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Edited Transcript of FTAI earnings conference call or presentation 2-Aug-19 12:00pm GMT

Q2 2019 Fortress Transportation and Infrastructure Investors LLC Earnings Call

New York Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortress Transportation and Infrastructure Investors LLC earnings conference call or presentation Friday, August 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan John Andreini

Fortress Transportation and Infrastructure Investors LLC - IR

* Joseph P. Adams

Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO

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Conference Call Participants

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* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Fortress Transportation and infrastructure Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I will now introduce your host for today's call, Alan Andreini. You may begin.

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Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [2]

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Thank you, Operator. I would like to welcome you to the Fortress Transportation and Infrastructure Second Quarter 2019 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer, and Scott 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 call is open to the public in listen-only mode. It is being webcast.

In addition, we will be discussing some non-GAAP financial measures during the call today including FAD. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.

Before I turn the call over 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 and forward-looking statements, and to review the risk factors contained in our quarterly report filed with the SEC.

Now, I would like to turn the call over to Joe.

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [3]

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Thank you, Alan. To start the call I am pleased to announce our 17th dividend as a public company and our 32nd consecutive dividend since inception. The dividend of 33 cents per share will be paid on August 27 based on a shareholder record date of August 16. The key metrics for us are adjusted EBITDA and FAD, or Funds Available for Distribution. Adjusted EBITDA for Q2 2019 was $94.1 million compared to Q1 of 2019 of $66.3 million and Q2 of 2018 of $52.2 million. FAD was $86.9 million in Q2 versus $70.2 million in Q1 of 2018, and $44.8 million in Q2 of 2018.

During the first quarter, the $86.9 million FAD number was comprised of $126.8 million from our equipment leasing portfolio negative $10 million from our infrastructure businesses and negative $29.9 million from corporate.

Now, let's turn to aviation. Our aviation business just completed its best quarter ever. Adjusted EBITDA in Q2 was approximately $103.6 million, or $324 million annualized, up from $290 million annualized in Q1. During Q2 we closed $87.1 million in new investments and we ended Q2 with $340 million approximately in signed letters of intent or purchase agreements which includes the $160 million for Avianca planes which we announced on July 24.

The large increase from the $290 million annualized number in Q1 to the $324 million annualized number in Q2 was a result of a couple of things. Number one, three of the five aircraft we had off-lease in Q1 started new 6-year leases in Q2. And we put five new aircraft and seven new engines on lease in Q2.

As we mentioned on our Q1 call, we have started harvesting the premium in our portfolio by selling in Q2, $61.3 million of assets that had a book value of $38.7 million for a gain of $22.6 million. We expect to realize more gains in Q3 as we continue to take advantage of a strong market while we replace those assets that we sell and simultaneously continue growing our portfolio.

Our Advanced Engine Repair JV is making great progress. We fully expect to have the first commercially available products in the market in the first half of next year. As a reminder, we funded $15 million of development costs in early 2018 in exchange for 25% ownership of the JV plus preferential pricing on the JV products for use on FTAI's owned engines.

With this progress and a very positive market for aftermarket engine overhauls and repairs, we have agreed to expand the joint venture and have commenced the development of additional products following the same process and JV structure and an additional $13.5 million investment in the JV. These parts and repairs will provide FTAI with unique and proprietary products that will substantially reduce the cost of aftermarket shop visits for us and our airline partners and generate a meaningful incremental EBITDA contribution to FTAI beginning in the second half of next year.

The bottom line is our aviation business continues to outperform our expectations. Our offering becomes more differentiated every quarter and the macros for the industry remain very strong. I like this business more every quarter.

Turning now to offshore, in general the offshore marine industry remains in a position of oversupply but there are signs of some recovery. Offshore spending is expected to grow modestly in 2019, marking the first year of CapEx growth since the downturn and is expected to be an outsize contributor to upstream spending over the next several years.

As we've mentioned previously we are in the process of transitioning the Pride away from the general inspection repair maintenance sector into well intervention.

The new tower for the Pride, which will enable the vessel to carry out well intervention, is currently under construction with an expected completion in early 2020. As such, we have recently signed a letter of intent and are negotiating definitive agreements with Helix Energy Solutions whereby Helix would provide certain additional equipment and operational expertise while jointly marketing the Pride. Helix is the leading provider of well intervention services globally and we're particularly excited about the potential for this strategic partnership.

