FTAI Aviation Ltd (FTAI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fortress Transportation FTAI Third Quarter Earnings conference call. At this time, all participants are in a listen-only mode. Later we have conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Alan Andreini. Sir, you may begin.

Thank you. I would like to welcome you to the Fortress Transportation and Infrastructure Third Quarter 2015 Earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; and Jon Atkeson, 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 a listen-only mode and is being webcast.

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 a review of the disclaimers in our press release and the investor presentation regarding forward-looking statements and to review the risk factors contained in our quarterly report filed with the SEC. With that, I would like to turn the call over to Joe.

Thanks, very much, Alan and I am very pleased to welcome everyone today to our quarterly earnings call so that we can give you an update on our Company's developments and performance over the last quarter and looking ahead. Starting out, our goal at FTAI from the beginning has always been to deliver strong, recurring cash flows from our equipment investments and drive long-term growth through a series of infrastructure investments, and also deploy capital opportunistically in new transportation investments where we believe we can earn exceptional returns.

During the third quarter, we made progress on all fronts and feel good about the potential that is built into our existing portfolio, as well as the fact that we are sitting on about $400 million of cash and an estimated $500 million of debt capacity. So first, let us start with a few highlights and then I will take you through our financial results and a review of each of the segments. And I will conclude by commenting a bit on the investment pipeline.

To begin with, I am pleased to declare a third quarter dividend of $0.33 per share, our second such dividend since going public, and the Company's 17th consecutive dividend. The dividend will be paid on November 30th based on a shareholder record date of November 20th.

Third quarter FAD, or funds available for distribution, hit $15.9 million for the quarter, up from $8.5 million the previous quarter, due in part to the opportunistic sale of two aircraft engines. We completed the purchase of $110 million of new aviation equipment during the third quarter, bringing total aviation investments since the IPO to $140 million.

Aviation is now our biggest and most profitable segment and we see significant additional investment opportunities by focusing on a portion of the market that is more difficult for larger players to address effectively. Then I will talk more about that shortly.

Now, for the numbers, during the third quarter, total FAD of $15.9 million was made up of $33.4 million from our equipment leasing portfolio, negative $8.1 million from our infrastructure investments, and negative $9.4 million from corporate. Our equipment leasing FAD consisted predominantly of FAD from our aviation segment of $24.6 million, which grew significantly during the quarter; benefiting from our additional investments since the IPO, as well as the sale of two engines for $7.5 million. Offshore energy contributed $3.4 million of FAD, shipping containers contributed $5.4 million of FAD and benefited from the maturity of a finance lease in one of our portfolios, which added $2.7 million.

Our infrastructure FAD continues to be negative, but we expect this to change as we add business to our Jefferson terminal and see ongoing improvements in our railroad business. Our ultimate goal continues to be to generate FAD equal to two times our dividend. We are not there yet but believe we will reach these levels as we realize the full benefit of our recent equipment investments and the ramp-up of the infrastructure projects and as we deploy the Company's $400 million of investable capital plus our untapped debt capacity.

Our aircraft and engine leasing portfolio continues to be the biggest contributor to the results, delivering high returns on equity and 20% plus unlevered cash-on-cash returns, in line with our expectations. Today we have approximately $377 million in equity capital invested in 17 aircraft and 41 engines, and as we mentioned on the last call, since the IPO we had committed to acquire approximately $150 million of additional aviation assets and we have now closed on $140 million of those, acquiring four additional aircraft and 17 additional engines during -- since the IPO.

We expect these new assets to add a total of approximately $28 million of FAD on an annual run rate basis. We see strong demand for aviation assets, and our utilization remains high. Our current overall utilization as of November 1st is approximately 86%, which reflects aircraft utilization of 96% and engine utilization of 54%. And we expect our engine utilization to increase shortly as we lease out our newly acquired engines. We have always targeted engine utilization to vary between 50% to 75%.

Our average remaining lease term is 28 months, and we are in discussions with a number of our aircraft lessees regarding extensions of their existing leases. Finally, as I mentioned earlier, during the quarter we sold two engines for a gain of $1.7 million. This is consistent with our strategy of both buying and selling engines opportunistically and taking advantage of our strong sourcing capabilities. Before leaving aviation, let's talk a little bit about the industry in general.

