FTAI Aviation Ltd (FTAI) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fortress Transportation and Infrastructure Investors Q2 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Alan Andreini, Managing Director. Sir, you may begin.

Thank you. I would like to welcome you to the Fortress Transportation and Infrastructure's Second Quarter 2017 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 and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today. 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. 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 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.

Thank you, Alan. To start the call, I'm pleased to announce our 9th dividend as a public company and our 24th consecutive dividend since inception. The dividend of $0.33 per share will be paid on August 28 based on a shareholder record date of August 18.

Now let's start with the numbers for the quarter. The key metrics that we look at are adjusted EBITDA and FAD, or Funds Available for Distribution. Adjusted EBITDA for Q2 2017 was $28.8 million compared to Q1 of this year of $22.1 million and Q2 of last year of $14 million. FAD was $34.6 million in Q2 of 2017 versus $21.7 million in Q1 of 2017 and $13.3 million in Q2 of last year.

During the second quarter, the $34.6 million FAD number was comprised of $54.5 million from our equipment leasing portfolio, negative $6.1 million from our infrastructure business and negative $13.8 million from corporate. The negative infrastructure number was higher than Q1 of this year and was primarily due to reduced throughput reduction at Jefferson due to construction activity on the terminal. The increase in the negative FAD at corporate compared to Q1 was primarily due to our first full quarter of interest expense from the public bond deal that we did in Q1 of this year and several one-time deal expenses. Finally, $20.4 million of the $54.5 million for the equipment FAD was the result of a sale of 3 airframes and 6 engines for a gain of $2.0 million.

Once we normalize the Q2 numbers, one fact is clear, our ability to generate adjusted EBITDA and FAD on a run rate basis continues to strengthen, and I see that growth not only continuing but accelerating.

Let's turn to aviation first, our largest business segment. Aviation had another excellent quarter. Aviation FAD was $57 million, which includes $20.4 million from sale proceeds. Excluding asset sales, Q2 aviation FAD was $36.6 million or $146.4 million annualized, up from $122.8 million annualized number in Q1 of this year.

The portfolio is performing as well or better than expected, and we have a very active quarter for investing, closing $160.8 million in new asset acquisitions consisting of 9 aircraft, 3 airframes and 21 engines. Through June 30, year-to-date this year, we have closed on $234 million of new investments.

With that $234 million already closed and with approximately $167 million in letters of intent that are signed but not yet closed as of January 30, we're now projecting approximately $400 million in new investments for 2017. Deducting asset sales from this, year-to-date, we have completed or will close approximately $85 million in equipment sold yielding a net new investment of approximately $315 million.

On top of this, for the balance of the year, we are estimating another additional $100 million of net new equipment acquisitions. So in short, we're now projecting net new acquisitions in aviation in 2017 in excess of $400 million, up from the original estimate of $250 million. To state the obvious, our aviation business is growing faster than we had expected.

Our annualized adjusted EBITDA yield and return on equity without gains were 22.4% and 12.6%, respectively, both higher than Q1 of 2017. And we expect to get back to our target return levels of 25% and 15% soon, as the aircraft we purchased off-lease as part of the Air China deal go on-lease.

To that point, let me update you on that deal. Of the 11 planes in the deal, we have closed on 8. Two of the planes went on 6-year leases at the end of June, and 3 went on 6-year leases in July. And one is in heavy maintenance and is due out this month, when it will go on a 6-year lease. 2 have been sold for part-out value. And of the remaining 3 aircraft, 2 of those should go into revenue service in Q4, and 1 will be sold for parts. Therefore, we will see much of the impact of this deal in Q3 and pretty much the full impact in Q4.

Before reviewing more of the specifics in our aviation portfolio, I want to highlight the environment in which we are conducting this business. The worldwide aviation macros are as strong as they've ever been. Revenue Passenger Miles were up 7.9% globally through June 30 of this year versus 2016 according to the IATA data, which is above the historical 5% to 6% growth rate for this -- for the industry. IATA is also predicting that by 2035, global air travel will double to 7.2 billion passengers. As important as the demand side is, it's also important to look at the supply side. And we are seeing the normal delivery days -- delivery delays that you often see with new models, which are affecting the new 737-MAXs and the A320-NEO, which is good news for our 737 NGs, Next-Generation, and A320 aircraft where we are seeing very strong demand for them.

