mREIT Preferred Share Dashboard

6 min read

Version: 2021 Q3

Updates:

• refreshed all company balance sheet health with Q3 earnings data
• streamlined the equity composition section for easier gleaning
• revised the methodology for calculating safety score
  • pfd shares have revised weights for the equity compositions
  • bonds have revised weights for payout ratios

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Mortgage REIT (mREIT) preferred shares are a hybrid instrument between equities and bonds. The concepts and mechanics of preferred shares are straight forward. Of the companies and sectors that issue preferred shares, mREITs have:

• the most compelling reasons to issue preferred shares relative to the reasons of other companies / sectors
• the most favorable provisions (eg: cumulative dividend policies) relative to other companies / sectors

mREIT preferred shares can serve as a low-beta alternative to cash or treasury holdings for margin collateral. This is useful for potentially boosting total return on a short-option strategy.

Preferred shares, as an asset class, have a return profile comparable to high-yield bonds. According to a 2019 publication by Vanguard, “a high-yield position may improve the risk-adjusted return characteristics of a traditional balanced portfolio if funded by the portfolio’s existing equity allocation” (see pages 10 and 11 in the linked white paper). This potential boost to risk-adjusted returns may help mitigate sequence of returns risk.

Today’s post is a deep dive into the practical and actionable details of investing in mREIT preferred shares. Namely, using objective data to assess the relative risk and return of mREIT preferred shares between differing mREIT companies and to find relative bargains between shares from the same mREIT company.

Let’s dive in!

Summary

Actionable spark notes from my mREIT concepts writeup:

• Don’t pay more than the stripped par value / liquidation preference for a preferred share (unless swapping between tickers from the same company to capitalize on a relative bargain)
• Don’t invest in convertible shares
• Only invest in preferred shares with a cumulative dividend policy
• Don’t index
• Agency mortgage-based securities (MBS) are insured against credit risk while non-agency MBS are not
• A higher market cap-to-preferred liquidation ratio is better
• A lower payout ratio is better
• Shares can be highly illiquid; purchase with high conviction and the intent to hold for a while
• Relative bargains may exist amongst different tickers from the same issuing company

Dashboard Links

Free, Static Dashboard

Updated quarterly, this version provides convenient, consolidated access to point-in-time price and yield data along with general dividend details.

Tables listing ticker symbol syntax and documentation references facilitates easy, self-directed and continuing research on mortgage REIT companies.

Subscriber-Only, Dynamic Dashboard

Updated continuously, this version provides near-real-time data on the most relevant mREIT preferred share attributes for making informed investing decisions.

• price action
• safety score
• current-yield data
• floating-yield data
• stripped-yield
• annualized yield-to-call
• call protection and expiration dates
• dividend accrual calculations
• equity portfolio composition and leverage ratio
• capital structure and cash flow
• preferred IPOs as they occur

Attributes and Definitions

Price Action

Data from Google Finance as well as calculated values paint a picture of immediate and past price performance.

• 52 wk Low – the lowest price at which the ticker traded in the last 52 weeks. Source: Google Finance
• Off Low – the % of price appreciation relative to the 52 week low. Source: calculations by spintwig
• Last Price – the most recent price at which the ticker traded. Source: Google Finance
• Stripped Price – the most recent price at which the ticker traded when adjusting for accumulated, unpaid dividends. Source: calculations by spintwig
• 52 wk Rank – the rank of the Last Price relative to the 52 week low and 52 week high values. Source: calculations by spintwig
• 52 wk Trend – a sparkline chart displaying the “last price” movement over the last 52 weeks. For tickers that have an inception date less than a year ago, the sparkline chart displays price movement from the date of inception through present. Source: Google Finance
• Off High – the % of price depreciation relative to the 52 week high. Source: calculations by spintwig
• 52 wk High – the highest price at which the ticker traded in the last 52 weeks. Source: Google Finance

Safety Score

A quantitative measure of the relative safety of the mREIT Preferred Share in reference. This is a blend of company safety (eg: ability to pay the dividend) and investor safety (eg: negative annualized yield-to-call scenarios). Methodology to determine the safety score is a as follows.

Preferred Shares

Range is from most safe (10) to least safe (negative 3).

