FTAI Spin-off Deep Dive

August 2, 2022

Summary:

Today, FTAI began trading as two independent companies. Unfortunately, I don’t think either company is particularly interesting at the current valuation.

The spin-off, FTAI Infrastructure (FIP) is comprised of four infrastructure assets (more details below).

FTAI Infrastructure finished trading in the when issued market at a market cap of $328MM and an enterprise value of $1.8BN, implying an EV / 2023 EBITDA multiple of 9.0x.

Par Pacific Holdings (PARR), FTAI Infrastructure’s peer, trades at 4.7x 2022 EBITDA.

This seems rich to me given:

  1. Very high leverage.
  2. No history of positive free cash flow on an aggregate basis.
  3. Poor incentives given management agreement with Fortress.

What is fair value? I don’t know but I would need to see a sharp sell off to interest me.

Some other things to consider:

  1. FTAI Infrastructure will be a C-Corp and will no longer send investors a K-1. This is a positive and could result in index fund buying.
  2. FTAI Infrastructure intends to pay a dividend of $0.12 per year. This is something to watch. Current yield is 3.6%. If it gets cheap enough ($1.20?), it could be worth a trade.

The RemainCo, FTAI Aviation (FTAI), looks fairly valued currently.

Peers, AerCap Holdings (AER) and Air Lease (AL) trade at 9.3x 2023 EBITDA and 7.9x EBITDA, respectively.

On its last day of trading in the when issued market, FTAI Aviation (RemainCo) closed at $19.50.

At that price, the stock has a $1.9BN market cap and $3.9BN enterprise value.

If you believe my EBITDA estimate ($416.8MM) which is lower than management’s guidance of $550MM to $600MM, the stock is trading at 9.4x 2023 EBITDA.

If you believe management’s guidance and even ignore public company expenses ($575MM EBITDA estimate), the stock is trading 6.8x EBITDA and looks cheap. But I’m not convinced.

FTAI’s current valuation seems fair to me given:

  1. Poor incentives given management agreement with Fortress.
  2. Virtually no insider ownership.

At the same time, there are positives:

  1. FTAI Aviation will no longer issue K-1s. This will open up the stock to many investors who previously would not have been interested in owning it.
  2. It will pay a very attractive dividend. Guidance from the Q2 call was $1.20 on an annual basis which implies a 6.2% yield. Pretty juicy.

All in all, I’m not interested in owning FTAI Aviation at the current price, but I will continue to watch it, and would be interested at the right valuation.

Summary Table

Company Resources

Q2 ‘22 Earnings Slide Deck

Q2 ‘22 Earnings Call Transcript

FTAI Infrastructure Form 10

FTAI 2021 10-K

Other Resources

VIC Write Up – December 22, 2021

Philosophy Capital Video Pitch – December 17, 2021

Philosophy Capital FTAI Slide Deck – November 19, 2021

FTAI Infrastructure Overview

Fortress Transportation and Infrastructure Investors LLC was formed in 2014 as a Holdco to own high quality infrastructure and related equipment that is essential for the transportation of goods and people globally.

The below chart shows the Company’s assets by reportable segment as of December 31, 2021.

Why the Spin-off?

The spin-off was announced in late 2021, and it makes all the sense in the world.

Currently, the company has infrastructure assets and aviation assets. Infrastructure has nothing to do with aviation and there are no synergies between the business units. Further, there are several pure play “aviation leasing” companies which are good comps for Remainco (the aviation business).

It is unclear whether the spin-off will be taxable.

Regular way trading for FTAI Infrastructure will begin on August 2, 2022 under the ticker FIP.

Spin-off Overview

The infrastructure business has 4 main infrastructure assets.

The company pitch is that it will generate run rate EBITDA of $200MM+ within 12-24 months.

Transtar

This is a rail system that serves the bulk of US Steel’s domestic production.

It is comprised of five short-line freight railroads and one switching company, including two that connect to US Steel’s largest production facilities in North America

FTAI bought this asset from US Steel for $640MM in July 2021.

FTAI is targeting $100 million+ of annual Adjusted EBITDA in the next 12 – 24 months as core business continues to grow and new initiatives contribute incremental profits.

Transtar does look like a good asset. It generates excellent operating cash flow and has limited capex requirements:

Jefferson Terminal

Here’s what FTAI wrote about Jefferson in its most recent 10-k:

“In August 2014, FTAI and certain other Fortress affiliates purchased substantially all of the assets and assumed certain liabilities of Jefferson Terminal (“Jefferson”), a Texas-based group of companies developing crude oil and refined products logistics assets since 2012. As of December 31, 2021, Jefferson is wholly owned by us and certain Fortress affiliates.

Jefferson Terminal is developing a large multi-modal crude oil and refined products handling terminal at the Port, and also owns several other assets for the transportation and processing of crude oil and related products. Jefferson Terminal has a unique combination of six rail loop tracks and direct rail service from three Class I railroads, multiple direct pipeline connections to local refineries and interstate pipeline systems, barge docks and deep water ship loading capacity, capabilities to handle multiple types of products including refined products and both free-flowing crude oil and bitumen, and a prime location close to Port Arthur and Lake Charles, which are home to refineries with over 2.3 million barrels per day of capacity. Jefferson Terminal currently has approximately 4.4 million barrels of heated and unheated storage tanks in operation servicing both crude oil and refined products. As we secure new storage and handling contracts, we expect to expand storage capacity and/or develop new assets. The timing of the ultimate development of Jefferson Terminal will be dependent, in part, on the pace at which contracts are executed as well as the amount of volume subject to such contracts.