There is unquestionably a lot of capital moving into aircraft ownership and leasing, and for good reason. Airlines are doing well. With air traffic rising and fuel prices are low. And this is notably true in the market for new aircraft, where it is easier to deploy large amounts of capital. Here the flow of funds is driving up asset prices and depressing yields, making it hard to achieve target returns without substantial leverage in an environment where everything goes right.

Our strategy is quite different. We target older aircraft and engines, which by contrast involve smaller dollars and requires more effort to manage shorter leases and maintenance events and are difficult to debt finance. It is more work, but we think the returns in our space can be substantially higher without the need for leverage. We have built a team with the technical skills and experience to manage engine leasing and have the right capital structure to take advantage of this unique value opportunity.

We believe that our process and skill at getting the most out of the engine creates sustainably high returns with relatively low risk. We also believe the macro environment is very favorable for what we do.

Firstly, lower fuel prices lead to increasing traffic levels while lessening the advantage of newer, more fuel efficient engines. Secondly, growth in emerging middle class populations, even in the face of China's slowing construction boom, drives growth in air traffic that exceeds GDP. And thirdly, growth in eCommerce generates demand for air cargo, which can extend aircraft life to well beyond 25 years.

These factors are all positives for our business model. As to the aircraft types that we want to own, we project that we will make our best returns by investing in aircraft models with sizable fleets that will be flying for a long time. And let me talk about a couple of specifics.

First, let us take the 757, which is one of our favorites. A total of a thousand aircraft were produced from 1990 to 2003, of which more than 700 are still flying. At the current rate of retirement, the 757 will be around until 2040 or later. And this is an asset that you can buy today as a passenger aircraft, convert it to a freighter aircraft, and generate attractive cash yields for another 15 plus years in the cargo market.

An even bigger market just developing is the 737-700, and 737-800 flight. The last of these aircraft will come off the line in 2017, when the max enters service. At that point industry estimates show the relevant 737 fleet will total about 7,000 aircraft, all with one engine type on wing, representing over 14,000 engines, which is worth over $50 billion in engine value alone.

The 737-800 has an appraised freighter conversion program also, and we believe this means these aircraft will become, in the future, the workhorse of the air freight industry; and are likely to remain in service well beyond 2050. Because of the market size and long remaining useful life of these assets, we believe both of these models will be major areas of additional investment for the Company.

Let me turn next to offshore. The offshore energy segment remains challenging. Oil prices are volatile, and E & P companies are taking longer to make investment decisions, which impacts short-term demand for offshore assets. We are in the process of taking redelivery of the Pride, which is our largest asset in the segment, and we are looking at multiple opportunities for the Pride rechartering including a one-year deal in southeast Asia for a national oil company and a three-year contract with a national gas company.

While the market remains difficult, we are seeing more opportunities in the inspection, repair, and maintenance phase as existing fields still have to be maintained. We are encouraged by the recent level of activity, and hope to have the Pride deployed soon. With no new vessels like the Pride being ordered, the Pride is one of the newest and most efficient vessels of its kind in use today.

Our shipping container segment is generally performing on plan, and with approximately 75% of our assets on finance leases. Under finance leases, containers are returned to the lessees at the end of the lease, and we therefore have no real exposure to the residual value of the asset as it comes back.

As a result, we have mostly been insulated from the significant reductions in lease rates and residual values that the market is experiencing currently. That said, in our joint venture, we have one series of operating lease investments where we have elected to take a non-cash impairment that reflects the reality of today's lower resale values. While the return on this particular deal has not turned out to be what we had hoped, the overall deal still has a positive internal rate of return, which is not bad given the depressed market today.

Let me now turn to our infrastructure investments; Jefferson, CMQR, [Rapano], and Hannibal. We made progress on each during the quarter, and feel very good about the potential of these investments on a stand alone basis, which we will take you through shortly. In addition, we have had several recent conversations with large potential customers who are looking for solutions which involve two or more of our assets so they can create unique logistics supply chains for various liquid hydrocarbons.

These conversations are ongoing and represent an exciting business opportunity as we build out our terminal infrastructure portfolio. Let me turn to each of our properties now. Jefferson's financial performance during the quarter was similar to the second quarter's performance, and we expect that to continue until we finalize some of the discussions we are having regarding additional business at the terminal.

