Q1 2020 Earnings Call
Ladies and gentlemen, we stand body or fortress transportation infrastructure investors I don't see first quarter 2020 earnings conference call will begin momentarily. Thank you for your patience and please standby.
[music].
Ladies and gentlemen, thank you for standing by welcome to be fortress transportation infrastructure investors LLC first quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question answer session asking question during the session you'll need to press star one on your telephone.
Please be advised that today's conference is being recorded you require any further assistance. Please press star zero knowledge and the conference over to your Speaker today Alan Andreini. Please go ahead Sir.
Thanks, Josh I would like to welcome you to the fortress transportation infrastructure first quarter 2020 earnings call. Joining me here today, our Joe Adams, Our Chief Executive Officer, Scott Mr., Christopher our Chief Financial Officer.
We have posted an investor presentation in our press release on our website, which we encourage you to download if you have not already done. So also please note that this called the public in listen only mode and is being webcast.
In addition, we will be discussing some non-GAAP financial measure during the call today concluded that the reconciliation of those measures to the most directly comparable GAAP measures in town in the earnings supplement.
Before I turn the call Liberty, Joe I would like to play out that certain statements made today will be forward looking statements, including regarding future earnings.
Statements by their nature are uncertain and may differ materially from actual results may encourage you to redo the disclaimers in our press release and Investor presentation regarding non-GAAP financial measures and forward looking statements in the review the risk factors contained in our quarterly report filed with the FCC now I'd like to turn the call Liberty.
Yep.
Thanks Alan.
Before going into the Kurt I want to take a moment to think two groups.
First I want to thank our employees for their tremendous effort they've put into keeping f. type functioning smoothly over the last six weeks.
There were safety was our primary concern and as we implemented procedures to protect you we made your jobs much more difficult.
The way you have responded to this challenge has been nothing short of remarkable we haven't missed a beat and that's because of you.
For certain it's been extremely helpful. But a lot of us have worked together in many cases for more than 10 years.
That being said the way to you you have taken it to the next level is inspirational.
It seems as if the toughest times can bring out the depth and talented workforce and you've all showing those qualities and I just want to say thank you on behalf of myself.
Our board of directors and our shareholders.
The other group I want to acknowledge our the health care professionals first responders and all the central employees and their families who are working incredible hours and putting themselves at great risk to make our troubled world safer place.
Your courage and dedication have never been more appreciate it or more apparent. Thank you.
Now, let's turn to the more mundane of Q1.
To start I'm pleased to announce our twentyth dividend as a public company and our 35th consecutive dividend since inception the.
The dividend of 33 cents per share will be paid on May 26 based on a shareholder record date may 15th.
The key metrics for us, our adjusted EBITDA, and fad or funds available for distribution.
Adjusted EBITDA for Q1, 2020 was 72 million compared to Q4 2019 of 234 million in Q1 of 2019 of 64.8 million.
Note that the Q4 2019 figure includes a gain of 116.7 billion from the sale of a 49.9% interest in long rich and a gain of 20.6 million from the sale of noncore aviation assets and a gain of 4.6 million from the acquisition of the remaining.
50% interest in our ethanol joint venture at Jefferson.
On a normalized basis, excluding the gains or losses from these sales.
Q1, 2020, adjusted EBITDA was 73.8 million compared to 92.1 million in Q4, 2019, and 63.1 million in Q1 29 team.
Fad was 96 million in Q1, 2020 versus 288.6 million in Q4, 2019, and 70.2 million in Q2 thousand 19.
During the first quarter and 96.0 million Fad number comprised of 121.3 million from our aviation leasing portfolio 1.7 million from our infrastructure businesses had a negative 27 million from corporate and other.
The Q1 2020 Fad number includes 28.6 million of proceeds from the sale of aviation assets.
Well Q4, 2019 Fad includes 266 million proceeds from the sale of the C.M. QR rail assets, a 49% interest in long ridge and aviation assets.
Q1, 2019 Fad includes 27.3 in Santa proceeds from the sale of aviation assets.
On a normalized basis, excluding sale proceeds and nonrecurring items Q1, 2020, Fad was 50.1 million compared to 58.1 billion in Q4, 2019, and 42.9 million in Q1 2019.
Now, let's turn to aviate.
Before I go into details on F tie aviation, let me first talk about the overall aviation market.
As we sit today as a result of covert 19 passenger air traffic globally is down over 90% and unprecedented and dramatic development.
Approximately 15000 aircraft are part and out of service.
Obviously, this downturn will be longer and deeper.
Prior industry disruption.
But people will travel by our again and some pastor markets are already growing well cargo flights are in very high demand as a result of snow significant and long lasting supply chain disruptions and passenger belly capacity cuts.
On the passenger side.
While far from certain are most likely scenario calls for domestic medium haul markets to recover over the next six to 12 months and long haul international markets to take 12 to 36 months to get back to more normalized levels.
When people begin flowing again, the first trip is more likely a domestic flight to visit relatives in Austin, then a two week trip to resort in Thailand.
Also during this recovery period as a result of having excess equipment and undertaking extreme cash conservation efforts Airlines and aircraft owners will minimize engine shop visits by burning Green time off all available engines first and ramp up part out of unserviceable engines to.
Reduce maintenance costs and generate cash.
As a result, we <unk>, we expect engine leasing to increase for virtually every airline in the world.
So with that backdrop, let's look at it advertise portfolio composition.
