Description

Situation Overview

Fortress Transportation & Infrastructure LLC is a publicly traded holding company that owns a portfolio of aviation leasing and infrastructure assets. The company’s aviation business is a leader in the engine leasing market with scale advantages in a small, niche segment that lacks competition from larger aircraft lessors and is led by a top executive in the space, Joe Adams. The company’s infrastructure assets are in various stages of development and will generate meaningfully more cash flow over the coming 1-2 years, driving significant equity upside. With the aviation business net of debt and corporate expenses valued at ~$12-$15.50 p.s., the market is ascribing little value to infrastructure assets that could be worth over $40 p.s. at maturity. For a thorough overview of FTAI’s competitive advantages in the engine leasing market and the long-term potential of the Jefferson terminal, I suggest reading Kava0822’s write-up from July 2017.

A few catalysts should drive FTAI’s stock higher over the coming quarters: (1) the sale of the CMQR railway, (2) the sale of a minority interest in the Long Ridge facility and (3) a continued ramp in storage capacity at the Jefferson terminal (along with a debt refinancing at Jefferson). Any combination of two of these catalysts will help FTAI raise the dividend—driving near-term upside to $18 p.s. (+20%)—finance its remaining infrastructure investments and generally support cash needs as infrastructure profitability ramps through 2022.

Longer-term, as infrastructure assets reach maturity and begin generating meaningful profits, the business could be worth in excess of $30 p.s. (+100%) before factoring in returns from the dividend.

Thesis Points

Aviation Cash Cow with Growing Competitive Advantages: Joe Adams, the CEO of FTAI, has been an operator in the aircraft and engine leasing industry for decades (having previously built Aircastle and having led DLJ’s transportation industry group)(my aircraft industry channel checks on Joe have been universally positive). Understanding the challenges of competing against larger aircraft lessors and appreciating the merits of engine leasing, he focused FTAI’s strategy on the engine market and has grown the business into the second largest private, engine lessor. The company’s experience and scale in this niche market provide it with a better understanding of the maintenance needs of existing and prospective assets, lowering its overall maintenance costs. The company’s expertise also helps it identify seemingly undesirable assets that others misvalue or are incapable of servicing, contributing to FTAI’s ability to achieve 25%-30% unlevered returns on its jet engines. The aviation segment is and will continue to be a cash cow for the company.

Near-term results should show strength due to market tightness driven by the grounding of the Boeing 737 MAX; run-rate EBITDA excluding asset sales could approach $380m exiting 2019. Over the next year, the aviation segment’s prospects could improve meaningfully as the company comes to market with commercial products for use in engine repairs. Specifically, the company is 25% owner of a JV developing engine components that could materially lower FTAI’s cost of engine maintenance. This cost advantage will allow FTAI to (1) outbid competitors for engine assets and (2) offer superior economics to lessees. Finally, FTAI’s growing partnership with United Airlines provides it with privileged access to engine inventory and a captive customer for leasing assets. The company sees great potential in the growing relationship with United and believes it could be an important driver of growth in the near future.

Infrastructure Profitability Inflecting: FTAI’s three main infrastructure assets are approaching meaningful profitability inflections. The Jefferson Terminal is scaling crude and refined product storage capacity adjacent to the largest refineries in the U.S. and should generate positive EBITDA in Q4’19 and substantially more EBITDA in 2020 (potentially $50m, a $100m run-rate by mid-2020). The first phase of LNG storage and port facilities are being developed at the Repauno Port and could begin generating EBITDA in late 2020 or early 2021 ($20m EBITDA in 2020, $150m long-term). Finally, the Long Ridge power generation facility has signed a long-term contract with the US government that will generate $120m of annualized EBITDA beginning in 2022. Near-term these assets could generate $50m-$100m of EBITDA and over the next few years EBITDA could ramp to over $500m.

The table below is a simplistic view of the potential terminal value of these assets, but it captures the big picture opportunity well. Even with $500m of unforeseen cash needs and using a 12x EBITDA multiple for assets that are typically valued for 12x-18x EBITDA, the potential equity value for FTAI’s Infrastructure assets could exceed $40 p.s.

Asset Sales Provide a Funding Bridge: FTAI needs a substantial amount of capital to fund future infrastructure investments. Capital sources will come from (1) the aviation segment, (2) project-level debt financing and (3) the sale of equity stakes and non-core assets. Near-term, the company is selling its industrial railway asset, CMQR, for an estimated ~$100m, as well as a minority equity stake in the Long Ridge facility estimated to be worth ~$200m. With the recent acquisitions of Genesee & Wyoming at over 13x EBITDA and Patriot Rail at an undisclosed, but apparently comparably high multiple, there is clearly strong demand for rail assets. I would not be surprised if the company sells CMQR for more than the estimated $100m. The ~$300m of funding from CMQR and Long Ridge would more than adequately support continued investment in the infrastructure assets (particularly if Jefferson profitability inflects in 2020). The sale of either asset should be a positive catalyst for the stock.