We took a number of important steps during the quarter that will enable us to provide a better product for our customers. First and most importantly, we have completed the construction of one new 100,000-barrel tank; three other 100,000-barrel tanks are nearing completion, and we expect to have all of these online by the end of December. Having these tanks available is an important step in winning new business, and we receive lots of interest in customers leasing them. On the commercial front, we continue to have active dialogues with many of the large refineries about new projects.

Multiple new loading facilities are coming online in Canada, and as expected, the level of interest in receiving heavy crude from western Canada by rail is high, even today with low prices and low differentials. Industry publications continue to point out that Canadian crude production is expected to substantially exceed pipeline capacity in 2016, thus making rail a crucial and economic part of the supply chain, and the Gulf Coast is a logical destination for these barrels.

Currently, we are actively negotiating with two major refineries for multi-year programs to receive and blend Canadian crude at Jefferson. Additionally, two ships of storage to barge opportunities are being negotiated as well, and also we are negotiating a diesel export project and an ethanol project. All of these further illustrating the range and flexibility and capabilities of the terminal. Today we are more confident than ever in the terminal's capabilities as we see; one, demand for proposals are growing, and contract negotiations are moving along, and in several cases we are down to a handful of final contract issues being negotiated.

Also of note for Jefferson, during the quarter we cleaned up the balance sheet by retiring the 2010 bonds so you will not see those in the future. In addition, we are looking at tapping tax-exempt debt financing to allow the funding of future projects such as additional storage tanks and pipelines to nearby refineries. Lastly, we finalized the extension of our lease with the Port of Beaumont from 30 years out to 50 years, which gives us additional runway for even longer term agreements with our local refinery partners.

Let us turn to our railroad, the Central Maine and Quebec Railroad or CMQR. Performance at the Railroad improved during the quarter, revenues increased by over a $1 million in Q3 to $6.6 million from $5.6 million in Q2, driven largely by increase in carloads carrying finished wood products, paper, and wood pulp. In early September the state of Maine announced that it selected the CMQR as its preferred bidder to operate the Rockland Branch, which is a 58-mile short line near Portland, Maine, under a 10-year operating agreement starting on January 1st, 2016.

We see this election as a validation of CMQR's strong performance from both a commercial and safety standpoint, and look forward to continuing to grow our presence in the short line owner and operator in the northeast and across the entire US. We have also received notice that CMQR will be awarded a $6 million Tiger grant from the Federal Government in 2016, which will allow us to improve the rail infrastructure between Searsport and Millinocket in Maine.

We expect these improvements to both increase existing business and attract new business through the Port, once that work is completed in 2017. Increasing traffic through Searsport and the Port of St. Johns in Canada and New Brunswick remain an important focus for CMQR, and we are pursuing a number of commercial opportunities oriented around that goal. Rapano, this is our 1700-acre port development project on the Delaware River, across from the Philadelphia Airport. The master plan for this includes automobile handling, energy storage, and an industrial warehouse complex.

We are currently engaged with multiple potential users in each of these categories, discussing use agreements. We are now projecting closing of this deal at the end of Q1 2016, with revenues beginning at the end of 2016. Hannibal, which is the project I briefly mentioned on our last earnings call, appears to be a very exciting opportunity for us. Hannibal is a privately-owned industrial port on the Ohio river encompassing 1660 acres, near some of the most active growing gas markets in North America, with direct access from the property to water, rail, and proximity of major highways.

There is working infrastructure on the site, which includes buildings and warehouses, tanks, barge stocks, conveyors, day tanks, water pumps, and treatment plants, and power transmission capacity; as well as a twelve mile short line railroad that serves the property. Since getting engaged on this over the summer we have seen significant interest from potential customers for a wide range of projects. The combination of our -- the excellent location, the available space and buildings, the cheap Marcellus and Utica natural gas and natural gas liquids around with rail and water access is very powerful.

We expect to close this transaction by the end of 2015 and expect to have positive operating cash flow from the get-go. Let me conclude with some final comments on investment opportunities. With available equity of approximately $400 million and an estimated $500 million in debt capacity that we have, we have a lot of dry powder. Expect to see us deploy our remaining capital in cash flowing assets.

We continue to see attractive opportunities in the aviation sector, and believe we can deploy another $100 million into aviation in the near term. Other opportunities are coming to us as a result of the cyclical downdraft currently hitting much of the transportation sector. Market conditions are challenging in trucking, rail, intermodal, and parts of aviation. And when you layer on market volatility, the specter of rising interest rates, dramatically lower commodity prices, and a slowdown in China, assets in our sector are pricing at levels we have not seen for some time.

