REIT Preferreds Reign as Long-Term Investment

8/4/2011 | By Carisa Chappell
According to Simon Wadsworth, retired chief financial officer of apartment REIT MAA (NYSE: MAA), preferred shares of REITs can provide steady income for investment portfolios.

That’s the thesis of Wadsworth new book, “Cash Is King: Investing in REIT Preferreds to Generate Long-Term Income,” released in July. In an interview with REIT.com, Wadsworth said as he was preparing for retirement in early 2009—just as the financial crisis hit—he was struck by the lack of suitable retirement investments. It prompted the former REIT executive to share his success in investing in REIT preferreds.

Wadsworth said investors consider REIT preferreds “weird ducks,” because they trade like a stock but carry fixed income like a bond. Consequently, they are often overlooked when it comes to investment planning. Additionally, the market for preferreds is too small to attract institutional interest, according to Wadsworth.

“There are no analysts that are really dedicated to the sector because it’s too small and there’s not a lot of liquidity, so it’s hard for institutional investors to get in and out,” Wadsworth said.

After investing in REIT preferreds in 2009 and 2010, Wadsworth said he discovered that they are fundamentally sound and would recover from the turbulent market. His annualized internal rate of return during the two-year period was 50 percent.

While investors were seeing returns of 1 percent on CDs or 2.8 percent on 10-year Treasurys, Wadsworth said he was generating a return of 8 percent on REIT preferreds.

“A lot of friends of similar age are all concerned about getting income,” he said. “Portfolios need to generate high-yield retirement income with limited risk, an investment challenge in the current low-interest rate environment.”

As CFO of MAA, Wadsworth said he sensed an investment opportunity after observing that the yields on the preferred securities were set at the same rate as high-yield bonds, but their credit risk was far less. Wadsworth also noticed a discrepancy between the perceived and actual credit risk of the shares.

“The ratings agencies tend to underrate and ascribe too much risk to REITs in general,” Wadsworth said. “For various reasons, I think they tend to think that REITs are more risky than they really are, and this especially comes in to play in the preferred sector.”

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