Textainer Group Holdings: I Own The 7%+ Yielding Preferred Shares (NYSE:TGH)

Introduction

Textainer Group Holdings (NYSE:TGH) is likely one of the largest container lessors on this planet, and as most of its lease agreements have multi-year phrases, the earnings visibility is fairly good. The typical remaining lease tenor is roughly 6 years which means Textainer has a fairly good concept of the money flows coming in over the subsequent decade or so. And except a few of its lessees are going bankrupt, I’m assured in Textainer’s capacity to handle the present fleet.

The dividend and asset protection ranges of the popular shares nonetheless seems to be good

2022 was a 12 months of consolidation. After massively increasing its asset base in 2021 (when Textainer’s fleet grew from simply over 4 million container-equivalent items to in extra of 4.5 million items), the expansion fee was a lot slower as Textainer took supply of some pre-ordered containers to finish the 12 months with 4.58 million container-equivalent items.

Though the large demand spike we noticed in 2020 and 2021 has died down, it is essential to know the vast majority of Textainer’s belongings are on long-term leases with the lessees. The utilization fee of the containers remained very near 100% in 2022 and that is in the end what counts. The excessive utilization fee was not fueled by decrease lease charges: in its annual report, Textainer confirmed it was capable of improve the lease fee of its working leases by 3.2% in 2022.

As I am primarily excited about Textainer’s most well-liked shares, I needed to verify the corporate’s asset protection degree and dividend protection degree stay robust.

Beginning with the latter, we see the corporate reported a complete income of $810M, which resulted in a $472M working earnings after deducting all of the related working bills. As you may see within the picture beneath, roughly 70% of all of the working bills are associated to the depreciation bills.

The price of debt is one other essential issue as Textainer clearly noticed its web curiosity expense improve in 2022. The full curiosity invoice elevated by about $30M however this was nonetheless ample to put up a higher-pre-tax earnings and web earnings. The latter got here in at just below $310M. After deducting the just about $20M in most well-liked dividends, the web earnings attributable to the shareholders of Textainer was just below $290M.

Not solely does this imply the inventory is certainly buying and selling at simply round 5 occasions the 2022 earnings outcome, it additionally means Textainer solely wanted about 6.5% of its web earnings to cowl the popular dividends. This implies the popular dividend protection ratio exceeded 1,500%. Whereas that’s nice, take into accout I count on the curiosity bills to extend in 2023. The This autumn curiosity bills incurred by Textainer had been roughly $43M which signifies that on an annualized foundation, we should always count on the web curiosity bills to extend this 12 months. And though this can weigh on the reported web earnings, there’s little or no doubt the popular dividends are protected based mostly on the present state of affairs.

Whereas the overall debt of $5.54B (and web debt of roughly $5.4B) might sound excessive, particularly in comparison with the $7.6B stability sheet, take into accout a big portion of the debt consists of asset-backed securities.

The vast majority of the debt both has a hard and fast rate of interest or the curiosity danger has been hedged. And as you may see beneath, the debt reimbursement schedule will permit Textainer to progressively refinance current debt. Over the previous three years, Textainer generated on common near $170M per 12 months by promoting outdated containers which have reached the top of their helpful lives.

Trying on the legal responsibility aspect of the stability sheet, the overall quantity of fairness got here in very near $2B. Of that quantity, $300M comes from the popular shares which implies there may be virtually $1.7B in fairness ranked junior to the popular shares. Or in different phrases, the asset protection ratio (whole fairness versus most well-liked fairness) exceeds 600%.

I personal each the A and B sequence of the popular shares

For a breakdown of the popular shares I would wish to refer you to my earlier article, however a really temporary recap is smart. The B-Collection (TGH.PB) have a hard and fast most well-liked dividend fee of 6.25% per 12 months ($1.5625 per share per 12 months, payable in 4 equal quarterly installments) and based mostly on the share value on the closing bell on Tuesday ($20.15), the yield is roughly 7.8%. Take into account there isn’t a overseas dividend withholding tax on the popular dividends (there clearly additionally is not any withholding tax on the dividends on the frequent shares).

The Collection A (TGH.PA) have a most well-liked dividend yield of seven% and closed at $23.93 on Wednesday, leading to a yield of seven.3%. Based mostly on these components, the Collection B have a better yield and look like the providing the very best worth right here.

That’s true, however the A-series have a particular kicker. After an preliminary five-year interval (ending on June 15, 2026), the popular shares might be referred to as by Textainer. If that does not occur, the popular dividend will likely be reset to the five-year Treasury fee plus a mark-up of 6.134%.

The 5 12 months US Treasury Bond at the moment has a yield of three.53% which signifies that if the popular dividend could be reset at present, the popular dividend would are available in at $2.41 per share. Which might end in a yield of simply over 10%. And if the Collection A would get referred to as in 2026, its house owners will generate a yield to name of in extra of 8.5%. Each choices are tremendous with me and the worst case state of affairs could be to see the 5Y US Treasury fall beneath 2% once more which would cut back the chance of a name and would end in a considerably disappointing dividend reset.

Funding thesis

I personal each sequence of the popular shares. I personal the A-shares as a speculative place on both a gorgeous reset in 2026 or seeing the popular shares being referred to as by the corporate to lock within the capital achieve. I additionally personal the B-series to fulfill my longer-term wants. As a 6.25% price of capital for fairness is fairly low, I can not see the B-series being referred to as anytime quickly.