Preferred Stock Strategist: Tax-Advantaged Developments
UBS, 8 May, 2006
Retain market weight allocation:
* We retain a market weight allocation in preferreds. Yields on both 30-year Treasuries and swaps are higher by roughly 70 bps since the beginning of March and yields are near the upper end of WMR's target range. In addition, we expect credit conditions to remain supportive.
* Current landscape:
* In the current market environment, we focus our attention on Neutral-rated preferreds with coupon levels generally above 6% that are trading at discounted prices. In addition, we continue to underweight preferreds with the lowest coupons and highest degree of sensitivity to interest rate changes.
* Tax-advantaged developments:
* House and Senate negotiators reached an agreement on legislation to extend the 15% tax rate on dividends until 2010, which seems likely to pass. While we do not expect tax-advantaged preferreds to rally if the bill passes, the 15% tax extension makes taxable-equivalent yields more appealing.
* Rating changes:
* We are initiating coverage of DRE M, MSJ, and PSA H with Neutral ratings as these securities exhibit spreads in line with peers and above-average income distributions relative to each company's existing preferreds. We are reclassifying EDV and NRY preferreds to Refinanceable from Neutral now that their first call dates are approaching.
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