About REIT Preferred Stocks Frequently Asked Questions

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About REIT Preferred Stocks Frequently Asked Questions

About Reit Preferred stock What are REIT preferred stocks?
Why do companies issue preferred stocks?
Why invest in this small market segment?
How do REIT preferred securities diversify my portfolio?
How sensitive are REIT preferred stocks to interest rate movements?

What are REIT preferred stocks?

REIT preferred stocks are shares that possess additional rights beyond those of common stocks, including a priority claim on the company’s cash flow. These securities typically pay higher current dividends and are considered potentially “safer” than common shares. As an income vehicle, REIT preferred stocks have less appreciation potential and tend to offer a lower total return.

Why do companies issue preferred stocks?

Preferred shares can provide a company a more flexible financing option as compared to bonds. Most REIT preferreds are perpetual in nature and can provide effectively permanent financing. The company can also redeem the shares at a pre-established value, called “par.”
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Why invest in this small market segment?

Due to their priority claim on cash flow, we believe REIT preferred securities can present a compelling alternative source of income for investors, offering:
• Attractive Dividends Yields
• Low Volatility
• Diversification Benefits

How do REIT preferred securities diversify my portfolio?

REIT preferred securities have historically shown a low correlation to other assets classes, including corporate and government bonds.

REIT Preferred Stock Correlation

Correlation is a statistical measure of how two investments move relative to one another. A perfect correlation of +1 indicates that both investments always move together, whereas a correlation of 0 indicates there is no relationship between the two investments.

Diversifying your fixed income portfolio across non-correlated investment types can help increase returns and lower risk over the long term.

Source: Callan Associates, Inc. All statistics based on monthly returns since inception of the Merrill Lynch REIT Preferred Index, February 1, 1997 - September 30, 2007. REIT Preferred Stocks – Merrill Lynch REIT Preferred Index; REIT Common Stocks – FTSE NAREIT Composite Index; Large Cap Stocks – S&P 500 Index; Government Bonds – Lehman Brothers Treasury Long Term Bond Index; Corporate Bonds – Citigroup Broad Investment Grade Bond Index.

How sensitive are REIT preferred stocks to interest rate movements?

Although REIT preferred stocks are often considered an income vehicle due to their higher dividend yields and low volatility, the asset class has exhibited relatively low correlations to interest rates, as measured by government bonds (see above). We believe that this can be attributed to several factors:

Small, Niche Market	Because REIT preferreds are typically smaller issues of securities that generally lack broad coverage by the investment analyst community, these securities tend to trade at higher yields versus their non-REIT counterparts. As such, wider yield spreads often cause REIT preferreds to be less impacted by movements in broader markets.

Yield-to-Call	Preferred stocks are typically callable at par, which means that a company can redeem their

Daily Liquidity	outstanding shares at a pre-established value. Historically, this “callability” has served to dampen preferred shares’ price movements relative to bonds.

Definitions

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.

The Merrill Lynch REIT Preferred Index is an unmanaged index of investment grade REIT preferred shares with a deal size in excess of $100 million, weighted by capitalization and considered representative of investment grade preferred real estate stock performance.

The FTSE NAREIT Composite Index is an unmanaged index consisting of approximately 200 Real Estate Investment Trust stocks. The NAREIT Index excludes brokerage commissions or other fees.

The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.

The Lehman Brothers Treasury Long Term Bond Index is composed of all bonds covered by the Lehman Brothers Treasury Bond Index with maturities of 10 years or greater. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

The Citigroup Broad Investment Grade Bond Index is an unmanaged index, generally representative of the performance of the investment-grade corporate and U.S. government bonds.

Index performance is used for comparative purposes only. An investor cannot invest directly in an index.