Friday, September 25, 2009

Advantages and Disadvantages of Equity REIT Cumulative Equity Preferred Stocks

Snapshots of Trades at the end of the post.

For my own convenience I am including trad snapshots of other fixed coupon equity preferred stocks at the end also.   


This is a Gateway Post containing links to posts discussing REIT cumulative preferred securities. The prospectuses for these securities can probably be found in the posts linked below. It would be far easier for anyone interested to find them at the QuantumOnline site, where they are grouped under the heading "All Preferred Stocks" under the "Income Tables" tab: All Preferred Stocks Table - QuantumOnline.com

I am about to make categorical statements about the class of REIT preferred securities. I would add this caveat. The prospectus needs to be checked on all of these issues prior to any purchase. The foregoing is based just on my memory about the ones that I have some familiarity, and I have not examined all prospectuses for every REIT security. Furthermore, my memory is not what it use to be. Maybe my mind is turning into mush.

I would add another caveat. I have little interest in these securities as a rule. However, I view it important enough to become familiar with them so that I can take advantage of opportunities as they may arise.

Disadvantages to REIT Preferred Securities:

1. These securities lack a maturity date, always a bad option for the investor.

2. The REIT preferred stocks are a form of equity, superior only to common stock and junior to all forms of debt. This would become important in the event of a bankruptcy, since REITs have a considerable amount of secured and/or senior debt.

3. The dividend tax issues associated with REIT preferred dividends are best described as convoluted. Unlike other equity preferred issues, most of the dividends paid by REIT, possibly all in some cases, would not be classified as a qualified dividend under U.S. tax law. Sometimes part of the dividend will be classified as a long term capital gain, or a section 1250 gain, or even a return of capital, or as a non-qualified dividend. I just download the information into TurboTax and let the computer program deal with it.

4. While the REIT preferred is treated by the company as equity, the owner of these securities have no equity interest in the business. The REIT could be acquired and the common stockholders paid a premium for their shares, and the REIT preferred shareholders would not receive anything. I am aware of one case involving an acquisition of InnKeepers, a hotel REIT, where the preferred shareholders were left hanging and the shares were even delisted from the regular exchange. I do not own it but I was curious what happened to it. Here is a link to the what is called a "grey market" quote for the preferred stock, last traded at 35 cents on a $25 par value issue: Innkeepers USA Trust - INKPP (After this Post was written, Innkeepers declared bankruptcy and the preferred shares are no longer traded WSJ.comI just wanted to highlight a point. All you have as an equity preferred shareholder is the dividend. The common shareholders of Innkeepers were paid a premium for their equity interest in this REIT when it was taken private in 2007, whereas the preferred shareholder received nothing as a result of the buyout other than a delisting of their shares from the exchange and now their dividends are in suspension with the shares traded at 13 cents on the grey market.

5. The only real protection that the preferred shareholder has for the payment of the dividend is a payment on a junior security which means a dividend payment to the common shareholders. As soon as that common dividend is eliminated then the company could defer the payment of the preferred dividend. Several publicly traded REITs have eliminated their common dividend and some have deferred their preferred dividends.

6. While the dividends are cumulative, a deferred dividend does not earn interest, at least for the REIT securities within my sphere of knowledge.

Advantages:

1. The dividends are cumulative.

2. The dividend has to be paid in full if any dividend is paid to the common shareholder. This becomes important when the REIT substantially reduces the dividend payable to the common shareholders to preserve capital, which has become routine over the past year.

3. Starting in the 4th quarter of last year and continuing into the 1st quarter of this year, many of the $25 par value REIT preferred stocks fell to large discounts to par value. The decline for many of them were to levels near or even significantly below 50% of their par value. Since the dividend is calculated based on a $25 par value, buying one of these securities at a substantial discount to par value increases the yield to the investor.

By way of an illustration, a REIT preferred with a 8% coupon and a $25 par value, which is bought at 1/2 of par value or $12.5, would yield to that purchaser 16%. Buying that security at a total cost (including commission) of $8 would increase the yield to 25% (.08 x $25=$2 per share per year divided by $8 total cost=25% ) I bought one during a meltdown that is still paying me 75% per year based on my cost. For the most part these huge discounts have disappeared over the past two months and I am no longer interested in most of them at current prices. I simply could not avoid buying some during one of the meltdowns in the 4th quarter of 2008 and the 1st quarter of 2009, notwithstanding all of their disadvantages. The yields were just too large to entirely pass up even with the enhanced risks due to the recessions and the credit crunch.

