Series H Preferred Shares: Are they the Right Investment Choice Now?

As interest rates drop, the price of fixed rate preferred shares in companies like Sunstone Hotel Investors (NYSE:SHO) may rise. Dive into the Q1 results and full-year guidance to see if now is the time to re-establish a position in Series H preferred shares for a potentially higher yield.

Chicago, Illinois – An investor, seeking exposure to preferred equity, is contemplating re-establishing a long position in Sunstone Hotel Investors, Inc. (NYSE: SHO). With interest rates on the financial markets expected to decrease, the investor sold preferred shares in Sunstone a few months ago and is now considering reinvesting. The potential price increase of fixed-rate preferred shares is a key factor driving this decision.

Looking at the financial performance of Sunstone Hotel Investors, the investor focuses on two critical elements: the preferred dividend coverage ratio and the asset coverage ratio. Evaluating these ratios helps assess the safety of the preferred dividends and equity offered by Sunstone.

In the first quarter of the current year, Sunstone Hotel Investors reported a net income of $13 million. However, to gain a clearer understanding of the company’s performance, the investor analyzed the funds from operations (FFO) and adjusted funds from operations (AFFO). The AFFO per share for the first quarter was approximately $0.18, indicating a slight decrease compared to the previous year.

Sunstone Hotel Investors is undergoing a redevelopment plan that includes significant capital expenditures. While these investments may result in short-term challenges, the company expects them to yield long-term benefits, aiming for a substantial EBITDA lift in 2025. The full-year guidance forecasts an AFFO of $171-192 million, translating to an AFFO per share of $0.84-0.94.

Analyzing Sunstone’s two series of preferred shares, the investor notes that both options are cumulative and callable by the company in the future. The H-series offers a 6.125% preferred dividend, while the I-series provides a 5.7% preferred dividend. Based on current yields, the H-shares appear to offer a better choice due to a higher preferred dividend yield.

Sunstone’s balance sheet reflects a healthy financial position, with total liabilities of $980 million and significant cash reserves. Despite recent acquisitions, such as the Hyatt Regency San Antonio Riverwalk, Sunstone’s acquisitions are expected to be accretive going forward.

Considering the improved yield on the Series H preferred shares, the investor is revisiting the possibility of investing in Sunstone Hotel Investors’ preferred equity. With a focus on safety and yield, the investor acknowledges Sunstone’s low loan-to-value ratio as a key factor that makes their preferred dividends relatively secure. If a new long position is established, the investor intends to prioritize the series with the highest yield.