Podcast #87: Jacob Rubin is flying with $FTAI

Jacob Rubin returns to the podcast for a two part episode. In part one (this episode), Jacob talks about FTAI and some follow up on his first appearance on ESGC. You can find part 2 on GLNG here, see my notes on FTAI here, Jacob’s research on FTAI here, and Jacob’s first podcast appearance here.

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Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript!

Transcript begins below

Andrew Walker: All right, hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. With me today, I'm excited to have for the second time, my friend, Jacob Rubin. Jacob is the CIO of Philosophy Capital. Jacob, how's it going?

Jacob Rubin: Andrew, thanks for having me back. Yeah, it's going okay. We're trying to make it to the end of the year. We got a certain little Fed announcement today. We've had a fun November. We're here.

Andrew: It feels like just a race to zero before the end of the year, but I hear you. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. Jacob and I traffic, especially Jacob and some quirkier, hairier stocks, so everybody should just particularly remember that advice today, not investing advice, please go consult a financial advisor and do your own due diligence. Second to pitch for you, my guest, people can go back and listen to our first episode for our pitch. But, I think the best pitch I can give you currently is our mutual friend, Leo of Plum Capital. He's going to work for you and Leo does great due diligence. He's a great guy and he wouldn't be going to work for you if he didn't do all the due diligence on you and thought you were a great person to go work with. I'm really happy for the two of you. I think that's what it is.

Jacob: Look, a big thank you to you and the community you're building because you put me in touch with Leo and I think people out there, especially in the investment context and other labor issues going on, I think there's a Reddit thread of quitting work up to 1.3 million members last I checked. Finding someone of Leo's caliber, who fits us perfectly, was just such an amazing fortuitous thing, and I thank you and we're really excited. We just had Leo out. Fun anecdote, I mean, part of our process that we do, we flew him out and he sat with us for a whole week in the office to just absorb the culture, see how we mesh, do our strategy. That way, he knows really what he's doing with us and we know what we're doing with him, and it's just a perfect match. I mean, Leo's great. Anyone who followed Plum Capital or his Substack, they can see what a good writer he is, a clear thinker he is, and I really am excited for what he's going to do to our team.

Andrew: Yeah, and I thought your process when you were recruiting him as Jacob said, he flew him out and they spent a whole week's got an office. I thought that was the coolest recruiting process I've seen. But anyway, we're not here to talk about Leo, even though he's great. We're here to talk about two stocks today, but first are the first time we did a podcast was on Eros ESGC. That hasn't worked out spectacularly, to say the least and I think there were lots of questions that I know you wanted to take two minutes to talk about that and then we can maybe switch over to FTAI and GLNG.

Jacob: Yeah, you set it up perfectly. What we really want to do is focus on FTAI and Golar not just put the past in the past. But because it's fun and it's the point of the podcast and the job professional investing is to get back on the bike and to keep pedaling and to not let it impact your work rate. Yeah, I really do want to spend the majority of the time today on those new ideas. But I'd be remiss if I didn't at least give the very brief post-mortem because I came in a pod, pitch the ESGC and it was a spectacular debacle. Worst investment in my career, worst investment of our fund. For the avoidance of doubt, anybody listening, we lost money on it. We bought high and sold low and that's what it was. If I give you a little more detail to recap for what that podcast was all about, it was a spectacularly risky binary situation where it was an if-then statement. If they get their financials done, if they sort out their current maturities, if they've solved the corporate governance problems with India and the US, if they did those things, we thought there was a valuable business. We thought the industry around sort of content production. If you look at what Reese Witherspoon's company did or MGM and Lionsgate, you see all that everybody wants content factories. Plenty of logical buyers for that out there. We thought they would behave like a normal company. Do an investor day, communicate, stop being opaque, stop being a black box, and you'd have price discovery.

What happened? Nothing of in the if part of that equation happened. We layout as part of our process a roadmap with mile markers that are objective and quantifiable and it helps us know if we're right or wrong. If we're right, take a WillScott, our biggest position. Over the years from 9 bucks to 40, they do everything they say, every single thing they say and we have predictions. Then they do it and we tell our partners, "Hey, look. That's what we just said in our last letter. We just wrote about it. Oh, where we feel so smart." Yeah, but importantly we add, we buy more. Well, the flip side is probably even more important and more true, which is when you don't tick the boxes, I know I'm wrong. I got something wrong. It is not doing what I thought and I need to risk manage, which means more work re-underwrite. If I don't get comfortable and the explanations are not sufficient, eventually you sell and eventually you exit and you have the humility and you take the embarrassment, you take the pain, but you move on. That's what happened here. They as March deadline, April deadline, July deadline came and went and they didn't produce any financials. Nothing improved. We huddled internally over time. This were long-term oriented, but we have to account for new information. It wasn't tracking.

Eventually, we took the L. What I'll leave you and your listeners with is just a couple of lessons learned and these apply and you could probably see my selection in FTAI and Golar, the fact that it's two names, the margin is safety on these investments, it's all you can see the learning in real time, okay? A couple lessons learned. The first one is podcast selection. This was a mistake that I made above and beyond the mistake of the investment, which is we curate, we create a portfolio of 30-odd long, 30-odd shorts that are idiosyncratic. They are sized one of our best risk tools as I'm sure you have to is sizing. We have a roadmap to know for right or wrong and we can make the ones that are tracking well with bolster conviction big. The ones that don't track are small or we exit. The ones that have certain risks like binary nests or they're very hairy or debt cliffs, they need to be sized appropriately. Well, that's a portfolio. But a podcast, how many are going to do? I show up, I pitch one thing and I leave and then it lingers. What I've learned is it floats in the ether and it gathers comments. If I ever read it, I'll go cry myself to sleep. You have to find this balance and the truth is my bias was I find a lot of Iris Zone pitches in podcast which is super boring. Let's pick our...

