Lodging REIT Hersha Hospitality Trust Sells a Preferred
By: Tim McPartland,
Once again a lodging REIT has sold a new preferred stock offering with a coupon that we consider too low for the risk/reward proposition.
Hersha Hospitality Trust (NYSE:HT) is executing a “refinancing” of the currently outstanding 8% cumulative preferred stock (NYSE:HT-B) with a new 6.50% preferred stock issue. The company has 1 additional issue outstanding that carries a coupon of 6.875% which will remain outstanding. It is certain that they will be able to easily float the new issue as yield starved investors jump on almost any issue. Personally we believe the coupon on the new issue is inadequate to compensate us for the risk inherent in the lodging industry and we will register our dissatisfaction by staying away from this issue.
We have seen REITs Sunstone Hotel Investors (NYSE:SHO) and LaSalle Hotel Properties (NYSE:LHO) sell preferreds this month with coupons of 6.45% and 6.3% respectively. You would believe that all of these companies are top notch quality REITs given these low coupons, but they are not. Sunstone is a high quality operator with a bullet proof balance sheet, while the other 2 are not high quality by any definition. Hersha has a debt to asset ratio of around 65%, while a quality operator like Sunstone has a debt to asset ratio of around 40%. When the time comes (and it will come sooner or later) that a economic slowdown hits those with high debt levels will have have lost their ability to successfully navigate the downturn because of an inability to control costs as the interest payments continue. Revenues of lodging companies can drop sharply in an economic downturn so we want to be paid for the eventuality that there will be a recession.
In spite of the above many investors with a tolerance for more risk than us may want to purchase this new issue, in particular if it can be bought under $25 on the OTC Grey market.
Details on this new issue can be found here.
OTC Grey market trading has not yet been announced for this new issue so we will update our home page when the ticker is announced. Details on how to trade on the OTC Grey market can be found here.