It is a great environment to be a buyer and we have significant capital to deploy. Having said that, we will continue to be opportunistic but disciplined, as we have been since the inception of the Company. With that, I will turn it back to Alan.

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

Thank you. (Operator Instructions). And our first question comes from Devin Ryan of JMP Securities. Your line is now open. Please go ahead.

Hey, thanks. Good morning. I appreciate the update on each business and the opportunity, so maybe just starting off, just to bring it all together, is there anything that has changed in your view over the past couple of quarters that would move the targeted 50% to 60% payout of FAD or the 10% annual dividend growth? Obviously the timing maybe is impacted a little bit but is there anything that has changed where kind of those objectives are different today.

No, we still feel very good about that. I think as you pointed out, maybe the timing a little bit later in terms of the growth from the contribution from the infrastructure, but we still feel very good about both of those goals.

Okay. Great. And then with respect to Jefferson, you know, appreciate the additional color you provided there on some of the discussions that are ongoing. Assuming you probably cannot get into too much of the specifics, but are these the types of contracts that if they come together, will be immediately revenue-productive; or are there other things that will have to happen kind of down the road so there still might be a lag in terms of the impact on the financial sheet, trying to think about the context of the discussions you're having?

Some of each. There are some contracts where we would be required to put in additional infrastructure, like storage tanks -- is a good example -- which would take probably six to nine months before you would see revenue. And then there are other contracts that would be faster and would also potentially have an interim step and then a final step in terms of the infrastructure. So it could be a mix, hopefully will be a mix of both.

Okay. That is helpful. Thank you. And then just last, with respect to the dry powder and the amount of capital that you have at your disposal, I mean, clearly I think that is an opportunity today, just given some softening and, you know, a little bit more dislocated market across some of the areas that you look at. So when you think about capital deployment opportunities, are the IRR targets still the same? Do you think that maybe you can retire then what you had been anticipating because there has been a little more dislocation of certain asset types, or is it really just a function of kind of staying the course and hitting the numbers that you guys originally planned on?

I think the returns could be a little bit higher. I think the market is definitely more unsettled. There is a little less competition. So I would not be surprised to see returns that could be a little bit better. Having said that, there are deals, you know, if you have the right risk profile and you have fallen in acceptable returns, you do not need to do more than that.

Got it. Okay. Great. Thanks for taking my questions.

Thank you.

Thank you. And our next question comes from Justin Long of Stevens. Your line is now open. Please go ahead.

Thanks and good morning. I wanted to ask a couple questions about the pipeline. First, could you provide some more color on what drove the sequential decline from about $2 billion last quarter to $1.5 billion today; and, second, could you talk about how that $1.5 billion pipeline splits out between the three different categories you have on that page?

Sure. The decline is really just deals coming -- coming off and deals going in. It is a dynamic pipeline, which changes, you know, fairly regularly. So we are always looking at new things and we are always, you know, investigating, you know, other deals and sometimes, you know, it is just a mix. It is not reflective of quality.

It is just sort of math as to how it sort of all adds up. But it is a real pipeline. In terms of the breakout between the various categories, I would say that equipment and infrastructure, which would be for the third platform, would be the largest, you know, probably half of the pipeline. And then the aviation is probably, you know, another $300 million to $400 million dollars of that. So the balance would be the add on, you know, opportunities at Jefferson, Hannibal, Rapano, and CMQR.

Okay. Great. That is really helpful. And with the cash balance and the ability to lever up, you could get close to a billion dollars of buying capacity. I wanted to ask, are you looking at bigger deals that are, say, in that $500 million plus range or should we still be thinking about, you know, a serous of smaller deals?

We are -- we would look at bigger deals, Las Vegas. I mean, we have done that from time and, absolutely, if the right situation comes along and it is a large deal, we have the capacity and the ability. So we would -- we would pursue larger deals as well.

Okay. Great. And one last one. Joe, you mentioned the $140 million of aviation assets that you purchased in CIPO and your expectation for that to contribute about $28 million to FAD. As we think about our models, what was the FAD contribution from those assets recognized in the third quarter?