Turning now to infrastructure and Jefferson, from a financial performance standpoint Jefferson was a little short of where we wanted it to be. We had hoped to be EBITDA break-even or slightly positive this quarter. Instead, we were slightly negative at minus $2.6 million. However, from an operational, contracting and flow standpoint, it was our best quarter ever, so let me explain both of those.

On the financial performance side, we had two main issues. Our refined products customer experienced delays with their receiving tanks in Mexico, and as such, we did not move the volume levels we or they had anticipated. The expectation is these issues will be resolved by the end of this month and increased shipments will begin immediately thereafter.

Also secondly, the WCS versus WTI spread which served us well in the Q4 of 2018 and Q1 of 2019 was not sufficient to generate positive EBITDA this quarter. On the positive side of that equation, our train counts are growing faster than we had expected. In Q2 we did 27 trains into the terminal in April, 29 in May and 33 in June. And our scheduled trains for the balance of this year continue to grow and we're now expecting to end the year with over 40 trains per month based on customer estimates and contracts in hand.

On the construction front, we are on track to complete an additional 1.4 million barrels of storage in early Q4. That project remains on budget and ahead of schedule. Of the three tanks that comprise the 1.4 million barrels, one is fully committed for 3 years; one is optioned for 3 months during a test period and will convert to a fully committed 3-year deal if the test trains are successful; and as to the third tank, we're in negotiations and expect to have that signed by the end of this quarter.

The demand for tankage continues to exceed our supply and as such, we have begun work on an additional 2 million barrels to be delivered in the middle of 2020 at which time we will have approximately 6.4 million barrels of storage at Jefferson.

On the pipeline connection front, we made progress on two important initiatives. Our multi-pipeline construction project to one of our neighbor refiners is about to commence. We are finalizing approvals and expect to have two refined products pipelines fully operational by mid-2020. This is important to our refined products customer because they would like us to handle 60,000 barrels a day by that date, an increase from the approximately 20,000 barrels a day that we're currently moving.

Their expansion plans in Mexico are aggressive and we are expanding to keep pace.

Our second main pipeline project is moving forward at an accelerated pace as well. Final right-of-way and engineering checkpoints have been met and we expect construction to begin no later than Q4 2019, and to be completed by mid-2020, at which point our existing 3-year storage deal with that customer will become a 5-year deal.

The bottom line is that Jefferson is now experiencing the growth we had always expected it to have. It is not surprising, given the very positive macros for gulf coast refiners that have been developing over the last 18 to 24 months.

It's also worth noting that Jefferson is rapidly morphing from a purely development company into an operating company, and like most infrastructure projects, the big uplift comes from new opportunities arising that can be exploited from the existing infrastructure and waxy crude opportunity from Utah, which we discussed last call, is a great example of this.

Finally, I want to let you know that we plan to do approximately a $500 million non-recourse debt financing at Jefferson late Q3 or early Q4 of this year. We plan to refinance approximately $250 million in existing tax-exempt debt and take in approximately $250 million in new capital at the Jefferson level to fund these expansion projects. Jefferson is finally coming together as we had hoped from the beginning and it's an exciting time for our team at Jefferson, and it's an exciting time for our customers.

Now turning to CMQR, the railroad had another good quarter. Carloads were up 9,153 in Q2 of 2019 which is a 56% increase versus Q2 of 2018. And in addition we have experienced improvement in both [dwell] and velocity metrics. Net revenue was up to $10 million in Q2 2019, a 13.6 increase versus Q2 of 2018, primarily driven by base transportation services and car cleaning revenue.

Adjusted EBITDA in Q2 2018 was $900,000 versus $1 million in Q2 of 2019. Excluding startup costs for the car cleaning operation and several onetime charges, adjusted EBITDA for Q2 2019 would have been $1.5 million versus $900,000 for Q1 of 2018.

Our car cleaning operation is starting to ramp and is well positioned for continued growth with an established base now of over 15 customers. This is an important metric in the car cleaning operation because car cleaning is recurring in nature once customers have used the service, and are happy with it. As of this time, we now have the three largest owners of rail cars in the country as customers and employees that all three of these are now repeat customers. In short, the business is now growing and [Ryan Rutledge] and his team are excited about the prospects for accelerated growth this year and next.

