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More New Preferred Issues Hit the Market

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By Tim McPartland

September 28, 2017

The biggest rush of new preferred stock issues and baby bonds of the year has been hitting the market this week.

As a result, some outstanding issues will be redeemed and income investors thereby will lose their higher-coupon securities.

Gabelli Multimedia Trust (NYSE:GGT), a closed-end fund (CEF), has sold a very high quality preferred issue with a coupon of 5.125%. The issue is high quality due to the fact that it is a senior security of a CEF that needs to maintain a 200% asset coverage ratio. Moody’s has given the issue an A2 rating.

Normal terms for the issue apply, so it is cumulative with respect to paying dividends and qualified for preferential tax treatment. Readers should understand that as far as safety goes, this is a great issue, but when interest rates rise, the issue will be susceptible to greater capital loss than a higher-yielding preferred.

We had purchased some of the Ellsworth Growth and Income low-coupon preferreds last week knowing they have some capital risk, but we have a limit to how many low-coupon issues we can hold.

Shares are now trading on the OTC Grey Market at around $25.10. Trading will move to the NYSE within two business days.

Details of the issue are here.

Investors Real Estate Trust (NYSE:IRET) has sold a new cumulative preferred issue with a coupon of 6.625%. This is one of the issues with the highest coupon lately and it is a reasonable issue to own for yield seekers. The company is a real estate investment trust (REIT) and is not of high quality, but as long as the economy remains firm, IRET should do okay. The trust used to have a diversified portfolio of buildings, but more recently has favored apartment ownership.

IRET will be redeeming its outstanding 7.95% issue (NYSE:IRT-B), which became redeemable in August. Normal terms apply, so the new issue will be cumulative, redeemable in about five years and NOT qualified for preferential tax treatment. The shares are now trading on the OTC Grey Market at $24.75/share.

Details of the issue are here.

Federal Realty Investment Trust (NYSE:FRT) has sold a cumulative, redeemable preferred stock offering with a miserly coupon of 5%. While FRT is a very high-quality triple-net-lease REIT, we find no reason to personally even consider a 5% coupon, but it might work for someone’s circumstance. The issue is now trading on the OTC Grey Market at $24.73 a share.

Check out the details here.

Lastly, Spirit Realty Capital (NYSE:SRC) has sold a cumulative, redeemable preferred with a low coupon of 6%. Spirit is a triple net lease REIT which has somewhat of a checkered history from a financial perspective. Potential investors should make sure to do due diligence prior to any purchase.

While the company will likely do fine in the current economic environment, it is heavily exposed to retail. Any recession will pressure the collection of its rents. Income investors are better served looking elsewhere for income other than this SRC issue. Plus, 6% just doesn’t seem an adequate reward to its holders for the risk incurred.

Further details for this issue are here.

While it may seem like we are “picky” with issues we like, it is because we are very, very cautious about buying low-coupon issues. The current coupons we are seeing from junky issuers simply don’t carry the reward necessary to compensate for risk in issuers — it is that simple.

Easy money in the United States and around the globe is pushing conservative income investors into risk that is normally reserved for more aggressive, younger investors. Investors who are retired or near retirement are risking hard-fought savings on higher and higher risk.  Such risk-taking likely will end badly for some older investors. When or how it ends badly is impossible to predict, but it will end badly for some.

 


Tim McPartland

Tim McPartland is a private investor with over 45 years of investment 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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