No. of Recommendations: 36
This is Chapter 5 of "Searching for the Holy Grail 
of REIT Preferred prices/yields." 

Today's questions:

Goal: How large is the REIT preferred space that we
invest in and are there any elephants in the room?

1) Starting point was XOT's list of 165 REIT preferred issues.

2) All issues including convertibles, "low quality" and issues
where the dividends are suspended were included in these calculations.

3) Using the 4/16/10 closing price and the number of outstanding shares,
the total "market cap" of these issues is ~ $17,072,135,481. The number is
approximate because there is uncertainty on the number of shares outstanding.
In some cases, I was not able to determine how many shares were originally 
issued. In other cases, there have been partial calls. Market cap is not
used in the traditional sense. The definition of market cap I use for this
study is number of shares outstanding times the share price. 

4) The market cap of the issues ranges from $22.3 million (GOODO & GOODP)
up to $487 million (PSA-M, PSA-I, PSA-K, KIM-G are > $400 million)
This indicates that the range for the issues is very wide. When you aggregate
the issues for each REIT, you see that a few companies dominate the market cap.
Here are the top 19 companies with their total market cap.

Company		Total REIT
		Market Cap

PSA		$3,066,317,000
DRE		$902,816,000
HRP		$691,860,000
VNO		$627,955,200
KIM		$563,500,000
PSB		$560,759,700
AIV		$542,986,000
DDR		$469,462,000
EQR		$455,977,060
HPT		$349,440,000
EPR		$346,574,000
HCN		$338,721,400
O		$323,615,120
SFI		$323,112,000
LXP		$304,950,000
WRI		$302,956,000
PLD		$290,551,560
LHO		$256,140,000
HCP		$245,262,600
Total		$10,962,955,640

These 19 companies represent 64% of the overall REIT preferred market.
PSA by itself represents 18% of the market. 

5) Now that we know the size of the market, it would be helpful to understand
our role in it. If we assume that 50 REIT boarders each have $1 million REIT
preferred portfolios, we get a market cap of $50 million. Out of $17 billion,
that works out to .3%. We are small players in the room and are unlikely
to move markets with our buy/sell decisions STRICLY based on market cap.
( In a future chapter, I am going to show how this is NOT actually true.
It is possible for us, the .3% group, to move individual issues.) 

6) The next question is who owns the other 99.7% of REIT preferreds and
is there an elephant in the room. I have found at least one elephant in
the same REIT preferred room that we are in. Based on limited data,
he appears to be a nice, friendly elephant wishing us no harm. The elephant
is the Forward Select Income Fund, symbol KIFAX. 

General information on the fund is at:

The fund manager publishes the complete holdings in the portfolio, at
the end of every month. The most recent portfolio is dated February 28,
2010. Here is the link to the portfolio:

my only interest is to study their effect on REIT preferreds.

8) Portfolio highlights as of 2/28/10

a) Held a total of 103 REIT preferred issues. They even hold a few that
are NOT on XOT's list. From that quantity alone, the fund "feels" somewhat
like a REIT Preferred Index fund.

b) The total value of REIT preferred holdings was $963,655,925. Note
this uses the quantity from 2/28 with the prices from 4/16,
so the numbers are a little different from what is shown
in their portfolio holdings.

c) This represents 5.6% of the total REIT preferred market cap.

d) The total value of their portfolio is 1,103,657,200,
so REIT preferreds are 87.3% of the total. REIT commons,
REIT exchange traded notes (VNOD, HRPN, WRD) and
REIT over the counter notes make up to rest of the
portfolio. The fund uses leverage. They have borrowed
$150 million presumably at low interest rates in 
order to purchase more high yielding REIT 

e) Here is where it gets interesting. You might not get
too excited that this fund holds 5.6% of the market. 
When you look at their detailed holdings, you get
a very different picture. Here are their top 10 holdings
sorted by what percent of the issue they own. So if the
issue had 1 million shares outstanding and this fund owned
500,000 shares it would have 50% ownership.

Symbol		Percent
		of outstanding
		shares owned
		by KIFAX

UBP-PD		48%
LSE-PA		34%
LTC-PF		32%
OFC-PG		32%
GRT-PF		29%
SHO-PA		28%
PSB-PL		23%
OHI-PD		22%
PKY-PD		22%
HST-PE		22%
DLR-PA		21%
HT-PA		21%
BFS-PB		20%
PLDGP		20%
MNRTP		20%

So if you happen to be a holder of UBP-PD, you probably
care a whole lot about what this funds does. With them
holding 48% of the available shares, you better hope
that the elephant is nice and friendly. The fund
owns 481,400 shares out of 1,000,000 outstanding.
This issue has a 90 day average volume of 951 shares
per day. I do not know for sure when they acquired the
shares but my guess is on June 13, 2007 when 993,600
shares traded. our concern is if and when they decide to
sell some or all of these shares. If they sold an extra
951 shares per day, it would be April 2012 before all of the 
shares sold.

f) I compared their portfolio holdings between January and
February. Here are the changes in REIT preferred shares:

Symbol	Shares	Shares	Change in	Comment
	on 	on	number of 
	1/31/10	2/28/10	shares	

CBL-PD	254,779	728,779	474,000		300,000 shares on 2/25/10, no movement	
HPT-PB	136,100	186,733	50,633		90,000 shares on 1/29/10, no movement
PSB-PO	77,400	102,400	25,000		
LXP-PD	435,842	459,582	23,740		90,000 shares on 2/23/10, no movement
HRP-PB	418,314	439,763	21,449		No effect
FCH-PC	200,000	217,500	17,500
DLR-PB	0	16,500	16,500
LHO-PE	266,700	281,700	15,000		Opportunistic buy 2/23/10 for 25,000 shares
FR-PJ	261,663	274,663	13,000
EPR-PD	74,858	79,758	4,900
CBL-PC	536,830	540,330	3,500		No effect
SLG-PD	212,175	213,775	1,600
EPR-PB	358,900	359,600	700

In some cases, you can see when they purchased the shares in large
blocks. In other cases, there are no discernable changes in volume
that would indicate when they bought shares.

IN ALL CASES, I do NOT see that their trades had any material 
affect on the price of the issue. To me this says that they are
doing one of two things in their trading:

i) Using a broker to pre-arrange the sale with another party,
so that the price does not move.

ii) Doing the trades on a "dark pool" where only large
institutions are allowed to trade. (More on "dark pools"
in a future chapter.)

g) It is interesting that the funds owns NO PSA-* issues. Not sure
why this is. It might be yield chasing, since the PSA's are amongst 
the lowest yielding issues. I assume there is significance to which
issues the fund holds versus not hold. It was not obvious to me
what if anything the main message of the holdings is. Other more savvy
REIT boarders can probably decode it better than I can.

9) BOTTOM LINE is still a concern that this elephant might wake up
unfriendly one day. Maybe he will only be unfriendly when all of
the other REIT preferred holders in the world are also unfriendly.
However, if he decided to be unfriendly asynchronously from
the rest of the kingdom, he could easily trample us on the
way out of the room.

10) A few facts on this fund:

Has three different classes of shares: A, C and institutional
30 day yield on C shares is 9.16%
Minimum initial investment $4,000
Expense ratio: 3.16%
Maximum buy fee: 1%
Maximum sales fee: 1%
Annual turnover: 66%
Morningstar rating: 4 stars

Yoda's comment: It seems to have underperformed all of the REIT preferred
issues I have compared it to starting about July 2007. It is off
about 40% since then, where the typical REIT preferred is off
in the 10% range.

Here is a link to the spreadsheet that contains all of the raw data
on the funds holdings.


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