Earnings Call Transcript - FTAI Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2021 Fortress Transportation and Infrastructure Investors LLC Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andreini.

Alan Andreini, Speaker

Thank you, April. I would like to welcome you to the Fortress Transportation and Infrastructure second quarter 2021 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; and Scott Christopher, our Chief Financial Officer.

Joe Adams, CEO

Thank you, Alan. To start today, I'm pleased to announce our 25th dividend as a public company and our 40th consecutive dividend since inception. The dividend of $0.33 per share will be paid on August 30 based on a shareholder record date of August 16. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA and FAD or funds available for distribution. Adjusted EBITDA for Q2 2021 was $68 million compared to Q1 2021 of $47.2 million and Q2 of 2020 of $66.5 million. FAD was $68.3 million in Q2 2021 versus $14.4 million in Q1 2021 and $47.3 million in Q2 2020. On a normalized basis, excluding sale proceeds and nonrecurring items, Q2 2021 FAD was $15.7 million compared to $9.8 million in Q1 2021 and $38.2 million in Q2 2020. During the second quarter, the $68.3 million FAD number was comprised of $116.2 million from our aviation leasing portfolio, negative $2.5 million from our infrastructure business and negative $45.4 million from corporate and other. Now starting with aviation. Aviation experienced a meaningful increase in activity in passenger markets in Q2, and our portfolio of engine products and services is picking up momentum. While we achieved our goal of $80 million of EBITDA in Q2, up from $60 million in Q1, we are seeing a slightly slower ramp due to continuing COVID travel restrictions related to the Delta variant, particularly in Europe. As a result, we're now projecting 2021 EBITDA of $400 million as compared to our previous projection of $450 million for the full year. The engine leasing market is particularly strong as airlines look to ramp up flying while continuing to minimize maintenance capital spending.

Alan Andreini, Speaker

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

Operator, Operator

And your first question is from Josh Sullivan with Benchmark.

Josh Sullivan, Analyst

Hey, good morning.

Joe Adams, CEO

Good morning.

Josh Sullivan, Analyst

Just a question on the new 12-plane lease order you have with the major U.S. airline there. Can you give us some color around that contract? There is a new relationship, what's the total opportunity there? Do you think this is going to attract other U.S. major airlines of similar caliber going forward?

Joe Adams, CEO

Yes. We're very excited about it. As I mentioned previously, given the pandemic, we've been able to access airlines that we probably would not have had as much access to. Part of it is just the need they have for capital, but also part of it is to focus on the engine side of the business. So we see that as a door opener for more business, but also the ability to integrate our products offering into the mix in terms of the equation. So when there are shop visits, we can be talking about module swaps, PMA, used serviceable material, and we're already doing that to some level with this existing airline. So it gives us the opportunity to increase the volume. One of the prohibitions is obviously, people have traditionally thought if you have an asset that's owned by a leasing company and you want to put PMA in it, usually the leasing companies have been prohibited. However, if we own the asset, we have the ability to give ourselves permission. We can resell it at a very low cost. So I think it is a door opener for us to vertically integrate and provide a broader range of services than anyone has ever done before and actually save us money. The level of interest in both USM and PMA is very high. As this picks up, it's going to give us additional ways to do business with big carriers.

Josh Sullivan, Analyst

And then maybe just more broadly, if you could just give us color generally on the leasing market or durations extending on leases, how is the lease-up marketing responding to the uptick here in the Delta variant?

Joe Adams, CEO

Yes. I think the engine leasing market is heading up very nicely. We’re not doing any. The era when people were doing power by the hour deals is over; lease rates are turning up, terms are extending. The recent deals we've done in the engine side are virtually as good as what we were doing in 2019, and I think it's going to go higher. As we know, it's the laws of supply and demand. Everyone is deferring maintenance as much as they can. They're starting to line up assets and engines in particular for longer terms. Our portfolio is now extended out 18 months, and we've signed deals with a large airline that have a three-year term. So I think rates and terms are going up. Maintenance reserve rates, which is another important economic part of the lease, has never really gone down. The manufacturers set maintenance reserve rates by taking the estimated cost of the shop and dividing it by the number of hours, and the OEMs keep raising the parts prices even during this pandemic period. Maintenance reserve rates are still very strong. All in all, I think the engine lease market is trending up very nicely.

Josh Sullivan, Analyst

And then if I could just sneak one last one in here. Can you just talk a little bit about the market for GE56 assets on the secondary market, just what you're seeing at this point?

