Locking Down Portfolio Gains

December 15, 2017

By   Tim McPartland

Excellent returns continue to accrue to our Medium Duration Income with Zip Portfolio as we continue to execute our strategy of holding only shorter maturity baby bonds and term preferreds, which are bolstered by a sprinkling of real estate investment trusts (REITs) to add a bit of a boost with potential capital gains.

We have just sold our two real estate investment trust (REIT) holdings to lock down some significant percentage gains. Our two holdings, Independence Realty Trust (NYSE: IRT) and New Residential Mortgage (NYSE: NRZ) served us very well in respect to adding some “zip” to the model. We have bought and sold IRT a couple times in the portfolio and each time we have realized significant gains.

Our sale today at $10.07/share represents a capital gain of over 16% since our purchase earlier in the year and we collected an incremental 5% in monthly dividends. NRZ provided a 18% capital gain since purchase and contributed another 5% in dividends.

Readers will recall that we seldom “trade” in any of our model portfolios. The reason for this is that we try to model our own personal situation. That means we are not able to monitor our share holdings on a continuous basis and simply want to earn a respectable 7% (or in the case of this “zip” model portfolio: 8%). Little time is available for trading in and out of the market.

With the two REIT sales, we are now presented with the normal dilemma that happens every time a sale is made and that is “what do we purchase now?” These sales mean we have a cash position of about 16% and a current portfolio yield of 5.83% which includes cash holdings. If we want to maintain our excellent returns, which now are approaching a gain of 21% in 28 months, we will need to redeploy our cash within 30 days. We are looking at a number of retail-related REITs as possibilities, such as Tanger Outlets (NYSE: SKT), DDR Corp. (NYSE: DDR), as well as triple net lease REIT Store Capital (NYSE: STOR). Obviously, DDR is the highest risk, but it also carries the highest potential return. We are also open to repurchasing either IRT or NRZ if they were to experience setbacks to the current share prices.

As we head through the third year of this model, we are hoping that we can achieve a return of 8% for the year. Given that we are likely to realize only 6-7% through term preferreds and baby bonds, we have to get a good bump from our REIT or master limited partnership (MLP) holdings, which leads us into more risk. We will resist making impulse moves because experience shows this normally leads to poor decisions and there is nothing we hate more than losses.

We will keep you posted on our future portfolio actions as they occur.