Q2 2020 Fortress Transportation and Infrastructure Investors LLC Earnings Call
Ladies and gentlemen, please standby your conference calls scheduled to begin momentarily. Thank you for your patience and please continue to standby.
[music].
Ladies and gentlemen, thank you for standing by and is now my pleasure to introduce your speaker Mr. Alan Andreani. Your line is.
Thank you Sydney.
I'd like to welcome you to the fortress transportation infrastructure second quarter 2020 earnings call.
Joining me here today, our Joe Adams, our Chief Executive Officer, Scott, Christopher Our Chief Financial Officer.
We have posted an investor presentation in our press release under website, which we encourage you download if you've not already done. So also please note that this call is open to the public in listen only mode and is being webcast.
Addition, we will be discussing some non-GAAP financial measures during the call today, including sad reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.
Before I turn the call ever to Joe I would like to point out that certain statements made today will be forward looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and Investor presentation regarding non-GAAP financial measures.
In forward looking statements you had to review the risk factors contained in our quarterly report filed with the FCC now I would like to turn the call over to Joe.
Thank you Alan and welcome everybody todays call for the second quarter 2020 results to start I'm pleased to announce our 21st dividend as a public company and our 36 consecutive dividend since inception.
The dividend of 33 cents per share will be paid on August 31st based on a shareholder record date of August 17th.
Now, let's start with the numbers the key metrics for us or adjusted EBITDA, and fad or funds available for distribution.
Adjusted EBITDA for Q2, 2020 was 66.5 million compared to Q1 2020.
72 million in Q2 of 2019 of 92.7 billion.
On a normalized basis, excluding the gains or losses from the sales.
Q2, 2020, adjusted EBITDA was 65.7 million compared to 73.8 million Q1, 2020, and 70.1 million in Q2 of 29 team.
Fad was 47.3 million in Q2 2020.
This is 96 million in Q1 of 2020 and 86.9 million in Q2 29 team.
On a normalized basis, excluding sale proceeds.
And nonrecurring items.
[music] to 2020, Fad was 38.2 million compared to 50.1 billion in Q1 of 2020 and 42.7 million in Q2 of 29 team.
During the second quarter, the 47.3 million Fad number was comprised of.
82.1 million from our aviation leasing portfolio.
Negative 6.7 billion from our infrastructure businesses.
And negative 28.1 million from corporate and other.
Now, let's turn to aviation.
Aviation had a pretty decent quarter given the circumstances.
77.5 million in Q2, EBITDA after an estimated $20 million negative impact in Q2 from covert 19.
And further more than half of the impact resulted from fewer hours and cycles flown which means the hours in cycles are still available and have significant value.
Somewhat offsetting the negative we recognized 8 million in income from early lease terminations.
Proactively took back seven aircraft at separated the engines as we believe engine demand is and will return faster than airframe demand.
During Q2, we we negotiated rent deferrals.
Approximately 20% of the portfolio.
Averaging three months of deferral in return for three months of lease term extension.
Overall, we collected approximately 75 million in cash from customers, which is approximately 85% of a more normalized run rate without the effect of a pandemic.
Turning now to the outlook for Q3, and the remainder of 2020, the environment is improving a lot and we believe the worst impact of covert 19 is behind us.
Whereas last quarter, we estimated a range of 50 to 100 million.
Of onetime negative impact from Cobot 19 in 2020, we now expect to be closer to 50 million total if not potentially less with over half of that behind us in the first half of this year.
Looking at our aviation portfolio, we feel very good about what we currently own.
And what we expect to add this year.
As of June Thirtyth.
Our fleet was comprised of 65% 737 energy and Athree 20 C O narrow body aircraft and engines.
20% cargo aircraft engines, and 15% 757, and 767 aircraft engines.
As expected the 737 at Athree 20 market.
He has been the first to recover the grounded fleet is down to approximately 30% from a high of 65% in April in some markets, such as China in Vietnam or less than 10% below the 2019 levels.
We expect to see continuing improvements the balance of 2020.
As Europe is now almost fully reopened.
We also expect the cargo markets remained strong for the balance of 2020 and 2021.
As long haul international passenger flights.
We'll remain suppress while industrial activity and trade rebound.
Finally for US the 757 and 767 markets are recovering, but will take longer demand for cargo conversions are supporting residual values.
But freighter conversions take time and the international Lees leisure markets are still largely closed but expected it'd been begin reopening soon.
And with overall, 90% of our fleet are you being engine value. We think that is the best place to be invested in aviation today.
Overall engine utilization in Q2 was low at 40% for two main reasons.
One we proactively added engines to inventory as a result of taking engines off aircraft and selling airframes.
And to with many airlines totally shut down new engine leases and even moving engines around the world was extremely limited.
But that is changed now.
Well, we had 20 engine lease extensions in Q2, we now have over 40, new engine leases that will start in July and August of this year.
We anticipate Q3 engine utilization to return to a more normal level of 65% to 70%.
Looking ahead in times of cash crisis in surplus equipment.
Airlines dramatically cut back engine aftermarket maintenance.
With the quickest recovery and 737 and Athree 20, flying we're looking to add more cfmfifty six envy 2500 engines today.
We concluded a 16 aircrafts sale leaseback with air France in May.
And are actively negotiating to more similar deals totaling over 30 aircraft or 60 engines, all of which are cfmfifty six engines.
We believe these are some of the best investments.
Ever made.
With regard to our exclusive joint venture covering CFM products. The first product is in final form.
Paul requisite testing has been successfully completed and we are waiting approval to begin commercial production.
The second product is moving along it is still targeting a potential year end 2020 launch.
Also importantly, with a dramatic change in our favor.
Of the aftermarket MRO business, we expect to finalize a partnership with a major aviation MRO shop to accommodate our requirements for Cfmfifty, six overhauls and maintenance shop visits.
