Inside A Wall Street Tycoon’s Plan To Get Americans Off The Highway — And On His Trains

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As the world grapples with how to make travel safe in the age of coronavirus, private equity billionaire Wes Edens is betting $9 billion that America’s transportation future is passenger rail.

Shouting over the noise of diners at a Mexican restaurant on the floor of a casino, buyout billionaire Wes Edens has come to Las Vegas, one of the cities least friendly to mass transit, to talk about passenger rail. “It’s not like I had Lionel train sets in my basement,” he says. “I wasn’t a train nut, but I love riding on trains. It’s my favorite form of travel.”

Even a couple months ago, that was audacious talk from the casual, sandy-haired 58-year-old who made his fortune with Fortress Investment Group and who co-owns the NBA’s top team, the Milwaukee Bucks. In a post-Covid world, as people settle in for a period of minimal travel, especially if it involves being squeezed among others, a bet on train service sounds downright crazy, especially since it comes with a $9 billion price tag.

Edens’ vision: tax-exempt bonds to create high-speed train lines linking Orlando to Miami and Las Vegas to Southern California. He sees a service modeled on the Paris-to-London Eurostar and is so confident the plan will work that he’s put more than $100 million of his own money into it. If things go right, his trains could haul nearly 20 million passengers in 2026, generate annual revenue of $1.6 billion and operating profit of almost $1 billion a year.

Great fortunes are generally made by solving the most obvious problems,” Edens says, woven leather bracelets on his right wrist jiggling each time he lightly thumps the table. “Drive from Miami to Orlando with your family; drive from Los Angeles to Las Vegas. It’s a bad experience.”

So is the money pit known as U.S. passenger rail. Amtrak, since its creation in 1971, has consumed $52 billion of public funds and never made money. Its best year was the $30 million operating loss it reported in 2019. But inside those numbers, bloated by mandates from various members of Congress to run coast-to-coast operations in a country with little appetite for it, there’s a bright silver lining: Amtrak’s high-speed Acela service along the congested I-95 corridor between Washington, New York City and Boston earned $334 million in operating profit last year. In other words, find the right regions and passenger rail can work wonderfully.

“The lack of passenger travel by train in this country is a travesty,” Edens says. “It’s a gigantic opportunity.” His role model: the 19th-century industrialist Henry Flagler—cofounder of Standard Oil with John D. Rockefeller—whose rail projects essentially made the state of Florida economically viable.

Edens and Fortress took over Flagler’s South Florida rail line for $3.5 billion in 2007, and as his ambition blossomed, he pitched its potential to governors on both coasts. The effort paid off.

He secured tax-exempt bonds over the last two years to expand his Brightline rail service from Miami north to Orlando, a project with total construction costs of $4.2 billion. In April, he won a $600 million private-activity allocation from California. Up to $2.4 billion worth of bonds from that award, provided to California by the federal government, can in turn be sold to private investors. If all goes as planned, by 2023 the train will be whisking passengers from Las Vegas to a far-flung Los Angeles suburb in 85 minutes at speeds of up to 200 miles an hour. The $5 billion desert train also snagged private-activity financing from the federal government worth $1 billion and is awaiting a bond allocation from Nevada.

“His ideas are so big,” says friend and Los Angeles Lakers owner Jeanie Buss, a co-owner of Edens’ Cincoro tequila brand alongside Michael Jordan and the owner of the Boston Celtics. “We need thinkers like that in this country, people who see possibility and opportunity, because we’ve kind of lost that as a country.”

His public-private financing model is also exactly how big-ticket infrastructure will get built, says former HUD secretary and San Antonio mayor Henry Cisneros, who chairs a firm that specializes in securing funds for such projects. “There’s pioneering work being done of a financial nature to unleash private capital,” he tells Forbes. “If there’s sufficient incentive to ensure that the [projects] will get built and can be moneymakers, there are investors and entities in our system of capital that want longer-term investments.”

Edens’ grand plans are compelling; his modern Florida and West Coast trains mean thousands of construction jobs when they’re most needed, considering the unemployment and economic carnage wrought by Covid-19. But his track record suggests delivering them isn’t a certainty.

