Yet Another Value Podcast - Jacob Rubin is flying with $FTAI

Episode Date: December 17, 2021

In Part 1 of this two part podcast, Jacob Rubin returns to the podcast. We start by wrapping up his prior podcast appearance on ESGC, and then we move into discussing FTAI and why he thinks the stock is dramatically undervalued and an upcoming spinoff could unlock significant value.My FTAI notes: https://twitter.com/AndrewRangeley/status/1470841498048634885?s=20Jacob's first podcast appearance: https://twitter.com/AndrewRangeley/status/1366760857590521861?s=20Jacob's research on FTAI: http://philosophycap.com/research.htmlChapters0:00 Intro2:20 ESGC follow up10:15 FTAI overview16:00 How a spinoff and eliminating K-1's could catalyze FTAI22:05 FTAI's aerospace segment32:05 The upside from FTAI's parts manufacturing36:55 Is engine leasing really a good business?45:30 Discussing FTAI's external management structure50:30 FTAI's infrastructure segment52:05 FTAI's management team54:20 More on FTAI's different infrastructure assets

All right, hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And 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? 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. So, you know, we're here. 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 in advice. Jacob and I, traffic, especially Jacob in some quirkier, hairier stock. So everybody should just particularly remember that device today, not investing advice. Please consult a financial advisor and do your own due diligence. Second, a pitch for you, my guest, people can go back and listen to our first episode for our pitch. But, you know, I think the best pitch I can give you currently is our mutual friend, Leo, 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. He didn't do all

the new diligence on you and thought you were a great person to go work with. So I'm really happy for the two of you. Look, and I think that's about it. A big thank you to you in the community you're building because you put me in touch with Leo. And I think people out there, especially in the investment context, know, there are labor issues going on. I think there's a Reddit thread of quitting work up to 1.3 million members last I checked. And, you know, so finding someone as of Leo's caliber who fits us perfectly was just such a you know an amazing fortuitous thing and I thank you and we're really excited we just had Leo out we actually fun anecdote I mean part of our process that we do we flew him out and and he sat with us for a whole week in the

office to just absorb the culture see how we mesh do our strategy and 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 And so 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. Yeah. And I thought your process when you were recruiting him, as Jacob said, he flew him out and they spent a whole week together in the 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 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. Yeah, you set it up perfectly. You know, what we really want to do is focus on FTAI and GOLR,

not just to 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 peddling and to not let it impact your work rate. And so, 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 on a pod, pitched this ESGC, and it was a spectacular debacle, worst investment of my career, worst investment of our fund for the avoidance of doubt to anybody listening.

We lost money on it. We bought high and sold low. And that's what it was. And so if I give you a little more detail to recap for that. 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 Witherspins company did or MGM and Lionsgate, you see all the, 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 lay out 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. And if we're right, like take a Will Scott, our biggest position. Over the years from nine bucks to 40, they do everything they say. Every single thing they say. And we have predictions.

And 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, we feel so smart. Yay. 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. And 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. And so 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. And so eventually we took the, took the L. And what I'll leave you and your listeners with is just a couple of lessons learned. And these apply. And you can probably see my selection in FTI and Golar, the fact that I have two names, the margin of 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-oddongs, 30-odd shorts that are idiosyncratic. They're sized. One of our best

risk tools, as I'm sure you have too, is sizing. So we have a roadmap to know, or right or wrong. And we can make the ones that are tracking well with bolstered conviction big. The ones that don't track are small or we exit. And the ones that have certain risks like binariness or they're very hairy or debt cliffs. They need to be sized appropriately. Well, that's a portfolio. But a podcast, like, oh, how many I'm going to do? I show up. I pitch one thing and I leave. And then it lingers. And what I've learned is it floats in the ether. And it gathers comments. And if I ever read it, I'll go, you know, cry myself to sleep. And so you have to find this balance.

