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PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, February 2020
Finally, relief.
Preferred stock prices fell an average of
$1.22 per
share during February, delivering higher returns to today’s preferred
stock buyers. The average share price of U.S.-traded preferred stocks
is now $24.90, just below these securities’ $25 par value for the first
time in a year, now delivering an average current yield of 6.7 percent
to today's buyers.
February’s new issues
February’s
eleven new preferred stocks are offering an average annual dividend
(coupon) of 6.3 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.7 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 8.5 percent (using February 28 prices).
Note that I am using IPO date here, rather than the date on
which retail trading started. The IPO date is the date that the
security’s
underwriters purchased the new shares from the issuing company.
A
special note regarding preferred stock trading symbols:
Annoyingly, unlike common stock trading symbols, the format used by
exchanges, brokers
and other online quoting services for preferred stock symbols is not
standardized.
For example, the Series K preferred stock from Public Storage is
“PSA-A” at
TDAmeritrade, Google Finance and several others but this same security
is
“PSA.PR.K” at E*Trade and “PSA.PK” at Seeking Alpha. For a
cross-reference
table of how preferred stock symbols are denoted by sixteen popular
brokers and
other online quoting services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
There
are currently 123 high quality preferred stocks selling for an average
price of $25.73 (February 28), offering an average current yield of 5.4
percent. By high quality I mean preferreds offering the characteristics
that most risk-averse preferred stock investors favor such as
investment grade ratings and cumulative dividends.
There
is now a total of 918 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
With
respect to how long they trade, traditional preferred stocks come in
two flavors – “perpetual” and “term.” Perpetual preferred stocks trade
indefinitely until the issuer calls them (buys the shares back from
shareholders), but there is no obligation that they ever do so (CTA-B,
originally issued by E.I. du Pont de Nemours & Co., for example,
was issued on October 21, 1937 and is still trading). Term preferred
stocks, on the other hand, are those that mature, like a bond or bank
CD, on a specific future date.
When
a term preferred stock reaches its maturity date, the issuer is
obligated to buy back the shares held by shareholders (at a value
described in the security’s prospectus, but typically the par value).
Term preferreds are rarely issued, making up only about ten percent of
all preferred stocks trading on U.S. stock exchanges. But during
February, three of the month’s eleven new preferred stocks are term
preferreds (OXLCP, MDRRP and PRIF-F). Here are some of my observations
about the eleven new income securities introduced during February.
AGNCP is a 20 million share unrated, traditional preferred stock from
mortgage REIT AGNC Investment Corporation (AGNC). AGNCP offers a 6.125
percent cumulative dividend until its April 15, 2025 call date. At that
time, the dividend paid by this security becomes variable based on the
three-month LIBOR rate (currently at 1.64 percent) plus 4.697 percent.
Page S-9 of this security’s prospectus describes how the coupon will be
calculated when/if the LIBOR is no longer published. Dividends
designated as “cumulative” are viewed as having less risk than
“non-cumulative” dividends since cumulative dividends that are skipped
must ultimately be paid to shareholders (except in the case of
bankruptcy). AGNC makes its money by raising cash (such as with a new
preferred stock issue) and using the proceeds to purchase bundles of
mortgages that, hopefully, pay a higher return. AGNC has a total of
four preferred stocks trading, all of which have been introduced since
August 2017 (none of which are currently callable). AGNC is an $8.7
billion company founded in 2008 and headquartered in Bethesda, Maryland.
OXLCP, an unrated term preferred stock offering cumulative dividends,
was introduced by Oxford Lane (OXLC) with a 6.250 percent coupon in
early February. OXLCP’s 3.5 million shares raised just under $87
million. The company is using about $30 million of the OXLCP proceeds
to redeem 1.2 million outstanding shares of their older OXLCO, saving
the company about $375 thousand per year in dividend expense. This is a
partial redemption of OXLCO’s 5 million outstanding shares. From their
website “Oxford Lane Capital Corp. is a publicly-traded registered
closed-end management investment company. It currently seeks to achieve
its investment objective of maximizing total return by investing in
securitization vehicles which, in turn, primarily invest in senior
secured loans made to companies whose debt is rated below investment
grade or is unrated.” The performance of management investment
companies like Oxford will be particularly sensitive to how the
coronavirus story unfolds. Oxford Lane’s common stock has lost about 20
percent of its value of the last ten months, with most of this decline
beginning last October.
