Summary Strategy's preferred shares, STRK and STRF, offer 9.9% and 11.6% effective yields, respectively, with strong overcollateralization from Strategy's $40 billion BTC treasury. STRF is safer with a 10% yield on $100 liquidation preference, while STRK offers potential BTC upside with 8% yield plus an embedded everlasting call option on 1/10 MSTR share. Both preferred shares are well-covered unless BTC falls over 75%, making them suitable for investors who believe BTC will not face catastrophic failure. I rate STRK and STRF a Hold, with potential Buy due to their strong yields possibly outperforming other assets in a downturn. They may very well outperform if the macro picture gets worse. I’m a Bitcoin bull, and I recognize that many readers on Seeking Alpha are not. If you think Bitcoin (BTC-USD) is tulips, you can still gain some controlled exposure to the speculation on BTC for the benefit of your retirement. Strategy, formerly MicroStrategy (MSTR), preferred shares come in two batches: Strike (STRK) and Strife (STRF). Both offer around 10% effective yields, paid quarterly. As you’ll see in this article, the yields appear quite safe. Here’s the breakdown. Strategy Perpetual Strife 10% Preferred Stock (STRF) Risk averse investors can purchase Strife (STRF), the more senior preferred series of the two. Strategy has committed to ensuring that STRF will be the most senior preferred shares the company will ever issue. STRF offers 10% yield on the $100 liquidation preference value. This means $10 per share per year dividend should be paid to STRF investors. At a market price of $86.25 as of April 8 close, this is a yield of 11.6%. Strategy Perpetual Strike 8% Preferred Stock (STRK) Income seekers who want some possible upside from BTC can purchase Strike (STRK). This pays 8% on the $100 liquidation preference, which comes to a $8 per share per year dividend paid to STRK investors. At a market price of $81.13 as of April 8 close, this is a 9.9% yield. STRK is special in that each share is convertible into 1/10 a share of MSTR common stock. This means that STRK is an everlasting call option combined with a perpetuity. There are therefore two ways for STRK investors to win: BTC can go up, which sends MSTR higher, which raises the value of STRK’s option value. The floor price of STRK can be thought of as 1/10 MSTR, which is about $23 at a share price of $230. But if, for example, MSTR goes to $1000, then the floor price of STRK becomes $100. Interest rates can go down, which raises STRK’s perpetuity value. Given a fixed income stream, lower rates mean lower discounting which means a larger net present value. Generally, you can think of the everlasting call option as an option with delta close to 1 as long as implied volatility of the underlying asset is about 80 or higher. An everlasting call option also almost 0 gamma. The high IV requirement isn’t a hurdle for MSTR, which is easily the most volatile large cap stock in the US markets. Where Does The Yield Come From? Is It Safe? The yield comes from BTC and is backed by a massive overcollateralization thanks to Strategy’s treasury of $40 billion worth of BTC. Strategy takes the proceeds of the preferred stock issuance to purchase BTC. If BTC rises more than 9.9% or 11.6% each year, then the BTC purchased with those proceeds are enough to fund the dividends sustainably. What if BTC does not rise more than this hurdle rate? Well, there are only $850 million notional value in STRF issued and $765 million notional value in STRK issued . Senior to both series of preferred stock is $8.2 billion in convertible debt , though about half is ITM and should convert assuming MSTR stays at current levels or goes up. Thus, the $1.615 billion of preferred stock is covered by a net $32 billion in unencumbered capital in the form of Strategy’s enormous BTC treasury ($40 billion BTC minus $8 billion debt). This is an enormous coverage ratio. BTC must fall quite a bit (over 75%) before the preferred investors are unable to get their money back. And remember that right now, both STRK and STRF are trading at a sizable discount to their $100 liquidation preference. So the risk of both preferred shares is that BTC does fall over 75%. If you are sure BTC is tulips that are destined to go to 0, then this might not meet your risk profile for long term investment. However, if you are willing to take the view that BTC is tulips which will ebb and flow over time but probably not have a catastrophic, terminal failure event, then either preferred share is likely appropriate for your investment consideration. There is technically a risk that the company delays dividend payments on STRK. If cash flow is essential to your strategy, then this is a point worth noticing. While it is possible for payments to be delayed on STRF too, the dividend rate obligation compounds with each skipped quarter , up to a max rate of 18% per annum, so it is unlikely that these dividends are skipped. Just for completeness, I will mention that in practice, the dividends will almost certainly not be paid by cash proceeds of selling BTC. Strategy will likely use the sale of MSTR common to fund dividends or proceeds from future convertible bond issuances. Because the common stock is so exposed to BTC, using an ATM offering is effectively like selling BTC (and technically the BTC would be sold at a premium if the stock trades at a premium to its BTC NAV). For what it is worth, Strategy insiders are buying the preferred shares . The Bottom Line I would rate both STRK and STRF a Hold for the average investor. Given the extreme risk off behavior we are seeing at the macro level, I am somewhat compelled to raise it to a Buy rating since I do believe we could see 10% perpetual yields outperforming most other assets. While I remain bullish on BTC, it is also undeniable that the macro picture looks uglier and stable fixed income may be better for weathering the storm. So, I don’t think these preferred returns will be particularly strong, but they may very well be stronger than most other investments, especially if the current drawdown in the broader markets continue.
