3 8%+ Yields From RAIT Financial

| About: RAIT Financial (RAS)

Summary

RAIT Financial's common stock is quite volatile as an income vehicle.

The REIT is financially stable, making it a stable payer of preferred dividends.

We'll look at three preferred stock issues from RAIT that all yield more than 8%.

In the quest for yield, many investors turn to REITs. They are generally stable income payers that afford a bond-like payout with the potential upside of equity. While not for every investor, REITs have certainly become a popular investing vehicle. But what about those investors that want yield but don't want equity market volatility? In the REIT space many companies issue preferred stock as a means of perpetual funding and in this article, we'll take a look at the issues from RAIT Financial Trust (NYSE:RAS) in order to determine if their yields are more attractive than that of the common stock.

To begin, RAS shares have a current yield around 9.5%, which is very strong, but shares have also moved around quite a bit over the past year. In that timeframe shares have traded in the $6s and $9s, introducing significant volatility to what many investors would buy as an income vehicle. So while the yield from the common is great, and many investors believe there is upside potential, there are others that want income without the noise. Luckily, if you want exposure to RAIT, you can choose from its three preferred stock issuances for income.

We'll cover three RAIT issues in this article: RAS-A, RAS-B and RAS-C. We'll cover them together because they are so similar and should be discussed at once in relation to each other. All three are perpetual issues, meaning there is no stated maturity date on them. Thus, they are true preferred stocks as, unless RAIT decides to redeem them, they will exist as long as RAIT does.

And speaking of redeeming them, all three issues also have clauses where RAIT can redeem them at any time once they've passed their respective call dates. For all three of these issues the call dates have come and gone and thus, RAIT has the ability to redeem them at any time if it so pleases. That doesn't mean RAIT will redeem them, it just means that it could. And if it does, investors are entitled to the full $25 issue price for the shares that are redeemed, regardless of where shares trade prior to the announcement.

From a tax perspective, they are also all the same. Preferred shares issued by REITs are not eligible for the favorable dividend tax treatment that non-REIT preferreds are eligible for. This means that any distributions received from these issues are taxed as interest income essentially, which increases the amount of taxes one would pay on them over what it would be if they were eligible for the preferential treatment. This is an unfortunate side effect of these being REIT issues, but if you were to hold them in a retirement account, it wouldn't matter.

All three issues also pay dividends quarterly, but where they differ is in the amounts of the dividends. The A pays an annualized dividend of $1.9375, the B pays $2.09375 and the C pays $2.21875 per share. At the issue price of $25, those payments work out to coupon yields of 7.75%, 8.375% and 8.875%. Of course, if the prices never changed, you'd want to own the C because everything else about the preferreds is the same including, most importantly, the issuer. However, the prices do change and given the most recent closing prices of $24.20 for the A, $25.25 for the B and $25.43 for the C, current yields are now 8.0% for the A, 8.3% for the B and 8.7% for the C.

So which is the one you should choose? That is a question for each investor to answer individually, but I'll outline my thoughts. The A offers the added safety of trading below the par value, which means that, in the event that RAIT calls them, investors will be rewarded with some capital gains. However, the other two offer higher current yields at the expense of trading for more than par value. Thus, the opposite is true for each of them. If RAIT calls the B or the C, investors will be subject to losses on their shares as they will only be paid $25 per share. But perhaps you are being compensated for the risk as the yields are higher.

If RAIT is going to call one of these issues, which I have no reason to suspect that it is, I think it will call the C since it is the most expensive to carry. Thus, that one would carry the highest risk of a capital loss, but like I said, the current yield is higher so there is some compensation for that risk.

Any of these issues offers a pretty safe way to get a very nice yield from RAIT with much lower price volatility than the common stock. Which one is for you would depend on your risk tolerances, but any are a good choice for an income investor. If I had to choose only one, it would be the B because it offers the higher yield without the risk of being the first one called if RAIT chose to do so. However, any of them are great options for investors seeking stable income.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.