Ladies and gentlemen, thank you for standing by and welcome to the Fortress Transportation and Infrastructure Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the call over to your conference speaker today, Alan Andreini. Please go ahead, sir.

Thank you. I would like to welcome all of you to the Fortress Transportation and Infrastructure third quarter 2019 earnings call.

Thank you, Alan. To start the call, I'm pleased to announce our 18th dividend as a public company and our 33rd consecutive dividend since inception. The dividend of $0.33 per share will be paid on November 26 based on shareholder record date of November 15. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution Adjusted EBITDA for Q3 2019 was $114.1 million compared to Q2 of 2019 of $94.1 million and Q3 of 2018 of $58.8 million. FAD was $120.7 million in Q3 versus $86.9 million in Q2 of 2019 and $44.7 million in Q3 of 2018. During the third quarter, the $120.7 million FAD number was comprised of $185.7 million from our aviation leasing portfolio, minus $32.1 million from infrastructure which includes a one-time revolver paydown of $23 million which happened in this quarter, and negative $32.9 million from corporate and other. Now, let's turn to aviation. In Q3, aviation hit on all cylinders. Strong asset utilization drove record EBITDA excluding gains of $89.7 million or $358.8 million annualized, up from $324 million in Q2. Second, the sale of 21 engines and 5 aircraft with a book value of $57.7 million produced gains of $37 million. And thirdly, our attractive new investment pipeline will allow us to generate continued growth in Q4 this year and in 2020 ahead. Run rate EBITDA increased nearly 11% over Q2 2019 due to new investments that were made in Q2, new leases in Q3 that came on and generally high utilization of engines.

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

. And our first question comes from the line of Justin Long with Stephens. Your line is now open.

Thanks. And good morning. To start, Joe, I was wondering if you could expand on that last point around potentially monetizing some of the company's infrastructure assets going forward. You mentioned that you've invested around $800 million in these assets. Could you maybe provide a little bit more color on what you feel like you could get for those assets in today's market and how you would think about redeploying that capital? It sounds like aviation would be a primary focus there, but would love to get your thoughts.

Good question. I'm not going to project asset values individually or really in total, except to say that I think every asset that we've invested in in infrastructure is worth more than what we've – our cost basis. So, I expect to have gains from everything we sell. So, if you take some math around that, what I was thinking about, $800 million invested in infrastructure, if you pick a number, and say we monetize that for $1 billion just as an example and we reinvest all of that in aviation, our target EBITDA return from aviation is 25% which we've been consistently achieving. So, that would be an incremental $250 million in EBITDA. And if you add that to the $350 million on our current portfolio, that would be $600 million in EBITDA. And if you think, well, aviation should probably trade at least at an 8 times EBITDA multiple, then I could probably argue a higher number, but pick 8. That's $4.8 billion and you'd have $1.2 billion of debt. So, the equity value would be $3.6 billion, which is a $40 stock price.

Great. That's really helpful. And secondly, I think last quarter, you mentioned that Jefferson was capable of $100 million in EBITDA on a run rate basis sometime around the middle of next year. Is that still your expectation? And could you share how much of that $100 million is related to crude by rail versus other areas of cash generation?

Yes. I do believe that's achievable by the latter half of next year, 2020. If you think about – when I think about Jefferson, we've indicated that for every million barrels of storage, we generate typically $10 million to $15 million in annual EBITDA. And the terminal starts a year with $20 million of fixed costs. So, the first 2 million barrels, which is where we were at the end of 2018, we're covering our costs and breaking even EBITDA. And incrementally then, what you do is you add storage and you increase the amount of turns that you can get off of that storage. And so, the end of this year, we'll end with 4 million barrels of storage. We're targeting potentially up to 6 million next year and it could go higher than that. And then, in addition, with the pipeline connectivity, we should significantly increase the velocity of product that flows through the terminal. So, that's how you – those are sort of the building blocks to get to the $100 million that I think is very achievable. The mix between crude by rail and other products, I think, it's probably going to be two-thirds crude through the terminal and one-third refined products. But are there a couple big projects out in the market now that could swing back towards refined products. So, that's a good thing. It's just that I can't accurately predict the mix and it's really not substantively different to us. I think we do make – the highest contribution we will make is by moving barrels in from Canada by rail, storing them, then blending them and then shipping them out. And so, that's the full Chinese menu of fees. But the other businesses, you could have refined products and you might have a refined products tank that you could turn the tank four or five times a month. So, it's all good.