Andrew: Right to the heart of podcast.

Jacob: No, well, so if I took your whole library there's some fraction that are really fun to listen to and some are a little more down the middle. I just the way I'm wired, I don't really want to listen to the boring ones or that predictable ones or the here's why it's 25% too cheap. I like the fun stuff, the off the run stuff. That's our strategy. That's how I'm wired and I let that blindly in my selection and it should be a balance. It should because we don't have a full idiosyncratic portfolio cobbled together, this should be something with a margin of safety that's a long-term orientation. These two today, our top five positions that we plan to own for a long time, there's nothing in the next couple of months that I envision changing my mind dramatically. Always reserve the right, but we have to see what happens in the world. It should be balanced. It should be fun and interesting and a little bit different without being completely binary.

Andrew: Look, I think one of the things I've learned from the podcast and from my writings in the blog and stuff is say, there are two companies that are both worth 10. But one of them has $7 in debt and $1 in equity value. It's worth 8 as an enterprise but if it went to 10 the stock would triple. Whereas another had it's just worth 8, no debt. If it went to 10, the stock could be up 20%, 25%, whatever. People tend to gravitate towards the ones that are much more, oh my God, there's huge upside, huge hair, huge leverage, all this type of stuff. Then when they don't work out because they've got $7 debt and $1 is equity, people are freaking out but they just kind of pass on the one that, hey, it's at 8. I think it's worth 10. There's no debt. I just find the ones with really high-upside lots of hair attract lots of eyeballs and people go crazy on them. I'm with you, it needs to be idiosyncratic position sizing. I don't know, but I've definitely noticed if I say, hey, this thing might have a short squeeze potential. The views on it double. There's huge engaging and everything. Anyway, neither here nor there. Anything else on ESGC or do you want to turn to the two stocks we're going to talk about?

Jacob: Well, look, for all conspiracy theories or any other, it's very simple. It was a bad investment. It didn't track, a couple lessons learned, corporate governance in foreign jurisdictions is a big deal. Chalk that up to lesson learned. I will take that into account as I assess new ideas in the future. I will think a little bit harder about what goes on podcasts to the extent we decide to stay in the public domain and on we go. That's the point is like if you're not wired to take a mistake and move on, do something else with your passion or your time or your money or your profession in my case. I think one of my key attributes hopefully is yeah, I'm embarrassed and I feel bad and I lost money personally underfunded. But we move on and we keep going and over time, this is not 100% hit rate business where this is like baseball. What I need to do is have a good batting average and when I whiff, I need to find it early and contain the damage, which I think we did adequately here. When I get it right, put some chips behind it and that's the job. That's just the sort of high level and now let's talk FTAI, let's talk Golar. Let's get into it because these ideas are really fun. That's behind us now.

Andrew: Perfect. Well, let's start with the one that I think just they're both very interesting, but I've got a history with aerospace and infrastructure. I love these. Let's start with the one a little more in my wheelhouse, FTAI, and I'll just turn it over to you. What is FTAI, Fortress? What is it? Aviation and industrial, is that right? Aviation infrastructure, but...

Jacob: Fortress is a very literal ticker, Fortress Transportation and Infrastructure, FTAI.

Andrew: Why don't we just turn it over to you? What are they? Why are you so interested? All that type of stuff.

Jacob: Yeah, and I have kind of a framework. I saw the Twitter thread. I saw the questions. They're fair, nothing new, nothing we haven't thought of or dealt with and I saw you said about your father. I'd like to hit it all but I think a framework is sort of, okay, what is it? Then there's a technical, there just is a catalyst-heavy sort of event orientation to this, which is quite interesting because it's 3 to 6 months out. It's timely. Then you've got these two business units, aviation and infrastructure. If we sort of tick through and maybe after each section we can take questions on sort of the technical stuff. What is it? It's FTAI, it's a pass-through LLC corporate structure generating a K1. It has 99 million shares outstanding, trading at 24 bucks or so called at 2.3, 2.4 billion equity cap. It has 2.3 billion of corporate debt, 700 million of Jefferson project debt, 294 consolidated basis of long-range power plant debt, 315 million preferred, and then they just picked up a bunch of engines from Avianca, Colombian Air Line, and Alitalia and there's about 350 of debt funding for that. That's a lot to say 5.9 billion enterprise, tons of debt, and a small preferred. I'm throwing lots of numbers at you. We have a deck that we just figured haven't really done this before, but we'll just make it available and you can look at it. I'll give you that link.

Andrew: Great. I'll put the notes, the link and show notes.

Jacob: Put in the show notes and people can click on it. You can see the numbers I'm laying out is all public stuff.

Andrew: I've seen an early copy of the deck. It's definitely worth checking out if you're interested.

Jacob: You said the disclaimer earlier. Let me just reiterate the disclaimer. If we made mistakes, we did. We're talking our book, we did our best. We can change our minds in the future. All those disclaimers, this is super honest and down the middle. We're just doing what we do. But I do want people to have the perspective of do your own work. Read the disclaimer on page 2. There's a reason we don't like to share because I don't want to get hung out to dry if I accidentally did something wrong, but I did my best. That's the structure. What they are, these two segments, we'll get into each segment because it's actually nuanced and a little tricky. I just want to leave it with that's the capital structure. It's an LLC and now the technical setup, let's just dive right into it. The first part of the technical setup is that this is two different businesses that don't really have any synergies with each other. Infrastructure and aviation, they certainly don't have any operating, there's no overlap. They don't procure things together and have some scale benefit on the cost side. There's nothing. You might argue that the relationship with Fortress in the ability to raise attractive capital is important in both cases, building a giant project that takes 5 years to build before it turns on or playing offense in tough times for airlines and being able to pick off engines at attractive prices and wanted to raise money in a tough environment. Sure, but they don't need to really be together to get the capital market sector benefits. They really don't belong to each other.

