No. of Recommendations: 54
REIT Preferreds: Searching for Value and Dodging Increased Risk of Call

This post is a collaborative effort between Ralph, aka REITnut [1], and Yodaorange. Fellow REITsters have likely seen the changing landscape for our beloved REIT preferreds. So far in 2012, 36 issues have been called. Public Storage aka PSA floated its latest issue, PSA-pU with a coupon yield of 5.625% - and it’s now trading at a premium! Last week Vornado announced a new issue with a 5.7% coupon.

The Federal Reserve has been effective in steering many yield seeking investors out of CD’s and money market funds. Some of those investors have likely discovered the desirable characteristics of REIT preferreds. However, it is also likely that some of the lesser informed investors do NOT understand the call features of REIT preferreds. It’s quite likely that some of these investors bought issues north of $26 or $27, not expecting them to be called at $25.

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. 27 issues with Yield to First Call >= 7.5%. 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 27 issues would be in at least some doubt.

4. 76 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. 65 of the 76 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 doesn’t rate these, although 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 54 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 7.5%. We have separated them into the NAREIT sector and subsector. Then we rank them by descending Yield to First Call. Note that some 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 appropriate 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. 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.

Thanks,
Reitnut and Yodaorange

[1] Ralph Block, Bloomberg Book, “Investing in REIT’s”, 4th edition

http://www.amazon.com/Investing-REITs-Estate-Investment-Bloo...


LIST OF ALL REIT Preferred as of 7/15/12

Sweet spot for attractive long term returns
>= 2 years before the issue is called
IS currently paying a dividend
Is NOT convertible into common stocks
<7.5% Yield to First call

Symbol Years Coupon Current Yield REITnut
To Yield Yield To Rating
First First
Call Call


Sector: Diversified Subsector: Diversified

DFT-PA 3.21 7.88% 7.55% 6.36% A
DFT-PB 3.63 7.63% 7.17% 5.69% A
DLR-PF 4.72 6.63% 6.32% 5.47% A
DLR-PE 4.13 7.00% 6.54% 5.13% A
O-PF 4.55 6.63% 6.07% 4.41% LTL
VNO-PJ 3.72 6.88% 6.32% 4.32% A
VNOD 2.21 7.88% 7.13% 2.99% LTL

Sector: Health Care Subsector: Health Care

HCN-PJ 4.63 6.52% 6.13% 4.98% A

Sector: Industrial/Office Subsector: Industrial

FPO-PA 3.47 7.76% 7.67% 7.38%
STAG-PA 4.30 9.00% 8.44% 7.23% RS
PLDGP 14.31 8.54% 7.00% 6.31% A

Sector: Industrial/Office Subsector: Mixed

GOODN 4.47 7.13% 6.86% 6.16%
PSB-PT 4.80 6.00% 5.87% 5.48% A
PSB-PS 4.47 6.45% 6.03% 4.71% A
PSB-PR 3.21 6.88% 6.43% 4.52% A

Sector: Industrial/Office Subsector: Office

OFC-PL 4.88 7.38% 7.12% 6.54% A
HPP-PB 3.38 8.36% 7.83% 6.15%
KRC-PG 4.63 6.88% 6.64% 6.01% A
BDN-PE 4.72 6.90% 6.60% 5.80% A
CWH-PE 3.88 7.25% 6.74% 5.09%
ARE-PE 4.63 6.45% 6.07% 4.95% A
CWHN 2.30 7.50% 6.68% 2.07%

Sector: Lodging/Resorts Subsector: Lodging/Resorts

HT-PB 3.80 8.00% 7.81% 7.28%
AHT-PE 3.72 9.00% 8.47% 7.09%
PEB-PB 4.13 8.00% 7.55% 6.36% A
PEB-PA 3.63 7.88% 7.49% 6.28% A
LHO-PH 3.47 7.52% 7.14% 5.84% A
HPT-PD 4.47 7.13% 6.62% 5.23%