On an overall basis over 90% of our aviation portfolio is engine value, which we see as a major positive.
Aircraft type approximately 60% is narrow bodies seven three sevens and Athree 20 aircraft and engines, 20% is cargo aircraft and engines and 20% is 757 and 767 aircraft engines, let's talk now about each of these markets said.
Yes.
Athree Twentys and seven three sevens are the workhorses of domestic airlines and will be the first to fully recovery.
With a large number of engine shop visits now not likely to occur. This year, we expect to see a material increase in engine leasing of Cfmfifty six and V 2500 engines in the latter half of 2020 and a potential shortage of available engines in early 2021.
Also very low fuel prices and maintenance cost also advantage and g.'s and she goes over newer models.
Cargo aircraft are the best performing segment of aviation fleets today.
Running pretty high.
And receive high rate bucket historical bankers.
We expect cargo to stay strong aided also by low fuel for the next 18 to 24 months at a minimum.
The 757, and seven six markets will likely be challenging as many aircrafts scheduled for retirement over the next two to four years will be accelerated.
However, 90% of our fleet is engine value, which will be strongly supported the cargo market and many of these parked passenger aircraft will be converted from passenger to freighter.
Overall, we would not trade off our aviation portfolio for any other.
Also with all airlines implementing extreme cash conservation practices and in a low fuel price world. We see this new environment accelerating our business plan to be the world's leading edge and leasing company by providing value and outsource maintenance services and flexible lease terms.
This crisis will drive additional demand for engine leasing.
Facilitate new relationships with all airlines, including the largest in the world.
And enable us to negotiate favorable terms with an engine MRO shop to implement our proprietary products.
Let's turn to the numbers now for for the first quarter 2020 annualized adjusted EBITDA, excluding asset sales. It was 341 million compared to 425 million in Q4 of 2019 and 288 million in Q1 of 2019.
As mentioned on the Q4 2019 call Q4, 2019 annualized adjusted EBITDA included annualized income from lease return compensation of approximately 55 million.
In addition.
Maintenance revenue than normal in March of this year due to the grounding of several aircraft as a result of covert 19.
During Q1, we closed 56.1 million in new aviation investments and continued to harvest noncore aviation assets, which generate 28.6 million in sales proceeds.
Even with Cobot 19 impacting our business in March we were able to generate EBITDA yield on equity invested and return on equity of 25% and 12% respectively versus our long term targets of 25% and 15%.
Many airlines are being negatively affected by the krona by a situation and we'll need financial assistance, one investment opportunity, we're beginning to see as a result.
With these airlines who.
Have you historically avoided using now all aircraft on the sale leaseback basis to raise capital.
Our recent announcement regarding air France Fleet is a perfect example, and there are others that will almost certainly happen.
Finally, our strategic goal.
Becoming the leading market.
<unk> of aftermarket power for the Cfmfifty six engine by developing proprietary products and practices.
Made great strides recently, our joint venture has submitted final application materials to the F. say for approval of our first product, which we hope to have.
In production very soon.
Now onto Jefferson and infrastructure.
Jefferson as we predicted during the Q4 2019 call Jefferson contributed positive EBITDA in Q1 2020.
During Q1, Jefferson generated 4.6 million of adjusted EBITDA compared to negative 200000 in Q4, 2019 and negative 1.3 million in Q1 2019.
The positive EBITDA contribution was primarily driven by an increase in overall throughput volumes from our core businesses, coupled with a full quarter utilization of the 1.4 million barrels storage that went online in Q4 29 team.
The throughput volumes, the Jefferson increased to 13.2 million barrels up from 12.8 million barrels in Q4.
This was primarily driven by increased volumes from our core crude and refined products businesses.
Offset by a reduction in volumes in our ethanol and crude marketing businesses, which were discontinued at the end of <unk> Q4 2019.
Extended lower crude prices as a result of the Saudi Russia dispute and covert 19 demand destruction have impacted our volumes, especially from Canada, but we're seeing some instances where customers are shifting modes, rather than materially reducing volumes, our largest customer recently informed us they intend to.
Take in crude by importing via ship, rather than taking volumes from Utah for Canada by rail as an example.
Our long term goal has always been to provide our customers with a maximum optionality to receive or ship products via rail truck pipe or water and within months. This year as our pipelines come online we will have all these modes fully operational.
In Q1 of this year Jefferson refinanced all existing long term recourse debt.
Of approximately 185 million and raised an additional 80 million of new debt.
By doing this we achieved a significant reduction of interest expense.
And position the company to access attractive long term tax exempt debt to fund future expansion projects.
Average interest rate on the retired debt was 7.5% as compared to the new debt average rate of 3.9%.
And new data included 15 year, and 30 year tax exempt bonds priced at three in Fridays and 4%, respectively, both of which were substantially oversubscribed.
And five year taxable bonds priced at 6%.
Importantly, all this data is non recourse to have tie which has reduced our recourse debt to total capital to approximately 43%.
The positive EBITDA ramp at Jefferson has begun and we expect 2020 to be positive notwithstanding covert 19 or the current issues in the crude market.
Having said that covert 19 has created some demand destruction.
And the Saudi Russia disputing created another problem, but we view these issues as manageable and more importantly, so our customers. We continue to build out Jefferson and continue to solve customer problems our relationships with our customers have never been better and the array of projects. We are working on with them has never been greater.
