A LEAP Call That Pays You While You Wait (HRP-D)

[JEast]

Before I get into this teaser, as many have changed their handle, it too decided to changed mine from "653211" to "JEast" for James East.

 

A LEAP that pays you? Well it would appear that there are such items out in the ether currently. From a previous post and recommended by another board member that I thought worthy of bringing up again is HRP's Preferred Convertible Debenture "D" which is convertible in November 2011 for 1.92 shares of HRP per debenture held.

 

What are the some the facts? 1) HRP reduced their current equity dividend (i.e. good for the preferred), 2) They are buying back equity (3M last two months) and debt (again good for the preferred), 3) Attempting to float a portion of their holdings into a Government only REIT (i.e. more funds to reduce debt or other), 4) No significant debt due until 2011, and 5) the Equity appears to be selling less than book given even dire real estate assumptions. So are you paid an estimated 18% yield to hold the call on a potential rebound of the common? I know many are interested in the WFC Preferred, and others, but do they have the call like kicker?

 

Any others looking a deeply depressed Preferred Convertibles?

Disclosure: I own the HRP-Ds.

 

 

Cheers

[Myth465]

Thanks for the tip. I have loaded up on HRP and am looking to trade out of ORH.A soon. Do you know of any other issues as nice as this one? I love the steady interest and equity kicker.

[Guest kawikaho]

On the common, what if the prices fall from current prices in 2011?  At today's prices, $12, you are exchanging $12 for $4.56x1.92 = $8.76.  You get the dividend of 18% which comes out to about $5.  So, for $12, you get $13.76 by the call date... assuming the common doesn't fall bellow $4.56.  You break even if the price falls to 2.8, and lose out if it goes lower.  They look to be highly leveraged.  What about GOV?  Anyone look into that one? 

[Myth465]

They arent too leveraged compared to other REITs. GOV seems like a good deal but, is trading at a higher FFO multiple. HRPT is levered 50% and has no serious maturities for the next 2 years.

 

I think the preferred is simply convertible into 1.92 of the common. Last time I checked it was 26 percent under water for a convert.

[JEast]

Remember when this was first approached, HRP-D was in the $7-$8 range.

 

As for leverage, HRP is one is in the lower quartile for debt that I am aware of for most REITs. Plus the spin-off of the GOV IPO just provides a little more cash for HRP-D Preferred.

 

Also, this is not a mandatory conversion but the holder has the right.

 

 

Cheers

JEast

[Myth465]

Thanks for the rec JEast the more I read and think about HRPT the more I like it. I am already up 12% on the Ds and you are up quite a bit more. I would love to buy more but, feel as if I should dig deeper for other issues.

 

I also like LXP convertibles though they have more issues then HRPT (maturity issues mainly, FUR like them though). What do you think.

[JEast]

Looks like HRP is using some of the cash from the GOV float.

 

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=ACBJ&data-ipsquote-timestamp=20090624&id=10063420

 

JPMorgan quietly put the building on the market in early 2008, asking $385 per square foot, or roughly $250 million, brokers said.

 

It appears that HRP paid only $134M and "in cash" for this nearly fully leased government building.

 

 

Cheers

JEast

[Myth465]

Its not a GOV building but seems like a great deal. Brookfield wanted it at $250 but couldn't come up with the financing. So far im impressed with management.

 

The building, with an attached parking structure, is 93 percent leased and includes Ink! Coffee and Heidi’s Brooklyn Deli outlets. It is home to the headquarters of Molson Coors Brewing Co.

[Myth465]

Hey J East thanks for the great idea. It has worked out wonderfully but, what do you think now on the valuation. I got in at $11.50 but, with a basis of $7 and change you must have a big smile on your face. My thoughts are below.

 

HRP is now approaching $8 and is at $7.40 as of today. It has rallied quite a bit and I may have to part with it soon to protect my gains. It is approaching 8 times FFO but, they are still making great moves and interesting transactions which makes me want to hold. They are selling properties with cap rates of 7 and 8 and buying class A properties at cap rates of 10. They also still have the liquidity to make a game changing move and have the balance sheet is still full of undervalued assets. I would sell if I had another interesting REIT but, don’t have any other good options aside from FUR. I will be adding significantly to FUR and for now will collect my 13% dividend.

[JEast]

Yes - I do have a smile on my face and glad you were able to participate.

 

My normal game plan for selling is usually sell if you find something extremely better or that if it is near full to at full value. Currently with HRP-D, it is indeed nearing full value, but the dividend appears to be safe. Tough choice if you want to sell something for a short-term gain that would still yield you 15%+ for a few more years (depending on your entry price). For now I am holding as most of my "on deck" candidates are just outside my margin of safety. Damn this strong rally :)

 

As a side note, I am surprised that some have started following SSW since when I originally brought it up there was silence. I like SSW more than HRP-D, but it also carries a little more market risk, but I do not believe it carries any excess investment risk at these prices.

 

 

Cheers

JEast

[Myth465]

I would have loved to get into SSW at the same price as you. Even over the last few weeks that I have been looking into it it has moved up 20%. Similar to you all other REITs have rallied and you cant really get a safe 13% (in my case) out there in the market. Thanks for the tip, it has worked out quite well and I am sure HRPT's management can generate a bit of value while we wait.