Great. I appreciate the time.

Thanks.

Thank you. And our next question comes from the line of Brandon Oglenski with Barclays. Your line is now open.

Hey, good morning, Joe and Alan. Joe, I guess I wanted to come back to the discussion on aviation. You guys are clearly doing a pretty decent job with that portfolio, but, obviously, benefiting from the . But I think you also mentioned something about your joint venture on the engine repair side. I know this is something that's come up a couple times now. Can you just tell us a little bit more about the scope and scale of that project?

Yes. So, as I mentioned, 2020 will be a big year for that. We expect to have the first products available and improved, so that we can be selling products out of the joint venture to the broad airline market in 2020. And it really is focused on the CFM56 engine, which is, for those who remember, it's the engine I always talk about. So, it's the biggest engine market in the world. Just to put some – and in that joint venture, we can we can make money and have a big contribution, a lot of upside, at least two different ways. And I say at least because there's other things that are in development which we could add to. But the first way is that we own 25% of the joint venture, the equity of that. So, as an owner, there will be about 15,000 engines that will be in the aftermarket – in other words, not covered by power by the hour contracts – in the near future. So, that represents approximately about 3,000 shop visits a year. And when we went into the joint venture based on historical precedent, it's not unreasonable to assume that we could capture 5% to 10% of the market. So, that represents between 150 and 300 shop visits that we could supply and service out of the joint venture, which means that our 25% interest in that based on the margins would produce between $50 million and $100 million per annum of profits to us with no additional capital. So, that's number one which is pretty good. And our total investments in the joint venture is $30 million. So, that's number one. The second way we make money is that we have – as part of the joint venture agreement, we have the right to buy those products from the joint venture at cost. In other words, with no profit, no markup for the manufacturer, the producer, that is. And that represents, for every shop visit we do, we're estimating that we can save $2 million off of the list price from the original equipment manufacturer per shop visit. So, if our fleet of engines is 300 – ticket number 300 engines and we're shopping 60 a year, that's another $120 million savings for us per annum. So, $50 million to $100 million from owning the JV and over $100 million from being able to buy from the JV at cost.

I appreciate that, Joe. And what's the timing or the proposed timing on when this is going to really ramp up?

It will be in stages. I think we expect to have the first product available in the first half of the year and the second product in the second half of the year, and then we've got additional products coming behind that, so then we would have, we expect, all of the products to be available by 2022.

Okay. Appreciate that. Sounds pretty exciting. And then, I guess, to your comments at the end of prepared remarks here, when you went to IPO, I guess the idea was we can invest across infrastructure and equipment leasing cycles and really take advantage of when asset values come up and come down. Should we be thinking long term now that this is just becoming more of an aviation leasing company or do you still see infrastructure playing a pretty significant role going forward?

I don't know, to be fair. I think the conditions that exist today and you see it from not just us, from many other people, is that private market values of infrastructure are much higher than the public market values. So – and we'll make good money off of our infrastructure investments. Whether we do that again or repeat in this company, I don't know.

All right. Thank you.

Thank you. And our next question comes from the line of Devin Ryan with JMP Securities. Your line is now open.

Great. Good morning, Joe.

Good morning.

