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RLJ Preferred Hit Too Hard By COVID-19

Vlae Kershner profile picture
Vlae Kershner


  • RLJ Lodging Trust common and preferred stock have declined rapidly during the COVID-19 scare.
  • The risk to the preferred seems minimal.
  • The lack of a call provision makes it look good in a declining rate environment.

One memory from the 2007-09 financial crisis is that preferred stocks in cyclical industries got pummeled even though their dividends were rock solid. Kansas City Southern preferred (KSU.P) was one that I bought at the time. By 2012, it was back above par.

Is there some opportunity like that in the COVID-19 scare?

Preferreds exposed to the travel and shipping industries suffered last week. For example, Global Ship Lease preferred B (GSL.PB) fell 20.4%. Looking for something less opaque than international shipping, I hit on the domestic hotel industry.

RLJ Lodging Trust (RLJ) is a real estate investment trust owning 108 hotels in 23 states, tilted toward Hilton's Embassy Suites (HLT), Courtyard by Marriott (MAR), and Residence Inn by Marriott. Northern California is its largest market. The common stock declined 18% last week as hotel stocks got slammed by convention cancellations on the West Coast.

The virus spread to its RLJ $1.95 Series A Convertible Preferred (NYSE:RLJ.PA), which pays 7.8% at par (Quantum description). The preferred ended the week down 10% to $26.11, for a juicy yield of 7.486%.

RLJ and RLJ.PA stock prices

Yet, it's hard to see a huge risk in the preferred. A bullish SA article on it last November by Rida Morwa called it "seriously mispriced." If mispriced then, it's even more serious now.

Forced Conversion Unlikely

Usually, when one buys a preferred above its $25 redemption value, one is subject to the risk of capital loss in the event of call. However, RLJ.PA cannot be called, but instead is subject to conversion into 0.2806 shares of RLJ common.

According to the 2017 proxy statement/prospectus:

RLJ may exercise its option to redeem the RLJ Series A Preferred Shares, in whole or in part, only if, for 20 trading days within any period of 30 consecutive trading day period, including the last trading day of that

This article was written by

Vlae Kershner profile picture
I am a 35-year stock market investor, MBA, and retired reporter and editor for the San Francisco Chronicle. I also was a featured investor with the investment app Netvest. My primary style is a mix of growth and income, with attention to special situations.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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