|Shares Out. (in M):||76||P/E||0||0|
|Market Cap (in $M):||764||P/FCF||0||0|
|Net Debt (in $M):||-70||EBIT||0||0|
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Fortress Transportation and Infrastructure Investors LLC (“FTAI” or “Company”) owns infrastructure and transportation related assets that include:
(i) Leasing business made up of (a) airplanes and engines; (b) offshore support vessels; and (c) shipping containers (expected to be sold this year)
(ii) Infrastructure business which includes (i) a 60% stake in the Jefferson oil & refined product terminal (“Jefferson Terminal”) located in Beaumont, Texas and (ii) the Central Main & Quebec Railroad (“CMQR”).
FTAI’s leasing business provides stable and contracted cash flows that, once ramped up, should be sufficient to cover FTAI’s dividends while its infrastructure assets offer growth platforms that support bolt-on investments/acquisitions to drive its 10% annual dividend growth objective.
We believe that at $10/share (70% of FTAI’s tangible book), the market is ascribing little value to the ramp up of Jefferson Terminal (FTAI invested capital of $210 mm) or the growth optionality from our expectation that FTAI deploys $875 million of potential liquidity.
We expect the stock to re-rate and the dividend yield to compress as FTAI. (i) signs contracts for Jefferson Terminal and (ii) meaningfully deploys its available liquidity at its targeted 15-25% equity returns. Under this scenario, which is expected to unfold this year, we expect FTAI to generate $167 mm of run-rate Funds Available for Distribution (“FAD”) exiting 2017 and re-rate to our price target of $16/share. Including dividends, this represents a total return of 75% over the next 12-18 months.
FTAI is cheap due to the following:
1. Management credibility has taken a hit and investors have gotten impatient with delays in closing several contracts for Jefferson Terminal. Currently, Jefferson Terminal is only 10% utilized; hence, it’s generating negative annual cash flow of $13 mm to FTAI. FTAI has not meaningfully invested its $350 mm of cash raised in its May 2015 IPO.
2. FTAI’s current FAD does not cover its quarterly distribution of $25 mm.
3. Two offshore inspection, maintenance & repair leasing assets are off lease.
4. FTAI has an unusual mix of assets, segmented between multiple leasing assets and infrastructure assets.
5. The industries to which FTAI’s operating assets are classified into: MLP energy infrastructure, offshore energy, yield vehicles, aviation leasing have performed poorly in the stock market since its IPO.
We believe these factors are temporary and that there are upcoming catalysts to address each of them.
1. Business development activity across the oil industry stalled over the last year as a result of the severe oil price decline. According to FTAI, now that oil prices seem to have stabilized, business activity is regaining momentum. Jefferson Terminal is in the midst of securing multiple contracts across three main business opportunities: (i) Canadian crude by rail; (ii) export of refined products to Mexico; and (iii) ethanol storage and transportation. FTAI is in negotiations with several Canadian crude by rail deals to close in 2016, thereby increasing terminal utilization to 60%. At this level, Jefferson Terminal should generate $40 mm of EBITDA. We estimate the Mexico export and Ethanol deals to close over the next 6-18 months; while these projects will require additional capex, EBITDA should grow to ~$100 mm.
a. FTAI recently obtained $144 mm of tax exempt financing at 7.25%, used the proceeds to pay off $100 mm 9% debt, and kept the remainder for growth capex. This tax exempt facility can be expanded by another $156 mm for future growth initiatives.
2. Incremental aviation acquisitions ($140 mm in Q2/Q3’15, $25 mm in Q4’15, and $40 mm in Q1’16) and our estimate of an additional $365 mm of investments in this segment over the next year, should bring pro forma annual cash flows to $104 mm. At this level, FTAI would fully cover its dividend from its aviation segment alone.
3. FTAI’s Construction Support Vessel (“the Pride”) is “one [CEO] signature” away from a contract with a major oil company in Malaysia.
4. FTAI is expected to complete the divestiture of its shipping container assets at or above book value in 2016. We also expect the Company will sell its offshore support vessels next year at around book value. These exits will simplify FTAI’s story.