As for our particular portfolio, our market of focus has been 12- to 20-year-old A320s, 737 Next-Gens, 767s, 757s and 747s aircraft and associated engines. That market, which today is estimated to be about $64 billion in total asset value, is projected to grow to $95 billion by 2027. So the bottom line is, our target market is growing as is, not surprisingly, our deal flow.

If you combine all these factors with low fuel costs and projected Revenue Passenger Miles growth averaging 5% to 6% through 2025, we see a very strong aviation leasing market for many years to come.

On our last call, I mentioned, we were -- as we like to call it widening the moat to make our offering more unique and defensible. Our joint venture in the area of advanced repairs is progressing nicely. And we expect to be able to describe that deal in more detail towards the end of this year. In addition, we commenced discussions on another unique aspect of advanced repairs, which we hope to be finalizing shortly.

In both cases, our objectives are the same: That we have a unique niche in the used commercial aviation market, and we've become a recognized brand in that space. And these advanced repair initiatives are designed to make that brand even more value-added and defensible.

Let me finish aviation by letting you know where we are as of this call in quarter-end. At the end of Q2, we had LOIs covering $167 million in additional assets. Once the remaining equipment under those LOIs are purchased and taking into consideration the sale of 2 737-800s, which will occur in Q3, we expect run rate aviation to be approximately $220 million per annum in EBITDA, up from $200 million we projected last quarter.

Turning now to Offshore. For the first time in over a year, all 3 of our vessels were utilized for the vast majority of Q2. And we expect that to be the case for Q3 as well. The market for offshore energy services remains significantly depressed, but it is starting to stabilize with contractors seeing some increased activity albeit at low prevailing rates. We are seeing signs that the decline in spending has bottomed and the result of this, combined with a new cost structure in offshore, is causing some previously shelved projects to be resurrected. Having said that, we continue to evaluate our options, and we're simultaneously looking at several unique distressed opportunities as we continue to evaluate our own presence in the sector, and more on this on our next call.

Let's turn now to infrastructure and Jefferson. The construction projects, while affecting throughput volume in Q2 as I mentioned, are coming in under budget, but have been delayed between 30 and 60 days due to rain. We now expect both ethanol and refined products system to be operational by October 1. And we continue to believe we will get to an annual run rate of $15 million to $20 million in EBITDA during Q4.

As we did with aviation, I think it's important to address the macros in this space. And especially, for the macros for Jefferson and the Gulf Coast. In short, they continue to strengthen. Demand for refined products in Mexico is increasing. Since our last call, Exxon has announced a $300 million commitment to introduce the mobile retail brand in Mexico. And also, since our last call, both Exxon and Motiva have announced multibillion-dollar refinery expansion plans near our terminal. It's probably worth noting also that approximately 70% of liquid hydrocarbon storage on the Gulf Coast is provided by third-party companies like Jefferson and 30% is provided -- has been provided by the refineries themselves.

Another macro working in our favor is the specter of pipeline apportionment. For the Canadian Association of Petroleum Producers, or the CAPP, Annual Report and direct conversations we're having with Canadian producers, apportionment will become very real beginning in Q4 of this year 2017 and Q1 of 2018 and for most of 2018 and '19. We have started to see this reflected in the forward curves for the price of WCS, or Western Canadian Select, versus WTI. The spreads are widening as is the intensity of the conversations we are having regarding crude-by-rail from Canada. We now have 6 trains scheduled for Q4, and we expect the Q4 number to rise. And more importantly, all indications are that in 2018, we will see this number ramp up significantly.

As the exporting of U.S. crude abroad, the numbers go up almost daily. The U.S. is now exporting over 1.2 million barrels per day of crude. And just as important as this development are conversations we're having with foreign refineries regarding the use of Jefferson as the facility to handle trans-shipment of Canadian crude to Asian refineries. We believe we're in the early innings of this opportunity, and we're in a perfect position to take advantage of it. We have previously discussed on ethanol, our joint venture with Green Plains, and as I mentioned earlier, we expect that to commence operations on October 1. And all indications are that it'll be as successful as we and Green Plains had planned. Back on crude of a great strategic importance to us, we are now engaged with multiple crude pipelines regarding connectivity to Jefferson both in and out. Growing demand for storage in the Gulf and our capabilities and location make Jefferson an ideal extension for these pipeline offerings. Multiple conversations are ongoing and accelerating, including a recently executed letter of intent with one of these pipelines. As to a formal announcement, as to our pipeline connectivity and strategy, we expect to be able to make that before the end of this year. If these deals move forward, we would expect pipeline construction to take approximately 12 to 18 months until completion.

