Preferred Stocks

[ericd1]

Cheapguy - Well I kinda, sorta did a cf analysis...

 

They have alot of things going on...some large discretionary expenses - refurbishing/improvements $143M ('08) that could be postponed, or cut back...also they took some impairment charges $108M last year. (non-cash)

 

That said...using back of a napkin accounting

 

2008 EBITDA    $145M + deprec $140M ~ CF  $285M    PFD Div  $39M  (7x coverage)

 

This again from the 10K -- We currently expect approximately $97 to $112 million of cash flow provided by operating activities for 2009. This forecast assumes RevPAR decreases 10% to 13% and Hotel EBITDA margins decreases by approximately 350 to 450 basis points. Our current operating plan contemplates that we will make no common dividend payments, $39 million of preferred dividend payments, $11 million in normal recurring principal payments and $15 million repayment of maturing mortgage debt leaving approximately $32 million to $47 million in surplus cash flow (before capital expenditures or additional debt reduction). In 2009, we plan to spend approximately $84 million on capital expenditures, which will be funded from operating cash flow and borrowings.

 

Our line of credit contains certain restrictive financial covenants, such as a minimum leverage ratio (65%), a minimum fixed charge coverage ratio (1.5 to 1.0), and a minimum unencumbered leverage ratio (60%). At the date of this filing we were in compliance with all of these covenants. Our compliance with these covenants in future periods will depend substantially on the financial results of our hotels. If current financial market conditions persist and our business continues to deteriorate, we may breach one or more of our financial covenants.

 

More -- If we are unable to repay our line of credit, and we breach one or more of these financial covenants, we would be in default, which could allow the lenders to demand payment of all amounts outstanding under our line of credit. Additionally, a demand for payment following a financial covenant default by our lenders constitutes an event of default under the indentures governing our senior notes, which in turn, could accelerate our obligation to repay the amounts outstanding under our senior notes. While we believe that we will successfully close our new secured term loan, as discussed above, we have several other alternatives available to ensure continued compliance with our financial covenants or repay our line of credit, including identifying other sources of debt or equity financing, selling unencumbered hotels and/or implementing additional cost cutting measures. Of course, we can provide no assurance that we will be able to close our new secured term loan, identify additional sources of debt or equity financing or sell hotels on terms that are favorable or otherwise acceptable to us.

 

Somebody obviously knows more about the situation...What am I missing? 

 

I guess they could go out of business...end of the world scenario

[JEast]

Very interesting times on the preferred front. Yes, FCH-C was (still is) an interesting play, but anytime you are required to do financing, the new financiers have the lead and can force suspension of dividends which they appear to have required in this case.

 

Cheap the ideas flowing :)

 

 

Cheers

[ericd1]

I believe the suspension was voluntary - again from their 10K

 

In 2008, we declared and paid common dividends of $0.85 per share in the aggregate. We suspended payment of our quarterly common dividend in December 2008 in light of the deepening recession, the attendant impact on our industry and FelCor, and the severe contraction in the capital markets. Our Board of Directors will determine the amount of future common and preferred dividends for each quarter, based upon various factors including operating results, economic conditions, other operating trends, our financial condition and capital requirements, as well as the minimum REIT distribution requirements.

 

Because they will want to maintain their REIT status, it's likely the common dividend will be re-instated if there are any earnings.

[JEast]

Check the news as the preferreds were suspended too.

 

http://phx.corporate-ir.net/phoenix.zhtml?c=118512&p=irol-irhome

[ericd1]

Thanks JE - It is a cumulative preferred...so if they 'ever' start paying again...

 

-- By suspending its preferred dividends, the company will preserve approximately $10 million of liquidity per quarter, and expects to generate positive cash flow during 2009. Operating results through February were in-line with the high-end of our expectations.

 

With operating results at the high end of expectations it doesn't look too bleak for the company...

 

Any opinions/comments on these? 

 

AHR-C, MBHIP, CDR-A, CTZ-A  (I am long all of these in my high risk basket)

[Junto]

CTZ-A, Holding company with ample liquidity, good capital position, core earnings still good, needs to stop the provisions and the one time write-downs. Terrible market area but has been doing business there forever. As i have said, I personally think this company is a deep value play at current prices.

 

AHR-C - I think this is a gamble investment, a lot of hair on that one...covenant breaches, liquidity issues, earnings power, etc...

 

MBHIP - Interesting investment. Really tough 4Q conference call by how it reads at Seeking Alpha. Some life might be there but don't like that it is non-cumulative.