Sector: Mortgage Subsector: Home Financing

MFO 4.72 8.00% 7.70% 7.04%
AGNCP 4.72 8.00% 7.65% 6.86%
NLY-PC 4.80 7.63% 7.32% 6.62%

Sector: Residential Subsector: Apartments

CCG-PA 4.55 8.00% 7.52% 6.39%
PPS-PA 14.22 8.50% 6.76% 5.92% A
AIV-PZ 3.96 7.00% 6.60% 5.33% LTL
ESS-PH 3.72 7.13% 6.70% 5.23% A

Sector: Residential Subsector: Manufactured Homes

UMH-PA 3.80 8.25% 7.92% 7.02% RS

Sector: Retail Subsector: Free Standing

NNN-PD 4.55 6.63% 6.29% 5.32%

Sector: Retail Subsector: Regional Malls

PEI-PA 4.72 8.25% 7.77% 6.73% RS
SPG-PJ 15.22 8.38% 5.95% 4.73% A

Sector: Retail Subsector: Shopping Centers

EXL-PB 4.47 8.13% 7.87% 7.29%
IRC-PA 4.22 8.12% 7.83% 7.09%
KRG-PA 3.38 8.24% 7.93% 6.94%
KIM-PI 4.63 6.00% 5.84% 5.33% A
REG-PF 4.55 6.63% 6.26% 5.20% A
KIM-PH 3.05 6.90% 6.09% 2.37% LTL
WRD 2.13 8.10% 7.06% 1.10% LTL

Sector: Self Storage Subsector: Self Storage

CUBE-PA 4.30 7.75% 7.35% 6.32% A
PSA-PU 4.88 5.62% 5.32% 4.35% A
PSA-PT 4.63 5.75% 5.36% 4.05% A
PSA-PS 4.47 5.90% 5.42% 3.76% LTL
PSA-PR 3.96 6.35% 5.70% 3.28% LTL
PSA-PP 3.21 6.50% 5.86% 2.92% LTL
PSA-PQ 3.72 6.50% 5.75% 2.81% LTL
PSA-PO 2.71 6.88% 6.18% 2.53% LTL


High risk of being called away soon
<2 years to First Call
In most cases, Yield to First Call is NEGATIVE
Purchase at your OWN RISK!

Symbol Years Coupon Current Yield REITnut
To Yield Yield To Rating
First First
Call Call

Sector: Diversified Subsector: Diversified

EPR-PD 0.09 7.37% 7.34% 2.19%
LXP-PD 0.09 7.55% 7.50% 0.49%
VNO-PH 0.09 6.75% 6.69% -3.59%
VNO-PE 0.09 7.00% 6.93% -5.68%
VNO-PF 0.09 6.75% 6.68% -5.93%
CUZ-PB 0.09 7.50% 7.40% -8.44%
CUZ-PA 0.09 7.75% 7.61% -14.00%
VNO-PG 0.09 6.62% 6.49% -17.43%
VNO-PI 0.09 6.62% 6.47% -21.36%
O-PE 0.09 6.75% 6.55% -28.12%
IRETP 0.09 8.25% 7.90% -42.58%

Sector: Industrial/Office Subsector: Industrial

PLD-PM 0.09 6.75% 6.64% -11.52%
PLD-PO 0.09 7.00% 6.88% -12.66%
PLD-PL 0.09 6.50% 6.39% -13.15%
PLD-PP 0.09 6.85% 6.72% -14.67%
PLD-PR 0.09 6.75% 6.61% -18.00%
PLD-PS 0.09 6.75% 6.58% -23.99%
MNR-PA 0.09 7.63% 7.38% -31.76%
MNR-PB 0.09 7.88% 7.32% -78.55%

Sector: Industrial/Office Subsector: Mixed

GOODP 0.09 7.75% 7.71% 0.69%
DRE-PO 0.55 8.37% 7.98% -0.48%
PSB-PP 0.09 6.70% 6.65% -2.70%
GOODO 0.09 7.50% 7.40% -8.90%
DRE-PJ 0.09 6.62% 6.53% -10.25%
DRE-PK 0.09 6.50% 6.40% -11.76%
DRE-PL 0.09 6.60% 6.36% -37.40%