After owning Flagler’s railroad for a dozen years, the return for Edens and Fortress investors remains uncertain. According to Forbes’ analysis of public pension and securities filings, Edens and Fortress plowed about $2 billion of equity into their rail bet, struck at the apex of the 2007 real estate and buyout bubble, and they’ve yet to recoup all that cash. Staring down a near-total loss on his career—and his rail wager—at the market bottom, Edens has spent a decade-plus quietly clawing investors back to even. Now, any meaningful next act hinges on his train bet paying off.

Florida-based Brightline is the starting point. Funded in 2017 with $600 million in private equity and tax-exempt bonds, the only private U.S. passenger line began operating a 67-mile service in the dense corridor between Miami and West Palm Beach the next year. Its sleek yellow-black-gray-and-white Siemens trains chug along at a top speed of just 79 miles an hour. Brightline coaches feature soft white-and-blue interiors, roomy seats and free Wi-Fi. Passengers book through its app or at digital kiosks, and company president Patrick Goddard, a Dublin native with a luxury-hotel background, says premium customer service is a priority.

But it’s far from a moneymaker. Last year it carried just over 1 million riders, with $22 million in revenue and a $66 million operating loss. That doesn’t concern Edens, who says the current operation is just a taste of what’s coming.

A big moment will arrive in 2022, when Brightline opens 170 miles of new track north to Orlando, funded with $2.7 billion of tax-exempt bonds and investor cash. Trains traveling up to 125 miles an hour will haul passengers between Orlando’s airport and Miami in about three hours, an hour faster than by car. The ridership target is 6.6 million people in 2023, the first full year of service. Brightline also has a branding deal with Richard Branson’s Virgin, renaming its Miami station Virgin MiamiCentral in 2018, and is in talks to add a second Orlando station at Disney World and an extension to Tampa.

“Wes is a spirited investor and has a true pioneering spirit with these major investments in U.S. infrastructure and, in the case of Miami, real urban regeneration,” Branson tells Forbes. Virgin’s deal with Brightline hasn’t included any investment.

Markets have been more skeptical. After raising $1.75 billion in high-yield tax-exempt bonds at a whopping 6%-plus coupon in April 2019, Brightline’s debt trades below par. “Even though the early results are somewhat delayed and some people have criticized them as a disappointment, it’s still in an early stage of the ramp-up,” says John V. Miller, head of municipal fixed income at Nuveen, a holder of $1.4 billion, or 80%, of the project’s total debt.

When times are tough, having capital that can’t be redeemed from flighty investors is critical. A permanent war chest is the ballast of Wes Edens’ new industrialist vision in infrastructure. He’s up against billionaire Bruce Flatt of Canada’s Brookfield Asset Management, who oversees an empire with $60 billion in cash to invest in Covid-crushed markets and permanent capital vehicles worth $100 billion, including infrastructure, where Brookfield recently closed on a dedicated $20 billion fund. The cash will help it add bargains to a portfolio with 16,500 kilometers of natural-gas pipelines and 6.6 million electricity and gas connections, 22,000 kilometers of railroad tracks, 13 port terminals and 51 data centers. “The one thing that really matters is that a business can make it through this period intact and without undue harm,” Flatt says. “It’s usually a function of having made preparations before the tide went out.

Edens’ West Coast plan is 180 miles of track connecting Las Vegas and Apple Valley, California, a high-desert city 90 miles east of Los Angeles whose claim to fame was being home to silver-screen singing cowboy Roy Rogers, his wife, Dale Evans, and his trusty horse, Trigger. Edens bought 300 acres there for a train station and parking structure. Trains on the line will be fully electric—a move that pleases California officials because they’ll eliminate vast amounts of exhaust and CO2—and run alongside Interstate 15.

In contrast to California’s highly criticized publicly funded high-speed rail project, state treasurer Fiona Ma sees no local risk if it flops. “There’s no hit to California taxpayers,” she says. “It’s just the allocation of [federal] bonds.”

The trim, 6-foot-1 Edens, dressed in a low-key black pullover, white T-shirt and chinos, navigated an unlikely path to his new-age industrialist vision. The grandson of a homesteader raised near Helena, Montana, he was educated at Oregon State and cracked into Wall Street in 1987 at Lehman Brothers. After making partner, he left in 1993 for fledgling bond manager BlackRock before founding Fortress in 1998.