What we found too is infrastructure investors are niche and specialized. They're used to the cadence of say, these long-term projects. They are willing to look from conception to some sort of building phase to then you sign up a 15-year off-take agreement with some great counterparty and then you give credit for it incrementally. Then one day it turns on and eventually produces. Once it produces and it's on a 15-20-year deal and you put some 20 times multiple and the 5% sort of rate and it works for infrastructure, Brookfields of the world. But they don't know or care about aviation. Then you got aviation investors and what infrastructure does is not only is it a different model. It obfuscates the consolidated financials because you take the debt on the chin day 1. Your enterprise value reflects the 700 at Jefferson debt in this case or the of 25 of Repauno or 294 consolidated to Longridge. We're taking a billion dollars of debt on the chin and they might not have even turned on Jefferson debt 3 million at EBITDA last quarter. Let's say, you annualize to 12 and look at the 700 of debt and what does that do to your consolidate of metrics, both leverage and valuation?

It just ruins everything. It's noise. When you split, you get two pure plays and you can assess the capital structure, the business plans, and the prospects independently and it plays into different investor basis. I think we always talk about these corporate events is sometimes you're consolidating everything and then everybody wants to split everything. This is logical and I really talking to a lot of investors and getting a feel for the lay of the land. I think it makes a ton of sense and they're going to do it. I think that filing whether it's confidential filing or public filing. I don't know, but I think it happens this month. It's all public, but it's happening by yearend and sometime in the first quarte it will be effectuated. This is timely, it's happening. They get it and that we're excited about it. Number 2, K1s, I saw your comment where you're like, "I'm not sure it's like that good of a thing." I am the exact opposite. I have come to the view that it's very real and it's a big pain in the ass.

Andrew: Jake, I can I just jump in here? K1 is what you're referring to is right now, FTAI is structured as a LP structure basically. [crosstalk]

Jacob: It's an LLC through entity.

Andrew: If you go buy stock on the open market, at the end of the year you will get a K1, which is for many people it's a disaster because K1s are complicated. They make your life, much more complicated. As part of this split off that they're filing that they should announce officially, they've said this publicly but they should announce officially sometime December, hopefully they split off in Q1 of 2022. They will go from a LLC passthrough structure into two different C-corps which are normal stocks that you don't get a K1 for. Just to make sure everybody knows what we're talking about.

Jacob: There's the pain in the ass thing for like individuals. Like you just said, you know what? You don't want to file a K1 then you can make the decision. Do you want to deal with the K1? Is it worth it or not? Fine, but there's some bigger ramifications. We've done this statistically and we've sort of gone through the nuts and bolts of this particular situation. Statistically, we looked at all the alt managers, the Apollos and Carlyles of the world that all converted. They were weighing the tax benefit of their structure with all the benefits of not being a K1-producing entity. They all came to the decision to convert to C-corps. Then there's been some energy companies as well as some partnerships, notably New Fortress Energy, another Fortress entity they converted. We analyzed two things, stock performance relative to the S&P over 12 months. We found an average of 20% uplift outperformance over S&P for the list that we ran, and every single one outperformed the S&P. Now, we didn't do everything, and if you run everything, I'm sure the numbers are different. But our set was pretty powerful. Interestingly as well, the liquidity doubled. 107 percent, I believe is what we showed increase in daily trading volume. I can say, as one investor, we care about trading volume.

Speaking to many investors, we all care about trading volume. It's very important. We get an uplift in performance and liquidity. If you think about sort of why that makes sense or why that would be, it's a couple things. One, index funds, they don't own K1-producing entities. There are no indices in that type. It's 40% of the market flows. Supply-demand, it's a whole bunch of demand for your stock that doesn't exist right now. Let's get the indices and believe me, these guys they're savvy. The FTAI team, they're all over it, they're going to talk to every relevant index where they could be eligible. Give them the heads up, here it's coming and I don't know when it happens. But I think I think they do quarterly rebalance type stuff. Hopefully, some of these index start buying at the end of the, I don't know, first quarter but we'll see. Also, let's say you're an institutional investor. I've talked to so many long-only's, who the first thing they say is, "K1 pencils down can't do it." Stop talking. I've even tried to pitch. I'm like, they're not going to be a K1-producing entity in Q1. Do the work now, get smart. I think it's smart so that when they convert, assuming it doesn't just pop like crazy and they normally don't pop like that a day. It takes time.

Andrew: I owned a KKR when they flipped and it took time. I remember, they would always say, "Oh, our volume's up." I'd say, "Yeah, but your stock pressing up." [crosstalk]

Jacob: No, exactly. I'm saying just wait and then there's going to be a day where T plus 1, you can buy it with K1 and you can just you'll have done all the work. Get ready if that's your orientation. Some guys know K1. Some other folks by mandate can't do K1s. Then still others, they can do it, but they're going to do it on swap, which basically means they'll come up with a unilateral agreement with the prime to have the economic interest in the underlying and the prime deals with everything. Problem is, what I found specifically on FTAI is this swap capacity is very tight. It's hard to find. You need to go find it with a bank, will take sort of all the logistical side to it and you need to find a swap line. I know of an investor who has tens of millions in this stock. I won't name them, but they told me a horror story of when they wanted to buy it, they tried to get a swap and it was a horrible situation that took a while to resolve and they almost had to walk away. When this is done, that is just ancient history. Whether it's guys who couldn't come in or want to be bigger but they are hamstrung by the swap issue or it's folks who can't do swap and can't do K1s. By the way, Chris, our analyst, also pointed out it's not even eligible for Robinhood. Robinhood, doesn't do these. It's not [crosstalk]

Andrew: Robinhood, what you buy?

