PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, October 2017
The robust number of new
preferred stock offerings continued throughout
October with eleven new issues being introduced
during the month. October’s eleven new preferred
stocks are offering an average dividend (coupon)
of 7.3 percent.
October’s new issues
Here are the eleven new issues
introduced during October for the
consideration of preferred stock investors.
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 brokers and other
online quoting services for preferred stock
symbols is not standardized. For example, the
Series A preferred stock from Public Storage is
“PSA-A” at TDAmeritrade, Google Finance and
several others but this same security is
“PSA.PR.A” at E*Trade. A case in point during
October was the new preferred stock from
RiverNorth Marketplace Lending Corporation. The
company applied to the NYSE for the symbol
“RMPL” but was assigned “RMPL-“ (note the hyphen
at the end). This security is referred to as
RMPL- and RMPLp at nyse.com and RMPL-P at Yahoo
Finance. 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 95 high
quality preferred stocks selling for an average
price of $25.81 (October 31), offering an
average coupon of 5.54 percent and a current
yield of 5.36 percent. And thirteen of these
high quality issues are selling below their $25
par value, providing an average yield-to-call of
5.35 percent. By high quality I mean preferreds
offering the characteristics that most
risk-averse preferred stock investors favor such
as investment grade ratings, cumulative
dividends and call-protection.
There are now a total of 944 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that the newest issue –
GOLPF from Golar LNG Partners LP (GMLP) – is
still trading on the wholesale Over-The-Counter
exchange (as of October 31). This is a temporary
OTC trading symbol until this security moves to
the NGM exchange, at which time it will receive
its permanent symbol.
But there is no need to wait;
during a period of relatively high prices,
individual investors, armed with a web browser
and an online trading account, can often
purchase newly introduced preferred stock shares
at wholesale prices just like the big guys (see
"Preferred
Stock Buyers Change Tactics For Double-Digit
Returns" for an explanation of how the
OTC can be used to purchase shares for
discounted prices during a period of high
preferred stock prices).
Those who have been following
this strategy of using the wholesale OTC
exchange to buy newly introduced shares for less
than $25 are more able to avoid a capital loss
as prices start to drop (if they choose to
sell).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. GOLPF will become GMLPP
(probably by the time you read this).
About
the new issues
The diversity of the eleven new
October issues is striking. Securities from four
property REITs, one mortgage REIT, four
companies tied to natural resources and
shipping, one bank and one investment management
company were all introduced during the month.
Real Estate Investment Trusts
(REITs)
SOHOO, NSA-A, IIPR-A, PLYM-A,
NYMTN
REITs come in two flavors –
property REITs and mortgage REITs. While
property REITs make money by owning physical
property and leasing it out, mortgage REITs make
money by investing in residential and/or
commercial mortgages (the idea being to borrow
cash at a low rate and use that cash to buy
mortgages that pay a higher rate).
SOHOO from Sotherly Hotels (SOHO),
NSA-A from National Storage Affiliates (NSA),
IIPR-A from Innovative Industrial Properties
(IIPR) and PLYM-A from Plymouth Industrial REIT
(PLYM) are all cumulative, perpetual preferred
stocks offered by property REITs.
“Cumulative” means that if the
issuer misses a dividend payment to you, they
still owe you the money (short of a bankruptcy);
their obligation to you accumulates. “Perpetual”
means that the issuer is not required to ever
redeem your shares (i.e. the shares have no
maturity date).
Diversity can also be found
within this group – Sotherly Hotels, hotels;
National Storage Affiliates, self-storage;
Innovative Industrial Properties, and Plymouth
Industrial REIT, industrial facilities.
In an unusual move, Sotherly’s
SOHOO preferred stock was issued at 7.875
percent with the proceeds being used to redeem
all outstanding shares of the company’s older
SOHOM Exchange-Traded Debt Security which paid a
lower 7.0 percent. While this maneuver increases
the company’s annual dividend expense by about
$100,000, the transaction converts debt (the old
ETDS) into equity (the new preferred), improving
the company’s all-important debt-to-equity
ratio.
For the risk-takers among us, the
most unique in this October group is Innovative
Industrial Properties, founded last year.
According to their website, IIPR “…acquires
freestanding properties that are used for
growing licensed medical-use cannabis and
operated by state licensed growers.”
All of these property REIT issues
are traditional preferred stocks offering
fixed-rate dividends.
New York Mortgage Trust (NYMT) is
a mortgage REIT, investing in residential
mortgages. NYMTN pays a fixed 8.0 percent
dividend until its October 15, 2027 call date.
At that time, the dividend rate of this security
becomes variable based on the three-month LIBOR
rate (currently at 1.37 percent) plus 5.695
percent.
Shipping, Natural Resources,
Liquefied Natural Gas
SSWA, TGP-B, GNT-A, GOLPF/GMLPP
These four October issues
surround the activities of those who extract
natural resources and move them around. All four
securities offer cumulative dividends.
SSWA is an Exchange-Traded Debt
Security from Hong Kong-based shipper Seaspan
Corporation (SSW). ETDS’ are bonds 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. Seaspan now has
four preferred stocks and two ETDS’ trading on
U.S. stock exchanges.
