Interest Rates

Rates fell a bit in May, but remain elevated.

Even a modest dip was enough to allow REITs some breathing room. Our purchases from late April have been doing pretty well.

They rallied, dipped, and then jumped between mid-day Wednesday (5/29/2024) and Friday’s close (05/31/2024).

Yeah, rates are the big story lately.

With rates being such a big factor, I find the year-to-date performance of the iShares Preferred and Income Securities ETF (PFF) quite surprising.

Source: MBSLive

I understand how our preferred share investments have done well. Our preferred share choices have been overwhelmingly fixed-to-floating shares or fixed-to-reset shares.

Note: A fixed-to-reset share typically has the rate reset every 5 years after becoming callable. It uses the 5-year Treasury rate.

I can understand how our choices did well, but fixed-rate shares are doing well?

Inflation?

There’s still some. Not as much as the numbers show (lagged data).

Artificial Intelligence

Artificial intelligence remains poised to disrupt most parts of the economy.

In May, Seeking Alpha moved to explicitly ban the use of all AI products in preparing articles labeled as “exclusives” and “non-exclusives”. Articles shouldn’t be built with AI, but the current policy would apply to any article in which AI has revised even a single sentence. It doesn’t apply to Investing Group articles yet. I hope it never does, as I’m encouraging less censorship instead of more. Disclosures are great though.

Here’s the disclosure on my use of AI products:

1. Occasionally dictating articles and having the AI transcribe it. I always check the transcript to verify it is accurate.
2. Occasionally assigning AI to proofread articles because it is better than Word or Google’s spell check feature.
3. Some tables are designed to be hard to extract from documents. I often use AI to extract the data and transform it into a useful table.
4. Assisting with formulas to run in our Google Sheets.
5. Generating a few fun images.

I’ve encouraged Seeking Alpha to consider scaling back the application of the policies.

I’ve also provided Seeking Alpha with a road to dramatically improving content on the site with no increase in expenses. These are mostly policies that could be changed to encourage more great authors and to reduce articles from college students. I may opt to share some of those ideas here in the future to get feedback from readers.

Upcoming Preferred Share Updates

Our preferred share and baby bond targets automatically update on ex-dividend dates. However, as preferred shares move closer to their floating dates they deserve a slight extra bump to targets. When a share should be yielding 10% (using the future floating rate and comparing to other similar shares) but it only yields 7% because it isn’t floating yet, it should gradually see targets increase as it moves closer to the floating date.

I anticipate making a few small adjustments for those shares. Typical changes to targets will probably be in the range of +$.05 to +$.25.

There are a few shares that will see negative target adjustments though. Those are referenced towards the end of the “potential trades” section.

Americold

Americold (COLD) research is still underway.

I’ll provide a brief preview here.

COLD’s price has been hammered over the last few years.

Given the increase in Treasury yields, lower equity REIT prices are not surprising.

However, on fundamentals (like FFO & AFFO per share), COLD beat my predictions for 2022 and 2023.

That’s strange, so I want to look at how COLD was able to achieve that AFFO per share growth.

I don’t have the answers yet, but I have some notes:

Occupancy was a tailwind in 2022 and 2023. However, it appears to be a material headwind for 2024 (bad trend).

COLD is also one of the most complex equity REITs because they generate income from other segments.

One of the particularly interesting (that means difficult to model) segments is “Warehouse Services”. The margin on this revenue is low. It hardly ever passes 10%.

The year with the best full-year margin percentage was 2020 (at 9.28%). That was also the year Warehouse Services contributed the most to AFFO per share ($.40, which was nearly 1/3rd of AFFO).

Margin was awful for the segment in 2022 and 2023, but rebounded hard.

Given that the annual contribution from this segment has swung between $.40 per share and $.06 per share, it can have a substantial impact on the headline numbers.

Article Starts

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.

Trade Alerts

We have a page on Substack 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

Note: The presentation of the charts was modified slightly to enable running it through Google Sheets instead of Excel to reduce transferring data.

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) - Major mortgage REIT ETF
• (PFF) - The largest preferred share ETF
• (VNQ) - The largest equity REIT ETF
• (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.