Sector: Industrial/Office Subsector: Office

OFC-PG 0.09 8.00% 7.97% 4.23%
PKY-PD 0.09 8.00% 7.96% 2.35%
BMR-PA 0.09 7.37% 7.28% -6.71%
SLG-PD 0.09 7.87% 7.73% -13.19%
CWH-PC 0.09 7.12% 6.97% -18.09%
OFC-PH 0.09 7.50% 7.30% -23.71%
SLG-PC 0.09 7.62% 7.40% -27.26%
OFC-PJ 0.09 7.62% 7.35% -35.03%
BDN-PD 0.09 7.37% 7.08% -40.27%

Sector: Lodging/Resorts Subsector: Lodging/Resorts

AHT-PD 0.09 8.45% 8.43% 6.56%
HT-PA 0.09 8.00% 7.91% -6.08%
FCH-PC 0.09 8.00% 7.91% -6.08%
AHT-PA 0.09 8.55% 8.42% -8.97%
SHO-PA 0.09 8.00% 7.88% -10.27%
HPT-PC 0.09 7.00% 6.84% -20.99%
LHO-PG 0.09 7.25% 7.04% -27.63%

Sector: Mortgage Subsector: Commercial Financing

NCT-PB 0.09 9.75% 9.41% -32.03%

Sector: Mortgage Subsector: Home Financing

MFA-PA 0.09 8.50% 8.25% -26.86%
ANH-PA 0.09 8.62% 8.34% -30.85%
NLY-PA 0.09 7.87% 7.37% -69.76%

Sector: Residential Subsector: Apartments

AIV-PU 0.09 7.75% 7.74% 5.86%
BRE-PD 0.09 6.75% 6.56% -25.83%
EQR-PN 0.09 6.48% 6.28% -29.76%
BIR-PA 0.09 9.00% 7.89% -145.52%

Sector: Residential Subsector: Manufactured Homes

ELS-PA 0.09 8.03% 7.89% -13.49%

Sector: Retail Subsector: Regional Malls

GRT-PG 0.09 8.12% 8.03% -5.49%
GRT-PF 0.09 8.75% 8.63% -7.67%
CBL-PD 0.09 7.37% 7.26% -9.97%
CBL-PC 0.09 7.75% 7.63% -10.06%
TCO-PH 0.09 7.62% 7.45% -19.44%
TCO-PG 0.09 8.00% 7.76% -27.35%

Sector: Retail Subsector: Shopping Centers

BFS-PB 0.63 9.00% 8.63% 2.13%
UBP-PC 0.79 8.50% 8.10% 2.15%
KIM-PG 0.21 7.75% 7.60% -1.22%
KIM-PF 0.09 6.65% 6.60% -2.28%
WRI-PD 0.09 6.75% 6.67% -6.39%
WRI-PF 0.09 6.50% 6.42% -8.04%
BFS-PA 0.09 8.00% 7.89% -8.88%
DDR-PH 0.09 7.37% 7.27% -9.51%
REG-PE 0.09 6.70% 6.61% -9.70%
WRI-PE 0.09 6.95% 6.83% -12.71%
DDR-PI 0.09 7.50% 7.36% -14.48%
CDR-PA 0.09 8.87% 8.69% -15.54%
UBP-PD 0.09 7.50% 7.30% -24.17%

Sector: Self Storage Subsector: Self Storage

PSA-PW 0.09 6.50% 6.47% 0.38%
PSA-PX 0.09 6.45% 6.32% -17.42%
PSA-PF 0.09 6.45% 6.27% -27.50%
PSA-PD 0.09 6.18% 5.99% -30.11%
PSA-PA 0.09 6.12% 5.89% -39.23%
PSA-PZ 0.09 6.25% 6.01% -40.01%



Market views as low quality
Yield to first call is >7.5%
Purchase at your OWN RISK!

