With real estate in a bit of a tumultuous time because of interest rates, a real world example has come up that illustrates some of the benefits of having preferred shares vs. regular common share. There is no exact definition of what 'preferred' actually has to mean, but it is usually attached to special treatment compared to common equity shares.
Most of my modeling has to do with joint venture real estate and syndication deals and not with buying public real estate investment trust shares, but there is a bit of cross-over and you can see an example of a preferred return waterfall template here if you like.
So what am I talking about? The REIT in question is Vornado Realty Trust (VNO). I do have a long position in this stock full disclosure. Yesterday morning (April 27, 2023) Vornado decided to suspend common share dividends until the end of the year. The reason being was to use that cash savings to pay down debt and then, from what I have read, the unpaid 2023 dividends may get paid (in all cash or cash + stock). There is also a planned $200 million share buyback program. The sale of properties is going to be the source of cash in the near-term.
Basically, they are trying to re-structure their debt so they can survive. Many public REITs use lots of leverage / debt to produce bigger returns and bigger dividends. The problem happens when you have 5-year balloon debt payments and may have to refinance at higher rates or if you have variable rates and never thought things would get to certain levels.
They also have lots of office properties, which have fallen out of favor since COVID, which can hurt resale value and ongoing rents in the long run if the work-from-home trend continues.
This can get even more tricky because as they go to sell assets, the pricing is going to be weak if interest rates are still high. It is just one example of what is going on in the real estate sector in general. It is not dying, but deal makers, owners, and everyone in-between will need to make some changes to their debt and equity structures.
Preferred Shares of VNO
Those who own preferred shares of this stock are stilling getting paid their dividends and that is what I was trying to highlight. You don't always see it, but having the preferred ownership is beneficial in this case because when things get bad, those shares have priority and are not getting paused.
So, investors that want more security will be the ones buying preferred share offerings. They could come with liquidity limitations and will have a lower preferred return rate than common share dividends. Preferred stock dividends in VNO's case are cumulative.
Initially the share price dropped 10% but then recovered back to higher than where it was before the announcement probably because people realized they are trying to restructure instead of going bankrupt.
Article found in Joint Venture.