Joe Adams, CEO

Yes. Most of what we've been trying to do is buy older A318, A319s, 737-700s, and then get rid of the airframe. We're buying engines, acquiring whole planes and then scrapping the airframe. That way of acquisition makes sense, and we've been acquiring assets at probably the lowest prices we've ever bought them, sometimes lower than $1 million for an engine. That's been very fruitful; we added 27 new engines in the second quarter, which is one of the reasons our utilization looks a little lower, because we found some really good investments to put on the books. That reflected about 10 points of utilization, so really it's more like 65%, but that's the best way to create an engine today because there are very few buyers for off-lease older assets. If you have an older asset without a revenue stream attached, we might be the only bidder. So we like that dynamic.

Josh Sullivan, Analyst

Okay. Appreciate the time. Thank you.

Joe Adams, CEO

Yes.

Operator, Operator

Your next question is from Guiliano Bologna with Compass Point.

Guiliano Bologna, Analyst

Good morning. I guess, following on a similar topic. You were talking about some lease rates moving higher and there has been some industry discussion around that point. I'd be curious, not necessarily specific dollar-wise, but from a magnitude perspective kind of how much lease rates have moved at least on a percentage basis, we kind of where they were and are they up 5%, 10%, 20%? I'm just curious from a magnitude perspective, how much of these rates have been moving for specifically CFM56 engines?

Joe Adams, CEO

Yes. I would say that probably from the pre-pandemic to the bottom of the pandemic, we’ve probably declined 25% to 30% at the worst. I think most of that 25% to 30% now has recovered. We're very close to pre-pandemic levels.

Guiliano Bologna, Analyst

That's great. And then thinking about the aviation business, kind of a little bit more holistically. You obviously have the module factory, which seems to be kicking off and achieving early success. I'd be curious if there is a sense of the magnitude of how big you could grow the module factory from a throughput perspective, because you obviously have to have some engines in inventory and kind of what that opportunity could look like over time?

Joe Adams, CEO

Yes. I mean, we have to have some engines in inventory, and we currently own 200 CFM56 engines. Many of the airlines we are talking to right now are looking at starting programs that could be 10 or 20 years to discuss 10 or 20 modules. They have fleets that could involve hundreds of engines, so they're looking at that as really a starter kit. If we get people started doing it, it has a flywheel effect, and we can grow with them. Our 200 engine fleet could grow to 300, 400, while remembering there are 22,000 engines of this type in the world. Moving from 200 to 400 to 600 doesn’t really move the needle. So I think we can scale our inventory with the needs of the customer; the upside of how many we can deliver is very significant. Once they integrate this into their maintenance operations, it’s quite significant, and if you add PMA into it, which will start to happen next year, it could become even bigger.

Guiliano Bologna, Analyst

That's great. I appreciate all the insights and I'll turn back in the queue. Thank you.

Joe Adams, CEO

Yes.

Operator, Operator

Your next question is from Chris Wetherbee with Citi.

Chris Wetherbee, Analyst

Thanks, good morning guys. Maybe just touching on Jefferson here, obviously getting the Exxon deal done was a great step in the right direction. It seems like there is probably a decent amount of storage opportunity or space to fill up the facility. And I guess it's probably building interest in coming to you guys. Joe, if you can maybe provide a little bit of color in terms of what sort of the deal prospect pipeline looks like at Jefferson right now? I'm guessing there is probably a couple of deals in the hopper that maybe could be coming to fruition. And then maybe if you could talk about the timing of that might look like?

Joe Adams, CEO

Yes. Every time we do a deal or have a meeting, we end up with a longer list than when we started, and that's the fun part. We have multiple projects, sort of a handful of projects with Exxon and Motiva that are real. Large entity sales always take longer than we would like, but we do get there, and we seem to have staying power in these negotiations. The opportunities are significant and it's on both refined products and crude. From a macro point of view, in 2023, Exxon will be the largest refinery in North America, around 600,000 barrels a day in and 600,000 barrels a day out. So we're constantly moving a significant amount right in our backyard. A lot of things are happening that we didn't anticipate, and many larger projects are in discussion. The lead time for building storage takes about a year, but with pipeline connections ready, the process has become easier; getting connected initiates conversations that lead to opportunities. The timing for many of these projects typically has a lead time of nine months to a year.

Chris Wetherbee, Analyst

Okay. That's helpful. I appreciate that. And then just making sure I understand here, I'm going to go back to the aviation guide, the 50 million there. Can you elaborate on the variables that could drive that to 400 or leave it a bit higher than 400 or potentially create some risk to it? I just want to ensure I understand the key dynamics of that guidance as we think about the remainder of the year.

