Monday, October 20, 2008


I was a little surprised to see my limit order to buy 100 shares of Strategic Hotels Preferred A (BEEPRA) stock filled at 7.55 at the close.  There is generally a wide bid and ask price so limit orders have to be used and this one was fifty cents below the last trade when I placed it.  I previously sold for a profit another preferred issue from this company, BEEPRB, just a few months ago at over 16 and it has been cut in half since then.  So, this is not for the faint of heart, and even a nibble requires a high tolerance to risk.   This is a trade for me, with the last holding period being less than 2 months.

BEEPRA is a cumulative preferred with a $25 par value. The coupon on the "A" preferred is 8.5% and there is no maturity date, which is always bad.  This one has a .25% higher coupon than the "B" or the "C", which are both at 8.25% and that explains why I bought it today. The BEEPRA is no different than the other two except for the yield; and today at 7.55 it gives me a higher yield than the other two alternatives.

Dividends are paid quarterly. At my price, the effective yield is 28.14% annually. While the dividends are cumulative, no interest is paid on a deferred dividend.

About the only protection that you have, besides the cumulative feature, is that no common dividend can be paid in cash if the preferred dividend is skipped.  This is a common feature and it simply means that the common dividend will go first.  This is a quote from the BEEPRA prospectus filed with the SEC:

"..., unless full cumulative dividends on the Series A Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period, no dividends (other than in common shares or other stock ranking junior to the Series A Preferred Shares as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other dividend or distribution shall be declared or made upon the common stock or any other of our stock ranking junior to or on a parity with the Series A Preferred Shares as to dividends or upon liquidation, nor shall any common stock or any other of our stock ranking junior to or on a parity with the Series A Preferred Shares as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such shares) by us or any of our subsidiaries, except by conversion into or exchange for other of our stock ranking junior to the Series A Preferred Shares as to dividends and upon liquidation. "

Payment of the dividend in common stock is generally a permissible exception.

Strategic Hotels is a hotel REIT. I am already familiar with the company. You have to become as familiar as you can with the company before buying its bond or preferred issue.  It owns about 20 luxury hotels in major cities including London, Paris, New York, Miami & Chicago, in areas where the property can not be duplicated easily.   In addition to the preferred stock issues, the company has mortgages on 10 of the properties amounting to about 1.377 billion including the Westin St. Francis (220 milllion),  Fairmont Scottsdale Princess (180m), Marriott Grosvenor Square in London (154 m), Fairmont Chicago (124 m) and  Loews Santa Monica (118 m).  All of that data comes from the 10-q for the June 2008 quarter.  The preferred stock debt together is around 360 million.  The common stock is selling for less than 4 (BEE), down from a 52 week high of around 22,  which gives it only a 300 million market cap at the current price.  This company is leveraged to say the least, making it extremely risky, which explains why I did not buy the common.  In addition, the common has a lower yield than the preferred and is not cumulative, and the preferred has a higher claim than the common on the assets in the event of a bankruptcy.  The secured debt will always come first, and that explains why I looked for those figures in the SEC filing. 

Goldman Sachs recently lowered its target on the common to 5 from 8.2, saying as you would expect that business travel will be among the first expenses cut in a downturn. That is true, no doubt, which means a few tough quarters ahead and a dividend cut for the common is certainly a possibility.  Reuters  

I also read the S & P report that had a two star rating on the common which means a sell. 

Morningstar also has a good report that I re-read before buying the preferred.

The company also had to forfeit a deposit on a Chicago property recently when it decided not to follow through with a purchase.  On a positive note, Bill Gate's investment company owns more than 5% of the common. 

Needless to say, this investment is high risk/ high reward given its dividend yield, leverage and the downturn in business.

 In these blogs, I am acting as an unpaid financial journalist and an occasional ornery political commentator.    This is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a blog explaining my reasons.  The sale may before or after the blog.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news and all of that is true even if the investment is a bond or a preferred stock, since you have to make an assessment on the dividend or interest paying ability of the issuer.   In this blog, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all blogs written by me may not be suitable for others based on their unique financial position and risk profile

No comments:

Post a Comment