A Preferred Way to Play Saul Centers

04/18/2018 5:00 am EST

Focus: BONDS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

To say retail and mall REITs are out of favor is a gross understatement. The whispers in the wind say that brick & mortar stores are going the way of the dodo bird, thanks mostly to Amazon (AMZN), suggests Jack Adamo, editor of Insiders Plus.

Besides the online pressure, America was over-stored in the early 2000s anyway, as folks indulged in an orgy of spending from home equity loans.  The bursting of the housing bubble showed the flaws in that reasoning.

That said, not all areas of retailing and real estate were equally affected, and neither were all regions. That's why we will do well with Saul Centers, Inc. Series D Cumulative Preferred (BFS-D).

Saul Centers Inc. is a REIT that invests primarily in upscale malls, apartments and mixed-used properties in the Washington DC area. The location makes a lot of difference.

The growth of the Federal Government, as well as a good central location and pretty good weather has made the area a fertile area for all enterprises. The population density and wealth effect of all the government largesse (and waste) has done wonders for the region.

Because the shopping centers generally are located in highly developed areas, management believes that there is little likelihood that significant numbers of competing centers will be developed in the future.

There is no dearth of purchasing power in America's best neighborhoods, and contrary to market talk, people still like to go out, socialize, and look at and touch the merchandise.

Saul's Series D is a new series of preferred. Part of the older series was redeemed with the proceeds. Both series are cumulative and the company paid out more than double the preferred dividends last year to common stock shareholders, so there should be no problems meeting these obligations.

In fact, Saul has never even missed a common dividend since it went public in 1993, and it only reduced the common stock dividend in 2009 after the financial meltdown. It came down 23% and gradually worked its way back up. It's currently 10.6% higher than its pre-crash payout.

All this is very good, but there's more. Here, we have a founder and chairman of the board who owns 46% of the company's common stock and only takes a salary and bonus of $150K per year, although various perks bring total compensation up to about $248K.

You know this guy wants to keep those dividends coming. The rest of the executive team owns less than a million shares in aggregate, but Vanguard Group, Blackrock and T. Rowe Price own 23% of the shares outstanding. That's a lot of faith.

Last but not least, this issue is very new and not well known yet. The preferred D shares rcently sold at $23.27, a 7.4% discount to its redemption price. The coupon rate is 6.125%, but with the current discount, the yield is 6.58%. The shares aren't redeemable until January of 2023, so you get nice income at least until then.

With the current price below redemption value, the shares have a compound annual return of 7.06% to the redemption date. Saul Centers Series D Cumulative Preferred is a buy up to $25. But try to get it near its current discount.

Buy the preferred stock only with a limit order, never a market order. The float is rather small. There may be a significant bid-ask spread. Also remember that there is no standardized system for preferred stock symbols, so you may find the symbol slightly different.

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