I recently swapped out of the MAA common and into their preferred-H. As I have chosen to become more defensive in this raising interest rate environment. I don't call my self an experenced REIT investor, but I'm looking to put more money into other REIT preferred shares. For added safety I want the REIT operating income to completely cover their common dividend outlay. Can you suggest some REITs with high-yielding preferred shares, apartments or otherwise, to focus my research on? Thanks.
Exerpts from the article I posted the link to, in case the link goes dead at some point.
This is from a The Street.com article :
For Capital Automotive's common-stock owners, the deal looked good. The company, which leases real estate to car dealerships, agreed to be acquired by clients advised by DRA Advisors for $38.75 a share. This represented a premium of about 9% to the stock's last closing price prior to the merger news, which was announced the day after Labor Day. Capital Auto recently traded at $38.21.
But the story is much different for the preferred-share holders, since those shares are not being cashed out and will remain outstanding after the merger. It is not clear whether the dividends on the preferred shares will still be paid quarterly. But what is clear is that the preferred owners are now stuck with stock in a private company, where trading is less liquid and disclosure requirements are fewer.
The issue isn't unique to Capital Automotive. When apartment REIT Gables Residential (NYSE:GBP - News) agreed to be acquired by ING Clarion in June, Gables' preferred-stock owners didn't get cashed out either.
But not only do Capital Automotive's preferred owners lose out on the 9% merger bump that the common holders got. They ended up losing money in the deal, at least on paper. Capital Automotive's Series A preferred shares, which carry a 7.5% yield based on the $25 issue price, have tanked 12% since the news and now trade at $22.40. The company's Series B preferred shares, which carry a higher 8% yield based on the $25 issuance price, have fallen 8.7% to $23.65 since the news was announced.
Closed-end funds are major players in REIT preferred stock. Indeed, mutual funds run by Kensington Investment, Neuberger Berman and Cohen & Steers were some of the larger holders of the Capital Automotive preferred shares. Representatives from the funds didn't return calls seeking comment.
For individual investors, who often flock to REIT preferred shares for the dividends, the deal is a good reminder of how investing in preferred stock carries different risk from that of holding common stock.
In most instances, preferred stock looks pretty safe, since preferred shareholders get their dividends before common-stock holders. However, preferred shares typically carry no voting rights and are callable, meaning a company has the right, after a stated time, to buy back the shares at the issue price.
In the late '90s, many investors made big bucks off REIT preferreds by buying them well below par. It's a "wonderful area for astute investors," says Ken Statz, managing director of Security Capital Research and Management, a major investor in REIT preferred stock. His firm doesn't own any of the Capital Automotive shares.
"But if you buy, be prepared to do some research," Statz says. "I think you have to be very cognizant of your rights as a preferred shareholder and what happens when things change.
"Most people focus on the call risk, the credit risk, but there can be changes in a public company going private," he adds.
Barry Vinocur, editor of Realty Stock Review, points out how, in the Capital Automotive situation, the preferred-share holders will now own stock in a private company where there could be less information provided. Also, the new owners will likely leverage up Capital Automotive, and if they do take on more debt, "how does that impact DRA's ability to continue to pay these dividends?" he asks.<<
The govenment CPI supplied number is around 4%. The way the government uses hedonic adjustments to calculate their CPI figure inflation is probably 5%. Add 1.5% for paying taxes and another 0.5% as a fudge factor. So you are looking at a yield of 7% to just maintain ones purchasing power. If anyone can suggest a 7% risk-free investment I'm all ears. If I cannot find a 7% risk-free invesntment then I have to take on risk just to maintain my purchasing power. This yield starved world sucks.
OK, I rethought my original take on these preferreds Probably had a knee-jerk bias, since I owned MAA pfd. a few years ago when they were yielding 13% (which I eventually swapped for the common when the common yielded almost the same). But that was then, this is now.
So. maybe OK for retirees and yield-seekers, like me, IF they are hedged against a sharp interest rate rise and inflation rise (I am, via some Rydex inverse funds, gold, etc.).
So, I bought some today, from money market funds.
Thanks for the idea. I'm happy to be back in the fold!
I don't like preferreds at all at these prices. The stocks are very vulnerable if/when rates go up. If rates go down, most of them will be called at par, and the call feature caps their prices(at $25 usually), so where is the reward for the risk - the 4% dividend? Not enough.
Tough market to chase yield in. I'd prefer to not reach, though.
Not worth making 4% a year with the risk of losing 20-30% hanging over you.
They were great a few years ago when some(including MAA's) were yielding 12% plus and were selling a few dollars under par.
MAA-ph at $26 has a yield to call of 7%, not bad in this yield starved world we are currently in. Yes 12% would be nice, but that was a few years ago. I think we are much closer to the end of Fed tighting then the beginning. I'm betting on 2 maybe 3 more quarter point increases. Looking at preferred charts during the time the Fed has been increasing rates will show their prices have not decreased much at all. Look at the MAA-ph chart. Yes, as rates go up preferreds should show some weakness. But I don't expect a 25% drop in price for a 0.5% - 0.75% further increase in the Fed Funds rate. I also don't plan to make any more preferred purchases until after the next tighting. I'm just starting to get a list together to watch until I feel the timing is right.