With airlines everywhere looking to outsource more capital intensive functions are exclusive proprietary suite of cost saving products positions us perfectly to capture an expanding share of a growing market.
Now onto Jefferson and infrastructure, starting with Jefferson Jefferson had another positive EBITDA quarter at plus 3 million despite demand destruction issues related to covert 19, and the oil price decline, which effectively shut down the Canadian crude by rail market.
Conditions continue to improve today, and we are projecting another positive EBITDA quarter in Q3.
There were several there were several important developments in Q2, which are setting us up for a good second half of 2020.
We executed a jet fuel storage deal with Exxon to lease the newly converted ethanol tanks.
Motiva, Saudi Aramco his name in the U.S. took over a tank, which Jefferson and use last year for crude marketing.
And finally, we have a new customer in the terminal who took over several tags from existing customer for a longer term and at a higher rate.
Altogether, our storage revenue went from 4.4 million to 6.1 million for 40% increase in the quarter.
We also reduced costs to address the current covert 19 operating environment.
While continuing to operate safely.
Head count reductions will show up into Q3 numbers due to savings in Q2, being largely offset by severance packages, which were paid in Q2.
[laughter] of major importance for Jefferson is the progress we made in Q2 with our three pipeline projects.
We executed in down pipeline connection and marketing agreement with the pay line pipeline to give us connectivity to Cushing, Oklahoma.
We also progressed construction with our Southerns Star project, which is our pipeline outbound pipeline to Motiva.
Which we expect to be operational by the end of November of this year.
And at that time, our three year storage contract with Motiva becomes a five year contract.
Finally, our six cross channel pipelines to Exxon are scheduled to be completed in November of this year as well and are actively under construction.
When these three pipeline projects are completed.
We expect to see a dramatic uptick in throughput volumes.
Once those pipelines are completed we will be in a position to offer our customers maximum optionality and flexibility and the ability to bring in crude or refine products.
By truck rail ship or pipeline.
And at various times any one or two of these means of transportation will be the most favorable to the refiners and producers.
We will soon have the ability to offer all modes and in the terminal business customers and look for and will pay for maximum flexibility and optionality.
Now turning to Repauno.
As a result of some equipment delivery delays related to covert 19.
Construction of phase one of our NGL trained to ship loading operation is now expected to be completed at the end of Q3.
Also our <unk> hundred 86000 barrel cavern has been successfully pressure tested confirming our ability to use that cavern to store propane in addition to butane.
This is important to us because the size of the protein propane market is much bigger than the beep butane market.
We're currently in negotiations with both producers and off takers for propane deliveries early in 2021.
Negotiations are going well and we expect to have firm commitments either late in Q3 or in Q4 of this year.
And we expect to begin shipping our first cargoes of propane.
Late in Q1 or early Q2 of 2021.
As to phase two of the report of development the permits for dock to which is designed for two vlgcs are now in hand.
That's the other opportunities that Repauno, we are in advance discussions with the wind farm developer and the state of New Jersey concerning the development of Repauno as a wind farm hub.
For steel component manufacturing and distribution.
And finally road construction of the bypass rode into Repauno has started.
And is expected to be completed in Q2 2021.
Bottom line is cobot 19 has caused some construction delays it repauno.
But as to the commercial discussions we are seeing parties reengaging and those discussions are going well.
Turning to long reads Q2 was another good quarter for our Frac sand business as we continue to take market share.
For the first half of 2020, we transloaded nearly half a million tons of Frac sand, which is approximately 25% ahead of budget.
Long ridges volume has remained robust in the face of declining drilling activity in the basin, which is a result of our strategic location in the core of the Marcellus and Utica shale.
In our high speed, Transloading operation, which combined to make us the low cost operator in the basin.
In addition in the second quarter Laagered signed a two year contract with a large commodities and company to Transload in store roads. So.
The power plant construction continues to be on time and on budget and we expect to be operational earlier than November of 2021, which is the date that is guaranteed by our construction firm.
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 Ridge.
This is in part because we had been developing.
Two carbon neutral electricity options for.
Power users one.
Deploying CEO to emissions capture and to using hydrogen as an alternative fuel to generate power both of which are of particular interest to hyperscale datacenter customers.
The largest of these developments would utilize.
50% to 100% of long ridges power plant capacity at premium prices.
50% of the plant's capacity is taken by one of these datacenter customers. The EBITDA generated by the plan would go from 120 million.
To approximately a 140 to 145 million.
And the contracted committed term would increase from eight and a half years to approximately 12 years.
And the higher EBITDA and longer committed term should give our 50% interest a materially higher value.
In conclusion as we look back on Q2, we like many companies are happy it is over.
While putting enormous stress on our company or customers and on our our employees.
Being able to successfully navigate these challenges has made us more confident than ever.
Our employees and our business model.
In aviation, it's clear that our decision five years ago to focus primarily on narrow body aircraft was the right decision.
Narrow bodies are the backbone of the World Aviation fleet and they are the most liquid and most resilient, especially during times of crisis.
Also we have always pushed hard for security deposits and maintenance reserves in our lease terms.
On occasion that position has cost us deals.
But at times like this those structures are proving to be robust and dramatically better than other alternatives.
From a revenue received standpoint, our performance in Q2.
There is thus far leading the industry for those public aviation lessors, who have reported.
This is in no small part a result of the two items I just mentioned the credit mix of our portfolio combined with the equipment mix and deal structure makes our portfolio a model for the industry.
And as I said before.
I would not trade our portfolio for any other portfolio in the industry.
Finally on aviation, let me return to the advance repair joint venture, which reform three and a half years ago.
That initiative is we feel days away from becoming reality.
If it happens as we believe it will we will have the most differentiated an exciting offering in the aviation leasing and maintenance markets.
Three and a half years of planning and hard work.