FTAI’s Infrastructure Assets

FTAI’s long-term strategy is to repurpose cash flows from long-duration, steady cash flowing infrastructure assets to fund the purchase of shorter-duration aircraft engines generating higher, 25% unlevered returns. Today, the roles of the segments are reversed: the engine leasing business is helping fund investments in the infrastructure assets.

The Jefferson Terminal is a large crude, refined product, and ethanol storage facility FTAI is developing in the port of Beaumont, Texas. The facility also has a crude-by-rail storage terminal that drove the Infrastructure segment to positive EBITDA in Q4 2018 when the price spread between Western Canadian Select and Western Texas Intermediate crude widened significantly. The spread subsequently narrowed after the Canadian government curtailed crude by rail volumes, but both factors are turning positive for FTAI: the WCS-WTI spread is widening again and new conservative leadership in Alberta has loosened crude-by-rail restrictions.

More importantly, with added storage coming online in 2H 2019, the asset should be meaningfully EBITDA positive in 2020. The company has also begun developing an underwater pipeline with a direct connection to Exxon’s refinery across the river which should significantly increase storage demand over the next couple of years.

The Repauno Port is a deep-water port on the Delaware River with a small natural gas storage cavern. This region serves as the main export conduit for natural gas from the Marcellus shale and a significant amount of natural gas refining capacity is coming online through 2022. The key asset in development is a system of underground storage caverns that are expensive to build (requiring a $500m+ investment) but will lower the cost of storage for the large industrial refiners and chemical companies in the area (Sunoco, Exxon, Dow, BASF). Over the next year, Fortress is investing $60m to bring rail-to-ship loading operations online that should generate $15m-$20m of EBITDA and, long-term, the facility will generate $150m of EBITDA (3m barrels of underground storage generating $50/barrel). Net of the anticipated build-out costs, the asset could generate over $11 p.s. of equity value.

The Long Ridge Energy Terminal is a 485MW, gas-fired power plant built at the site of an old aluminum smelter facility in the heart of the Marcellus and Utica shale formations. In the first quarter, FTAI signed an 8.5-year, take-or-pay contract with investment-grade counterparties and financed the project with an $850m nonrecourse loan. The Company is now aiming to sell a 50% equity interest in the project which could generate over $200m in proceeds, an amount in excess of Fortress’s entire equity investment. If successful, Fortress will be able to use the funds to buy additional engine leasing assets while maintaining a 50% interest in a business that should generate $120m of EBITDA in 2022.

In isolation, each of the infrastructure assets has potential to generate $8-$20 p.s. of equity value over the next 2-3 years. Assuming the Aviation segment is worth ~7x-8x EBITDA and after deducting net debt and capitalized corporate expense, the market is implying the infrastructure assets are worth -$1.00 to $3.50 p.s.; a cheap option given the long-term return potential.

Risks

• Sensitive to Global Macro Trends: engine leases are short-term so aviation profitability could decline in a global slowdown. Higher oil prices could also impair the relative competitiveness of FTAI’s older, less fuel-efficient engines relative to newer, more fuel-efficient planes and engines.

• Infrastructure Assets are Undeveloped and Unproven: management’s estimates of the profit potential of its infrastructure assets could be overstated or require more time and investment than anticipated. This has been the case over the life of the company but does not invalidate the earnings potential of these assets at maturity. Developing these assets is complicated, capital intensive and takes time. Employees at the Jefferson terminal are optimistic about the facility’s prospects and say the pipeline to Exxon’s facility will be a game-changer (driving significantly more storage demand).

• Require Access to Capital Markets to Fund Cash Needs: FTAI has substantial capital needs to fund its infrastructure and aviation investments. The company will need to raise project-level financing or sell equity stakes in its assets to fund growth capex.

Note: Aviation leasing comps are not directly comparable to FTAI given its mix of leasing and infrastructure assets and the P&L burden of the infrastructure assets as they ramp to profitability. Nevertheless, FTAI trades at an EBITDA multiple discount to the group.

Catalyst

- Sale of CMQR or an equity stake in Long Ridge

- EBITDA inflection at Jefferson

- Strong aviation results

- Continued development of the United Airlines and other aviation JVs