It is John. It is, I think, excluding the engine sale of the $7.5 million, it is about between $1 and $2 million of contribution from the newly-acquired assets in the third quarter.

Okay. So it was a pretty small number. That is helpful. And I appreciate the time today, guys.

Thanks.

Thank you. And our next question comes from Christian Wetherbee of Citigroup. Your line is now open, please go ahead.

Hey, great. Thanks. Good morning. I need to just pick it up on the aircraft side. Joe, I just want to get a sense, I mean, I am feeling a little bit of a sort of a body language change in terms of the direction of investments sort of in the near term, and I do not know if I am sort of perceiving that, but can you give us some color as to how your thinking has evolved relative to sort of shorter-term leasing, the higher cash flow generating assets and investments relative to sort of the longer-term infrastructure investments? I just want to get a sense conceptually how that may have changed at all, since the IPO, if it has.

I do not think it has. I do not know what I said that caused you to think that, but we -- you know, the pipeline and the level -- the focus on the investment side is really not changed at all since the IPO. I mean, the only thing I would say on the equipment side is that we are much more focused as we were before on aviation, as the most -- where we think the most attractive equipment opportunities are at this time.

Okay. So probably about another $100 million is roughly what you think might be able to be deployed into the aircraft side over the course of the next several quarters?

No, I think that maybe the misunderstanding is, the $100 million is near term, and when I think of near term, that could be, you know, around or by the end of the year. So that does not include what I think we could invest next year in aviation.

Okay. Okay. That is helpful. If you were to think about that $900 million or so of capital to be deployed, you know, how would you sort of split that pie up these days, just sort of thinking about that, combining both the near term and the next, you know, year or so? Is it materially different than before or is it still sort of roughly the same sort of bucket?

I think it is still the same proportions and buckets. It has not -- you know, in our mind it has not changed.

Okay. No, that is helpful. I appreciate the clarity there. In terms of just thinking about sort of Rapano and maybe some of the infrastructure side, as you think about the timing here and maybe sort of the pipeline, probably, you know, maybe valuation and sort of clearing has taken a bit longer but, you know -- have the opportunities arguably gotten a bit better? I guess I just want to start conceptually thinking also about the infrastructure side and putting the capital to work there. It sounds like Rapano and Hannibal are moving forward, but in terms of other new deals out there, is the valuation getting a bit more attractive? Are the deals potentially better?

I think the opportunities have gotten better. I think with the -- you know, what you have happening in the energy space has, you know, caused a disruption in some of the midstream players; the MLP prices are down, yield COS on the solar side are down, so I think you have less competition from, you know, low-cost capital buyers. So I feel good about that.

Okay. Okay. No, that is helpful. And I think it is probably a very difficult question to answer but I am going to sort of have to ask it, anyway. Just in terms of Jefferson and getting something sort of material signed here, any ballpark or any, if you can give us in terms of the timing of potentially getting a contract signed there? I know that storage is sort of an important factor in that, and that sounds like you are going to have most that -- some of those -- 400,000 incremental barrels up and running by the end of the quarter? I just want to get a rough sense. I mean, are we still thinking shortly thereafter? Any help you can give us there would be great.

Well, I would say we are closer today than we ever have been, and, as you know, the outcomes of large commitments are binary so it is hard to, you know, say when. But I feel good about it. I mean, we are engaged with high quality counter parties who are very serious, have spent time with us, and like what the terminal can do. And so it is just all of our focus and efforts are on converting those right now and it feels like we are -- we are close. I wish I could say, you know, we have a deal today, and I can not.

Yes. I completely understand. Great. Well, listen. Thanks so much for the time. I appreciate it.

Thanks.

Thank you. And our next question comes from Art Hatfield of Raymond James. Your line is now open. Please go ahead.

Thanks. Good morning, everybody. Joe, just actually one question this morning. And I appreciate all your comments about how you see the environment and the deal pipeline, and it is good to hear that you think that maybe some of the less rational players in the market for acquisitions due to easy money may be easing up a little bit. Your comment about valuations and where you see those today, do you -- given that, do you feel a sense of urgency that you want to move more quickly given the low level of valuations? Or do you think that you are in a spot where you can be more selective and patient, valuations will stay low, and with some of these irrational buyers in the market, maybe going away, that you can be patient in that regard?

