REIT Preferreds on the Rise - Cohen & Steers' Scapell on Benefits of Preferred Securities

http://www.reit.com REITs have entered a new property acquisition cycle, and the preferred securities market is an attractive source of financing, especially for new and smaller REITs that may not yet have access to unsecured debt, according to Bill Scapell, director of fixed income with Cohen & Steers.

In a video interview with REIT.com, Scapell outlines the advantages of REIT preferreds, as well as ways to mitigate some of the potential risks they may pose for investors.

Scapell says that while preferreds are more expensive than bonds, they're less expensive than common equity—and perpetual preferreds enhance issuers' balance sheet flexibility, as we saw in the recent credit crisis. As unsecured and covenant-free obligations, preferreds may also help companies achieve other balance sheet goals, including higher credit ratings. Additionally, potential increases in interest rates could motivate issuers to use preferreds as sources of long-term financing.

Refinancing will also drive new issues, Scapell says. With interest rates now low and credit spreads having tightened, many issuers may call their higher-coupon securities and replace them with lower-coupon issues, he says.

Preferreds' high, frequent and stable income is their greatest appeal for most investors. In a yield-starved environment, REIT preferreds can provide income rates of 7.5 percent or so for a diversified portfolio, according to Scapell. Scapell points out that while interest-rate risk is an issue, right now preferred yield spreads over U.S. Treasuries remain wide by historical standards, and this could provide a buffer should rates go back up as they did late last year.

Scapell notes that preferred securities do pose some "privatization risk" for shareholders. Unlike bondholders and banks, most preferred shareholders do not have covenants that protect them if the issuer goes private. In most cases, preferred securities are not redeemed unless a privatization is part of a full corporate liquidation.

Scapell contends that underwriters and preferred investors should demand privatization protection before they agree to participate in a new issue, and he says such measures are becoming more common. Recently, Scapell notes, issuers have included terms allowing holders to convert preferreds to their par value in common shares in the event of a takeover by a non-public company. These shares would simultaneously be bought on the same terms as the common shares, effectively providing par value in cash to preferred holders.

By Allen Kenney

Category:

News & Politics

Tags:

• Bill Scapell
• Cohen & Steers
• investor
• REIT
• REITs
• portfolios
• stocks
• perferred stocks
• common stocks
• shares
• REIT management
• preferreds
• preferred securities
• market
• finance
• debt
• equity
• credit
• rating
• interest
• rates
• refinancing
• yield
• diversified portfolio
• shareholders
• privatization
• protection
• property acquisition
• commercial real estate
• real estate
• real estate investment
• real estate investment trusts
• NAREIT
• REIT.com
• Allen Kenney