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 those positions are in equity REITs.

Preferred shares and baby bonds:

Equity REITs:

Mortgage REITs and BDCs:

Other:

Subsequent Changes

None so far.

Potential changes discussed in the paid section.

Outlook

I’m still maintaining some caution as evidenced by the cash allocation still over 10%.

I’ll be hunting for the preferred share opportunities (including swapping positions) and looking for potential opportunities in baby bonds.

We picked up quite a bit of equity REITs during April with our 4 purchases.

Note on target updates:

• Target updates are a constant process. Swings in interest rates, positive or negative developments, and new research can all push targets higher or lower.
• Preferred share targets update daily for dividend accrual and drop on ex-dividend dates. We also adjust targets for swings in interest rates and risk levels.

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 06/04/2024 here are some of the trades on my radar.

Note: Prices are from the end of day. The section takes a while to prepare, but thankfully prices were not moving wildly in the final hours.

Paid Section Begins

Keep in mind that this is based on current prices and which shares stand out as closest to triggering a trade.

I’m not expecting to insert much capital into the portfolio this month. We may need to run more advertising and I want to be ready to cover any costs there. I’m not an expert on running effective campaigns, but I’m open to hearing from people with expertise in the field if they want to help.

Foreshadowing potential equity REIT trades

Industrial: On a dip, I might bump up our Rexford (REXR) ($44.87) allocation again. Just slightly. Shares are still pretty cheap. I still like the long-term picture for industrial real estate as people buy more junk online.

Housing:

I’ve been interested in the apartment REITs, but I’m hearing any panic from investors yet about the Real Page case. Repeating from last month:

“Mid-America Apartment Communities (MAA) could still be interesting as a long-term play. However, we’re not going to jump in for fear of missing out. Shares have underperformed other apartment REITs, but still remain over 16% above their lows. The end of the excess supply should be positive. I’m not hearing much yet about the cases against landlords for using RealPage. RealPage is a software service for pricing apartments. The problem is that it is built by pulling data from all landlords and requiring landlords to follow the “suggested” prices. The impact on market rents is very similar to what would happen if landlords were colluding to raise rents.

There are many cases open against RealPage. I doubt RealPage will succeed in arguing that it isn’t collusion simply because there is a computer doing it. Not a lawyer or judge, but this seems like a pretty obvious case.

There’s a chance of headlines driving prices lower, so I remain patient awaiting opportunities.

To be fair, if RealPage is completely eliminated, it could have a material impact on rental rates.

Without landlords being compelled to match the RealPage pricing suggestion, more landlords might compete on price.”

Towers:

Allocations are suitably large in our portfolio. I like the property type as I don’t think satellite-based service will be remotely cost competitive at the speeds customers will want. Could add to positions on dips. Top candidate would be SBA Communications (SBAC) ($198.63). I see near-term challenges to AFFO per share growth (some harder markets, debt rollovers, less acquisitions), but a more attractive growth rate thereafter.

Other: No other equity REITs on my radar at the moment.

Foreshadowing potential BDC trades

SLR Investment Corp. (SLRC) ($16.58) finally made it out of the “buy under” range. First time in a long time. 9.9% dividend yield is still attractive, but I’m debating taking some gains here. Might reallocate part of the position into baby bonds (still getting yields over 8%, but would prefer around 9%) or sit in cash for a little bit. I like having some exposure to BDCs, but there are literally 0 BDCs trading below the “buy under” targets. Our purchases in SLRC (we have quite a few, but each is small) are up about 11.55% to 33.96% including dividends. SLRC has not hit the “overpriced” threshold yet, but I might pocket a bit of the gains to take some risk off the table.

Foreshadowing potential mortgage REIT trades:

I’m thinking about making a small addition to our position in Ready Capital (RC) ($8.40). Shares have been very weak. RC has been disappointing (on price movement and on recent fundamentals), but the charges they took recently were positioning them to clean up some of the worst loans on their balance sheet. If RC took similar charges to clean up all of their worst positions, the remaining BV would still be high enough to make the current price a substantial discount. The worst loans tend to be on non-accrual status, which means the presence of those loans are also reducing the average yield on assets. Whether a REIT should hold onto them depends on how well they believe they can resolve the situation and the cost of capital while they resolve it.