You know, I think it is the latter. I do not feel a sense of urgency to rush because I do not think that the valuations are going to run away from us. So I would be selective and careful and opportunistic. And oftentimes when these things start, the earliest deals are usually not the best. So you need to -- sometimes the first few calls you get when you look at the assets available, they are challenged for a reason. And the better stuff comes later.

That is great color. Thanks for the time this morning.

Yep.

Thank you. And our next question comes from Rob Salmon of Deutsche Bank. Your line is now open. Please go ahead.

Hey. Great. Thanks for taking the question. As a follow to Art's questions related to some of those opportunities when you are seeing kind of the better asset valuations, are these the type of investments where you would actually have to fund some cash flows given some of the challenges in some of the end markets that you guys are currently looking at, or is that something you would like to kind of avoid at least in the near term?You know, Joe, how are you guys thinking about that balance between investing as well as funding potential cash losses versus kind of, you know, with the potential better return on equity versus near term cash flow opportunities?

Well, I would say this is why we have a very strong preference for in-place cash flow immediately. And I think in a weaker market, you can do that. So I think that that should be what we are, you know, going to achieve. You can never -- you can never say never. If somebody came and offered you, you know, the Empire State Building for a $1, you would buy it, although that is positive cash flow. But that is probably a bad example, but something -- there is always a price on any asset, but I think today, in place cash flow is really the -- is what we are shooting for, and it should be achievable, at good -- you know, at good prices.

Got it. You guys announced kind of an update with regard to the CMQR, there is a 60-mile operating light that you expect to begin in Q1. Can you talk a little bit about that revenue stream potential from that line; is there any sort of investments that you guys are needing to make and, you know, how that fits into the rest of your railroad up there?

Yeah. There are no capital commitments. It is purely an operating agreement. The revenues from that are not going to be, you know, major. It is probably under $1 dollars a year. But I think it is -- you know, we won a safety award in Canada and the state of Maine picked us to operate the railroad, you know, out of a range of other possibilities.

I think it is just very representative that we have got a great management team and they have done a very good job of getting that operation up and running and doing it very safely and being recognized for that. And that bodes well for other acquisition opportunities in that space. You know, be it in the northeast or anywhere in the United States. It is so much easier to buy the second railroad than it is the first railroad.

Right. And are you seeing a lot of opportunities on the shortline -- in the shortline space currently?

Mostly right now have been frac sand, which we have been kind of avoiding, but we have seen some, and I also think that, with the distress in the mining space, where you are having a lot of extremely distressed companies, they have a lot of rail and mining -- and logistics assets, which is an area which I think we will be focusing on. But the shortline, you know, opportunities are episodic, they come up, you know, out of nowhere and there is really no way to predict, you know, what that pipeline looks like.

But we are always -- I would say every week, you know, we see a deal. But it is just sometimes they are not -- they are not really up to scale or, as I say, they might have a single commodity risk, which is not interesting. But I think definitely we are well-positioned, there are properties out there, the coal -- you know, the rail is having experiencing declines in revenues from loss of coal and loss of metals, is good for us, and I think those opportunities will be -- we will see some good ones.

Great. Thanks so much for the time.

Yep.

Thank you. And our next question comes from Jared [Shohan] of Wolf Research. Your line is now open.

Hi, good morning, thanks for taking my questions. If I can ask a question here on the dividend. You had $16 million in FAD this quarter, and then the $25 million dividend that you are paying out here at the end of November. It implies you are funding some of the dividend through existing cash on hand, and I am wondering how long you are comfortable doing that. And is there a certain point where you w ill not pay out $0.33 a share if the FAD-to-dividend ratio is not at least one to one? How long will this continue?

Well, we do not have a set timeline on this. I mean, we still feel, as I said, very confident that we will achieve the two to one coverage with the combination of improvements in Jefferson and additional deployment of the capital, so, you know, as long as that -- we have that view, then we will continue to recommend paying a dividend of the same level.

Okay. Thanks. And then just switching gears here, I want to get back to the aircraft leasing market, some of the comments you made. And I am wondering, is it true that if interest rates rise over the next few years and the OEMs potentially overbuild, then does that represent kind of a worst-case scenario for an aircraft leasing company? I really just want to reconcile some of your optimism versus some of the fears that have been expressed by others, specifically on OEM overproduction.

