For those of you unfamiliar with my preferred investment philosophy, my article "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 Hospitality Properties Trust (NYSE:HPT) 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 HPT. Below is a snapshot of a slice of that page:
A quick review informs us that HPT is an hotel REIT. It IPO'd with a market value of $4.2 billion, making it a relatively large company.
Let's click on Find Related Securities to examine any preferreds this company has to offer:
Here we learn that HPT offers one remaining preferred (HPTRP), initially offered at 7.125%, which indicates to me that HPT is perceived as a moderately safe company, and has retired or recalled all of its previous preferreds.
Now let's click on HPTRP. 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 the 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 are callable on 1/15/17 at $25.00 plus any accrued interest owed.
- It pays a dividend of $1.78125 per share per year, or 0.4453125 per quarter, to be paid 1/15, 4/15, 7/15, & 10/15 of each year.
- At the time of its IPO, 1/18/12, these shares were rated Baa3 by Moody's and BB by S&P, which really doesn't concern me but might concern a more conservative investor.
- 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 shareholders' 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. These are Yahoo Finance and FinViz. I have cued each to open to the financials of HPT.
Above is a screenshot of HPT's less-than-one-year chart. Unfortunately, Yahoo Finance did not allow me to search further back, which I planned to do after I opened my IB platform on my desktop, but as you will soon see, I found this unnecessary as I continued with my research.
Above is a screenshot taken from a Finviz view of HPT's present financial highlights. The company's current market value is $5.07 billion. It earned $119.80 million on sales of $2.04 billion. Year to date, it's up 23.40%. Its short- and long-term debt/equity is 1.09.
Now let's see how its preferred performed, as illustrated by the following MarketWatch chart:
Considering that HPTRP is callable in a virtual nanosecond, a purchase at this price, in my opinion, would not be a wise move. Too bad it took so long to get here because at par or less it would have been a wonderfully safe investment. However, the value of this article is to alert all my ultra-conservative preferred followers to keep watch for any future preferred offerings HPT comes up with because they'll be money in the bank.
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.