First question. Just on – Canada made some statements around production and crude by rail and you saw WCS/WTI blow out a little bit on the announcement along with the leak at the Keystone pipeline. And so, I'm just curious what you think the implications are on crude by rail at Jefferson and how you're thinking about implications of that along with all the other comments you made about Jefferson.

It's positive for crude by rail and for us. The Alberta government is encouraging producers effectively to use rail, which is great. And I think what I've said over the – over the next three to four years, most industry participants see the crude by rail market as being very strong and very active from the Canadian market. And so, we're well-positioned to capture that. And we have Canadian producer, as I mentioned, that just took storage in our terminal which is the first time that has happened. addition to local refiners having a position, we have a producer. So, I see more of that coming over the next three or four years as do most people. Beyond that, as I mentioned, we have been investing time and – not money yet, but time in helping, encourage and, hopefully, developing a diluent recovery unit, a DRU. And that's made progress. And I think a DRU project is very likely going to be firmed up by the end of the year, which means you'd have a permanent supply of crude moving by rail. And I mean permanent, meaning 10 to 15 years because we invest in the hardware to make that happen. We're going to have producers and consumers who will sign up for 10 to 15-year take-or-pay. And that – when you take the diluent out of the crude, it also has the added benefit, is that crude then becomes classified as not hazardous from the railroad point of view, which means you get lower rail rates than you get – you can use different railcars, not 117J. So, it's positive I think in the short term. What they're doing spreads now back out to 2020, I hear this morning. But really we're focused a lot on the long-term and trying to turn this into a 10 to 15-year effective pipeline.

Great. Appreciate the detail. And then, just a quick follow-up on CMQR. Just if you can give us maybe a little bit more detail around where that asset stands and the potential for sale and timing there? And anything else you can provide would be helpful. Thank you.

I think I'm just going to stick to close.

Okay, fair enough. Thanks, Joe.

Thank you. And our next question comes from the line of Chris Wetherbee with Citi. Your line is now open.

Hey, thanks. Good morning, guys. Joe, I wanted to come back to the comment about sort of the split of infrastructure relative to aviation with the potential for monetization at some of these infrastructure assets. I guess, how do we think about sort of the duration of the lease terms in a scenario like that? Do you anticipate that evolving significantly from sort of maybe the initial view of having the aviation to generate a lot of cash, having the infrastructure to generate a lot of term? That's always been a sort of good and appropriate balance on our mind. Just want to make sure I understand if that is viewed as that's changing or maybe I'm not thinking about it the right way.

No. I think what we're saying is that, clearly, the private market values of infrastructure are higher than public market values. And it doesn't feel like we're getting a lot of credit from our stock price for what we think is the value of infrastructure, given that we don't have a lot of EBITDA contribution from that yet. So, we're just playing around with the numbers. If we were to turn the value of those into cash flow at aviation, it should be highly, highly accretive to value. So, we haven't made a final determination. It's sort of just trying to take a view of what current market and what we think the market environment would be for the next few years and then not be stuck on doing it one particular way.

Okay. No, that's fair. And then, in terms of Jefferson, as we think about pipeline connections, can you talk a little bit about potentially timing and then maybe how we should be thinking about contracting related to the pipeline?

Yes. We said all three of those pipeline projects should be completed sort of around the middle of the year. I would say, some in – maybe one in the end of Q2 and one in Q3 and one in Q4 is kind of the way I see it. And we have contractual arrangements in place on each one of those already. I would say it's not fully contracted, but in each pipeline opportunity, we have an anchor tenant, an anchor customer. And then, that optionality, so to speak, of having those available for customers, I think, will allow us to pick up a lot of additional business and a lot of additional volume.

Okay.

It's the one piece of the puzzle that we didn't have. And it's important because our people want every option. And now, we have every option. We have written excellent rail. We have truck. We have 40 foot water gap, so we can load Aframaxs and we can bring in barges and we can ship out barges. And now, we'll have pipe in and out.

Okay, okay. That's helpful.

And once you're wired in by pipe to someone, it's very hard for anybody to undercut you.