Let's turn now to Repauno.
Repauno, we completed construction of dock, one and our completing phase one construction of our NGL and natural gas liquids export operations, which is our rail to ship offering.
We're working with both European NGL off takers and domestic producers on commercial deals, but production cutbacks at the refinery and demand distribution due to covert 19 are slowing down the process.
Hopefully normalcy will return to the markets in the next quarter or too. So we can conclude these negotiations and in the meantime, we're hoping to take advantage of other dislocated liquids markets given our unique east coast combination of storage and truck rail and deepwater could activity.
Once that program has commitments, we will start the process of putting in place the necessary contracts and permitting to to commence phase two construction of the 3 million barrel undergrounds granted storage caverns, which we expect to the operational in 2023.
Finally, we are leveraging report of scale and multi modal capabilities to bridge pursue additional business opportunities. For example, the growth in wind power development offshore is driving the demand for Transloading large wind power components and Repauno is uniquely positioned to handle these movements and we believe can become a trend.
Floating hub.
Turning now to long rich in Q1 2020, it was a record quarter for our Frac sand business in terms of total volume Transloaded. During Q1, 2020 long Ridge Transloaded, approximately 270000 tons of Frac sand or 1.1 billion tons on a run rate basis annually.
Well overall drilling activity in the basin has decreased long rich has gained market share due to our strategic location and our rapid truck loading capability, which makes log rich the low cost provider in the region.
The power plant construction is on time and on budget.
We expect to be operational not later than November 2021.
Furthermore, we continue to see a high level of interest from data centers and other power intensive industries looking to site new facilities at long rich the largest of these developments would require between 50 and 100%.
As long rich power plants capacity at premium prices.
In short long ridge is moving along nicely.
Now in conclusion after four years of hard work infrastructure has gone EBITDA positive and we expect that to continue.
The strong cash flow from aviation is now being joined by the ramp of increasing cash flow infrastructure.
Starting over a year ago, we Ghana began a program to create maximum financial flexibility at half time.
Being in that in the 11th year of an expansion we felt it prudent to prepare for what is consistently happened to long term economic expansions the end.
We took recourse debt to total cap from 58% down to 43%.
We doubled the size of our revolver from 125 million, a 250 million and we recognize that private markets were more aggressive than ever for infrastructure assets and we took advantage of that by taking close to 200 million and profits and taking a lot of capital off the table.
Sitting here today, we obviously feel good about those decisions.
Is this a stressful and difficult environment absolutely.
But we came into this environment as well prepared if not better prepared than any from any aviation leasing industry or infrastructure space.
Capital and financial flexibility, our key in any environment, but especially important now.
We've already started to exploit that advantage in the marketplace and we will continue to do so but as we do we will remain vigilant and run appetite conservatively as we always have so there will be prepared if this setting and industry gets worse.
We have a lot of levers, we can pull which is exactly the position we wanted to put ourselves in when we started the de leveraging and infrastructure sale processes almost a year ago.
So we came into this environment well prepared and we remain so.
With that let me turn the call back over to Alan.
Thank you.
Later, you May now open the call to Q and <unk>.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound keep please stand by we can probably kuni roster.
Our first question comes from Justin long with Stephens.
They proceed with your question.
Thanks, and good morning.
So Joe circling back to the call last quarter. It sounded like there were multiple fleet deal than the works they deal with Air France was announced this week, but are there other sizable deals that you think didn't materialize in the near term and just more generally how are you thinking about the potential to take advantage.
Distressed assets and this type of market.
Thanks, Jeff and yes, though we do see.
There are more deals out there virtually every every airline is in a <unk>.
As I referred to it and extreme cash generation mode, they're looking to raise cash every way. They can so sale leasebacks in particularly like air France, its older equipment, which for US is ideal because it's really the engine that we're buying and and I think these are from our point of view. These are extraordinary deals where you.
You are buying it very very attractive prices and you have cash flow attached to it. So that's kind of what what we're looking at there's there's at least one deal that does pretty far along that we're working on that's a little bit bigger than than the one we just did and.
And you know in some ways some was better but it's also very they're both very attractive.
And and then there's others that are probably in an earlier stage of discussion you know beginning, but but I think at six months airlines are going to be looking at everything.
Makes sense and secondly, obviously be me energy environment has come under a lot of pressure I was wondering if that's causing you to make any strategic pivot that Jefferson you talked about the flexibility there with a different modes of transportation, but can you.
Just kind of levels that things and.
Give us your sense of if oil prices.
Don't improve meaningfully from year end crude by rail movements go to something close to zero, how should we be thinking about the potential EBITDA range for that asset.
Yes, I think the.
You know just from a bigger picture point of view a lot of midstream assets or you know going to come under pressure, particularly assets that are you know gathering you know related production gathering related and.
It's one of the reasons, we really focused on having a terminal next to two big refineries this because when those refineries.
They're operating 24, seven and they they bring in Motiva brings and 600000 barrels of crude a day and 600000 product barrels a product today and Exxon is going from 360 to 625.
So so the beauty of that is that there's always product. Following a that's not always the case if your next to a well in the well decides they're not going to produce anymore. So.
From a strategic point of view that was always our view vision that I think the strength of that is very apparent right now and we're very pleased that you know we don't have.
Gathering infrastructure, we have we have terminals that handle both crude and refined products and really what we focus on is diversifying that because.