And the truth is my bias was I find a lot of Irosone pitches and podcast pitch is super boring. Like, let's pick our right to the heart of the podcast. No, no. Well, so if I took your whole library, there are some fraction that are really fun to listen to. And some are a little more down the middle. And I, just the way I'm wired, I don't really want to listen to the boring ones or

the 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 blind me in my selection. And it should be a balance. Because we don't have a full idiosyncratic portfolio cobbled together, you know, this should be something with a margin of safety that's a long-term orientation. Like these two today are 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 just see what happens in the world. It should be a balance. It should be fun and

interesting and a little bit different without being completely, you know, binary. You know, look, I think one of the things I've learned from the podcast and from my writings and the blog and stuff is, you know, say there are two companies that are both worth 10, but one of them has $8 in debt and $1, or sorry, $7 in debt and $1 in equity value. it's worth eight as an enterprise, but if it went to 10, the stock would triple. Whereas another head, it's just worth eight, no get. So if it went to 10, the stock would 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. And then when they don't work out, because, you know, they've got $7 a debt and $1 equity, people are freaking out, but, you know, they just kind of pass on the one that, hey, it's worth it. It's at eight. I think it's worth 10. There's no debt. I just find like the ones with like really high upside lots of hair attract lots of eyeballs and

people go crazy on them. And I'm with you. It needs to be like idiosyncratic position size. I don't know. But I've definitely noticed if I say, hey, something, this thing might have a short squeeze potential. People go like the views on it double. There's huge engagement 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? 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 and 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. And that's the point is like if you're not wired to take a mistake and move on, like do something else with your passion or your time or your money or your profession in my case. And I think one of my key attributes, hopefully, is, yeah, I'm embarrassed and I feel bad and I lost money personally and the fund did. But we move on and we keep going. And over time, this is not 100% hit rate business where this is like baseball. And what I need to do is have a good batting average. And when I when I whiff, I need to find it early and contain the damage, which I think we did adequately here. And when I get it right, put some chips behind it. And then,

that's the job. And so that's just the sort of high level. And now let's talk F-Tai. Let's talk Golar. Let's get into it because these ideas are really fun. And that's, you know, that's behind us now. 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. So let's start with the one, a little more in my real house, F-Tai. And I'll just turn it over to you. What is F-Ti Fortress, Fortress, what is it, aviation and industrial? Is that right? I can't remember. aviation infrastructure, but Fortress, it's a very literal

ticker, Fortress, Transportation, and Infrastructure, F-T-A-I. Why don't we turn it over to you? What are they, why are you so interested, all that type of stuff? So, yeah, and I have kind of a framework. I saw you 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 know, what you said, what your father, so 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 three to six months out. It's timely. Then you've got these two business units, aviation and infrastructure. So if we sort of tick through and maybe after each section, you know, we can

take questions on sort of the technical stuff. Okay. So what is it? It's FTAI. It's a pass-through LLC corporate structure generating a K-1. It has 99 million shares. is outstanding trading at 24 bucks or so, call it $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 airline, 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. and I'm throwing lots of numbers at you.

We have a deck that we just figured, I haven't really done this before, but we'll just make it available and you can look at it. So I'll give you that link. I'll put the notes, the link in the show notes, and people can click on it, and you can see the numbers I'm laying out. It's all public stuff. I've seen an early copy of the deck. It's definitely worth checking out if you're interested.

And 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 like this is super honest and down the middle we're just doing what we do but i i do want people to have the perspective of like do your own work read the disclaimer on page two it's like there's a reason we don't like to share because i want to get hung out to dry if i accidentally did something wrong but

we did my best so that's the structure um what they what they are these two segments will get into each segment because it's actually nuanced and a little tricky. So 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 and the ability to raise attractive capital is important in both cases, building a giant project

that takes five 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 benefits. So they really don't belong to each other. And what we found, too, is infrastructure investors are nichey and specialized. They're used to the cadence of, say, these long-term projects. They are willing to look from, you know, 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, and then one day it turns on and eventually

it produces. And once it produces, and it's on a 15, 20-year deal, and you put some 20-times multiple and the five times, you know, five percent sort of rate. And it works for infrastructure at Brookfields of the world. But they don't know or care about aviation. And then you got aviation investors. And what infrastructure does is not only does it, is it a different model? It obfuscates the consolidated financials because you take the debt on the chin day one. Your enterprise value reflects the 700 of Jefferson debt in this case or the 25 of Rapano or 294 consolidated to Longridge, you're taking a billion dollars of debt on the chin and they might not have even turned on. Jefferson did $3 million at EBIT dollar last quarter. So let's say

you annualized to 12 and look at the 700 of debt. And what does that do to your consolidated metrics both leverage and valuation? It just ruins everything. And so it's noise. And so when you split, you get two pure plays and you concess the capital structure, the business plans and the prospects independently. And it plays into different investor bases. So I think, you know, we always talk about these corporate events. 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 is all public, but like it's happening by year end. And sometime in the first quarter, it will be effectuated. This is timely. It's happening. They get it. and we're excited about it. Number two, K-1s, 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 is very real, and it's a big pain in the ass.