Jacob: If we're wrong, blame Chris because he told me. But what I'm hearing is it's not even on there. The point is, I don't want to spend all day on the technical. K1 goes away, we split into two pure plays and I think this is all very helpful.

Andrew: I mean, that's just like classic right up the middle of a bad investing, right? You've got a company, it's going to go through a split and then you get the cherry on top. It goes from LLC K1 to two separate C-corps. It really opens it up, sell out to lots of incremental buyers. Lots of people who might want to play. Hey, I want to play in aviation recovery. Hey, I only want these infrastructure and so that's perfect. But let's dive into the business. What are the infrastructure assets they have and what are the aviation assets they have?

Jacob: We break down this thing and ultimately we get to a, and this is not now or necessarily next year. It could be a few years down the line. I'm not just Pie in the Sky lunatic, but we see that this could be $80 a value. Just the rough split, we have something like 65 going to aviation. It's not that infrastructure is not valuable and it actually could be much more. But with our conservative assumptions, we see the picture on aviation a little more clearly so I'll start there. There are some catalysts to each business that we haven't touched on that are almost sort of belonging to the technical section, but they're more business-specific. We dive into aviation first because that's the bulk of the pie. What is it? 439-odd engines that they own and lease? Some of these are staple to aircraft and some just are freestanding. This started as this asset leasing business different than just straight air leasing, which was aircraft and oftentimes brand-new. These are used engines so there's two sources of arbitrage, which has led to a better margin over time because there's more inefficiency in going used and in going just engines.

But that's what it was. The critical point around aviation is that this is an evolution from some kind of leasing business. Something totally different that it's just apples and oranges. If you're trying to do some air leasing framework with book value or whatever, it's wrong. It's not what this business is go forward and that's sort of my job or the opportunity has to explain it. Hopefully, if it's compelling, great. Because what they've done is around these aircraft but predominantly engines, they have done a few major strategic moves. This is like playing the long game, talk about playing chess. One thing they've done is vertically integrate into the hot section of their engines. To give one more bit of color, the predominant engine in the fleet is a CFM56. This is a joint venture between Safran and GE Aviation. That's interesting when I get to modularization because as a result of being this combined entity, they have these three modules and a lot of say, Rolls-Royce engines are not modularized. These are. They are also the most prolific engine in the world, 22,000. They power 737s, A320s, they're all over the place, predominantly narrow-body and cargo. If you're thinking aviation narrow-body means a little bit more domestic. It should snap back and be more resilient. Cargo has just been a powerhouse through the whole thing, right?

If you're talking COVID, cargo is awesome. It's a very prolific engine. We're talking 449 at a 22,000. 2,200 would be 10%, 220 is one so they're 2% penetration. I don't think they're going to get the OEM's attention and this is more relevant to the aftermarket until they're 8 to 10% market share. This thing can grow the fleet many times over before being an annoyance to the big guys out there. If you're wondering sort of the TAM or the opportunity, it's underpenetrated large TAM so that's part of it. Staple to this fleet and this backdrop is the vertical integration. They have a joint venture with a privately-owned aerospace company. This company with FTAI is producing five parts that go in the hot section of this engine. They got the first one FAA-approved this year. The second approval is probably, I don't know, a Q1 event. I think they're getting it submitted right now. Once they get two approved, these are 60% of the value. Then the other three will take another year. But when they get two approved and if you're a customer, you don't really want to drop an engine and do a bunch of work and put in one part if the second is coming and is also a big cost component. We believe customers are sort of waiting, you get to approved. It's the majority of the value and now it's going to be a while for the other three. Now, it's sort of enough to say, all right, let's do it. That is on the come, it's not producing anything for them yet. But this is PMA, FAA-certified aftermarket parts where the only other production option, the only other way to get these parts is OEM and they price in the stratosphere. If you look at HEICO [crosstalk]

Andrew: This is reminiscent of what HEICO does and they've mentioned this.

Jacob: Exactly, this is very high quality. If you think about why the ROIC is tremendous, the depth and width of the moat is huge. Once they go in, almost like an authorized generic. Once they go in with this aftermarket parts and they figure out casting and coding in the manufacturing process and they go through FAA certification. Once they've done all that, who's going to want to invest the capital and the machinery and the know-how to follow them into this niche little part. No, the answer is no. I mean, in my opinion, well I'll be very surprised if we start seeing that there's some other entity that's going to follow them in.

Andrew: Again, it's reminiscent of HEICO, right? Everybody used to say, oh, well.

Jacob: This is why HEICO trades 25 times over there.

Andrew: People say, "Oh, the OEMs are are going to shut them down." Well, that didn't happen and then people say, "Well, if they can do it, other people are going to come do it and nobody could come."

Jacob: There are hundreds of parts or thousands of parts and plenty of engines and other aircraft over time where aftermarket comes in. If you take a small amount of market share, it is best for everybody to just leave well enough alone. That's the idea here is you could actually go up to 5% of this market and the JV at that rate would be at full-scale 5% market share would make something like 200 million EBITDA. We get 25% of it. Right off the bat, we get 50 million EBITDA scale at 5% market penetration. What's that worth? That is pure play aftermarket parts and we have comps and that's very valuable. By the way, has nothing to do with leasing, but interestingly, it's super synergistic when you have a whole fleet of used engines that require that part when you do overhauls. What it actually does is it fuses with this business and helps it evolve, such that you will become the low-cost provider of a product and service globally that nobody matches. To give one bit of context, to overhaul this engine right now is 6 million bucks. By the time all these parts are done and it will take time, combined with the other efforts I'll talk about in a second, they'll be able to overhaul these things for 2-and-a-half or 3 million dollars. If you are, by the way, thinking about book value, okay, how much does it cost to buy that engine?