When we originally started the terminal as you recall, we were simply crude by rail and realized you know in 2016 that went away and so we had to plan for the possibility that happened and that's when we.
I have developed the refine products relationship with Exxon, we've added jet fuel to that for export a and then we've diversified with motiva.
By storing intermediate some fuel oil and also you know bringing in crude by water. So.
It really is about diversifying in serving the needs of those two customers and you know with what's going on in the market. There's so much disruption in dislocation that I think that it gives us the opportunity to further strengthen our relationship with those two big players and potentially add another refinery as well.
So I feel strangely. This you know this environment could actually help US you know become more important to those players and when the market does rebound.
Be as profitable or more profitable than we ever than than in our original plan.
Now clearly crude by rail this year is a contributor so.
We're going to that's going to negatively affect Jefferson and so you know we had expected to be run rate of 80 to 100 million Buddy ended the year of EBITDA.
It's probably not going to happen, it's going to be maybe something like half of that but as I said longer term, we're diversifying and adding products and.
Well, the Exxon refinery expands and 2022.
You know we're in a great position to you know to pick up and do more business. So.
Nothing that I think it's near term negative a little bit, but as I said manageable and long term I think it's positive.
Very helpful. Thanks into time today.
Yep.
Thank you. Our next question comes from Chris Wetherbee would city you May proceed with your question.
Yeah. Thanks, Good morning, guys, Yeah, maybe just picking up on the Jefferson comments for a moment I guess, specifically one of the opportunities that you guys were seeing was Mexico exports refined products going down there kind of curious to see sort of how that business plays out I think it's hard to get a chance you know.
Fine products demand perspective, obviously, you know it down quite a bit but I think there's market share opportunities that you guys have talked about in the past that can you give a bit of an update on how that's playing out.
Yes.
I think Exxon is pretty positive about where the market is now I mean, there was a bit of a decline down you know when when the started in Mexico is seeing some demand destruction as well so.
There was little uncertainty, but over the last couple of months, it's it's stabilized and I think there now becoming increasingly positive an optimistic as well you know they've been able to pick up market share down there because exxon's really the only one that's.
Built their own distribution system, it doesn't use pemex barrels.
So they bring in their own molecule, which the market you know values more and was it will pay a premium for so.
So the mobile brand is doing well, they're expanding again and I think when the when people start opening up in driving we you know they and we expect volumes will grow but they've.
For the near term they've they've stabilized I think is the is the way we we see it.
Okay. Okay. That's helpful. And then just sort of giving back to aviation and just trying to understand maybe the big picture of all of this so.
Clearly, there's the potential for you know some utilization rates to maybe get it did get hit but they also sounds like there's some interesting new opportunities in the business. So I don't know if you want to take it from sort of that a net dollars invested in 2020 versus now versus maybe what it would have been a couple of months ago for your outlook for this year.
Or if it's from a you know cash flow or EBITDA generation standpoint, but could you give us some of the sense is like some of the sensitivity around some of the good stuff that's happening with new deals like we saw yesterday and maybe some of the headwinds that you could face because it is just a challenging market.
It is a challenging market and there's no doubt that you know when airlines are not flying they don't have revenue and you know your game, you're going to suffer along with and but we.
Importantly, I think we've structured or leases to collect maintenance reserves, which are always always been a big fan out. So we hold security deposits in the form of cash which is the best kind of security deposit you can get and.
And and we have over 200 million of that to negotiate with so [noise].
So I think that in the fact that we have cargo and that we have engines makes our position you know better but nothing that I mean, I think this year. This will cost probably $50 million to $100 million to us for you know the code the impact of covert 19.
And that's what I think relatively less than what other leasing companies will see because of the reasons I just mentioned, but.
But then on the flip side you know these deals that were negotiating.
Ours are probably the best economics, we we have ever seen and maybe we'll ever see again because of this is without precedent that you know every early in the world is effectively grounded.
And they're all you know scrambling for cash so.
So the.
The terms of these deals are are really a phenomenal <unk>. If you believe that people will fly again, which as I said, we do and I think we also believe that the.
The 737, and an Athree 20 markets will ultimately be the best markets the in it.
They will recover first.
And then because people are not doing shop visits to save cash the they're actually.
In our mind very likely could be a shortage next year, then if you couple that with.
The fact that airlines.
You know historically, they didnt lease engines very frequently if you were if you were one of the largest or a quote one of the best Airlines in the World you wouldn't have talked about leasing engines now I think everybody believes engines to avoid a shop visit.
So it's sort of a perfect confluences. It plays out that way that we could end up you know our targeted you know EBITDA, 25%.
EBITDA to invested capital an unlevered returns at 15, I think the deals we're doing now are above those numbers meaningfully so.
So.
If we can add [laughter] as I mentioned I think you know we have one other deal that's pretty far along in addition to what we just did.
And I think there will be other opportunities later in the year. So this you know ironically it could be our biggest year for investment ever.
And we've typically done for.
Oh around four to 500 million of new investments per year. So I believe that that a this could be bigger and better economics.
Okay. That's the that's very helpful color I appreciate the time this morning. Thank you.
Yeah.
Thank you. Our next question comes from Devin Ryan with JMP Securities. You May proceed with your question.
Good morning, Joe So just maybe want to pick up where that question ended and some great color here, you're clearly historical moment and it's off a moment for the aviation industry, but you guys put yourself in a position.
