No. of Recommendations: 18
JasperCapital said: that kind of illiquidity makes a good case for not going into those kinds of issues at all.

JC, "You can check out anytime you like, but you can never leave” is a fairly accurate description for REIT preferred owners. They are one of the most illiquid investment options that are regularly traded. I would not include them in the same category as life insurance, annuities, hedge funds and/or partnerships. But they are EXTREMELY thinly traded compared to most common stocks. They are MORE liquid that trading individual bonds.

For example, today (2/8/13), the median volume for REIT preferreds was 4,899 shares. Of issues >=$5.00 per share, 14 did NOT trade today. This is fairly common and some of the same issues regularly show up on the do NOT trade list.

Related to this is how wide the bid-ask spread is. In cases like the one I documented with the “One Share Club”, the bid-ask spread can be up to $1.00. This is NOT the norm. Maybe 10% of the most liquid issues trade with a 1 cent bid-ask spread. Since the bid-ask spread is constantly changing over during the trading day, it is difficult to quantify it with a single number. My guess is that a 5 to 7 cent spread is about the median.

The other part of this is “how deep the book” is. That means how many orders to buy, at what price and volume there are. Same for orders to sell. Let me illustrate with an example. With a broad brush, if you placed a 5,000 “market” buy order on any issue, you would buy every single share up to the “stub quote.” The “stub quote” is the dummy price that dealers use. Recall during the flash crash that issues traded for both 1 cent and $99,999. Those were stub quotes at the time. After the flash crash, dealers “tightened up” their stub quotes. That is where the ~$33.00 ask price shows up for $25 REIT preferreds. If you placed the 5,000 share buy order, probably the last 2,000 to 4,000 shares would be at $33.00. Once again, I am using generalities to make the point.

I have actually done this “experiment” several times with real money. Sometimes is was purposeful and one time it was an accident. For example, I might place a market buy order for 1,000 shares to see how it got filled. I have seen several cases where the fill range was ~$1.00 wide.

All of this reinforces the illiquidity of REIT preferreds. Investors have to understand this as part of the game if they are going to invest in them. Several times, REIT board followers have taken advantage of the illiquidity to buy temporarily depressed prices. That is fine and good.

There are broadly three types of REIT preferred holders:

1) That yield sure is great! I don’t understand calls. I don’t understand Yield to First Call. I have no idea how or when I would ever sell one of them. Have I told you how great the yield is?

2) I have a belief that interest rates will NOT spike and that I can comfortably hold REIT preferreds for the long term. The biggest risk I see is that they will be called away and I will have to reinvest at a lower yield. I understand Yield to First Call and sell issues that become irrationally priced. Sometimes I trade from one issue to the other to maximize current income.

3) I think I can spot the rising interest rate/inflation fire before everybody else. I think I can get out of the door safely before the pileup occurs. If I am wrong, I understand that I might suffer a capital loss if I sell the issue. In the meantime, I will still enjoy the high coupon yield. I might choose to hold, even if the prices go down substantially.

The question is what would happen when/if the REIT board decided to sell all? Let’s say we got a divine “Sell All REIT Preferreds” today signal. In round numbers, there are about 25 REITsters. Let’s assume they all owned the same issues. Let’s also assume they own an average of 1,000 shares per person. So we are trying to sell 25,000 shares at the same time on issues that trade ~ 5,000 shares per day. We are attempting to do 5 days of trading in one day. The prices would drop significantly. Gun to my head, I would expect the price to go down 5% to 15% in one day. Once again, this is very broad. Some issues trade a lot more and could take the 25,000 shares and NOT move the price very much.

At the other extreme, if you tried to sell 25,000 shares of my bellowed long call date SPGPRJ, PPSPRA and/or PLDGP, you would absolutely, positively HIT the lower stub quote. Matter of fact, I suspect that the dealers would turn their algorithms off and you would NOT be able to sell that many shares at any price. These are the issues that have first call dates of at least 13 years from now. As REITnut would say “they trade by appointment.”

Yoda might be incredibly foolish, yet we DO own SPGPRJ, PPSPRA and PLDGP in widows and orphans funds. Hopefully we understand the risks and know what we are in for. It is very important IMO that investors understand these risks before they buy any REIT preferreds with a substantial allocation. Buying them might mean you just checked into the Hotel California.



Here is a table of REIT preferreds plus their volume for 2/8/13.