Joe Adams, CEO

The two biggest drivers would be the number of flying hours. As airlines ramp up flying, our revenues increase on the maintenance reserve side. The third quarter of 2019 was our best quarter because of 85% utilization. The flying hours per aircraft were around 300 to 400 a month. That’s probably the largest indicator; the ramp-up we've seen is mainly in the U.S. and South America, while Europe is lagging. However, I think Europe will follow, and we expect increased flying late this year. The second driver is acquisitions. We have one deal closing this week or next week, and a large deal with a European carrier expected to close in Q4. The utilization of flying hours and acquisitions are the two primary factors.

Chris Wetherbee, Analyst

Okay, got it. That’s super helpful. I appreciate the time this morning, guys. Thank you.

Joe Adams, CEO

Thanks.

Operator, Operator

Your next question is from George Sellers with Stephens Inc.

George Sellers, Analyst

Hey, good morning. This is George Sellers on for Justin. I guess to start, could you talk about the EBITDA you expect to be generated from the maintenance and parts pieces within aviation? And any update you can provide around the ramp of that number into the second half of this year and into 2022, it would be great.

Joe Adams, CEO

I assume you're referring to the three joint ventures, USM, and the Module Factory. We believe that 50 million for the year is still a solid number for those three. The decrease from 450 to 400 was largely on leasing revenues. Those three will produce about 50 this year. We haven't forecast for next year yet, but it's safe to assume it will be higher.

George Sellers, Analyst

Got it. Okay. That's helpful. And then turning to Jefferson, could you walk through your latest thoughts on how you expect EBITDA to ramp at Jefferson through this year and then into 2022 as well? And as you think about that expectation, could you also speak to the level of visibility you have around that based on contracts that you already have in hand?

Joe Adams, CEO

We believe that the run rate for Jefferson by the end of 2021 will be roughly 70 million to 80 million, and for next year, we haven't really issued an official forecast but I would assume it will be around 100 million or more.

George Sellers, Analyst

Okay, great. Thank you so much. I'll leave it there.

Joe Adams, CEO

Thanks.

Operator, Operator

Your next question is from Rob Salmon with Wolfe Research.

Rob Salmon, Analyst

Hey, good morning, guys. And thanks for taking the question. I guess, Joe, to start off with just a bigger picture question. Could you discuss how you expect the two companies to look following the split from a capital structure perspective as we look forward?

Joe Adams, CEO

Sure. We're targeting to maintain the level of debt on each company to preserve a double-B rating for each one. We'll be working through our financial modeling and with rating agencies over the next few months, but that’s our objective. The infrastructure business would be in U.S. domestic seaport, and most of the implemented projects would already be financed, like the Jefferson bonds we've discussed. Corporate debt would be under aviation, which will be a non-U.S. corporation with the same target rating.

Rob Salmon, Analyst

That's helpful. I mean, historically, the FTAI Company has targeted both growth and return of capital to shareholders. How do you see the dividend playing out across the two companies? Have you thought through those dynamics at this point, or is that still a work in progress?

Scott Christopher, CFO

We do not anticipate any change in that regard. The investment objective will remain income plus growth. So I don't expect that to change.

Rob Salmon, Analyst

Got it. And that would be true for both of the companies moving forward?

Scott Christopher, CFO

Yes.

Rob Salmon, Analyst

Perfect. And then a couple of quick – sorry, go ahead.

Joe Adams, CEO

Historically, I think you would see higher dividends from aviation than infrastructure.

Rob Salmon, Analyst

Yes. That makes sense, given the investments. And then just a couple of quick follow-ups with the aviation segment. Can you give us a sense of the capital investments that you guys are planning in the back half of the year that underpin the 400 million of EBITDA you're expecting that company to generate?

Joe Adams, CEO

Right now, we're looking at about $300 million in additional investments that are all under letter of intent, and we haven't added anything beyond that.

Rob Salmon, Analyst

Perfect. And is that pretty evenly weighted between the two quarters, or is it more weighted towards the fourth quarter? I know you mentioned there was a big deal you expected to close in Q4 and you've just closed a large deal with an American airline.

Joe Adams, CEO

We weren't supposed to say that, but yes, I would say it's evenly weighted.

Rob Salmon, Analyst

Yes. Got it. Helpful. And then just looking at June—in terms of the utilization rate, can you give us a sense of how that exited the quarter relative to the 65% utilization, excluding the adjustments that you had noted within the transactions you completed during the quarter?

