6 Equity REIT Preferreds For The New Year

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Includes: CBL, CDR, DFT, MNR, PEI, VER
by: Rubicon Associates

Summary

My selections for the equity REIT sector or a preferred stock portfolio.

Two different selections, one par sensitive, the other par indifferent as investors often have a "par bias".

The "par sensitive" selections yield 6.90%, while the "par indifferent" selections yield 7.75%.

This is the third article in my "preferreds for the new year" series, which is being done to help readers design a preferred stock portfolio focused on income generation. This article is focused on equity REIT preferred stocks. The two prior articles are:

  1. 6 mREIT Preferreds For The New Year
  2. 3 Higher-Yielding, High-Volatility Preferreds For The New Year

There are two "groupings" I have created for this sector: par sensitive and par indifferent. Many preferred investors have a bias towards where their investments trade relative to par, and the two groupings are designed to accommodate this. I am "par agnostic" personally, using the yield to call as a measure of my "par risk," with the assumption that the securities I am purchasing are not at risk of bankruptcy. With that said, let's begin.

The best place to start is with the selections designed for those that are par sensitive, as a large percentage of my readers seem to fall into this group.

The par sensitive ("3BP") selections are:

  1. Cedar Realty Trust (NYSE:CDR),
  2. VEREIT (NYSE:VER), and
  3. CBL & Associates (NYSE:CBL).

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The three REITs chosen for this sector exposure are solid REITs (yes, VEREIT has had its challenges) from three different REIT sectors - triple net, mall and shopping. I have tried to diversify the exposures to some degree in order to help mitigate the systemic risk of any one segment (admittedly, difficult to do when limiting each sector to three names). The yield on the 3BP portfolio is 6.93% on a stripped yield basis, compared to 6.99% for the universe. Reducing selections to below par issues (and having addressed the higher vol issues in a previous installment) has the effect of under-yielding the universe, and will affect total return versus the universe.

Shown graphically:

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A graphical look at the 3BP selections versus other peer selections and the universe:

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The next grouping is the par indifferent ("3PI") selections. The REITs included are:

  1. Monmouth Real Estate Investment (NYSE:MNR),
  2. Penn REIT (NYSE:PEI), and
  3. DuPont Fabros Technology (NYSE:DFT).

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Again, the REITs selected are solid REITs from different REIT sectors - industrial, datacenter and malls. As you can see, when expanding the universe of choices to those preferred stocks trading above par as well, increases the yield on the equity REIT preferred stock portfolio by nearly one percent.

Shown graphically:

Now a graphical comparison of the 3BP and 3PI selection's stripped yield:

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Finally, a graphical comparison of all the referenced securities:

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As I stated earlier, I am par agnostic so the following fundamental snapshot of the referenced issuers has the 3PI portfolio highlighted a different color.

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As I have done in the other installments, the following table shows the difference between the equity yields and preferred yields of the referenced securities. As we have noted in the earlier series, the preferreds yield more when the equity is supposed to generate strong returns and the equity yields more when investors are willing to pay for the stability of the preferred dividends (at the expense of ownership/upside).

Expressed graphically:

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Of the 3BP portfolio, 2 of the selections have underperformed the broader REIT market, namely, CBL and VEREIT:

CDR Chart

CDR data by YCharts

Despite the underperformance, both REITs continue to generate more than enough FFO to cover their obligations and should continue to do so as they recycle capital and adjust their portfolio.

Within the 3PI portfolio, the issuers have only marginally underperformed the broader market. This is also a reason that, like the universe, they trade at/above par.

VNQ Chart

VNQ data by YCharts

Bottom Line: I believe that either portfolio - 3BP or 3PI - offers investors an attractive yield and the ability to tailor the exposure to their par bias.

Disclosure: I am/we are long VER, EPR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.