Jefferson Terminal’s prime location and excellent optionality make it well suited to provide logistics solutions to regional and global refineries, including blending, storage and delivery of crude oil and refined products. Jefferson handles, stores, and blends both light and heavy crudes that originate by marine, rail or pipeline from most major North American productions markets, including Western Canada, the Uinta Basin, the Permian Basin, and the Bakken Formation, as well as other international markets, with full heating capabilities for unloading heavier crude prior to storing and blending. Jefferson also transloads refined products, such as automotive gasoline and diesel fuel, that nearby refineries produce and ship through its terminal by rail and marine to other domestic and foreign markets in North America, including Mexico.

Heavy crude oils, such as those produced in Western Canada, are in high demand on the Gulf Coast because most refineries in the area are configured to handle heavier crudes (previously sourced predominately from Mexico and Venezuela) than those in other parts of the United States. Heavy crude is well suited for transport by rail rather than pipeline because of its high viscosity. Jefferson Terminal is one of only a few terminals on the Gulf Coast that has heated unloading system capabilities to handle these heavier grades of crude. As the production of North American heavy crude grows in excess of existing takeaway capacity, demand for crude-by-rail to the Gulf Coast is expected to increase. Refined products opportunities for storage and logistics are expected to be positively impacted by demand growth in export markets.

Mexican demand for U.S.-sourced refined products continues to increase; however, Mexico lacks the infrastructure required to efficiently import, store and distribute large volumes of gasoline and diesel. This has spurred the rapid build-out of new Mexican rail terminals, as well as storage capacity on both sides of the U.S.-Mexico border. To meet such increased demand, Jefferson Terminal operates a refined products system that receives three grades of products by direct pipeline connection from a large area refiner, as well as inland tank barge via the barge dock, stores the cargo in six tanks with a combined capacity of approximately 0.7 million barrels, and operates a 20 spot rail car loading system with the capacity to load approximately 70,000 barrels per day. This system may be further expanded to meet additional market demand.

Recent expansion projects completed include the construction of three pipeline systems, including a bundle of six pipelines, varying in size, a 14.2 mile outbound crude oil pipeline connection to a large refinery in Port Arthur, and a 5.6 mile inbound pipeline connecting to neighboring Delek Paline pipeline.

In addition to the Jefferson Terminal, Jefferson Terminal owns several other energy and infrastructure-related assets, including 299 tank railcars which are leased to third parties; a gas processing and condensate stabilization plant; pipeline rights-of-way; and a private inland marine terminal property all of which can be developed. These assets can be deployed or developed in the future to meet market demands for transportation and hydrocarbon processing, and if successfully deployed or developed, may represent additional opportunities to generate stable, recurring cash flow. As we secure customer contracts, we expect to invest equity capital to fund working capital needs and future construction, which may be required.”

FTAI expects Jefferson to generate ~$80MM of EBITDA on a run rate basis over the next 1-2 years.

Long Ridge

Here’s what FTAI wrote about Long Ridge in its most recent 10-k:

As noted above, FTAI sold 49.9% of Long Ridge for $150MM in cash plus earn outs in 2019 to Labor Impact Fund, L.P., a fund managed by GCM Grosvenor (“GCM”).

FTAI expects Long Ridge to generate $50MM of run rate EBITDA over the next 1-2 years.

Repauno

Here’s what FTAI wrote about Repauno in its most recent 10-k:

FTAI expects Repauno to generate $10MM of EBITDA over the next 1-2 years.

In terms of total earnings power of the infrastructure business, here’s what management said on is most recent earnings call:

In total, FTAI Infrastructure expects to generate $200MM of EBITDA on a run rate basis. Importantly, management notes that there is room for growth

Historically, FTAI Infrastructure has been in investment mode and has generated negative free cash flow on a consolidated basis (Transtar is FCF positive):

FTAI Infrastructure Strategy

The Company’s strategy is to continue to make infrastructure acquisitions to build a broad portfolio of assets that are diversified and benefit from secular trends.

Here’s more from the Form 10:

I personally think future acquisitions will be limited as the company is highly leveraged (more on that below).

FTAI Infrastructure Management and Incentive Compensation

Here are the bios for the CEO and CFO:

Both guys seem competent and experienced.

But they don’t seem that incentivized. The CEO owns 210,506 shares. Based on FTAI Infrastructure’s when issued price, these shares are worth ~$600k. His 2021 compensation was not disclosed, but I’m sure it was well over $1MM.

The CFO owns just 10,300 shares (worth $30K). He earned ~$900K in 2021.

The bigger issue from my perspective is FTIA infrastructure’s relationship with Fortress.

