REITs Continually Hammered Lower as Preferreds and Baby Bonds Drift Down

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Whether it be the specter of a Fed Funds rate hike in December or simply a tiredness caused by a vicious political campaign REITs are being unloaded at a quick pace–today being down by about 2%.  While the viciousness of the REIT drop isn’t being lavished upon preferred stocks and baby bonds, the direction is the same–down.  Preferreds and baby bonds dropped by around 1 1/2% during October, which while modest, is beginning to show up in portfolio performance. For the 1st time in months (and maybe this year) the average price of a $25/share preferred dropped below $26 today–closing at $25.98.

Now while we see no particular reason for the drops in income issues we do know our reaction at this point in time is that there is no reason to do anything different than what we have been doing all year–keep plenty of dry powder and deploy it as more generous yields become available.  It is interesting to note that of the last 10 new issues of preferreds and baby bonds only 2 are trading above $25, while a couple,  Ashford Hospitality Trust 7.375% preferred (AHT-G) and Public Storage 4.90% preferred are trading at $23.75 and $23.85 respectively.  As we noted on October 24th it would appear that the move to lower and lower coupons is over and now we are finally reversing that move.

While we transition to somewhat higher rates (assuming it truly comes to pass given that the economy is still weak on a global basis) there will be some give back of net asset values in your income portfolio–this is almost unavoidable.  The outcome that we hope will occur is that dividends and interest will be received in amounts equal to or greater than the capital losses over the next couple of months.  This would allow for a somewhat bearable transition.  More than likely it won’t be this easy and we will have a “panic” at some point in time and this is where investors have to utilize their dry powder to buy some bargains.  While one doesn’t know if a panic drop will end right away you can be fairly certain that you will be able to buy decent quality with yields higher than they are today.


We will end with a short list of some of the bargains that are beginning to appear (for a watch list) in the REITs.  All-star Realty Income (NYSE:O) is trading at $58.50 which is down from a 52 week high of $72.  Self storage up and comer Extra Space Storage (NYSE:EXR) is trading at $71 which is down from a 52 week high of $95. Omega Healthcare Investors (NYSE:OHI) is trading around $31 down from $38.  Lastly Digital Realty Trust NYSE:DLR), a datacenter REIT, is trading at $93 which is down from $113/share.  Each of these issues is off near 20% from their highs so they are presenting decent bargains–although they may get better in particular in a big selloff.


Tim McPartland

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Tim McPartland
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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