Well, it is -- you know, there is possibility and there have been times where people have over ordered, and you do not have enough demand, and so if you are buying new aircraft on SPEC and you reach a point where you do not have people to take those airplanes when they deliver, that is a problem. And typically what has happened in those industry environments is the manufacturers have been pretty flexible about pushing deliveries out.

So, you know, it is something to be concerned about, but it has happened before and the market, you know, kind of makes adjustments and has worked their way through it, as long as you have, you know, overall growth in aviation. So I think that that risk is probably not as -- you know, it is not as great as some people might be making it to be because there is flex in the system.

Okay. Thanks, guys.

(Operator Instructions). And our next question comes from [Mario Rosa] of Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Hey, good morning, guys. I just wanted to ask for a little more color on Jefferson. What are customers saying in the deal negotiations? And I am trying to understand a little bit better, how the spread between western Canadian crude and Mayan crude is impacting those discussions.

Well, I think that the refineries will take a longer term view than the traders, so when you are talking to traders they will say, well, I just buy Mayan today because it is cheaper than Canadian. The refiners, though, will look at a multi-year program of sourcing. I would say every refinery we have talked to in the Gulf has some plan to source Canadian crude, you know, to the refinery; which is good for us because -- and they also acknowledge that rail, you know, will play a role in that. So that is where we come in.

So I think those -- that dynamic is still positive in spite of, you know, fluctuating spreads. There was a period in August where the spreads, you know, went wide and everybody was scrambling and saying, "Can I get a train load of crude this week?", and whatever. But the refineries are much more, you know, we will look at it over a longer period of time. And that is our target customer base.

So I think that is a -- that is a good dynamic, the 2016 numbers for Canadian production to exceed pipeline capacity is also very positive as well. So we think, you know, based on our conversations, that people are very interested in sourcing Canadian crude by rail to our terminal, and the negotiations are often around the timing of that.

The blending, oftentimes they will bring in the crude from Canada and then blend it with another crude. And so a lot of the programs are oriented around where they source that from, how do they get it, where do we store it, and what volumes. And so those really are the big discussions on the crude by rail side. Then in addition, we have a number of conversations about bringing crude in by ship and storing it and blending it and then barging it out or piping it out to the refineries.

So we have engineered pipeline connections to all the major refineries, which long-term I think is very valuable to do. But obviously we want to do that when we have a contract in hand. So there has been a lot of discussions and work around pipeline connectivity as well.

Okay. Great. That is helpful. And then taking a step back, looking at kind of the M&A landscape, you know, you mentioned that some of the first calls you get tend to be some of the less attractive ones. Are you seeing some hesitancy on the part of sellers given the downturn kind of in the industrial economy? Are people waiting to ride this out, are they kind of -- do they step back from the table a little bit, are they playing hardball a little bit more in terms of getting deals done? I am trying to kind of reconcile what the expectations were maybe six months ago in terms of the timing of what could get done versus how it looks now and how those conversations maybe have changed.

Well, typically when you have prices, you know, for an asset class that go down, you always have sellers that are in denial, you know, and so people want to wait, and they know the price that somebody got three months ago. But then after passage of time, usually six months to a year, people are resigned to whatever it is. So there is a lag between sellers and, you know, deals happening whenever you have a price adjustment like that.

Okay. That is helpful. And then just the last question, has the thinking around the aviation portfolio -- I know we kind of talked about how maybe it has changed but I think there was at one point an expectation that you might be able to get to about 100 engines. Is that still consistent?

Yes. I think that, you know, we still believe that having a portfolio of 75 to 100 engines would put us in a very good position in the industry. We are at about 41 right now, I think. So we are well on the way. And, actually, I have been -- since we started this, you know, business four years ago, we have -- actually it has developed exactly as we hoped it would.

And we are -- you know, it 9is -- unfortunately you can not do it in the snap of a finger, you have to build, because no one really does this business the way we do, but it has developed exactly as I hoped it would and I think that, you know, that goal of 75 to 100 engines with also a number of airplanes with those same engine types on it is very achievable.

And then, you know, kind of the last question I will ask and you can choose to answer it or not, but, you know, when you think about kind of 2016, what do you think about in terms of the aviation portfolio, its total contribution towards FAD? What is the aviation important represent as a contribution to FAD?

I am looking at John.

