Fortress Transportation And Infrastructure Investors: This Is Its Second Preferred Stock IPO In 3 Months

Summary

  • What are the key metrics of the new preferred stock, FTAI-B?
  • What are the company's key metrics?
  • A look at the previously issued preferred stock by FTAI.
  • Where in the context of all Fixed-to-Floating preferred stocks does the new IPO stand?
  • Special optional redemption clauses.
  • I do much more than just articles at Trade With Beta: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by Fortress Transportation and Infrastructure Investors LLC (NASDAQ:FTAI). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B2 Filing by Fortress Transportation and Infrastructure Investors - the prospectus. (Source: SEC.gov)

For a total of 4 million shares issued, the gross proceeds to the company are $100 million. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

Fortress Transportation and Infrastructure Investors 8.00% Fixed-to-Floating Rate Series B Cumulative Perpetual Redeemable Preferred Shares (NYSE: FTAI-B) pays a fixed dividend at a rate of 8.00% before 12/15/2024 and then switches to a floating-rate dividend at a rate of three-month LIBOR plus a spread of 6.447%. The new issue bears no S&P rating, pays quarterly dividends and is callable as of 12/15/2024. Currently, the new IPO trades a little above its par value at a price of $25.30 and has a 7.91% Current Yield and a YTC of 7.71%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the "qualified equivalent" Current Yield and YTC would be 6.59% and 6.42%, respectively.

Here is the product's Yield-to-Call curve:

Source: Author's spreadsheet

The company

Fortress Transportation and Infrastructure Investors LLC (“FTAI”) owns and acquires high quality infrastructure and equipment that is essential for the transportation of goods and people globally. FTAI currently invests across four market sectors: aviation, energy, intermodal transport and rail. FTAI targets assets that, on a combined basis, generate strong and stable cash flows with the potential for earnings growth and asset appreciation. The Company’s existing mix of assets provides significant cash flows as well as organic growth potential through identified projects.

The Company is externally managed by an affiliate of Fortress Investment Group LLC, which has a dedicated team of professionals who collectively have acquired over $17 billion in transportation-related assets since 2002. As of June 30, 2019, FTAI had total consolidated assets of $3.1 billion and total equity capital of $1.04 billion.

Source: Company website | Company Overview

Below, you can see a price chart of the common stock, FTAI:

Source: TradingView

The dividend the company pays for the common stock is constant from 2016 till the present 2019 and is a $1.32 yearly dividend. With a market price of $17.53, the current yield of FTAI is at 7.53%. As an absolute value, this means it pays out $111.77 million in yearly dividends. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued Series B preferred stock) of the company is around $14.2 million.

In addition, the market capitalization of FTAI is around $1.43 billion.

Capital Structure

Below, you can see a snapshot of Fortress Transportation and Infrastructure Investors' capital structure as of its Quarterly Report in September 2019. You can also see how the capital structure evolved historically.

Source: Morningstar | Company's Balance Sheet

As of Q3 2019, FTAI had a total debt of $1.59 billion ranking senior to the newly issued preferred stock. The new Series B preferred stock rank is junior to all outstanding debt and equal to the other preferred stock of the company,

The Ratios Which We Should Care About

Our purpose today is not to make an investment decision regarding the common stock of FTAI but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.

  • Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
  • Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.

Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:

  • Market Cap/(Long-term debt + Preferreds). This is our main criterion when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 1430/(1590 + 175) = 0.81, indicating the company's liabilities are slightly larger than its equity but generally the ratio is satisfactory, as there is 4/5 coverage of all its debt and preferred stocks; moreover, it is one of the best ratios in the sector (Rental & Leasing Services).
  • Earnings/(Debt and Preferred Payments). This is also quite an easy-to-understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM financial results from the Income Statement data is 40.66/(90.25 + 14.20) = 0.38, which is not the best record we can hope for, as the company's earnings are insufficient to cover the payments to its creditors. Also, for the previous 4 accounting years, the company reports a loss, $28.63 million in 2015, $40.60 million in 2016, $23.24 million in 2017, and $15.70 million in 2018. The total loss for the last 4 consecutive years is at $108.17 million.

The FTAI Family

FTAI has one more outstanding preferred stock: Fortress Transportation and Infrastructure Investors 8.25% Fixed-to-Floating Rate Series A Cumulative Perpetual Redeemable Preferred Shares (FTAI.PA). Some more information about the issue can be found in the following chart:

Source: Author's spreadsheet

Like the newly issued Series B Preferred Stock, FTAI-A pays a fixed dividend at a rate of 8.25% before 09/15/2024 (its call date) and then switches to a floating rate dividend at a rate of 3-month LIBOR plus a spread of 6.886%. Actually, FTAI-A and FTAI-B call dates are separated only by 3 months, and the main differences between the two are the current nominal yield and the eventual LIBOR spread, as the "A" is higher with respect to both. With the current market price of $26.00, the Series A Preferred Stock has a 7.93% Current Yield and a 7.25% Yield-to-Call. If we compare the two issues, we can see them sharing the same Current Yield, but with a Yield-to-Worst of 7.71%, FTAI-B seems to be better than its "older brother".

In addition, in the following chart, you can see a comparison between FTAI-A and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). Due to the short history of the preferred stock, hardly any meaningful conclusions can be made, so this is for informational purposes only.

Source: TradingView

Furthermore, the company has 6 Corporate bonds:

Source: FINRA

I'll compare the newly issued preferred stock with the most suitable for this purpose, the Corporate bond due 2025:

Source: FINRA | FTAI4694007

FTAI4694007, as it is the FINRA ticker, doesn't have any rating. It is maturing on 10/01/2025 and has a Yield-to-Maturity of 5.91%. This should be compared to the 7.71% Yield-to-Call of FTAI-B, but when making that comparison, do remember that its YTC is the maximum you could realize if you hold the preferred stock until 2024. This results in a yield margin of around 1.8% between the two securities.

