FTAI Aviation Preferred: 9% Current Yield, 12%+ Future Floating Yield, 5% Discount (FTAIP)

Due to the Fed’s rate-hike campaign, floating rate preferreds are currently favored by the market so far in 2023.

The FTAI Aviation Ltd. 8.25% Fix/Float Series A Cumulative Preferred Share (NASDAQ:FTAIP) has one of the highest floating rates we’ve seen, at 688.6 basis points above whatever the 3 Month LIBOR rate is on 9/15/2024.

FTAIP Profile:

FTAIP is a cumulative preferred series, so FTAI must pay you for any skipped dividends, before paying common dividends. The coupon is 8.25%, paying $.515/share quarterly. The floating period starts on the 9/15/2024 call date.

At its 1/26/23 closing price of $23.70, FTAIP yielded 8.70%. It pays quarterly, and should ex-dividend next on ~3/3/23, with a ~3/15/2023 pay date.

There are 3M shares of FTAIP, so it’d cost FTAI $75M to redeem on or after the call date. Buying them ~5% below the $25 call price would give you a $1.30/share capital gain if FTAI redeems them.

There are 7 quarterly dividends left before the 9/15/2024 call date, $3.609/share, giving you a total net profit of ~$4.91/share, 20.71% in ~20 months, or ~12.64% annualized:

FTAIP’s future floating rate is 688.6 basis points above whatever the 3 Month LIBOR rate is on 9/15/2024, which is one of the highest floating rates in the market.

With 3M Libor now at 4.82%, (vs. just 0.25% a year ago), that would work out to a total rate of 11.71%, bringing in $2.93/share per year. At $23.70, that equals an equivalent future yield of 12.35%:

On a Funds Available for Distribution, FAD, basis, FTAI has had a very low Preferred Dividend Payout ratio of 10.71% so in Q1-3 2022. That equals a strong Preferred Dividend coverage factor of 9.33X, roughly in line with the coverage ratio in full year 2021:

Company Profile:

FTAI Aviation Ltd. (NASDAQ:FTAI) owns and acquires infrastructure and related equipment for the transportation of goods and people in Africa, Asia, Europe, North America, and South America.

It formerly operated through 2 main segments: Aviation Leasing, and Infrastructure. The Aviation Leasing segment leases aircraft and aircraft engines. FTAI was founded in 2011 and is headquartered in New York, New York.

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

Earnings

FTAI recycles its aircraft and aircraft engines via asset sales, which can alter quarterly earnings dramatically.

In Q3 ’22, Aviation Leasing had $165M in Revenue, nearly 2X $86M in Q3 ’21, due to $85M in asset sales. Adjusted EBITDA was $96M, in line with Q3 ’21, with $51M in Net Income, down slightly vs. Q3 ’21.

FTAI’s other segment, Aerospace Products, had a solid quarter with $19M of EBITDA.

Management was bullish on the Aerospace segment on the Q3 ’22 call:

“We see tremendous potential and feel good about generating $20 million to $30 million in quarterly EBITDA and think $100 million-plus in 2023 EBITDA to be very doable.”

Q1-3 Consolidated Revenue was up 83%, EBITDA up 37.5%, and FAD up 55.6%. Net Income fell -115%, due to non-cash asset impairments. Interest expenses were up 14%, due to higher interest rates, and more assets to finance:

Q4 ’22 Preview

Mgt. made more asset sales and purchases in Q4 ’22, as of late October ’22:

“With respect to Q4, we have begun closing the sale of $200 million in assets and have signed letters of intent to purchase $300 million in new assets also in Q4. The net pickup in leasing EBITDA from the new investments minus the give-up from the sales we estimate to be $40 million per annum or $10 million per quarter.” (Q3 ’22 earnings call.)

Debt Leverage:

Due to the $564M in assets it spun off in August 2022, FTAI had a small $26M Equity basis as of 9/30/22, which inflated its Debt/Equity leverage.

Net Debt/EBITDA has improved to 4.83X as of 9/30/22, vs. 5.44X in Q1 ’20, pre-Covid. That’s also considerably more conservative than the industry average of 9.46X. FTAI’s EBITDA Margin of 64.26% is also much better than the industry average of 35%:

Debt:

As of 9/30/22, FTAI’s Debt/Assets ratio was .89X, a conservative number. It had liquidity of ~$73M in cash. Management is targeting a lower leverage level of 3X to 4X in 2023.

FTAI’s debt is comprised of corporate bonds, which come due in 2025 2027, and 2028. There’s no balance due on its Credit Revolver, which was paid off earlier in 2022.

“In conjunction with the spin-off of FTAI Infrastructure, the Company repaid all outstanding borrowings under its 2021 bridge loans and $200.0 million of its6.50% senior unsecured notes due 2025, and approximately $175.0 million of the outstanding borrowings under its revolving credit facility.” (Q3 ’22 10Q.)

Parting Thoughts

We rate FTAIP a BUY. It should do well in 2023 and over the next few years, with its high future floating rate. If FTAI redeems it, instead of going with the floating rate, investors will also reap a capital gain, in addition to the quarterly dividends.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.