Could billion-dollar bet on All Aboard easily derail?



By Wes Edens’ calculations, if even a small portion of the people who travel between Miami and Orlando decide to take the train, All Aboard Florida will bring in big bucks.

Edens is co-chairman of Fortress Investment Group, the New York private-equity fund proposing for-profit passenger trains that would stop in West Palm Beach and Fort Lauderdale.

No passenger rail service has operated profitably in the United States for decades, but Edens is undaunted by the financially disastrous track record of passenger trains. He sees “tremendous opportunity” for All Aboard Florida to poach some of the 50 million yearly trips between Miami and Orlando. If a one-way ticket costs $100, sales add up fast.

“If we capture 4 percent of them, we make $200 million,” Edens said during an October call with Wall Street analysts. “We capture 6 percent of them, we actually make $300 million, $400 million … we think that those numbers are very, very achievable.”

The 52-year-old Edens has become very wealthy by making savvy wagers, but he has made his share of bad moves, too. Worth $2.5 billion in 2007, Edens fell off Forbes magazine’s list of billionaires after his boomtime investments soured.

Fortress Investment Group’s $3.5 billion bet on Florida has proved a money loser so far, and its Miami-to-Jacksonville freight railroad is loaded with debt.

As he pitches All Aboard Florida, Edens looks to Europe as a model. He cites high ridership on routes connecting London with Paris, and Madrid with Seville. Of course, sprawling Florida and quaint old Europe are two very different places, and critics wonder if All Aboard Florida is a $2.5 billion solution to a transportation problem that’s really not much of a problem.

“I’m skeptical whether it can possibly work,” said Randal O’Toole, a rail expert and senior fellow at the Cato Institute. “We have these things called automobiles that get us from where we are to where we want to go. We have these things called airplanes that are twice as fast as even high-speed trains.”

Rick Geddes, director of Cornell University’s Program in Infrastructure Policy, said “optimism bias” inevitably inflates passenger counts for rail proposals.

“I would like to see proof that it is possible to run a really efficient, reliable train service,” Geddes said. “The U.S. has been so auto-centric.”

But Chris Kotowski, a Wall Street analyst who quizzed Edens about All Aboard Florida during Fortress Investment Group’s October conference call, said the rail proposal sounds feasible. His back-of-the-napkin calculations: Find 3.46 million riders to pay $150 each way, and All Aboard Florida pulls in $518 million a year in revenue.

“You’re flying a little blind here, because there hasn’t been a private passenger railroad for, I think, 80 years,” said Kotowski, an analyst at Oppenheimer & Co. in New York.

Allen Harper, who launched the ill-fated Florida Fun-Train and now runs tourist railroads in the mountains of Colorado and North Carolina, also sees promise.

“Theoretically, there are enough trips there,” Harper said. “Can you make the ease of the transition from Miami to Orlando so good that people, are going to say, ‘Screw the car, I’m going to have some fun on the train?’ They’ve got a really good chance of making it work.”

Fueled by sunny projections, All Aboard Florida plans to spend $2.5 billion to launch its rail service — over the objections of residents of northern Palm Beach County and the Treasure Coast who worry about the noise and traffic snarls of hourly passenger trains.

All Aboard Florida has applied for a $1.5 billion loan from the Federal Railroad Administration, an amount that would be the largest ever granted under the Railroad Rehabilitation & Improvement Financing program. The state has promised $200 million for an All Aboard Florida station at Orlando International Airport, and Broward and Palm Beach counties have asked the federal government for $20 million to upgrade crossings.

Florida’s recent history is littered with failed attempts to move people around the state by modes other than cars and jumbo jets. The Florida Fun-Train, run by a Hollywood company, filed for bankruptcy in 1998 after a short stint ferrying passengers between Hollywood and Kissimmee. In a lowlight, a Fun-Train killed a driver whose tow truck had stalled on the tracks in Central Florida.

Harper said there were several reasons for his company’s collapse — optimistic projections, a thin financial cushion, and delayed departures as a result of sharing tracks with CSX’s freight trains.

“It was a disaster,” Harper said. “But the company that is the main backer of All Aboard Florida owns the right-of-way. They have a built-in advantage that’s worth a ton compared to the Florida Fun-Train.”

In another failed attempt at innovation, DayJet, an air taxi service based in Boca Raton, shut down and filed for bankruptcy after offering flights on small planes for a year. DayJet liquidated in 2008, and state economic development officials couldn’t retrieve the $2 million in cash subsidies they had given the start-up.

Fortress Investment Group (NYSE: FIG) isn’t as shaky as those predecessors. The private-equity fund pulled in $1.3 billion in revenue last year and has $365 million in cash on its balance sheet.

Fortress Investment Group in 2007 paid $3.5 billion for Florida East Coast Industries, a deal that seemed a can’t-miss bet at the time. Florida East Coast’s empire included the 351-mile freight line from Jacksonville to Miami and the commercial real estate portfolio amassed by Armando Codina, the Coral Gables developer who employed Jeb Bush before Bush was elected governor in 1998.

But Fortress Investment Group is carrying its Florida bet at a small loss. The Florida East Coast Industries portfolio was down a cumulative 0.3 percent from 2007 through the end of 2013, Fortress Investment Group said.

Fortress split off the freight railroad into a separate company, Jacksonville-based Florida East Coast Holdings, which lost money every year from 2008 through 2012, reporting combined losses of $124 million. It finally turned profitable in 2013, reporting net income of $8,000.

By contrast, larger freight rail lines, such as CSX and Union Pacific, have been consistently profitable in recent years.

Meanwhile, the rail company’s balance sheet is weighed down with $641 million in debt and a junk bond rating that has pushed its borrowing costs as high as 10.5 percent. “We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business,” Florida East Coast Holdings told federal securities regulators in March.

Harper, a board member of the Florida East Coast freight line before it was sold, said the line’s financial struggles aren’t a result of a lack of demand. Instead, he blamed the private-equity playbook of borrowing heavily at high interest rates.

“Florida East Coast Railroad was hugely profitable,” Harper said. “They just piled so much debt on it.”

In addition to passenger fares, Fortress Investment Group has another angle — the real estate around its train stations.

“Incremental to the rail opportunity is, of course, a real estate opportunity,” Edens told analysts last year. “The functional density of rail stations for commercial traffic is spectacular.”

All Aboard Florida in 2012 paid $3.8 million for land along Evernia Street and Rosemary Avenue in West Palm Beach, but the real trophy is its 9-acre site in downtown Miami that could hold 2.5 million square feet of development. All Aboard Florida’s ads show a sleek train station, and Edens points out that the proposed train station is near AmericanAirlines Arena, home of the Miami Heat.

“The highest sales per square foot of any shopping mall, I think, in America is the Union Station in Washington, D.C.,” Edens said. “We are basically building that in downtown Miami.”

Combining passenger trains with real estate speculation is a time-tested way to run a railroad.

“That’s the history of railroads in America,” Harper said. “All railroads relied on their real estate to make money.”


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