Switching to Offense

In our last communication, I profiled a couple of triple net lease REITs, suggesting they would be good defense in an inflationary economy.

On May 4th the Fed raised rates by 50 basis points and effectively promised they would make similar moves in each of its next two meetings. Since bond prices move inversely to interest rates, the announcement caused long dated fixed income securities to continue the decline that began at the start of the year. In the real estate world, markets sold down notes and preferred shares and revealed an opportunity for rising income and potential capital appreciation.

Thus far, we have identified and vetted 20 separate preferred issues that will convert from fixed to floating rate coupons over the next 6 to 30 months. We know their call/conversion dates.  We know the rate schedules they will pay when they convert from fixed to floating. They are currently trading at discounts of 7-20% to redemption price so we can calculate our capital appreciation if they are called or the yield escalation if they remain outstanding.

Even though the Fed is directing the level of short-term interest rates, much of the market’s concern focuses on the longer term rates of the 10y Treasury or 30 year mortgages. These preferred issues, however, are typically pegged to 3 Month USD LIBOR. As the table below details, since the beginning of the year, 3 Month LIBOR has moved from 0.21% to 1.44% while the Fed Funds rate has risen 0.75%. The aforementioned 100 basis point hike in the coming months will move LIBOR rates higher. Consensus estimates put the year-end Fed Funds rate at 2.50% versus today’s 0.75% -1.0% target.

With the first issue coming callable on 10/15/22, we can buy those shares for a 7-7.5% going-in yield and a 7.5% gain if they are called. If they are not called the dividend rises with LIBOR.

We will carefully take the offensive and seize opportunity in this time of extended volatility.

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

Hypertext links to other sites are provided strictly as a courtesy. When you link to any of the sites provided on our website, you are leaving this website. We make no representation as to the completeness or accuracy of information provided on these websites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, websites, information, and programs made available through this website. When you access one of these websites, you are leaving our website and assume total responsibility and risk for your use of the websites to which you are linking.