Jacob, can I just jump in here? So K-1's, what he's referring to is right now, FTAI is structured as an LP structure, basically. It's an LLC, path-through entity. So if you buy it, if you go buy stock on the open market, at the end of the year, you will get a K-1. which is, for many people, it's a disaster because K-1s 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 in December. Hopefully, they split off in Q1 of 2022. They will go from a LLC pass-through structure into two different C-Corps, which are normal stocks that you don't get a K-1 for. So just to make sure everybody knows what we're talking about. And so there's the pain-in-the-ass thing for, like, individuals, like you just said, like you don't want to file a K-1, and you can make the decision.

Do you want to deal with the K-1? Is it worth it or not? Fine. But there's some bigger ramifications. And 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 Carlis of the world, that all converted. And they were weighing the tax benefit of their structure with all the benefits of not being a K-1-producing entity. And they all came to the decision to convert to Seacorps.

And then there's been some energy companies as well, some partnerships, notably New Fortress Energy, another Fortress entity, they converted. So we analyzed two things. Stock performance relative to the S&P over 12 months. We found an average of 20% uplift outperformance outperformance over S&P for the list that we ran. And every single one outperform 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%, I believe, is what we showed, increase in daily trading volume. And 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. So we get an uplift in performance and liquidity. And 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.

So they don't have, there's no, there's no, there are no indices in FTI. It's 40% of the market flows. So supply demand. Like it's a whole bunch of demand for your stock that doesn't exist right now. So let's get the indices. And believe me, these guys, they're savvy. The FTI 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. So, you know, hopefully some of these index start buying at the end of the, I don't know, first quarter. We'll see. Also, let's say you're an institutional investor. I've talked to so many long-onlys who the first thing they say is K1, pencils down, can't do it.

Yep. Stop talking. I'm like, I've even tried to pitch. I'm like, they're not going to be a K-1 producing entity in Q1. So 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 day. It takes time.

Oh, I earned KKR when they flipped end. It took time, and I remember they would always say, oh, our volumes up, and I'd say, yeah, but your stock crescent up. No, exactly. And so I'm saying, just wait, and then there's going to be a day where T plus one, you can buy it with no K1, and you can just, you'll have done all the work. So get ready, if that's your orientation. So some guys, no K1.

Some other folks, by mandate, can't do K1s. And 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. The problem is what I found specifically on F-tie is this swap capacity is very, very tight. It's hard to find. You need to go find it with a bank who will take sort of all the logistical side to it. And you need to find a swap line. And 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. And so whether it's guys who couldn't come in or want to be bigger, but they're hamstrung by this swap issue or it's folks who can't do swap and can't do K-1s. And by the way, Chris, our analysts also pointed out it's not even eligible for Robin Hood. Like, Robin Hood doesn't do these. It's not even on that. I don't, if we're wrong, blame Chris because he told me. But what I'm hearing is it's not even on there. So 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. So that's, I mean,

that's just like classic right up the middle of a Ben 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-Corp, so it really opens itself up 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 assets. So that's perfect. But let's dive into the business. What are the infrastructure assets they own? What are the aviation assets they own? So 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. So I'm not just pie and sky lunatic, but we see that this could be $80 a value. And just the

rough split, we have something like 65 going to aviation. So 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. And there are some catalyst to each business that we haven't touched on that are almost sort of belong in the technical section, but they're more business specific. So if we dive into aviation first, because it's the bulk of the pie, what is it? 439-odd engines that they own and lease.

Some of these are stapled to aircraft and some just are freestanding. And so this started as this asset leasing business, different than just straight air leasing, which was aircraft and oftentimes brand new. These are used and 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. There's something totally different that is just apples and oranges. And if you're trying to do some air leasing framework with book values or whatever, it's wrong. It's not what this business is go forward. And that's sort of my job or the opportunity here is to explain it. And 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.

And this is like playing in the long game. Talk about playing chess. So one thing they've done is vertically integrate into the hot section of their engine. So to give one more bit of color, the predominant engine in the fleet is a CFM 56. This is a joint venture between Saffron and GE Aviation. And 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. but these are.