Foreshadowing potential preferred share or baby bond trades:

This is another reminder that GPMT-A (GPMT.PR.A) $16.52 will see a preferred share risk rating adjustment to 5.5 (up, worse) from 5.0. I was hoping to have that adjustment done already.

Targets will also be negatively impacted by this adjustment.

Note: Common shares already have a common share risk rating of 5.5. A preferred share risk rating of 5.5 is lower than a common rating of 5.5, but it emphasizes that these shares remain high risk.

The adjustment reflects their Q1 2024 results and will weaken price targets. Prior downwards adjustments to targets reflected their status before the Q1 2024 results.

I’m sitting on my position for now, but if we see optimism send prices higher, I would certainly think about reallocating. If prices stagnate, we’ll have to see. We have a small positive return on our position. That’s “nice”? It underperformed all of our other preferred share trades. I like a small profit for a month or two, but not so much for a couple of years. I’m opposed to closing the position before I get the update published for all our paid members. Any time there can be weak liquidity, it’s important for members to get the signal first. Why don’t we just post the exact trade a day in advance? Because we’re only placing trades if we like the prices offered in the market. We can foreshadow potential trades, but we’re not prophets. GPMT’s position has deteriorated quite a bit since we initially purchased our position in GPMT-A, so a lower price makes sense. The nice thing about these investments is we still collected a significant dividend yield, which more than offset the dip in the price. I’ve been disappointed by the performance, well below expectations, but won’t be beating myself up over a positive total return.

Next position:

CIM-D (CIM.PR.D) was highlighted as a potential opportunity for taking profits. However, I mentioned I may wait until after shares went ex-dividend and then see how the price performed.

As expected, shares performed quite respectably during the ex-dividend period. The price is down slightly, but the dip is materially less than the dividend. I’ll be continuing to watch this and might take our gains. Following a general theme, I might move up the structure and look at the baby bonds.

Unfortunately, since I highlighted the baby bonds for our subscribers a few days ago, the price jumped from $24.50 to $24.90. Congratulations to everyone who bought in around $24.50.

Next position:

As mentioned previously:

“I’m thinking about going back into PMT-B (PMT.PR.B). This is one of the shares we marked as “fixed-to-lawsuit”. PennyMac (PMT) $PMT management has not yet announced any change in their plans to violate the LIBOR act. In the next week or so, they should make an announcement regarding PMT-A. Based on their Q1 2024 10-Q, they still believe they can get away with fixing the rate. They might get away with it, but as we covered previously, they will be in violation of their own contract when they make the next payment on PMT-A. PMT-A began floating 3/15/2024 and PMT-B will begin floating 6/15/2024 per the contract. Therefore, PMT-A’s dividend should be declared at the floating rate. However, it is very unlikely that management will admit their “mistake” until they face pressure to do so. If I do this, I may also close out my position in PMT-C (PMT.PR.C).”

I’m still considering his trade as a possibility.

• PMT-A: $23.27
• PMT-B $23.07
• PMT-C $19.05

Note: Each of these shares went ex-dividend very recently.

Any investors in PMT-A or PMT-B should be prepared for a long fight with the risk that regulators might be asleep at the wheel. I’ll be providing some steps for investors to join me in contacting regulators. Whether I have a position or not, I want to see management forced to honor the contract.

Other Adjustments:

As referenced in the article on MFA-B and NYMTZ, the common shares for NYMT have been dreadful. Targets will be revised moderately lower on all NYMT preferred shares. When common goes up or down a bit, it’s no big deal. When the move is substantial, it can be material. This is particularly relevant for higher-risk shares because they start with lower coverage. If AGNC, NLY, or DX were getting hit for 25%, it would barely have any relevance for the preferred shares. However, higher risk shares have less cushion. They have to be watched more frequently and may see larger adjustments.

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, it is extremely common to have at least one or two. If you’re reading this more than a day after it’s been published, check the comments section for any corrections.