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On occasion we can see some spectacular failures within the preferred share market. One of the most incredible failures to come up from time to time is a disconnect between preferred shares from the same company. The mortgage REIT in question is Anworth (NYSE:ANH). I spotted this deviation in value a couple days ago and was shocked to see it last for so long. The table below contains my ratings for when ANH-A and ANH-C are attractive investments. I include ANH-B because it is in the later tables, but ANH-B is so strongly tied to the common stock that it should be valued in relation to the common stock rather than against the other preferred shares. Here is that table:

These are my price ratings as they were a few days ago, but movements in my estimated values have been very small since then.

The real question for investors is why I would be so bullish on ANH-A when I like ANH-C so much. I’m even long ANH-C. I bought it shortly prior to the ex-dividend date.

To really understand the trading ranges and targets for these shares, you need to know more about them:

For ANH-A, it is possible for a call to come out in the very near future. The company merely need give notice and initiate the call. The investor would still get some dividend accrual, around $.30 by my estimate, but they would suffer a capital loss (based on buying at the latest price) of $1.82. The net result would be a loss of around $1.52 in value. On preferred shares, which are relatively stable in prices, losing $1.52 is substantial.

As an alternative, I like ANH-C. The stripped yield is lower by 33 basis points, but it still trades below par value and carries a healthy amount of call protection. Unlike ANH-A, it is well within its normal trading range.

Why ANH-A Is a Poor Investment

In a prior article on Anworth, I pointed out:

“I expect ANH-C to remain in a range of $24.60 to $24.95 for most transactions. Based on the disclosed transactions, ANH received gross proceeds of $24.82655 per share and that turned into net proceeds of $24.57828 per share (very reasonable transaction costs). Each share of ANH-C costs $.25 less in annual dividend payments. They are getting net issuance proceeds of only $.43 less than the call price on ANH-A.

That payback period is under two years. Yes, the call risk on ANH-A is substantial. Perhaps most notably is the risk that if interest rates move lower it could push preferred share prices which would drive ANH-C into a scenario of rapidly issuing a very massive amount of shares.”

When I was looking into ANH-C previously, I found evidence that an agent working for the company was issuing a high volume of shares with an enormous number of small limit-sell orders. Anworth effectively confirmed it with this 8-K.

As Anworth issues the shares of ANH-C, they have a significant inflow of cash that can be used to fund calling the shares of ANH-A. While the net spreads available to mortgage REITs are fairly poor right now, an opportunity for a 2 year payback period on calling ANH-A is exceptional.

What to Expect

An investor buying ANH-A today needs those shares to remain uncalled for another 9 months or so simply to avoid losing money. I believe ANH will call the shares of ANH-A before then unless rates move substantially higher. That means shareholders in ANH-A would have a net loss compared to simply taking the last closing value for ANH-A of $26.82. If investors want to bet on rates moving higher, there are far simpler ways to do it than hoping ANH-A doesn’t get called.

Extra Disclosures

I have no position in ANH-A. If it were available very close to par value plus accrued dividend, I would be interested in buying it. That would eliminate the risk of negative total return through a call. I am long ANH-C. I am aware that another Seeking Alpha author is shorting ANH-A. I have no affiliation with that author. Due to the interest costs on shorting preferred shares, I do not recommend them for shorting. However, I do recommend harvesting gains when I believe shares are overvalued.

This is your opportunity to lock in prices at $310 per year before the next price increase on May 1st, 2017. Rates are going up because of the high cost of providing such detailed analysis. By signing up today, your price is locked in against future increases. I put together a guide showing my strategy for generating returns. If you want to learn more about investing in high yield instruments, specifically mortgage REITs and their preferred shares, check out the reviews from my subscribers. In the last month I was able to correctly call the opportunity in shorting Orchid Island Capital (NYSE:ORC) (about a 20% return), shorting Western Asset Mortgage Capital (NYSE:WMC) (for a 6% to 7% return) which included a release when shares hit the target range to close the trade, and buying Resource Capital Corporation (NYSE:RSO) (up over 20% since the call) going into the earnings release. As of 04/11/2017, a new SMS alert service is available for subscribers.

Disclosure: I am/we are long ANH-C, RSO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No financial advice. Investors are expected to do their own due diligence and consult a professional who knows their objectives and constraints. I might take bearish positions in ORC or WMC if I detect the right catalysts.

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