Entering 2002, Fortress was mite-sized, with just $1.2 billion in assets, but it grew quickly. Edens’ first two buyout funds, raised amid the dot-com bust, were among Wall Street’s best performers, and Fortress became a giant in hedge funds and managing complex pools of debt. Assets soared 25-fold over a five-year stretch. Edens outraced billionaires such as Blackstone’s Stephen Schwarzman and Henry Kravis of KKR by taking Fortress public in February 2007. Its shares soared 89% on their first trading day; Edens and his partners became billionaires.
The coronation was premature. Fortress descended into freefall as Edens, armed with $9.4 billion of buyout funds raised in 2006 and 2007, made mistake after mistake. He bet on a subprime lender, Nationstar Mortgage, just before defaults soared, and pressed an $8.9 billion buyout of casino operator Penn National Gaming, costing the firm a $1.5 billion termination fee when Fortress pulled out. Even a wager on skiing—Fortress’ 2006 takeover of Intrawest, the owner of Whistler, Steamboat and Squaw Valley—was a catastrophe. When the 2010 Vancouver Olympics arrived, Edens was warding off foreclosure threats and working to sell assets like Whistler. From 2008 through 2010, investors pulled $12.8 billion from Fortress, which posted $3.2 billion in combined losses during the crisis, and its stock plunged. Edens spent years salvaging bad investments. “It’s hard to express how difficult 2007, 2008 and 2009 really were in the business,” he recalls.

With his back against the wall, he got creative, embarking on a 12-year odyssey to make his investors whole, leaning on his skill for making money in lowbrow areas of finance such as subprime lending. He repositioned failing bets like Nationstar Mortgage, which became a servicer of subprime mortgages as banks exited the troubled business, eventually selling it for over $1 billion in 2018. Fortress pressed this idea, opportunistically buying large portfolios of ailing subprime mortgages to service from AIG and Citigroup, which it also exited in 2018 at a $3 billion–plus profit.

“We went into the financial crisis high on helium,” says investor Michael Novogratz, Edens’ former partner, who went on to make a fortune betting on cryptocurrencies. “Wes did a lot of really crafty things” to claw his way back, he adds. “He kind of salvaged what would have been a real disaster for investors and his reputation.”

Unable to corral large amounts of money for buyouts from pensions, Edens found the cash by turning Fortress into a financial alchemist, shuffling assets around and conjuring six public companies in a six-year stretch. He spun out four new listed firms between 2013 and 2015 that manage assets in media, mortgages, senior housing facilities and golf courses—and which pay Fortress hefty fees. Edens also shifted a large infrastructure fund into a vehicle called Fortress Transportation and Infrastructure, which houses rail facilities and aircraft leasing operations and was listed in 2015. In 2019, he created yet another public concern, New Fortress Energy, with a burgeoning liquefied natural gas business and a goal to supply hydrogen for electric-power generation.

The moves yielded Edens unheralded windfalls and new fee streams. When Fortress sold itself to SoftBank in 2017, earning Edens and his partners a pretax $1.4 billion, 40% of the fees it earned that year were paid to Fortress by the companies Edens had devised. The pandemic hit many of them hard because of their heavy exposure to mortgages, real estate, newspapers and aircraft leases. But the newer ones, particularly the rail and energy business, are now his focus.

“At this point in my life, I’m more of a builder,” Edens says, adding, “upgrading our nation’s infrastructure and building high-speed trains can be this generation’s Hoover Dam and Tennessee Valley Authority.”

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From Los Angeles, the U.S. capital of cars and congestion, I try to make sense of technology-driven changes reshaping transportation, cities and how we get around. I’ve tracked global automakers, advanced vehicle tech and environmental policy for more than two decades, including 15 years at Bloomberg, and squeezed in stints in the financial and corporate worlds. What’s your story?

 

I’m a staff writer and associate editor at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, mergers, and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a member of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to agara@forbes.com. Follow me on Twitter at @antoinegara

Source: https://www.forbes.com

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