Pandemic-Proof Performance: Own REIT Preferreds

This article was previously published in the August 2020 edition of the Forbes Real Estate Investor

We believe that most REITs will survive the pandemic, continue to operate, continue to pay their cumulative preferred dividends, and have minimal impairment. This month we highlight three preferred REIT picks.

Remember that preferred shareholders are senior to the entire equity stack and sit senior to all common distributions. Given the dislocation in the sector today, we consider preferreds an excellent source of revenue and sustainability during the pandemic.

Preferred Pick 1

Saul Centers (BFS) is a self-managed, self-administered equity REIT headquartered in Bethesda, Maryland. It currently operates and manages a real estate portfolio of 60 properties that includes 50 community and neighborhood shopping centers and seven mixed-use properties with approximately 9.8 million square feet of leasable area, and three land and development properties.

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Approximately 85 percent of the Saul Centers’ property operating income is generated by properties in the metropolitan Washington, D.C./Baltimore area. The principal amount of Saul Centers’ outstanding debt totaled approximately $1.1 billion at March 31, of which approximately $928.9 million was fixed-rate debt and approximately $199.5 million was variable rate debt outstanding under the credit facility.

Debt represents about 55 percent of the capital structure. Equity and preferred stock represent 36 percent and 9 percent of the capital structure, respectively. Additionally, Saul Centers has approximately $32 million in cash on the balance sheet.

Amortizing fixed-rate mortgage debt with staggered maturities from 2021 to 2035 represented approximately 82.3 percent of the Saul Centers’ notes payable, thus minimizing refinancing risk. Saul Centers has two series of preferred stock, BFS D and BFS E. Both preferred stocks are cumulative.

This means that if the dividend cannot be paid, it accrues until it can and is paid before common dividends. On or after January 23, 2023, BFS D is redeemable in whole, or in part, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid. BFS E is redeemable on or after September 17, 2024. BFS D has a 6.125 percent coupon.

As of July 21, BFS D’s price and yield were $20.95 and 7.3 percent, respectively. BFS E has an 6 percent coupon. BFS E’s price and yield were $20.30 and 7.4 percent, respectively.

Preferred Pick 2

Ohio-based SITE Centers (SITC), formerly known as DDR Corp. SITC , a self-administered and self-managed REIT, is in the business of acquiring, owning, developing, redeveloping, expanding, leasing, financing and managing shopping centers.

SITE Centers owns approximately 57.0 million total square feet of gross leasable area (GLA) through all its properties and managed approximately 13.2 million total square feet of GLA for Retail Value (RVI), an owner and operator of shopping centers.

SITE Centers has approximately $2.2 billion in unsecured indebtedness and $54 million in mortgage indebtedness. Debt represents about 57 percent of the capital structure. Equity and preferred stock represent 35 percent and 8 percent of the capital structure, respectively.

Additionally, SITE Centers has approximately $514 million in cash on the balance sheet. Over the prior three years, it has been a net seller of assets and used the proceeds to deleverage.

From January 1, 2017 to December 31, 2019, SITE Centers sold 115 shopping centers for an aggregate sales price of $3.3 billion. On July 1, 2018, the company completed the spinoff of RVI. At that time, RVI owned 48 shopping centers, representing $2.7 billion of gross book asset value and $1.3 billion of mortgage debt.

SITE Centers has two series of preferred stock, SITC A and SITC K. SITC A is rated BB by S&P and BB+ by Fitch. SITC K is rated Ba1 by Moody’s MCO , BB by S&P and BB+ by Fitch. The company is rated BBB- by S&P and BBB by Fitch. Both preferred stocks are cumulative.

On or after June 5, 2022, SITC A is redeemable in whole, or in part, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid. SITC K is currently redeemable. SITC A has a 6.375 percent coupon. As of July 21, 2020, SITC A’s price and yield were $22.43 and 7.1 percent, respectively. SITC K has an 6.25 percent coupon. SITC K’s price and yield were $22.05 and 7.1 percent, respectively.

Preferred Pick 3

Vornado Realty Trust (VNO) is a fully‑integrated REIT and conducts its business through, and substantially all its interests in properties are held by, the operating partnership. The company has approximately $5.6 billion in mortgages payable and $3.8 billion in unsecured debt.

Debt represents about 55 percent of the capital structure. Equity and preferred stock represent 40 percent and 5 percent of the capital structure, respectively. Additionally, Vornado has approximately $1.6 billion in cash on the balance sheet.

Vornado currently owns 19.1 million square feet of Manhattan office space in 35 properties, 2.3 million square feet of Manhattan street retail in 70 properties, 1,991 units in 10 residential properties, the 1,700-room Hotel Pennsylvania located on Seventh Avenue at 33rd Street in the heart of the Penn District, and a 32.4 percent interest in Alexander’s (ALX).

Additionally, Vornado owns the 3.7 million square foot the MART in Chicago and a 70% controlling interest in 555 California Street, a three-building office complex in San Francisco’s financial district aggregating 1.8 million square feet

Vornado has three series of preferred stock, VNO K, VNO L and VNO M. All three preferred stocks are rated Baa3 by Moody’s and BB+ by S&P and Fitch. The company is rated BBB by S&P and Fitch. All three preferred stocks are cumulative.

VNO K and VNO L are currently redeemable in whole, or in part, at a cash redemption price of $25.00 per share, plus an amount equal to all dividends accrued and unpaid. VNO M is redeemable on or after December 13,2022. VNO Khas a 5.7 percent coupon.

As of July 21,2020, VNOK’s price and yield were $22.51 and 6.3 percent, respectively. VNO L has a 5.4 percent coupon. VNO L’s price and yield were $21.21 and 6.4 percent, respectively. VNO M has a 5.25 percent coupon. VNO M’s price and yield were $21.21 and 6.2 percent, respectively.

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