For those of you unfamiliar with my preferred Investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More importantly, it will provide you 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 Pebblebrook Hotel Trust (NYSE:PEB) preferred shares, PEB-C & PEB-D, 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 PEB. Below is a snapshot of a slice of that page:
A quick review informs us that PEB is listed as a REIT with a market value of $1.9 billion and primarily invests in upper upscale and full service urban hotel properties.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here we learn that PEB offers two preferreds (PEB-C & PEB-D), which are offered at respective interest rates of 6.50%, and 6.375%. The A & B Series have been called.
Now let's click on PEB-C itself. I'm particularly partial to investigating the preferred offering the highest coupon rate. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that most interests me:
- I like that this preferred is cumulative, meaning that in 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. Although bank preferred dividends are usually secure, they are almost always non-cumulative, consequently, I don't buy them.
- These shares are callable at the company's option on 3/18/18 at $25.00 plus any accrued interest owed, which mean it's currently callable.
- They pay a dividend of $1.625 per share per year, or 0.40625 per quarter, paid 1/15, 4/15, 7/15, 10/15 of each year.
- At the time of their IPO, these shares were unrated by Moody & 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 $25.00 call value plus any accrued interest owed.
- 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, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
- BTW, except for coupon rate and when callable, the D Series is virtually identical.
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 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 interest 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 begin with a five-year chart of its commons as shown below, which is provided by Yahoo Finance as shown below:
Above is a screenshot of PEB's five-year chart, which, as far as I'm concerned is the picture of a company that's as solid as a rock, one I'd have no fear of making a preferred investment in, in spite of the fact that it has retreated from its high at the close of 2014. The price of its shares during this time has trended higher nicely moving from $18.63 on 12/12/11 to its current $29.20. All during that time, it has increased its common dividend to its current $1.45 per year.
Because, as I illustrated above, as a long-term cumulative preferred investor, I am a little concerned about quarterly financial reports and their attendant conference calls, which are liberally spun. I don't bother paying much attention to them unless the particular company is at risk of suffering some existential threat. PEB is not one of those companies. Therefore, it's time to determine if either of its preferreds are a buy at this time, and if so, which is the better buy.
And according to MarketWatch, let's see how those preferreds are priced now:
Now for those of you interested in owning one of PEB's preferreds, let's do the math to determine which is the best buy at the current prices.
According to yield alone, PEB-D at the above price is the best buy. But what makes it truly more valuable is that it is not callable for five years and when and if it is called the holder at this price will earn 0.77/share, higher than the 0.20/share earned with the C series. You might not agree, but when I buy preferreds, I buy them for a constant and long-time source of steady income that I can love long-time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.