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REIT Preferred Securities Potential Default Risk


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REIT Preferred Securities Potential Default Risk

  1. 1. MARKET MATTERS AUGUST 2009 REIT Preferred Securities Potential Default Risk What is the potential risk of default to REIT preferred shareholders? In our view, the cash dividends generated by REIT preferred shares offer a degree of insulation as compared to the common equity issued by the same company, due to their priority claim on cash distributions—common dividends would first have to be eliminated before the preferred dividend could be omitted. In the case of the REITs listed below, each company paid out common dividends of between $36 million and $522 million in 2008. Although some common dividends have been reduced or suspended for 2009, we see the substantial levels of common dividends as meaningful insula- tion against the future prospect of potential preferred dividend omissions. Forward Select Income Fund Top 10 Issuers as of 6/30/09 Preferred and Common Dividends Paid for Calendar Year 2008 1 (in millions) 522.0 Common 522.1 Common 421.2 Common 283.4 Common 177.9 204.7 Common Common 88.3 35.9 Common Common 36.0 33.4 Common Common 15.8 14.5 25.4 47.8 35.6 11.6 71.4 9.7 15.8 50.8 Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred Preferred LTC Equity ProLogis Kimco Weingarten BioMed Digital Omega AMB PS Properties, Residential Trust Realty Realty Realty Realty Healthcare Property Business Inc. Corp. Investors Trust, Inc. Trust, Inc. Investors, Corp. Parks, Inc. Inc. Source: Foward Management, LLC. A recent sensitivity analysis of 86 REIT preferred issuers found that 80% of those reviewed could withstand a 50% decline in operating cash flow (defined as Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA) before their coverage ratios would suggest imminent cuts to preferred dividends.2
  2. 2. Forward Thinking. Forward Funds. MARKET MATTERS AUGUST 2009 While this grim scenario cannot be fully discounted, we continue to feel positive about the prospects for the vast majority of our underlying companies’ ability to pay their dividends. We believe that the previously limited long term default rate for REIT preferred stocks will likely rise in response to the recessionary environment and the financial crisis. However, due to the securities’ priority claim on cash dividends, and the cumulative nature of real estate preferred shares—meaning that the issuer must accrue any missed dividend as a liability and eventually pay it—at this time, we do not believe REIT preferred defaults will be a widespread problem. Learn more today at or call (888) 312-4100. 1 Source: Dividend payout information sourced from each company’s 2008 10-K filing with the exception of Corporate Office Properties Trust, whose dividend information was sourced from its Supple- mental Information Package. 2 Source: Wachovia, November 2008. Operating cash flow represented by EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which is an indicator of a company’s financial performance. You should consider the investment objectives, risks, charges and expenses carefully before investing. A prospectus with this and other information about the funds may be obtained by calling (888) 312-4100 or by downloading one from It should be read carefully before investing. The Fund will invest in lower-rated debt securities and may utilize de- rivatives for hedging purposes. The Fund’s use of short selling involves additional risks and transaction costs, and creates leverage, which can increase the volatility of the Fund. The Fund may invest a larger percentage of its assets in the se- curities of a smaller number of is- suers, since it is a “non-diversified” mutual fund. Forward Funds are distributed by ALPS Distributors, Inc. (9/09) FWD002119 103109