Steadfast Preferred Income (SPI or the “Fund”) seeks to ensure that its investment portfolio is geographically diverse and backed by a broad range of high-quality real assets that are essential to the efficient functioning of modern day economies. The Fund invests, on a leveraged basis, with a focus on the Preferred Stock or Preferred Equity in the capital stack of global real estate, utility and infrastructure companies. In making these investments SPIF makes use of the expertise and knowledge of its investment manager, Steadfast Asset Management. SPIF has adopted a long-term strategic approach to investing and focuses on identifying value.
What is a Preferred Stock?
The term “stock” refers to ownership or equity in a firm. There are two types of equity – common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders. Within the vast spectrum of financial instruments available today, preferred stocks (or “preferreds”) occupy a unique place. Because of their characteristics, they straddle the line between stocks and bonds. Technically, they are equity securities, but they share many characteristics with debt instruments. The details of each preferred stock depend on the particular issue.
Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate such as LIBOR and are often quoted as a percentage in the issuing description. Adjustable-rate preferred shares specify certain factors that influence the dividend yield, and participating preferred shares can pay additional dividends that are reckoned in terms of common stock dividends or the company’s profits. As with common stock, the decision to pay a preferred dividend is at the discretion of a company’s board of directors.
Unlike common stockholders, preferred stockholders have limited rights which usually does not include voting. Preferred stock combine features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. This is of appeal to investors seeking stability in their future cash flows.
Companies in Distress
If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders. Shares that have this arrangement are known as cumulative. If a company has multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority. The highest ranking is called prior, followed by first preference, second preference, etc.
Preferred shareholders have a prior claim on a company’s assets if it is liquidated, though they remain subordinate to bondholders. While preferred shares are equity, in many ways, they are hybrid assets that lie between stock and bonds. They offer more predictable income than common stock and numerous issues are rated by the major credit rating agencies. Unlike with bondholders, failing to pay a dividend to preferred shareholders does not mean a company is in default. Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on preferred shares are generally lower than the same issuer’s bonds, with the yields being accordingly higher.
Voting Rights, Calling and Convertibility
Preferred shares usually do not carry voting rights, although under some agreements these rights may revert to shareholders that have not received their dividend. Preferred shares have less potential to appreciate in price than common stock, and they usually trade within a few dollars of their issue price, which is most commonly set at $25 per preferred share. Whether they trade at a discount or premium to the issue price depends on the company’s credit-worthiness and the specifics of the issue: for example, whether the shares are cumulative, their priority relative to other issues, and whether they are callable.
If shares are callable, the issuer can purchase them back at par value after a set date. If interest rates fall, for example, the company may call its shares and issue another series with a lower yield. Shares continue to trade past their call date if the company does not exercise this option. The callable nature of preferred shares often results in the price being somewhat tethered to the call price when the issue is past the call date. While this results in reduced volatility of the preferred stock, it often will have the effect of placing a limitation on price appreciation on a preferred stock that is past its call date and considered to be at risk of being called.
Some preferred stock is convertible, meaning it can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date at which it automatically converts. Whether this is advantageous to the investor depends on the market price of the common stock.
What returns are being targeted?
We target Preferred Stock generating an unlevered yield of between 7 – 8 per cent. per annum, in addition, capital growth of between 5 – 7 per cent. per annum may be achieved providing a total unlevered return of up to 15 per cent. per annum.
We target for inclusion between 30 – 50 counters whose underlying assets constitute real assets that are essential to the efficient functioning of modern day economies. The various real estate investment trust (REIT) and limited liability partnership (LLP) structures amongst others (CEF’s) the Fund invests in provide exposure to real estate and essential infrastructure themes such as: logistics and healthcare real estate, data communications and data infrastructure, oil & gas pipelines and storage facilities, transportation assets (toll roads, airports, and ports), utilities and renewable energy.
Preferred Income Fund under incubation
We have recently launched and have under incubation a fund called the Alternative Real Estate Preferred Income Fund.
The appointed Investment Manager to the Alternative Real Estate Preferred Income Fund is Alternative Real Estate. As the Fund is under incubation, it is not available to the general public for investment purposes. This is not a solicitation for investment.