Concluding the Jefferson discussion, let's review storage now. By the end of this year, we will have close to 2 million barrels of storage operating on the terminal, all of which is contracted. In addition, we will be adding approximately another 750,000 barrels of storage to be available in Q2 of 2018.

On the current site, we're capable of taking the storage to approximately 4 million barrels total. But of noteworthy mention is the fact that with the adjacent properties to our main terminal, we can take total storage numbers up to over 20 million barrels.

So with the pipeline connectivity that we are working to put in place and with the massive refinery expansions, we expect to take place adjacent to us, we believe that even 20 million barrels of storage at Jefferson would not satisfy the total demand, which is coming our way.

The bottom line is, we've never been busier or looking at more opportunities for Jefferson than we are today. As of this call, we now have 3 of the 4 largest refineries in the area either contracted or in final documentation to do business at Jefferson. And so we know this for certain in that we have the right asset and the right location at the right time. And we believe that the opportunity at Jefferson is going to exceed the upper end of even the most aggressive assumptions when we made the initial investment in 2014.

Turning to the Central Maine and Québec Railroad. The CMQR results came in slightly below our expectations for Q2. Comparing the -- compared to Q2 of 2016, revenues for this year in Q2 were flat at $7.7 million. And it was in line with our expectations, as revenues in the second quarter are negatively affected by the seasonality of the propane business.

EBITDA and FAD for Q2 2017 were slightly lower than the Q2 '16 -- 2016 numbers due primarily to a timing issue on 45G tax credits and an equity compensation charge. We do expect to see the 45G tax credit appear some time in the second half of this year. But more importantly, we still expect to see CMQR do approximately $30 million of revenue for 2017 and approximately $4 million to $5 million EBITDA. And we also still expect over the next few years to grow that EBITDA to $10 million to $12 million on revenues of $35 million to $40 million. We continue to explore new business initiatives there including 3 specific meaningful new development projects, which would augment the traffic at the CMQR. And as always, we continue to explore other short line acquisitions. And while we like the space in the business, we find the market for these assets very fully priced at this time.

Turning to Repauno. The good news is our butane operation is up and running. And we took the first deliveries from one of the local refineries into the cavern in the middle of July. We started this operation a month later than we originally hoped, but it is functioning exactly as we had planned. And we remain very excited about its prospects moving forward.

We are looking now at multiple natural gas liquids and other liquid hydrocarbon storage and export opportunities out of this terminal. Once again, the confluence of rail, truck and ship logistics in one site, like we have at Hannibal and Jefferson, is proving to be a big advantage in these ongoing negotiations.

Negotiations on our auto import deal for Repauno are also ongoing. And in addition, we're discussing with other potential auto and roll-on, roll-off tenants. And we remain positive on these discussions, and we'll update you on this on our next call.

Turning now to our newest property, Hannibal. As we announced during the second quarter, we acquired the Hannibal site in mid-June. And we have made good progress this quarter as it relates to the power plant project. And we're pleased to announce that we've received formal approval for construction from the Ohio Power Siting Board on July 28. We continue to work on our EPA air permit, the last major permit, before we can begin construction. And we expect to have that by the end of Q3. We ran a competitive RFP process for key power plant equipment and are close to selecting a preferred vendor. And we have opened the EPC bidding process and commenced discussions on final project financing options and equity partner relationships.