Scott Christopher, CFO

I think the exit rate was up about 10 percentage points from the beginning of the quarter.

Rob Salmon, Analyst

Okay. Helpful. Appreciate the time, guys.

Scott Christopher, CFO

I think we put 23 engines on leases during the quarter; it was a pretty big quarter. We expect probably to potentially put 30 on and 53.

Rob Salmon, Analyst

Appreciate it. Thanks for the color.

Scott Christopher, CFO

Thanks.

Operator, Operator

Your next question is from Frank Galanti with Stifel.

Frank Galanti, Analyst

Great. Thank you for taking my questions. I wanted to follow up on, I guess, the three horsemen or whatever you want to call it—the JV, the Module Factory, and the USM. You said 50 million was your expectations for this year. Can you kind of talk about what that assumes has been done already specifically in the second quarter?

Joe Adams, CEO

Probably about five of the 50.

Frank Galanti, Analyst

Okay. That's helpful. And kind of staying on the aviation side, can you talk about the second PMA part? I guess the PMA parts generally, how has the first one been—give us an update on how the penetration has been from an interest level from third parties? And if there's an update on the timeline for the second and three to five parts?

Joe Adams, CEO

Yes. So regarding the first part, the interest level is very high. We have a couple of airlines that have ordered it; we’ve received positive feedback over the phone. A lot of interest, and one airline has actually ordered and installed it. Further penetration is delayed because there's not much shopping going on; most airlines are focusing on burning off green time. They are waiting to build up their overhauls. They're also waiting to pair it with the second part, which we expect to submit to the FAA in September, hoping for approval by year-end. The second batch of parts is expected for late 2022 or early 2023, with additional three parts.

Frank Galanti, Analyst

Okay. That is helpful. And then I think the last question I wanted to walk through—kind of CapEx needs. You mentioned part of that financing at Jefferson 175 million is going to be upstream to the parent. You've got 150 million left in the undrawn revolver. But you'd mentioned about 300 million CapEx needed for aviation. I just want to walk through what level of equity contribution is needed from FTAI across the various businesses and then onto that, 100 plus million at Jefferson needed for the expansion—what are the CapEx needs in the next few quarters?

Joe Adams, CEO

So the Jefferson capex needs will all be financed by this bond offering. There’s zero need for Jefferson, zero for Long Ridge, and zero for Repauno. Transtar is fully financed, which closed yesterday. Regarding the aviation capital needs, we have 175 million plus the undrawn revolver to fund that. There are no additional unfunded capital requirements for this year; everything's covered.

Frank Galanti, Analyst

Okay, great. That's very helpful. Thanks very much.

Joe Adams, CEO

Thanks.

Operator, Operator

And your next question is from Robert Dodd with Raymond James.

Robert Dodd, Analyst

Hi guys. A question on the dividend—this feels like a flashback. Previously, Joe, you said when FAD covers the dividend by a factor of two, you'd consider taking up the dividend. By my math, certainly by the fourth quarter, maybe the third, you'd be in excess of that, coinciding with the spin or separation. Could you give us any thoughts on—is that still a good rule of thumb and does that apply to the separated businesses as well?

Joe Adams, CEO

Yes, that is a good rule of thumb. Your calculations are on point, and we will factor that in if and when it's coincident with a spin.

Robert Dodd, Analyst

Okay. Got it. Thank you. One more if I can, unrelated to that. You talked about the leasing nature basically returning to pre-pandemic levels. Given that airlines are burning down all that green time—do you think there's meaningful upside to lease rates? We can see what happened in the rental car market. If you run your portfolio down, do you think there's a risk in your favor for a material uptick in lease pricing if airlines continue running down green time while you have available engines?

Joe Adams, CEO

Yes, we have been saying that all along. We believe by the fourth quarter of this year or first quarter of next year, demand will outstrip supply. Unlike rental car companies, we can’t go from charging $80 a day to $300. We will likely achieve better terms, such as longer deals and higher maintenance reserves. Airlines react sensitively to rent; therefore, instead of lowering prices significantly, we focus on terms that allow for ongoing relationships. While rates may flex a little, it will typically align better with market levels—around $60,000 a month on average, but not going back to $30,000.

Robert Dodd, Analyst

Got it. I appreciate that. Thank you.

Operator, Operator

There are no further questions at this time. I will now turn it back to Alan Andreini for closing remarks.

Alan Andreini, Speaker

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

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.