They are also the most prolific engine in the world. 22,000. They power 737s, 8-320s. They're all over the place, predominantly narrow body and cargo. And if you're thinking aviation, narrow body means a little bit more domestic. It should snap back and be more resilient. And cargo has just been a powerhouse through the whole thing, right? If you're talking COVID, cargo is awesome.

So it's a very prolific engine. We're talking 449 at a, you know, 22,000. So 2,200 would be 10%, you know, 220 is one. So they're like 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%, so market shares. So this thing can grow the fleet many times over before being, you know, an annoyance to the big guys out there.

So if you're wondering sort of the tam or the opportunity, it's underpenetrated large tam. So that's part of it. So stapled to this fleet and this backdrop is. is the vertical integration. They have a joint venture with a privately owned aerospace company. And this company with FTAI is producing five parts that go in the hot section of this engine. And they got the first one FAA approved this year.

The second approval is probably, I don't know, Q1 event. I think they're getting it submitted right now. And once they get two approved, these are 60% of the value and then the other three will take another year. But when they get two approved, 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. So we believe customers are sort of waiting. You get two 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. So that is on

the come. It's not producing anything for them yet. But this is a PMA, FAA, you know, 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. And so if you look at HICO or... I was not saying this is reminiscent of what HICO does, right? And they've mentioned this is very high quality. And if you think about why, the ROIC is tremendous, the depth and width of the moat is huge. And once they go in, almost like an authorized generic, once they go in with this aftermarket part and they figure out casting and coding and 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 nichey little part? No, the answer is no one. 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. Again, it's reminiscent of HICO, right? Everybody used to say, oh, HICO trades like 25 times or whatever. People you say, oh, the OEMs are going to shut them down or the suit. Well, that didn't happen. And then people say, well, if they can do it, you know, other people are going to come do it. And no, nobody could come there. There are hundreds of parts or thousands of parts and plenty of engines and other aircraft over time where aftermarket comes in. And if you take a small amount of market share, it is best for everybody

to just leave well enough alone. And so 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 have 25, we get 25% of it. of it. So right off the bat, we get 50 million at EBITDAG scale at 5% market penetration. And what's that worth? That is pure play aftermarket parts. And we have comps. And that's very valuable. And oh, 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. So 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. And to give one bit of context, to overhaul this engine right now is like six 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 two and a half or three million dollars. Yep. So if you were, 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. So your book value, you know, what you paid, what it went on your books for is dramatically

understated because you're going to be, it's going to be twice as valuable to you as anyone else. And oh, by the way, you might be able to tear it down more than once. And I haven't even gotten to the AAR and Lockheed. And now I'll do that. So they've built this platform. One of these, you know, 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. So to sort of save the jobs and keep the facility, FTI started talking to them, they've been wanted to do an MRO angle for years. And here, boom, perfect fit. So 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 airline.

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. So they're going to have modules, these three primary modules on the shelf up in Montreal with a bunch of technicians ready to, you know, do all the work around it. Then the third thing that they've built is this AAR partnership.

So that's a AIR ticker, public company. And 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 part of the engine's 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, take a commission. And this is accretive to all parties, but this is great for FTAI because essentially when you do the unit economic 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. And so capital goes out for the rebuild,

you put it to work again. And then eventually some or all of it gets salvaged, this boost that salvage value. And so better salvage value, the ability to modularize, which will be even better economics and salvaging. And 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. Yep. Big.

So they've built this thing. So if you want to use a hodgepodge of terminology, 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 and rebuilt and leased out. It still does leasing, but it's also vertically integrated into the parts. So 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 like these old, you know, constructs that you use for air cap or air leased, they just don't apply. So let me back up for a second and just, I just want to summarize what you're saying. So 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 HICO 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 at it, you can look at my notes. I was just looking at, oh, they own engines. How do you value engine? You know, Compitants Air Cup. 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 here. 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. This is from leasing. This is from leasing. 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 like 90% plus. The engines are lower, sort of 50s and 60s. It's low now because of COVID. So there is a reopening angle here. And that is at risk, by the way. If Omicron goes nuts as it certainly looks like it's going nuts, this might not, 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 know, you can come up with 500 million bucks at EBITDA. And 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 the big target is all the new stuff. So the new stuff, they have quantified at scale could be, you know, 200 or 220 million of incremental. And that would be basically like that rebuild at six, that that's now two and a half or three. 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. So you take the number of shop visits per year times the savings. Boom. Great. So we can get over time towards 700 at EBITDA. And I don't think it's crazy. I don't think it's next year. So that is not what I'm saying. I'm not doing a 20-22 estimate, but I'm saying we build toward 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. And I don't care that much is the bottom line. And so then the next question is, all right, what's the right multiple? And I've talked about Haiko and Transdime and God,