On the demand side of the power plant equation, we are also developing a list of potential tenants who would come on to our site as -- and operate on the site, who would also be electricity users under the long-term power purchase agreements. With all these pieces coming nicely together, we would expect a final investment decision in Q4 of this year. Like with Repauno and now that we are the actual owner of the property, the abundance of cheap gas coming out of the Utica, Marcellus region is generating multiple liquid and gas hydrocarbon storage and processing opportunities. And we have a number of exciting deals under consideration. We're also exploring partnering with local gas drilling companies to obtain long-term fixed-price gas, which would achieve our ultimate goal of having economic ownership of the lowest-cost gas possible. Before leaving infrastructure, I want to point out a developing story for all of our terminals. The world, and specifically the U.S. energy picture, as I'm sure you're all aware, is changing. With 1.2 million barrels of crude now being exported daily from the U.S., something that was impossible just 2 years ago. With the overabundance of U.S. gas making its way onto world markets and the emergence of Mexican refined products market, the fundamental plumbing of the U.S. energy industry is changing. And that's change puts all of our ports and terminals, Jefferson, Repauno and Hannibal, in front of massive new flows of hydrocarbons. Cushing, for example, used to be the center of the U.S. crude storage story and that's changing. Pipelines like Seaway have been reversed, which historically ran north to Cushing, are now running south to the Gulf. And it's become clear to all the industry participants that growth in storage is going to come through the Gulf Coast for crude and through the Philadelphia area for natural gas liquids. That puts our terminals in front of these flows with the ability to offer multiple logistic options from strategically located facilities. We could not be better positioned for this developing change.

Let me spend a minute on financing, and then I'll finish. We have a $75 million revolving credit facility in place provided by JPMorgan and Barclays. And we are in the process of putting a revolving credit facility in place at Jefferson as well. As you know, we did our initial public debt deal last quarter of $250 million. With the accelerating growth in our aviation business and the rapidly expanding opportunities in infrastructure, we will be needing more capital to develop these opportunities. The good news is that we have a full array of options, multiple choices in front of us to secure that capital at attractive pricing.

As a conclusion, aviation continues to outperform our internal projections both in terms of volume and returns, and that outperformance is continuing and accelerating. And as our market dominance in areas -- in our area of choice strengthens, we continue to advance initiatives, which will make us an even more formidable competitor in the future. Offshore, we expect to break even this year. And as stated, before we'll evaluate our position in that sector by the end of this year. And the potential for all of our infrastructure assets, especially Jefferson, looks like they're going to exceed our most aggressive assumptions.

For all 4 of our infrastructure assets, the macros have never been better, and our opportunity set has never been more robust. In short, FTAI continues to get stronger every quarter and stronger at an accelerating pace. Simultaneously, the associated macros important to our businesses continue to strengthen and improve. And we're in a very good position today. With that, let me turn the call back to Alan.

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

(Operator Instructions) Our first question comes from the line of Justin Long of Stephens.

So first thing I wanted to ask about, I was wondering if you could expand a little bit more on the pipeline in storage opportunities at Jefferson. What's the total amount of capital that could potentially be deployed towards these opportunities? And is there any way at this point to ballpark the incremental FAD this could generate for the business?

Sure. Well, it's still early to pinpoint numbers, but I'll give you thoughts on approximate amounts. And if you think about the pipeline opportunity recurrent, as I mentioned, we got 3 or 4 different options were under consideration. And the pipelines with both supply crude in as well as to be able to transfer and take crude out to a variety of different locations including export opportunities. So it's a big strategic initiative, and it's very important for the long term of the terminal. And it enables that growth that I referred to. But ballpark, I would say, pipelines if you take the 3 or 4 of them, they might be in the range of about $150 million. And then, if you think about storage in terms of chunks, and in other words you don't build 20 million barrels at once. But say that connected to that pipeline investment might be 3 million barrels of additional storage. And a good ballpark is $50 a barrel. So you're talking about $150 million there. So total investment might be in the range of $300 million or approximately that. And I think the incremental contribution from that should be in the $40 million to $50 million a year range. So that's kind of the -- that's the rough math that we think is available. But it's obviously at the caveat that because it is early, and we'll be more precise as we go forward.

That's really helpful. And I think you mentioned the time for construction for the pipeline would be 12 to 18 months for the storage opportunity. How should we think about the timing around construction for that?

It's shorter -- it's a little bit shorter than that, so 9 to 12 months as long as it doesn't rain. As much as it's been raining. So it's -- when it gets wet, it's hard to do outdoor construction. But 9 to 12 months is a good ballpark.

Okay, great. And as you try to lock down contracts for these pipeline and storage opportunities, could you just talk through the competitive advantages, you feel that Jefferson has relative to other terminal locations? I just want to hear some of the key points that you would make as you enter these contract negotiations with the refiners.

