The recent stock bear market had caused widespread havoc in the REIT market, especially the mortgage REIT (mREIT) and mall/ hospitality REITs. REITs have to distribute 90% of their taxable income, and they need to borrow money for investing activities in many cases as they don't usually have loads of cash sitting around due to distribution. Consequently, many of them are highly leveraged and rely on public offering of common stocks or through indebtedness to cover for capital expenditure and so on.
For MBS market, although the Fed steps in and buy Agency MBS, the general MBS market is still in a very bad shape, in particular the non-Agency, Mezzanine and Interest only loans. Many mortgage REITs (mREIT) borrow money via repo operations to invest in mortgage-backed securities at a very high leverage. The instability in the MBS market is reflected in the stock price of mortgage REITs. In particular, stock price of many mREITs that primarily holds non-Agency MBS are crushed cruelly due to repo margin calls as banks want more collaterals in chaotic market situation. Many mREITs have received elevated number of margin calls on repos last two weeks, several of them like NYMT, AG Investment corp, MFA Financial are unable to fulfil these margin calls last week. Several of these mREITs are now selling some their portfolio to get cash. Book value of these companies have dropped up to 50-ish% in the last few weeks after selling majority of their exposure. Based on these numbers, common stocks will have hard time to recover as investors will evaluate the Price-to-Book ratio. On the other hand, once investors determined that these companies would not bankrupt, or could cover all the indebtedness, the preferred stocks should be able to significantly recover.
I am currently betting many of these mREIT would not go bankrupt or even in the event of liquidation, the preferred stocks could still recover most of the money. Consequently, I am currently holding NYMT, MITT, MFA etc preferred stocks.
On the other hand, small malls and hospitality REIT are also hammered by the Wuhan Virus as malls and hotels has basically no income during this crisis. I believe the stimulus package would help these REIT through this crisis and those have mediocre balance sheet and cash flows could survive this. Consequently, I am currently accumulating preferred stocks of the weaker REITs due to low market price. However, I have no appetite of their common shares currently unless the situation of the virus become clear later. Currently, I am invested in Braemar Hotel and Resort Series B preferred stocks, Summit Hotel Properties Series E preferred stocks, Pennsylvania Real Estate Investment trust Series C preferred stock and RPT Realty Series D preferred stock. I will also invest in Simon Property Group Series J preferred stock when it is cheaper.
Do not rely your investment decision on this primitive post. thank you.
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