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American Finance Trust Preferreds: I'm Still Buying AFINP Around Its $25 Par Value For A 7%+ Yield

Summary

  • American Finance Trust's FFO and AFFO are covering the dividends on the common shares again.
  • That's good news for the preferred shares which are now yielding over 7% and rank senior to the common shares.
  • Even in an "end of the world" wind-down scenario whereby AFIN has to sell its assets at a 40% discount to book value, preferred shareholders will be made whole.
  • The preferred shares aren't callable before 2024, and in excess of $6.5 in dividends will hit the account before the prefs can be called.
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Introduction

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.

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 the 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.And this has important implications for the coverage ratio of the preferred dividends. Let’s pull up the income statement of the American Finance Trust (as the $7.1M quarterly net loss is the starting point used by AFIN to calculate the FFO and AFFO).

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 payout 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 - https://seekingalpha.com/article/4394333-american-finance-trust-preferreds-still-buying-afinp-around-25-par-value-for-7-yield

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