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Month: May 2020

Principal Real Estate Income Fund – Monthly Dividends

Principal Real Estate Income Fund (PTZ) is a closed-end ETF that invests in high yielding debt and equity commercial REITs. This may sound dangerous in the current environment especially with many businesses with the potential of closing or going bankrupt. However, PTZ has been a consistent dividend payer monthly and, unlike other stocks where many have suspended their dividend, Principal Real Estate Income Fund has already announced dividends to be paid for May and June.

Let’s delve deeper into the closed-end fund and see how safe the company is to continue to pay the dividend.

Principal Real Estate Income Fund is managed by the ALPS Advisors, Inc. The advising company was founded in 1985. From their website, they state that the management team has more than 23 years experience which means they have been through two of the big recessions of 2008 and 2001. It is a positive that they have experienced two major downturns in the economy. However, they still weren’t immune to the March 2020 downturn falling over 50% in stock price.

Looking at their holdings as of 4/30/2020, their biggest holding is JPMorgan Chase Commercial Mortgage Securities Trust at 5.65% of their Total Market Value followed by Goldman Sachs Mortgage Securities Trust which is 4.87% of their Total Market Value. The close-end ETF has a total of 130 holdings that consists of majority Mortgage Securities Trust, Mortgage Trusts, and equity REITs. Around 67% of the holdings are Mortgage Trusts and Mortgage Securities Trust, this does sound a bit dangerous in the current environment especially if their customers do not make their mortgage payments.

Fortunately, the Federal Government announced they would be purchasing commercial debt through their TALF 2.0 program. TALF 2.0 revives the Term Asset Backed Securities Loan Facility (TALF) that was used in the 2008 Great Recession. TALF allowed the FED to purchase commercial backed mortgage securities. TALF was successful in the 2008 Great Recession to reviving the commercial market.

The new program TALF 2.0 allocates up to $100 billion to support asset based security markets. On April 9, 2020, the Federal Reserve announced TALF would include commercial mortgage backed-securities which means the majority of Principal Real Estate Income Fund would be included in that program. However, there is plenty of highly leveraged companies that can easily force the Federal Reserve to use their max allocation of $100 billion.

Let’s look at the original TALF program that was implemented in 2008 to see how things could possibly play out in the 2020 stock market. The TALF program was originally announced in November 2008. The S&P hit a all-time low of 741 when it was announced. This was a huge drop from S&P being at 1313 in August 2008 and S&P at 1576 in October 2007. This is a 43.5% drop and 52.9% drop respectively. On February 10, 2009, the Federal Reserve announced they would expand the Term Asset-Based Securities Loan Facility. This announcement still did not prevent the stock market from dropping further as it hit a S&P low of 666.

If there was another meltdown in the credit market and the Federal Reserve ends up using the $100 billion allocation, I believe the FED will do whatever it takes to make sure the market survives as they did in 2009. In this most recent TALF 2.0, the FED did act rapidly and announced the program a week after the March lows. I believe that the FED will continue to act rapidly in response to any future downturn as well. It remains to be seen how far the commercial market can go down which puts the investment in PTZ to be a bit risky. In the long-term, as long as the Federal Reserve can make afford payments to shore up the commercial market, then PTZ should continue to pay dividends and survive any downturn.

Principal Real Estate Income Fund is currently offering a substantial yield at over 10%. It remains to be seen if they will cut or suspend the dividend like many real estate investment trusts have already done in this pandemic. I believe that the FED will do whatever its needed to shore up the commercial market including purchasing more commercial mortgage backed securities and continue purchasing corporate bonds and even start a program to purchase equities. Of course, when things do get worse, PGZ will have a dip in price which should give you ample opportunity to get purchase more. However, at the current price, PGZ does give a substantial yield so there’s no reason not to at least purchase a small allocation to diversify your portfolio. I would not recommend putting all your “eggs” into PGZ as there should be plenty of opportunities to buy in future dips as well.

Granite Point Mortgage Trust – Strong Buy!

Granite Point Mortgage Trust (GPMT) is a mortgage reit that purchases floating-rate mortgage loans. From the initial outlook, especially at this time, purchasing commercial loans is risky. That means their loans are not backed federally like agency debt. To remedy this concern, they do use less leverage than other mortgage reits. At 63% loan-to-value, they are more conservative in the other players in this space.

However, even with a 63% loan-to-value, there is still lots of risk for default. However, their earnings report showed from a couple weeks ago that their is plenty of upside in this stock. First, their book value was a very high $17.43. At their current stock price of $5, the stock is trading at a very discounted value that is more than 70% off. This is the most discounted mortgage reit out of all the stocks that invest in commercial loans.

Digging deeper into the earnings report, they reported that only one of their commercial loans did not make the payment for the quarter. That means 123 out of 124 of their mortgage loans are current. This shows that the management is experienced to handle this recession and are conservative to make the company can survive.

You might wonder why their price is so cheap compared to their competitors. One of the main issues is they suspended their dividend. Their competitors continued to pay a dividend which kept their stock price higher. The should be a positive for investors wishing to get into GPMT.

You get in at a very affordable price for a stock that will pay a strong yield over 10% when they put the dividend back in place. There was a sell-off when the dividend was suspended. Many expected that GPMT might go bankrupt or get “margin called” on their portfolio. However, none of this was true. The company was just acting conservatively and making sure they have enough reserves to handle the situation.

At the current price of $5, there is plenty of upside in the stock in both price appreciation and dividend yield. Their most recent dividend was $0.42 which was recorded on December 31, 2019. If that dividend gets reinstated on the 2nd half of 2020, you can expect a dividend yield of 33.6% at a purchase price at $5. I would be more conservative and expect them to put the yield at 10% though. Either way, the stock is really cheap and you have plenty of upside from here.

America First Multifamily Investors – Tax Exempt Income

ATAX, America First Multifamily Investors LP, holds mortgage revenue bonds in majority multifamily apartments and student housing. They hold the first lien on these buildings which means they are the first to be able to foreclose if the landlord cannot make payment. The company has been around for almost half a century and have been consistently paying dividends every quarter. They are a very conservative company with a very experienced team.

With the covid-19, there stock has had a dramatic drop from being over $8 to now being under $5. Since they offer a $0.50 per year dividend, you are getting over a 10% dividend at today’s levels. It’s rare to see the current price being below $5. Each time that it fell below $5 per share the stock ripped back upwards. For the long-term buy and hold investor, you are getting a nice 10% dividend that is majority backed by tax-free income.

That means if you have a federal income tax at 32% you still do not pay any taxes for the dividend that comes out of ATAX. They are able to do this by investing in low-income housing which gets tax benefits. Of course, not all their income is tax free, but they will do their best to make sure it is tax exempt.

With an experienced team in place and first lien holders to housing, America Family Multifamily Investors is a great long term investment. Even for those looking for appreciation, there is plenty of upside in this investment. I expect the price to spike upwards with the after stock market earnings call later today.