Well, you'll pay the market rate, which is going to be based inextricably on what it cost to refurb these things. But now you can refurb at half the cost. Your book value, what you paid, what went on your books for is dramatically understated because it's going to be twice as valuable to you as anyone else. By the way, you might be able to tear it down more than once. I haven't even gotten to the AAR Lockheed and now I'll do that. They've built this platform. One of these three amigos or three legs on the stool is the parts, the vertical integration. But then they have an MRO capability, maintenance and repair. Where it's a long story, but they were opportunistic in the middle of COVID. Lockheed does business with Canada, wants to do business with Canada. They have a facility in Montreal, 300,000 plus square feet. A couple hundred people work there and those jobs could be in jeopardy because no one's doing shop visits. They're cannibalizing their fleets, they're not spending capital on their equipment because it's been a really tough go through COVID. To sort of save the jobs and keep the facility, after I started talking to them, they wanted to do an MRO angle for years and here, boom, perfect fit.

Now they have this thing where if they break down engines into modular components and let's say one or two require some work, but one is pristine, they can drop it and send it to Montreal and put it on a shelf and over time create a store and they can offer it to airlines. This is something Airlines do internally for the broader world for smaller fleets has not been done before. It's novel. This is new stuff. It's a product and service that's tremendously valuable and hasn't been done. They can have modules, these three primary modules on the shelf up in Montreal with a bunch of technicians ready to do all the work around it. Then the third thing that they've built is this AAR partnership. That's a AIR ticker, public company. What we can do here is as parts, when you scope an engine and you say this one is not usable, let's say, or maybe these modules are but this other engine is not, you scrap it. They are going to send it now to their partner AAR that will take it on consignment, refurbish it, work on it, and then sell it out into their network, which is what their business is and take a commission. This is accretive to all parties, but this is great for FTAI because essentially, when you do the unit economics analysis, which we've done and you buy an engine and you put it to work, you rebuild it, you put it to work again.

Capital goes out for the rebuild, you put it to work again. Then eventually some or all of it get salvaged. This boosts that salvage value. Better salvage value, the ability to modularize, which will be even better economics and salvaging. Then vertically integrating so you can rebuild parts at cost instead of OEM and the difference between OEM and cost is huge. But we're talking way more than 50% savings. Big. They've built this thing. If you want to use a hodgepodge of terminology is it's a platform because it's all these things working together to be an aftermarket product and service company because it's really focused on this engine that these are used engines being built then rebuilt and leased out. It still does leasing, but it's also vertically integrated into the parts. It's sort of this aftermarket aviation platform business that hasn't been done. There's no pure comp and for hopefully, some of the reasons cited, these old constructs that you use for AerCap or Air Lease, they just don't apply.

Andrew: Let me back up for a second. I just want to summarize what you're saying. They've got a very attractive call option growth opportunity, whatever you want to describe it as where they're going to do with engines kind of what HEICO does, right? They're going to start, there's a bunch of different angles as you just went through. But the main one is they're going to start making their own parts internally for these engines. They can undercut the OEM, sell them. It's going to fuse really synergistically with their current business. But I think the critical thing here because when I was looking up, you can look at my notes, I was just looking at they own engines. How do you value engine? This business right now currently produces nothing. It's not really on their books for anything. This is a growth call option that you're describing.

Jacob: Well, yeah, so here's a way to do some numbers and we put it out there. Pre-COVID and pre any of this stuff, I think they were doing 1.37 million of EBITDA per engine. They've grown the fleet from a couple hundred to 440.

Andrew: This is from leasing?

Jacob: Yeah, just talking about the engine, the old school, just how many engines and they lease it and they have better margin than the peers. But whatever, 440, there's a utilization factor. The aircraft are 90% plus the engines are lower, sort of 50s and 60s. It's low now because of COVID. There is a reopening and go here. That is a risk, by the way, if Omicron goes nuts, as it certainly looks like it's going nuts, this might get delayed by a quarter or two. But we think it's a when, not if, and we're willing to ride it out that the pills and boosters and the fact that it's narrow body and cargo. We think eventually we're going to be okay. But if you take utilization at normal rates on a blended aircraft engine basis around sort of low 80s on 440, you could call it 375 utilized assets, at 1.37 million per asset and you can come up with 500 million bucks of EBITDA. That's basically taking pre-COVID normal level multiplied by the new fleet size. That's nothing for all that cool stuff I just talked about. The reason I'm here, the reason there's a big target is all the new stuff. The new stuff they have quantified at scale could be 200 or 220 million of incremental. That would be basically like that rebuild that 6, so that's now 2 and a half or 3. They'll share some of the economics with customers. It's going to be a business decision and then some of it they'll keep for themselves and that's incremental. You take the number of shop visits per year, times of savings.

Boom! Great! We can get overtime towards 702 EBITDA and I don't think it's crazy. I don't think it's next year. That is not what I'm saying. I'm not doing a 2022 estimate. What I'm saying, we build towards 700 from something like 500. Frankly, I'm not totally sure what they'll do next year because it depends probably in part on how this Omicron stuff goes. I don't care that much is the bottom line. Then the next question is, all right, what's the right multiple? I've talked about HEICO and TransDigm and God, I would love to just be there multiple, but it's only a part of the story. It's a small part of the story. I'm going to be fair. We just blend it. It's a small part of our sort of blended multiple. You look at MROs. It's a little tricky on the leasing companies because they're so different and people really do it on not EBITDA. DNA is real for leasing businesses. It should be more on EIBT. But we think it's going to more asset like service oriented model. We think EBITDA or free cash flow eventually will be relevant here. We don't really have that much of a problem looking forward.