Is about to bear fruit with the potential for extraordinary results.
In real estate, the phrase location location location as well known but it also applies to the terminal business.
When we started putting our infrastructure portfolio together years ago.
We first consider that location.
And in addition, we look for excellent connectivity to rail water pipeline in roads.
And it's hard to find all those attributes in one location, which which makes the selection process more difficult.
But patience and hard work or about to bear fruit in that area as well.
Our goal from the investment side and infrastructure has always been to build at three to four times EBITDA to have the those businesses trade at 10 to 12 times EBITDA.
And to sell if we choose at 15 to 20 times EBITDA.
With respect to the central made a good back railroad and the 50% interest in long Ridge.
We did exactly that and more.
With respect to Jefferson and Repauno, we now see the way clear to have the same results.
As I mentioned at the beginning of this section.
There are few things better to test the strength of the business model than extreme stress and we had that in spades this quarter and I'm pleased to report that we successfully got through Q2, and we see that success, continuing and growing over the balance of Q3 and beyond.
In short I've never been more excited about were appetite is today.
Nor have I ever been this confident in our prospects for the future.
So with that I'll turn the call back to Alan.
Thank you operator, you may now open the call acuity.
Thank you ladies and gentlemen, if you have questions. Its time, please press the star and the number one key on your telephone.
Yourself in the queue. Please press the pound.
Once again its start wanted to ask a question and our first question comes from the line of Brandon Oglenski with Barclays. Your line is open.
Yeah, Hey, good morning, Jones, why now and and thanks for taking my question. Joe You mentioned that during the quarter you had a 20% deferral rate on some of your leases.
It does sound like your prospects are much more I guess relatively bullish looking ahead, you just remind us again that utilization estimates that you're running in Threeq you in any you know differ or default rates that you're expecting going forward.
As I mentioned on the engine side, we expect Q3 utilization to be about 65% to 70%, which is sort of it.
We always have targeted 50% to 75%. So we think that will be.
Strong and improving and as I also mentioned earlier with the lack of.
Airlines doing shop visits we expect over the balance for the year.
That the engine market is going to get even stronger and sometime next year weeks, we even think there'll be a shortage. So.
The outlook is very good there on the.
On the airframe side the utilization.
We we actually as I mentioned the remarks, we took back seven aircraft early.
And it was because we felt like either the credits were weak and they weren't going to survive or there was a lease term you know coming up shortly.
And it was advantageous for us to get those assets back early and we took those seven.
Narrow bodies and we've we've scrap the airframes and put the engines in the engine lease business.
Because overall I think the supply of airframes is going to take longer to use up than the supply of engines. So we think being in the engine market will be better quicker to get those assets deployed than in the.
Then in the competitive airframe market.
On the deferral side, we did say 20% of our portfolio. We gave deferrals most of those deferrals are the biggest portion of those were in the 75776 market.
Because as I mentioned a lot of those operators are just not flying so.
Thats, where probably the highest stress.
But it's only about 15% of our portfolio and ultimately.
We think the values of seven 5.76 is we'll be fine because cargo is still very strong and most of those plays you know the excess of those planes will end up being converted to a cargo.
Okay really appreciate that response and then you did highlight I think at the end of your prepared remarks that you're getting close on diesel engine products I think one probably it's coming up soon then one towards the end year can you just update us on the approval process and then how does that fit into your commentary about 10.
So I think you said a JV partner.
Aerostructure is that something just for your own fleet or is this something you want to sell externally too.
So.
So I'll start with that on the MRO side, it's it's mainly for our own fleet, because we're going to have.
Several products you mentioned two that are in development and we'll have another three that we will have in 2022, we'll have about 80% of the oil.
Our foil portion of a shop visit.
This joint venture will have a substantial approximately 2 million dollar cost advantage.
And we wanted to have a shop, there was really dedicated to us to manage.
Our shop visits and make sure Theres no interruption and that we have a priority place in the.
In the Q, it's not an ownership position so it's simply a partnership but with a dramatic change in the MRO business. We had been looking at this for over a year.
Now the MRO shops are largely empty, we we actually got a significantly better deal with a very large company and I think it will.
Address all of our needs for our own fleet for the CFM engine over the next you know 10 years.
It will also allow us to facilitate us.
Managing the parts one of the things that we will have an opportunity to do is.
If we take our engines into shop, and we put in these new joint venture parts.
We could sell.
Some of the used serviceable material.
That comes out of that engine the OEM parts and that's something also also that we want to be able to manage and control.
As that could be a significant.
Source of income and then profits for us going forward given the volume of.
Business that we see that being able to do.
The.
And the approval process is.
We have been.
Working very collaboratively with the Epay and.
Through this whole period so.
Theres been a lot of back and forth and a lot of sharing of information a lot of.
Adjusting as I said in terms of you know what what was needed so.
With the conclusion of this the parts are actually made they've been you know reviewed their being produced.
Tests have been completed so.
With that with the first part as I mentioned, it's it's substantially complete now it's just up for the final review of the final package, but all of what has been submitted has been seen before so there's nothing new.
So we're very.
Uh Huh hopeful and confident that that will you don't go smoothly as it has to date.
Okay I appreciate that and then last one.
He just talking about your current liquidity position and how that compares to think that 30 aircraft you mentioned.
In the pipeline that you're looking to acquire.
And then he commitments on the infrastructure side.
Yes, so we.
We just did a $400 million bond deal last week.
So that pay down the revolver in full and we have.
150 million ish hundred 70 million a cash so.
So the.
The two deals that I mentioned 30 aircraft, if you know roughly a few ballpark.
The aircraft that you know eight to 10 million per aircraft, we have we have plenty of liquidity to.
Two.
Close on those deals.
With respect to.
Infrastructure I think the remaining commitment we have is to repauno is about $10 million for finishing.
