Short-line Railroads Offer Appealing Investment Opportunity Even Amid Pandemic

May 12, 2020 (FREIGHTWAVES) - Private equity funds and other investors are scouring 35,000 miles of North American short-line rail track for deals even as the industry sees one of the biggest volume drops since 2008.

The hunt for acquisitions among the roughly 500 companies in the space comes as investors see first-mile access to shippers as the next smart way to deploy large pools of capital and the demand for railcar storage increases.

Brookfield Infrastructure Partners and GIC’s $8.4 billion acquisition of Genesee & Wyoming, the largest short-line operator with some 120 short-lines operating on 16,000 miles of track globally, stands out. Below that mega-deal, there are a host of smaller ones.

Since June 2018, there have been 19 acquisitions of short-line railroads or other closely held rail assets, such as transloading facilities, according to S&P Global Market Intelligence. A bit over half of those deals occurred this year. In October, U.K.-based 3i acquired the Florida operations of Pinsly Railroad, which owns 208 miles of track spread across three short-line operators serving Orlando and Tampa.

Pinsly is being folded into 3i’s Regional Rail acquisition made in April. Regional Rail is the parent company of three short-line railroads spanning Pennsylvania and New Jersey, covering 155 miles of track.

Australia’s First State Investments bought Patriot Rail and Ports, an operator of 12 short-lines over 585 miles of track across 14 southeastern states, from SteelRiver Infrastructure Partners in August.

In May 2019, a group including Related Companies, Brookhaven Capital Partners and investment bank Stephens, acquired Pioneer Railcorp, the owner of 15 short-lines covering 12 states. The group said that Pioneer will become a “platform investment” with additional capital to be committed for growing Pioneer’s trackage and customer base.

Platform investments are also a strategy of RailUSA, an operating company that received a $200 million injection in 2018 from Equity Group Investments, a fund controlled by billionaire Sam Zell, and International Rail Partners.

RailUSA acquired 430 miles of track in the Florida panhandle from CSX earlier this year, its second acquisition after buying Grenada Railroad, a 212-mile line between Memphis and Canton, Mississippi.

RailUSA Chief Executive Gary Marino cited the potential to get closer to customers and the ability to offer railcar storage as keys to the acquisition.

“We see a substantial opportunity to enhance the suite of services we offer [customers], as well as to attract new customers with concentrated local services,” Marino said at the time.

Denver-based infrastructure fund Broe Group was also active this year through its operating company, OmniTRAX, the second-largest U.S. short-line railroad operator.  OmniTRAX did three acquisitions, the biggest being the $105 million deal for the Winchester & Western Railroad, which serves the Virginias, Maryland and New Jersey.

“The Broe Group and OmniTRAX are very bullish,” said OmniTRAX Chief Executive Officer Keving Shuba. “We continue to think rail is an efficient mode of freight. And it can continue to gain market share from trucks.”

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