RILYM from B. Riley Financial (RILY) is an unrated Exchange-Traded
Debt Security offering a 6.375 percent coupon. ETDS’ are also referred
to as baby bonds and are recorded on the company’s books as debt
(rather than as equity, as in the case of preferred stock). As debt,
the obligation to pay the interest on these bonds is cumulative. As
bonds, ETDS’ are often seen as having lower risk than the same
company’s preferred stock shares. ETDS are very similar to preferred
stocks and are often listed on brokerage statements as such. RILYM is
the company’s eighth income security offered within the last three
years, its third in the last seven months. B. Riley always strikes me
as a company that has a hard time saying no. During February RILY’s
special purpose acquisition company B. Riley Principal Merger
Corporation (BRPM) announced the acquisition of Alta Equipment
Holdings, Inc., “…a leading provider of premium industrial and
construction equipment and related services.” And previously, the
company acquired magicJack VocalTec, a company that manufactures a
voice over IP telephone device. Founded in 1973, B.Riley is
headquartered in Woodland Hills, California.
Brookfield
Property Partners LP (BPY) introduced BPYPN on February 10 just
six months after its introduction of BPYPO last August. Where BPYPO
carries a 6.375 percent coupon, the new BPYPN was introduced at 5.750
percent, an illustration of the prolonged downward pressure on the cost
of money. Notably, however, BPYPN’s market price has yet to reach its
$25 par value, indicating that market participants feel that this
security’s 5.750 percent coupon does not offset the risk. BPYPN’s 5.750
percent dividends are cumulative and offer a BB+ speculative grade
rating from S&P. BPY specializes in shopping malls, a segment that
is under enormous pressure from online shopping. On February 14, the
company announced that it would be acquiring a 25 percent stake of the
intellectual property and operating businesses of the bankrupt Forever
21 teen fashion outlet (Forever 21 has 593 stores in 57 countries). BPY
is a $17 billion commercial real estate company headquartered in
Bermuda.
NRZ-C was introduced by New Residential Investment Corp. (NRZ) on
February 11, just six months after introducing NRZ-B on August 8, 2019.
The company has three preferred stocks currently trading, all of which
were introduced during the last eight months. NRZ-C is an unrated
traditional preferred stock offering cumulative dividends. The rate
will remain fixed at 6.375 percent until this security’s February 15,
2025 call date. At that time, the coupon will float based on the
three-month LIBOR rate plus 4.969 percent. NRZ is a $6.4 billion
mortgage REIT founded in 2011. NRZ is a $6.5 billion mortgage REIT.
T-C is a speculative grade, fixed-rate traditional preferred stock
from AT&T (T) offering 4.75 percent cumulative dividends. AT&T
has four income securities currently trading, two preferred stocks and
two investment grade ETDS’, none of which become callable until at
least November 2022. The new T-C is the company’s second preferred
stock offering within the last two months, T-A being offered at 5.0
percent last December 5. A recent three percent common stock buy-back,
expenses related to fighting off the pending Sprint-TMobile merger
(which finally appears to be making some progress) and preparations for
5G will likely see the lion’s share of the proceeds from this new
preferred stock.
MDRRP is an unrated term preferred stock offered by Medalist
Diversified REIT (MDRR) paying 8.0 percent cumulative dividends. As a
term preferred stock, Medalist will redeem outstanding shares of MDRRP
on February 19, 2025. The dividend rate for a new preferred stock is
set by the underwriters at the rate they feel market participants are
willing to pay the security’s par value for ($25.00 in this case).
MDRRP’s dividend rate is set at 8.0 percent, but the shares have not
traded anywhere near $25.00 since its February 13 introduction. Rather,
market participants have been pricing this security between $19 and
$21, indicating that the dividend rate of this security should have
been set at about 10.5 percent in order to compensate investors for the
risk. Also worth noting is that MDDR’s common stock value has lost
about 70 percent of its value over the last twelve months. MDRRP, the
company’s first preferred stock, has not been well received. Medalist
is a property REIT specializing in commercial real estate primarily
throughout the eastern U.S., its strategy “…to focus on value-add and
opportunistic commercial real estate which is expected to provide an
attractive balance of risk and returns.” Not clear how that’s working
out.
