In the yield-starved world in which we live, it is not uncommon to hear about fixed-income investors extending maturities or moving down the credit-quality scale in search of higher income streams. If you are such an investor, you might also consider adding preferred stocks to your list of income-producing assets.
Given my interest in adding some real-estate-related income streams to my portfolio, I recently decided to go hunting for preferred shares of real estate investment trusts (REITs). My hope was to find investment grade REIT preferreds trading at a discount to their redeemable value with a minimum current yield of 5%. During my search, I found two companies of interest that currently have preferred shares meeting the criteria just mentioned. In this article, I would like to share some of the details relating to those preferred shares.
Public Storage is a real estate investment trust that owns and operates storage facilities. According to its website, the company “operates over 2,200 unique and diverse company-owned locations in the United States and Europe, totaling more than 142 million net rentable square feet or real estate.” Additionally, “its PS Business Parks interest adds another 28 million (approx.) rentable square feet of commercial and industrial space.” Public Storage has several Series of preferred stock. One of them, Series W, has only been trading for a couple of months.
Here are the highlights of Public Storage’s Series W preferred shares:
Vornado Realty Trust describes itself as a fully integrated real estate investment trust and “one of the largest owners and managers of commercial real estate in the United States.” It has a portfolio of over 100 million square feet, which includes office and retail properties throughout New York, Washington, D.C., California, Puerto Rico, and other parts of the northeast. Like Public Storage, Vornado Realty Trust has several Series of preferred stock outstanding, including its Series L preferred, which has also only been around for a couple of months.
Here are the highlights of Vornado Realty Trust’s Series L preferred shares:
In today’s ultra-low-interest-rate world, it is quite hard to find a fixed-income investment having completely satisfactory terms. The aforementioned preferred stocks are no exception. One thing of which investors should be aware is that each of the securities mentioned above has the lowest yields among all other Series of preferred shares issued by their respective companies (the Public Storage Series W is tied for the lowest with the new Series X). Given that the preferreds also have no maturity dates, if interest rates were to rise significantly from today’s levels, there is a good chance you will have unrealized capital losses on these securities for a very long time. That may be fine for investors whose time frame is decades and whose main focus is finding reasonable income streams with acceptable credit risk. But it is something of which you should be aware. Furthermore, some investors may not like the fact that the Vornado and Public Storage preferreds outlined in this article are not convertible into other securities and pay distributions that are taxed as ordinary income.
On the other hand, there are a few positives worth noting: Both preferreds have cumulative dividends. They also both provide respectable income streams and exposure to real estate (if you view real estate exposure as a positive). Moreover, both pay quarterly distributions (versus semi-annual for many corporate bonds) and are currently considered to be of investment-grade quality by Moody’s and S&P. Additionally, if you think we will be in a low interest-rate environment for many years to come, then owning the preferreds with the lowest payout to liquidation preference (the rate specified on the security compared to the callable value) will increase the likelihood that other securities will be called before yours.
Please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual securities is suitable for you.
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