Lexington Realty Trust: A View From The Perspective Of A Preferred Investor

| About: Lexington Realty (LXP)

Summary

Readers new to my approach to preferreds should click the "Basics" link to understand my investment philosophy.

When considering preferreds, I view them as a separate entity from their common cousins.

I utilize Quantum Online to thoroughly research each preferred prospectus.

I like to compare the performance of the stock I want to invest in with the S&P and others in its sector.

I believe Lexington's preferred is a safe bet even for the conservative investor.

For those of you unfamiliar with my preferred investment philosophy, I explain how and why I became a preferred investor in my article "The Basics: Underlying Investments Viewed Through the Eyes Of A Preferred Investor." More importantly, that article provides the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.

When considering the acquisition of Lexington Realty Trust (NYSE:LXP) preferred shares, LXP-C, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.

Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to Lexington. Below is a snapshot of a slice of that page:

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A quick review informs us that Lexington, is a REIT that owns and manages commercial properties net leased to major companies throughout the US. It also provide advisory and asset management services. Best of all, all taxes, utilities, maintenance, and repairs are generally paid by their tenants.

Click "Find Related Securities" to examine any preferreds this company has to offer:

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Here we learn that LXP offers only the preferred (LXP-C), the B & D Series having been called, which is a good sign, coupled with the fact that their remaining preferred only costs LXP a 6.50% interest rate.

Now let's click on TNP-C itself. Below is the screenshot:

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Observations:

  • I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds.
  • These shares were callable at the company's option on 11/16/09 at $50.00 plus any accrued interest owed. Notice, as with many preferreds they are not called any time near when they could have been. Evidently, LXP decided, because of their low interest rate, it was not advantageous to call this series although it called the other more interest rate expensive ones.
  • They pay a dividend of $3.25 per share per year, or 0.8125 per quarter, paid 2/15, 5/15, 8/15, 11/15 of each year.
  • At the time of their IPO, these shares were unrated by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
  • These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $50.00 call value plus any accrued interest owed.
  • An interesting wrinkle: Although the preferred shares are convertible at the holder's option, the detail of which you can see for yourselves, the wrinkle is as follows: After the callable date and the share price of the commons exceeds 125% of the conversion for 20 of any 30 consecutive trading days, the company may force that conversion from the preferreds to commons. Something I don't like and will keep an eye on.
  • Dividends are NOT eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
  • As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.

However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls.

Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder - which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.

Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of LXP. Click to enlarge

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Above is a screenshot of LXP's 5-year chart, which, as far as I'm concerned, is the picture of a company that has its ups and downs during this time. The price of its shares over the past year have dropped only to rebound slightly of late. However, it has increased its common quarterly dividend twice, from 0.15 to its present 0.17. This is a positive indicator.

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Above is a screenshot taken from a Finviz view of LXP's present financial highlights. The company's current market value is $2.21 billion. It earned an income of $121.40 million. Its stock price over the past year has risen by 11.91%, and by 41.60% during this last quarter. Year to date, it's up by 20.01%. I also find its long and short-term debt/equity is a moderate 1.64.

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According to the Yahoo chart above, LXP placed solidly in the middle of its peer group, and underperformed the S&P. In fact, as a sector, these companies have underperformed the S&P. The peer comparisons charted above are: Apollo Commercial Real Estate Finance (NYSE:ARI), Brandywine Realty Trust (NYSE:BDN), Blackstone Mortgage Trust (NYSE:BXMT), Chimera Investment Corp. (NYSE:CIM), and Colony Capital (NYSE:CLNY).

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The final chart illustrates the 3-year price movement of the preferred issue LXP-C we are interested in acquiring. This is the chart of a company preferred, which has performed well except for some great buying opportunities, which I suggest we be patient for. Personally, I would wait for one and not be in a rush to buy at their present price.

My bottom line decision is to look at charts of the past few years' performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year.

Ultimately, I must decide whether or not I believe in the long-term survivability of LXP, which I view as positive, and I have virtually no fear of this company going bankrupt now or in the near future. Although the yield is low according to my taste, it is a safe bet for the more conservative investor.

My advice is simply my opinion, and you know what they say about opinions and how everyone has one. It's your money; invest it with care.

Disclosure: I am/we are long LXP-C.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Notice that I utilize the same format to determine whether or not, or how to invest in a particular preferred. I do this for several reasons: The primary reason is because this is the way I accomplish it most effectively. It's also easiest for me to write. But, best of all, it makes it easier for you, my repeat audience, to breeze through each article and painlessly absorb the valuable information, particular to each company, that will help you make your most informed investment decision.