GGPYP 540,350
NLY-PD 376,574
WRI-PD 263,270
DDR-PH 111,532
CDR-PB 89,940
PSA-PO 86,924
PSA-PP 62,324
ELS-PC 51,581
RPAI-pA 50,700
VNO-PH 49,035
NRF-PC 48,769
CLNY-PA 44,423
PSB-PT 34,988
PSA-PT 32,541
NLY-PA 32,279
GRT-PG 32,127
VNO-PL 31,488
ARR-PA 28,360
SNHN 28,159
LHO-PG 27,133
KIM-PJ 26,744
NLY-PC 25,612
VNO-PK 25,441
HTS-PA 24,833
PSB-PU 24,596
NRF-PB 24,141
AGNCP 24,124
PSA-PV 23,997
BEE-PC 22,038
EPR-PF 21,919
KRC-PH 21,235
DDR-PJ 20,678
ANH-PB 20,455
VNOD 19,786
SHO-PA 19,400
COR-PA 18,228
KIM-PH 17,797
SLG-PI 17,545
PSA-PR 16,731
AMTG-PA 16,547
PEI-PB 16,405
INN-PB 15,720
RAS-PA 15,713
IVR-PA 15,438
AHT-PE 15,378
VNO-PJ 14,346
TCO-PJ 14,284
FCH-PA 14,262
RSO-PB 13,383
RAS-PB 13,211
AREEP 12,731
SFI-PD 12,561
PSA-PQ 11,647
PSA-PS 11,117
CDR-PA 10,937
FR-PK 10,899
CMO-PB 10,365
MFO 10,319
HPT-PD 10,112
PSB-PS 9,990
IRC-PA 9,873
CYS-PA 9,494
CWHO 9,471
WRT 9,330
DLR-PE 9,107
O-PF 8,561
O-PE 8,531
EPR-PC 8,371
WRD 8,367
VNO-PI 8,044
PSA-PU 7,794
CWHN 7,668
BIR-PA 7,538
IRET-PB 7,510
REG-PF 7,244
CBL-PD 7,146
ARI-PA 7,075
BEE-PA 7,012
DFT-PB 7,003
DLR-PF 6,973
MITT-PB 6,950
KIM-PI 6,926
HPT-PC 6,832
DRE-PO 6,690
SFI-PE 6,520
MITT-PA 6,400
RAS-PC 6,310
HCN-PJ 6,144
CWH-PD 6,011
KRG-PA 5,902
WRI-PF 5,850
BFS-PA 5,646
GRT-PH 5,626
HT-PA 5,448
CBL-PE 5,445
CWH-PE 5,443
DRE-PJ 4,980
PEI-PA 4,817
HCN-PI 4,631
GKK-PA 4,460
NNN-PD 4,115
CHSP-PA 4,056
LSE-PA 4,047
SUI-PA 3,843
ARE-PE 3,450
FUR-PD 3,328
AHT-PD 3,164
SFI-PG 3,100
VNO-PG 3,065
SFI-PI 3,028
BMR-PA 2,970
FCH-PC 2,719
LHO-PH 2,700
CCG-PA 2,697
DFT-PA 2,598
EXL-PB 2,400
LSE-PC 2,400
INN-PA 2,400
DRE-PK 2,393
MPG-PA 2,303
RSO-PA 2,272
NCT-PB 2,225
OFC-PL 2,190
PEB-PA 2,100
ANH-PA 1,995
NRF-PA 1,957
PSB-PR 1,900
PLD-PS 1,850
AIV-PZ 1,815
VNO-PF 1,700
MNR-PB 1,527
UMH-PA 1,500
REG-PG 1,465
ESS-PH 1,451
RPT-PD 1,400
UBP-PD 1,300
GOODP 1,285
BEE-PB 1,280
CUZ-PA 1,220
PPS-PA 1,203
TRNO-PA 1,200
BFS-PB 1,164
BDN-PE 1,100
NCT-PC 1,100
LXP-PC 1,085
EPR-PE 1,000
LXP-PD 1,000
FPO-PA 1,000
MNR-PA 1,000
LSE-PB 950
KRC-PG 900
BRE-PD 900
SLG-PC 868
DRE-PL 862
UBP-PF 835
CUZ-PB 805
HT-PB 800
SFI-PF 800
PLD-PR 550
MFA-PA 525
PEB-PB 500
HPP-PB 450
IRET-pA 400
NHC-PA 353
FR-PJ 300
OFC-PJ 200
PLD-PO 200
DX-PA 100
PKY-PD 100

