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 Hersha Hospitality Trust (NYSE:HT) preferred shares, HT-C, HT-D, & HT-E, 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 HT. Below is a snapshot of a slice of that page:
A quick review informs us that HT, at the time of its IPO, was listed as a hotel REIT with a market value of $762 million and primarily invests in high-quality upscale hotels in urban central district locations.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here, we learn that HT offers three preferreds (HT-C, HT-D, & HT-E), which are offered at respective interest rates of 6.875%, 6.50%, and 6.50%. The A & B Series have been called. Furthermore, as evidence of this REIT's solidity, notice that its latest issues were offered at reduced coupon rates. No different when you want to take a mortgage on your home. The better your credit profile, the lower the interest rate you will have to pay.
Now let's click on HT-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 3/6/18 at $25.00 plus any accrued interest owed.
- It pays a dividend of $1.71875 per share per year, or 0.4296875 per quarter, paid 1/15, 4/15, 7/15, 10/15 of each year.
- At the time of its IPO, these shares were unrated by Moody's & 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.
- By the way, except for coupon rates and when callable, all the series conditions are 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 HT's five-year chart, which, as far as I'm concerned is the picture of a company that's solid, 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 beginning of 2015. The price of its shares during this time has increased, moving from $18.56 on 12/12/11 to its current $21.22. During this past year, it has paid a common dividend of $1.12. My canary in the coal mine. As long as the common dividend is paid, I'm certain so will I, and before the company will even think of cutting my preferred dividend, it must cut the common dividend.
Now let's see how HT performed in comparison to its peer group during the past five years. To help me accomplish this, I am relying on a new investment site, Simply Wall Street, that one of my followers introduced me to. It has a lot of information, which I'm trying to wrap my head around. Therefore, I decided to use the section of it that is easiest for me to understand and use.
Therefore, I've chosen its peer group choices for my comparison:
I'm not happy to report that HT performed at the very bottom of its peer group, which are: Ryman Hospitality Properties (NYSE:RHP), Summit Hospitality Properties (NYSE:INN), Pebblebrook Hotel Trust (NYSE:PEB), FelCor Lodging Trust (NYSE:FCH), Chesapeake Lodging Trust (NYSE:CHSP), and Chatham Lodging Trust (CLOT). However, I am undeterred, I have wanted to add an HT preferred to my portfolio for years without success because it never offered the yield I was seeking. Consequently, I urge that you do your own conscientious DD before placing a bid, or not, it's your money you are risking, take care.
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. HT 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 HT's preferreds, let's do the math to determine which is the best buy at the current prices.
HT Preferreds 12-7-16
According to yield alone, HT-E at the above price is the best buy. However, the C series is callable three years earlier and will earn 0.48/share, if called promptly. Consequently, its YTM will be increased. You might not agree, but when I buy preferreds I buy them for a constant and long-time source of steady income; therefore, I'm sticking with my E choice as the best buy at the current prices.
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.