I would love to just be there multiple, but it's only a part of the story. It's a small part the story. So 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. So it's not, it should be more on EBIT. But we think it's going to a more asset like service oriented model. So we think EBITDA or free cash flow eventually will be relevant here. So we don't really have that much of a problem looking forward. And so simple math, we can get to something like an 11 times multiple. I mean, again, it's like 20 plus times for HICO, mid-teens for Transdime. So you blend a

little bit of that in. The MROs trade sort of low double digits. And then, you know, and then you figure out what you want to do with the leasing comp. So we shake out at 11. So you can get on 700, whatever, $8 billion. And then I didn't even talk about that, the JV, that what I said was 25% of 200 at 5% market penetration, pure play aftermarket parts business, we think super valuable. You slap like a 15 times on 50, another 750. So big picture, you can get to like 8750, strip out some debt, divide by the share count, and that's how we get to our big number. And 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. Like, yes. And if you think COVID lasts forever, then you probably

They don't want to go in aviation. Okay. But big picture, we just think they're building something really innovative in an industrial, you know, sleepy value name. So it's kind of cool. So 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? And that will drive into the second question. So I'll just ask you now. The second question would be, you know, they've got quotes about how attractive leasing engines is versus leasing aircraft. And, you know, I know the guys from Air Cap, they're extremely smart. And Air Cap has had engine leasing before. For those who don't know, Air Cap is the largest aircraft lessor. And Air Cap, 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 an engine leasing. So my two questions you would be, one, why hasn't anyone done it? And two, why hasn't anyone done the aftermarket's part side that they're trying to do? And then number two, is the engine leasing business as good as you're saying if the largest aircraft lesser in the world every time they touch it tries to run it off. And there's some stocks in the stock. There's some smaller engine lessers I'm familiar with that maybe haven't performed that that well. So those would be my two questions. So 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

are quite large. And they do big shiny deals on the newest and greatest models. And they order billions worth. Yep. And so working on used engines that are like three million, two million a pop to buy where you're nickel and diming, where at times you're not buying much. And then you're trying to buy and play offense when the market's 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 you get too big, it's a nichey thing. And it's something where you either should be all in like F-Tai and become the world dominant player at this niche, where you shouldn't do it.

And you stick to the bread and butter. And if you're an employee at one of the big guys, like, do you want to go work on two or $3 million used engines or do you want to go work on billion dollar giant, you know, sexy dream miners or whatever? Like 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 holds 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, like I'm trying

to contrast what we're doing here to air leasing. Air leasing, if you go back to like ILFC, back in, you know, 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 AAA rated credit, they have a better through the cycle cost of capital than airlines. So they optimize this, this ARB spread by having a capital, you know, cost of capital advantage. And then they negotiate scale-based OEM discounts. And that's sort of the value they bring to the market. They can take a 10, 11, 12% ROE, then they lever the hell out of it. And they're this middleman. And maybe they have some value add beyond that. It's tenuous. They get the OEM discounts,

They have lower cost of capital, and then they offer a leasing product. So that is something, you know, where I do think book values 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. I just, it's just different. So I don't think their lack of involvement here is some negative signal. Okay.

That makes sense. And then, you know, I don't think we fully address it in the question. Why has no one else tried the aftermarket's part side? 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. And so you've got this regulatory body that oversees everything. So to have the engineering know-how to commit the capital and the resources to a project,

to recreate these parts and 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. And if you want to go, you know, create the Andrew Walker aftermarket's parts business, like, good luck. I guess not easy. So I do like, I think they've got an advantage doing it here because they have the engine leasing side of the business. So they have almost a built-in customer to kind of like internally spin this up, right? Very similar to how Amazon had the retail side to internally spin up Amazon web service, right? They had the demand. So 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? Yeah. And I got to make one more big picture point if you're thinking about this. So we alluded to COVID and sort of near-term headwinds and relatively recent, you know, past headwinds, but hopefully in the future we come back. There's 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. So 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, and eventually you run out of what they call green hours. And now you've got to fix your engines, which is cheaper than buying new ones.

