Income Investing With Yield-Advantaged REIT Preferreds

 |  Includes: CUBE, DLR, DRE, EQR, KIM, O, PLD, PPS, PSA, SPG, VNO
by: Rubicon Associates

Yesterday I wrote an article on Investing In Banks For Income in order to increase the yield available within the bank sector. Today, building on that theme, I would like to address investing in equity REIT preferred in order to increase the yield available in the equity REIT sector (I am addressing equity REITs, which I consider separate from mREITs).

Part of my investing motto (when investing for income or cash flow) is to "sleep well and eat well." REITs historically have met both conditions. With the search for yield due to low rates and low dividend yields available elsewhere, REIT yields have come down a bit (well, many have). As many investors realize, REITs have been a stable and well performing sector over time due to their stable cash flow and conservative balance sheets (due in part by the financial covenants contained within their debt - a subject of a future article I have been planning) - fulfilling the "sleep well" condition of "sleep well, eat well."

Lately, when writing about REITs, one of the recurring comments I get (as well as other contributors writing on REITs) is that the sector does not meet the required yield of many income investors. This article will attempt to address that by showing that REIT preferreds can offer yield advantages to their common brethren.

When selecting a diverse target group of REIT preferreds, I used similar criteria that I did in my "5 High-Yielding High Grade Equity REITs For An Income Portfolio" article by utilizing REITs with investment grade corporate ratings - in fact, you will see a decent overlap between the REITs selected. One additional constraint I used was that the REIT preferred selected had to have a yield advantage of 2% to the common.

Here are my selections: Cubesmart (NYSE:CUBE), Digital Realty (NYSE:DLR), Duke Realty (NYSE:DRE), Equity Residential (NYSE:EQR), Vornado (NYSE:VNO), Kimco (NYSE:KIM), Post properties (NYSE:PPS), Prologis (NYSE:PLD), Public Storage (NYSE:PSA), Simon Properties (NYSE:SPG) and Realty Income (NYSE:O).

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Data from quantum online and quote media online.

What I have tried to create with this selection of REIT preferreds is a sample portfolio of diverse REIT preferreds so as not to have exposure to just one sub-sector of the REIT universe.

The result: a portfolio of strong, "best in class" REIT preferreds with a yeild advantage over the common stock of 3.38%. This allows an investor to go up the capital structure (even safer) and increase yield (even tastier).

The bottom line: Inclusion of REIT preferreds in an income-focused portfolio allows an investor to "eat well and sleep well."

Two brief notes:

  1. For Realty Income, I prefer the series F preferred (which I wrote about in "Realty Income's New Preferred Offers Decent Yield, Swap Opportunity." Itis newly issued and trades OTC, so analytical data is not yet available.
  2. I really need a clever acronym, such as contributor Brad Thomas's sleep well at night (SWAN). EWSW just doesn't cut it.

Disclosure: I am long O and O-E.