Yeah. I would imagine it's a very sticky relationship at that point. That certainly makes sense. And then, just coming back to your comments lastly on refined products, making sure we understand. Obviously, there's been some delay in terminal offtake in Mexico. I believe that's expected to ramp back up in the first part of 2020. Is that sort of how you view it? Would you expect to see those volumes begin to accelerate as you move into the first half of next year?

Yes. That's what we're being told. Obviously, it's not our decision. It's the customer's. But that every expectation is that those issues – they had facilities in Mexico that were finished. It took four months to get the final letter on. I mean, it's that kind of stuff that happened. So, we're told that volume should ramp next year. One of the main reasons for building the pipeline across – under the river to Exxon is for that refined product flow, which they want. Today, we're running about 20,000 barrels a day. And the plan is to have that ramp to 60,000.

Yeah, okay. Okay, that makes sense. Thank you very much for the time this morning. Appreciate it.

Thanks.

Thank you. And our next question comes from the line of Ariel Rosa with Bank of America. Your line is now open.

Hey, good morning, Joe. Congrats on a really strong quarter here. So, first question. Obviously, you guys stepped up the asset sales here on the aviation side. Maybe you could talk a little about how you think about which assets to sell as you look at the portfolio and maybe give us a little bit better sense of – if there's anything we can expect from a modeling standpoint in terms of the stability of cash flows to be generated from the asset sales on a fairly consistent basis.

It will be a regular program for us. And as I mentioned, I think, in previous calls, we had – appraised value of the fleet at the end of year was $1.5 billion and book value was $1.1 billion. And so, we see that as an opportunity to continue to show gains and prove that out. And then, in terms of evaluating assets, this quarter, we sold a number of engines. And as I mentioned in the last call, there is a lot of shortage of parts in the market right now. So, people are scrambling for parts. And so, what we did is we took some engines that we could've put through the shop, and instead of putting them through the shop, we just sold them for parts. Like an engine that was a run-out engine, six months ago, that was worth $2 million. We sold for $4 million. So, that's – and that $4 million represents probably the total profit we would ever make from that engine over the next 10 years today. So, it's hard to turn those down. And so, I see the – we'll go through the portfolio and focus on what are the lower cash yielding investments and then look at monetizing those. But it will be a regular program. I can't predict the quantum, but it's part of our MO.

Fair enough. I guess we'll just expect it to be lumpy. And so, second question, just maybe a little bit more color on kind of how things are progressing at Repauno. And it seems like sometimes that gets deemphasized just because there's so much activity at the other locations, but maybe if you could just give us an update on kind of what you're saying there, market conditions and how you guys are progressing in terms of CapEx spending and development there.

Yes. Good question. It's going quite well. As I mentioned, the macro for natural gas liquids being exported from the United States is excellent. So, you've got production volume to continue rising and we're really focused on the Marcellus production volume. So, there's lots of increased volume and there's no increased – really effective increase in US consumption or very little. So, all of that has to find its way to the water. And so, we have very good dialogue with customers about phase one volumes. We're looking, as I mentioned, to sign three-year contracts. We expect that to happen shortly. And we have started some of the preliminary construction near not the major part – we want to have a contract before we do that. But we should be operational in the middle of 2020 with probably between 25,000 and 30,000 barrels a day flowing through the terminal. And then, after we do that, we will engage with customers about phase two, which will allow us to load VLGCs, which is – that is the most efficient way to export and we can gain additional profits and volumes from phase two, but we have to have caverns built to do that. So, we're actively continuing to do the engineering design work on the caverns. Very confident that that works. So, we expect to just all continue marching forward and it's a great macro.