Turning now to Repauno, you remember from the last call that our next goal was to secure long-term natural gas liquid export agreements for the rail-to-ship phase of the Repauno development. We have received five proposals and are deep in negotiations with these parties. We expect to have these negotiations concluded before the end of this quarter and both we and the counterparties want this concluded because the counterparties want to start receiving natural gas liquids by Q2 of 2020. To do that, we're targeting having these contracts signed and construction started no later than early Q4 of this year, and we are on schedule to meet that timeline.

As to our current butane cavern, we're now 86% full and expect to be 100% full before the selling seasons start in late Q3 and early Q4. Once again, we expect this operation to generate approximately $3 million of EBITDA primarily in Q4 of this year.

Now for Long Ridge, the frack sand operation is on track to deliver between $5 million and $6 million in EBITDA this year. Q2 was slower than expected due to periods of flooding on the Ohio River when barge traffic was either limited or suspended. That's now been resolved and we're off to a good start in Q3 including entry into a multi-year contract with one of the largest sand companies in the U.S.

As to the power plant, construction has commenced and is on budget and on schedule. We continue to expect commencement of operations no later than November of 2021. As I believe most of you have seen, we entered into a nonbinding data center power purchase agreement with DP Facilities. That contract permits DP to take up to 125 megawatts of power under a 15-year contract which, if fully executed, would increase annual projected EBITDA for the power plant by between $10 million and $30 million per annum, up to a total of $130 million to $150 million EBITDA per year for the power plant.

As to the sale of the 50% interest in the plant, we still expect this process to be completed by the end of Q3 or early Q4 and we have received preliminary, non-binding offers within the ranges we have previously discussed.

Finally, let me discuss the dividend. As we sit today approximately one 1 month into Q3, I feel comfortable saying that our dividend coverage for Q3 will be coming in somewhere between 1.7- and 2.0-times coverage. And as we look at Q4 now that range would go higher. And as we have said in the past, once we exceed 2 times coverage, we will consider increasing the dividend, and we're close.

So in conclusion, we just completed our best quarter ever as it relates to net income and adjusted EBITDA. As pleased as I am about that, I am even more pleased about seeing growth accelerating in all of our businesses.

One of our goals in aviation has been to continue growing our book of business, but only if we are maintaining our target returns of approximately a 15% unleveraged ROE and a 25% EBITDA yield. We're doing exactly that.

Our other main goal has been to continue to widen the moat between us and the competition by developing proprietary and bespoke lease products and value-added service offerings.

In short, our offerings in the aviation leasing side are better, more differentiated and more robust every quarter. We truly have built a unique franchise now, and the marketplace recognizes that.

As to infrastructure, I think we will look back on this year as the inflection point where our ports and terminals and Jefferson ramped as we had always expected them to. We have made good choices as to the assets we purchase, where we purchase them and how we've been developing them. With a push to get crude to the gulf coast refineries and natural gas liquids to the east coast, we could not be in a better position.

Jefferson, Long Ridge and Repauno are positioned squarely in front of the flow of these hydrocarbons. As a result, we're seeing demand from customers that is exceeding our high expectations.

As of this date, we have more multi-year contracts signed with investment-grade customers than at any time in the history of FTAI, and even better, we are in the middle of more contract negotiations with our customers than ever in our history. It has taken a few years to get into this position but that's the nature of infrastructure development. The exciting news is we're now here.

With that, let me turn the call back to Alan.

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Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [4]

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Thank you, Joe. Operator, you may now open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Devin Ryan from JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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A couple questions here on aviation. I guess the first one, would love to just get some thought around implications of the 737 Max grounding, whether you're seeing any impact on your business or whether you expect any going forward?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [3]

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I think the Max grounding has had a positive impact on us in several ways., one of which is that today every 737 NG and A320 CO aircraft and engine is on lease and flying today. And in our fleet, that's a total of about 185 engines, so it's a pretty sizeable amount. The market is very tight and lease rates are probably up around 10% so that's a benefit.

The second benefit is maybe not as obvious in that we've seen the part-out value of engines rise dramatically. The example of that is 6 months ago a run-out CFM56 engine core was worth about $2 million and we just sold one recently here for over $4 million.

