FTAI Aviation: 8.25% Fix/Float Preferreds, 11% Yield Coming

Summary

• FTAI Aviation Ltd. 8.25% Fix/Float Series A Cumulative Preferred Share has provided a solid 20%-plus return since inception.
• FTAI's earnings in Q4 '23 showed year-over-year gains in both segments, with overall revenue rising 14% and net income jumping 4.5X.
• FTAI acquired the remaining 50% of the QuickTurn Engine Center and had $200M in Letters of Intent in its pipeline for new deals.

The FTAI Aviation Ltd. 8.25% Fix/Float Series A Cumulative Preferred Share (NASDAQ:FTAIP) was added to our portfolios in January 2023.

This preferred stock has given a solid 20%-plus return since inception. More importantly for income investors, its cumulative dividend yield has provided attractive income since inception.

Company Profile:

Fortress Transportation and Infrastructure Investors LLC (NASDAQ:FTAI) owns and acquires infrastructure and related equipment for the transportation of goods and people in Africa, Asia, Europe, North America, and South America.

It formerly operated through two main segments: Aviation Leasing, and Infrastructure. The Aviation Leasing segment leases aircraft and aircraft engines. FTAI was founded in 2011 and is headquartered in New York, New York.

On Aug. 1, 2022, FTAI spun off its infrastructure assets into a new company, FTAI Infrastructure (FIP), and retained its Aviation Leasing operations under the FTAI ticker. As noted below, shareholders will receive a 1099, not a K-1.

FTAI's asset base is 55% aircraft and 45% aircraft engines. Aircraft leases have an average of nearly four years remaining, with 86% utilization, while engines have 16 months remaining, with 67% utilization. Narrowbody assets comprised 95% of Aviation portfolio as of Dec. 31, 2023.

Earnings:

Q4 '23: Both segments had year-over-year adjusted EBITDA gains, with Leasing rising ~15%, and Products up 111% vs. Q4 '22. Sequentially, Leasing rose 4.3%, and Products rose 26% vs. Q3 '23:

Overall revenue rose 14% in Q4 '23, with net income jumping 4.5X, adjusted EBITDA rising 31%, and operating cash flow growing 19X vs. Q4 '22.

2023: The first full year after the spinoff saw major growth in all categories, with revenue up 65%, net income up 211%, adjusted EBITDA up 39%, and operating cash flow swinging from -$20.66M to ~$129M. Interest expense was down 4.5%.

Part of the negative net income in 2022 was a $120 impairment charge to write-off the entire carrying value of leasing equipment assets that management didn't expect to recover from Ukraine and Russia. As of Dec. 31, 2023, eight aircraft and 17 engines were still located in Russia.

Acquisition:

FTAI acquired the remaining 50% of the QuickTurn Engine Center on Dec. 1, 2023, for $27.8M, following its initial 50% investment of $19.5M on 1/1/23. Management said that this gives FTAI "greater ability to develop FTAI’s Aerospace Products offerings and create cost savings." (FTAI site)

FTAI also acquired 33 engines and 10 aircraft during Q4 2023, and had $56.2M in asset sales for a 40% net book value gain of $22.7M.

As of 12/31/23, FTAI had $200M in Letters Of Intents in its pipeline for new deals.

Preferred Dividends:

FTAIP is a cumulative preferred stock, meaning that management must pay shareholders for any skipped dividends before paying common dividends and also must pay all any skipped dividends upon redemption.

FTAIP pays $.51625/quarter. It goes ex-dividend on Monday, March 4, with a 3/15/24 pay date. At $25.52, FTAIP's dividend yield is 8.08%.

The floating rate period for FTAIP will begin in less than seven months, on 9/15/2024. Its floating rate will be 688.6 basis points above whatever the current SOFR rate is at that time. This is one of the highest floating rates we've seen in the preferred market.

If the three-month SOFR rate is still 5.31% on 9/15/24, FTAIP's total rate will be ~12.20%. Since it's currently priced at ~$25.50, its equivalent current yield is 11.95%, still very attractive.

On a net cash flow basis, FTAI has a very conservative preferred dividend payout ratio of 10.79%, which equals a preferred dividend coverage factor of 9.27X.

Looking forward, management estimates that the annual run rate for adjusted EBITDA is ~$705M:

Deducting maintenance capex of $60M and interest expense of $161M from 2023's adjusted EBITDA of $516M, leaves ~$295M in cash flow available. If FTAI does generate ~$705M in adjusted EBITDA in 2024, available cash flow would rise to $484M.

Potential FTAIP Redemption:

While management seems to be more focused on new deals, it's still possible that they might redeem FTAIP.

As FTAIP is $.52 above its $25.00 call price, there would be a negative capital gain if you buy it at that price. There are three more quarterly distributions left before the 9/15/24 call date, for a total of $1.545/share. The net profit on a redemption is just 4.02%.

Taxes:

FTAIP and FTAIN shareholders will receive a 1099, not a K-1, at tax time.

Profitability and Leverage:

After the spinoff, FTAI was left with a very small equity base, which was $175M as of 12/31/23. That's why its ROE and debt/equity both look so high. Both have improved markedly over the past five quarters, as has its ROA and net debt/EBITDA leverage.

Debt and Liquidity:

FTAI had $91M in cash, with total debt of $2.52B, and ~$390M of available liquidity as of 12/31/23.

FTAI's $300M credit revolver matures on 9/20/2025, with no amount outstanding amount as of 12/31/23. FTAI has $652M in Senior Notes maturing on 10/1/2025.

Parting Thoughts:

FTAIP yields over 8%, but since its floating rate begins in under seven months, on 9/15/24, that yield should increase to well over 11%. Even if the Fed does lower rates somewhat by then, we feel that FTAIP will still provide an attractive 10%-plus dividend yield.

The trick with FTAIP is to try to buy it at $25.00 or less, since its call date is so close.