That's terrific update. And then, just last one for me, Joe. Maybe this is a little esoteric, but maybe you could just speculate on kind of that gap between private market valuations and public market valuations. But what you think – what do you attribute that to essentially? And I guess, along with that, obviously, as I look at some of these projects, whether it's Long Ridge or Repauno and even Jefferson, which is kind of the farthest along it seems, obviously, they're not yet at the stage of kind of generating stable EBITDA and it sounds like that's more in the pipeline for 2020. Do you think maybe that shifts that balance between private market and public market valuations?

Okay. There's several parts to that. I'll start with – I read an article in the FT about a month ago that sort of captured what I thought was what was happening. And that is – the article was that investors would rather own an office building in LA than the stock of a REIT that owns an office building in LA. And I think the reason is that people don't want to have to explain to anybody what happened on the last day of the quarter when somebody sold 25,000 shares and the stock went down $0.50. So, there is the investment – and lots of people all over the world want to own real assets and infrastructure. So, there's new funds and new investors that show up almost every week looking for infrastructure assets. And yields in Japan are 2%. So, 4% sounds great. So, I think that the private market values, you might see infrastructure assets trade between – in the private market between 15 and 20 times EBITDA in some cases today, whereas as a public stock you might trade at 10 to 12. There are other parts of the question…

Go ahead. I'm sorry.

There are other parts of your question, I can't remember exactly.

That itself is great color. The other part was essentially just asking, if as more stable EBITA materializes at Jefferson and at Long Ridge, maybe you start to see that gap close. But it sounds like you're talking maybe more about kind of the dynamics of public markets versus private markets and that's really what you're attributing the difference to. And so, that's – it sounds like a compelling opportunity regardless if you can monetize it in that way.

Yes. And that's a good point also, is that when you go out and sell assets today, everybody shows what they call adjusted EBITDA. And adjusted EBITDA can do some spectacular adjustments that people make off of actual markets – and the public markets tend to trade off actual, but private markets right now are buying adjusted. So, you could without looking at trailing EBITDA, if you have contracts at Jefferson and you have adjustments, you could sell potentially off of that. So, there's several differences, significant differences between the private and the public markets right now that sort of – and I don't – based on the flow of capital and the amount of money that seems to be being raised from infrastructure funds, I don't see that slowing down.

Okay. That's great color. Thanks for the time, Joe.

Thank you. And our next question comes from line of Robert Salmon with Wolfe Research. Your line is now open.

Hey. Good morning, guys. And thanks for the question. I guess, Joe, to continue on with the thought process that we could see FTAI's service offering kind of shift towards more infrastructure – away from infrastructure more to the equipment leasing, in particular the aviation side of the business, how should we think about the dividend if you guys kind of play out there because, as Chris is alluding to, there are a little bit different revenue streams between the two and required investment thereof. So, I'm curious to get a – if you guys do play this out, how you think about dividend and dividend growth longer-term?

So, I don't think that would change. The approach we took in the beginning is to pay up 50% of FAD and that gives a good yield to the equity as well as allows capital to be reinvested in growth. And that sort of a model, it works both in our minds for infrastructure as well as equipment leasing. And I think we maintain the same policy. And, obviously, we're going to – right now, 100% of our EBITDA is aviation. So, if we were to monetize assets and invest in – monetize assets today that have no EBITDA and turn those into EBITDA assets, then it's going to be more growth.

Clearly, in the short term, it definitely be a tailwind there from that perspective. I guess shifting gears a little bit here, a follow-up with regard to the outlook for the growth that we should be thinking about within the infrastructure business at Jefferson. Can you give us an update in terms of the projected CapEx? Has the timing or anything changed at all there, looking out to 2020?

No, we're very close to launching a bond yield for Jefferson, as I mentioned the last call, which would raise an incremental $250 million of capital which would fund the pipeline projects, additional storage, additional rail capacity, so that all of the CapEx for 2020 would be funded with this offering that we expect to conclude here fairly soon.

Right. That's helpful. So, kind of internally generated investment funding there. In your prepared remarks, you'd noted that we were kind of close. It felt like a little bit closer on the CMQR relative to the 50% interest sale. Can you give us a sense of the infrastructure sale? Should we still be expecting that as kind of 2019 event or could that push into early 2020?

