Last night in the ‘headlines of interest’ I posted a presentation from lodging REIT Pebblebrook Hotels (PEB).
PEB has 4 issues of preferred stock outstanding–all of them with current yields of 6.6% to 7% and all trading under liquidation preference of $25/share.
PEB is one of the better operators in this sector and their results are impressive—their numbers are surpassing pre-pandemic numbers.
Maybe there is a spot in the portfolio for a few shares from this quality operator?
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Definitely something to think about. This is my 2nd largest preferred holding behind various PSA issues combined. I was lucky enough to get some of the shares at $17.65 on March of 2020 but my average is much closer to par value. It might be time to reevaluate this one as none of what you describe is particularly appealing.
Tim, finishing up for the day and reading more on this great site. Two years ago I would of thought hotel preferred’s would be a great place to park some money and I did. That in January and February of that year, Just in time for COVID and travel shutting down. As a matter of fact I was on a trip to Portland and back and worried about my investments. A lot eventually recovered and some stocks I sold then jumped back in the market snagging some good deals. That was the long answer. Short answer is if company is doing good and has good cash reserves reasonable debt go for it.
Charles–some of the top quality issues will do well (financially)–some of the lower quality issues are much dicier–I will likely nibble more on the higher quality issues like the PEB issues. Already hold some of the RLJ-A non callable preferred.
Tim:
Just be careful on RLJ+A. I also own some, but we might get burned if a private entity ever decided to buy RLJ in an all-cash deal. Given RLJ’s stellar balance sheet, a take-private deal is certainly possible.
The RLJ+A issue was an old Felcor REIT issue (FCH+A) from 2003 that never had any “change of control language” in the original prospectus. RLJ assumed the preferred when they bought FCH.
Rob,
What could happen in that situation? The new company could just refuse to pay dividend? The shares would be called at $25?
NewToThis:
Any number of things.
The acquiring entity could offer $25/share in cash, or they could just keep paying the preferred dividend and relegate it to the dreaded Expert Market. It is a very large preferred for a property REIT – 12.88M shares.
Or they could find a way to cram it down like what happened with the Cedar preferreds. One has to hope that RLJ management would do the right thing for preferred holders, but they never issued this preferred and I’m sure don’t like paying the $1.95 cost on it ($25+ million annually). The acquiring entity certainly won’t like paying that type of interest.
But you have zero protection from the convertible feature, as each share in the $25 RLJ+A converts into only .2806 shares of RLJ Common.
So converting your RLJ+A shares if RLJ gets acquired for $20/share in cash would only get you $5.61/share for each $25 share of preferred.
I keep the position small, but love the current yield on it fully aware of the risks.
Definitely something to think about. This is my 2nd largest preferred holding behind various PSA issues combined. I was lucky enough to get some of the shares at $17.65 on March of 2020 but my average is much closer to par value. It might be time to reevaluate this one as none of what you describe is particularly appealing.
Rob & New-
But- RLJ would have to go up $103 to 115.82 :
” The preferred shares are convertible at any time, at the option of the holder, into 0.2806 shares of common stock, an initial conversion price of $89.09 per common share. On and after its issue date, if the price of the common stock exceeds 130% of the conversion price for 20 of any 30 consecutive trading days”
We can probably sleep soundly on that bit.
Gary:
The conversion feature is clearly at the option of the preferred holder and not the company, unless the scenario you described happens (which we all know never will since RLJ trades for $12.65/share).
But that conversion language has nothing to do with an all-cash merger for RLJ and the change of control that comes with it. RLJ common will no longer exist if it gets acquired for $20/share in cash.
The preferred RLJ+A could be left on a deserted island, or something much worse.
Correct- separate issues. Hoping there’s no buyout since I have quite a bit of it at a good price.
NTT:
There are no worries at this point. But given RLJ’s $4+ Billion total enterprise value, great balance sheet, and the recovery of the hotel business, it is a risk – albeit a small one.
I believe the other busted property REIT convertible (6.5% LXP+C) has the change of control language so you would get $50/share in cash if an all-cash merger scenario developed for LXP.
I believe that is one of the reasons LXP+C started dropping quickly towards $50/share when LXP put itself up for sale (unsuccessfully) earlier this year.
If RLJ ever announced that they were exploring a sale of the company, I expect RLJ+A to fall in price rather fast.
Good comments – picked up some LXP-C today for avg $47.9876 – I had not seen that one before.