The ship rail to ship loading system.
So thats that'll happen in Q3.
And Jefferson the pipeline projects were anticipating financing all of that in Q3 in Q4 with nonrecourse debt financing at Jefferson as we did in the Q1 of this year and the tax exempt market.
So no significant needs.
That infrastructure.
Thank you.
Yes.
Thank you and our next question comes from Justin Long with Stephens. Your line is open.
Thanks, and good morning.
Maybe to follow up on that on that last question. Joe could you just talk about how the recent bond deal was received in and going forward as you think about.
The different areas you can deploy capital what's the update on where you would feel comfortable taking leverage going forward.
Yes so.
The bond deal. We did was higher cost it was probably 300 basis points higher than what weve.
Had typically traditionally done in the in the high yield market as a result of.
Being in the aviation business is not great on the fixed income side and also with energy exposure. So.
But.
Having said that the reception was very very strong we had.
Over 900 million of orders for the 400 million dollar deal that we did we we launched 300 and an increased it to 400, so very very good reception bonds have traded up.
So we're very pleased.
Really to be able to access capital at this point you know at the that pricing.
The way on the return side, though the returns have gone up more than 300 basis points I would estimate we're seeing.
Higher returns on aviation in the order of 1000 basis points, so 10% point percentage points higher.
Then historically.
Given that you know the industry and tremendous distress never been more distressed.
And the were only doing deals right now on CFM engines.
If government owned airlines and that have substantial backing so.
It's hard to imagine.
A better set of circumstances for for that given that we were not even factoring when I talk about yield returns I'm not even factoring in.
The upside from having the joint venture parts that we will have next year starting next year. They ended this year.
So if you know it's a dream in terms of being able to buy these assets at these prices from government backed airlines and I think the reason.
It's happening is a.
Hey, there's very little competition for us nobody else is buying.
17, 18 year old airplanes and be the government.
If you're an airline to something by government you only have two choices. You can you can go fine you know people like us.
And that allows you to that go back to the government say I don't need as much money I can I can take less and.
Conversely, if you don't do that deal you have to go ask the government for more money, which is not very popular so.
So that's why I think the deals.
The market is so attractive in terms of.
Leverage you know, we've always targeted 50% were on a nonrecourse debt basis were about 50.6, I think or something.
So we're we're right at the level Weve.
Targeted obviously this environment is one where you'd want to have lower leverage not higher leverage so.
I think we'll look again to potentially issue preferred stock as we've done before.
To bring some of the leverage down and and then just take advantage potentially of.
Monetizing assets sales as we did with.
Longbridge and CMQR, our last year, we could we could potentially sell minority stakes in some of the in for do do other things to raise capital, but not really looking to take leverage up much from here.
Okay, that's really helpful and going back to what she said on that Tobin had when I guess now you're expecting it to be $50 million. There are less as we think about these aviation deals that are in the pipeline. If you just get wanted.
These two deals done do you think that's enough to kind of fill the co bid hold this year.
Yes, the first deal with air France, I would say approximately $20 million of additional EBITDA and.
The second deal we're working on right now is probably 40 and the third deals about 25 so.
If you add all that up.
Good.
Well above the 50.
Okay, that's great I'll leave it at that thanks for the time Yep. Thank you.
Thank you enter next question comes from Ari Rosa with Bank of America. Your line is open.
Great. Thank you and morning, Joe and Alan So Joe I was hoping you could address.
The variability in demand patterns for aviation assets across regions.
And just offer some thoughts on what you think the lingering effects of cold it could be in terms of the types of negotiations that you have in and not not necessarily specific to apply but also just kind of across the industry, how how the experience of public kind of changes.
Those negotiations and the overall market for aviation leasing.
Yes, I'm sure so.
Several points I think regionally I mean, our view is dramatically different than anybody else's and that it's asia's recovered the fastest and you can see it in China Vietnam.
Korea other markets in Asia has done pretty.
Pretty well considering.
On the domestic flights I mean long haul international is going to be challenged for many.
Several years since so I.
I would not want to own a lot a triple sevens and Athree hundred Thirtys, and we and we don't own any so.
Then Europe is now sort of coming on where a lot of countries have gotten.
Virus largely under control and the flights are opening up in domestic flights and.
Air, France, Alitalia th why.
Lufthansa.
They're all they're all starting to to add in the domestic markets.
Which is what I you know we care about the most.
Long term.
What I mentioned is.
I wouldn't necessarily want to be facing a lot of new deliveries of aircraft in the next few years, because you can imagine that's not going to be.
Very that's going to be hard.
With that there's going to be surplus equipment, so putting a new asset on lease.
Almost any kind is going to be difficult but.
When I look at our where we're positioned as you know where the engine people and.
What has happened previously and crises and this is this is one but it's much bigger is that airlines stop.
Putting engines through major overhauls, and we've seen we've had that discussion.
Every big airline they all confirm it you see articles you know confirming the same thing you see maintenance and repair shops are emptying out so.
It's happening, but at the same time people are flying those airplanes and they're using up the green time so.
That for us means that sometime in early 2021.
Theres going to be increased demand for at least engines. Once people use up there are green time in their existing fleet.
And they'll probably be a shortage.
So.
That's perfect timing to have you know our products.
We're developing which we expect could improve this year, our maintenance joint venture, which we.
Hope to announce this quarter and finalize very close and.
And.
We're trying to add you know as many CFM engines at good prices as we can right now that's what the air France steel was in the other two deals.
We're looking at are all the same cfmfifty six engines.
So.
That's that's where we're focused in head and I think it's a great you know it's actually.
Not that you want to benefit from you know.
Yes, but I think that being position there where you can see that's where the that's where the puck is gonna be and that's what we're trying to escape too.
Got it understood so sounds really exciting for F tie into congratulations on navigating obviously very difficult market.
