The ABCs of REIT Preferred Stocks

By Jim Luckett, Ph.D., economics

If you want to invest in REIT preferred stocks, as suggested by Ralph Block in the accompanying article, then you’ll need the information below about risks, returns, call provisions and how to trade these odd ducks.

First some basics:

  • REITs are real estate investment trusts.  That means they are real estate companies who have elected to be taxed as REITs.   To meet the requirements of this tax election, they must pay out a very high percentage of their tax-basis earnings as dividends.    They don’t have the freedom to retain earnings to the degree that non-REIT companies do.
  • Some REITS own rental property, some own and develop rental property, and some just do real estate finance.   Among the ones that own property, most specialize in one property type, such as shopping malls, apartments, office, distribution or storage buildings.   We will not be talking about REITs that only do real estate finance.
  • Since the only thing REITs have in common is a tax election and some connection to real estate, there is quite a bit of variety in the characteristics of REITs.
  • There is also significant variety in the terms (the contract language) underlying different REIT preferred stock issues.  So you should investigate the particulars of any preferred issue your thinking of investing in.  Quantumonline.com is a good website for detailed data.
  • Some REITS have many different preferred stocks.  These are generally differentiated by a letter, as in “Public Storage preferred stock series P” and “Public Storage preferred stock series U,” etc.  The dividend level, call provisions, conversion provisions (if any) and other characteristics may be quite different between different series issued by the same REIT, so you have to research this before you buy.  However, all preferred of a given company have the same standing in terms of the seniority of their claim on the company’s cash.

Call Provisions

Most REIT preferred were issued at $25 per share and that’s their par value.  A few have other issue prices.  Why do we care (continued) 

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