Weekly Series: mREIT And BDC Recommendations (And Price Targets) As Of 06/23/2024
Hi subscribers.
We aim to retain the same layout from week to week.
Weekly Notes From Colorado Wealth Management Fund
Positions: As foreshadowed on multiple occasions, I picked up a new preferred share position. We’re back in PMT-B (PMT.PR.B). PennyMac Mortgage Trust (PMT) is facing a lawsuit over their attempt to reclassify fixed-to-floating shares as fixed-to-fixed. Our assessment of “fixed-to-lawsuit” looks great. There will be some slight target adjustments to the preferred shares to adjust for fixed-to-floating shares approaching the float dates. Those adjustments will typically be less than 1% of the target price.
At $24.21, PMT-B climbed outside our target “buy under” range. Relative valuation looks much more reasonable now compared to other shares. There’s still risk and delays with the lawsuit, so investors definitely shouldn’t be paying $25.00 today. They were a steal at $23.00. Some investors might look to start winding down positions as the risk/reward profile is roughly balanced following the sharp rally. Given that this suit is just getting started, here’s my thinking about a few price points.
$23.00 = incredible.
$24.20 = roughly balanced
$25.40 = terrible
When we started our position (at $22.92 to $23.00 last week), the market was barely pricing in the potential for the shares to float. We aimed to get in before the market recognized what was happening. Many investors were still sleeping on the potential.
Now the market is pricing in a better than 50% probability that PMT is forced to follow the law. I concur with the idea that it’s better than a 50% probability. It’s not certain, but it is probable. It still takes time though. As a reminder, our thesis here was to capitalize on the potential for a capital gain because the market was undervaluing the potential for PMT-A and PMT-B to float.That’s precisely what we’ve seen playing out. The market repriced shares as investors became aware of the current situation.
We previously unloaded shares of PMT-B at $24.12 and $24.13. However, at that point the floating date was still further away and there was no lawsuit. Now we have lawyers bringing cases because they are confident in some of the assertions we made early on. So I think at $24.20 today, the shares are still a bit better than they were at $24.12 in late January.
There were also more alternatives at that point that were quite attractive.
Commentary: Rates were roughly flat. No significant changes over the last week. I’ve got an article coming up on Gaming and Leisure Properties (GLPI). I’m planning on another one for VICI Properties (VICI) after that. Both articles will contain target updates.