 

CDR-A - Looks like preferred dividend is safe right now. Tough sector but it appears they are able to roll over their leases and maintain a 92% occupancy rate. 1Q was tough on this sector. I am going to do more research but find this intriguing. I didn't see their debt maturing schedule, their liquidity is certainly tighter.

 

[ericd1]

Junto - Thanks for your comments...it's junk basket...my Las Vegas money...

[Josh4580]

Michael Ashner (Of Winthrop Realty) wants to buy up to 25% of MPG (Maguire Properties) pref series A stock.  Does anyone have an opinion on MPG or its pref stock?

[dcollon]

MPG looks like it could be an interesting spec.  The pfd is cumulative and it looks like they didn't pay the Dec. dividend.  I haven't gone through the documents, but it would be interesting to see if the pfd shareholders can elect board members after a certain amount of quarters when the dividend hasn't been paid.

 

Michael Ashner is obviously a great real estate investor, but it's going to be tough for him to get 25% of shares (I realize that he already owns 9.5%).

 

 

[netnet]

So any updates on the preferred front?

 

On my end, I have (intellectually) put the WFC-L and USB into the money good category along with ORH (both issues),  I expect to get paid the divi and expect them to trade to 75% of par within 7 years.  (This is a political as well as a balance sheet analysis.)

 

Interestingly enough, one financial Armageddons are good, e.g. continued stagnating deflation, think Japan of the 90's, makes these issues look even better.  On the other hand, rampant inflation hurts all but the floating rate issues.

 

 

 

Netnet

[dcollon]

A quick little update on some of the Citi preferreds.

 

Then this from BAS/ML:

 

Citi public preferred exchange offer may get capped

On Ferbuary 27, 2009, Citigroup (C; $4.25; B-3-8) announced its intention to exchange various publicly and privately held preferred stock and trust preferred securities for shares of its common stock, and on March 2, 2009, the company further specified the conversion ratios of this upcoming exchange for publicly trading straight and convertible preferreds (series E, F, AA and T) (see Table 1 below). After a preliminary S-4 filing on March 19, 2009, with substantially the same exchange terms, the news and filings tape about the offer went quiet while the final filing and the formal tender offer statement have been long overdue (traditionally, 7-10 business days after the preliminary filing).

 

With the Citigroup common stock trading above $3.25 (the company-chosen exchange strike for the preferreds) in the last few days, the risk of the preferred exchange offer being repriced lower (that is, lower conversion ratios than previously indicated) has increased, in our view. Specifically, the exchange values for public preferreds listed in Table 1 may get capped at par. Nonetheless, the previously highlighted arb between preferreds and common still exists albeit in a less-easily quantifiable form, based on the fact that preferreds are trading only at about 68-78% of their par values. Even if the preferred exchange values are capped at their par values, there is potentially still a lot left to gain in these preferreds, since they are even now trading significantly below par.

 

We still view the likelihood of the exchange offer being cancelled altogether as very low, given that Citigroup still needs to significantly increase its tangible common equity (TCE) in order to pass the government's looming stress test.

 

[valuecfa]

I hope the Citi series AA pfds conversion rate holds. I'm still in this one. Amazing how long the spreads are lasting on all these Citi preferreds.

[Junto]

So any updates on the preferred front?

 

On my end, I have (intellectually) put the WFC-L and USB into the money good category along with ORH (both issues),  I expect to get paid the divi and expect them to trade to 75% of par within 7 years.   (This is a political as well as a balance sheet analysis.)

 

Interestingly enough, one financial Armageddons are good, e.g. continued stagnating deflation, think Japan of the 90's, makes these issues look even better.  On the other hand, rampant inflation hurts all but the floating rate issues.

 

 

agreed

[mvalue]

Not a preferred, but has anyone dug up the gritty on Sears Acceptance notes? Any links or info would be appreciated.

[JAllen]

Mvalue,

 

They are really hard to buy, at least for me through IB who placed the order through Knight Securities.  Sometimes I watch them trade below my bid (which is a bit frustrating).

 

I didn't do much digging but if we are talking about the same securities (SSRAP, SBCKP) they mature in about 20 years, pay interest of $1.75-$1.85, and are unsecured debt of Sears Acceptance, a wholly owned sub of Sears Holdings.

[mvalue]

I think they are different - interesting to know about those though.

 

2012's CUSIP 8124JFAG1 I see offer with YTM about 24.5%

 

2012's CUSIP 812404BJ9 offer with YTM 24.9%

 

and some others

 

 

[ericd1]

Sears made a tender offer for these back in '05, but evidently not all were re-purchased. The remaining shares trade in a 'gray market' and are very illiquid.

 

http://www.searsholdings.com/pubrel/pressOne.jsp?id=2005-05-11-0003594934

 

I found a couple of discussions about them...

