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 American Homes 4 Rent (NYSE:AMH) preferred shares 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 AMH. Below is a snapshot of a slice of that page:
A quick review informs us that AMH was listed as a Large Cap REIT with a market value of $4.5 billion that is primarily focused on acquiring, renovating, leasing , and operating single-family homes as rental property.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here we learn that AMH offers Five preferreds (AMH-A, B, C, D, & E), which are offered at respective interest rates of 5.00%, 5.00%, 5.50%, 6.50%, and 6.35%.
Now let's click on AMH-D 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 5/24/21 at $25.00 plus any accrued interest owed.
- They pays a dividend of $1.625 per share per year, or 0.40625 per quarter, paid 3/31, 6/30, 9/30, & 12/31 of each year.
- At the time of their IPO, these shares were unrated by Moody 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 $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. REIT dividends are usually not tax advantaged.
- As usual, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
- Note that the A, B, & C series are convertible preferreds, respectively callable after 9/30/17, 12/31/17, & 3/31/18. However their conversion formulas will be determined on their respective conversion dates, which I find a bit problematic. The E series is similar to the D, except for when callable and coupon rate.
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 (in this case 3) of its commons as shown below, which is provided by Yahoo Finance as shown below:
Above is a screenshot of AMH's three-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. The price of its shares during this time has trended higher nicely, moving from $16.10 on 8/4/13 to its current $21.08. All during that time, it has maintained its common dividend of $0.20 each year.
Now let's see how AMH performed in comparison to its peer group during the past three years.
AMH performed at the very middle of its peer group, in tandem with the S&P 500. Its peers were: Silver Bay Realty Trust (NYSE:SBY), Colony Starwood Homes(NYSE:SFR), Education Realty Trust (NYSE:EDR), and American Residential Properties (NYSE:ARPI). As usual, 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. AMH 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 AMH's preferreds, let's do the math to determine which is the best buy at the current prices.
According to yield alone, the D at the above price is the best buy, although in comparison the E has the most to gain in appreciation. But there are other factors to consider. Consequently, the best buy should be determined by the price that's available on the day you decide to place your bid. Because the A, B, & C series are all convertible, their call dates are irrelevant because they can't be called. But under the right circumstances they can be converted to AMH common shares. However, according to the preferred prospectuses the conversion ratio formula will only be available on the conversion date as established for each individual preferred. Too complicated for me, therefore I eliminated them from my computations. However, for those of you interested, I invite you to study each prospectus to determine whether or not each of the three are worth pursuing. As for me, I'll pass.
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.