And then thirdly, I think if you think about the life expectancy of -- the economic usefulness and life expectancy of particularly 737 engines, we believe that that has probably increased by 3 to 5 years. So very good for our fleet.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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And then just a follow-up on the Avianca deal, given that it's your largest yet and given the relationship with United. How does this tie in with the broader United partnership, if you can? And then if you also can, just be more specific around closing date and kind of when it will start contributing, and whether we should think about recurrent being consistent with the overall portfolio there?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [5]

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The return profile I think is very good. So it certainly meets our targets and we expect to realize maybe slightly better returns on this. But a very attractive deal, it's really mostly an engine play in that the A318 is not the most attractive air frame to lease. But the engines are very strong. And so we likely will sell the air frames, and then focus on the engines. So it's a perfect fit for our type of deal.

The deals will close starting in September, basically September through December, probably fairly [ratably]. And as to the relationship, I think it is a good tie-in with United. We've had conversations with Avianca about maintenance, about Advanced Engine Repair JV that we have as we had those with United. And so I think the United constellation of airlines around the world will provide us, I think, very good leverage for both asset sourcing as well as the joint venture repair initiative that will kick in next year.

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Operator [6]

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Our next question comes from Justin Long from Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [7]

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So maybe shifting to Jefferson with a couple questions there. First, I was wondering if you could provide an update on your longer-term thoughts around crude-by-rail. With some of the back-and-forth we've seen on pipelines, the Alberta government, etc., how do you see crude-by-rail and that opportunity playing out for Jefferson over the next 3 to 5 years?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [8]

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I think that for the next 3 years, we have been actively lining up rail volumes and I think that most of the producers in Canada and the buyers on the gulf expect that rail will play a significant role while this pipeline situation gets sorted out. So for the next 3 to 4 years and could be longer, I think crude-by-rail in the conventional way is looking very, very good and we see that in committed volumes whereas in the past I think that's been -- people have been less willing to do that. So I think '20, '21, '22 period is going to -- we're going to see strong crude-by-rail from Canada in the conventional way. So thinking out beyond that, and I had mentioned this the last time, we really have two projects that both I think advanced in this quarter which would be 10-year to 15-year deals for a rail. And as I mentioned, we make the highest contribution at Jefferson by moving product in by rail, so it's something we're keenly focused on. It's not the only way to make money but it's the highest margin. And one of them is the waxy crude from Utah, and that product will never move by pipe. So it's always going to be a rail move. We had several, a handful of test trains that came in in the quarter. The tests ran very well and the client is interested in upping the volume, so I think that's something you're going to be hearing about for us hopefully for a very, very long time. And I think that's a long-term project that will pay off for us, I believe given our location and capability. And then the second is longer-term if you want a product to move by rail from Canada the best way to make the economics better than pipe is to strip out the diluent. And so there are a number of projects underway to build what's called a diluent recovery unit, a DRU. And I think that I'm pretty optimistic that one or more of those DRUs is going to get built. We may or may not be involved in it but it's going to happen I think finally. People have figured out a lower cost way to do it. The demand is there. And it also potentially could recharacterize the product that you're shipping as non-hazardous. And non-hazardous is cheaper by rail on every measure. It's cheaper on rail rates, cheaper rail cars, and it's also cheaper on insurance. So I think that the DRU is -- the time has come. And that should provide probably a 10-year to 15-year contract opportunity for rail to move into our terminal. So near-term I think 3 years is conventional crude by rail from Canada, is very strong. Longer-term, waxy crude from Utah and strip diluent out or what they call pure-bid from Canada, is really going to be I think a big story for us.

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Justin Trennon Long, Stephens Inc., Research Division - MD [9]

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Okay. And as you factor in all of the opportunities on the horizon for Jefferson including some of the things that you just mentioned, do you now think we'll get break-even, or to break even EBITDA for that asset here in the third quarter? I know you were hoping to get there in the second quarter, but just wanted to get your updated thoughts around the timing of kind of break-even. And then maybe longer term, as we look into 2020, where you see the adjusted EBITDA going on a run rate basis?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [10]

