Portfolio Update - June: Preferred Shares Rocking Year-to-date
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:
Occasionally dictating articles and having the AI transcribe it. I always check the transcript to verify it is accurate.
Occasionally assigning AI to proofread articles because it is better than Word or Google’s spell check feature.
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.
Assisting with formulas to run in our Google Sheets.
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) COLD 0.00%↑ 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.
Returns on Total Portfolio
Sector Allocation
Reminder About Cash
Housekeeping
Recently Closed Positions with Returns
Recently Opened Positions with Returns
All Open Positions by Sector with Returns
Outlook
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 0.00%↑ - Major mortgage REIT ETF
(PFF) PFF 0.00%↑ - The largest preferred share ETF
(VNQ) VNQ 0.00%↑ - The largest equity REIT ETF
(KBWY) KBWY 0.00%↑ - 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.