Portfolio Update - February: The Hunt Continues, One Potential Opportunity Catching my Eye

• Treasuries were up and then dipped. Net change is small.
• Still plenty of cash. Interest rates remain a primary factor.
• I’ll cover potential upcoming trades in the section for paid members. The rest of the article is available to everyone.
• One of those trades is catching my eye today so I wanted to get this piece published quickly.

Article Begins

Rates moved higher until the middle of January, then they dipped. Not much though. I’m skipping most of the introduction today in favor of spending the time on our potential trades section.

Portfolio Updates

You can find prior installments of the Portfolio Updates on the Portfolio tab of our website.

Older editions of the Portfolio Update are unlocked for everyone. The newest release reserves the foreshadowing section for paid members (for a couple of weeks).

Trade Alerts

We have a page on our REIT Forum website to link all trade alert articles.

Here are The REIT Forum’s trade alerts.

Layout - Modified Order

To keep things simple for our investors, the rest of the portfolio update is divided into several segments. We run the same segments (with new content) each week. 

We usually maintain the same order from month to month, but I revised the order to work better with free previews. Eventually, the order will be locked in again.

1. Returns on Total Portfolio
2. Sector Allocation
3. Reminder About Cash
4. Housekeeping
5. Recently Closed Positions with Returns
6. Recently Opened Positions with Returns
7. All Open Positions by Sector with Returns
8. Outlook
9. Foreshadowing Potential Trades (paid section)

This layout maximizes transparency while keeping the foreshadowing of our potential trades within the paid section. It also loads the images together at the front, while putting the text-heavy sections together at the end.

Returns on Total Portfolio

The chart below shows our performance since we began preparing for The REIT Forum at the start of 2016 through the end of the latest month:

There are four major index ETFs we use for evaluating performance. They are:

• (MORT) $MORT - Major mortgage REIT ETF
• (PFF) $PFF - The largest preferred share ETF
• (VNQ) $VNQ - The largest equity REIT ETF
• (KBWY) $KBWY - The high-yield equity REIT ETF most retail investors follow

Annual comparison vs. each ETF:

Our performance vs. the average of the ETFs:

We evaluate alpha based on performance against the ETFs because it strips out the general change in our sectors.

The next chart shows the change in the value of our portfolio from month to month. We strip out the impact from contributions made during the month because, obviously, contributions are not returns.

The prior year is included as well to help investors see how the calculations work.

If anyone is confused by these calculations, let me know. I believe this transparency is crucial, so I’ll include an example showing every calculation if I hear that readers have any difficulty following it.

Sector Allocation Chart - 

The sector allocation chart helps to explain how we are thinking about risk and seeking returns:

Reminder About Cash (repeated)

I normally keep at least 6 months or more of living expenses in “cash”.  If you normally keep around $40k to $50k in “cash”, the difference between getting paid 5% and 0.2% is around $2k per year. 

I’m using (SGOV), (SHV), and (BIL) as my cash substitutes. These are short-term Treasury ETFs. Prices are extremely stable. Liquidity is excellent.

I use a Schwab business account that is not part of my portfolio. The only assets it holds are actual cash and cash substitutes (those 3 ETFs). 

Nearly all my expenses go through my credit card already (paid off in full each month).

I still have my checking through USAA because of the long history on those credit cards. If I need cash, I can sell Treasury ETFs and transfer the funds to my USAA account.

It takes a few days, but that’s fine.

This is a pretty nice return for cash I was going to have there anyway. 

Note: Some people think you don’t need a strong credit score after getting a mortgage. I disagree. The long history on those cards is extremely useful if I want to boost someone’s credit score. If I add someone to my card, their next update will show they have a card with 20 years of perfect history.

You can get scammed this way. You are liable for the bill. They can just charge the card and walk away. This doesn’t concern me because I keep a lower limit (such as $10k) on those cards and I’m only doing it for people I trust. If one of those people betrays me, I’ll count myself lucky that I found out for only $10k. For people who can’t afford to risk that money, this would be too dangerous. 

Housekeeping

We used to have a repeated section on strategy, but I wanted to shorten the update. 

I’ll be posting an article that covers our strategy in greater depth and just adding a link to that post.

We have a project underway to update our guides and improve the organization.