I think what we said was if you just took the incremental investment that we have made, that would add $28 million to the -- and all of that would be next year. So basically you could add $30 million. And then where we expect to be in the fourth quarter, I mean, it is --

It is tough to give you a forecast because we do not really disclose FAD on a segment-by-segment basis, so I think we are struggling with how to answer that question. But if you think of the aviation EBITDA, it basically translates to the FAD almost on a one to one basis. So if you want to think about it that way, and the increment of $28 million on top of what we are going to do this year in aviation for EBITDA, I think that is a pretty good proxy for it.

Okay. That is helpful, guys. Thank you.

Yep.

Thank you. And our next question comes from Justin Long of Stephens. Your line is now open. Please go ahead.

Hey, guys. Thanks for taking the follow-up. I just wanted to ask a question about the fourth quarter. Do you have an initial expectation for FAD and how it should progress sequentially in the fourth quarter? I know there is a lot of moving pieces, but I wanted to ask, especially with the Pride coming off lease and the potential headwind from that, I just wanted to make sure we were sizing that up correctly.

Yeah I guess, again, that is a tough one to answer. What I would tell you is, you know, we benefited in the third quarter from the sale of those two engines, you know, so unless we sell something in the fourth quarter, that will not recur in the fourth quarter. So -- and there will be some pressure with the off-hire status of the Pride during the fourth quarter. That said, we will get a little bit of the benefit from some of the aviation assets that we have invested in during the course of the year.

So I think we will probably see twice as much benefit in the fourth quarter as we did in the third quarter from that. And so when you kind of add it all up, I think the biggest driver is going to be the absence of the sale proceeds unless we do sell something.

Okay. But there is no way to really quantify what that headwind from the pride being off lease will be in the fourth quarter?

It is a couple million dollars.

Okay. Perfect. That is really helpful. I appreciate the time.

Thank you. And our next question comes from Brandon Oglenski of Barclays. Your line is now open. Please go ahead.

Hey, good morning, everyone. Thanks for getting me on at the end of the call here. Joe, I just wanted to come back to the discussion around urgency, because it sounded like your answer, and I do not want to paraphrase what you said; but I think you said like we are not more urgent than we were in the past. But I just want to reconcile that with the IPO because obviously we went out and raised a bunch of new equity with new shareholders, right?

With the idea that there was this abundant pipeline that we are going to close on pretty quickly. And I know you have done some pretty good things on the aviation side, but how can you reconcile the need to raise capital earlier this year? Obviously the share price has been a little bit more challenged along with the rest of the market, but I guess if we could look back, would you have done as much then or have the opportunities changed that much in the last six months?

No, I think the opportunities are good, and I think we are seeing a number of good investment opportunities. When I -- the comment about urgency was, I think it is a little bit out of context. It was like do you feel a sense of urgency that you have to invest this capital, you know, like right now. That is the way I was answering it. And you never want to feel that as an investor. You never want to feel like you have to put the money to work because you'll end up -- you will end up doing deals, you know, that you probably should not do.

So I think that that was the context. We have always been disciplined. We know what we like. And when we see it, you know, we can act. And I think that is the key, is to have capital but not feel pressure to invest it. And so we would have -- I would have done nothing different from, you know, the IPO up to now. I think today is a better investment environment than it was at the IPO. And I feel good about that.

Okay. I guess the way we were looking at it back then, though, we were thinking we probably have this capital deployed by the end of 2016. Are you willing to just discuss when you think you will be fully deployed on what you've raised this year?

I still think that is very achievable. I mean, I would say that I would expect to deploy this capital in 2016. And I do not know which part of the year but I think definitely the capital we have available, I would certainly expect to have that invested by 2016 -- in 2016.

Okay. And I know we have asked a lot of questions on FAD but I am going to nitpick a little bit more, and maybe this one is for John or Joe, I am not sure, but when are we actually going to get to a one for one-for-one FAD coverage?

Well, I think as we said, we -- it is a combination of things that will be -- will drive that. Improvements in Jefferson, and the deployment of the capital that we have, and then those two things, you know, we expect to be happening next year, so it is a question of when next year we will hit that.

Okay. So just as we think about it, it is not going to be necessarily a 4Q or even a 1Q event then, is that correct?

Not necessarily.

Okay. I appreciate the time. Thank you.

Thanks.

Thank you. And I am showing no further questions at this time. I would now like to turn the call over to Mr. Alan Andreini for closing remarks.

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

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