So you're going to fix your engines eventually. That is kind of like springloaded demand. I mean, eventually they're going to owe, the bill's going to come due. Second of all, airlines are struggling. You know, the stocks hold up because everyone's trying to play the reopening trade. But, I mean, how many more interested legroom can they, can they weasel out? You know, I mean, these guys have these unionized workforce. They're the 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. And we're not alone in that. The FTI sees it. And you can rest assured they're trying to pitch all these guys. So we certainly hope to see some deals with big fleets.

And we think that's out there, you know. And just going back to the part side of the business, you know, So when you were talking about, you said, I think the company can do $700 million in EBDA, slapping 11 times multiple once we blended on it. Like, what happens if you are wrong? They've got an approval for one part. They're hopefully getting approval for the second part, which 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 apart? Like, what would the EBITI drop down to and what would your valuation look like them? So let's look at, I guess, the pro forma aviation business. It'll be, there's the two, three of corporate debt stays here. Yep. But then they're going to get an intercompany from infrastructure. structure at 800. So you're going to knock that to one five and there's a 300 million preferred.

So you got one-eight of liabilities. And if we use the 99 million share count and we're just valuing this thing at, I don't know, just pick a number. Every 10 bucks is roughly a billion of equity, right? So 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. And what do you get for it? Well, I told you at a utilization normalized and at pre-COVID levels, you could spit out at this fleet, 500 EBITDA. And you can quibble on the EBIT 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. And by the way, the whole stock, including infrastructure, is 24 today. And I haven't even counted all the new stuff. And the new stuff is 200 odd of EBITDA. at a much higher multiple. So, 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 start. Now, people point out of the cash flow, right? And you say, oh, that was going to be the next question. It's perpetually negative. Well, guess what? 200 engines went to 450. Was that smart or are they just lighting, you know, 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 that's what 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. So basically, many of the central overhead, the executives, their salaries are actually paid by, Fortress. But then there's the sort of in exchange, FTIP pays Fortress a management fee. Can I just jump in? So what Jacob 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? So as you're saying, Fortress is the external manager. Fortress pays it all the guys who actually work at FTI themselves, but Fortress gets a management fee and an incentive fee. And historically, externally managed companies, people don't like this because it creates a disincent, it creates a mismatch of its perception. I think the 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 that it ties up perfectly.

We have a chart and doesn't tie up perfectly, but it covers overhead because Fortress pays some stuff and then they have this manager fee. Frankly, no one's getting rich on that fee. Okay, so 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.

So it's right there in the proxy, a 2% in the quarter return on net equity, growing just some empire in and of itself is not growing equity. Because to grow equity, you know, you have the asset value and you have how you pay for it in 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. And it's an 8% hurdle. They have a little bit of a catch up between 8 and 8.9% in the quarter. It's like between 2 and 2.22, whatever, is where they get 100% pay out on that little portion.

So it's sort of a catch-up on the first eight. And then after 8.9% it's a 10% incentive fee on creation of net equity. So, okay, is that fair? Is that good? Is that bad? All I know is go look at like our buddy Mike at NonGap or formerly known as NonGap. Now he's going on to bigger and better. But you can look at these comp plans.

You know, you go look in some other industry like Dropbox and the founder has PRSUs from 30 to 90 bucks. gets filthy rich or look at Elon Musk making billions and billions if the stock works. And so we don't really have a problem with RSU payouts and strike prices way up high because we know in the world where they get paid, the stock's up. So the world in which these guys are clipping 10% is a world in which they're creating net equity value north of 9%. And whether you want to give these guys huge grants of RSUs struck at $40 stock or do

it this way, I honestly, I don't think the incentive is all that different. But let me just push back on one point because they did a deal on the infrastructure side that I think was very, I think it was a good deal, right? They acquired U.S. deals, railroad operations. And it's in the scheme of all the aviation stuff you're laying out, not 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 size equity offering to fund that deal. And, you know, historically, this is not a company. I'll just, you said that you think aviation is worth $60 per share. And they just funded a, in a creative infrastructure deal, but they funded. with equity that they issued at like $25 per share, right? And I don't think the management team here would really disagree with a lot of the math you just laid out. So 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, you know, seem pretty attractive as a buyer. And they're probably not going to be a share buyback. So how do you look at that? So 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. It's like a fund can make a lot more money for its principles if it's bigger than if it's running $10 million.