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Sure. Well, just in terms of profitability I think we took advantage of the WCI/WTI spread in Q4 of last year and Q1 of this year, where we made probably $4 million to $5 million in each of those two quarters. And so that was a good source of income and I believe it will come back periodically from time to time and we'll take advantage of. Unfortunately, because of the production curtailments in Q2, the spread was not wide enough to make money so we didn't have any of that income in Q2. Having said that, our tolling volumes have been increasing as we mentioned in the call in the second quarter -- we were doing sort of in the 20-ish, you know, high 20s trains per month. Q3 it should be in the 30s and Q4 well into the 40s. So while for current profitability I think Q3 should be break even or maybe slightly positive, Q4 should definitely be positive. So in that, I don't think we'll -- and then we have next year, we have additional crude by rail but we also have importantly, pipe connections. And so then that leverages the whole infrastructure of the terminal and that's where I think the profitability should really kick in. The number I mentioned last time was $100 million run rate by the middle of 2020 which I still believe is very, very doable. So it's -- the outlook is very good. I know it's frustrating that it doesn't quite get there as fast as we would like, but strategically and tactically and every other way, we've made huge, huge strides.

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Operator [11]

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Our next question comes from Chris Wetherbee from Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [12]

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Wanted to just pick up I guess on Jefferson for a moment, talk a little bit about the refined products or a ramp-up and maybe talk and think a little bit about the offload tank situation in Mexico. We've heard sort of conflicting things around permitting times and processes down there. How do you think about that sort of timing of that? Sounds like you have confidence that you'll start to see that ramp up again in the second half, but could you give us a little bit more color on sort of what you're seeing in terms of actual development of that offloading tank situation in Mexico.

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [13]

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Sure. I mean we're not there on the ground, but from what we hear from people who are, it's -- the situation -- it's just in delays and it's not shocking that building new things in Mexico has been delayed. So that's -- but we hear at end of August it should be largely new storage tanks and new facilities, are going to come online. And it's not that complicated to build a receiving terminal. It's just that it's in Mexico. But the demand is very strong. Customers long-term are very positive about that. And you know, I think they would not be going forward with a pipeline project if they didn't feel pretty good about it. So that pipeline will allow volumes to ramp from 20,000 barrels a day currently up to 60,000 barrels a day. So I think the outlook is good but you know, it is Mexico. So --

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [14]

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Yes. You've got to be cautious about it, makes sense. And then you'd be switching gears onto the aviation side. So you're in a little bit of a harvest mode, taking advantage of the gains that you have there. How should we think about that progress through the back half of the year? Is 2Q a reasonably good benchmark to use to think about sort of the opportunity set before you in the next couple of quarters? Or is there another way we should be focused on?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [15]

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I don't think it's a bad way. I think as I mentioned in the remarks we're going to continue the program in Q3 because we have assets identified and deals being negotiated. So I feel pretty good about that. It's always harder to forecast asset sales on a quarterly basis so I don't know what Q4 will look like. But the market, as I mentioned, the market is very strong. And you know, we have -- we've bought assets many times off-lease or that needed maintenance work and repair, and once we do that the market is very strong. There's lots of capital that's trying to get into aircraft leasing, and we're happy to help them.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [16]

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Yes, got it, makes sense. And I guess one final one, just touching on the dividend and I kind of have to ask the question -- you know, you can answer it sort of how you think is appropriate. I guess when you think about the 2 times distribution coverage, when we hit that break point, is there a period of time that you need to see sustainability of that 2X coverage before you think about sort of increasing the dividend? Is it sort of once you get there that's all you need to see, to get more comfortable taking it up? Just kind of get a sense roughly of your thinking around that process, of how much you need to see before you ultimately step up and increase the dividend?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [17]

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Yes. We would want to -- I mean you wouldn't want to raise it because you've had a onetime event. So you want it sustainable for sure. But I think we'll have, as we mentioned we're signing up more and more long-term contracts with customers so the visibility, forward-looking visibility in my mind just gets better. So I don't think that will be -- I -- I don't think that'll be the biggest issue but you definitely want -- you don't -- you don't ever want to cut the dividend. So you want to make sure if you raise it that you're going to stay there.