5. In terms of investment opportunities, FTAI’s CEO believes that “this is the best market [he] has seen since 2009 and 2010.” They are currently evaluating a variety of investment opportunities, including aircraft/engines, Jefferson Terminal growth projects, other infrastructure investments, and “discounted high yield debt or loans that offer highly attractive returns or even better entry points for equity ownership.” The Company has disclosed two potential infrastructure investments under evaluation; Repauno Port along the Delaware River and Hannibal Port in Ohio, as being close to consummation.
Valuation: We believe FTAI is worth $16/share in our base case and $9/share in our downside case.
Pro forma for FTAI’s $40 mm investment in aviation in Q1’16, FTAI’s aviation leasing segment has invested equity of $433 mm and should generate run rate annual FAD of $60 mm. Exiting 2017, we estimate total invested equity in the aviation business of approximately $800 mm (Company target is $1 billion). At this size, aviation should generate ~$104 mm of Adjusted FAD, allowing FTAI to cover its current dividend.
FTAI’s Strategy: FTAI targets an attractive niche in the aviation leasing market that allows FTAI to obtain 15% unlevered IRRs based on our figures while public aviation leasing companies like AerCap and AirCastle get 7-8% unlevered IRRs and 15% levered IRRs.
FTAI is able to earn a higher return due to its focus on a smaller and inefficient niche that deals in older planes and older engines and contracts with less well known counterparties while public aviation lessors deal in the newest airplanes and contract with large, at-scale airlines like American Airlines, Emirates, etc. In FTAI CEO’s words, “we target older aircraft and engines, which by contrast involve smaller dollars and requires more effort to manage shorter leases and maintenance events and difficult to debt finance. Our process and skill at getting the most out of engines creates sustainably high unlevered returns with low[er] risk.”
The barriers to entry to FTAI’s aviation leasing business are (i) required origination capability and technical expertise to source and maintain planes and equipment, which limits small firms from entering; and (ii) size of opportunity which precludes larger aviation lessors from participating as it does not move the needle for them. For example, in contrast to FTAI's targeted aviation business size of $1 billion of assets; AerCap currently has $35 billion of assets.
There are 3 private competitors in this niche: Castlelake, GA Telesis and Apollo Aviation (no connection to the Apollo Management). In terms of size, FTAI currently ranks in the middle. FTAI believes there’s potential for it to acquire and consolidate the market.
Marco Outlook: The macro outlook for this business is bright. Lower fuel prices have lessened the advantage of newer, more fuel efficient engines and lowered travel costs, leading to greater traffic levels. Also, growth in emerging middle class population drives growth in air traffic and emerging nations’ airlines, with less established technical expertise, prefer leasing aircraft and engines. Finally, growth in e-commerce generates greater demand for air cargo, which extends aircraft life to 20+ years.
Additionally, FTAI believes that recent plane & engine ABS financing deals did not have enough maintenance reserves for older planes and those problems are surfacing now. FTAI believes they can take advantage of upcoming ABS’ distressed sales of aircraft equipment and obtain attractive purchase prices in that environment to quickly scale the business to their targeted size.
Business details: At Q4’15, the aviation leasing segment’s book equity was $393 mm, composed of 18 aircraft and 42 engines. In Q1’16, FTAI announced LOIs for $40 mm of planes & engines, bringing pro forma equity invested to $433 mm. At its targeted $1 billion size, FTAI should have 40-50 aircraft and 75-100 engines.
FTAI’s aircraft fleet is a mix of older, popular models with long equipment lives like Airbus 320 and Boeing 737s. The engine mix is made up of Pratt & Whitney, CFM and GE engines, basically single aisle engines that are compatible with its single aisle planes. The current remaining average lease term for aircraft is 37 months; its aircrafts are 96% utilized. The current remaining average lease term for its engines is 13 months; its engines are 56% utilized. FTAI targets 100% utilization levels for aircrafts and 50-75% for engines. FTAI keeps its engine utilization below 75% to allow for profitable engine sales, in an inefficient market, to third parties. For instance, FTAI recently purchased a pair of engines for $6.0 mm in an opportunistic deal; 2 weeks later an international airline lessee bought these engines for $7.6 mm.
FTAI’s lessees include Ethiad Airways, Korean Air lines, Ethiopian Airlines and Europe Airpost. Even though its counterparties are international airlines, FTAI gets paid in US dollars and does not take currency risk. For example, despite the Russian ruble devaluation over the past 2 years, FTAI’s Russian airline customer has always settled its US denominated payments to FTAI promptly. Furthermore, FTAI requires its lessees to pay monthly maintenance reserves.
