Lexington Realty Preferred: LXPPRD

I discussed briefly Lexington Realty in a post earlier today.  I was watching the price action and a seller emerged late in the day, knocking the price of the $25 par value cumulative preferred D down to $6.  The coupon is 7.55%.  As I have stated, there are a lot of motivated sellers for both the common and preferred REIT issues particularly from leveraged closed end funds that are imploding.  Many of those funds focus on REITS while some combine REITS with other higher yielding securities such as utilities.  Many of those funds are trading at or below a dollar as the fall in prices causes a cascade in selling due to the high leverage.  These funds own both common and preferred stocks.  

While Lexington just cut its common dividend, it had to declare it regular preferred dividends and the quarterly payment on LXPPRD is .4719Yahoo! Financeor $1.8876 per year, giving it a yield of 31.46% at the 6 price.  After researching the company, reading reports from Barclays, S & P, and recent earnings releases and transcripts, I decided to buy 50 only at 6 or below.  While the preferred dividend does have more protection than the common, both are highly problematic investments in the event of a bankruptcy. Both are subordinate to senior debt and of course secured debt. Lexington has a lot of debt, 2.5 billion, and has to refinance almost 266.7 million coming due next year.    Lexington Realty Trust Reports Third Quarter 2008 Results: Financial News - Yahoo! Finance  Based on my limited review, however, the company appears to be well managed.  But, as leases for rental property come up for renewal in the current economic environment, it is going to be tough sledding.  Lexington focuses on single tenant properties with long term net leases, which place the burden on the tenant to pay real estate taxes, utilities, insurance and ordinary repairs.  Almost 70% of properties are offices.  Another REIT, Vornado, owns about 15% of Lexington and just added to its stake by buying 8 million common shares.  Insider Trades - VORNADO REALTY LP - Yahoo! Finance

It would be an under statement to say that REITS are under severe distress.  Selling pressure has been relentless this year.  I have no idea when it will stop or where the bottom will ultimately prove to be.  If one of these firms bankrupts, there is not likely to be much for a preferred shareholder, especially for those REITs that have mortgages on their properties. If there are unsecured properties, and many do have them, and if the secured loans are non-recourse to the company, then there could be more for a preferred shareholder in the event of a bankruptcy.   I have mentioned that I do not like the lack of maturities for these issues although I did have one called a couple of years ago at par when the REIT could refinance at lower rates.  My interest now is due to the yields generated mostly by the deep discounts to par value.  The coupon is always applied to the par value to determine the dividend payments.  A 75% discount to par value and a 7.55% coupon will jack  the yield into the clouds.  I do like the cumulative feature of the dividends which provides some protection short of a bankruptcy.  Another protection is that the preferred dividend can not be eliminated as long as the REIT pays a common dividend.   To maintain its tax status, a REIT has to pay out 90% of its income. Thus, if there is income, there will have to be a common dividend.  If there is a common dividend paid in cash, then the preferred dividend has to be paid in full.  A reduction in a common dividend actually improves the situation of the preferred shareholder in that the REIT is keeping more money, making it that much more likely the preferred dividend is paid.  But once the common dividend can be eliminated, due to losses, the preferred shareholder is certainly vulnerable to a postponement of his dividend.  It is not forgiven but postponed.  Most do not pay interest on the postponed dividend, some do, but that also creates a tax headache in that taxes are paid on interest that is not paid, similar to what happens with a treasury inflation protected bond or a zero coupon taxable bond. These REIT preferreds that I am buying are high risk and I am limiting my exposure to small amounts for each one bought.  I have already sold several this year at a profit and collected numerous dividends already. My current positions, all extremely risky and recently added, include BEEPRA, BDNPRC, SLGPRD, CBLPRC, GRTPRF, FRPRJ AND FRPRK, all of these are cumulative and all are still paying common dividends except for BEE.   I believe that, in aggregate, that I am ahead this year for this kind of security considering profits realized on positions already sold and netting that with unrealized losses on the positions currently held.   My hope is simply that these REITS stay solvent and pay the dividends, and any gain on the security is just gravy.  If I break even on security sales for these preferred issues as a class, and just net the dividends, I will be most pleased.  I would be more than happy and content just to receive  the 30% annualized dividend yield for LXPPRD for example and just sell it for a wash or a small profit.  But I sort of expect now that one or two may recover over the next year or so back up to where they started the year, near par value, while one and possibly two may have more suffering in store for them.   I will probably end up with preferred stocks in about 10 different REITS.  I am likely to continue adding to my collection as I conduct more research into those companies outside my normal monitoring spectrum such as Lexington and Strategic Hotels (BEE). 

The link to the filed prospectus for LXPPRD:  

http://www.sec.gov/Archives/edgar/data/910108/000095012307001842/y30156b2e424b2.txt