LaSalle Hotel Properties (LHO) is a growing REIT that specializes in, you guessed it, hotels. In this article, we'll take a look at a way that investors can take advantage of the company's profitability and growth without having to take on undue risk by owning the common stock. The company's Series G Cumulative Redeemable Preferred Shares (LHO-G, may differ depending on your broker) is a solid choice for current income and could be a nice addition to your retirement income portfolio.
LHO-G is a traditional preferred stock which means it has no stated maturity date and pays regular quarterly distributions. LHO-G was issued at $25 per share and pays an annualized dividend of $1.8125, good for a coupon yield of 7.25%. However, this issue now trades at a moderate discount to its issue price at $23.76, offering investors a chance to grab a current yield that is a robust 7.6%.
Beginning in 2011 LHO-G has been redeemable by LHO at its option. In fact, last April saw LHO-G partially called as LHO redeemed about two-thirds of the outstanding shares of LHO-G for the full $25 issue price. However, there are still ~2.4 million shares of this issue outstanding and it is still traded on the NYSE so even though it was partially called, this issue is still very much around and traded. Since LHO-G is currently trading for a discount of $1.24 per share, in the event the remaining shares are called by LHO-G, holders will receive a $1.24 capital gain on their position, assuming it is initiated today. This means that, although you may be called earlier than you may otherwise like, you will at least be made whole and then some.
LHO-G is also a cumulative issue, meaning that if LHO were to miss dividend payments on it, the issuer would be obligated to make up those missed payments. Unlike a non-cumulative issue, which has no guarantees, a cumulative issue is a virtual guarantee barring a bankruptcy event. As LHO is in no danger of that occurring given its management's robust performance history, I consider the dividends on LHO-G to be quite safe indeed.
There are some risks to owning LHO-G and chief among them is interest rate risk. Any income producing security carries with it the risk that, if interest rates move up, it will move down in price in order to meet new expectations for interest rates. Unfortunately traditional preferreds are more subject to this than other interest-bearing securities because traditional preferreds have no stated maturity dates. Thus, if interest rates spike you could see LHO-G move down in price fairly rapidly, leaving holders with capital losses on their positions. To mitigate this, you could initiate your position and then build on it slowly, perhaps adding to it once a quarter, for example. The point is that volatile interest rates will move LHO-G up and down in price fairly rapidly and that is something you must make peace with before owning it.
In addition, LHO-G is ineligible for the favorable dividend tax treatment given that it is issued by a REIT. Although the issue pays dividends instead of interest payments, it is still ineligible because of the issuer and this can be a sizable negative for holders in a taxable account. Everyone's tax situation is unique so if you plan to hold LHO-G in a non-retirement account, make sure you understand what the tax implications of it are for you before taking a position.
LHO-G offers investors a chance to buy into a 7.6% current yield and a chance to see capital gains on their position from a seasoned security issuer and safe payer in relation to other REITs. LHO is a superior operator and as such, I believe the market is mispricing LHO-G in terms of its safety and soundness. While LHO's business model is outside the scope of this article, the company's profitability and common stock secondary issues mean LHO is likely going to be around for a long time and continue to grow. These things make it easier for LHO to pay the dividend on LHO-G and thus, provide income investors with a less volatile way to gain income exposure to LHO.
Additional disclosure: I am long LHO-G