TGP-B is from Bermuda-based
Liquefied Natural Gas shipper TeeKay LNG
Partners, LP (TGP), a master limited
partnership. Like NYMTN, TGP-B offers a
fixed-to-floating dividend rate, paying 8.5
percent until its October 15, 2027 call date. At
that time, the coupon of this security will be
calculated by the three-month LIBOR rate plus
6.241 percent. The new series B preferred stock
is the company’s second offering within the last
thirteen months.
GNT-A is from GAMCO Natural
Resources (GNT), a closed-end fund. According to
the fund’s prospectus, the fund “…will attempt
to achieve its objectives by investing at least
80% of its assets in securities of companies
principally engaged in the natural resources and
gold industries.” This security is the only
rated October offering, with an A2 rating from
Moody’s.
GOLPF/GMLPP is issued by Golar
LNG Partners, LP (GMLP), another Bermuda-based
shipper of LNG products. While very similar to
TeeKay’s TGP-B, GOLPF/GMLPP offers a fixed 8.75
percent coupon that does not float. Further, the
dividends paid by GOLPF/GMLPP are a distribution
of the company’s after-tax profits and therefore
qualify for the special 15 percent tax treatment
(more on this below). Dividends paid by TGP-B,
on the other hand, are made from pre-tax cash
and are therefore taxed as regular income.
Financial and Investment
Management
STL-A, RMPL-
STL-A is offered by Sterling
Bancorp (STL), a financial services firm
offering retail banking services to businesses
and individuals in or near New York City. While
the prospectus of this security does not
specifically say so, it is likely that the
proceeds from this offering have gone toward
Sterling’s acquisition of Astoria Financial
Corporation on October 2, 2017. STL-A is a
non-cumulative, traditional preferred stock.
RMPL- from RiverNorth Markplace
Lending Corporation (RMPLX) is the only “term”
preferred stock among October’s offerings. This
traditional, cumulative preferred stock matures
on October 31, 2024. If it is still trading at
the time (i.e. if is has not been called on or
after its October 31, 2020 call date),
shareholders will receive the security’s $25 par
value in cash in exchange for their shares.
Source: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
STL-A,
SSWA,
SOHOO,
NSA-A,
NYMTN,
IIPR-A,
TGP-B,
RMPL-,
PLYM-A,
GNT-A,
GOLPF/GMLPP.
Tax treatment
The tax treatment of the 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.
With that rule in mind, here is
how the tax treatment of October’s eleven new
issues plays out.
Companies incorporated as REITs,
be they property REITS (Sotherly Hotels,
National Storage Affiliates, Innovative
Industrial Properties, Plymouth Industrial REIT)
or mortgage REITS (New York Mortgage Trust), 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, dividends received from
REITs are taxed as regular income (i.e. they do
not qualify for the special 15 percent dividend
tax rate).
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 (i.e. interest
payments made to lenders are paid with pre-tax
dollars). Since Exchange-Traded Debt Securities
are debt (Seaspan), ETDS shareholders are on the
hook for the taxes. Income received from ETDS’
is taxed as regular income.
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. Looking at the Status
column in the above table, dividends received
from Sterling Bancorp’s STL-A, RiverNorth’s RMPL-,
GAMCO Natural Resource’s GNT-A and Golar LNG’s
GOLPF/GMLPP, are a distribution of the company’s
after-tax earnings and are therefore designated
as being Qualified Dividend Income (see
prospectus for exceptions and conditions).
In
Context: The U.S. preferred stock marketplace
So how do the new October issues
stack up within the context of today’s preferred
stock marketplace?
For many months now, two of the
most significant contributors to upward price
pressure have been (1) continued
zero-to-negative rates implemented by foreign
central banks and (2) insensitivity by member
banks toward changes in the federal funds rate.
Through July of this year, preferred stock
buyers totally ignored the Fed’s federal funds
rate increases.
But that started to change during
early-August, as preferred stock prices realized
their second most significant drop so far this
year. And prices have remained relatively flat
since then as investors appear to be
anticipating another federal funds rate hike
this coming December.
When combined with the surge of new issues that
we have seen over the last five months, there
may be reason to be optimistic that upward
pressure on rates has finally built up enough to
start pushing prices down in a meaningful way.
But 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.
While the continuing strong
demand for U.S. preferred stocks can be
attributed to several factors, the next chart
makes it pretty clear that the lack of
attractive alternatives is certainly among them.
U.S.-traded preferred stocks are currently
returning an average current yield of 6.4
percent (blue line) while the annual return
being offered to income investors by the 10-year
treasury is 2.4 percent and that of the 2-year
bank CD is a meager 1.9 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new October preferreds
on October 31. It is into this marketplace that
October’s new issues were introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield of
6.4 percent, plus the 6.3 percent annualized
value gain, those investing in U.S.-traded
preferred stocks since the beginning of 2017 are
currently on pace for a total annualized return
of 12.7 percent (6.4 percent of which is
realized in dividend cash).
Starting at 2252 at the beginning
of the year (January 3, 2017 open), the S&P500
common stock value index closed on October 31 at
2575, an unrealized annualized value gain of
about 17.2 percent plus about two percent in
average annualized dividend yield – a
year-to-date annualized gain of about 19.2
percent for common stock investors.
|
to the