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. And so 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. So you then judge the deals.

Was the rail deal a good deal? Yes, it was. And 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. So if they can get away from just U.S. steel, now it's like a 10 or 15 year contract with them, which is good. if they can diversify the customer base and trade anything like Rails, then this was a home run deal. And they can grow 80 to 100 with some actions they're taking. So 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. was an important part of the of the spin, right? They needed that deal to get infrastructure. I want to spend time on infrastructure, but infrastructure still have. I don't know if we're going to have enough. Well, infrastructure has Rapano 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. And so they had different options. Sell all those assets one by one. Yep. Or give it a little more heft so it could stand on its own. And that's the

option. That's the route they went. And 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. Like they deal with rail. They have run rail. In fact, that's why U.S. Steel allowed them to buy it. Let me just turn to my last question because we're actually running pretty long and I think we want to talk GLNG as well. I want to do GLNG. So we got to do two parts. Just last question here would be, you know, 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 a really promotional management team. And we'll probably talk about that with GL&G as well. But, you know, somebody

pointed out, oh, I think I was pretty attracted to Jefferson when I was reading the 10K and reading how they described it. And somebody pointed out, hey, look at what they were saying in 2019 about Jefferson. Like, they said this is a dog. They were saying Jefferson was going to do $100 million in EBITDA this year. In 2019, they said Jefferson does $100 million. It's generating basically nothing, right? And they were saying, look across the portfolio, this management team as a history over promise under deliver. And that proudly relates to the incentive issues we talked about. So I just want to let you address that.

So I would, first of all, I saw that comment. And I sort of thought, well, something happened in 2020. And that's something impacted energy markets. Yep. And so in the movement of product down from Canada went to zero. And movement of all sorts of other commodities is ground to a halt. And EMP crews pulled rigs, pulled man can. People. I mean, this was a shock to the system. It's a pandemic. Yep. So, yes, 2019 pre-COVID targets

were missed. I think we understand why. Similarly, on a quarterly basis, like we thought they'd do better on Jefferson and 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 a pandemic. But look at what they've built, go through the economic. So maybe we'll talk brief. I'll try and hit infrastructure because I've gone on for a long time quickly. Infrastructure has four things. You talked about rail. 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. You know, they've got some blocking and tackling. I think they'll get there.

Long Ridge is a power plant that they built. They sold half of it. But they're retain 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. So I think there's 300 of debt that belongs to them. And then, you know, above and beyond that, I would give another 450 of equity value or something like that. So you could call it 750, which is a low double digit, you know, 11, 12 times type multiple. So you've got enterprise value. basis, you know, maybe a billion at rail, which is unlevered at the moment. You've got the 750 of, call it, Long Ridge value. Repano, 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 a 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, and he used to 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. So 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 leads us with Jefferson. Okay. They put 700 million into this project for sort of phase one. And it's not producing. And so you say, is it worth anything?

Well, here's what did it, multimodal terminal with a port for seaborne, with rail, with truck, and it's built pipes into the two largest refineries in North America, Motiva, which is Saudi Aramco and Exxon. And they announced a 10-year deal with Exxon, which, by the way, like, that's not easy to go, like, try and go get an Exxon deal for 10 years. It's not easy. So 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 was another one. They were 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. So whatever you got to do, like it's time to turn this thing on. they have certain promises we think over time so what we did as a unit economic basis how do they make money uh docking fee product over over the port over the dock into the facility

storage piping in and out uh rail in and out trucking in and out it's they're they're toll takers and so we went through sort of on a capacity basis what could this thing do if it gets utilize. And we think at a reasonable utilization eventually could do 140. Right now, it's doing barely anything. So 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 Almacron, I'm not going to be too aggressive on the timing. But it's going to make its way to 100 plus EBITDA. And, you know, to skeptics, you know, the best thing about being skeptical on that is that the numbers will just prove, prove the point. perfect well hey jacob i think we need to call it here because this is the issue this is why only

one do one stop in every podcast we've got to switch over to the g lng podcast so what i'm going to do i'm going to stop the recording here we'll record g lng 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 thanks