Floating Preferreds Have Monstrous Yields Due To Timing Phenomenon

Core Viewpoint - Floating rate preferreds are currently yielding around 10% due to a timing phenomenon resulting from changes in the interest rate environment, which has created attractive yield opportunities that were not originally intended [1][6]. Group 1: Timing Phenomenon - Many preferred issues were created 4 to 7 years ago during a zero interest rate period, allowing REITs to raise capital at low rates, with initial coupons in the mid-6% range [2][5]. - These instruments were initially tied to LIBOR, which has since transitioned to SOFR, complicating the ability to graph historical data accurately [3][5]. - The yield curve has shifted significantly, with SOFR now at 4.28%, leading to higher yields on previously fixed-rate preferreds, such as AGNCO, which is set to yield 9.51% upon conversion to floating rate [6][10]. Group 2: Investment Opportunities - AGNCO is highlighted as a stable investment with a high yield of 9.51%, backed by AGNC Investment Corp.'s substantial equity of over $8 billion [9][10]. - Other preferreds, such as AGNCP, are also noted for their potential as they convert to floating rates, although AGNCO is currently viewed as more attractive [11]. - Preferreds in general are thinly traded, leading to price volatility, which can create opportunistic buying situations [12]. Group 3: Capital Appreciation Potential - Preferreds like PMT-C are trading at significant discounts to par, offering higher current yields and potential for capital appreciation if interest rates fall [22][23]. - The market has assigned a mid-8% yield for certain preferreds, creating a valuation discrepancy that benefits those trading at a discount [22][23]. - ABR's preferreds are also seen as attractive due to their discounted trading prices and potential for capital appreciation as market conditions stabilize [36][37]. Group 4: Market Dynamics - The current yield environment has shifted from intended yields of 5%-8% to actual yields of 8.5%-11%, providing opportunities for market-beating income [38]. - Rapid fluctuations in the yield curve can impact mREITs, but preferreds maintain a senior position in the capital stack, offering some protection against sudden shocks [38]. - The expected Fed rate cuts could influence SOFR and subsequently the yields on floating rate preferreds, potentially lowering them by 25 basis points [39][41].