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BERKO: Foreign real estate too risky for retiree

DEAR MR. BERKO: I’m 84, and my wife is 82 and in good health. Our only debt is $5,300 on our home, and we live frugally. I invested $60,000 in three Puerto Rican bonds years ago. They paid $3,600 a year tax-free, but now they are defaulting and won’t pay interest. We need to replace this income quickly, so my stockbroker told me about Colony Capital’s 7.125 percent Series C preferred stock, which pays a safe 8.3 percent. He advised me to buy 2,500 shares, which would pay us almost $4,500 a year. Is this an attractive and reliable yield? I don’t want to take any more risks in this market. I also lost over $37,000 in energy stocks – for example, Double Eagle Energy Services, Arch Coal, Africa Oil, TransGlobe Energy, Spartan Energy, Breitburn Energy Partners and Atlas Energy. We have $81,000 remaining after these losses. Please help us. I read you every week, and I trust you. – PK, Rochester, Minn.

DEAR PK: Holy moly, Michael and Macbeth! At your age and stage, those energy stocks and municipal bonds are patently unsuitable investments. And if they were recommended by that brokster, I’d seek legal advice because you may have a good chance to recover all those losses. Meanwhile, an 8.3 percent return is an “attractive” return in almost any market, but with Colony, it may not be a “reliable” yield. However, that preferred has fallen in value since your letter, so the yield is now a little higher.

Colony Capital’s 7.125 percent Series C preferred stock had a 10 million-share initial public offering, raising $250 million at $25 a share, in April 2015. Today the preferred stock (CLNY-C) trades at $20.62 and pays 44.53 cents a share in January, April, July and October. It trades at a 19 percent discount to its $25 call price and now generates a yield of 8.9 percent. It’s listed on the New York Stock Exchange, rated BBB- and callable at the issuer’s option on or after April 13, 2020, at $25 plus accrued interest. CLNY-C ranks junior to the senior debt of the company and equal to CLNY’s other preferred issues but senior to the common stock.

Colony Capital is a $536 million-revenue real estate investment trust with 112 million shares outstanding and $331 million in cash. This REIT manages a diversified international portfolio of equity and debt-related investments from 14 offices in 10 countries. Management invests between $10 million and $100 million per transaction, primarily in Europe, China, Hong Kong and Macau. The common stock (CLNY-$16) has an attractive book value of $26 a share, and the recently raised $1.60 dividend yields 10.2 percent. CLNY expects 2016 earnings of $2.11 a share and trades at a forward price-earnings ratio of just under 8-to-1. And with the exception of operating margins, CLNY’s balance sheet and income statement numbers are significantly better than the industry average. According to Thomson First Call, each of the six brokerages following CLNY has a “buy” recommendation on the common, with a high target price of $30. But I think they’re bloody nuts. CLNY came public in 2009, has 302 employees and is home-ported on the Left Coast, in Los Angeles. This very speculative issue has impressive redeemable value, but not for investors – like you – who can’t afford risks.

I’m not comfortable with real estate investments in foreign countries, especially in the rush-rush fast-paced, highly speculative economies of China, Hong Kong and Macau, where values can plummet as quickly as lightning, with the changes very slow to be recognized or felt in the U.S. market. Though I think CLNY’s dividend is safe, I can’t confidently tell you it will be safe two or three years hence.

Stay out of the stock market. Consider a reverse-annuity mortgage on your home, which could increase your income by $700 or $800 a month. The bank where you’ve established a checking account, your credit union or AARP can recommend a RAM source. A RAM is riskless, and the money is tax-free and will continue as long as you live in your house.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].

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