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Operator [18]

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Our next question comes from Brandon Oglenski from Barclays.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [19]

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Hey Joe, I wanted to come back to this Advanced Engine Repairs JV that you were talking about in your prepared remarks. I guess could we get a little bit more detailed? I mean how much contribution is this adding today? Is it up and running? You know, what could it get to?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [20]

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Well, there's no contribution today. As I mentioned, the first commercially available products we expect to have will be next year in 2020 and we said we expect a meaningful EBITDA contribution in the back half of next year. And you know, I don't -- meaningful to me is, you know, could be $15 million, $20 million. So that -- that -- and the market opportunity is tremendous. It's going to grow from there. If you look at the -- if you look at the aftermarket repair of engines that are on existing 737NGs and A320s, that market is going to grow almost certainly over the next 10 years and double. So our timing is perfect with the introduction of these products. We've obviously been having conversations with airlines now in more detail and the receptivity is extremely high because airlines are frustrated at maintenance costs on engines keep going up well above inflation. And that's not something that they're happy about. So the macro and market environment is excellent and the customer receptivity is tremendous. So I fully expect that that will be a huge part of our story and a huge contributor incrementally to our aviation business starting next year.

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [21]

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Okay, and you've also mentioned products a couple of times, and R&D spend. Can you go a little bit deeper there too?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [22]

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We're not really doing that yet for commercial reasons, so it's --

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Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [23]

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Okay. All right. And obviously you guys are doing well on the aviation side but this is your fourth year of waiting for infrastructure to deliver returns. So I think you mentioned 15% target ROE on the leasing business. I'm not sure you mentioned that on infrastructure. Please talk about where you want returns to get long-term, and then I know it's kind of a long question but what does the capital require now to facilitate these pipelines in and out of Jefferson and you know, is this just a case that we've got to build more before they come?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [24]

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So starting with the first question, the return profile. What we've said is we're looking to build infrastructure for roughly 3, 4, 5 times EBITDA and we expect the value of those projects that once they're stabilized in delivering those contracted cash flows, to be 12 times, 14 times, in some cases -- you know, in today's world you could see infrastructure projects trading as high as 20 times. So it's different -- a different metric than return on equity which we look at for the aviation business. It's really value creation. And we expect to create some of that value this year with the sale of Long Ridge, 50% of Long Ridge power plant and the CMQR Railroad that we expect to realize some of that value this year. And as a developer, 3 to 4 years to build and sell is not a bad turnaround time. So that's how we think about that. The pipeline projects as I mentioned are -- it's roughly $90 million to build the crude outbound pipeline, which is about 12, 10 to 12 mile pipeline, and then $20 million to build the multi pipeline connections to the local refinery. So figure $110 million. That $110 million will be funded by the debt deal that I mentioned that we're going to do, so we're raising $500 million of debt to refinance $250 million of existing debt and add $250 million of new capital. So that's all in that number. And it does -- there is a leveraging effect as I mentioned, when you have existing infrastructure, just tanks, rail cars, rail tracks, everything, docks built, and you add pipeline connectivity, it's extremely high contribution. So -- and there's roughly $20 million of SG&A at the terminal that you have to first cover before you make money. But then once you cover that, it's all high margin and incremental. So it's not really a build it they will come, but it's a -- it's sort of leveraging off of the infrastructure. And once you achieve a certain level it's highly accretive.

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Operator [25]

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(Operator Instructions) Our next question comes from Rob Salmon from Wolfe Research.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [26]

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Joe, you just alluded to the CMQR sale. Could you give us an update on where you guys are with the solicitation of bids in the RFP? Clearly this quarter we had a big industry event with Brookfield acquiring Genesee for around 13 times our 2019 estimate and it implies closer to 14 times for the North American properties. So I'd love to get your perspective in terms of valuations as well as what sort of interest you guys have received on the offering.

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [27]

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I would characterize the market as very strong. It's a seller's market so there's lots of interest out there. It's a nice -- I think the difference in this asset is that it's a very manageable size for lots of people. So we have very strong interest from the market. It's still preliminary stage so this is sort of non-binding, but I would say there's lots of people spending time and money which is a good sign. In terms of valuation, we're not really giving guidance to people at this point. But we have said in the past we think we can realize $100 million or more, and I would stick by those numbers.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [28]

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One of the things you had been kind of talking about was the opportunity to nicely expand EBITDA as the car cleaning business comes online. Could you give us a little bit more color of the expenses that flowed through the P&L in the second quarter, and what, if any, revenue contribution you had had from the car cleaning business at the CMQR and what your expectations are looking forward with regard to that business? And if you could talk a little bit about seasonality, obviously it's a harsher weather where the property is located. But I would imagine you guys contemplated that as you built out the business, so --

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [29]

