A New Purchase for the Short/Medium Duration Portfolio

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Portfolio

By Tim McPartland

As interest rates have risen, we have been watching for shorter maturity securities to add to the Short/Medium Duration Income Portfolio since we have enough cash on hand for the purchase of 300 shares of a $25/share issue.

Lodging real estate investment trust (REIT) Sotherly Hotels (NASDAQ:SOHO) recently sold a new $25 baby bond that fits our needs perfectly. SOHO is issuing a baby bond with a coupon of 7.25% and an extremely short maturity date of 2/15/2021. I can’t remember when I have seen a baby bond issued with a maturity date this short, but it is perfect for investors in a period of rising interest rates.

The new issue will begin trading sometime in the next few days under the ticker SOHOK. Since it is a small issue of just 1.15 million shares, which includes 150,000 over allotment shares, it is likely there will be reasonably good demand and we wouldn’t be surprised to have to pay over $25 to secure the shares. Remember that baby bonds seldom trade on the OTC Grey market, so there may be little chance to be able to buy the shares under $25.

Sotherly Hotels has no other baby bonds outstanding but does have two perpetual preferred issues available. SOHOB and SOHOO have coupons of 8% and 7.875%, respectively. It is noted that the coupons are much higher on the perpetual preferreds, but because of the very high likelihood or rising interest rates, we will see the share price of these two issues drop considerably in the months ahead. Short-dated maturities on a baby bond will allow the baby bond to trade fairly flat over the next couple of years. That is exactly what we are after in this income portfolio.

Sotherly Hotels is a rather modest-sized lodging REIT that has approximately $150 million in annual revenue. The Funds from Operations (FFO), which is a key measure of financial performance for a real estate investment trust, has been solid and we think that the company will continue to perform well, if the economy remains relatively strong. In three years at maturity, investors will have the chance to reinvest at potentially a higher current yield.

Further details on this nice new issue can be found here.

 

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