Really to take advantage with the steps taken over the past few quarters, especially around capital and so I'm just trying to think about kind of where you left off there the capacity.
To potentially take advantage of some of these deals that you've already executed on in some better in the pipeline and I suspect others will come together as people see the from involved here and showed the capacity and maybe other options to create more capacity, whether it be selling off other informatics ads.
For accessing capital through other means just trying to think about you know how you can kind of maximize your position here to take advantage of the situation.
Yes. Good question I mean, we're obviously looking hard at that in the markets. You know last month were pretty choppy. So.
So we are having you know moments of like pauses like you know how are we gonna finance is or how do we how do we manage it but we did go into this with multiple options. We have no an undrawn revolver, which we can use.
We have the fleet, we opted to finance our aircraft on in the unsecured market as opposed to gave you have secured market. Starting you know many many years ago and I think that was a great decision. We now have you know 1.5 billion of unencumbered assets. So.
That's a that's flexibility and then we also can sell assets and we we'd have some aviation assets in a on the cargo side.
They would potentially could sell here and then and then as you mentioned infrastructure. It's.
We see the next this month is not really an ideal time to put anything on the market, but but I can definitely see you know as you go there's other monetization options and.
And the infrastructure space, there's still you know billions and billions that had been raised by private funds for infrastructure.
And then you have you know potentially of Washington coming out with their two trillion dollar infrastructure.
Bill they're going to be looking for projects that are shovel ready.
And we have three sites that have you know opportunities to build lots of stuff on it I mentioned Datacenters and you know hundreds we've we've had inquiries.
Wanted to speak is one gigawatt you know our our approach our power plant is 485 megawatts and.
<unk> data center.
Buildout is a huge opportunity so.
So the answer is we're looking at everything and we're not wedded to any one thing and I think you know every week. We have you know more visibility and more options than we had the week before so I feel like we feel like we've got many many different ways to.
Fund deals that we think are very attractive so we'll figure it out.
Okay terrific color. Thank you I mean, there just a follow up just if you can remind us with the infrastructure I'm just kind of development over the next year.
You know capital needs relative to kind of capital position and I'm, just the ability to fund kind of all that the asset level just trying to make sure that we are thinking about that correctly.
Yes, so that really the only longbridge is 100% funded you know it's under construction was all project finance debt. So that's easy Repauno, we have about 30 million of capital remaining for the Oh Buildout of phase one and we could we could opt not to do that if we decided.
I think we will go forward.
Theres really great opportunities in the NGL market I think once we.
Once we have an operating side, we're gonna season, just like you see in the and the crude markets. You know if you had storage available all the sudden you you can then to money off of it. So I think theres an opportunity to being in business is a benefit in that 30 million is not huge it's very manageable. So I think that.
That we will go ahead to do and then a Jefferson and all the capital is basically you're gonna be funded through either debt that we've already raised the jefferson or or debt that we will raise going forward. So doesn't require any appetite cap.
[noise] terrific appreciate the color John.
Yes.
Thank you. Our next question comes from Ari Rosa with Bank of America. You May proceed with your question.
Hey, good morning, guys and strong quarter, all things considered.
So.
I want to stand that line of questioning Joe maybe even talk about what the appetite looks like in the marketplace.
For selling infrastructure assets and if that's something I. You know you. Obviously said that that's something that you would consider you know it would shift you away from that targeted 50, 50 mix between a engine leasing or between leasing and infrastructure that you guys had spoken about you know a couple of years back. So just you know if you could give us.
For more color on what your thoughts are on the potential to do that and what the market looks like for those assets. If you were to actually look to monetize those.
Yes, I mean.
In general our philosophy has been to as we've said, we'd like to build a infrastructure at three to five times EBITDA.
We'd like to see it develop and and lease up so that it would trade at 10 to 12 times.
And in certain circumstances, we would sell at 15 to 20 times EBITDA and then recycle that capital. So we have.
Well have other development opportunities at each one of the properties. We could you know invest in so we don't see.
We don't see the sale or liquidation or or monetization of infrastructure as a divestment more as a just a you know going full circle from start to finish and then and then doing it all over again.
So I think that that opportunity <unk>.
Exists and as I said with a with U.S. potentially doing this big you know two trillion dollar and infrastructure there might be many many more opportunities to do that so there aren't that many people that developed there's a lot of people in the infrastructure world that by.
Mature cash flowing properties, but very few people build stuff. So I think we have.
Skillset and experience and the know how that you know is quite valuable so.
So really that's a philosophy as I said today, you wouldn't start up and M&A process today in this market environment, but but who knows in a month or two you know it might be back to normal in it and you do have.
You have a tremendous imbalance of funds or there's been an enormous.
Money raised in the infrastructures for private infrastructure investments and very few investments available now I think if you look at it was.
One of the areas that people were had invested in was airports or container terminals and you wouldn't necessarily rush to do that right. Now so the types of things that we do I think could be very very valuable and there could be a lot of demand, but as I said it wouldn't I wouldn't be in a process today, but.
I don't expect that to stay that way for very long.
Sure that makes a lot of sense. Thanks for that detail there and then I think it was too Chris you mentioned that there could be an impact was about $50 million to $100 million from Covidien I'd, just like I understand.
You know is that.
Relative to you know traditionally you guys provided an outlook on on run rate Fad.
From aviation is that saying basically a 50 100 million dollar it to that run rate and if so do you have a view on on where that might settle out.