So turning to the sad it continues to be well in excess of the dividend or what maybe not well in excess but comfortably in excess of the dividend and what's probably.
You know one of the most difficult quarters that anyone will face in the kind of business is that your and Oh any thoughts on either increasing the dividend or thoughts around kind of uses of capital ops for that.
For that spread between where fat is coming in and.
And where the dividend does that.
Well, we have Oh, we have great aviation you know investment opportunities. So you know with these returns that's where.
My our priority would be to invest.
In CFM.
Engines, just like we're doing so.
So I see those.
Airlines are not going to get out of distressed.
Quickly it's going to go on so I think there's going to be more deals. So we we have good uses in terms of.
The dividend I mean, it's been always been an important part of our.
Shareholder.
Investment thesis and maintaining that in this quarter was important for us and.
And we've done that and so I think that.
That feels like a great place to be to have you know.
John through what is arguably one of the worst environments ever for both aviation and energy and not not reduce the dividend.
And also have great investment opportunities so.
I feel like we're going to good spot.
Got it that makes a lot of sense. Thanks for the time, yes.
Thank you enter next question comes from Josh Sullivan with that's that's the benchmark company. Your line is open.
Hey, good morning, congrats on a quarter.
I'm just a question on the PM, a part opportunity and commercial production can you give us a flavor how deep in discussions you are with airline customers. At this point do you have any otherwise orders from airlines, rather customers and then how do you see the could go to market strategy on holding with the joint venture.
Yes, there are several orders.
That were both both orders are two orders that are sizable or.
Before covered it.
So.
Yes, there are customers and there are.
People, who are put in pre preproduction orders, which is a good sign once cove. It hit obviously it was very hard to get airlines to focus on.
Yes, and so it's kind of.
I'd say it went into a marketing.
Oh.
Pre approval, but but every airline you know we talked who is interested in two things one is reducing costs and this is a way to do that and secondly.
Reducing any capital investment and so the opportunity for us has to offer a total solution.
To an airline and say we will.
We will manage the shop visit for you will put in our proprietary products and.
Into into the engine and lease them too to you on a power you know.
Almost like a PVH power by the hour business.
So that I think we'll get a very very good reception.
Once we're through a little bit more this and people are sort of back to a more normal environment, which I think will be the end of this year by by the end of Q4.
Got it.
Thank you.
And then just turning over to the cargo market you know, what's the timing calculus between returning passenger belly capacity greater conversions.
I've seen some cargo rates come back to Earth, no, but I add and others are looking at say kind of a 2023 return that global passenger traffic how should we think about the tightness in the cargo market between now and then.
I think it's going to be tied I mean, it's just hard to add a lot of supply of cargo airplanes. So to the extent you've got this excess demand, which is coming really from.
The two things are happening is one is the passenger planes are not flying as much on those international routes, which is a lot of the capacity, but also ecommerce is growing very rapidly.
So we see demand.
Particular number of.
Seven through seven 800 aircraft that we were looking at where.
People are looking at converting them and putting them into China in the domestic market in China, which is barely scratched the surface. So.
So I think the outlook for cargo is pretty good for the next two three years I think any anybody that forecasts longer than that in aviation is sort of kitting kitting themselves but.
It does feel like there's.
Two of those two fundamentals are pretty strong and it's hard to create a lot of cargo.
Aircraft capacity that quickly.
Thank you.
Thank you and our next question comes from the line of Guiliano Black <unk> Veatch Yaghi your line.
Good morning, and congrats on the successfully.
To be doing a pretty tough environment here.
I guess jumping in on the aviation side.
This is as you build out the portfolio Cfmfifty six as you become increasingly relevant player in that market I'd be curious where you are in terms of the number of Cfmfifty six engines, but you have in the portfolio with air France, and then where you could go with the other transactions.
Do you have that numbers Scott.
Hi.
Yes, I, just don't habits right off the top behavior I can get it.
In the interim Mike I'll jump in on the.
Switching over to do your engine repair JV.
Got a topic I'd be curious.
Since you have some orders I believe on for some of the parts how fast could you ramp up and ship some of those products and start recognizing your 25 or some share of the economics on those.
So our partner has been preparing for production all along and.
Very good shape to produce products quite quickly and there's not a theres not a significant bottleneck.
In the production the only thing.
What do you do start up production.
What typically happens is your yield starts out a little bit low and that increases as you as you make more of the parts. So in the beginning their there'll be more scrapping and then the production.
We will ramp up very quickly so.
So the facilities the capability the castings.
Machining and the coatings are all readied and available for a very quick ramp up.
That makes sense.
Kind of switching gears a little bit.
Right I realize it asset values on the infrastructure started probably not.
Back yet quite sometime to recover but if you're able to get some deals done with long ridge and potentially starts going Jefferson would you consider selling the remaining 50% stake them on rich, we're selling a partial stake in Jefferson.
In the near term called a year or two years and redeploying that capital either into aviation assets are related yeah.
Related investments like MRO type of platform that would help skilled <unk> leasing business.
Yes.
I think we're going to have a great MRO deal without having to buy and MRO, which is what I that would be my preference but.
But yes, we would be.
Open to that and I do think.
The probably the time to sell long ridges when its operating.
And it should be.
Were they are targeting key what is now saying potentially a September was originally promised for November of 2021 and are seeing September now and maybe August so we should be and we could be.
Operating.
In a little over a year, which would be great.
And that's when I think that's where we have the longest contract coverage and you take away. The you know the issue that some buyers have they just don't buy things that are not you know operating.
So you get access to potentially the lowest cost capital in the infrastructure World, which is.
Fully contracted and operating and so I think that would be.
That's something that we're you know we would definitely think about it.
Jefferson as well it's.
You know these pipeline projects or are huge.
Step change for the capabilities of the terminal.
