Saul Centers' Preferred Stock: A High-Yield, Undervalued Play on Stable Real Estate Income

The preferred stock market often offers compelling opportunities for income-seeking investors, but few securities currently match the combination of 7.17% yield, 14.6% discount to liquidation preference, and cumulative dividend protection found in Saul Centers Inc.'s 6.125% Series D Cumulative Redeemable Preferred Stock (BFS.PRD). This security, tied to a REIT with a fortress-like portfolio in high-demand markets, presents a rare chance to lock in outsized income while benefiting from potential capital appreciation as its valuation converges toward intrinsic value.

The Value Proposition: Yield, Safety, and Liquidity at a Discount

As of June 2025, BFS.PRD trades at $21.35, a $3.65 discount to its $25 liquidation preference (see ). This discount creates a dual-income opportunity: the 7.17% current yield (based on its $1.53125 annual dividend) is already 100 basis points above its 6.125% coupon rate, while the price gap to liquidation value implies a potential 17% upside if the discount narrows to zero.

What makes this security stand out is its cumulative dividend feature. Unlike common stocks, preferred dividends cannot be skipped—missed payments accumulate and must be paid before any dividends to common shareholders. This structural advantage ensures Saul Centers' steady cash flow from its real estate operations directly supports BFS.PRD's payouts.

The Pillar of Stability: Saul Centers' Real Estate Portfolio

Saul Centers (BFS) operates as a REIT focused on retail and office properties in the Washington, D.C./Baltimore corridor, an area with enduring demand driven by federal spending, corporate relocations, and strong population growth. The company's portfolio includes 25 million square feet of space, with tenants like Walmart, Target, and regional anchors, providing a reliable income stream.

Key financial metrics reinforce this stability:
- Low leverage (debt-to-EBITDA ~4.5x, below industry averages).
- Consistent dividend history: Saul Centers has raised common dividends for 32 consecutive years, a testament to operational resilience.
- Liquidation preference protection: Even in a worst-case scenario, preferred shareholders are entitled to $25 per share upon liquidation, offering a floor below the current $21.35 price.

Why the Discount Persists—and Why It Won't Last

BFS.PRD's discount likely stems from broader market headwinds for preferred stocks, including rising rates and liquidity preferences. However, three factors suggest this gap will narrow:
1. Structural safety: Cumulative preferreds like BFS.PRD are less rate-sensitive than bonds because their dividends are tied to the issuer's cash flow, not fixed interest rates.
2. Call protection: The security's January 2023 call date has passed, meaning Saul cannot redeem it at $25 unless they choose to—a move unlikely unless rates drop significantly, which would benefit holders.
3. Sector outperformance: REIT preferreds often trade at premiums during economic expansions. Saul's focus on high-traffic retail and office spaces in supply-constrained markets positions it to capitalize on rising rents and occupancy rates.

The Investment Case: Immediate Action for Income and Appreciation

Investors should act now to capture:
- Immediate income: A $1.53 annual dividend translates to $612 per year for a $40,000 investment, a 1.5x higher yield than the S&P 500.
- Capital appreciation potential: If BFS.PRD trades to $23.50 (a 10% discount to liquidation), the total return jumps to 10.5% annually (7.17% yield + 11.4% price gain).
- Tax efficiency: Preferred dividends are taxed at the 20% rate for qualified dividends, lower than ordinary income.

Key Considerations and Risks

• Interest rate sensitivity: While BFS.PRD's yield mitigates this risk, rising rates could temporarily pressure prices.
• Real estate risks: Tenant defaults or vacancies could strain cash flow, though Saul's conservative balance sheet and high-quality portfolio mitigate this.
• Liquidity: Preferred stocks can experience volatility in thin markets; monitor bid-ask spreads before large purchases.

Final Recommendation: Buy BFS.PRD for Income and Value

BFS.PRD offers a rare trifecta of above-average yield, discounted valuation, and structural dividend protection in a REIT with proven stability. Investors seeking to boost portfolio income while hedging against equity volatility should consider this security. The $21.35 price provides a margin of safety, and the $25 liquidation preference acts as a gravitational pull for price appreciation.

For maximum benefit, time purchases before upcoming ex-dividend dates (next expected April 2, 2025, for the April 15 payment). Holders will benefit from compounding income and the eventual convergence of price toward intrinsic value—a recipe for strong total returns in 2025 and beyond.

Action Step: Allocate to BFS.PRD as part of a diversified income portfolio, targeting a position size that balances yield with sector exposure.