This is slightly off--topic, in that it's a preferred rather than a bond. The difference being you NEVER get your principal paid back.
I've been looking into HRPT Properties Trust (HRP), a REIT, which has 3 preferred issues, B, C, and D (HRP-PD), all of equal seniority. D is the most actively traded and also has the highest yield at the moment.
HRP-PD pays $0.4063 quarterly at 6.50%, cumulative, on a $25 par value. It can be bought today for under $10.25, resulting in a current yield of 16.0%. Most, but not all, of this is taxable at ordinary income rates - taxable at around 85% of your marginal tax rate.
I own or have owned office buildings, so I'm somewhat familiar with their business.
HRP owns about 500 buildings at a total cost of $6.1 billion - an average of $12.2 million. By square footage, these are 55% office and 45% industrial. They are highly diversified among downtown and suburban locations throughout the U.S.
The weighted average acquisition date is 2001, so the book value of the properties may be not so different from their current market value. Accumulated depreciation is $0.8 billion. About $0.5 billion of other hard assets gives total assets of $5.8 billion.
Against this $5.8 billion are total liabilities of $3.2 billion, leaving $2.6 billion of equity value. Of this, $0.7 billion is reserved for the preferreds, with the remaining $1.9 billion attributable to common stock. The market value of the common is $0.8 billion.
The near-term debt repayments appear small and the leases seem generally strong, relative to the poor overall market. Net operating income is about $500 million annually. Interest has been $180 million annually.
So, how does that 16% preferred look. I see a loan to value at the preferred level of 54% at the $5.8 billion asset value. That is very strong. Can assets go down another 40%? Sure, but how likely? Cash flow coverage on the preferreds is
The common just took a dividend cut - now at $0.48 per year. At today's price of $3.50, that's 13.7%. The highest price the common ever reached was $13.50, for a total enterprise value of $6.9 billion. Today that is $4.6 billion. Seems like a reasonable significant decline given the market.
Negatives:
My main issue is the conflict of interest for management. The REIT is controlled by the company that gets fees for managing, acquiring, disposing the properties. This is generally based on a % of assets, not success in the REIT. A horrible way to conduct business.
The other issue, of course, centers around the current and future valuation of the properties. |
