Spirit Realty convertibles tumble on earnings miss; Lumentum trades higher on 3D hopes

By Stephanie N. Rotondo

Seattle, May 4 – Convertible bond investors continued to focus on earnings news on Thursday, driving Spirit Realty Capital Inc.’s paper downward and Lumentum Holdings Inc.’s bonds upward.

Tesla Inc.’s paper was also in play, after the company reported mixed earnings late Wednesday. While there were some positives about the results, the automaker’s convertibles didn’t react positively.

For its part, Spirit Realty reported first-quarter results that were below expectations. As a result, the company’s convertibles were trading off anywhere from 2 to 4.5 points.

As for Lumentum, its results were mixed, coming in line on profit but below expectations on revenue.

The company also issued current quarter guidance that disappointed.

However, investors seemed optimistic that the company’s efforts in the 3D sensor market could be fortuitous and, as a result, the 0.25% convertible notes due 2024 were gaining ground.

As for the primary, the market was waiting to see new deals from AMAG Pharmaceuticals Inc. and HubSpot Inc. price after the day’s close.

However, as of 6 p.m. ET, no details were available.

AMAG is offering $250 million of five-year convertible senior notes, the company said on Wednesday.

Price talk is for a 2.75% to 3.25% yield and an initial conversion premium of 37.5% to 42.5%.

J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are the joint bookrunners.

Prior to March 1, 2022, the notes are contingently convertible. After that date, the notes can be converted at any time.

Conversions will be settled in cash, stock or a combination.

The notes are non-callable for life and are putable only upon a fundamental change.

Proceeds will be used, along with cash on hand, to repay and terminate the company’s 2015 term loan facility.

Ahead of pricing, AMAG’s stock declined 60 cents, or 2.93%, to $19.90 – even though Moody’s Investors Service deemed the refinancing and deleveraging effort credit positive.

As for HubSpot, it is selling $300 million of five-year convertible senior notes via a Rule 144A offering.

The deal is being talked at a 0.5% to 1% yield and an initial conversion premium of 30% to 35%.

BofA Merrill Lynch, Morgan Stanley and JPMorgan are the joint bookrunners.

The convertible debt is non-callable for life. The paper is contingently convertible, should the stock hit a 130% price hurdle.

Conversions will be settled in cash, stock, or a combination.

A portion of the deal’s proceeds will be used to fund hedging transactions. The remaining funds will be used for general corporate purposes.

Like AMAG, HubSpot stock was retreating prior to pricing of the new issue.

The equity dropped $1.65, or 2.3%, to $70.20.

Spirit slides

Spirit Realty Capital posted weak first-quarter results late Wednesday, which resulted in pressure on the company’s convertibles.

At one desk, the 3.75% convertible notes due 2021 were called off 5.25 points, trading just north of 96.

At another desk, the 3.75% convertibles were pegged around 97.5, which compared to previous levels of 101.625.

The 2.875% convertible notes due 2019 were seen in a 97.5 to 98 context, versus par previously.

Earlier in the day, a market source deemed the 2.875% convertible notes due 2019 off a deuce around 98. The 3.75% convertible notes were meantime down about 4.5 points, trading around 97.25.

The company’s underlying equity wasn’t doing very well either, falling $2.21, or 24.78%, to $6.71.

For the quarter, the Dallas-based real estate investment trust reported net income of $12.8 million, or 3 cents per share. Revenue was $165.4 million.

On an adjusted basis, revenue was $163.2 million.

Funds from operations – a key metric of REITs – came to $98 million, or 20 cents per share.

Analysts polled by Zacks Investment Research had expected FFO of 22 cents, on revenue of $169.8 million.

Spirit is forecast full-year FFO between 80 cents and 84 cents.

Lumentum lights up

Lumentum Holdings’ own quarterly results were mixed, beating on a per-share basis, but missing on revenue.

Still, progress on the company’s 3D sensors for mobile device applications – such as facial recognition and augmented reality – seemed to impress investors.

The 0.25% convertibles neared 107 at its highs, according to one market source. However, the paper closed closer to 105.5, which compared to 97.5 previously.

A second source placed the issue at 103.5, up 4.25 points.

A source saw the issue rising about 8 points in early dealings, trading around 107.625.

As for the company’s shares, they were also faring better, rising $4.25, or 9.94%, to $47.00.

In the first quarter of 2017, the Milpitas, Calif.-based optical and photonic producer saw a loss of $56 million, or 92 cents per share.

On an adjusted basis, earnings per share was 49 cents.

Revenue hit $255.8 million.

Analysts polled by Zacks Investment Research had projected adjusted EPS of 49 cents on revenue of $259.3 million.

For the current quarter, Lumentum expects to report EPS of 30 cents to 40 cents, on revenue of $220 million to $235 million.

As for the company’s 3D sensors, Troy Jensen – an analyst at Piper Jaffray – sees momentum building on the product. He therefore is projecting that revenue from unit alone could be around $100 million.

“We believe Lumentum may have captured 100% of initial shipments of the low-power vertical-cavity surface-emitting laser into Apple's iPhone 8, and potentially as much as 75% of the high-powered VCSEL,” Jensen said in a report. “We believe the 3D sensing market is a significant earnings enhancement opportunity for Lumentum.”

Tesla trades off

While Tesla’s earnings announcement failed to impress, but the company’s big plans might be enough to encourage investors in the long run.

But for Thursday, investors reacted negatively to the results and the convertibles suffered as a result.

The 2.375% convertible notes due 2022 lost about 4 points, finishing in a 107.625 to 108.625 context, a market source reported. The 0.25% convertible notes due 2019 dipped about 2.5 points to a range of 102 to 103.

Tesla’s shares were also weaker, sliding $15.56, or 5%, to $295.46.

The San Carlos, Calif.-based automaker posted a net loss per share of $1.33 late Wednesday. Revenue was $2.7 billion.

Analysts had expected a loss of 81 cents on revenue of $2.62 billion.

But the company also reiterated that it was on track to get its new Model 3 sedans out the door in the second half of the year.

Additionally, Tesla plans to open more stores this year and will add 100 mobile repair trucks to its fleet in the second quarter.

The company also pointed out that its latest results included the results of SolarCity and that it was looking at ways to offer SolarCity products in its Tesla stores.

Mentioned in this article:

AMAG Pharmaceutical Inc. Nasdaq: AMAG

HubSpot Inc. NYSE: HUBS

Lumentum Holdings Inc. Nasdaq: LITE

Spirit Realty Capital Inc. NYSE: SRC

Tesla Inc. Nasdaq: TSLA

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