REIT Preferred Issues Are a Disfavored Sub-Asset Class for Me:

I group REIT Preferred stocks with my bonds in my asset allocation, since their bond characteristics are far more dominant to me than any equity feature. Since I have a negative view of these securities, due to their many disadvantages, I managed my positions in them fairly aggressively, trading in and out of them frequently, and keeping my positions small. I am currently anticipating that the sub-class of REIT preferred stocks will earn, at a minimum 15 to 20% per year for me. Actually, I am now higher than that return, and I am factoring in a failure which has yet to occur. I thought BEEPRA might be one but it has started to come back. The annualized return projection is primarily due to the low prices paid for them which will generate high levels of dividend income, and secondarily to successful trading activity. As shown in the following links I have also had some success in trading them.

Trading Rules for Disfavored Asset Class:

I discuss trading rules applicable to this class of securities in these posts:

Transaction Links (THIS IS NOT COMPREHENSIVE AND THE LINKS UNDER EACH SECURITY ARE NOT IN HISTORICAL ORDER. I WILL ADD MORE AS I COME ACROSS THEM AND ANY NEW TRANSACTIONS MADE AFTER THE DATE OF THIS POST):

Alexander Real Estate (AREPRE):
Item # 6 Bought 50 AREPRE at $23 Regular IRA (2/25/15 Post)
Sold 50 AREPRE at $24.8-Regular IRA (April 2014 Post)


American Homes 4 Rent (AMHPRA)
Bought: 50 AMHPRA at $24.55

American Realty Capital (ARCPP)
Bought ROTH IRA 50 ARCPP at $21.33 (Feb. 2014 Post)
Bought 100 ARCPP at $22.76 (April 2014 Post)
Paired Trade: Sold 100 ARCPP at $23.43 and Bought 300 ARCP at $12.69
ROTH IRA Paired Trade: Sold 50 ARCPP at $23.75 and Bought 100 JPI at $23.38

BRANDYWINE REALTY- BDNPRC and BDNPRE
COUSINS PROPERTIES- CUZPRA CUZPRB
LEXINGTON REALTY -LXPPRD
BOUGHT 50 LXPPRD at $6.60 November 2008


EQUITY REIT PREFERRED STOCKS: 

As of 10/2/17-Start 2008 
Equity REIT Fixed Coupon Preferred Realized Gains/Losses =  $7,238.02
Non Equity Fixed Coupon Preferred Realized Gains/Losses = $3,608.13
Total Net Realized Gains in these 2 categories: $10,846.15

2008


2008 CUZPRA/CUZPRB $367.95
2008 BEEPRB 50 Shares +95.49
BEEPRA 100 Shares $228.82

2008 BNDPRC 30 Shares +$162.99
2009


2009 GRTPRG 30 Shares +$251.79

2009 BDNPRC 50 Shares +$234.48

2009 CBLPRC 50 Shares +$118.98

2009 CUZPRA 50 Shares +$210.49

2009 FRPRK 50 Shares  +128.98
2009 LXPPRD 50 Shares +$98.99

2010


2010 CUZPRB 40 Shares +$48.08

2010 FRPRK 50 Shares +$239.34

2010 LXPPRD 50 Shares +$807.03

2010 SLGPRC 30 Shares +$377.63

2010 SLGPRC 50 Shares +$697.02

2010 CBLPRC 50 Shares +$100.57
2010 LXPPRD 50 Shares +$40.57


2011


2011 CBLPRC 100 Shares +$84.07

2011 LXPPRD 50 Shares $40.57
2012


2012 LXPPRD 50 Shares +$34.08


2012 GRTPRF 30 Shares +708.86
2012 CBL Preferred Stocks +$29.64

2013: 


2013 Roth IRA 50 BDNPRE $43.98
2014


2014 Roth IRA 50 NNNPRE +$57.48
2014 NNNPRD  50 Shares +$55.57
2014 Regular IRA AREPRE 50 Shares +$74.08
2014 DLRPRG 100 Shares +$145.96
2014 ARCPP 100 Shares +$51.04
2014 DREPRL 50 Shares +$43.47
2014 CBLPRE 50 Shares +$39.58
2014 OFCPRL 50 Shares +$92.58
2014 Roth IRA ARCPP 50 Shares +$107.22
2014 EPRPRF 50 Shares +$93.98
2014 Roth IRA 50 DLRPRE +$92.87
2016:


