FTAI - FTAI Aviation Series C Preferred: 8.8% Yield Strong Q3 '23

2023-11-26 09:15:00 ET

Summary

• FTAI preferred shares have a higher dividend yield of 8.7% compared to the common shares' yield of 2.3%.
• The market has favored FTAIN in 2023, with a total return of 28.44% compared to 4.9% for the Leasing Industry and 19% for the S&P 500.
• FTAIN has an attractive future floating rate, which may go over 12%, and strong dividend coverage.

Do you hold any preferreds in your income portfolio? Preferreds usually have much better dividend coverage than common shares, and often have much higher dividend yields.

Such is the case with the FTAI Reset Rate Cumulative Series C Preferred shares (FTAIN), which yields ~8.7%, vs. just ~2.3% for the FTAI Aviation Ltd. ( FTAI ) common shares.

Our portfolio added FTAIN in March 2022, and, while it struggled in 2022, its total return since inception is currently 11.40%, thanks to its ample dividends.

The market has favored FTAIN in 2023, giving it a 28.44% total return, vs. 4.9% for the Leasing Industry, and 19% for the S&P 500, as of 11/24/23.

Company Profile:

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

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

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

Segment Earnings:

FTAI's Aviation Leasing segment, contributes the majority of its earnings and cash flow. It had a $2B portfolio of 92 aircraft and 377 CFM56 engines as of Sept. 30, 2023.

Preferred Dividends:

Both of these preferreds are cumulative, meaning that FTAI must pay preferred shareholders for any unpaid dividends before paying a common dividend.

Both preferreds currently have an 8.25% interest rate before they enter their floating rates on their future call dates.

At its 11/24/23 intraday price, FTAIN yields 8.79%. It pays quarterly, and goes ex-dividend next on 11/30/23, with a 12/15/2023 pay date.

Future Floating Rates:

In addition to its attractive 8.25% coupon rate, a key feature of this preferred stock is its future floating rate.

FTAIN's future floating rate will be 7.378% above the 5 year T-Bill rate , which is currently 4.44%. FTAIN's floating rate period doesn't begin until 6/15/26.

At its current price of $23.46, new buyers would potentially have a future equivalent yield of 12.59% on FTAIN, if the five-year T-Bill rate is ~4.44% when FTAIN's floating period starts on 6/15/26.

Now that its past its spin-off expenses, FTAI has had a big turnaround in operating cash flow in Q1-3 '23, covering its preferred dividends by a 5X factor. Its EBDA coverage factor is 11X so far in 2023.

Taxes:

FTAI issues a 1099 at tax time for common and preferred distributions.

Earnings:

Q3 '23 was a strong quarter, with revenue up 26%, net income up 244%, and adjusted EBITDA up ~42%. Forty-one engine modules were sold in Q3’23 to 11 unique customers, including two new customers and nine repeat customers. Management also closed on 23 engines and 10 aircraft at attractive prices to help generate future growth in aviation leasing adjusted EBITDA.

"Part of the $120 million in EBITDA for Leasing came from gains on asset sales. We sold $55.4 million book value of assets at a 24% margin for a gain of $17.6 million benefiting from strong demand for assets globally. And we've had more asset sales coming in the final quarter of this year. " (Q3 '23 ear nings call )

Q1-3 '23 has also seen major growth year-over-year, with revenues nearly doubling, net income up 143%, EBITDA up 43%, and operating cash flow up more than 6X.

Looking forward, management sees "FTAI coming in above the high end of the $550 million to $600 million EBITDA range. Looking ahead to 2024, our current expectation is for leasing EBITDA to total $475 million for the year, including $50 million from gains on asset sales. We expect annual aviation EBITDA for 2024 to be between $675 million to $725 million, not including Corporate and Other." (Q3 '23 earnings call)

Profitability and Leverage:

FTAI's ROA and ROE both improved greatly in 2023 - its ROE is very high, due to a small equity base, which also gives it a high debt/equity leverage figure. However, its net debt/EBITDA leverage improved to 4.08X, as of 9/30/23.

Debt and Liquidity:

FTAI's $250M Credit Revolver comes due on 9/20/25, followed by ~$653M in Senior Notes, due on 10/1/25.

FTAI had $50M of corporate revolver facility available, plus $53M in cash, as of Sept. 30, 2023.

Russian Litigation:

FTAI has 3 separate, ongoing insurance claims vs. Russian airlines that illegally seized assets. Management expects "it's reasonable to get from both of those would be around $300 million." (Q3 call)

Parting Thoughts:

Looking at management's projections for Q4 '23 and 2024, FTAI should continue to have good preferred dividend coverage. We rate FTAIN a Buy, up to $25.50, as its call date isn't until 6/15/2026.

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

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