Symbol Years Coupon Current Yield REITnut
To Yield Yield To Rating
First First
Call Call



SFI-PI 0.09 7.50% 10.45% 395.59%
SFI-PF 0.09 7.80% 10.60% 366.81%
SFI-PG 0.09 7.65% 10.36% 363.50%
SFI-PE 0.09 7.87% 10.50% 345.74%
SFI-PD 0.09 8.00% 10.19% 292.67%
RAS-PA 0.09 7.75% 9.47% 243.51%
RAS-PB 0.09 8.37% 9.77% 189.93%
RAS-PC 0.09 8.87% 9.93% 142.11%
NRF-PB 0.09 8.25% 8.97% 106.84% RS
BEE-PC 0.09 8.25% 8.57% 53.49%
BEE-PB 0.09 8.25% 8.55% 50.55%
FR-PJ 0.09 7.25% 7.45% 39.79%
NRF-PA 0.09 8.75% 8.96% 36.95% RS
FR-PK 0.09 7.25% 7.38% 29.16%
NCT-PC 0.09 8.05% 8.18% 27.03%
BEE-PA 0.09 8.50% 8.58% 19.41%
NCT-PD 0.09 8.37% 8.44% 17.38%
SPPRO 0.88 10.00% 10.08% 10.95%
RSO-PA 4.88 8.50% 8.80% 9.37%
LSE-PA 0.09 8.12% 8.13% 9.07%
CDR-PB 4.80 7.25% 7.78% 8.98%
FUR-PD 4.30 9.25% 8.86% 8.05%
CLNY-PA 4.63 8.50% 8.31% 7.92% RS
INN-PA 4.22 9.25% 8.75% 7.67%
SHO-PD 3.72 8.00% 7.91% 7.67% RS
LSE-PB 4.72 8.38% 8.12% 7.58%
ARR-PA 4.88 8.25% 8.00% 7.49%



Roulette Wheel Special
NOT currently paying a dividend
Be prepared for 100% loss of you investment

Symbol Years Coupon Current Yield REITnut
To Yield Yield To Rating
First First
Call Call



ACPPQ 0.09 0.00% 0.00% 2352.92%
ACPOQ 0.09 0.00% 0.00% 2351.06%
IMPHO 0.09 0.00% 0.00% 2311.89%
IMPHP 0.09 0.00% 0.00% 2237.27%
EHPTP 0.09 0.00% 0.00% 2009.20%
AHHAP 0.09 0.00% 0.00% 1439.68%
MPG-PA 0.09 0.00% 0.00% 588.24%
GKK-PA 0.09 0.00% 0.00% -122.67%


Convertible into common REIT stock
Must evaluate each issue on its own merits
Yield to first call MIGHT not apply

Symbol Years Coupon Current Yield REITnut
To Yield Yield To Rating
First First
Call Call


CMO-PB 10.08% 8.23%
FCH-PA 7.80% 7.80%
LXP-PC 6.50% 6.87%
EPR-PC 5.75% 7.53%
HCN-PI 6.50% 5.97% A
CWH-PD 6.50% 7.14%
EPR-PE 9.00% 8.00%
AREEP 7.00% 6.77% A
RPT-PD 7.25% 7.25% A
NHC-PA 5.08% 5.41%
ANH-PB 6.25% 6.19%
CMO-PA 9.76% 6.83%
ESSFO 4.88% 4.66% OK but trades thin
DGRDP 5.50% 3.20%

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No. of Recommendations: 1
yoda, ralph,
thank you both for what is clearly a lot of hard work gathering, analyzing and presenting this data....

However, it is also likely that some of the lesser informed investors do NOT understand the call features of REIT preferreds. It’s quite likely that some of these investors bought issues north of $26 or $27, not expecting them to be called at $25.

this may explain some of the anomalous pricing (and price swings) we have been observing in the past weeks....i was able to sell some Kim-I on the x-div date for an entire year of dividends...(and bought it back a week later just over par).

caution is clearly the way forward for these preferreds.