DX-C is an unrated traditional preferred stock from Dynex Capital
(DX) offering 6.90 percent cumulative dividends. DX-C uses the
fixed-to-float rate structure, with the coupon rate pegged to the
three-month LIBOR rate plus 5.461 percent once this security reaches
its April 15, 2025 call date. DX-C is a 4 million share issue, raising
about $100 million for the company. The company is using the proceeds
from 2 million of the new DX-C shares to redeem all outstanding shares
of DX-A (an 8.5 percent fixed-rate security issued in July 2012) on
March 24. This maneuver will save the company approximately $800
thousand per year in dividend expense. Dynex is a mortgage REIT
headquartered in Glen Allen, Virginia and founded in 1987.
BEP-A
from Brookfield Renewable Partners L.P. (BEP) was February’s
only new preferred stock offering an investment grade rating, barely
squeaking over the line with a BBB- from S&P. Brookfield Renewable
Partners L.P. is based in Toronto with its common stock trading on the
NYSE as BEP (which has almost doubled in value over the last twelve
months). BEP-A, raising about $200 million, is the company’s first
preferred stock and offers a fixed-rate 5.2 percent cumulative
dividend. BEP is a $9 billion renewal energy utility. The company has
owned a 62 percent interest in TerraForm Power, Inc. (TERP) but on
January 13, 2020 BEP submitted a non-binding proposal to TERP to
acquire all outstanding shares of the company. While the prospectus for
the new BEP-A preferred stocks does not specifically state that any of
the proceeds from BEP-A will be put toward the costs for this
acquisition, the document does say that “We intend to allocate an
amount equal to the net proceeds from this offering to finance and/or
refinance investments made in renewable power generation assets or
businesses…” among other potential uses.
PRIF-F is an unrated term preferred stock from Priority Income Fund
paying 6.625 percent cumulative dividends. Note that although this new
security is publicly-traded, Priority Income Fund is not. As a term
preferred stock, Priority Income Fund will redeem all shares of this
security on February 25, 2023 that remain outstanding on that date.
Priority Income Fund has six preferred stocks currently trading, and
has issued all six of them within the last 18 months. All six of the
fund’s preferred stocks are term preferreds. The fact that preferred
stock trading symbols are not standardized is creating more than the
usual amount of confusion with this security. The prospectus says that
the NYSE symbol will be “PRIFF”, but that cannot possibly be true since
the NYSE uses the “.p” convention for preferred stock symbols. This
Series F preferred stock at the NYSE is therefore PRIF.pF. And with
many other quoting systems, including ours as seen in the above table,
the NYSE’s “.p” is replaced with a hyphen, so the symbol is PRIF-F in
those cases. The fund is managed by Priority Senior Secured Income
Management, LLC which, in turn, is part of the Destra Capital
Investment, LLC stable. On their website, the fund’s objectives are
stated in the most non-specific terms possible as “Priority Income Fund
seeks to generate current income and long-term capital appreciation by
strategically investing in broad pools of senior secured, floating rate
loans made primarily to U.S. companies. The Fund's goals are to
increase income and portfolio diversification and reduce correlation to
traditional fixed-income assets.” (make some investments and make some
money).
MFABO/MFA-C
is an unrated traditional preferred stock from MFA Financial, Inc.
offering 6.5 percent cumulative dividends. The 6.5 percent coupon rate
will float when this security reaches its March 31, 2025 call date,
equal to the then-current three-month LIBOR rate plus 5.345 percent.