2016 EPRPRC Roth IRA 50 Shares +$160.48 
2016 DLRPRI 100 Shares +$181.55
2016 EQCPRD 50 Shares +$93.97
2016 CBLPRD 50 Shares -$1.53


2016 CORRPRA 50 Shares -$111.53

2017:  


2017 NNNPRF 30 Shares +$32.75
2017 MNRPRC 100 Shares +$71.93
2017 REXRPRA 50 Shares +$17.97


2017 CIOPRA 50 Shares +$146.97
2017 NNNPRF 50 Shares +$32.9
2017 DLRPRI 50 Shares +$86.23
2017 PSAPRE 50 Shares +$51.04
2017 AHTPRD 41 Shares +$36.69
2017 HTPRD 50 Shares +$44.98
2017 HTPRD 50 Shares +$46.46
2017 HTPRD 50 Shares +$146.02
2017 BRGPRA 50 Shares $139.64


Total as of 10/2/2017= +$7,238.23

+++++++++++++++++++

Non-Equity REIT Fixed Coupon Equity Preferred Stocks

Total as of 10/4/17 +$3,608.13

2010 RNRPRB 50 SHARES +$30.05

2010 RNRPRD 50 Shares +$107.58

2011 AHLPRA 100 Shares +315.05


2011 WLFCP 300 SHARES $232.16

ZBPRC 40 SHARES $40.47

50 AFPRC 50 SAHRES +$7.88

2013 BANCP 50 SHARES $32.47

2013 NLYPRD 50 SHARES $41.47

2014 AFPRC 50 SHARES +$45.99


2014 BPFHP 50 Shares +$105.47 

2014 EVERPRA 50 Shares +$128.47

2014 FHNPRA 50 Shares $39.08

2014 KFN PR 100 Shares +$119

2014 NLYPRD 50 Shares +$83.47

2014 PFGPRB 50 SHARES +$37.97


2014 BPFHP 50 SHARES +$51.58

2014 TCBIP 50 SHARES $62.58

WBSPRE 50 SHARES +$20.98

2014 WBSPRE 100 SHARES +$31.6

2015 BPFHP 50 SHARES +$179.07

2015 NGHCP 50 SHARES $5.98

2016 NGHCP 50 SHARES $22.57 


2010 OFGPRA 50 Shares +$176.58
2010 ROTH IRA 100 AHLPRA +$167.1
2016 EVERPRA 50 Shares +$8.57
2016 DFSPRA 28 Shares +$ 60.49
2016 RFPRB 30 Shares + $ 72.74
2016 TCBPRC 50 SHARES +$64.02
2016 COFPRF 50 Shares +$57.48
2016 NLYPRD 50 Shares $+30.02
2016 EVERPRA 50 Shares +$74.47
2016 EVERPRA 50 SHARES +$82.52
2016 CYSPRB 50 Shares +$39.54
2016 GNEPRA 100 Shares +$61.5
2016 BANCPRE 50 Shares +$11.47
2016 BANCPRE 50 Shares +$3.52
2016 Roth IRA 100 JPMPRH +$85.95
2016 RSOPRA 50 Shares +$24.52
2017 WFCPRW 50 Shares +$48.97
2017 CYSPRA 50 Shares +$16.72
2017 NLYPRD 50 Shares +$16.57
2017 RNRPRC 50 Shares +$20.47
2017 Roth IRA NLYPRD 50 Shares +$47.48

2017 CYSPRB 50 Shares +$6.91
2017 COFPRC 30 Shares +$50.26 
2017 CYSPRA 50 Shares +$71.81
2017 CYSPRB 50 Shares +$100.03
2017 JPMPRG 50 Shares +$107.01
2017 COFPRH 50 SHARES +$115.3
2017 JPMPRG 50 SHARES +$108.57
2017 RNRPRC 50 Shares +$45.96
2017 WFCPRV 50 Shares +$72.21
2017 TCBIP 50 Shares +$17.12
2017 TCFPRC 50 Shares +$37.53
2017 AGNCP Issuer Redemption +$6
2017 WBSPRE 50 Shares +$6.92