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I, for one, fully understand why I focus on preferred stock, many in reits, now doing so since the 2007-09 financial crisis, so I am far from a novice in this area, and am vert cognizant of their risks (thank you very much) as you outline (although you do not argue the other side re: their benefits when compared to common stock investing), and feel very comfortable that the risks are acceptable to me. I have been financially fortunate in these past 5 years with this investing emphasis, but have always approached this from a continuing-to-be-educated standpoint, always reading prolifically from pro and con viewpoints, some of whom I consider investment sages, as I have bought and sold PS's during this time period. There is absolutely no risk free investment out in the universe, certainly none in the common stock investing area area of reits as many on this board invest in, just as sitting on all cash in lieu of investing has its own risk. You will find a number of savy investors who might well differ with you on the benefits of PS investing, whether in reits or non-reits, and who have a defensible track record to reinforce their investment emphasis. I would say after 5 years, including the terrible 07-09 downturn, the Hotel California is more like the Waldorf Astoria to me. I believe I will stay a while longer.
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Yoda, excellent post, thank you! I had no idea there was a Hotel California on Dagobah.

Some observations:

1) When you say three types of REIT Preferred holders, I assume you mean among retail investors. For retail investors, I would add two more types -- (a) small traders who are not interested in the dividend income and who understand very well the spreads and who trade in and out on temporary mispricings, and (b) investors interested only in income who understand YTC and who don't care in the least what happens to interest rates because they will hold until called. I am not either of these types, and am not judging whether these approaches are good or bad, but have seen a few posts on this board that represent these types.

2) Liquidity is a cost that can be priced in to an expected series of cash flows in terms of the discount. In his book on risk, Aswath Damodaran mentions a study that found that yield increases .21% for every 1% increase in transaction costs (primarily the liquidity costs of spread, price impact, and opportunity cost of trading, which eclipsed the commission cost) for investment grade bonds, while it increases .82% for every 1% for speculative bonds.

3) Looking at volumes over a 30 day period gives another perspective of REIT Preferred liquidity. Below is a table of equity REIT Preferreds with Min, Max, Median, and Average volume for the last 30 days. Of note are issues that have tiny median volumes but have days here and there with relatively huge volumes -- for example, HCNPrI, EXLPrB, HPPPrB, PLDGP, and so on.

