Portfolio Update - November: Rates Roaring, Credit Spreads Thinning

Well, interest rates climbed significantly higher during October 2024. It was nice to see the cut from the Federal Reserve, but the net result was rates moving up across most of the curve. Once again, I shifted my portfolio more towards defense. That was a nice call as higher rates pressured valuations, but we still saw values dip as most of our portfolio is invested. In early November, I’ve been favoring defense once again as we see Treasury yields continuing to trend higher.

In the event that we see tariffs used more broadly, it would have an inflationary impact. When those higher prices are passed on to consumers, it counts in the CPI. I wouldn’t expect 100% of the tariff impact to be passed on to consumers, but it could be a material portion. Given the sensitivity to even a 0.5% change in prices, that could influence the Federal Reserve. Continued deficits also drive inflation. 

We were at 19.6% cash at the end of October and already increased that a bit further by selling our positions in Schwab (SCHW) and RCB (RCB) yesterday. 

Today, we’re at about 22% cash and I’m still looking at options to increase it.

Interest Rates

Treasury rates are up significantly as projections for additional cuts from the Federal Reserve were substantially reduced. You can see the  large increase in the rate on 2-year Treasuries:

Source: MBS Live

That same impact was passed through the yield curve. We see 10-year Treasury rates increased by a similar amount and are once again modestly higher than 2-year Treasury rates:

Source: MBS Live

Eventually this is going to be a huge problem for the country. As a nation, we’re refinancing older debt to higher rates and issuing new debt at higher rates. The average rate on the debt is still just over 2%. Resetting that to over 4% would double the federal interest expense before accounting for any new debt. How many years will it take for people to look back at this as a critical error?

Even though Treasury rates continued climbing in early November, the iShares Preferred and Income Securities ETF (PFF) managed to go ex-dividend AND see the share price move up by a penny. That spread between the yield from the preferred share ETF and Treasury yields continues to shrink.

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

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) $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.

We delivered a respectable gain in August, but the indexes took the lead. Trailing this late in the year has been a rare occurrence.

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

Well, none of those is helping our performance on the month.

The shares we bought in MFAO were the result of swapping from MFAN to MFAO. The prices shown are rounded to the nearest penny.

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:

Equity REITs:

Mortgage REITs and BDCs:

Other:

Subsequent Changes

We sold our shares of SCHW and our shares of RCB on 11/4/2024.

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 11/05/2024 here are some of the trades on my radar. 

Note: Some prices are end of day, some are during trading. It takes a bit to prepare this section for subscribers.

Paid Section Begins

Potential trade with CPT:

As mentioned in recent articles, I’ve been debating whether to take the gains on part of my position in Camden Property Trust (CPT). If I place that trade, it would be to close the older position of 99 shares while leaving the newer position of 399 shares (huge short-term capital gain).

I’m also looking at reducing some of my preferred share positions.

Potential preferred share trades:

DX-C (DX.PR.C) saw the annualized yield to call dip as low as about 3%. If shares are not called, then it would probably achieve a negative worst-cash-to-call by the time it starts floating or shortly thereafter. However, I think the call risk is material because there are no other shares at the same risk rating with such a large floating spread and management is pretty smart. So they might look to refinance those shares with a new one that would carry a lower floating spread.

RITM-B (RITM.PR.B) is also on my radar since the annualized yield to call is a bit worse than negative 6%. Keep in mind that the value is annualized. The actual loss compared to today’s market price of $25.28 is about $.16 by my estimates. It’s not horrible, but it’s enough to be annoying.

I’m also seeing RITM-C trading at $24.23. The spread on RITM-C will be 4.969% (vs. 5.64% on RITM-B). RITM-C isn’t floating yet, but starts floating relatively soon (2/15/2025). The annualized yield to call is huge at 18.4%, but it wouldn’t be surprising if RITM-C trades a bit below call value. As the floating date is getting closer, it merits a small bump in targets.

Presently, I only have positions in 4 preferred shares. We already discussed DX-C and RITM-B, so we’re moving on to the other two: (RITM.PR.D) and EFC-B (EFC.PR.B).

