Triton International's Preferred Shares Offer An 8.3% Yield (With A Call Risk)

seekingalpha11-20 23:30

Triton International's preferred shares remain outstanding and well covered despite the acquisition by Brookfield Infrastructure, with a strong dividend coverage ratio of approximately 900%.Triton's ...

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VichienPetchmai/iStock via Getty Images Introduction While Triton International, a large container lessor, was acquired by Brookfield Infrastructure (NYSE:BIPC) (NYSE:BIP) in Q3 2023, the company’s preferred shares were not called by the acquiror but remain outstanding. There are four series of preferred equity outstanding, and they all have retained their primary listing on the NYSE (so no delisting has occurred, contrary to some other go-private transactions we have seen in the past). Of course, the financial risk has increased now the parent company is no longer listed and what essentially is a private equity group has taken the reigns. Fortunately, Triton continues to publish its detailed quarterly financials (which of course is a requirement to maintain its listing on a major exchange) and this allows me to keep an eye on the company’s performance, the preferred dividend coverage level and to see how much cash Brookfield is sucking out of Triton on a quarterly basis.   Seeking AlphaIn this article, I will focus on the preferred shares that remain outstanding. The earnings remain strong, and the preferred dividends remain well covered In the third quarter of this year, the company reported total revenue of $391M, which is an increase of almost 2% compared to the same quarter last year. The trading margin decreased, but Triton was able to record a higher net gain on the sale of leasing equipment.   TRTN Investor RelationsMost of the operating expenses remain very well under control, and in the third quarter, Triton’s operating expenses came in at $176.4M. That’s lower than the run rate in the first few quarters of the year and definitely lower than the almost $261M it incurred in the third quarter of last year, although the operating expenses last year were heavily impacted by the expenses related to the going private transaction. The total operating income for the quarter was approximately $233M, and about 30% of that number had to be used to cover the interest expenses on the existing debt. This resulted in a pre-tax income of $166.1M, with roughly $15.4M in taxes due on that pre-tax income. This resulted in a net profit of $150.7M, of which $137.6M was attributable to the preferred shareholders of the company. The remaining $13M was used to cover the preferred dividends.   TRTN Investor RelationsThis already answers one important question: Are the preferred shares enjoying a good dividend coverage ratio? The answer clearly is \"yes\" considering the company needed less than 10% of its net profit to cover the preferred dividends. And this wasn’t just a lucky quarter. Looking at the 9M results, Triton still needed just 11% of its net income to cover the preferred dividends, which indicates the preferred dividend coverage ratio is approximately 900%. Also, keep in mind, the 9M 2024 results were still impacted by the almost $27M in transaction-related expenses, which were mainly incurred in the first half of the year. Excluding those transaction-related expenses, the payout ratio would have been just over 10%. Very reasonable, indeed. The second question I’m always wondering when I look at preferred shares is to check if the balance sheet poses a risk. As you can see below, the balance sheet contains $11.2B in assets, of which $2.82B is equity.   TRTN Investor RelationsOf that $2.82B, $730M consists of preferred equity, which means there's approximately $2.1B in common equity that ranks junior to the preferred shares and which would have to absorb the first losses. The balance sheet also contains approximately $237M in goodwill, so even if we would take that out of the equation, the net tangible common equity was approximately $1.85B as of the end of the third quarter. One of the elements I’m keeping an eye on is to see how much cash the company is streaming up to the owners. In the first nine months of this year, that was just over $400M (including approximately $200M in the third quarter). While that is higher than the $314.5M in attributable net income generated in the first nine months of the year. While this represents an \"overspending\" on dividends, I'm not too worried yet, but it is an element I will continue to keep an eye on going forward. Highlighting some of the preferred shares Triton currently has five series of preferred shares still outstanding.   StockwatchTo make it easier, I have compiled the current yield of the five securities below.   Author-compiled tableBased on the table above, the Series A preferred shares with (NYSE:TRTN.PR.A) as ticker symbol are the most attractive series of preferred shares, but the caveat is obviously that those preferred shares are immediately callable (the series B are also immediately callable while the series C will be callable from Dec. 15 on). Therefore, buying the Series A only makes sense if you don’t expect the securities to be called in the near future. It looks like Brookfield Infrastructure Partners is more interested in streaming cash up to the parent level rather than using cash to retire preferred shares. Investment thesis  I currently have no position in any of Triton’s preferred shares, as I wasn’t quite sure about Brookfield Infrastructure’s intentions. The yields remain attractive, and considering Brookfield doesn’t appear to be in a rush to retire preferred shares, I’d probably lean toward picking the series with the highest current yield. Of course, if I’m wrong and those securities do get called within the next 12 months, the total return wouldn’t be that great. I’m rating TRTN.PR.A a ‘hold’ at this moment, but it would become a \"buy\" if the share price drops closer to the $25 principal value.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484145014"}