(limit orders or none of the above for me)
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No. of Recommendations: 13
I converted the tab data into a google worksheet for those that want to download the info into a more useable form. Added 7/13 price column.

https://docs.google.com/spreadsheet/ccc?key=0Al57eUiMCXw-dE9...

Much thanks to Yoda and Reitnut for their efforts.

John
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No. of Recommendations: 4
Thanks to yodaorange and Reitnut for this excellent post. May I suggest that you add it (or perhaps a digest of the main points) to the REIT FAQs, since the REIT landscape has changed since 2010, the last post in the REIT FAQs.

Wendy
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No. of Recommendations: 15
Yoda
Of the 8 suspended preferred dividends, only 2, MPG-A and EHPTP are equity REITs, the others are MREITs which I consider to be high risk bond funds rather than REITs. You don't give the N value you worked with, but using the listing of REIT preferreds at Quantum, it seems there are about 122 or so active (non-redeemed) REIT preferreds....give or take a few. This means that equity REIT preferreds have an overall average failure rate of 1.6% over the past several years. Considering the credit crisis and sharply declined GDP that has been slowly recovering since late 2007, this is quite a track record.

And I think it worth mentioning that the growing risk to the new retired preferred shareholders looking for reliable yield is perpetuity and inflation risk over the years and decades ahead. It will be interesting to look back 10 years from now and see how many of today's issues have been redeemed. I simply can't imagine a 5.65% preferred coupon EVER being redeemed. But then, there was a time when I couldn't imagine why anyone would ever buy a preferred, investment grade or not, yielding under 7%!

Thanks so much for sharing your work.

BruceM
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No. of Recommendations: 7
May I suggest that you add it (or perhaps a digest of the main points) to the REIT FAQs, since the REIT landscape has changed since 2010, the last post in the REIT FAQs.

I thought this was the first year I hadn't updated the FAQ; I had no recollection that it's now been (more than) 2 years. :( I guess it went hand-in-hand with the termination of the annual Bluest of the Blue list.

This would fit perfectly in FAQ #15; thanks for the suggestion, Wendy.

And let me add my thanks to Yoda & Ralph for such a helpful, giving post.

Ken
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No. of Recommendations: 0
yoda

We have a lot of PSA-D and bought it some years ago because at the time it was the lowest yielding PSA preferred and below par. Though it is now subject to call, I think the low yield offers some protection against call as others will probably be called first. So far so good. This said it is now above par, but the dividends are still very good compared to CDs and MMFs. I may be naive, but I'm willing to hold it.

brucedoe
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No. of Recommendations: 0
Can you short preferred's?

Seems to me at this point shorting some of the preferred's which are likely to be redeemed at less than current price might be worthwhile.
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No. of Recommendations: 0
I tried and my broker said they cannot borrow the shares. Yeah if I could short then I will go long on some and short simultaneously on few. I guess we are too small potatoes.
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No. of Recommendations: 2
Can you 'short' preferreds?
Theoretically, there is no reason one could not. But the brokerage likely would balk at this, as they'd need to be able to borrow them and then quickly sell them into the market. Most preferreds require time to sell under a limit order, to avoid an unexpected very wide bid-ask spread due to their very low average daily trading volume. On top of this, these are high yield instruments, and most investors would be hesitant to be constrained with a built in 1.5 to 2% loss per quarter until the short position is covered. And even if interest rates do rise, it is estimated that economic growth and therefore interst rates, would rise slowly, over several quarters, resulting in a slow decline in preferred prices. It is likely that only a suddently declared economic recession would provide enough sell-incentive to drop preferred prices appreciably...and these would likely be the most risky of the issuers.

Shorting works best on growth stocks without dividends that have suddenly exceeded their industry's P/E and are due for a correction.

BruceM
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No. of Recommendations: 0
Outstanding, phenomenally useful body of work. Thank you!

FC
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