Sector Comparison

This section contains all preferred stocks in the "Rental & Leasing Services" sector (according to Finviz), no matter their par value or the distribution type. There are 8 more preferreds in the sector, 4 fixed-to-floating and 4 fixed-rate. Except for GFNCP, which has a par value of $100, all others are with a PAR of $25.

Source: Author's database

Since all issues are trading above their par value, their Current yield is actually their Yield-to-Best. This is why I will compare the group by their Yield-to-Call, which is the group's Yield-to-Worst. Only GFNCP will not take part in the following bubble chart, as it is the only callable issue and is trading with a call risk.

Source: Author's database

With its Yield-to-Call of 7.71%, FTAI-B gives the best return from its peer group, while the second-best preferred stocks are the CAI's CAI-A and CAI-B with YTC of 7.58% and 7.60%, respectively.

The full list:

Source: Author's database

Fixed-to-Floating Preferred Stocks

This section contains all preferred stocks that pay a fixed-to-floating dividend rate and has a par value of $25. I've excluded the Just Energy Group's preferred stock JE-A, which recently had its dividend suspended.

  • By Years-to-Call and Yield-to-Call

Source: Author's database

  • By Yield-to-Call and Current Yield

Source: Author's database

Special Optional Redemptions

  • Upon a Ratings Event

Prior to December 15, 2024, at any time within 120 days after the conclusion of any review or appeal process instituted by us following the occurrence of a Rating Event, we may, at our option, redeem the shares in whole but not in part, at a redemption price of $25.50 (102% of the liquidation preference of $25.00) per share, plus an amount equal to all accumulated and unpaid distributions thereon, if any, to, but excluding, the date of redemption, whether or not declared.

  • Upon a Change of Control

Prior to December 15, 2024, if a Change of Control occurs, we may, at our option, redeem the shares in whole but not in part, at a redemption price of $25.25 (101% of the liquidation preference of $25.00) per share, plus an amount equal to all accumulated and unpaid distributions thereon, if any, to, but excluding, the date of redemption, whether or not declared.

  • Upon a Tax Redemption Event

Prior to December 15, 2024, if a Tax Redemption Event occurs, we may, at our option, redeem the Series B Preferred Shares, in whole but not in part, at a price of $25.25 per share, plus an amount equal to all accumulated and unpaid distributions thereon, if any, to, but excluding, the redemption date, whether or not declared.

Source: 424B5 By Fortress Transportation and Infrastructure Investors

Use of Proceeds

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses payable by us, will be approximately $96.4 million (or $110.9 million if the underwriters exercise in full their option to purchase additional shares). We intend to use the net proceeds from our sale of the shares in this offering for general corporate purposes, including the funding of future acquisitions and investments.

Source: 424B5 By Fortress Transportation and Infrastructure Investors

Addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index

With the current market capitalization of the new issue of around $100 million, FTAI-B is a potential addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index during some of the next rebalancings. If it manages to keep the market value above $100 million, it will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index and which is important to us due to its influence on the behavior of all fixed-income securities.

Conclusion

As fixed-income traders, we follow every preferred stock or baby bond which is listed on the stock exchange. As such, FTAI-B is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain, but in many cases, the new security happens to be better than the ones already trading on the market.

The company is satisfactorily leveraged, as it is one of the lowest leveraged companies in the sector. It is paying an early dividend of $111 million for its common stock, 8x times more than what it needs for its only two preferred stocks. In terms of yields, the new issue has 0.46% higher YTW than its 3 months older brother FTAI-A, and also has the highest YTW in the sector. However, as negatives should be noted the company's poor performance in the last few years and, as a result, the weak debt payments coverage. Also, except for the 8 preferred stocks in the sector, a further comparison cannot be made. Unfortunately, the fixed-to-floating preferred stocks' charts do not provide us with any comprehensive enough view. After all, it is always good when considering a specific issue to see it from different angles. Overall, I recommend being cautious with this one and frequent monitoring of the common stock.

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This article was written by

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Day trader whose strategy is based on arbitrages in preferred stocks and closed-end funds. I have been trading the markets since I started my education in Finance. My professional trading career started right before the big financial crisis of 2008-2009 and I clearly understand what are the risks the average investor faces. Being a very competitive trader I have always worked hard on improving my research and knowledge. All my bets are heavily leveraged(up to 25 times) so there is very little room for mistakes. Through the years my approach has been constantly changing. I started as a pure day trader. Later I added pair trades. At the moment most of my profits come from leveraging my fixed income picks. I find myself somewhere in between a trader and an investor. I am always invested in the markets but constantly replace my normally valued constituents with undervalued ones. This approach is similar to rebalancing your portfolio and I just do this any time there is some better value in the markets. I separate my trading results from my trading/investment results. I target 40% ROE on my investment account and since inception in 2015, I am very close to this target.


My main activity is running a group of traders. Currently, I have around 40 traders on my team. We share our research and make sure not to miss anything. If there is something going on in the markets it is impossible not to participate somehow. Some of my traders are involved in writing the articles in SA. As such Ilia Iliev is writing all fixed-income IPO articles. This is part of their development as successful traders.


My thoughts about the market in general:

*If it is on the exchange it is overvalued and our job is to find the least overvalued.

*Never trust gurus - they are clueless.

*Work hard - this is the only way to convince yourself you deserve success.

*If you take the risk it is you who has to do the research.

*High yield is always too expensive.


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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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