Continuing to hold these preferred shares:

I expect to continue holding RITM-D and EFC-B. I will be doing preferred share target updates soon (it’s been delayed too long already) and you’ll see targets increased for EFC-B. The annualized yield to call looks great at 12.1%. The downside is that the spread over 5-year Treasuries will only be 4.99% (not bad, but weaker than RITM-D). However, that would still be a yield over 10% if it happened today (instead of 1/30/2027). EFC-C will have a slightly better spread at 5.13% and has a higher coupon rate today. However, the annualized yield-to-call for EFC-C is about 8.2%. That demonstrates a significant difference in valuations. I give EFC-B the edge over EFC-C.

It’s been challenging seeing valuations rise so much because I like getting those attractive yields and I like having those great bargains in the sector to call out. Investors want to hear an analyst get pumped up and for years we’ve had great opportunities in the preferred shares that justified getting pumped up. We earned huge returns on many of those positions (other sectors reduced portfolio performance, but our preferred shares delivered outstanding performance).

Also on the radar:

I really like the valuation on Rexford (REXR). We added to our position in September (as rates were plunging) and twice more in October. The big factor holding me back from the next purchase has been the momentum in Treasury yields.

However, there’s also the tariff risk factor for industrial REITs. Tariffs are bad for imports, which is bad for industrial REITs. Management indicated on the earnings call that some tenants or potential tenants have been a bit more hesitant to sign leases as quickly because of “macro concerns and general decision making around the economy”. They also referenced “elevated levels of economic uncertainty”.

When we look at metrics like “Price to Net Asset Value (NAV)” for equity REITs, it’s important to understand that NAV estimates can often trail the share price. This is different from mortgage REITs, where book value can frequently move before share prices. 

When the share price and NAV substantially disconnect from each other and from their historical relationship, it’s worth looking into. We can see a substantial disparity for REXR:

Source: TIKR.com

Clearly the share price fell first and it preceded a decline in consensus estimates for NAV. However, we should also recognize that consensus estimates for NAV can be significantly flawed. This an imperfect system.

The point is that REXR’s decline looks much too large. I may add a bit to REXR. I really don’t like the momentum in Treasury yields, but I do like the valuation. 

There was one negative development during the latest earnings call. To give it context, I’ll start historically.

In the Q4 2023 transcript, management referenced growing Core FFO per share at an average of 11% to 13% over 3 years from the existing portfolio. In the Q&A, they discussed growing 14% to 17% in 2025 and 2026 (including additional growth beyond the current portfolio).

In the Q3 2024 earnings call, management walked back from that guidance. That’s probably related to the decline in market rental rates seen over the last year. They are projecting for lower leasing spreads than they were initially forecasting. I understand management’s decision to withdraw that 3-year forecast (a metric very few companies provide), but I would have preferred to just see it updated. As an analyst and investor, I like when management provides such extensive forecasts.

I appreciate that management has been choosing not to execute on their ATM (At The Market) program. REXR has typically been a REIT that would issue a large volume of shares and continually acquire new properties. Shares outstanding are still growing as they acquire additional properties, but the new shares are coming from older “forward equity sales” where they locked in the price in advance. 

Note: REXR is pretty close to their 52-week low. The Treasury yields are probably a substantial factor there, but it may concern some investors. I haven’t been concerned by buying equity REITs near the 52-week low so long as I like the valuation.

Baby bond:

Haven’t decided regarding MFAN. I swapped MFAO for MFAN because of relative valuations. Treasury yields have continued to climb, which is tightening the spread. I might close the position or I might sit in it for a bit. Or I might set a slightly optimistic limit-sell for a week or two and just see if I get lucky.

Potential Trade Summary

To summarize:

• Might close out or reduce positions in DX-C and / or RITM-B depending on the market bid available.
• Might reduce position in CPT by 99 shares while keeping the other 399.
• Treasury yield momentum kept me back from REXR, but I might take another nibble (small purchase) for long-term value. If I sell the 99 shares of CPT, I could use part of the proceeds on REXR.
• Not planning to sell my positions in RITM-D or EFC-B. Targets for EFC-B will be lifted a bit. Targets for RITM-C will be lifted slightly. A few other preferred shares may see updates as well.
• No decision on MFAN. Considering an optimistic limit-sell order and leaving it open for a week or two just to see if I can get lucky with low liquidity. But I can’t set it for much longer due to the combination of swings in interest rates and interest accrual. Both of those would impact valuation. The downside to doing those optimistic orders while running a service is when a few shares execute and you end up with a trade alert post to say something like 1 to 5 shares sold.

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.

Disclosure: Long the positions I showed in my accounts. I hope it was pretty obvious since disclosing our holdings, performance, and potential trades is the primary goal of this article.