And what it does is allows us to compete in much bigger projects. So it's not just you know crude by rail or refined products to Mexico. It's.
You know.
Serving refineries and exporting.
Refine products for the two largest refineries in North America. So.
That's what that's what this will allow us to do and I wouldn't want to.
So.
Without getting the benefit of all that work that we've done to get it to this point so.
But that's definitely something that we would consider as well as we did last year and the markets are coming back I think.
There were a number of sale processes, which were.
You know people, we're thinking of launching an April may and they stopped obviously, there's not a great M&A market, but we see them restarting now so people are confident that values are.
Back in so I think that you M&A market will start to pick up and.
In particular, there is tremendous amount of infrastructure capital that's still being raised there's a lot of it now being raised in Europe.
European companies are looking to invest in North America. So.
So I think the infrastructure.
Good from an M&A standpoint will be strong.
That's great and then you negotiate with just.
Zero interest rates for the next.
Who knows how long.
Let me close on that and then just pivoting over to the dividend payout I realize that there are a lot of opportunities on the investments are they're extremely attractive. So there there there's probably going into the balance and then at least in the near term terms of you're talking about moving to distribution and also getting the recovery as you invest more into other years now so to get more accretion.
And then also give.
And as the impact or deferrals roll off you should see a significant boost.
But even our EMS add probably into the end of the year in into 21 I'd be curious to know what kind of levers you're looking at in terms of drives actually driving an increase in the distribution.
Well, we've we've always said we wanted to two to one coverage. So once we exceed that that's when we would look at raising the dividend.
It is you're right there's potential that it could ramp.
Meaningfully you know late this year early next year.
That makes a lot of sounds I really appreciate the time and I will jump back in queue. Thank you. Thank you yeah, and just just just for a follow up with respect the CFM engine.
Currently we have 145.
Yes, I am engines, and then pro forma for the two new deals we have over 200 plus.
Thanks, So 200, and I would say that there are 22000 cfmfifty six engines out in the world. So just to give you the sense of the total market.
Is enormous and we're still we were one of the bigger players, but we're not by any means close to being you know.
Considered you know.
That big and in a market mover yet.
Thank you and our next question comes from frankly Stifel. Your line is open.
Yeah, Hi, Joe.
Congrats on the strong quarter I wanted to follow up on the engine business I was actually pretty surprised that you guys expect to get back the utilization above 65% in Threeq you answer to that end good job on that.
But those 40, new leases signed in the quarter can you give us a sense for who those leases were kind of geographically and market and then what those rates were comparable to a.
A year ago, or I guess the into last year.
The biggest uptake is Europe.
And the rates are comparable I mean, there's no.
There's a lot of rate pressure on engine leasing right now and I don't foresee it happening I see it going the other way potentially.
Okay.
And so that I guess to follow up on the aviation market the leasing market.
<unk>.
Obviously, the largest toggle for anybody's investment case enough tie and aviation assets, specifically is based on expectations around.
Effectively aircraft utilization and the implications that'll have four.
The burn rate on Green time that currently exist.
So then would you be able to add any color on how much green time exist for the engines that you guys focus on.
Yes, we actually we did our own analysis and then we hired an independent appraiser to do you know an independent analysis.
And we looked at both the Cfmfifty six five the which is on the Athree 20 in the 70, which is on the seven to seven LNG in both our.
Our numbers and the experts numbers came out saying that.
Sometime around the end of Q1, the available supply of engines will be less than the avail than the demand for those engines. So.
Q1 of 2021 so.
By the end of this year people expect probably.
70, 580% of the.
Athree 20, and 737 air aircraft to be flying globally.
And then assuming that happens then you basically with with a limited number of shop visits you basically are out of engines by the end of Q1.
Okay, great Yeah, that's super helpful. Thanks, very much congrats again on the Canaccord. We can we can share that information with you. We have we have that available I think it's in the slide or one of our decks.
That would be great follow up offline. Thanks, so much yep.
Thank you next question comes from Devin Ryan Jane.
Your line is open.
Great Great morning, most questions have been asked here, but I wanted to just come back because the sale leaseback transactions and the opportunity.
So Joe you walk through.
What's driving them right now, which makes sense, there's there's not a lot of competition, which is a pretty good position to be and.
Do you see the window opportunities like the closing just as economies reopening.
Why.
Increases or.
This kind of several year opportunity I'm, assuming that you guys are probably getting a fair amount of attention in the market for these deals, especially these other couple come together, so I suspect that could actually drive more to you to the extent, there's going to be more activity like this in the market.
Yes, I think they'll be more because.
As I mentioned airlines or are not going to be under stress for quite awhile. So.
There there mode is gonna be looking at anything they can do to generate cash and selling and selling and leasing back some of their older equipment, which they plan to phase out is.
It's obviously attractive because several people are doing it and I think more we'll do it so.
So I don't see it ending right away, but you know you can never be sure markets when markets got distress capital flows in and you don't want to wait around and assume that that's going to be a case. So I think that these deals are here and now and that's why we're.
You know that's why we're we're acting.
But I do think that its not the it's not going to be the end of it.
And the beauty about our strategy is that we have two ways to monetize those assets you can actually keep them as an airplane and leasing to somebody else and.
And by the way whenever an airline tells you there going to phase out an airplane they almost never get the timing right. They are almost always.
Keep keep those assets longer than they think I would say 90% of the time so.
That's an opportunity for extensions, but not not the to count on that but it usually happens, but but we can we have the opportunity to.
Keep it as an airplane or.
Scrap the airframe, which is our base case, and just and just leased the engines and I see a number of airlines you know.
On the horizon, where we can develop.
Leasing programs for the Cfmfifty six engine for their entire needs. So they don't have to do any shop visit so they don't have to do any.
Acquiring of engines, they can rely solely on us and we have a cost advantage.
In the shop visit.
