Last month, Cedar Realty Trust, Inc. (formerly known as Cedar Shopping Centers, Inc: CDR) priced its series B preferred. The preferred has a liquidation value of $25. Based on the liquidation value, the preferred yields 7.25%. However, Cedar priced the preferreds at $23 a share, so the series B is currently trading around the IPO price.
Cedar Realty's preferreds are a good investment for income investors as you get to lock in a great yield on a security trading under par. At the current market price of the preferreds, the yield is 7.8%. In addition to this yield, investors will get to enjoy an additional upside of 7.8% when the security is called.
The nice part about Cedar Realty's preferreds is that the yield is greater than the actual common stock. The common stock has a 4.3% yield and is lower in terms of capital structure.
Many investors in these preferreds may be spooked about them, since at first glance it seems that Cedar is losing money. However, investors should take into consideration that the company is a property REIT. A more accurate way of looking at these type of companies is by observing the fund from operations (FFO). FFO is a better metric, since it adds back in depreciation back into earnings.
Cedar reported an FFO of 11 cents per share last quarter. The company expects to earn between 40 cents to 45 cents per share on a diluted basis. The main thing preferred holders need to understand is that as long as the company stays profitable after dividend payments, the preferred stock will be fine. In addition to this, the company pays $13.5 million in dividends just to common shareholders. This is a lower capital structure, so in a bad environment these dividends will be the first to be cut.
Cedar Realty's series B preferreds are a great buy, since they allow investors to get a 7.8% return on a company that is generating decent profits.
Additional disclosure: I am long CDR-B.