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A Focus On mREIT Preferreds Pays Off + 20% Off Sale

Mar. 14, 2021 7:09 AM ETCIM.PD, AAIC.PC, CHMI.PB, TWO.PA
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Value, CEFs

Seeking Alpha Analyst Since 2014

At Systematic Income our aim is to build robust Income Portfolios with mid-to-high single digit yields and provide investors with unique Interactive Tools to cut through the wealth of different investment options across BDCs, CEFs, ETFs, mutual funds, preferred stocks and more. Join us on our Marketplace service Systematic Income.

Our background is in research and trading at several bulge-bracket global investment banks along with technical savvy which helps to round out our service. 


  • Welcome to another weekend blog post from Systematic Income.
  • Our allocation focus on mREIT preferreds has been paying off as the sector continues to be resilient to rate rises in addition to delivering strong absolute returns.
  • We continue to find the sector very attractive and have been reallocating to it in our Income Portfolios.
  • Take a 2-week no-obligation trial of Systematic Income and check out our Income Portfolios and interactive Investor Tools. Our 20%-off sale lasts through the weekend.

Welcome to another weekend blog post from Systematic Income. In this blog post we revisit our focus on the mREIT preferreds sector and how it has behaved over the last while. In short, the sector has continued to remain resilient in the face of sharp rises in interest rates while boasting attractive yield levels of 7-9% in addition to strong returns over the last few months.

The chart below, which we highlight regularly on the service, shows how various CEF sectors have behaved through three days of particularly large rate rises - averaging 0.11% across the three days.

The chart shows that not only were all sector NAVs down but that price falls were significantly in excess of the drops in NAVs, averaging close to -1%. 

mREIT preferreds, on the other hand, have been very resilient to rate rises, averaging a drop of only 0.1% across these three days. Part of the reason for this is that the sector remains attractively valued, allowing its credit spread to soak up most of the rate shock.

On the yield side, the sector continues to trade at a higher yield than in early-2020, which is very hard to find these days. 

And on the fundamental side the sector has increased in quality due to lower leverage, lower credit MBS allocation, more non-MTM financing, preferred redemptions improving coverage etc.  

Returns over the last 3 months have also been strong - only behind common-share sectors that boast much higher volatility.

Many income investors will wonder why they should allocate to preferred when the mREIT common offers a higher dividend, typically. Across most of the sector, however, the pattern has been that the preferred has delivered not only a stronger longer-term return but at a much lower volatility to boot. The chart below shows the pattern of the largest mREIT - Annaly - which is far from unique in the sector.

Investors who are curious about this sector should have a look at some of our recent updates on it below:

Chimera Investment: Resilient Credit Profile Makes ...

Arlington Asset Investment: A Constructive View On ...

Two Harbors: Reinvestment Ideas After A Gift To Pre...

Cherry Hill Mortgage Investment Corporation: Prefer...

How To Diversify Risk Exposure In mREIT Preferreds

Agency mREIT Preferreds Update

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Analyst's Disclosure: I am/we are long CHMI.PB, AAIC.PC, TWO.PD, CIM.PD.

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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