The 6% Solution – Income For Retirement

By:
On:
In: Income
Tagged: , ,

For those individuals planning to retire early, or even at normal retirement age, they will need a steady source of income to cover their monthly living expenses. Many investors do not have a defined benefit pension plan, and Social Security may not cover all of your living expenses. However, with a diversified portfolio of preferred stocks and REIT investments, a steady source of income can be made available. This article will look at a few of these securities and is the ninth article in my Early Retirement series.

Preferred stocks and baby bonds are normally issued with a par value of $25 and are ideal holdings for a fixed income portfolio. However, these securities rarely trade exactly at par value and more often can be purchased at a discount (or premium) to par value. Let’s take a look at a few of these securities to help build a portfolio of fixed income securities.

Security #1 – Urstadt Biddle (NYSE:UBP.PK) 5.875% Series K cumulative preferred stock

Source: Company website, New Milford Plaza

  • Urstadt Biddle Properties (NYSE:UBA) is a real estate investment trust (REIT) founded in 1969.
  • They are the owner and operators of high-quality retail shopping centers predominantly in the suburban communities surrounding New York City. However, the metropolitan NYC area has been hit hard by COVID-19, which has resulted in decreased rental income for the company.
  • Their 5.875% Series K cumulative preferred stock was issued in September 2019 and is not callable until October 2024 at $25 per share. It currently trades at about $23.80 per share for a yield of approximately 6.20%. It goes ex-dividend on October 15th.

Security #2 – Saul Centers (BFS-E) 6.00% Series E cumulative preferred stock

Photo Source: Company website, The Shoppes at Monocacy in Frederick, MD

  • Saul Centers is a real estate investment trust that operates 60 properties which include 50 neighborhood and community shopping centers and seven mixed-use properties with approximately 9.9 million space of leasable area.
  • Approximately 85 percent of Saul Centers‘ operating income is generated by properties in the high-income metropolitan Washington, D.C./Baltimore area.
  • The Waycroft building was delivered in April 2020, with 491 apartments and 60,000 square feet of retail area. The project is anchored by a 41,500 square foot Target store, which commenced operations in August 2020. However, they are still in the process of renting out all of the apartment units.
  • Their 6.00% Series E cumulative preferred stock was also issued in September 2019 and is not callable until September 2024. It currently trades at about $24.35 per share for a yield of approximately 6.15%. It recently went ex-dividend on September 30th and I should be receiving my dividend payment in the next several days.

Security #3 – Monmouth Real Estate Investment Corporation (MNR-C) 6.125% Series A cumulative preferred stock

Photo Source: Company website, FedEx Ground, Indianapolis, IN

  • Monmouth (NYSE:MNR) is a real estate investment trust that focuses on owning single-tenant industrial properties primarily leased to investment-grade tenants on long-term leases.
  • They currently own 119 properties in 31 states with occupancy of 99.4%. Revenue from investment grade tenants is 81% and their weighted average building ages is only 9.5 years.
  • As a risk factor, it should be noted that over 50% of their rent is received from FedEx Ground (NYSE:FDX) and FedEx Express. Amazon (NASDAQ:AMZN) is their next largest tenant, with slightly over 7% of their net rent.
  • Their 6.125% Series C cumulative preferred stock was issued in September 2016 and currently trades at approximately $24.90. The current yield is about 6.15% and goes ex-dividend on approximately November 13th. This issue is callable in September 2021, which is only 11 months away. However, it does trade under par value.
  • It should also be noted the preferred stock issue is very large, with about $433 million outstanding as of June 30, 2020. While it is possible the company may try to refinance the issue next September with a lower rate issue, I am expecting a partial call of the shares.

Security #4 – Private Real Estate Investment Trusts (REITs)

My portfolio is primarily focused on income, but I do have a few smaller common stock holdings for companies that pay higher dividends. However, I am very selective when making my investments.

During my search for alternative investments over the past couple of years, I was able to invest in a private REIT that has under 300 owners. Generally speaking, if the number of shareholders is less than 300, the company is under no reporting requirements and is considered a “private” company, although they do provide me with a brief annual report at the end of the year. There are many of these investment opportunities available; however, investors have to be very selective with their financial choices. This part of the article will discuss how I made my decision.

Photo Source: Dollar Tree website

  • The company owns various properties including a number of stand-alone buildings and two very small shopping centers. One of the shopping centers has a Dollar Tree (NASDAQ:DLTR) and a number of other small shops. Overall, I was pleased with the tenant mix.
  • Low leverage was a factor in my decision. This small company has approximately $20 million of real estate at cost, with a debt level of about $5 million. Therefore, their leverage ratio is only 25%.
  • Another calculation I use is the “Interest Expense to Rental Income” percentage. Basically, it just involves taking the amount of Interest Expense paid during the year and dividing it by the total Rental Income. This investment had a ratio of about 10%, which means that for every dollar of rent collected only 10 cents on the dollar went for interest expense. This is a very conservative ratio. Kimco, one of the largest owners of shopping centers in the United States, has a ratio of about 15%, although this is not an exact comparison.
  • Although the dividend distribution varies slightly based on rent collections, it provides me with income of about 6% based on my initial purchase prices. Also, if the debt is paid down in future years, I am hoping my dividend rate will be closer to 8% without the mortgage debt.
  • The downside of these private real estate investments is liquidity. Therefore, if I want to sell my interest in the company, I will have to find a buyer. Depending on general economic conditions, this could be very difficult to do in a short period of time. As a result of this, I have made this long-term investment decision with no intention of selling.

Investment Reading Idea #5 – The Billionaires’ Secret: How the World’s Wealthiest People Get Rich and Stay Rich with Preferred Securities

Source: Amazon.com

  • Investors new to preferred stock may want to consider purchasing and reading this book by Herbert Tabin. It is currently available on Amazon.
  • The author does a great job of explaining many of the basic concepts of preferred stock investing.
  • I’ve been investing in preferred stock for over 20 years, but still found the book helpful and very enjoyable to read. I’m never too old to learn any new concepts and investment ideas from others.

Closing Comments

This article provides a starting point for further research. Before making any investment decisions, I would encourage investors to read company financial statements available and to view investor presentations. Also, when investing in REIT-related companies, I always try to review the list of their top 10 or 20 tenants to see if I am comfortable with them and their financial condition. A real estate company is only as strong as their tenants.

Hopefully this ninth article in my series on early retirement has been educational. A portfolio of fixed income securities can provide a steady source of income while still protecting capital.

Happy and successful investing to everyone!

Disclosure: I am/we are long UBP-K, BFS-E, MNR-C. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source Article