Yes. No, I said they're both close. So…

All right, guy. I appreciate the time.

Thanks.

Thank you. . And our next question comes from the line of Robert Dodd with Raymond James. Your line is now open.

Hi, guys. A couple about Jefferson and then couple about aviation, if I can. On the Jefferson side, when you're talking about a $100 million run rate, EBITDA kind of kicking in mid – maybe second half of next year, how much of that is going to come from third-party contractor versus the Canadian crude marketing, tying in with your comment about adjusted EBITDA, the higher multiples presumably go with third-party long-term contractor revenue rather than whether you're getting some temporary WTI/WTS spread.

Right. So, our assumption now is 100% will come from third-party business. As I mentioned, we'll only do the Canadian marketing program on an opportunistic basis, and so we don't know what the spreads will be and whether we'll be opportunistic. So, we're not taking any of that in.

Got it. Got it. Then, on aviation, maybe get color here. You talk about obviously the current portfolio generating $350 million if you were to sell the infrastructure for a billion. That goes to kind of $600 million. Obviously, I think that does not include the JV, which going live starting next year could add more to that. And then the value you can get – one of the questions is the value you can get repair – doing the engine shop visit yourself, the average cost that you've got in an engine right now is about $2 million if you buy end of cycle engine, put it for a shop visit and sell it. With $2 million cost savings, whatever the sale price is, you've got a 100% gain on kind of your original purchase price on the engine. I guess, the contingency on that is what's the capacity you think you have to bring those – to run shop visits yourself versus just run them kind of through the JV. How many engines can you actually manage through a shop visit per year?

Our current plan is to – by the way, the JV is not going to do shop visits. It's just a product.

Right, right.

shop visit. But our assumption today is that we'll have probably between 50 and 70 shop visits a year on our own portfolio in the near term. That's based on reasonable growth in a number of CFM engines than we own. I think our capacity ultimately – today, we own probably 200 CFM56 engines and our capacity just could be 1000 and our ambition is 1000. And if we have a lower cost than anyone else in the world, which I think we will, that's a heck of an advantage. Every time I look at this, I think – I'm just amazed at what an opportunity this is and how big it is. So, we started this four, five years ago. So, I don't think anybody else was doing it then. And it's all going to happen really in the next couple of years. A lot of these engines that are covered under power by the hour program are coming off those programs and will be up for grabs in the aftermarket. And it's 22,000 of these engines selected. Like, it's a stunning market size.

Got it. Got it. On that – if you were to get to 1000 engines, apart from the capital required to do that, which you could reinvest from the infrastructure , how much – you don't have the capacity to handle that many – in terms of you taking the shop visits up by a factor of 5 as well and you talked – I would think, right? And you've talked in the past of shop visits taking longer and longer.

That's a good point. Over the last year, we've spent a lot of time thinking about and working on partnerships and arrangements on the shop itself. And so, we have conversations going with multiple parties right now, major airlines, all the way down to small shops to try to figure that out and align ourselves, such that we will be able to control our shop visits and manage them more effectively ourselves. We also have some ideas as to how to change the shop visit practice and I've mentioned modules before about how a CFM56 engine is really four different modules. And so, if you only need to work on one module, you don't need to send the whole engine – you don't need it to have the engine sit in a shop for six months. You could actually swap a module out and shorten that to three weeks instead of six months. So, we have a whole list of incidents that we're working on there to make sure that we both can manage that number of shop visits ourselves and control it, importantly. We don't want to be beholden to third parties that we don't control. So, that's actually a very good question and it's something we're working on. It's on our priority to-do list.

Okay, got it. I appreciate it. And thank you for the color.

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Alan Andreini for any further remarks.

Thank you all for participating in today's conference call. We look forward to updating you after Q4.

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