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First Industrial Trust (FR) has a a cumulative preferred stock, (FR-J). It offers a 7.25% return on the basis of a $25.00 price and is presently selling for somewhat less than $25.00. Since this preferred can be recalled at $25.00 at any time, do not pay more than $25.00 per share.

This preferred is cumulative, which means that if the dividend is not paid at the stated times, FR must pay all back dividends before any common dividends may be paid. This preferred dividend is not eligible for the 15% tax rate, so it is best held in a non-taxable account such as an IRA. The distribution dates are 3/31, 6/30, 9/30 and 12/31. Moody's rates this preferred a B2, and S&P rates it a CCC+.

S&P reports that FR has just completed the development of a new 629,000 square foot distribution facility in California. The trust will probably add an additional 400,000 square feet due to a lack of competitive space in this market. It will likely be funded by a $450 million secured credit facility. For this reason, it is highly unlikely the preferred stock will be recalled within the next 18 months.

S&P also reports that FR's business is improving with fewer tenant concessions that lower rental rates, and there is increasing demand for their industrial space. S&P also forecasts that it will resume paying a common dividend within the next 12 months.

Current book value of FR is $11.76 per share which is backed by its 403 light industrial properties. The common stock of First Industrial is also a reasonably good buy at the present price of $12.69 per share, because FFO is predicted to be around $1.00 per share this year. When it resumes the common dividend, it should be near this FFO figure.

One could buy both the preferred and common shares of the company in equal number and garner a 4.5% return. When FR resumes the common dividend, the price of the common will likely rise. Shortly thereafter, the preferred stock will likely be recalled at $25.00. One will have a reasonable return and some capital gains on the common with the resumption of dividend payments. At this point, one redeploys the money from the preferred redemption into other income-producing entities.

The best option to buy both the common and preferred is to purchase the common in an ordinary account and the preferred in a non-taxable account. This offers the best tax advantage by allowing one to take the tax deductions of the REIT on the common in a regular account which are not allowed in a non-taxable account. This option also offers long-term capital gains rates at the time one sells.

By having the preferred in the non-taxable account, one avoids paying the regular rate on dividends since the preferred is not eligible for the 15% tax rate. Whether one wants to buy both or only one of the stocks, the preferred of FR looks to be a safe bet for a 7% return over the short term and the common looks to offer positive returns in the near future.

Disclosure: I am long FR-J.

Source: First Industrial Realty Trust: 7% Or 4.5%, Take Your Choice