Why REIT Income Investors Buy Preferred Stocks

NoahBlacker

Brad Thomas wrote this article and it has appeared previously on Forbes.


Atrader works on the floor of the New York Stock Exchange at the closing bell of the Dow
We are often asked by investors how they can manage the volatility of their REIT investments or create a more stable portfolio value while generating above average income. One of the primary ways investors increase the yield of their REIT portfolio is to lower their quality standards and buy higher yield REITs.
We have often advised investors against buying riskier REITs and to consider investing in the preferred stock of higher quality REITs. For investors who want income with a stable portfolio value, buying riskier REITs does not accomplish their objectives while preferred stock will often achieve portfolio objectives.
In order to demonstrate this, we chose three REITs and compared the preferred stock of the REIT to the equity of the REIT. The REITs chosen are from across the risk scale and are widely held by investors. These REITs are Colony NorthStar (CLNS), Kimco Realty (KIM), and Public Storage (PSA).
The first example is Colony NorthStar, which could be considered somewhat risky due to their business profile and portfolio composition. The following chart shows the price history of both the common and the preferred stock.

The prices show that the common stock has a wider range and more volatility than the preferred stock. The figures behind the charts have the following characteristics:

The table above shows that the range of the common stock as a percent of the average price is nearly 15% while the range of the preferred relative to the average price is slightly over 5%. Similarly, when measured from the starting price to the low price during the period, the equity lost over 12% while the preferred lost nearly 4%, one third of the equity loss.
The second example is Kimco Realty, a shopping center REIT which has recently come under pressure due to current retail environment. The following chart shows the price history of Kimco’s common and preferred stock:

The prices show that the common stock has a much wider range and more volatility than the preferred stock. The figures behind the charts have the following characteristics:

The table above shows that the range of the common stock as a percent of the average price is approximately 56%, while the range of the preferred relative to the average price is slightly over 15%. Similarly, when Kimco is measured from the starting price to the low price during the period, the equity lost over 30% while the preferred lost approximately 5.5%, less than one quarter of the equity loss.
Finally, the third example is Public Storage, one of the highest rated REITs within the REIT universe. The price history of the common and preferred stock is as follows:

The prices show that the common stock has a wider range and more volatility than the preferred stock. The figures behind the charts have the following characteristics:

The table above shows that the range of the common stock as a percent of the average price is approximately 32% while the range of the preferred relative to the average price is a nearly 20%. Similarly, when Public Storage is measured from the starting price to the low price during the period, the equity lost approximately 19% while the preferred lost approximately 11%, slightly less than one half of the equity loss.
While the data shows a wider range of prices for the common stock relative to the preferred stock, investors also want yield from the REIT sector. On average, REIT preferred stock has higher yields than the common stock as preferred investors do not experience the same amount of capital appreciation potential that common stock investors do due to the fact they are not true owners of the REIT and will not receive dividend increases if they are declared.
The following chart shows the yield differential between the Kimco common and preferred stock:

As the chart shows, until the recent downturn in Kimco’s common stock price, the preferred stock yielded over 1.5% more than the common stock. Recall as well, that it had a higher yield with less volatility.
Similarly, the Public Storage preferred stock yields over 1.5% more than the common stock. While this is lower than the historic average of the yield differential, it has also been accomplished with less volatility than the common shares.

Due to the three way merger between Colony Capital, NorthStar Asset Management and NorthStar Realty, a yield comparison between the common and preferred shares is not an “apples to apples” comparison and will not result in a valid comparison over time.
Ultimately, an investor can obtain higher yields in the preferred stock of most REITs while experiencing less price volatility. For investors whose objectives include income and portfolio stability, REIT preferred shares are well worth considering.
I own shares in KIM.
For more information on REIT Preferred shares, CLICK HERE.
Source: Rubicon Associates contributed to this article and data provided by Bloomberg.
I'm editor of [Forbes Real Estate Investor, ](https://esp.forbes.com/subscribe?PC=VE)*coauthor of The Intelligent REIT Investor* (Wiley/Forbes) and author of [The Trump Factor: Unlocking the Secrets Behind the Trump Empire ](https://www.amazon.com/Trump-Factor-Unlocking-Secrets-Behind/dp/1682612651)*.*

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