 

http://can-turtles-fly.blogspot.com/2008/09/added-to-watch-list-sears-roebuck.html

 

http://boards.fool.com/Message.asp?mid=27579635&sort=whole#27600260

 

I talked with a Fidelity rep, they didn't seem to be able to trade them.  Any ideas?

 

[cman]

Interesting to hear Chanos say he has been buying up financial preferred stocks on cnbc today.

 

[ericd1]

The bank pfd's have made quite a run (thanks gang) with yields dropping from > 20% to < 15%.

 

The results of the stress tests will soon be announced and they could significantly impact current prices, either positively, or negatively.

 

The gains might be worth hedging. The financial preferred ETF (PGF) has Jun and Sep put options available. Not sure if there is another way to hedge the position...

 

Appreciate thoughts on the probably impact of the stress tests and comments on hedging...

[Junto]

I also have enjoyed the runs. Instead of hedging positions, I have been slowly trimming my positions in the preferreds. Seems like the simpler play for me right now. I have paid down my leverage and am sitting liquid again.

 

I think that the bank's will fair well in the stress tests; primarily due to the current yield curve. given 0% fed funds rate you have to have a pretty messed up balance sheet not to make money. The bank's that show the worst stress tests are the ones that have already been fighting for their lives. The good banks, US Bank, WFC, JPM, and others will only gain market share and strength in the current market.

 

This is my opinion. I don't have the facts in front of me to support it at this time but have been watching this sector like a hawk for the better part of the last couple of years.

[ericd1]

Junto - Thanks for your comments - I hope you are correct about the stress tests.

 

My basket of pfds has a yield at purchase of ~20%. There are probably a few astute investors here that can average 20%+ returns, but my long-term average is closer to 12%. I see no reason to part ways with long-term 20% annual returns, plus appreciation. Heck lots of folks were happy with Madoff's consistent 10% returns!

 

Intellectually it seems like a no-brainer to hold the pfds, but with lots of potential doubles and triples out there the thought of taking the gains and moving on is enticing. Hindsight being 20/20 (assuming the worst is over) I probably should have bought more!

 

Am I missing something?

[StubbleJumper]

My basket of pfds has a yield at purchase of ~20%. There are probably a few astute investors here that can average 20%+ returns, but my long-term average is closer to 12%. I see no reason to part ways with long-term 20% annual returns, plus appreciation. Heck lots of folks were happy with Madoff's consistent 10% returns!

 

Intellectually it seems like a no-brainer to hold the pfds, but with lots of potential doubles and triples out there the thought of taking the gains and moving on is enticing. Hindsight being 20/20 (assuming the worst is over) I probably should have bought more!

 

Eric,

 

I'm in a similar situation.  I bought a good pile of preferreds in late February and early March when the market was getting slaughtered.  Every day the good deals became more and more ridiculous.  I am now sitting on a nice stack of unrealised capital gains as most of these issues have nearly doubled from their bottom (I managed to buy some WFC-L for $325 and some HBC- for $8.55).  I used a modest amount of margin as the valuations just seemed too compelling. 

 

Assuming that the bottom does not fall out for WFC and BMO, I too will be collecting dividends in the high-teens for nearly perpetuity.  Historically, this would be a wonderful return, and it was just laying their available for anyone to pluck.  Over the course of the past week or so, I have had several fleeting thoughts to crystallize the gains and have had to remind myself of the reason why I bought the preferreds in the first place.  Ultimately, I plan to hold them for the foreseeable future....if this truly is a sucker's-rally, I'll be quite happy to have the dividend stream.

 

SJ

[Junto]

I hear you Eric, logically you are correct. My selling has more to do with making me positioned for other opportunities and outside the market investment ideas I am working on. The preferreds I sold were LNC-G 1/2 position, AIV-Y all, JPM-Y all, ORH-A all, the others I have pretty much kept in my bucket. On a core basis even with my equity positions figured in, my portfolio yield is 10.77%.

 

Now if some of the banking stocks out there reinstate their dividend in the upcoming couple of years (JPM, WFC for example) these numbers will once again look better.

 

 

 

[oec2000]

Hindsight being 20/20 (assuming the worst is over) I probably should have bought more!

 

Now, greed is not a good thing. ;D But, I sure feel the same way you do!

 

SJ, told you there were home runs lurking in these things! (HFC.PR.B is now a 3-bagger.)

[Josh4580]

Any opinions on LXP preferred stocks (C,B,D).  I know Winthrop Realty is buying these up and someone just did a VIC write up on one of the preferred stocks. 

 

-Josh