REITs With Increased Risk Of Preferred Redemption

by: Rubicon Associates

Over the last month or so, we have seen REITs tapping the preferred market in a way I have never seen before. With lower rates and a thirst for yield/income investments, REITs have tapped into the demand and the rate environment to redeem existing preferreds and to add to preferreds currently on their books (reopening existing).

This exposes REIT preferred investors to additional risk - the risk of having their investments redeemed with a new issuance. Those investors holding REIT preferreds that are currently redeemable with prices over par are facing an increased risk of low to negative yield to call.

Some examples of recent issues used to redeem outstanding preferreds by REITs include:

  • Alexandria Real Estate Equities (NYSE:ARE): Raised $130MM at 6.45% which was used to redeem its 8.375% Series C
  • Public Storage (NYSE:PSA): Raised $425MM at 5.75% which was used to redeem its 6.625% Series M
  • PS Business Parks (NYSE:PSB): Raised $200MM at 6.45% which was used to redeem its 7.375% Series O
  • Realty Income (NYSE:O): Raised $325MM at 6.625% which was used to redeem its 7.375% Series D
  • National Retail Properties (NYSE:NNN): Raised $287MM at 6.625% which was used to redeem its 7.375% Series C

Yesterday Kimco (NYSE:KIM) tapped the preferred market and is expected to raise over $300MM near 6%.

As a result of the increased issuance of REIT preferreds which are used to redeem existing preferreds, I thought it might be helpful to create a list of REIT preferreds that have a higher coupon and could be redeemed in the current market. Here is my list:

Click to enlarge

Click to enlarge

As you can see, the coupons of these preferreds including Vornado Realty (NYSE:VNO), Brandywine Realty (NYSE:BDN), BioMed Realty (NYSE:BMR), Commonwealth (NYSE:CWH),Equity Residential (NYSE:EQR), Prologis (NYSE:PLD) and Public Storage are high enough to be economically redeemed in the current REIT preferred environment.

Bottom line: Keep your eye on your REIT preferred investments if they are currently redeemable or soon to be redeemable and trade above par as your yield may be compromised. As well, keep an eye open for opportunities to swap into a newer issue with greater call protection.

Disclosure: I am long O, NNN.