Recently Closed Positions with Returns

These are the positions closed during the prior calendar month. If you want to see positions that were closed before that, you can see the prior portfolio updates or use the Google Sheets. 

If we didn’t close any positions for the sector during the month, then the image will be blank. 

Note: By loading the Google Sheets, you can still see all of our closed positions. We only include the recently closed positions to reduce the size of the article:

Recently Opened Positions with Returns

All Open Positions by Sector with Returns

We will start with the open positions as of the end of the month. It often takes a few days to prepare this article, but the screenshots below are from the end of the prior month.

The cell with the ticker is grey if the position is in a taxable account. This was a request by a few members and there was no drawback to adding the information. All of the taxable positions are in equity REITs.

Preferred shares and baby bonds:

There are so many equity REIT positions we split it up into two images.Equity REITs first half:

Equity REITs second half:

Mortgage REITs and BDCs:

Other:

Note: The cash position shows no returns, but we are using short-term Treasury ETFs. We collect monthly payments on them. Earning 0% on our cash would be awfully silly. However, since we are treating the ETFs as cash, we don’t record any purchase or sale of the ETF. Let me know if this is confusing and I’ll provide a longer explanation.

Subsequent Changes

None so far.

Foreshadowing Potential Trades

This section is usually prepared shortly before publishing. The goal is to quickly cover ideas for trades. We aim to foreshadow our trades here, though the market may move in surprising ways. While the article takes days to prepare and documents prices and performance from the end of the month, the potential trades section is written last to provide the most up-to-date pricing.

Based on the change in relative prices as of 02/04/2025 here are some of the trades on my radar. 

Note: This section takes time to prepare. Market prices change. Therefore, the prices below may not be precisely the same as the price at publication, even though they were retrieved on 02/04/2025.

Paid Section Begins

Potential Preferred Share (and Baby Bond) Trades

PMT-A (PMT-A) and PMT-B (PMT-B) are aggravating. When I wrote PennyMac and the Transcript, PMT-A was $24.23 and PMT-B was $24.05 ). Today PMT-A is $24.28 ($.05 up) and PMT-B is $24.20 (up $.15). In the article, my disclosure stated:

That price for PMT-A was breached on 1/31/2025, though I didn’t see it in real time. It happened right before the close. 

Note: Shares of PMT-A and PMT-B were $23.49 and $22.91 respectively when I called them out in the January Portfolio Update.

Note 2: I’m writing this while the market is open and PMT-A prices have been pretty wild since we published. In afternoon trading today (less than 30 minutes ago) we saw PMT-A briefly hit $23.90 for a SMALL number of shares. Total volume traded was high on the day, but volume at that price was low. Congratulations to the buyers. That is PMT-A trading below PMT-B, which is also quite unusual. As I’m coming back to edit this part in while working on the closing sections, I’m just going to get this piece published. PMT-A is at a $23.95 bid and $24.00 ask. I thought about tossing in a bid, but I decided I would get this part released to our website first. I might throw in some lowball bids since it was high volume that pushed prices down to that level. I really doubt I’ll see any execution even if I do. 

Note 3: I'll add in more ticker links on the website. I don't want to slow down publishing to do it.

MFAO (MFAO) is “down” to $25.14, but shares just went ex-dividend a couple days ago. Shares are about 3.4% over our current target (factors in dividend accumulation). MFAN (MFAN) about the same at 3.1% over target. I might close out my position in MFAO. We’re up about 1.92% including dividends. That’s not bad given the change in Treasury rates. We don’t have any baby bond options trading below our targets. So once again we have the challenge of not having many options for where to redeploy the capital. There are plenty of common shares we cover that are on sale, but I’m not looking to change our sector allocation that much. I’d like to be able to put this capital to work in the preferred shares or baby bonds.

RITM-A (RITM-A) at $25.17 or RITM-B (RITM-B) at $25.08 could be slightly interesting. Same as before, the yield to call isn’t great. Better than the NLY-F or NLY-I, but that isn’t saying much. NLY-F and NLY-I have moderately lower spreads but also carry lower risk ratings. I’m surprised these shares don’t typically trade about $.10 higher, but that isn’t all that much of a gap.