Sure. When you're making the pay, you're talking about connectivity and proximity. And then, I think a big one, additionally, is that there is a lot of congestion if you think about Houston and the Houston Ship Channel. So there is a big savings for people to use Port Arthur and Beaumont, because you don't have the demurrage charges in the congestion that you have in the Houston market. So there's a bit of Port Arthur versus Houston. So that's one sort of competitive dynamic, which is favorable to the expansion of our terminal. And then the others are connectivity and proximity. And so if you think about that's what we're trying to achieve with the pipeline connectivity is to have the same connectivity as other terminals, which we believe is very doable. And then proximity, you know our locations, so we're somewhere between 5 iron and 9 iron from Exxon. And then, we have the opportunity to easily connect to the other major refineries as well as to the refineries to the east of us in the Lake Charles, St. James. And ultimately, if they possibly do reverse the loop, the ability to connect directly to that, which would give you VLCC access. So we see the connectivity is something that we should be as good as anyone else, ultimately. And then obviously, proximity and then the advantage versus Houston are the other big reasons.

Okay. And maybe one last quick one on this topic, and then I'll pass it on. But how should we think about the potential length of contracts on this front when you assess these pipelines and storage opportunities? I'm just curious what type of commitment you're hoping to get before you pull the trigger on deploying capital.

The vast majority of these contracts are in the 3- to 5-year range. And that's been the pattern for both sides, because it provides the owner with -- and historically, it's provided with repricing upsides. So it's been a sort of a sweet spot for the 2 sides to sort of find an area where you have enough coverage, but you've not locked yourself into something that might be below market in a few years.

Our next question comes from the line of Devin Ryan of JMP Securities.

So maybe, spend a minute here on aviation. I appreciate all the updates that you provided, and the $220 million of pro forma FAD. Obviously it's good to see. Just kind of mechanically on timing of period and balances were quite a bit higher than the average balances. I'm just trying to think about the contribution kind of coming out of the quarter from the business. How much of the $747 million of assets are on lease now? And then, just thinking about kind of lease terms like what type of trends are you seeing there? Anything you provide would be helpful.

Sure. So I think the -- whenever you add assets, it's difficult to get a lot of the contribution in the quarter in which you added. So I would say that it's more weighted towards the end of the quarter in terms of when it's -- when it actually produces and which speaks well for Q3, frankly. So that is good. I think trend wise, we had mentioned last time that we've been taking advantage of a strong market to push out the lease terms on our aircraft portfolio, which I believe today now averages about 42 months in average duration. And pro forma for the closing some of the LOIs and extensions we have, it should increase to about 45 or 46 months. So that's very good. The market, as I mentioned, it's hard to think that can be better. So really strong aviation market globally. There's -- obviously, there's always issues in certain countries from time-to-time. But the core fleet that we're focused on is in very, very -- is in a great position. And you also have support from the e-commerce market for a lot of the aircraft that we own are freighter convertible. I think about the 767, 757, 737-800 now. Those aircrafts have a very strong bid from both the U.S. e-commerce providers if you follow Amazon or Alibaba, and the Chinese market is growing very, very rapidly. So I feel good about the longevity. And as we're -- our focus is on the engine. So we don't care whether it flies passenger or freighter, we just want it to fly for a long time. And I think the outlook for that is exceptionally good. Knock on wood.

That's great. So maybe just follow-up on that. Take a step back here. So the long-term opportunity you sound, maybe, more excited incrementally today. How should we think about the pace of capital [plummet] when we see the LOIs, and those are still elevated. But you had to bump up the target for 2017, it seems like the longer-term opportunity for a tie is bigger in this segment. So how do you think about kind of the end state, I don't know if there is an end state here, but where that goes to? And then, just the pace of deployment kind of beyond the current LOIs as we really look in the next year. It would seem that, that maybe should remain elevated if the backdrop that you talked about continues.

Yes. The -- as I said before, I never like to set a budget for new investments. Because that's a bad way to run an investment business. It's always subject to pricing. But this year, as I said, we think we'll add $400 million of net new assets. And the market set also, as I mentioned, is growing. Today, it's $65 billion of eligible assets growing to $90 billion. So I'm pretty optimistic that, that 12 to 20-year aircraft investments universe is going to get bigger. And our deals that we're looking at are bigger. If you just look at some of the numbers on that today, the 737 market is probably about -- in the 12 to 20-year range is about 1,700 aircraft. And that will almost double over the next 10 years as those -- and those planes are already flying. So this is not deliveries or any -- a 12-year-old aircraft is 10 years from now, today, is 2 years old. So it's actually in service. So you know that's going to happen. And on the A320 market, it's roughly 2,000 airplanes going to 4,000. So that looks pretty good to me that we'll be seeing a lot of deal flow and bigger deal flow. And while at the same time, not changing our pricing parameters or return requirements.