Calculating the coupon rate in the absence of a published LIBOR rate is
described on page S-12 of this security’s prospectus. MFA has two older
income securities current trading – MFO, a 4 million share 8.0 percent
ETDS that became callable on April 15, 2017 and MFA-B, a 7 million
share 7.5 percent preferred stock that became callable on April 15,
2018. Not coincidently, the new MFABO/MFZ-C is an 11 million share
issue. The proceeds from this new security will be used to (a) redeem
all of outstanding shares of MFO and (b) a portion of the outstanding
MFA-B shares (no redemption date has been specified as yet). MFA
Financial is a $3.3 billion mortgage REIT founded in 1997 and
headquartered in New York City.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectus:
AGNCP, OXLCP, RILYM, BPYPN, NRZ-C, T-C, MDRRP, DX-C, BEP-A, PRIF-F, MFABO/MFA-C
Preferred Stock Tax treatment
The
2017 Tax Relief Act included a provision aimed at small businesses that
also delivers an enormous benefit to those holding shares of preferred
stocks issued by REITs (which is pretty much all of us). Most small
businesses are incorporated as a Limited Liability Corporation (LLC).
Under this structure, the company’s earnings are passed through to the
owners who then pay the tax on their personal returns. The Act allows
those receiving such income to deduct, right off the top, up to twenty
percent of this “pass-through income.”
But remember that REITs do the same thing as LLC’s – at least 90
percent of a REIT’s earnings are passed to the REIT’s shareholders
primarily in the form of preferred stock dividends; the shareholders
then pay the tax on their personal returns. In other words, preferred
stock dividends received from REITs qualify under the Act’s
“pass-through income” provision and are therefore up to twenty percent
deductible. Such income is reported to you on the 1099 for received
from your broker as “Section 199A” income.
The
tax treatment of the taxable income you receive from income securities
can be a
bit confusing, but it really boils down to one question – Has the
company already
paid tax on the cash that is being used to pay you or not? If not, the
IRS is
going to collect the full tax from you; if so, you still have to pay
tax, but
at the special 15 percent rate.
Unless
specified otherwise, traditional preferred stock dividends, including
those paid by partnerships as pass-through income or are otherwise
paid out of pre-tax profits, are taxable as regular income; you pay the
full tax since the company has not (OXLCP, BPYPN, BEP-A, PRIF-F).
Companies
incorporated as REITs are required to distribute at least 90 percent of
their pre-tax profits to shareholders. Doing so in the form of
non-voting preferred stock dividends is the most common method of
complying and because these dividend payments are made from pre-tax
dollars, taxable dividends received from REITs are taxed as regular
income (AGNCP, NRZ-C, MDRRP, DX-C, MFABO/MFA-C).
Interest
that a company pays to those loaning the company money is a business
expense to the company (tax deductible), so the company does not pay
tax on the interest payments it makes to its lenders. Since
Exchange-Traded Debt Securities are debt, ETDS shareholders are on the
hook for the taxes. Income received from ETDS’ is taxed as regular
income (RILYM).
Lastly,
if a company pays your preferred stock dividends out of its after-tax
profits, the dividend income you receive is taxed at the special 15
percent tax rate. Such dividends are referred to as “Qualified Dividend
Income” or QDI. QDI preferred stocks are often seen as favorable for
holding in a non-retirement account due to the favorable 15 percent tax
treatment (T-C).
In Context: The U.S.
preferred stock marketplace
The
following chart illustrates the average
market price of U.S.-traded preferred stocks over the last twelve
months.
Many
things affect the market prices of these securities
such as the proximity to their call or maturity date, proximity to
their next
ex-dividend date, industry and/or overall health of the issuer,
perceived
direction of interest rates, pending government regulatory or policy
changes,
cumulative versus non-cumulative dividends and tax treatment of
dividend
payments. So what we really need to look at is current yield, which
calculates
the average annual dividend yield per dollar invested (without
considering
re-invested dividend return or any future capital gain or loss).
Current yield
is a “bang-for-your-buck” measure of value that normalizes differences
in
coupon rate and price to give us a single, comparable metric.
Moving
down the risk scale, the next chart compares the
average current yield realized by today’s preferred stock buyers when
compared
to the yield earned by those investing in the 10-year Treasury note or
2-year
bank Certificates of Deposit.
U.S.-traded
preferred stocks are currently returning an average current yield of
6.7 percent (blue line) while the annual return being offered to income
investors by the 10-year treasury is 1.3 percent (the Fed’s multi-month
effort to inject cash now pushing treasury yields down) and that of the
2-year bank CD is at 2.1 percent.
For
comparison, I have set the Yield column in the first table above to
show the current yield of the new February preferreds on February 28.
It
is
into
this marketplace that February’s new issues were introduced.
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