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CapLease, Inc. Message Board

  • stan1736 stan1736 Oct 12, 2011 4:24 PM Flag

    Preferred stock

    With the Preferred A stock currently paying about 8.7% , representing a safer yield than the common, can anyone explain why the price isn't higher? Thoughtful comments appreciated.

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    • What counts is Yield to CALL, not the YIELD. Do research before making any purchases.

    • Please do not invest in preferred stocks until you understand their characteristics.

    • The price of the A preferred isn't higher because it can be called at any time.Today's yield at the last
      trading price of $25.30 is around 8.07%. If you buy at this price and the issue is called in the next few weeks, you will come out ahead but not by much. I believe it is unlikely that the company will call this preferred issue anytime soon. They recently issued the preferred B and it has a higher coupon than the A but, because it is 4 1/2 years to the first call, it is selling for around $27 with a current yield of about 7.7% and a yield to call that is much lower than that (about 6.1%).
      If you buy the A preferred today and the issue is called in January, you .should earn the Dec dividend of $0.5078 and a portion of the dividend for the next quarter but you only receive $25 for each share of stock that you own (you lose $0.30 on that). Your yield, ignoring the portion of the next quarter dividend that you would get, is approximately
      ($0.5078 - $0.30)/$25.30 = 0.8%. SInce you only would have held the stock for around 2 months, your annualized yield is approximately 6*0.8% = 4.8%.
      If the issue is called after 1 year from today, you would have earned $2.03 and lose $0.30 on each
      share called. So your yield would be $1.73/$25.30 = 6.8%.
      After 2 years, you will have earned $4.06 and lose $0.30 so your annualized yield is {($4.06 - $0.30)/$25.30}/2 = 7.4%. If you continue to do these calculations, adding a year each time, the yield will ultimately approach the current yield, which is $2.03/$25.30 = 8.07%.
      One never knows but it is unlikely that the A preferred will be called anytime soon. Because the company is highly levered (almost all non-recourse mortgages), it is not able to sell a new preferred offering for a lower price versus the coupon on the A. This is evident by the recent offering by LSE of the preferred B, which has a higher coupon, $2.09. A lot of REITs have been calling their preferreds because, unlike LSE, they are able to sell new preferreds at much lower rates than their current issues, enabling them to sell new preferreds and take the money from that sale to redeem the older ones.
      I own shares of the B preferred which I was lucky to be able to purchase at $25 per share. I believe the A preferred at $25.30 is a good value, considering that LSE has a very high occupancy (98%)
      on its properties which are mostly triple net leased. Their clients occupying the properties are
      typically very solid companies.


    • Think if they were in trouble they would more or less paid the preferred holders first..... , then the common usually get the i dont think they want it higher........its like legal cooking the books on the preferred........ Thats imo only......... Best to you......

      • 1 Reply to jack1233446
      • SH- Very solid and detailed explanation. It's amazing that someone would consider the preferred without understanding call dates and yield to call calculations but clearly that is not the case.

        Jack - You are correct that pref dividends have priority over common dividends. Your theory on "cooking the books on the preferred" is complete nonsense though. The price of the preferred, and thus it yield, is market driven and you clearly don't understand how this works.