Our next question comes from Ariel Rosa of Bank of America.

Sounds like a lot of exciting things going on here. Just to start, what's the prospect for potentially raising the dividend given all these developments?

Well, I think last call I said that we wouldn't visit that topic until the end of this year. And I'm still -- we're sticking with that. So we wouldn't look to increase the dividend until early next year.

Okay, fair enough. So it sounds like, and I know this has been addressed on the past calls but obviously, in terms of the long-term outlook, there is a pretty broad array of opportunities. But as we look to kind of 2018 or at least the next 12 months, obviously, aviation continues to be a larger and larger part of the FAD contribution. Is there a point at which you kind of concerned about that? And maybe, if you could speculate for 2018, what the FAD contribution looks like across the business by segment?

Well, I think, the 2 numbers we've given is the 220 million of run rate FAD from aviation. And that's assuming no additional investments beyond signed LOIs, which I don't think will happen. But that's what that number is based on. And then the other is the $15 million to $20 million of run rate EBITDA from Jefferson. And that obviously, if we're going to grow the business the way we expect to, it should also go up. And that's really the extent of the guidance we've given so far.

Okay, fair enough. And then looking at the Jefferson pipeline deal. Could you just discuss a little bit the economics around that in terms of how you guys get paid, and what are the value-add services that you're providing? Is that -- is it a tolling arrangement similar to the crude-by-rail deals?

Largely, yes. It would be storage. You get paid by storage. And that's a per-month, per-barrel amount that people pay. And as I mentioned, if you look at the Gulf Coast, about 70% of the storage in that area is provided by third-party providers like Jefferson. And so about 30% of the storage needs the refinery has on their property or does themselves. That number actually has not been growing much over the last 10 years. The 70% number has been growing with the growth of the industry. So the -- a big part of the revenue is storage, which I mentioned is typically on 3- to 5-year contracts. And then there's a number of other services that you provide, a big one being blending. So you can combine multiple types of crude to give the refinery the spec that they need. And then, there's also intermediate storage. So refineries often will produce -- overproduce certain intermediates, which they need to store until the refinery is -- the demands to put them back into the refinery is there. Then lastly, there is a very significant growth in refined product storage. So outbound refined products in places like Mexico, South America, Africa, Europe have been growing, significantly. And the Gulf Coast refineries are keenly focused on that, as they have a big competitive advantage in this part of the world. So all of those things grow together. And as I mentioned, with Exxon and Motiva intending to expand the capacity, there is significant need for additional storage just from that alone.

Okay. That's really helpful. And good color around that. Just a last question I'll ask before turning it over. Given the economics around the aviation leasing markets sound really positive and it sounds like there are a positive tailwinds there. Any concerns about increased competition there potentially eroding some of those returns? Have you seen any of that? Have you seen new entrants in the market? Just if you could discuss that briefly?

Sure. I mean, I always worry about competition, as I mention in every call. But so far, most of the new competition is focusing on the newer aircraft. And that's where I think there's been significant price and yield competition. And to a large extent, a lot of those providers are undifferentiated. So they don't do anything differently than one another. And it's more of a cost-to-capital business. So our strategy focusing on the engine, we now have over 100 engines, pretty big market presence and a clear strategy that people know what we do and know what we're about. And I think that's a significant lead and advantage in and of itself. And then, as I mentioned, we're very focused on building up these other competitive advantages which will be proprietary and exclusive. So if we are successful in some of these advanced-engine repair initiatives, I don't think anybody will be able to copy us as hard as they might try. So that's what we're trying to do. And I think, we've got a good lead. But I never -- I'm never going to assume that somebody won't try to do what we're doing.

Our next question comes from the line of Christian Wetherbee of Citigroup.

This is Prashant on for Chris. Joe, I just wanted to pick up on that last question. You talked about aviation in the ramp, just looking to next year and longer term. As we see the business ramp-up, I kind of want to get a sense of the cadence of the equipment sales portion of FAD. Clearly, there's been a step up and you're implying a healthy rate for the back half of this year. Then how should we think about that going forward and as the business evolves? Will that grow in line? Does that become a little bit less of a percentage of FAD contribution as the other parts ramp up? Just wanted to get some color in there.