Offshore Energy Inspection, Maintenance and Repair Vessel
FTAI’s offshore energy segment’s book equity is $132 mm and should generate annual normalized cash flow of $16 mm.
Asset Overview: FTAI has 4 offshore support vessels (“OSV”): 1 construction support vessel (“CSV”), 1 remote operated vehicle (“ROV”) support vessel, 1 anchor handling tug supply vessel (“AHTS”), and 1 inspection, maintenance, repair vessel (“IMR”). The CSV, named the Pride makes up 92% of the segment’s book value.
Current situation: The Pride is a 2014 built state of the art CSV with a 250-ton crane, 2,000 square meter deck space, and has a cargo carrying capacity of 10,000 DWT. With its spec, it’s considered an Ultra Hi-Spec OSV (>5,000 DWT and built after 1991). FTAI bought the Pride in September 2014 from the shipyard Cecon ASA at an 18% discount to the construction costs. The Pride is currently off its lease and in Q4’15, it required $2 mm in additional expenses to dry dock and install thrusters. The good news is that it is being marketed in conjunction with Halliburton, recently did short term work for Exxon in South East Asia, and is close to securing a 1-2 year contract with a Malaysian oil company. According to FTAI CEO’s words, “and the Pride, we have lots of people interested in that vessel. We had one deal that all we needed was one more signature from the CEO and that seemed like low risk but we’re still waiting for that.” Halliburton recently installed its equipment on the Pride at Halliburton’s own expense, representing another vote of confidence of Pride securing the agreement.
Over the next year or two, we expect FTAI to sell its Offshore Energy segment at close to book value and re-deploy proceeds into its aviation or infrastructure business.
It’s not worth spending a lot of time on the shipping container business because FTAI is exiting the business and looking to redeploy sale proceeds from its shipping container assets into other segments. At Q4’15, there was ~$39 mm of book equity remaining in its 3 portfolios of an aggregate of 138,000 shipping containers. In Q1’16, FTAI sold one portfolio for $25 mm, or at 1.1x book equity. Pro forma for the transaction, the remaining FTAI container assets have book equity of $15 mm.
Despite an oversupply of shipping containers in the market, downside on the remainder of FTAI’s container assets is protected because 75% of the containers are on finance leases. This means the lessee is on the hook for the shipping containers after the lease term; hence, FTAI is not exposed to residual value risk.
Jefferson Terminal is an energy infrastructure facility located in Beaumont, Texas. Currently, FTAI’s 60% ownership stake in Jefferson Terminal represents $210 mm of invested capital. The terminal is currently underutilized and hence, generating negative cash flow, but FTAI believes its original investment thesis for long term earnings growth is intact. FTAI is working on multiple contracts across 3 distinct opportunities (Canadian crude by rail, refined product export to Mexico and ethanol storage & transportation) that can extract value out of Jefferson Terminal’s advantageous location. We estimate Jefferson Terminal can earn $40 mm of annualized EBITDA by Q3’16 and $95 mm of annual EBITDA exiting 2017. Beyond 2017, FTAI estimates capacity can increase to 780kbpd (from 230 kbpd today).
Asset detail: Jefferson is near the right customers and as a multi-modal facility, the terminal services: rail, marine/sea, trucking, pipeline, and storage & blending. The terminal has three Class 1 rail connections and is the only terminal in the area capable of handling heavy Canadian crude (pure bitumen). The terminal can also accommodate trucks, barges, and ships. Going forward, there are plans to install pipeline connections to the nearby refineries (listed below). Below is a picture detailing the different type of transportation possibilities.
Customers: Jefferson Terminal is within 15-20 miles of six major refineries with 2.2 mm bbl/d of capacity in aggregate. These refineries are Exxon Mobil Beaumont (345 mbbl/d), Total (225 mbbl /d), Motiva (600 mbbl /d), Valero (290 mbbl /d), Phillips 66 (240 mbbl /d), and Citgo (425 mbbl /d).