Ticker Name Min 30 Days Max 30 Days Med 30 Days Avg 30 Days
------ ----------------------------------- ----------- ----------- ----------- -----------
PSA-V Public Storage Series V 23,900 117,200 59,800 57,703
KIM-K Kimco Realty Corp. Series K 18,600 176,600 50,950 58,570
PSB-U PS Business Parks Series U 15,500 84,900 37,050 40,413
PSA-T Public Storage Series T 17,300 103,900 35,450 44,620
KIM-J Kimco Realty Corp. Series J 14,000 69,100 31,550 34,447
EPR-F Entertainment Prptys. Series F 5,900 96,500 28,800 33,093
COR-A Coresite Series A 9,900 297,500 26,250 40,797
VNO-K Vornado Realty Trust Series K 16,400 216,300 25,700 33,890
PSA-S Public Storage Series S 10,900 61,300 24,850 27,483
SLG-I SL Green Realty Series I 7,500 49,400 23,800 24,350
KIM-I Kimco Realty Corp. Series I 6,900 127,600 22,250 32,870
PSA-R Public Storage Series R 8,300 63,000 20,000 22,433
PSB-T PS Business Parks Series T 5,900 72,200 18,300 22,627
NNN-D National Retail Property Series D 4,100 84,700 18,300 22,230
CDR-B Cedar Shopping Centers Series B 2,800 89,900 17,600 23,113
PSA-Q Public Storage Series Q 7,300 130,700 17,250 22,777
KRC-H Kilroy Realty Series H 4,000 160,600 16,650 31,583
PSA-U Public Storage Series U 7,700 53,000 16,050 18,177
O-F Realty Income Corp. Series F 4,700 113,900 15,900 20,950
TCO-J Taubman Centers Series J 2,700 118,500 14,750 22,407
HCN-I Health Care REIT Series I 2,300 780,900 14,750 61,037
HPT-D Hospitality Property Series D 4,800 55,000 14,250 19,530
HCN-J Health Care REIT Series J 5,900 39,800 14,000 15,387
CBL-E CBL & Associates Pptys. Series E 1,700 96,700 11,750 18,520
CWH-E Commonwealth REIT Series E 3,400 30,900 11,050 11,523
PEI-B Pennsylvania REIT Series B 2,600 34,900 10,650 12,797
DDR-J Developers Diversified Realty Serie 1,300 190,100 10,650 23,290
DLR-E Digital Realty Trust Series E 3,100 22,900 10,000 11,687
OFC-L Corporate Office Pptys. Series L 2,000 115,200 10,000 20,540
KIM-H Kimco Realty Corp. Series H 1,600 25,400 8,800 9,417
VNO-J Vornado Realty Trust Series J 3,400 214,200 8,500 20,510
REG-F Regency Centers Series F 2,600 109,000 8,450 12,083
PSB-S PS Business Parks Series S 1,600 268,500 8,400 26,913
FUR-D Winthrop Realty Trust Series D 1,400 51,000 8,350 9,890
PSA-P Public Storage Series P 3,100 62,300 8,000 12,690
DLR-F Digital Realty Trust Series F 1,400 34,200 7,750 8,687
PSA-O Public Storage Series O 1,400 86,900 7,200 11,617
UBP-F Urstadt Biddle Series F 800 220,800 7,050 18,217
SUI-A Sun Communities 100 27,000 6,550 8,177
INN-B Summit Hotel Properties, Series B 1,500 72,800 6,300 11,387
AHT-E Ashford Hospitality Series E 100 42,200 5,950 7,830
IRET-B Investors Real Estate Trust Series 700 16,500 5,400 6,133
DFT-B DuPont Fabros Tech. Series B 1,000 20,900 5,050 6,150
KRC-G Kilroy Realty Series G 800 15,300 5,050 5,967
CHSP-A Chesapeake Lodging Trust Series A 400 66,300 4,600 11,920
FPO-A First Potomac Series A 500 43,800 4,050 6,377
DFT-A DuPont Fabros Tech. Series A 1,300 29,900 3,700 5,180
EXL-B Excel Trust Series B 400 413,200 3,600 17,573
PEI-A Pennsylvania REIT Series A 400 24,900 3,600 5,007
ARE-E Alexandria Real Estate Series E 300 92,100 3,200 7,487
BDN-E Brandywine Realty Series E 100 11,900 3,100 3,953
ELS-C Equity Lifestyle Series C 300 200,800 2,950 17,050
GRT-H Glimcher Realty Trust Series H 100 82,400 2,750 7,443
REG-G Regency Centers Series G 100 165,000 2,600 10,367
KRG-A Kite Realty Group Series A 300 6,300 2,450 2,370
PEB-B Pebblebrook Hotels Series B 400 179,300 2,350 10,890
RPT-D Ramco-Gershenson Series D 200 73,900 2,050 7,933
HT-B Hersha Hospitality Trust Series B 200 14,300 2,000 3,117
PSB-R PS Business Parks Series R 200 52,800 1,900 4,153
MNR-B Monmouth REIT, Series B 500 13,000 1,850 3,037
INN-A Summit Hotel Properties, Series A 300 10,800 1,850 3,000
LHO-H LaSalle Hotel Ppts Series H 100 8,100 1,800 2,120
SHO-D Sunstone Hotel Investors, Series D 100 193,500 1,750 9,900
CUBE-A CubeSmart Series A 200 13,200 1,650 2,693
UMH-A UMH Properties Series A 300 8,500 1,600 2,313
CCG-A Campus Crest Communities Series A 100 11,700 1,550 1,987
HPP-B Hudson Pacific Prop Series B 100 646,900 1,500 40,350
IRC-A Inland Real Estate Corp. Series A 100 9,800 1,450 2,497
PEB-A Pebblebrook Hotels Series A 200 6,100 1,250 1,773
GOODN Gladstone Commerical Series C 200 3,800 1,250 1,320
STAG-A STAG Industrial Series A 100 14,600 1,200 2,573
LSE-B CapLease Series B 200 8,900 1,200 2,003
AIV-Z Apt. Inv & Mgmt. Co. Series Z 100 3,300 1,150 1,327
ESS-H Essex Property Trust Series H 100 32,600 950 3,440
TRNO-A Terreno Realty Series A 100 7,300 700 1,373
PPS-A Post Properties Series A 100 4,600 650 853
SPG-J Simon Property Group Series J 100 8,600 500 973
PLDGP ProLogis Series Q 100 461,800 200 17,933

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The numbers I posted for 30 day volume are NOT correct. I used a canned program to pull the volume numbers from MSN, but there appears to be a problem in that the numbers are correct for some of the days but not others.