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Yes. So it's not very seasonal. We don't expect it to be seasonal. It's really driven by owners of cars that are coming off one service and going into another service. There's some regular maintenance and repair. So we don't believe, we don't have a long history but we don't believe that it will be very seasonal. And because it's in Maine doesn't make much of a difference to anybody. So that's one thing. I think that we had probably a $0.5 million of expenses in Q2 that flowed through the P&L so we didn't have a lot of revenue. We inducted cars into the system, really starting in April-May and you don't get paid until they're finished. So the revenue from the work we were doing in Q2, it was more expenses than revenue. But the business is ramping. The customer list is growing. It's a very nice business in that it's extremely high margin. Customers are not that price-sensitive. We put a few million dollars in some automated equipment that shortens the cycle time, you know, requires less man hours so to speak, and not many people in the industry -- this is not the most sexy industry as you can imagine. So when you put some money in and you create a better product we should be able to sort of capitalize on that. And it's very sticky, as I mentioned. The revenue -- once you get people using the system and they like the main element is service. So if you give good service you get a lot of repeat customer, and as I said, it's very high margin business. So we think that will play very well. It will produce good numbers for us later this year and we also think buyers will look at that very attractively.

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Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [30]

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One final kind of follow-up question. You had spoken positively on the aviation sales early in the call. Can you give us an update on the appraised value of your portfolio? Last quarter you were talking about $1.5 billion and you realized some good proceeds off the sales. Was curious kind of what the current mark-to-market number is.

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [31]

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So it's about the same. We do an annual, a full annual appraisal. But in the interim, we have updates. But it's about the same, $1.5 billion. But if you look at, you know, as I mentioned, one metric was this part-out value of engines right now has gone skyrocketing. So we have, I mentioned a run-out core six months ago for a CFM56 was marked worth probably $2 million and we've just recently sold a few at $4 million. So in market, the appraisals don't always capture that but we are.

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Operator [32]

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Our next question comes from Robert Dodd from Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [33]

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Just going to financing, kind of stem back to Jefferson and then Repauno. On Jefferson, you indicated obviously that the two pipelines that you're building are $110 million in capital. You're going to get out, the plan is for that incremental $250 million in non-recourse debt though in the year, which obviously -- does -- would you expect that $250 million to obviously cover the pipelines but also the 2 million barrels of incremental storage cost to build out that, etc.? I mean how long in terms of the projects you have on the boards right now, would you expect that incremental $250 million to last you at Jefferson?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [34]

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That covers -- the $250 million will cover everything through 2020 which includes an additional dock, it includes 2 million barrels of storage, two pipelines, and it's the full capital budget for 2020. Which at that point will have 6.4 million barrels of storage, two deep-water docks, one barge dock, thousands of feet of rail track. I don't even know the number but it's a lot. And pipeline connections. So that covers everything, and it's -- really, the debt markets are so strong right now as you can see. The interest cost I think on that total $500 million will be materially less than our current rate.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [35]

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If I can, the obvious question then goes to Repauno. Some of the projects that are coming up at Repauno, the granite storage caverns, you've given us numbers on those before. And those are expensive projects but can generate a lot of EBITDA, but they're expensive projects. So what would the -- I presume non-recourse financing on that side as well, but you have a timeline of when you expect to put those -- the financing structures in place for the pretty significant investments at Repauno over the next few years?

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Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [36]

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Yes. We are working as we speak on debt financing, non-recourse debt financing, for next year's spend at Repauno, or really Q4-Q1 which we estimate to be $70 million. And we will probably target raising more than that in a non-recourse debt financing. So between probably $70 million and $100 million for that. And we think that's very doable, so that will cover what we call Phase 1 of the spend. And that's -- the goal is to have a contract signed by the end of Q3 and then we will easily, I think easily raise that debt financing and we've already started conversations on that. Phase 2, we're not really focused on yet because we want to complete Phase 1 and then very likely we'll go to the same or similar potential buyers to line up contracts for Phase 2 which is, as you mentioned, is the granite storage and the bigger - and the VLGC opportunity. But again, I think that once we have a contract the debt financing on that will be readily available for actually more than our capital, more debt financing available than the capital we will need to spend.

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Operator [37]

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I'm showing no further questions at this time. I would now like to turn the call back over to Alan Andreini for closing remarks.

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Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [38]

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Thank you all for participating in today's conference call. We look forward to updating you after Q3.

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Operator [39]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect and have a wonderful day.