Simple math, we can get something like an 11 times multiple. I mean, again, it's like 20 plus times for HEICO, mid-teens or TransDigm. You blend a little bit of that in, MROs trade sort of low double digits. Then you figure out what you want to do with the leasing comp. We shake out 11 so you can get on 700, whatever, 8 billion. Then I didn't even talk about that, the JV, that's that what I said was 25% of 200 at 5% market penetration. Pure-play aftermarket parts business we think super valuable, you slapped 15 times on 50, another 750. Big picture, you can get to 8,750 strip out some debt, divide by the share count, and that's how we get to our big number. You can quibble on the multiples, fine, whatever. You can say they've been missing and I'd say yeah, it's freaking COVID, fine. Yes, and if you think COVID lasts forever, then you probably don't want to go in aviation. Okay. But big picture, we just think they're building something really innovative in industrial sleepy value name, so it's kind of cool.

Andrew: Let me ask some questions. I think the first question that jumps out on the aviation side would be, all right, they're doing this, it seems really interesting. Why has no one else done this before, right? That will drive into the second question so I'll just ask it now. The second question would be, they've got quotes about how attractive leasing engines is vs. leasing aircraft. I know the guys from AerCap, they're extremely smart. AerCap has had engine leasing before. For those who don't know, AerCap is the largest aircraft lessor and AerCap, every time they get involved in the engine leasing business from an acquisition or something, they basically run it off. They want nothing to do with the engine leasing. My two questions to you would be one, why hasn't anyone done it. Two, why hasn't anyone done the aftermarket part side that they're trying to do? Then number two, is the engine leasing business as good as you're saying if the largest aircraft lessor in the world every time they touch it tries to run it off? There's some smaller engine lessors, I'm familiar with that. Maybe haven't performed that well, so those would be my two questions.

Jacob: The best answers I have and these are educated based on what management says and what makes sense to me and what I see out there is some of those air leasing businesses are quite large and they do big shiny deals on the newest and greatest models and they order billions worth. Working on used engines that are 3 million, 2 million a pop to buy where you're nickel and diming were at times you're not buying much and then you're trying to buy and play offense when the market is in turmoil. That's what these guys do and you're thinking more like a distress-type fund. It's not that sexy. It's not a needle-mover. If you get too big, it's an itchy thing. It's something where you either should be all in like FTAI and become the world dominant player at this niche or you shouldn't do it and you stick to the bread-and-butter. If you're an employee at one of the big guys, do you want to go work on 2 or 3 million dollar used engines or do you want to go work on billion dollar giant, sexy Dreamliners or whatever? That's my first answer. I think one of your tweets quoted that part of Joe's response, the CEO chairman here, and I think that hold some water. Maybe it's a line but it makes sense to me.

I think also if you just think about air leasing and why it's so different, I'm trying to contrast what we're doing here to air leasing. Air leasing, if you go back to ILFC back in when it spun out of AIG, I mean, the birth of this industry for air leasing, I think and correct me if I'm wrong, but I believe they staple themselves in that case AIG to a Triple-A rated credit. They have a better through the cycle cost of capital than airlines. They optimize this ARM spread by having a cost of capital advantage and then they negotiate scale-based OEM discounts. That's sort of the value they bring to the market. They can take a 10, 11, 12% ROE. Then they'll lever the hell out of it and they're this middleman and maybe they have some value add on that, it's tenuous. They get the OEM discounts, they lower cost of capital, and then they offer a leasing product. That is something where I do think book value is relevant. It's just, it's a different model. Those guys need to be focused on capital markets, their cost of capital, their OEM relationships, and big deals that move the needle. It's just different. I don't think their lack of involvement here is some negative signal.

Andrew: That makes sense. Then I don't think we fully addressed in the question. Why has no one else tried the aftermarket parts side?

Jacob: I don't think it's easy to do. I think getting these designs right and building them to spec is a highly regulated industry where one crash is devastating. You've got this regulatory body that oversees everything. To have the engineering know-how to commit the capital and the resources to a project to recreate these parts. Then to have the confidence that you have a market to sell it into and to have those relationships, it's just a rare combination of know-how, capital, relationships that just doesn't exist broadly. If you want to go create the Andrew Walker aftermarket parts business, good luck. It's not easy.

Andrew: I think they've got an advantage doing it here because they have the engine leasing side of the business. They have almost a built-in customer to internally spin this up, right? Very similar to how Amazon had the retail sites, internally spin up Amazon web service, right? They had the demand. Am I thinking about that correctly where that might be what gives them the edge to do this where other players probably couldn't get in here?

Jacob: Yeah, and I got to make one more big picture point if you're thinking about this. We alluded to COVID and sort of near-term headwinds, but and relatively recent, past headwinds, but hopefully in the future we come back. There's some some other wrinkles here that could be bullish. Number one, shop visits are way down. We've plotted it out. People are cannibalizing fleet as I mentioned instead of doing capital-intensive overhauls of engines. You can't do that forever. Eventually, you drop engines, you take your grounded fleet and put the engines on flying planes or you swap planes or whatever you do. Eventually, you run out of what they call green hours and now you got to fix your engines, which is cheaper than buying new ones. You're going to fix your engines eventually. That is kind of like spring-loaded demand. I mean, eventually, the bill is going to come due. Second of all, airlines are struggling. The stocks hold up because everyone is trying to play the reopening trade. But I mean, how many more interest in legroom can they weasel out? I mean, these guys have these unionized workforce, they're tough business, very competitive. It's famously a tough business to run an airline. They need to save cash however they can and many of these major airlines have not done major engine leasing programs before. We think it has never made more sense for them to consider it now. We're not alone in that. The FTAI sees it and you can rest assured they're trying to pitch all these guys. We certainly hope to see some deals with big fleets and we think that's out there.

Andrew: Just going back to the parts side of the business. When you were talking about, you said, I think the company can do 700 million dollars in EBITDA, slapping 11 times multiple once we blend it onto it. What happens if you are wrong? They've got approval for one part, they're hopefully getting approved for the second part, which do you think is the catalyst to get that business kind of spun up? But what if you're wrong and nobody comes to this or they don't get approval for the next legs part? What would the EBITDA drop down to and what would your valuation look like then?

