New Low-Coupon REIT Preferred Offerings Unveiled

August 10, 2017

By  Tim McPartland

Two real estate investment trusts (REITS), Kimco Realty Corp (NYSE: KIM) and Digital Realty Trust (NYSE: DLR), have sold preferred issues with very low coupons, following closely behind a recent offering by giant self-storage REIT Public Storage (NYSE: PSA), which sold a new preferred issue with a low fixed coupon of 5.05%.

Kimco Realty, a triple net lease REIT that has its tenants pay all taxes, insurance and maintenance, sold a 9-million-share issue with a fixed coupon of 5.125%. Digital Realty Trust, a large data center owner, sold an 8-million-share offering of preferred stock with a fixed coupon of just 5.25%.

Kimco Realty’s offering has 1.35 million shares available for broker overallotment. In turn, Digital Realty is providing an additional 1.2 million shares for overallotment in its offering.

Proceeds from the Kimco Realty offering will be used for general corporate purposes that may include the redemption of its existing 6% and 5.5% preferred stock issues. Digital Realty’s offering proceeds are slated for paying down debt related to the acquisition of data center owner DuPont Fabros.

Investors would be best served by staying away from these preferred issues due to their low coupons. Both issues are investment grade, which should be apparent from the low coupons. As such, they provide very good safety to the holders. On the other hand, when, and if, interest rates rise, these investment-grade issues will be hurt the most.

Investment-grade issues will suffer share-price erosion that is about 20% greater than a junk issue. Of course, this is a generality and the difference could be a bit more or a bit less. However, my point is that if investors can find and own issues that are in the neighborhood of a 7% coupon, they will suffer less loss of share value if rates move higher.

Details of the Kimco Realty issue can be found here. The issue is now trading on the OTC Grey Market and was last priced around $24.60 a share.

Details of the Digital Realty Trust issue can be found here. This has been trading on the OTC Grey Market for about a week and last traded at $24.59 a share.

The new preferreds from both REITs will be cumulative in respect to dividends, but will not be qualified for preferential tax treatment.

Tim McPartland

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Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.

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