Based on kind of that baseline assumption that you mentioned with six to nine months.
Timeline to recovery for the domestic market just your latest thoughts on kind of what that market looks like with the understanding that obviously, there's a lot of uncertainties out there.
Yes, no. That's 50 to 100 million dollar would be a onetime impact this year for the balance of the year.
And I expect we expect that in 2021 run rate targeted run rate of 25% EBITDA on invested capital.
We'll be fully normalize back to normal and it's quite possible. If we do a number of deals you know this year and we have what happens what I, what I was talking about where more more airlines are leasing engines and there's a shortage it could be better than that in 2021. So I fully expect if you know full recovery if not.
If not upside next year, but this year, we'll have.
This year, you're gonna have you know a lower maintenance revenues and some rent deferrals in most cases, what you're doing is deferring revenue to see you put it on the backend. So it's not totally lost but it will it will it would have a onetime effect this year.
Got it understood and then just last question for me you know I think the presentation mentioned you guys have about $200 million and allies and obviously, there's still a couple of deals.
You know in negotiation or under development is it safe to assume that that any deal that you guys would do at this point would have some sort of guarantee you know along the lines of the air France deal that we saw I hate yesterday.
Yes.
We could possibly I mean that any sort of aircraft deal we're going to do with we would only do with revenue attached so to bridge and particularly like the air France fields, an average of three year term.
Will get us to the other side easily and.
The other deal working on is actually a little bit longer than that so so yes any aircraft deal we will buy engines.
At various points in time.
That don't have revenue, but but we can lease those out pretty quickly so.
And in particular like for instance, the freight market.
As I mentioned is very strong. So we have cfsix 80, see two engines and Pratt 4000 engines that fly on seven successor funds and seven four sevens and there's tremendous demand for those right now so we we actually bought a few of those this quarter.
So so we will buy engines, you know to to put in our regular inventory and leasing, but but on an aircraft deal we would only do it with revenues attached.
Got it makes a lot of sense. Thanks for the time job.
Yep.
Your next question comes from Giuliano blown out with BTG you May proceed with your question.
Good morning, and thanks for taking my questions I guess jumping in on the aviation side.
Obviously, there's a lot of disruption there have been trying to get your perspective on the timing of the JV you mentioned the first the first initiative or product. It's in a in the approval process is there an update on the timeline for the second part.
Oh, there's no change I mean, we're still expecting by the end of this year.
Ben.
We have not been impacted in any way by covert yet that I'm aware of.
That sounds pretty good.
When thinking about the opportunity set on the other side. There's a lot of airlines are deferring maintenance and effectively no different having are actually sitting on a lot of run out engines and the market tightens towards the end of the year and you could get approval for.
The first two JV parts, but he ended the year, we're somewhere in that timeframe could there be some opportunities on the back end to actually do Seo sale, leasebacks, where you're going out and buying along those engines and effectively put him back in service, that's the kind of lowest cost in the industry.
Yes, absolutely as a great softball question [laughter] that makes sense.
I do we do see that absolutely and and you know even the biggest airlines in the world, who we've had conversations with have said.
Prior to that there was said what we do our own shop visits we manage around fleets. We don't do engine leasing and take care of ourselves totally different tone now and you know I could see us providing programs two big airline so that we manage the shop is that we put in you know the joint venture low cost parts and when then.
We lease engines to even the biggest airlines and then they don't have to manage the shop visit and we can you know we can both you know make money that way so.
So I think it.
Set ironically, it could actually accelerate.
Our business plan to you know to develop that because.
The airlines are in a much weaker position.
That makes sense, then things a little more strategically on the on the leasing side.
Obviously lower shops are under a lot of pressure at the moment as everyone's deferring a minute incidents and overhauls do you didn't go to it whatever makes sense to try and go out and buyer shop or do some sort of deal where you could acquire shopper with associated business to your in house, a lot of the overhauls and aren't going to provide more of a full package to your if somebody airlines.
On a birdies.
Yes. Another another great question, we we had been having and I've mentioned over the last year, we've been having conversations and one of our concerns has been that the maintenance shops were so full.
That we wouldn't have priority for our engines and we were very you know that was one of things were concerned about well no more I mean, the opposite has happened.
Shops are emptying out. So so we are in a totally different position now to drive a than one of things I mentioned is it.
This will also help us get a much better deal with them with the them our shop.
We don't we've we've sort of hesitated about buying and Emrose shop.
Because we don't really want to be in that business, but I think we can have are taken needed to I think you'd have a deal with an m. aro and not own it but get everything that we want from that arrangement.
And I think the environment to do that.
Just got a lot better. So we expect we hope will have a deal in that area over the next few months.
And we're pretty far along with one party. So it's it's quite a its quite favorable on it I think it would be the last piece of what we're trying to put together.
That makes a lot sounds much I really appreciate it.
The time for the questions and a.
Good luck.
Thanks.
Your next question comes from Brent Delonte with Stifel. You May proceed with your question.
Yes, Hi, Joe Thanks.
Oh I wanted to ask about the balance sheet largest concern.
From investors about uptime is liquidity.
Obviously, the investment opportunities that has gotten a lot better in the last couple of months.
But a lot of investors I talk to Youre concerned about staying power and I know you have a revolver of $250 million, but looking at once you a cash balance went down pretty materially from Fourq, you down to 45 million.
<unk> <unk> looking at.