Yes, it's a really hard thing to forecast, because it's purely -- we do that on an asset-by-asset basis, and it's opportunistic. If we see a price that we think is a price that we wouldn't pay ourselves then we like to -- and I think as in running a business, one of the things I've always liked is, if you're not selling things periodically, you really don't know what things are worth. So that to me is a discipline that we'll always have in the company. And I think it's an important way to run the business. So getting back your question, it's -- the numbers are increasing on sales, so -- which I think is a good thing. How long will that last? I don't know. But it's -- but definitely it's going to be higher than it has been in the past. And we'll always report to people separately. So it's not that we're including that as run rate number, but we'll break it out for people. And I think it's a healthy thing.

Okay. That's helpful. And I know you've said that you're going to -- really revisit the dividend discussion at the end of the year and then potentially right at the beginning of next year. I just wanted to get a little bit of color on how do you think about market yields as you consider that. We've seen the market yields come in across the board, transport infrastructure, and energy-related yield instruments on equity side, maybe a little bit of a stall out in the last few months. But as you look to '18, how important is that in the discussion to you in terms of the timing of a dividend increase and also the magnitude.

Well, I think it's less about us trying to figure out what the market wants and more about running, having a clear policy. And as we've stated originally we want to have 2-to-1 coverage. And when we feel that -- we feel like that's a nice balance of retaining capital and paying out capital. So that will drive the decision more than what we think the market reaction would be.

Okay. That makes sense. And then I guess just a final question, sort of a smaller point on railroad. When we saw revenues kind of flat and revenues down and EBITDA margin basically flat for the quarter. When we heard from other short lines of 2Q was that -- the short lines that did not necessarily enjoy a robust revenue environment like the Class 1s did in Q2, but that could be coming in the back half. Do you think that's the market dynamic here as well? I know it's a smaller contribution, but as we think about the ramp in the back half and getting to like a sort of normalized run rate, I felt like 2Q is a bit of an anomaly so I was wondering if you could just speak of that a little bit.

Yes, it was a little soft. And we saw it even in our -- just our one little railroad. So -- but so far in Q3, the revenues actually have been pretty strong, so it doesn't seem like it was a sustained slowdown. It may have just been one of those corrections inventory exceeded something, I don't know. But it was definitely a little bit of a soft spot for us and probably for the industry as well. But it has come back. So -- and I'm not worried about that. We used to run rail America, and we have a railroads that always -- we had some that were up and some that were down, and it depends on your commodity. The railroads fundamentally have a good short line and diversified revenue mix. So I'm not worried about it.

Okay. And just one last one during the Jefferson and from the refined products opportunities. Kind of marrying that acquisition and the target landscape you have out there. Do you see any short line opportunities or rail opportunities to further extend in New Mexico to move refined products? I know you've talked about the pipe opportunity and maybe some of the transload and the other opportunities, but in terms of building a direct short line maybe out of Texas and across the borders, is that something that's prospectively in the mix or already sort of occupied by other entities?

Well, I mean moving that product into Mexico is going to be either KCS or [Firamax]. So I don't see us competing with that. That would be a quite a big initiative. And there are some short lines down the region over terminals that we looked at, that could be add-ons. That would tie into the Mexican strategy refined products. But not a main line competition with the big guys.

Our next question comes from the line of Robert Dodd of Raymond James.

On Jefferson, obviously, as everybody's [talked] kind of, I mean, you did too, a ton going on. I got to say not some of those things -- not the kind of thing I would, and obviously I'm not an expert on that, but I would have envisioned 3, 4, 5 years ago. Is there the possibility that there's maybe some remediation work at the core facility to cope with all these opportunities in addition to just to expanding the offerings, but some of the core components. Are those easily adjustable? Or is there going to be a material amount of work necessary in kind of the core? And is there any risk there of disruption if that's ongoing, if it?

No, everything is functioning very well. And as a matter of the fact, we have -- we're going to have Investor Day on October 17 at the terminal. So everyone can see for themselves. But at that point, we hope we'll have -- the construction will be largely completed. We'll have refined products and ethanol both operating and crude. So there's nothing as part of the core that needs adjusting in any way.

