Real estate investment trusts (REITs) typically don't borrow as cheap as solvent citizens taking out 30-year mortgages.
Hersha Hospitality Trust, the hotel group run by Philadelphia-based brothers Jay and Neil Shah, has set a record by selling $75 million in Series C Perpetual Preferred Stock at just 6.875%, a full 1% below some recent issues and the lowest recorded on a list of 20 hotel preferreds complied by Teresa Hee, managing director at Wells Fargo Securities, the bookrunning manager of the sale, in a note to clients today.
She credited "investors' desire to reach for yield" and "strong technicals" for the Hersha issue for "breaking the coupon barrier" with the low yield.
"We were very pleased with the offering and with the pricing," which came in at "3/8 of a point below any previous non-rated hotel REIT issue," Jay Shah told me. "We believe that our businss plan with a focus on urban transient business hotels in the country's six gateway cities" and a healthy balance sheet (the deal refinances more expensive instruments) has "piqued the interest" of institutional fund managers.
Why promise above-prime yields "in perpetuity" if you have a strong balance sheet? "Perpetual paper (has) no maturity," and other added flexibility, says Shah: Investors can sell the preferred on the New York Stock Exchange but can't force Hersha to buy it back until it's ready.