/2025 | $8.06 | |||
$24.53 | FTF | 7.09% | 6.95% | 5.28% | 9/30/2022 | $3.09 | |||
$24.25 | FTF | 6.70% | 6.50% | 4.50% | 3/31/2023 | $4.01 | |||
$24.50 | FTF | 6.89% | 6.75% | 5.29% | 6/30/2024 | $6.00 | |||
$24.55 | 7.15% | 7.00% | 7.15% | 1/28/2025 | $7.31 | ||||
$25.23 | FTF | 6.92% | 6.90% | 5.66% | 4/15/2025 | $7.10 | |||
$25.00 | 7.60% | 7.50% | 7.60% | 3/23/2021 | $0.34 | ||||
$22.68 | FTF | 7.51% | 6.75% | 5.99% | 10/30/2024 | $8.65 | |||
$24.11 | FTF | 7.85% | 7.50% | 6.27% | 8/15/2024 | $7.46 | |||
$23.47 | FTF | 7.66% | 7.13% | 6.27% | 8/15/2024 | $7.77 | |||
$21.78 | FTF | 7.39% | 6.38% | 5.98% | 2/15/2025 | $9.61 | |||
$24.94 | FTF | 8.15% | 8.13% | 6.04% | 3/15/2024 | $6.17 | |||
$24.72 | FTF | 8.10% | 8.00% | 6.25% | 6/15/2024 | $6.80 | |||
$24.58 | Bond | 6.87% | 6.75% | 6.87% | 3/23/2021 | $0.45 | |||
$25.00 | Bond | 6.68% | 6.63% | 6.68% | 3/23/2021 | $0.22 | |||
$25.25 | 8.06% | 8.00% | 8.06% | 10/30/2021 | $1.34 | ||||
$23.74 | FTF | 8.58% | 8.00% | 6.41% | 3/30/2024 | $7.68 | |||
$23.09 | FTF | 8.54% | 7.75% | 5.44% | 9/30/2025 | $11.04 | |||
$23.14 | FTF | 8.80% | 8.00% | 6.13% | 3/30/2024 | $8.28 | |||
$25.34 | FTF | 8.10% | 8.13% | 5.83% | 4/27/2027 | $12.35 |
Second batch:
Ticker | Price | BoF | S-Yield | Coupon | FYoP | NCD | WCC | QO Link | P-Link |
$24.57 | FTF | 7.84% | 7.63% | 5.70% | 07/27/2027 | $12.81 | |||
$23.74 | FTF | 7.71% | 7.25% | 5.53% | 01/27/2025 | $8.51 | |||
$25.31 | 7.75% | 7.75% | 7.75% | 03/15/2021 | -$0.01 | ||||
$25.30 | 7.50% | 7.50% | 7.50% | 3/15/2021 | -$0.01 | ||||
$25.39 | 8.18% | 8.20% | 8.18% | 8/17/2022 | $2.78 | ||||
$24.75 | FTF | 8.45% | 8.25% | 5.96% | 4/15/2024 | $6.87 | |||
$24.67 | 7.96% | 7.75% | 7.96% | 3/23/2021 | $0.65 | ||||
$24.37 | FTF | 8.11% | 7.75% | 5.62% | 12/27/2024 | $8.40 | |||
$24.54 | FTF | 7.78% | 7.50% | 5.69% | 9/27/2027 | $13.13 | |||
$24.03 | FTF | 8.31% | 7.88% | 6.98% | 1/15/2025 | $8.84 | |||
$24.15 | FTF | 8.40% | 8.00% | 6.18% | 10/15/2027 | $14.35 | |||
$24.16 | 8.26% | 7.88% | 8.26% | 3/23/2021 | $1.20 | ||||
$24.06 | 8.16% | 7.75% | 8.16% | 3/23/2021 | $1.29 | ||||
$24.66 | 7.75% | 7.50% | 7.75% | 3/23/2021 | $0.76 | ||||
$21.87 | FTF | 7.57% | 6.50% | 6.44% | 3/31/2025 | $10.03 | |||
$22.50 | 7.78% | 7.00% | 7.78% | 5/12/2022 | $4.47 | ||||
$22.20 | FTF | 9.30% | 8.25% | 6.60% | 3/30/2024 | $9.01 | |||
$24.36 | 8.47% | 8.25% | 8.47% | 3/23/2021 | $0.64 | ||||
$23.80 | 8.41% | 8.00% | 8.41% | 3/23/2021 | $1.20 | ||||
$21.75 | FTF | 9.20% | 8.00% | 7.67% | 9/17/2024 | $10.23 | |||
$24.28 | FTF - Floor | 9.01% | 8.63% | 9.01% | 7/30/2024 | $8.26 |
There are a few things you should know at the start:
- When a share can be called on short notice, the annualized yield-to-call reaches absurd levels. Investors shouldn’t put too much weight on it. On the other hand, a negative number can be a significant concern. Consequently, we decided to include it in the chart.