Next Call Date (10%):

• if >= 730 days away, add 1 point
• if < 730 days away, add no points

Equity Composition (30%):

• if > 66% of the portfolio is comprised of agency mortgage-backed securities (MBS), add 3 points
• if > 66% of the portfolio is comprised of non-agency MBS, add no points
• if > 66% of the portfolio is comprised of origination and servicing, add 2 points
• if no part of the portfolio has a >66% weight, add 1 point

Shareholder Equity / Pref Liquidation (20%):

• if >=5, add 2 points
• if >=3, add 1 point
• if < 3, add no points

Market Cap / Pref Liquidation (20%):

• if >=5, add 2 points
• if >=3, add 1 point
• if < 3, add no points

Payout Ratio (TTM) (20%):

• if < 15%, add 2 points
• if < 25%, add 1 point
• if < 40%, add no points
• if >= 40%, subtract 1 point

Annualized Yield to Call:

• if <= 0, subtract 2 points
• if >0, add no points

Bonds

Range is from most safe (10) to least safe (4).

Share type of “Bond”: (60%)

• add 7 points as this instrument (bond) is not subject to preferred liquidation considerations (40%) or direct equity portfolio credit risk (20%)

Payout Ratio (TTM) (40%):

• if < 50%, add 4 points
• if >= 50%, add no points

Annualized Yield to Call:

• if <= 0, subtract 2 points
• if >0, add no points

Current Yield Data

• Stripped Yield – yield on current price when adjusting for accumulated, unpaid dividends
• Current Yield – yield on current price
• Initial Coupon – yield on par value
• Annualized Yield to Call – CAGR if shares are called at par value on the next call date

Floating Yield Data

• Structure – describes whether the instrument has a “fixed-to-floating” (FTF) provision, has fixed dividend for the life of the instrument, or the instrument is a bond (as opposed to a preferred stock)
• Stripped Floating Yield – if the instrument has a FTF provision, this is what the current yield would be on or after the floating start date when adjusting for accumulated, unpaid dividends; typically comprised of a lower fixed interest rate + 3 month Libor/SOFR
• Current Floating Yield – if the instrument has a FTF provision, this is what the current yield would be on or after the floating start date; typically comprised of a lower fixed interest rate + 3 month Libor/SOFR
• Floating Spread – if the instrument has a FTF provision, this is the spread above the prevailing floating rate (typically 3-month SOFR) described in the prospectus
• Floating Start Date – the date when a FTF instrument transitions from a fixed interest rate to a floating interest rate
• Floating Yield Base – the benchmark upon which the floating spread is summed
• Floating Yield Base % – the benchmark’s current yield

Call Data

• Original Call Date – the date when call protection expires and the issuer has the ability redeem the shares
• Next Call Date – the date when call protection expires and the issuer has the ability redeem the shares
• Worst Cash to Call – the minimum amount of “cash” per share an investor will receive, net of any over/under payment on par value, if the shares are redeemed at the liquidation preference (par value) on the call date
• Maturity Date – the date when bonds mature and are to be paid in full

Dividend Data

• Annual Dividend – total dividend paid per share per year
• # of Payouts – quantity of payouts per year
• Each Payout – amount of dividend paid per payout
• Payout Months – month(s) in which dividend payout(s) occur
• Paused Div in 2020 – lists whether the company temporarily suspended dividend payments during the March 2020 bout of volatility

Dividend Accrual

• Ex-Dividend Date – estimated date in which the shares will go ex-dividend
• Progress – % of the way toward the next estimated ex-dividend date
• Dividend Accumulated – dollars per share of accumulated, unpaid dividend

Equity Composition

• Agency – mortgage-backed securities (MBS) that are guaranteed against credit (default) risk
• Non-Agency – MBS that are NOT guaranteed against credit (default) risk
• Origination and Servicing – revenue generation is from origination fees and mortgage servicing revenue
• Hybrid – a portfolio consisting of no less than two of the three allocations above

Capital Structure and Cash Flow

• Shareholder Equity / Pref Liquidation – the ratio of shareholder equity to preferred share call value
• Market Cap / Pref Liquidation – the ratio of market cap to preferred share call value
• Payout Ratio (TTM) – the last 12 months of preferred share dividends divided by the last 12 months of comprehensive income
• Market Cap – the value of all outstanding common shares of the issuing company
• Shareholder Equity – the value of all the issuing company’s assets minus liabilities
• Preferred Liquidation – the liquidation value (par value) of all outstanding preferred shares
• Preferred Dividends (TTM) – the last 12 months of preferred share dividends
• Comprehensive Income (TTM) – the last 12 months of net income adjusted for unrealized gains and losses, hedges, etc.
• Company Data As Of – the date of the quarterly/annual SEC filing from which the data was pulled

Ticker Symbols

A table listing the mREIT ticker syntax used at each brokerage company / trading platform.

Documentation

Links to Quantum Online, official prospectus and SEC filing page for each mREIT ticker.

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