FTIA Infrastructure pays Fortress a 1.5% management fee & incentive fee and it reimburses Fortress for transaction expenses. Meanwhile Fortress and its affiliates own just 3% of shares outstanding (worth $10MM). Meanwhile Fortress earned $3.6MM in affiliate fees in Q2 2022.

So alignment is….not great.

See more details below.

Capital Structure

FTAI Infrastructure is going to be heavily indebted. It will have $500MM of net corporate debt, $729MM of asset level debt and $236MM of preferred equity (I’m considering this debt).

Add it all up, and the stock has net debt to EBITDA of 7.3x (see below). Pretty high.

In terms of interest rate and maturity, the asset level debt ($729MM) is primarily backed by Jefferson (as I understand it). The debt looks very attractive. Maturities range from 2025 to 2060 and the interest rate ranges from 1.875% to 4.0%.

The corporate debt has a high interest rate (10.5%) and matures in June 2027,

On a pro forma basis, FTAI Infrastructure estimates interest payments of ~$70MM which implies a weighted average cost of debt of 5.7%.

Valuation

As shown above, FTAI Infrastructure finished trading in the when issued market at a market cap of $328MM and an enterprise value of $1.8BN, implying an EV / 2023 EBITDA multiple of 9.0x.

Peers trade cheaper.

Par Pacific Holdings (PARR) trades at 4.7x 2022 EBITDA.

This seems rich to me given:

  1. Very high leverage.
  2. No history of positive free cash flow on an aggregate basis.
  3. Poor incentives given management agreement with Fortress.

What is fair value? I don’t know but I would need to see a sharp sell off to interest me.

Some other things to consider:

  1. FTAI Infrastructure will be a C-Corp and will no longer send investors a K-1. This is a positive and could result in index fund buying.
  2. FTAI Infrastructure intends to pay a dividend of $0.12 per year. This is something to watch. Current yield is 3.6%. If it gets cheap enough ($1.20?), it could be worth a trade.

FTAI Aviation Overview (RemainCo)

FTAI Aviation (FTAI) will be the RemainCo. In a lot of ways, it will be a much cleaner story than FTAI Infrastructure.

The Aviation business is comprised of 244 engines and 107 aircrafts which are leased out to airlines.

FTAI Aviation boasts a 8.6% annualized return on equity. This doesn’t seem very boast worthy!

It also reports an “annualized adjusted EBITDA return on Equity” of 19.6%. This is a B.S. metric (Fortress knows this), and it doesn’t reflect well on the company that it reports it.

Right now, business is booming!

Here’s commentary from the latest conference call.

Management gave EBITDA guidance for 2023 as follows:

Aviation Leasing: $380MM (midpoint)

Asset sale gains: $100MM

Aerospace products: $100MM

In total, management expects the Aviation business to generate $580MM of EBITDA in 2023 and beyond.

The guidance looks a little suspect to me.

I will take management’s leasing guidance and aerospace products guidance at face value.

But counting “asset sale gains” as EBITDA doesn’t smell right to me.

Here’s management talking about asset sales:

I don’t understand why they are selling assets if they just have to replace those same assets? Perhaps, they are really good at selling overpriced assets and buying underpriced assets, but the skeptic in me wonders if they are flipping assets to grow book value (and maximize affiliate management fees paid to Fortress).

If we exclude asset sale EBITDA, 2023 EBITDA guidance is reduced to $480MM.

Then we have to factor in corporate costs of $63.2MM (annualized Q1 ‘22 Corp expenses), EBITDA decreases to $416.8MM.

Capital Structure

FTAI Aviation has $2BN of net debt. Maturities range from 2025 to 2028 and interest rates range from 5.5% to 9.75%.

Valuation

AerCap Holdings (AER) trades at 9.3x 2023 EBITDA. Air Lease (AL) trades at 7.9x EBITDA.

On its last day of trading in the when issued market, FTAI Aviation (RemainCo) closed at $19.50.

At that price, the stock has a $1.9BN market cap and $3.9BN enterprise value.

If you believe my EBITDA estimate ($416.8MM) which is lower than management’s guidance of $550MM to $600MM, the stock is trading at 9.4x 2023 EBITDA.

If you believe management’s guidance and even ignore public company expenses ($575MM EBITDA estimate), the stock is trading 6.8x EBITDA and looks cheap. But I’m not convinced.

FTAI’s current valuation seems fair to me given:

  1. Poor incentives given management agreement with Fortress.
  2. Virtually no insider ownership.

At the same time, there are positives:

  1. FTAI Aviation will no longer issue K-1s. This will open up the stock to many investors who previously would not have been interested in owning it.
  2. It will pay a very attractive dividend. Guidance from the Q2 call was $1.20 on an annual basis which implies a 6.2% yield. Pretty juicy.

All in all, I’m not interested in owning FTAI Aviation at the current price, but I will continue to watch it, and would be interested at the right valuation.

Putting it all Together

Unfortunately, I’m not interested in owning or recommending either stock at this time.

In the case of FTAI Infrastructure, leverage is very high and the stock’s valuation looks aggressive.

In the case of FTAI Aviation, its valuation looks fair.

Both names will stay on my watch list, and I would be interested in owning them at the right price.

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