We can manage that shop visit for $3 million versus $6 million average industry cost. So that that Delta has is something that you know we're going to obviously you point out in <unk> and make sure that we can.
We can grow that business by taking advantage of that.
And still generate you know amazing returns.
Okay, I think Joe and then just a follow up year.
I know this is our job is analysts year, but $15.
It doesn't feel like at least to us the valuation is getting a lot of credit for the board opportunity, which I'm, assuming you agree with but you appreciate there's a lot of moving parts to the story right now so.
It can sometimes be complex from the outside to look at as you evolved for more of a vertically integrated aviation company, which it feels like is where we're headed year given the opportunity set to deploy capital as you potentially exit somebody infrastructure assets. How are you thinking about what that.
Does her culpepper wide valuation I'm, what I'm, assuming there has to be some calculus around it and you have to think about allocating capital through the different opportunities.
Yes, well, it's it's a good question. We've we've acknowledged that you know in sometimes our story is too complicated we would benefit by simplifying it.
And simplifying it as we grow the joint venture in the engine business.
That could be a separate business in a separate company, which which might be better you know as a standalone assets. So.
That's a goal obviously, we didn't expect this kind of disruption that hit US we had the best quarter ever Q1, and then and then you know starting in April the world shutdown. So.
So I think everything is you know on that side, it's a goal at something we'd like to.
Move towards obviously, you know the Sox better now than it was in may but.
It is still not reflective of what we think it will be but.
But I'm not complaining I'm, just saying you know will we're going to work hard to get it there.
Okay. Thank you appreciate it.
Thank you and our next question comes from Chris Wetherbee with Citi. Your line is open.
Hey, guys James Mountain again on for Chris just funded.
A follow up on that last question about the.
Respect the transactions Ah you scrub the sale leasebacks just wanted to.
Dan you still handling the maintenance on those.
Engines in those assets are these more.
Financially opportunistic transactions just wanted to understand how he'd like E. These transactions to me it might be.
Different than what you typically do and or if that's even the case and sort of how they fit into your long term strategy just kinda wanting to get your.
Thoughts there.
The transactions are very similar to what we have been doing it's just I'd say two differences one is there they're bigger we're acquiring more assets at one time. So you do a 15 aircraft deal.
Instead of one or two airplanes.
And so larger transaction they also.
Involve.
Government owned Airlines, which is something previously you had a lot of government owned airlines would never considered doing these transactions, but the financial reality today has changed enough that they.
They are looking at everything so that market opportunities.
New to us, but the fundamental.
Oh deal is the same and that we're going to own and airplane.
At the end of the lease when it comes back to US we will have an airplane with engines on it.
And what Weve typically done is that gives us a choice if we're going to release. It we could if there's people that want to release the whole airplane with the engines, we could do that.
But alternatively, we've been able to very successful it.
Selling off the airframes and then just leasing the engines.
In large part you get almost the same cash flow from the two engines as you get from a whole airplane and you end up.
Putting money in your pocket by selling airframe so.
It's been great financially in from a flexibility point of view. It's a it's it's are you know, it's our core strength.
Got it and then also turning to Richard just wanted to get your updated CECO crude by rail it sort of.
Interest your tenant seeing there if any and maybe so to get your view on yes, there will be.
When there would be a rebound.
Yes, so I think.
Ignoring the shutdown of the dapple, which you know we don't have that'll happen, but if it did happen there would be part of crude by rail all of a sudden moving.
That's out of the Bakken.
But that's in the courts and so we don't know the answer that.
The other market you know opportunity is Canada and that is coming back and we see the spreads widening now.
Back out to normal or are showing in the forward market looking normal in Q4 of this year and.
And talking with some of the producers and refiners people are anticipating that crude by rail will will still be in the mix.
And and people are making commitments and.
Looking at investments and one in particular people are working on.
Still as we talked about the last time or two two quarters ago was a deal you wouldn't recovery unit a de are you.
That's where you buildup.
Processing plant in Canada, which strips out the diluent so that what you're shipping is really undiluted.
Bitumen and that has to move and rail. So it's so if that happens then we're looking at people, making 10 year commitments to crude by rail, which we still believe that will happen so were.
We're still working on that but it's obviously with the spreads.
Now where they are now there's not a lot of not great optimism, but its but it's definitely coming back.
Okay that makes sense thanks for the dot.
Yes.
Thank you enter next question.
Rob Salmon with Wolfe Research your line.
Hey, good morning, guys and thanks for squeezing me in.
Quick kind of I'm, perhaps I missed it in the prepared remarks on the asset impairment charge that you guys took in the second quarter was that related to the seven aircraft that.
That you proactively returned or was this related something else.
Scott do you want to answer that.
Yeah, that's related to yeah. The early return of some aircraft that we took we took back six six aircraft as part of a early release a return of all the lease and then there was one engine included in that in that overall impairment.
Yeah, that's helpful and another clarification questions and then a longer term one.
The clarification question is when you guys were talking about the.
The percentage of your book that's off lease I wanted to say you you'd mentioned it was 20% what does that 20% of that 15% that is kind of exposed to the 775776 that market or was that.
20% is off lease in all of that market basically is kind of off lease currently.
Well, the 20% I think you're referring to is the amount of rent deferral. We gave two two lessees in the quarter.
And that that was what was in the prepared remarks, if that's what you're referring to and that's for the entire yes, yes that was Joe Yes, Yeah, and then I think you had mentioned that the majority of that was seven six happens yeah. I think two thirds of that was in the seven five and 767 markets.
Which is 15% of our portfolio, but the biggest chunk of that deferral was for those aircraft because.
Those are the aircraft that are the heart as you know to fly and lease right now so the narrow body fleet is actually.
Performing very well the engines are doing well cargos doing well, it's the seven five and seven six is the most challenge.