Jacob: Let's look at, I guess, the pro-forma aviation business. It'll be there's the 2/3 of corporate debt stays here. But then they're going to get an intercompany from infrastructure 800. You're going to knock that to 15 and there's a 300 million preferred. You got 1/8 of liabilities and if we use the 99 million share count and we're just valuing this thing, I don't know, just pick a number. Every ten bucks is roughly a billion of equity, right? If you just use $20 for aviation, then you're 2 billion there and you got the 1/8 of liabilities if you're creating a 3.8 enterprise. What do you get for it? Well, I told you that at a utilization normalized and at pre-COVID levels, you could spit out at this fleet 500 EBITDA. You can quibble on the EBITDA stuff. I've laid out why I think you could stick to it. You could strip it down to EBIT and put maybe a slightly higher multiple. But I think you're going to come out with pretty good coverage even at 20 bucks just for aviation alone. By the way, the whole stock, including the infrastructure's 24 today. I haven't even counted all the new stuff. The new stuff is 200-odd of EBITDA at a much higher multiple. God, sky falling and none of the new stuff produces anything. I still think we have a margin of safety. I still think we're okay. There's a real business with a real fleet that's contracting out. It has a utilization that can make money. If they say, "No, people pointed a cash flow, right?" You say, "Oh, it seems fine."

Andrew: That was going to be the next question.

Jacob: It's perpetually negative. Well, guess what? 200 engines went to 450, was that smart or they're just lighting money on fire? It was smart and here's why. When should they buy used aircraft? When groups like Alitalia or Avianca are in restructuring processes?That's when they're on the back foot. That's when you buy the asset and these guys are sharks. They know what they're doing. They're smart and it brings up another point, which is the management setup with Fortress, the incentives. Basically, many of the central overhead, the executives, their salaries are actually paid by Fortress. But then there's this sort of in exchange, FTAI pays Fortress a management fee.

Andrew: Can I just jump in? What Jake is referring to and Jacob's actually front-running me, that was going to be one of my next questions that in cash flow. FTAI is externally managed, right? As you're saying, Fortress is the external manager, Fortress pays all the guys who actually work at FTAI themselves, but Fortress gets a management fee and an incentive fee. Historically externally managed companies, people don't like this because it creates a disincentive. It creates a mismatch.

Jacob: It's a perception. I think incentives are fine and here's why. There's this incentive. There's this management fee that goes to them based on net equity. That sort of covers some of the overhead. I don't know if that ties up perfectly. We have a chart and doesn't tie up perfectly but it covers overhead because Fortress pay some stuff and then they have this management fee. Frankly, no one's getting rich on that fee, okay? It's just not that big a deal. The big deal is the incentive fee and here's how it works. There's an 8% hurdle. This is calculated quarterly. It's right there in the proxy. A 2% in the quarter return on net equity growing just some empire in and of itself. It's not growing equity because to grow equity, you have the asset value and how you pay for it and equity and your cash and debt, you're not just creating equity out of nothing. You have to generate value to have equity growth and it's the net equity change where the incentive fee is that's where it's based. It's an 8% hurdle. They have a little bit of a catch up between 8 and 8.9% in the quarter. It's between 2 and 2.2222 whatever is where they get 100% payout on that little portion. It's sort of a catch up on the first 8.

Then after 8.9% it's a 10% incentive fee on creation of net equity. Is that fair? Is that good? Is that bad? All I know is go look at our buddy, Mike NonGAAP or formerly known as NonGAAP. Now he's going on to bigger and better. But you can look at these comp plans. You go look at some other industry like Dropbox and the founder has a PRS use from 30 to 90 bucks and he gets filthy rich. Or look at Elon Musk making billions and billions if the stock works. We don't really have a problem with RS you pay out and strike prices way up high because we know in the world where they get paid, the stock's up. The world in which these guys are clipping 10% is a world in which they're creating net equity value north of 9%. Whether you want to give these guys huge grants of RSU's struck at $40 stock or do it this way, I honestly, I don't think the incentive is all that different.

Andrew: But let me just push back at one point because they did a deal on the infrastructure side that I think it was a good deal, right? They acquired US Steel's railroad operations and the scheme of all the aviation stuff you're laying out are huge. But I think that was a very good deal. It was a good buy by them. But at the same time, they did a pretty nice-sized equity offering to fund that deal. Historically, this is not a company, you said that you think aviation is worth $60 per share and they just funded in a creative infrastructure deal, but they funded with equity that they issued at $25 per share, right? I don't think the management team here would really disagree with a lot of the math you just laid out. I do look at a company and say, okay, they're doing good deals, but they're willing to fund them with equity offerings at prices that seem pretty attractive as a buyer and they're probably not going to be a share buyback. How do you look at that?

Jacob: Let's be honest and I know this from raising a fund. An incentive fee based on net equity dollars created, they can make more dollars, especially if they keep their head count flat. They can all get a lot richer if they build a much bigger mousetrap and then create value on the bigger mousetrap. That's like a fund can make a lot more money for its principles if it's bigger than if it's running 10 million bucks. That's true. They can't deny that. But it's a balancing act because if they grow for growth's sake, it might be harder to create value. They might make mistakes. They need to think about creating equity value and being bigger and having sort of equity times incentive fee equal a bigger pile for themselves. You then judge the deals. Was the rail deal a good deal? Yes, it was. I think the calculus was not only that they bought 80 million at eight times and that's a fair multiple rails trade between 13 and 17 times out in the broader markets. If they can get away from just US Steel, now it's a 10 or 15-year contract with them, which is good. But if they can diversify the customer base and trade anything like rails and this was a homerun deal and they can grow 80 to 100 with some actions they're taking. Holding the multiple steady, they pay 640, 8 times 80 and then 8 times 100 could be 800, they create 160 million of value. I mean, there's that and if they diversify and it re-rates, God bless. But it's also it gives more heft to infrastructure because they wanted to spin it.