Your net debt to cap is about 52% what could you realistically get that up to.
I know you'd mentioned.
1.5 billion of unencumbered assets Abbott with 1.2 billion at the corporate level is that going to limit your ability to draw that down.
No. We can you know we have ability to do.
Secure secured debt for purchase money a indebtedness take all the.
He deal, we just announced we expect that fund that 100% with that.
So in and as I said will we can also look at some asset sales.
That is that as well so.
So I think the.
We feel pretty good we've brought the the non recourse leverage down to Fortys under 40, something percent, which is the lowest of any aircraft leasing company in the world I think.
So we've we've got ourselves in a.
Good position, where we can we can increase that.
We got it as high as 60% I think before we started the program. We did we began a year ago. So I I would say that that's probably maybe the upper bound.
So we can also we did it preferred offerings last year.
And we did asset sale. So this isn't a number of levers we can pull.
And you know, it's obviously you know dynamic as this year, you know unfold with deal, but but we feel like we're in a good spot to you know to sort of.
Manage that within those bound and we got upgraded by Moody's to double B.
And they didn't downgrade us so we.
We feel good about you know the the capital structure and the flexibility.
Great. That's super helpful. I'm kind of falling one onto that at what point do you look at that a big do you see common dividend, you're paying and ER.
Kind of maybe want to reprioritize that to the current investment opportunity set a in aviation space.
Is that something well, we're considering there's always.
We've always paid a dividend it was always part of our investment.
Thesis and story and and we can pay the dividend. So we we felt that that's you know that's important to two for shareholders and.
You know, it's not to say that couldn't get the environment could get worse.
But we don't want to cut the dividend. So I think that's clear sway I can explain express it.
And if the scenario that I laid out you know on is sort of close to coming true. We won't we won't have to cut the dividend. So that's that would be our first choice.
Okay, great. Thanks very much.
Thank you. Our next question comes from Rob Salmon with Wolfe Research you May proceed with your question.
Hey, good morning, guys and thanks for taking the question just a follow up in terms of the aviation investments. Obviously, a lot has changed since kind of the ended the quarter, but can you give us a sense with yellow why did that include the air France deal and you know we looked at kind of what the yellow wide sort of look like on on me first.
What would that look like relative to the 220 million that you called out in the presentation.
Scott do you ever the answer that.
Yeah. It does it does include you know did the air France.
Portion of it but some of the other deals that we still working on that Joe alluded to doesn't necessarily do that.
But air France.
That's helpful <unk>.
And obviously, we're seeing you guys got the ability to monetize the aviation.
Portfolio can you give us a sense of.
I'm kind of the timing of the asset sales and you know what were you.
What are you selling kind of engines Judy the cargo market reach scrapping some somebody aviation aircraft.
Just to get a better sense of kind of how that played out as as the airline industry felt a lot of pain throughout the quarter.
Yes, the biggest the biggest category for the asset sales in Q1, where the sale of the airframes from the obvious could deal. So if you remember we bought.
We bought a 14 aircraft from all the oncology at the end of last year.
And 10 of those were targeted for engines just to keep United and so we sold the airframes.
And that was always part of that Bill. So it was a it's basically just monetizing.
The part of the asset that we didn't want to keep.
That was the biggest portion of S. itself.
In Q1 going forward as I mentioned, a degree of the potential to sell some aircraft into the freighter. Some freighter aircraft. So we may look to do that given that's a very strong market and.
We have some that we can.
We can sell we've we've signed in L.I. to sell a couple of seven six is that are there would be converted from passenger to freighter, we're not going to do the conversion, but we would sell the aircraft. So that kind of a deal is what I would expect for this year and you know it's possible you know from market recovers and you know we have.
We do the air France deal and we do maybe one or two others, we could sell a portion of some of those deals to might be might be a very attractive way to you know sort of.
Changed the basis and what we've got.
Got it now and actually is that kind of my final question in terms deviation businesses I was actually surprised at the number of engine all engines off lease as Wallace aircraft off lease.
Didnt take out more sequentially kind of fourth quarter to first quarter.
Can you give us a sense in terms of what the timing is.
Some of your you know we've seen average duration of a little <unk> roughly a year in terms of the engines roughly three years in terms of aircraft can you give us a sense of what that you know how much of your current book. He is going to be is currently on a month to month leasing and what determinations look like over the duration of the year.
Yes, we have.
It was about.
15% of a the fleet comes up in a year for the aircraft that right.
Yes, it's around it's Ron and between 10, and 15% 10% to 15% so.
That's what is available on the aircraft side. The engines, obviously or you know many of them are and short term leases, but people don't return if people expect that they're gonna flag and they're not going to return all the engines, because it's going to be hard for them to get them all back.
So we don't see you know rush of people, giving returning engines, we haven't seen that so.
And as I said that the the engines the CF.
60 to 80 engine and the Pratt 4000 engine.
Our the engines for the seven six and seven four for the cargo and those those engines are in demand and they're flying a lot.
And then if you have the CFM engine for a V 2500 for the 737 in the Athree 20. Those are the first aircraft that you're going to put back you know in passenger service.
And not likely to to give those engines back either so.
So it's a stickier market in general people don't don't.
Take everything and return it you know like.
But obviously if its prolonged and that's why you know if it goes on a long time, then more of those assets will come back because people will you know they'll give up and they'll just.
I don't know when I'm going to fly and I'll return everything.