Got it. And then just on the capital needs component, obviously, huge opportunities. And as you said, in Jefferson, you maybe $300 million in incremental capital deployed over a couple of years. And you mentioned, obviously, needing more financing debt opportunities there. Is equity likely to be a component of those financing needs? The large growth in the capital between aviation and Jefferson, the growth is impressive.

Well, we have -- as I mentioned, we have lots of options. We've gotten ourselves well positioned to access multiple different markets. We haven't made any decisions yet about how we finance it. Obviously, we have been conservative in the way we've put leverage on the company. So we've had -- we have a good mix and a good position right now to be able to think about all those different choices. And obviously, we do have many financing, many capital deployment opportunities, but we also have a lot of financing opportunities. And Jefferson, I mentioned, we have a number of debt opportunities to finance Jefferson or power plant with partners. So lots of choices and no decisions.

(Operator Instructions) Our next question comes from the line of Nick Chen of Alembic Global Advisors.

Just digging a little bit deeper into the last question about financing. I was also wondering, is there any chance that you guys will look at partners for some of the projects or some sort of JV set up like Green Plains? Are you really just going to be considering the debt and equity markets?

I mentioned specifically on the power plant that something we're thinking about at Hannibal. So absolutely, we, for the right -- if we have the right partner and right structure, we're very open to that.

Excellent. And then, it's a little bit outside of my purview, but we've been following some commentary on potential sanctions against Venezuela right now and a potential shortage of heavy crude for refiners in the area. Have you guys had any conversations about that? Or do you have any color on how that might benefit Jefferson or Repauno?

We're following it. I'm not sure we have any better opinion than anybody else that writes articles every day. So it's -- most people do not think that sanctions will be applied. So -- but there's -- obviously, there's speculation. If you did have a restriction of Venezuela and crude, then very likely you have to fill that in with more Canadian crude, which, for Jefferson, is a good thing. But that's -- it's a little bit far removed, and it's not something that, as I said that most people believe will happen. So we just have to wait and see.

Got it. And then, obviously, there's a lot of stuff taking place around Jefferson right now in terms of refinery projects. Can you talk about some of the big ones that you guys are tracking?

So the 2 biggest ones that have been announced are the Exxon, Darren Woods earlier this year announced, they were going to invest $20 billion in the Gulf of Mexico, most of which would go into Beaumont. So Beaumont is where we are. So that's a good thing when you use the word "most". So that's significant. They have not put out detailed plans as to what that would be yet. So we can't do anything more than just report that. But that's -- that was -- that's a big development for us. And then the other announcement was also $20 billion by Motiva. Motiva is now separated from Shell. It was originally a joint venture with Shell and Saudi Aramco. The Motiva refinery is now part of Saudi Aramco. And Saudi Aramco has also come out and said they were no longer require the refinery to buy Saudi crude. So the crude sourcing for the Motiva refinery is largely going to be North American and a significant portion of that, we believe, is Canadian. And then, they've announced -- the Saudi Aramco announced that Motiva is going to expand their refinery as well. And they've indicated a number of roughly $20 billion, they think, they would invest also in the Gulf. So very, very strong competitive dynamic. The Gulf is very advantageously positioned with respect to crude, access to crude. And you have the people, the know-how, the favorable environment in Texas. They're getting projects approved and permitted. So as I said, the macro on that is outstanding from our point of view.

Great. And then, just a final question. Turning back to aviation, you guys have mentioned that you sort of target planes in the 12 to 20-year range. I was just wondering what the average useful life of those types of assets are? Sort of what do you do with them at the end of that?

Well, typically people say 20 years for a passenger plane. And then in the case of 757, 767, 747, 737-800. All of those aircraft are freighter convertible. So you can take them into various conversion shops. And they cut a door in the side, they take out the seats, they improve the structure, and voilà, presto, it's a freighter. So in freighter aircraft, packages never complain about how old the plane is. So they fly for a long, long time. You have 757s, that are out there that are 35, 40 years old. So the freighter conversion greatly extends the life of the airframe. And so that's -- and as I mentioned, our strategy is around engines. So if you think about what we're rooting for is people to be flying that airplane whether it be or freighter for a long, long time. And so that's part of our asset selection criteria is looking at that specific point. So it's a very good dynamic. And the e-commerce market is currently sopping up a lot of freighters.

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

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.