Redemption of some higher yielding preferreds has left many with the perception that there is an insufficient amount remaining. Plenty remain and with the declining number of sources, it only becomes more important to know about what options we have. In our search, we have to be careful of pitfalls such as preferreds that could get redeemed at a loss to the investor, but if we stick to 3 main categories, these yields are incredibly safe:
1) Preferreds with redemption call dates sufficiently far in the future that yield to call significantly outweighs the disparity between market price and par value.
2) Preferreds trading below par (of late, a rare find).
3) Preferreds which are unlikely to get redeemed based on clear intent of the company or a lack of resources such that the company is unable to redeem.
We will start with a table of excellent sources of yield and proceed with more detailed descriptions of each one.
Yield @ Market Price
Ashford Hospitality (AHT-A)
Strategic Hotels (BEE-A)
Cedar Realty (CDR-B)
First Industrial Realty (FR-J)
Glimcher Realty Trust (GRT-G)
CapLease Inc. (LSE-A)
Northstar Realty Finance (NRF-A)
*If At-The-Market offering is exercised in full
Distant call dates
With a current yield of only 7.28%, the preferred B of Cedar Realty Trust (CDR) is certainly not as tantalizing as many of the others but it remains notable due to its extremely long life and availability under par. Despite a 8.875% coupon, CDR-A is not a viable source of yield as it is in the process of being redeemed. In fact, this is largely why the B was released.
Glimcher Realty Trust (GRT) has already redeemed its series F shares and a portion of the G. It is hard to ascertain how long the surviving G shares will remain. If management intends to redeem them, it seems like they would have done so at the same time as the rest so as to not have to raise capital a second time, but the fact that GRT has access to cheaper capital makes it seem plausible. Invest in the G if you feel it will last but GRT-H is the more durable source of yield from GRT and should continue to pay dividends through most of 2017.
The preferred of CapLease (LSE) really belong under two separate categories: the series A under not likely to be redeemed and the B with a distant call date. However, I will address both of them here since the A is nearly as secure as though it had not reached its call date. The reasons it seems unlikely to be called are as follows:
1) The higher coupon B was just released. Redeeming a lower coupon preferred after just issuing a more expensive one would be absurd.
2) Paul McDowell (chairman and CEO of CapLease) announced intent to reduce LSE's debt to equity ratio. Since preferreds are counted as equity these are advantageous to this goal as well as reducing borrowing costs. The alternative of issuing common is deterred by the fact that LSE is trading well below its NAV.
If the above holds true, both of LSE's preferreds are excellent sources of long-term yield.
Preferreds trading below par
First Industrial Realty (FR) offers two preferred which both trade below par due to being beyond the call date. These provide a safe source of yield because in either outcome (redemption or continuance) the investor profits. That being said, I believe these will remain for a while as the company has other issues which may be more pressing. As the only REIT in the industrial sector that does not pay a dividend on its common, shareholders are becoming increasingly expectant. Given the relatively lackluster leasing performance of FR these past quarters, it would seem they do not have the desire to redeem these preferreds.
Northstar Realty Finance (NRF) is a hybrid between an equity REIT and an mREIT so the investment community has a tendency to be fearful of its mREIT side. This is most likely the reason the preferreds trade so deeply below par. With the inherent risk associated with commercial mortgage REITS some would consider these preferreds riskier than the other ones in the list above, but I feel they are rather safe. Their seniority in the capital structure combined with the common trading well below NAV provides an excellent buffer in the event of liquidation. Also, the company has been performing exceptionally well compared to other commercial mREITs and was even able to repeatedly raise its common dividend. The massive yield on these makes them at least worth considering.
Unlikely to be redeemed
Ashford Hospitality Trust (AHT) offers preferreds A, D and E (much like the fat soluble vitamins) which each yield over 8% and should be safe from redemption for quite some time. The series E is unredeemable until April 18, 2016, which makes it easily overcome the significant premium to par, but the A and D can be recalled at any time. What makes these unlikely candidates for redemption, is the clear intent of the company to expand. Monty Bennett has a very optimistic outlook on the hotels industry, so he will be focusing most of the company's resources on acquisitions. Also, having just released the higher dividend preferred E on Oct. 12, 2011, it would seem highly unlikely that these will be redeemed. In terms of choosing which series to buy, the E is safer but comes with a potential loss of the $2 premium to par at the eventual redemption.
Strategic Hotels (BEE) also offers 3 preferreds over 8% yields, but these are safe from redemption for a different reason. BEE will simply be unable to redeem them. On June 29 of this year, Strategic Hotels paid the 14 quarters of dividends that had accrued on these preferreds to become current. The rest of their available capital went to the acquisition of the Essex House for $362.3mm on Aug. 17, 2012. While this is a very nice property that fits well in BEE's portfolio, it was a large capital investment that precludes preferred redemption. Having also issued more common stock in recent history, that option seems unlikely as a source of capital for redemption. In my opinion, these preferreds are safe sources of yield that will be around for quite some time.
While yield may be diminishing, both in terms of number of sources and percent, plenty remains. Just in the issues listed above there is more than $1.6B worth of high yielding stock available. Between these preferreds and the plethora of generously yielding common stocks, investors can still create low risk portfolios with regular dividend income.
Disclosure: 2nd Market Capital and its affiliated accounts are long AHT-A, AHT-D, AHT-E, BEE-A, BEE-B, BEE-C, FR-J, FR-K, LSE-A LSE-B,GRT-G and NRF-B. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the write.