The market is still a bit jittery. High-yield credit spreads opened up a bit over the last few weeks, which can put pressure on many asset classes. That was a bit of a concern. However, I still really like the risk/reward profile on these shares.
The yield on fixed-rate shares from the same REIT is about 10.3%. When these shares float, if short-term rates are unchanged, the yield on cost would be around 13.5%. For shares to carry a 10.3% yield after floating (if short-term rates remain this high), shares would have to trade above call value. I don’t expect them to get that high, but I do see the potential for a material gain.
If we don’t slide into a recession or see rates cut significantly, then I think these shares could trade a few bucks higher. In the case of a preferred share, getting “a few bucks” plus the dividends while waiting would create a very attractive annualized rate of return. If they make it up to $25.00 by the day they start floating, the annualized rate of return would be better than 50%. Even if they only rally half the way between the current price and $25.00, it would still be an exceptional rate of return.
There was a nice dip in the price today. The preferred share index ETFs were roughly flat, so this isn’t hitting the entire sector.