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2013-12-31 TIA PIP REIT Preferreds For Income

TO:                 Investments Consultants

FROM:           Larry K. Pitts, CFA

DATE:            December 31, 2013

SUBJECT:     What’s Wrong With REITS, Anyway? 

The purpose of this e-mail is to review the REIT article which appeared in the December 20, 2013 Wall Street Journal.  The negative performance of REIT preferred stocks has also negatively impacted our Preferred Income Portfolio (PIP).  One of the biggest mysteries is why preferreds, which are fixed income securities, follow their corresponding common stock rather than interest rates for short periods.  I believe there are two main reasons for this:  1. the retail investors who own preferreds don’t understand the difference 2.  preferreds are callable but usually don’t have a maturity date.  Both reasons create misunderstandings and provide an opportunity for professionally managed preferred stock portfolios.  Preferreds in our PIP have a greater annual income return than the 6% - 7% for REIT common stocks mentioned in the article.  In summary, many consultants don’t understand our strategy of owning only preferreds with a coupon rate greater than 6.50%.  We believe our preferreds will all be called, producing a yield to call of 8.31%.  If we are wrong, the current income yield of 7.43% will be very competitive if not better than equity returns over the next four years.  This is a buying opportunity in the only attractive fixed income sector of a low interest rate market.  We welcome your comments and questions regarding our PIP.

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