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Thank you Yoda for the very valuable reminder posts.
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This contains replies to Annedoc and Earslookin:

Annedoc said: although you do not argue the other side re: their benefits when compared to common stock investing.

Anne, my apologies for not mentioning any of the positives about REIT preferreds. I probably have posted 200+ times on this board about REIT preferreds and their positives. It is a GREAT asset class IMO and we own many of them in the widows and orphans portfolios. In many cases, the percent allocation is VERY HIGH.

This new post was specifically written to help insure that any investor that either owns or is contemplating purchasing REIT preferreds understands the illiquidity of the class. Nothing more and nothing less. I did NOT say it was a terrible, horrible, very bad kind of asset class that you should never own.

There will be a day when REIT preferreds are NOT a good asset class to own IMO. I don’t know if any of us will still be around when that day occurs. That day might be tomorrow or it might be 50 years from now. Personally I am betting that it will NOT be tomorrow or anytime in the near horizon.

What we want to avoid is having anyone on this board come back and say: “I never understood how illiquid REIT preferreds were. I thought I could sell of them on short order, but found out that selling them drove the price down substantially. I wish somebody on the board had told me this MIGHT occur.”

Ears listed the average volumes for REIT preferreds.

Ears, I don’t talk much about the average volumes for a specific reason. They can be very misleading IMO. There are two ways it can be misleading.

Case 1 is where the average volume appears reasonable, but it dominated by a few days of high volume with many days of low volume. A reasonable example is DDR-pH with a recent 10 day average volume of 40,873 shares. You might look at that and conclude it is a very liquid issue. Take a look at the volumes for the last ten trading days:

1/28 1,836
1/29 2,400
1/30 615
1/31 1,450
2/1 8,453
2/4 3,220
2/5 3,592
2/6 273,432
2/7 2,200
2/8 111,532

The two high volume days on 2/6 and 2/8, skew the average to give a misleading impression of liquidity. If you happen to sell on one of those days, you might get a good fill. On the other hand, what it you decided to sell your shares on 1/30 when the total volume was 625 shares? Chances are good, you would substantially lower the price to sell say 1,000 or 2,000 shares.

Case 2 is where the volume on a single day can be very misleading. I posted a good example of this on PLD-pO.[1] On 12/27/12, it traded 94,179 shares. You see that and think it was fairly liquid until you realize that there was only ONE trade that day. Unless you happened to be the seller of the 94,179 shares, there was no market. Matter of fact, there were NO trades on the three previous trading days. If you only looked at the average volume, you might be mislead into thinking it was easier to sell than reality dictates

I track the volume on every REIT preferred every day. I look at the median and average volume, but only pay attention to the median volume. The average can and is often skewed by a relatively few issues with large block trades.

BOTTOM LINE is that you must be careful relying on average trading volumes to accurately judge how liquid a specific REIT preferred is. If the trading volumes are fairly consistent and are NOT large blocks, the average volume is a reasonable metric.



[1]Yodaorange post on PLD-pO strange trading day
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Ears listed the average volumes for REIT preferreds.

Actually, that list was sorted by median, not average. It showed the min, max, median and average. My point was that even though a preferred may show a tiny median there are some trading days where there is significant volume traded, so although it may appear someone is stuck forever in the hotel, there are some days when you can get out the front door.

For example, here is HPPPrB last 10 days. It has a tiny median but there were a couple of days there where you could have exited. One of the issues of course is the opportunity cost for having to be patient.

2/8/13 2/7/13 2/6/13 2/5/13 2/4/13 2/1/13 1/31/13 1/30/13 1/29/13 1/28/13
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
HPP-B Hudson Pacific Prop Series B 450 0 0 200 450 0 100 1,000 41,971 2,000

Median Avg Min Max
------ ----- ------ ------
325 4,617 0 41,971

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