No. of Recommendations: 8
BG said: At what point does one consider locking in their gain? Do you totally ignore it?

BG, personally I look at the “Yield to First Call” for each of the preferreds we own. This assumes that the REIT will call the preferred on the first possible date. Some REIT’s like PSA in particular have a track record of calling them on the earliest date. Others like CMO do NOT call them on the fist available date. It probably depends on several factors. In CMO’s case, because they are a mortgage REIT, I am guessing it was more difficult for them to raise funds. Why else would they continue to pay 10% for their funds when interest rates are low?

In the “old days” when new preferreds with 7.0%+ coupons were coming to market, it was a lot easier to make the sell decision. If you had a preferred with say a 5.0% YTFC, you could sell it and buy a new 7.0% preferred with 5 years of call protection.

These days, it is a more difficult decision. You might be selling a 4.0% YTFC preferred to buy a 5.5% new issue. It tempts you to hold onto the older, higher coupon yielding issue. If you are lucky, it will not be called and you continue to receive a high coupon. If it is called, you might get an ugly report like CMO-pB got yesterday.

I show 172 REIT preferreds that are currently trading, NOT including convertible issues and notes (bonds). 57 of these are IMMEDIATELY CALLABLE, so if they are trading above par, there is a risk of capital loss. For all 172 issues, I show a median YTFC of 4.85% so investors have some tough choices to make.


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