Andrew: It wasn't an important part of the spin, right? They needed that deal to get infrastructure [crosstalk]

Jacob: Yeah, I want to spend time on infrastructure but infrastructure still have...

Andrew: I know, we're going to have enough.

Jacob: Well, infrastructure has Repauno that doesn't produce anything. Jefferson, that's just at an inflection point. It does have half of a power plant producing very steady long-term EBITDA. It needed a little more economic heft to it. It did. They had different options, sell all those assets one by one or give it a little more heft so it can stand on its own. That's the option, that's the route they went. I think it's fine because they did it in a pretty, they know rails. Joe used to run a rail company. I mean, and rails go into their ports, they deal with rail. They have run rail. In fact, that's why US Steel allowed them to buy it.

Andrew: Let me just turn to my last question because we're actually running pretty long and I think we want to talk to you on LNG as well.

Jacob: I want to do GLNG. We got to do two parts.

Andrew: Just last question here would be I think a lot of the commentary and this relates to the incentive issues we've talked about and everything. But a lot of the commentary here was, hey, this is really promotional management team. We'll probably talk about that with GLNG as well. But somebody pointed out, oh, I think I was pretty attracted to Jefferson when I was reading the 10K and reading how they described it. Somebody pointed out, hey, look at what they were saying in 2019 about Jefferson. They said this is a dog. They were saying Jefferson was going to do 100 million in EBITDA this year. [crosstalk] In 2019 they said Jefferson does 200 million in '21. It's generating basically nothing, right? They're saying, look across the portfolio. This management team has a history over promise and under deliver. It probably relates to the incentive issues we talked about. I just want to let you address that.

Jacob: I would, first of all, I saw that comment and I sort of thought, well, something happened in 2020. That's something impacted energy markets. The movement of product down from Canada went to zero and movement of all sorts of other commodities ground to a halt and EMP crews pulled rigs, pulled man camps, pulled people. I mean, this is a shock to the system. This is a pandemic. Yes, 2019 pre-COVID targets were missed. I think we understand why. Similarly, on a quarterly basis we thought they'd do better on Jefferson in Q3 than they did. People are concerned about it. They'll probably not quite hit it. If I had to guess in Q4, it's just not linear and we're in a world with the pandemic. But look at what they've built. Go through the economic. Maybe we'll talk briefly. I'll try and hit infrastructure because I've gone on for a long time quickly. Infrastructure has four things. You talked about rail. It's we covered some numbers there and I think we can get to a billion dollars of value there without really stretching the imagination, that would be 10 times 100. They've got some blocking and tackling, I think they'll get there. Long range is a power plant that they built, they sold half of it.

But they retained half the economic interest. It's 120 going 130 of EBITDA. They get half so call it 65. It's super Steady Eddie long-term contracted power. I think that's a decent multiple. I think there's 300 of debt that belongs to them. Then above and beyond that, I would give another 450 of equity value or something like that. You could call it 750, which is a low double-digit 11, 12 times to have multiple. You've got enterprise value basis, maybe a billion at rail which is unlevered at the moment. You've got the 750, I call it Longridge value. Repauno they've put 325 million in, 25 debt, 300 equity, and I think it's a tremendous facility. We spoke to the guy who runs it. It's an amazing asset on Delaware River in New Jersey. It's got all sorts of features, hasn't really turned on yet so it's not producing anything. Everybody ignores it. We think it's a really unique asset. The guy who runs it spent 26 or 27 years at ET. Then you can see it across the river and he gave us this great anecdote of how he dreamed of one day running that asset. Now he is. It's a real thing. We just mark it at book because we don't need need it for upside but there is upside.

But it doesn't produce anything. That leaves us with Jefferson, okay? They put 700 million into this project for sort of phase one and it's not producing. You say, God, is it worth anything? Well, here's what it is, multimodal terminal with a port for seaborne with rail, with truck, and it's built pipes into the two largest refineries in North America, Motivo, which is Saudi Aramco and Exxon. They announced a 10-year deal with Exxon, which, by the way, that's not easy to go. Try and go get an Exxon deal for 10 years. It's not easy. You got pipes into the two biggest refineries and rail and truck and by sea. It's super strategic and it hasn't ramped yet because COVID has impacted timing. But it's going up. There was a Port of Houston terminal that traded hands. I think there was another one.

God, I don't want to get the name wrong, but there's another one. They're both sort of low double-digit multiples. We think they're going to do it and I've told management. I'm like, it's time to execute. Whatever you got to do, it's time to turn this thing on. They have certain promises, we think over time. What we did is a unity economic basis, how do they make money? Docking fee, product over the port, over the dock into the facility, storage, piping in and out, rail in and out, trucking in and out. They're toll takers. We went through sort of on a capacity basis. What could this thing do if it gets utilized? We think that at a reasonable utilization, eventually could do 140. Right now it's doing barely anything. There's a cadence to it. Maybe it's 50, 60, 70 next year. I don't know, maybe better. Maybe it can go up toward 100. But with Omicron, I'm not going to be too aggressive on the timing but it's going to make its way to 100 plus EBITDA. The best thing about being skeptical on that is that the numbers will just prove the point.

Andrew: Perfect. Well, hey, Jacob, I think we need to call it here because this is the issue. That's why I only one-to-one, it's going to be a podcast. We've got to switch over to the GLNG podcast. What I'm going to do, I'm going to stop the recording here. We'll record GLNG separately so that we can have two separate things. But anyone who's listening, this is part one. We'll be right back with part two.

Jacob: Thanks.

[END]