Preferred Shares
Preferred shares (also known as preferred stock) are securities that represent ownership in a corporation, with a priority claim over common shares with respect to the company's assets and earnings. In the context of securitized, non- traded alternative investments, preferred shares are not listed on an exchange, though the common shares of the company could be traded. Convertible preferred shares are securities that an investor can choose to exchange for a certain number of shares of the company's common stock, after a predetermined time span or on a specific date. Redeemable preferred shares provide an option (subject to restrictions on timeframe and pricing) to redeem the shares back to the issuer in the future. The per-share purchase price for preferred shares typically is fixed during the offering period. Most preferred shares are designed to provide the potential for steady monthly or quarterly dividend income, typically at a fixed annualized rate. Payments to holders of preferred shares must have priority over payments to common shareholders. *
An investor in preferred shares typically values the opportunity for enhanced income over the opportunity to participate in potential appreciation of the issuer’s underlying assets. Of course, those assets (real estate, energy, intellectual property, manufacturing, etc.) generate the gross revenue from which the preferred dividends are paid, but the ultimate behavior of the preferred share price will be less correlated to the assets than the common share price.
PREFERRED STOCK
COMMON STOCK
VS
BOTH HAVE INVESTMENT RISKS AND PAY DIVIDENDS
VOTING RIGHTS DIVDENDS FLUCTUATE MORE VOLATILITY
NO VOTING RIGHTS DIVIDENDS ARE SET LESS VOLATILITY
* Potential cash flows are not guaranteed and could be lower than anticipated.
Generally, there is no public market for non-traded preferred shares, and preferred shares are not rated. The ability to redeem preferred shares may be limited. Corporate charters or regulations may contain restrictions upon ownership and transfer of preferred shares, which may impair the ability of holders to acquire or dispose of preferred shares. Dividend payments on preferred shares are not guaranteed and may bear a risk of redemption by the issuer. Cash distributions received may be less frequent or lower in amount than expected. Rates of distribution will not necessarily be indicative of operating results. If distributions are paid from sources other than cash flows from operations or earnings, the issuer will have fewer funds available for the acquisition of assets, and overall return may be reduced. For real estate companies, upon the sale of any individual property, holders of preferred shares may not have a priority over holders of common stock regarding return of capital. Percentage of ownership may become diluted if the issuer incurs additional debt or issues new shares of stock or other securities, and incurrence of indebtedness and issuances of additional preferred stock or other securities may further subordinate the rights of the holders of common stock and preferred stock. Investors may experience dilution in ownership percentage of preferred shares if they do not participate in the issuer’s dividend reinvestment plan. In addition to the operational risks of the issuer, holders of preferred shares will be subject to inflation risk, interest rate risk and reinvestment risk. Holders of preferred shares typically have no control over changes in policies and operations, and have extremely limited voting rights. Management typically has broad discretion in the use of the net proceeds from preferred-share offerings and may allocate the net proceeds in ways that some stockholders may not approve.
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