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Industry Discussions / Real Estate Inv. Trusts: REITs
|Subject: REIT Pfds – Slim Pickin’s||Date: 10/14/2012 11:51 AM|
|Author: yodaorange||Number: 72731 of 80723|
This post is a collaborative effort between Ralph, aka REITnut , and Yodaorange. We published a comprehensive list of all REIT preferreds with REITnut ratings 3 months ago.  The REIT preferred landscape continues to evolve. Since the last post 20 issues have been called and 31 new ones have come to market.
Our goals for this post are to survey the landscape using mechanical formulas and to produce a list of all REIT preferreds, and to highlight those that Ralph knows and is comfortable with. Reasonable minds, of course, will differ, and Ralph’s opinion is only that. We used the following factors to categorize and separate the issues:
1. Is the issue “convertible” into shares of common stock or is it a “pure” cumulative preferred?
2. The earliest call date when the issue CAN be redeemed at the par price, most commonly $25 per share. Note that this does NOT mean that the issue WILL be called. It only means that the REIT has the right to call it at that date or any subsequent date.
3. The earliest call date is used to calculate the number of years before an issue can be called. For issues that have already passed their first call date, we assume the REIT will provide a 30 day notice to call the issue. This is why many of the issues show “.09” years in the “Years to First Call” column.
4. Coupon yield is the yield when the issue trades at “par” pricing. This marks the REIT’s true capital cost for preferred issues.
5. Current yield is the dividend divided by the current price. If the issue is trading at a higher price than par, the current yield will be lower than the coupon yield. This is the most common case. Assuming the issue is NOT called, this is the yield that an investor will receive if they purchase the issue. However, in all too many situations, THIS IS NOT A VALID ASSUMPTION; WE SUSPECT THAT SOME INVESTORS MISS THIS VITAL FACT.
6. Yield to First Call includes both the dividends AND the effect of the price change from today’s price to par. For example, if the issue is trading at $25.90 and is called 30 days from now, the investor will lose $25.90-$25.00= $.90. The REIT will pay a dividend when the issue is called, but it MIGHT not be enough to compensate for the loss of principal. Many REIT preferreds currently trade at NEGATIVE Yields to First Call, which assumes a call occurs within one month. Any investor that purchases the issue today will be at great risk of losing money if the issue is in fact called. This is NOT an exact science. A REIT MIGHT never call the issue, so the investor will realize a positive return. Our data highlights the POSSIBILITY of low returns assuming that the issue is called.
With this background, this is how the issues were categorized:
1. 14 issues that are convertible to common stock. This is because the Yield to First Call MIGHT not be a valid metric for these issues. You will need to perform your own due diligence before purchasing these issues.
2. 8 issues that are currently NOT paying their dividends. Consider these as wild gambling speculations only. NOT RECOMMENDED for conservative investors!
3. 29 issues with Yield to First Call >= 7.0%. This is an arbitrary cutoff, but it indicates that the market views them as high risk. Historically the market has been wrong in that very few REIT preferreds discontinue their dividend. However, as witnessed by the 8 issues that are currently not paying their dividends, the risk is NOT zero. Particularly if the economy enters a recession or worse, the dividends on these 29 issues would be in at least some doubt.
4. 87 issues with a first call date of less than 2 years. Many of these are immediately callable which shows up as .09 years in the data. 86 of the 87 have negative Yields to First Call, due to the assumption of call within 30 days. Thus, depending on whether the issue is, in fact, called, many of these will have very disappointing returns. Investors should only buy these issues if they are convinced that the issue will NOT be called in short order. Ralph rates a few these and he owns some of them; he’s willing to accept the risk of near-term call because he either doubts that they will be called, or because they are trading close to par, which minimizes the dollar loss if called. Each of these should be carefully analyzed on its own merits.
5. This leaves 72 issues that are NOT convertible, are paying dividends, are not callable in the next two years and have Yield to First Call of less than 7.0%. We have separated them into the NAREIT sector and subsector. Then we rank them by descending Yield to First Call. Note that many of these issues have low Yield’s to First Call, so there is still risk of low investment returns.
Ralph tracks some but not all of REIT preferred issues and has given ratings to those he tracks.
These ratings are as follows: A = acceptable for the reasonably conservative investor. LTL = lower than desirable total return, given balance sheet quality, management strength, business strategy and other factors. Ralph would avoid these unless and until they are priced more reasonably. (Neither of us can figure out why we used LTL; it should probably be “LTD”) RS = reasonable speculation, although not appropriate for the conservative investor.
If there is NO rating by Ralph, it does NOT mean that issue is a “Sell.” It only means that he has not figured out how to go sleepless for months on end to track all REITs.
Ralph wrote the following just before I posted this joint post. In it, he explains why he suggests only 20 pfds for investment at the present time, and then lists them.
There are only about 20 REIT pfds that I would consider buying at the present time – there are few bargains out there these days. I will break these up into three groups: (a) >2 year call protection, (b) <2 year call protection, and (c) converts. Note that many of these preferreds have “brothers or sisters,” i.e., pfds issued by the same issuer but with a different coupon and call date. Where I also like the brother/sister, it is noted; otherwise, I don’t believe the YTFCs are adequate for a current investment recommendation, e.g., I have listed WRIpD but not WRIpE or WRIpF. Of course, the pricing and YTFC relationships between same-issuer pfds change almost on a daily basis, so it makes sense to watch them closely – a large seller can create a buying opportunity.
The first box covers those with greater than 2 years of call protection (current yields and yields to first call aren’t great, but seem reasonable to me relative to yields available on other fixed income investments and competing securities). I own all of these except for PSBpU; I would buy PSBpU with particularly conservative money.
This next box covers those with less than 2 years of call protection. I have included these, despite the risk of near-term call, because (per Yoda’s spreadsheet) the stocks are trading at prices just slightly over par – so the downside in the event of call is modest, while the current yields are relatively good in light of my assessment of the REIT’s balance sheet, management team, property sector, business strategy and track record. Note that there are no “excellent quality” REITs in this section, but the PSAs are worth watching if their effective prices, adjusted for the accrued dividend, are very close to par. That said, PSA is known as a “serial redeemer,” ready to call any callable pfd if they can save just a little bit on dividend payments.
Finally, I have only two converts that make my list. I own both of these:
Reitnut and Yodaorange
 Ralph Block, Bloomberg Book, “Investing in REIT’s”, 4th edition
 REITnut-Yodaorange post on REIT preferreds 7/16/12