PREFERRED
STOCK NEWS
Alexandria
Real Estate Preferred Stock Buyers Earning
Twice the Return of Common Shares
Alexandria Real
Estate Equities, Inc. (ARE) finds itself riding
the baby boomer bubble like few others.
One-third of the U.S. population (about 100
million people) started retiring four years ago
and 10,000 people in the U.S. turn 60 years of
age every day. Alexandria is a property REIT
that specializes in commercial buildings for
life science tenants (pharmaceuticals, medical
research, biotech, medical devices and the
like).
Occupancy of
Alexandria’s North American facilities climbed
to 97.0 percent at the end of 2014, up from 95.9
percent a year earlier. And the company’s
financial metrics are very solid, as they have
been for several years. Funds From Operations (FFO)
is a more meaningful metric for property REITs
than Net Income, but ARE reports both in a
single summary table.
This strong
performance allows this $10 billion company
(market capitalization) to offer its common
shareholders a $0.77 per share annual dividend
or a current yield of 3.2 percent to today’s
common stock buyers.
Cash is king
Since fixed-rate preferred stock dividend
amounts are known and scheduled in advance, a
company’s unobligated cash flow is just as
important, if not more so, to many preferred
stock investors than its FFO. Preferred stock
dividends are paid out of the company’s cash
flow and the known obligations against it, more
so than quarterly profits.
ARE is facing some cash management challenges.
According to their June 30, 2015 financial
statements, ARE collects about $1 billion in
cash per year primarily in the form of tenant
rents ($204 million for Q2 2015), but only holds
about $68 million in cash. That may sound like a
lot of cash until you notice that their
liabilities include, among other obligations,
$61 million in dividends payable to
shareholders.
Cheap debt and lots of it
During this prolonged period of low interest
rates, like most property REITs, ARE has been
quick to take on relatively cheap debt while
they can in order to scoop up strategic
properties. Until a few weeks ago, the company
was facing secured notes payable and unsecured
bank loans worth $637 million coming due in
2016. More recently, the company has announced
that these 2016 obligations will be cut in half
through the sale of some of its properties and
the planned issuance of additional debt later
this year. These actions should resolve their
short-term cash issue and kick the debt can to
2019.
(Source: Company
Q2 2015 Earnings Report,
are.com)
Alexandria preferred
stock
Investors looking
for a lower-risk route to participate in
Alexandria’s success while earning about twice
as much income, may want to consider the
company’s preferred stock over ARE common stock.
Alexandria’s
series E preferred pays a 6.45 percent annual
dividend (coupon) and is currently priced at
$25.79 (July 30, 2014), providing a current
yield of 6.25 percent. This above-par price will
produce a $0.79 capital loss in the event of a
future redemption of these shares and a
Yield-To-Call of 4.42 percent if such a
redemption occurs on the security’s March 2017
call date. But the demands on the company’s cash
and low probability that rates will be lower
then than they are now make a March 2017
redemption less likely.
ARE-E offers a Moody’s investment grade rating
of Baa3 and cumulative dividends (meaning that
if Alexandria misses a dividend payment to you,
they still owe you the money; their obligation
to you accumulates).
Risk versus reward
Using the Moody's
rating scale as a proxy for investment risk and
current yield as a measure of reward, this chart
illustrates how ARE-E is positioned within the
U.S. preferred stock marketplace.
Each diamond on
this chart is a U.S.-traded preferred stock. The
criteria used to include and exclude securities
for the chart are provided in the footnote.
Notice how ARE-E stacks up against its other
Baa3-rated peers. ARE-E’s current yield of 6.25
percent compares favorably to the average return
of 6.10 percent at the Baa3 level.
(Sources: prospectus for ARE-E,
sec.gov; preferred stock data, CDx3
Notification Service database,
PreferredStockInvesting.com)
What’s next?
After a 16 percent value increase over the
last twelve months, the notion that a
downward correction is due for Alexandria’s
common stock seems reasonable. Given that
risk to principal, the company’s far less
volatile preferred stock may be a safer bet
for risk-averse investors, even as an
increase in interest rates appears to be
upon us. And the 6.25 percent current yield
far outstrips the common’s 3.2 percent
return to shareholders.
But with a coupon of 6.45 percent, today’s
buyers may be holding ARE-E shares for
several years. The security does not become
callable until March 15, 2017 and rates
would have to fall before it started to make
financial sense for Alexandria to redeem
these shares.
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