BRE Properties (NYSE:BRE) is a REIT that acquires, develops and manages apartment buildings in the US. The company's common stock has been on a great run and pays a nice dividend of 2.7% but for income investors, that may not be enticing enough. However, the company does have other securities outstanding that may do the trick and in this article, we'll take a look at the Series D Cumulative Redeemable Preferred Stock (BRE-D, may differ depending on your broker) to see if it is a better fit for your income portfolio.
BRE-D is a traditional preferred stock, meaning it pays regular quarterly distributions, has no debt issue backing it and has no stated maturity date. As the title of the security suggests, it is also cumulative, meaning that if BRE were to miss dividend payments on BRE-D it is obligated to make them up to holders. This is a significant positive as it implies that, barring a bankruptcy situation, your dividends are guaranteed. Unlike common shares that carry no such guarantee, cumulative preferred dividends are as safe as one can get because as long as the company persists in its current form, it must pay the dividends.
BRE-D is also redeemable and with the call date having passed in 2009, it is callable at any time. If that were to happen BRE would pay holders the full issue price of $25 per share plus any accrued and unpaid dividends. With shares currently trading at $25.05 the capital loss incurred would be miniscule; the main point is that you'd be unable to continue to hold the shares. However, given the relatively low coupon, which we'll discuss next, I think the odds of this particular issue being called any time soon are pretty low. Smaller REITs generally pay higher interest rates on their funding than many other businesses and the rate on the Series D isn't particularly onerous in that context.
BRE-D pays an annualized dividend of $1.6875 in quarterly installments for a coupon yield of 6.75%. With shares trading just over that amount the current yield is effectively the same at 6.74%. This is more than double what the common stock pays and while you can certainly find better yields in the preferred market, it is still quite strong. BRE is a very profitable and well capitalized REIT and I believe the relatively lower yield on this preferred reflects that somewhat.
Unfortunately, even though BRE-D is a traditional preferred, it is ineligible for the preferential dividend tax treatment because it was issued by a REIT. This could potentially send the after-tax yield on BRE-D shares held in a taxable account low enough that it is no longer enticing to some investors. Understandably, BRE-D may simply not be for those looking for current income in a taxable account as there are many preferreds that pay similar yields that are eligible for the preferential tax treatment. This is something you must understand about your particular situation before pulling the trigger. However, if you're holding BRE-D in a retirement account it doesn't matter.
In addition, BRE-D is like any other income security in that it has some inherent interest rate risk. If we see rates spike the price on BRE-D could come down significantly. If you are going to invest in income securities this is something you must know going in as movements in interest rates will cause the prices of income securities like BRE-D to fluctuate up and down. If you are holding for the long term those price movements can represent opportunities to add to your position at lower prices but it can also be difficult to sit through. Just make sure you understand the risks before you get long BRE-D.
Overall, BRE-D offers investors that are more risk averse to get a very strong yield of more than 6.7% from a profitable, well capitalized apartment REIT. While there are higher yields available in the preferred space, BRE-D's cumulative nature and stable issuer mean that BRE-D should offer a higher margin of safety than many other issues. The ineligibility of the issue for preferential tax treatment is unfortunate and as such, perhaps it is best to own BRE-D in a retirement account.