But it will come back I said with the freighter market being strong and leisure markets reopening, it's just slower to develop but that's that's where the deferral most of the referrals were there.
Got it helpful. And then just bigger picture just in light of Cobot could you got to provide US an updated your updated thoughts with regard to be engine repair market opportunity for after <unk> like how should we be thinking about kind of your ultimate share opportunity.
Actually things getting pushed out, but maybe you've got a a bigger end market.
Now just how should we think about those puts and takes yes, I actually think it isn't it is a bigger market because for instance, you know air France doing a deal with us and talking about engine leasing.
Opportunities with us Delta, telling us they you know and entertain engine leasing these.
These are carriers it typically wouldn't have you know.
Thought about they would have done everything in house, but with with the financial crisis in the cash crisis. You know there they are much more open to outsourcing.
Functions that consume capital and engine shop visits consume a lot of capital.
So with our products that we have coming.
On the joint venture side, we can we can overhaul cfmfifty six engine for under 3 million versus an industry cost average of 6 million.
And so where I.
I would love to see us.
Get too is being able to go to.
A larger airline obviously, we're going to do our own fleet you know.
The way, we're doing it but you could go to a larger airline and you could say, we'll do all of your Cfmfifty six engines for you and here's your hourly rate.
And you're done what you're out of it and you don't have to invest capital you don't have to.
Adage that and you get it you get a rate that saves you money.
And doesn't require you to.
Invest capital and shop visits so.
That opportunity I think is coming much much faster than it would have otherwise because of the crisis and as I mentioned the CFM engine is 22000 engines in the world, it's not going away.
For the next 15, and maybe maybe 30 years, there's still making aircraft and there.
A lot of the seven to seven eight hundreds are going to be converted into cargo airplanes to replace the 757 so that.
That's going to have demand for many many years. So I think the opportunity is.
Fantastic for Us and.
One of things I mentioned also as we do want to have.
Maintenance MRO partner and we're very close to finalizing that deal. So I think we'll have all the pieces in place to actually do this.
Appreciate the perspective.
Thanks.
Thank you and your next question comes from Robert Dodd Raymond James Your line is open.
Hi, guys and congrats on the quarter I mean, one what more aviation and Oh, you mentioned, Joe independent box that the deal with the M. all I could give you a part of it would be to get a presidential place in the Q.
The shelf, but it should send you you've talked before about you know how those those can take a while its capacities NAV and if we end up with a.
Squeeze on availability a shop visits.
When green timelines out sometime next year.
How much do you think that preferential.
If the deal gets on that preferential place in the queue could add to kind of value or will it otherwise we put that plus you'll you'll cost advantage on on a shop visit plus potentially a preferential place in the Q what could that due to kind of the yield on engine assets are the all that.
EBITDA you also on what you want.
So yes.
Well, that's I mean terrific questionnaires theres a couple of elements that one is that the preferential treatment and we're also working on.
Price advantageous pricing under the deal and on a on a fixed spaces. So no surprise basis.
And also one of things were focused on working together one of the reason we want to do this is a partnership is we want to shorten the time and engine is in the shop.
Because often an engine will go in and everything is done in sequence and you might be waiting months for a single section of the engine before the whole engine can come out and so part of our design is to create module inventory and as I've mentioned before the CFM.
56 engine has four modules.
So to the extent the work is needed primarily on one module you could swap one module out of an engine and B b out of the shop in 15 days instead of six months. So there's tremendous.
Benefits the other than the other benefit as I alluded to was being able to monetize parts.
And to the extent, we have our own MRO shop partner will be better it will be able to better manage the parts that come out of that engine and be more effective at that so when you. When you put all that together you know if you think about today, you can earn 25 or 30% Unlevered.
On an engine and as the average shop cost to 6 million and our cost drops to 3 million that we should earn 50%.
Unlevered.
And I actually you know those those are not you know.
Sounds you know hi, but you know maybe somewhere between 25 and 50, but not it's gone it's definitely going to be <unk> going up, particularly if its a tight market and we can turn the inventory faster.
I appreciate that thanks, Thanks, a lot and then one more kind of.
Structurally obviously, he and the the aviation business you've mentioned my makes sense as a standalone entity. It probably would make more sense as a standalone sequel bend to see rather than an LLC.
And if you were to sell all stake so all spin.
The other parts that could could make sense. So it is that obviously, we've talked about sequel Commendation before.
Is that still on the table any idea about the time claimed to that would it make sense to do it.
While the infrastructure assets, it's still owned all can it gives any thoughts that.
Oh, yes, the goal would be to get rid of K ones, because we know that's not helpful.
So yes to convert to C Corp is definitely on the table and.
You know, it's something I don't have a specific timeline on it but it's it's.
Rising up in terms of priority level. So we're we're working on it but I mean, we do think it has value on multiple fronts, but I don't have a specific timeline.
Got it I appreciate it thanks, a lot yes.
Ladies and gentlemen, once again, if you have a question at this time. Please press the star in the number one your telephone once again that's star then one our next question comes from Scott Buck with B. Riley Your line is.
Yeah. Good morning, guys, assuming you're able to close in the two aviation asset transactions has that changed the way you think about.
Additional asset acquisitions for 2021.
Or do you continue to be fairly active in the market next year.
I think we continue to be active.
Because as I mentioned that.
You know the Cfmfifty six market is enormous and our advantage is X is a huge and so.
I think we would continue to capitalize on that cities to the extent. It you know it advances the business and you can generate those types of returns.
Great and have you seen any material change in the asset pricing and you know here in July verses, the air France deal back in April and May.
No.
Perfect. Thank you guys.
Thank you and not showing any further questions at this time I'd now like to turn the conference back to your Speaker Alan.
For any further remarks.
Thank you Sydney.
And thank you all for participating in todays conference call. We look forward to updating you after Q3.
Thanks, everyone.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a good day.
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