Makes sense, what will appreciate the perspective than us well guys.
Thanks.
Thank you our next question comes.
Comes from Robert Dodd, Raymond James and as a reminder, asking a question you will need to press star one than your telephone.
Robert Dodd you May proceed with your question.
Hi, guys I'll, just sticking with with the aviation business Oh, the that kind of 50 to 200 million negative impact on side that you took a bunch up I mean, what's the visibility in on that it seems like you know old the Angela.
Yeah, I'm that up slightly more or the engines Lux panel many olds.
The ones you would expect so it could ask.
So et cetera et cetera, how many of those the quest if you've already seen.
And kind of maybe already adjusted lease terms or do you think that's that's a lot more still to come on that one and you're making a.
No.
You know estimates or is that the incremental not factored into that yet it gets visibility simple.
No no a pretty much everyone has asked for you know some deferrals and you know weve.
Negotiated many of the deals already and so when we.
When we came up with that number we did it asset by asset you know lease by lease and so we have you know basically gone through the whole portfolio. So it's it's not.
It's not just an assumption is what will happen. It's it's actually what have you know we will be pretty much see has happened.
But as I mentioned what.
It's it's an assumption that the people will start flying again in Q3 in Q4.
So if that doesn't happen that.
Would change that would change that assumption.
But right now that's what most people are planning.
It seems that many countries are starting to to do that China has recovered.
And added flights in the domestic side Vietnam has added flights.
Italy's actually increased flying so there's it's starting to happen, but you know there are many many forecasts out there that says this could be a W are.
You are in l. or whatever and.
No 100% sure if it comes back to the people wouldn't stop but right now the plans that people are you're putting in place you know it pretty much reflects what we're being told me what we're seeing and you know asset by asset negotiations.
Got to appreciate that Oh, you just mentioned one of the other than just once about cargo conversions I was you don't do that but that does.
You know, there's there's <unk> leasing story.
But you know we sevens and some of the are those that don't typically been then talk out older rates as a bill you talked about that that this those to the AC twenties could be kind of the next generation has made this do you think this this environment is is it salivating bank and <unk>.
That do.
Potential.
Allocation or your willingness to to lease out an engine to a passenger.
As fast this is holding off maybe and hoping.
We estimate that wed demand seems to be you know.
By now.
Well the beauty about engines is the engine doesn't care, if it's on a passenger plane or freighter.
And go back and forth. So for instance, we have 767, some flypast or in some fly freighter and you can listen engine to either one and an engine could go from past are playing to a for airplane and then back again so.
So.
Well, it's one of the reasons I like the engine to this but because you can serve either market and and you're not stuck with it.
I think there will be accelerating conversions, you're seeing already people are taking passenger planes and putting in taking the seats out and putting in freighter.
Systems to allow those like a triple seven or an athree 30 to fly and in freight or.
Only flights that are that are today are passed or airplanes. So.
Theres going to be more freighter conversions for sure and that's good I mean is a lot of.
Just a shift in soak up some of the supply.
Okay I appreciate it thank you.
Yes.
Thank you. Our next question comes from Brandon Oglenski with Barclays. You May proceed with your question.
Hey, good morning, Joe and Alan Thanks for getting me in here. So just wanted to come back to this what percentage of the lease but do you expect will actually be paying revenue.
Through the second and third quarter at this point.
Well I mean, I mentioned, 30% of cargo and then we have.
20% that are flag carriers.
And they will be paying partial rents.
So you're not giving 100% other Brent.
So I think in the second quarter, you know, we're probably going to see 25% decrease in rent something like that.
Okay and would be I mean, how much of the portfolio is actually reached out to restructure renegotiate serves all my Cherry.
Well as I said.
To Robert pretty much every airline we've had negotiations with already so it's been asset by asset you know lease by lease.
So nobody has not you know spoken then spoken to it and we've not we've not assumed anybody's disconnect you know keep paying and not not talk about it.
Okay.
So appreciate the visibility there or I guess, along those lines you know with your cash balance I think it's around what 50 million right now what are some more finite financing options that you're going to take into market, especially with deals like air France kill me because it by our math I think you do need some incremental liquidity is that correct.
Yes, and I think we're looking at a range of debt financing alternatives for that deal.
We could do secured.
And that market is wide open.
So there's a range of alternatives that we're considering.
Including you know the easiest one would be secured debt.
Thank you, but what about any form of equity financing evening and preferred markets is that on the table as well.
Yes.
Volatile market, but the yesterday was a good day, so I mean, it today may not be but yes.
Okay, and then I think you know my last one on infrastructure the capex projects on the pipeline build out to a you know two of your large customers I guess do you have committed contracts behind that spending such that you feel pretty comfortable that that will ramp or any of the Jefferson facility.
Yes, yes, we do.
So if you if you recall for instance, the Motiva contract had a provision there was a three year deal on the storage.
For the pipeline was build and then once the pipeline is build it converts to a five year deal.
And then Exxon, we have a refined products deal.
To Mexico, and we've also just added an additional storage deal a jet fuel.
As well and we think when the pipeline when those pipelines are completed weeks we.
We expect to get additional business and ramp those volume's up.
Okay, well listen we appreciate you guys are managing through a pretty difficult position, but thank you.
Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Alan and King for any further remarks.
Thanks, Josh Thank you all for participating in todays conference call.
We look forward to updating you after Q2.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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