DX-C (DX-C) could get a bit interesting on small swings in the price. Annualized yield to call is only about 2.7% at $25.30 today. That’s not impressive. Further, among the preferred shares we cover, I think DX-C has the highest probability of being called as soon as call protection ends or within 100 days of that date. Consequently, yield to call becomes more relevant. The interesting part is that if a call is not announced, then DX-C would stand to trade at valuations comparable to NLY-F and NLY-I. DX-C has a risk rating of 1.5 and has the highest floating spread (5.461%) of any preferred share with a risk rating under 2.5. 

Potential Common Share Trades

I’m still playing it cautious in the common shares. We’ve seen a dip in interest rates, but it only counts as a dip because rates were so high around the middle of January 2025. Those high yields remain a significant headwind for equity REITs because almost every debt maturity that occurs will be rolled over to a higher rate. The impact on AFFO per share is usually mild (under 2% of AFFO, often well under). However, the market likes to extrapolate trends even if the math for extrapolation is absurd. 

Challenges from Extrapolation

The impact of higher rates won’t be a headwind every year (unless rates continue to rise indefinitely). But we can evaluate this as if it was a simple dividend growth model. Since the REIT’s ability to pay dividends is very heavily impacted by AFFO per share, we can pretend dividend growth rates and AFFO growth rates will be similar. Over LONG periods, the correlation becomes massive. So let’s say we’re looking at a REIT with 4% AFFO growth if there is no interest rate headwind, but only 2% with the headwind. Assume that REIT carries a 5% dividend yield. 

Without the interest rate headwind, it would be 4% growth plus 5% yield = 9% total.

However, if we pretend that the interest rate headwind will last forever, then we would model 2% growth plus 5% yield = 7% total.

Clearly a 9% total looks much better than a 7% total. That leads to investors bidding different amounts.

I believe the market can often extrapolate too much. They see a headwind (or tailwind) and then proceed to compound that headwind or tailwind indefinitely.

Largest Allocations

My largest equity REIT allocations are in SBA Communications (SBAC), Rexford (REXR), and Sun Communities (SUI). Each has been dealing with headwinds to AFFO per share growth. As the market processes those headwinds, it seems to be punishing them too much. To be fair, these are REITs known for high growth rates in AFFO per share. They achieved some very high AFFO multiples in some prior periods. 

I want to share some charts here to demonstrate just how much pressure we’ve seen the prices for these REITs. I’ll use Rexford for the demonstration.

We can start with using price to consensus NAV. This is a bit flawed because there’s no rule that says consensus estimates must be accurate (or even good). However, it’s one tool to have in the tool box.

The price to NAV chart shows the market really soured on REXR:

By all accounts, industrial real estate is facing some challenges. However, that’s a pretty wild swing.

What if we switch from using NAV estimates to using forward consensus AFFO estimates? We can compare the industrial REITs by using AFFO multiples:

Once again, we see that REXR plunged from having one of the highest multiples (legitimately over 40x for quite a while) to having the second lowest (under 20x). 

Given the dip in market rents for industrial real estate (particularly in California), it’s not surprising that REXR’s leasing spreads are declining. However, they are still large. They just aren’t nearly as large as they were previously. How many REITS reported GAAP leasing spreads over 39% last quarter and cash spreads over 26% across new and renewal leases? Not many. How many of them are trading are REXR’s price-to-AFFO and price-to-NAV multiple? Off the top of my head, I can’t think of any.

Potential Trade Summary

To summarize:

• PMT-A is on sale (bid at $23.95). I may toss in a weak bid after publishing. I won’t be pushing the price because I won’t raise my bid. Just putting it in incase someone wants to dump some shares at the lower price. Being nice to any scared seller who shows up.
• I may close out my position in MFAO. Prices are down a bit, but we got another dividend. Adjust for the dividend, the price is up.
• Might get into RITM-A / RITM-B or add more DX-C depending on small price swings. Just looking for opportunities to capture a bit of extra returns. Probably wouldn’t be much. If prices went up, I’d head right for the door and probably put the cash back into those short-term Treasury ETFs.
• I’m pretty happy with my allocation to common shares, so I’m not looking to change that level much. Consequently, I have more cash sitting on hand.

Conclusion

Thanks for reading. I hope you find the ideas in this article helpful as you navigate the markets.

I apologize in advance for any typos. With such a large document, having at least one or two is common. If you caught any, let me know in the comments. If you’re reading this more than a day after publication, check the comments section for any corrections.