- We sort our spreadsheet for subscribers by risk ratings within each sector. We decided to use the same technique for this series since it communicates more information to readers. You’ll notice a general correlation where lower risk correlates with a higher price and lower yield, though this link isn’t absolute.
- Worst Cash to Call example: Imagine a preferred share that could be called in a few months and would pay out a total of $.75 in dividends by that time. If an investment in those shares ends in a call, the smallest amount of cash inflows possible would be $25.00 (call value) plus $.75 (total dividends). If the share price was $25.60, then the “Worst Cash to Call” would be $.15. That comes from the following equation: $25.00 + $.75 - $25.60 = $.15. If the share price increased by $.20 in the next hour, the “Worst Cash to Call” would decline to negative $.05.
Strategy
Our goal is to maximize total returns. We achieve those most effectively by including “trading” strategies. We regularly trade positions in the mortgage REIT common shares and BDCs because:
- Prices are inefficient.
- Long-term, share prices generally revolve around book value.
- Short-term, price-to-book ratios can deviate materially.
- Book value isn’t the only step in analysis, but is the cornerstone.
We also allocate to preferred shares and equity REITs. We encourage buy-and-hold investors to consider using more preferred shares and equity REITs.
Performance
We compare our performance against 4 ETFs that investors might use for exposure to our sectors:
Source: The REIT Forum
The 4 ETFs we use for comparison are:
Ticker | Exposure |
One of the largest mortgage REIT ETFs | |
One of the largest preferred share ETFs | |
Largest equity REIT ETF | |
The high-yield equity REIT ETF. Yes, it has been dreadful. |
When investors think it isn’t possible to earn solid returns in preferred shares or mortgage REITs, we politely disagree. The sector has plenty of opportunities, but investors still need to be wary of the risks. We can’t simply reach for yield and hope for the best. When it comes to common shares, we need to be even more vigilant to protect our principal by regularly watching prices and updating estimates for book value and price targets.
Ratings:
- Bullish on preferred shares ARR-C and NRZ-B.
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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 AGNCO, NYMTM, CIM-A, AGNCP, ARR-C, NRZ-B, NRZ, AGNC, NLY, SLRC, GPMT, PMT, ORCC, CMO. 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.
As a reminder, Scott Kennedy also is an author for the REIT Forum. You may see his commentary featured in our articles and may notice an extremely high amount of overlap in our ratings, so subscribers reading this article should see Scott’s latest REIT Forum sector update for more detail.
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.
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Comments (26)
I suppose it's a matter of style, my game is many small profits with very minimal losses. That's why I trade preferreds not commons.
I disagree with ARR-C. I bought NLY-F, right now NLY-F seems better than ARR-C. Any comments ?Thanks,
LD
I noted NLY-I wasn't included in your open positions. Are you still bullish on these shares?
Incidentally, I was able to capture a dividend lately on a portion of my position(bought @24.98 prior to ex-date, sold after ex-date @24.79, bought most of them back again after the ex-date @24.57, and finally I sold that position once again at $24.785. All of these trades took place over a 6 day period. I simply owned too many of the NLY-I shares and profited in reducing the position)Also determining whether I should dump my remaining small position in ANH-A, at these prices. Seems the common shares would actually be better to own, now. I already own a position in the common shares, it's just that the A shares seem risky at these levels and could be called away. After the recent reduction, to $.04 per share payout for ANH common shares, I would think that there is a higher likelihood of the A shares being called away at any price above a stripped price of $25. Yields 8.625%! I realize there is an accrued dividend of about $ .37 per share, at this time. Current price ANH-A = $25.54, stripped yield = 8.58%. Current price of ANH common = $2.90, stripped yld = 5.58%. Thoughts?Regards
-Paul
seekingalpha.com/...NLY-I is in our neutral range. There are some alternatives in the risk-rating 1 preferred shares at a more attractive valuation today. For ANH, there is a buyout in process. The dividend declaration might be a partial period dividend due to the upcoming merger.
Thanks.
I forgot to consider that that could be an issue with ANH's div., the merger.