Earnings Potential: Jefferson Terminal’s ownership structure hints at what insiders think about the earnings potential. FTAI acquired 60% of the terminal in August 2014. The original seller and developer of the project, Al Salazar and his partners, maintain a 20% ownership stake in the project and FEP Terminal Holdings, controlled by Wes Edens (co-founder of Fortress), owns the remaining 20%.
At 10% utilization, Jefferson Terminal’s current revenue source are an 18 mbbl/d take or pay contract with Total and several storage contracts that generate $18 mm of annual revenues. FTAI is working on multiple potential contracts across three main business opportunities described below.
Potential Contracts and Macro Outlook:
Why has it taken so long to secure contracts?:
Central Maine & Quebec Railroad (“CMQR”)
CMQR is carried on FTAI’s book for $14 mm book equity (its original purchase price in May 2014); we estimate CMQR’s fair value much higher at $60 mm. CMQR is expected to generate $8 mm of EBITDA in 2016.
Asset Overview: This 480-mile Class II railroad that runs from Montreal to the east coast of Maine is an example of FTAI’s opportunistic investment and operational turnaround capabilities. FTAI bought this rail for ~$14 mm out of bankruptcy and injected ~$10 mm of working capital, after the predecessor company suffered in the wake of crude oil spill accident in Quebec. FTAI hired the former RailAmerica CEO John Giles and other senior executives to improve operations, revitalize the asset base, and re-build customer connections; CMQR’s turnaround occurred 3 quarters earlier than FTAI expected. John Giles has a terrific track record of being one of the best short line operators; under his leadership, RailAmerica grew from $50 mm of EBIT to $120 mm of EBIT. Ultimately, RailAmerica was sold to Genessee & Wyoming for $1.4 billion.
CMQR primarily transports pulp and paper, construction products and chemicals; hence, it’s not exposed to secular declining coal market that other rails are exposed to. Below is a map of CMQR’s network.
Earnings Power: Based on Q4’15 run-rate, we estimate CMQR is currently generating ~$30 mm of annual revenue and $6 mm of EBITDA. FTAI CEO and CMQR management believes that CMQR can further expand EBITDA margins from 20% to 25-30%, targeting 2016 EBITDA of $8 mm.
Additionally, CMQR has an opportunity to work with a US car manufacturer to deliver finished goods from the manufacturer’s Canadian plant to Maine’s Port of Searsport that can potentially double EBITDA. We think these business development opportunities exemplify FTAI’s view of CMQR as a platform asset with an excellent management team; there are numerous opportunities to add and acquire additional business or rail-tracks. We estimate CMQR can acquire assets at 7x EBITDA. We estimate $90 mm of incremental invested capital by year end 2017 generates an incremental $12 mm of EBITDA.
FTAI is managed by Fortress Investment Group (“Manager”). FTAI’s CEO Joe Adams leads a team with over 50 years of combined experience in acquiring, managing and marketing transportation and infrastructure assets. The team has been working together for over ten years and has collectively invested ~$3 billion in equity capital and purchased ~$17 billion in transportation and infrastructure assets since 2002. Since the inception of the Fortress Transportation & Infrastructure Fund, the fund has generated an 18% IRR to its limited partners.
In exchange for day-to-day operations and business development, FTAI pays the Manager a (i) base management fee; (ii) an incentive fee, and (iii) capital gains incentive fee.
The base management fee is 1.5% of the average quarterly book equity value, excluding non-controlling interests. Currently, this is $18 mm annually. The incentive fee has an 8% annual return on equity hurdle. If ROE is above 8% (or 2% quarterly), the Manager’s incentive fee is 10% of the pre-incentive distribution net income subject to the 8% ROE threshold. Between 8% and 8.9% ROE, the Manager is entitled to 100% of the pre-incentive net income (Manager’s catch-up provision). The capital gains incentive fee is payable at the end of the calendar year and is equal to 10% of the cumulative net realized gains.
We think the mgmt. fee is not egregious compared to Brookfield Infrastructure Partners. For example, BIP’s fee to Brookfield is (i) 1.25% of BIP’s market equity plus debt; and (ii) incentive fees are based upon distributions increases paid to unitholders (similar to MLP structure). At BIP’s current distribution level, BIP’s GP is getting 25% participation in BIP’s quarterly distributions above $0.33/unit.
We had long exposure to FTAI at the time of submission (4/22/16). We have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained in this presentation. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this presentation.
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