Chesapeake Lodging (CHSP) is a REIT that is focused on investing in upscale hotels in major urban centers. The company currently has 12 hotels with a total room count of 3,516.
Chesapeake recently issued their first preferreds. Chesapeake's series A preferreds were issued last month. The preferreds currently have a 7.75% coupon. The preferreds will not mature until 2017.
This is a great preferred for income investors to purchase especially in this low rate environment. The important thing to consider when purchasing preferreds is making sure that the underlying company is profitable. This helps ensure that the company can keep making the quarterly payments.
Last year, the company earned $9 million. Analysts are expecting the company to earn .56 cents per share this year. This equates to net income of almost $19 million. The preferred dividend payments will cost the company $8.5 million.
The company plans to use the proceeds to pay off outstanding debt and acquire other properties. Chesapeake Lodging is a profitable company and will use the proceeds to find new ways to add to their bottom line.
The most important thing for investors to understand is that when looking at any preferred company is to take into consideration the payment risk for the underlying company. At a 7.75% yield, investors are effectively buying a company that is seeing strong earnings growth.
The company recently reported earnings and they saw RevPar increase 9.7% and EBITDA margin rise by 240 basis points. A 7.75% yield would be a fantastic risk-reward opportunity for investors. The company is very profitable and for the first six months of 2012, they earned $21.4 million. This is a good fixed income play backed by a strong underlying company.
The nice part about the preferreds is that they are trading very close to par value. The preferreds have a par value of $25 and it currently trades near $25.20. So investors will not have to worry about call risks when the company chooses to call those preferreds in.
A yield of 7.75% is great for income investors on a company like Chesapeake. Chesapeake is profitable and will continue to do well as the economy recovers. The company should have no problems making payments on the preferreds. I recommend investors in search of yield consider purchasing Chesapeake's Series A preferred.
Disclosure: I am long CHSP-A.