The preferred share of American Finance Trust (AFIN) currently are trading slightly above par value of $25/share. Although I tend to avoid preferred shares trading at levels in excess of their par value, I’m willing to make an exception for the A-preferreds which are trading with (AFINP) as a ticker symbol.
Source: Yahoo Finance
A brief recap of American Finance Trust
I recently published a more extensive review of American Finance Trust, the company that issued the preferred shares. I don’t want to be too repetitive and would like to refer you to the original article, but I will briefly discuss some important portions of the Q3 results that have a direct impact on the appeal of the preferred shares.
What really matters for American Finance Trust and the owners of common shares are the FFO and AFFO, and as mentioned in the article, both the FFO and AFFO are now (again) fully covering the dividend of the common shares.
Source: press release AFIN
And this has important implications for the coverage ratio of the preferred dividends. Let’s pull up the income statement of American Finance Trust (as the $7.1M quarterly net loss is the starting point used by AFIN to calculate the FFO and AFFO).
Source: SEC filings
At the bottom, we see the net loss of $7.1M includes $3.6M in preferred stock dividends. This means that the FFO of American Finance Trust excluding preferred dividend payments is approximately $29.2M. This also means the $3.6M in preferred dividend payments represents just over 12% of the total FFO excluding preferred dividend payments. Although you aren’t really allowed to just combine both elements, I do consider it an important takeaway here as it speaks volumes to the adjusted cash generation by American Finance Trust.
The specifics of the preferred share
American Finance Trust only has one publicly available issue of preferred shares, and that’s the A-series cumulative perpetual preferred share, which is trading with AFINP as its ticker symbol. This was a relatively small issue as the company floated just 1.2 million shares at the par value of $25, to raise $30M, and currently, there are approximately 7.72 million preferred shares outstanding.
Although this is a preferred issue, the company has the right to buy back the preferreds at the $25 par value, but can only do so after March 26, 2024. So anyone who buys the preferred shares now will receive the 7.50% preferred dividend until AFIN decides to buy back the shares. This means that there are at least 14 quarterly payments of $0.46875 to be paid, for a total of $6.56. That explains why I don’t mind paying $25 or even slightly more than $25 as I know for sure this security will pay out in excess of $6.50 before the issuer can “call” the stock. Even if I’d pay 1% over par ($25.25), the yield to first call would still exceed 7%. Fine with me.
Source: SEC filings
If we would now take American Finance Trust’s book value of its assets at face value, we can use the starting point of $3.34B. Meanwhile, the net financial debt of the company is approximately $1.72B. Deducting this from the $3.34B in asset value results in $1.72B in net book value. Preferred shares rank senior to common shares so in case American Finance Trust goes bust and needs to sell its assets to satisfy the lenders, preferred shareholders only need to see 7.72M shares * $25 face value = $193M from asset sales after satisfying the lenders.
And just to provide an example, let’s have a look what happens when AFIN sells its entire asset portfolio at a 40% discount (note: this is extremely unlikely and let it be clear this is definitely not a reasonable scenario. I’m just using this “end of the world” scenario to explain why I’m a big fan of the preferred shares). Selling at 60% of the book value would result in a realized value of almost exactly $2B. After deducting the full repayment of the net debt, there would be $282M left on the table. And that’s sufficient to repay the $193M in preferred shares, leaving approximately $90M on the table for the common shareholders (representing roughly 80 cents per share). This (unlikely!) scenario would be too bad for the common shareholders but shows how the preferred shareholders are protected even against an ‘end of the world’ scenario.
Considering the preferred shares A of American Finance Trust are cumulative (missed preferred dividend payments need to be paid out in whole before making any dividend payments on the common shares) and backed by a multiple of its total outstanding amount in real estate, I feel very confident owning the preferred shares. Although I usually don’t buy preferred shares above the par value, AFINP is currently trading just under 101% of its par value and the preferred shares aren’t callable before March next year.
I currently have a long position in American Finance Trust’s preferred shares and I’m planning to further increase the size of this position. Ideally below $25/share, but I wouldn’t mind paying slightly over par.
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Disclosure: I am/we are long AFINP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.