Ladies and gentlemen, thank you for standing by. It is now my pleasure to introduce your speaker, Mr. Alan Andreini. Your line is open..

Thank you, Sidney. I would like to welcome you to the Fortress Transportation and Infrastructure's Second Quarter 2020 Earnings Call. Joining me here today are Joe Adams, our Chief Executive Officer; and Scott Christopher, our Chief Financial Officer.

We've posted an investor presentation and our press release on our website, which we encourage you to download if you've 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, including FAD.

The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement..

Thank you, Alan, and welcome, everybody, to today's call for the second quarter 2020 results. To start, I'm pleased to announce our 21st dividend as a public company and our 36th consecutive dividend since inception. The dividend of $0.33 per share will be paid on August 31, based on a shareholder record date of August 17.

Now let's start with the numbers. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution. Adjusted EBITDA for Q2 2020 was $66.5 million compared to Q1 2020 of $72 million and Q2 of 2019 of $92.7 million.

On a normalized basis, excluding the gains or losses from the sales, Q2 2020 adjusted EBITDA was $65.7 million compared to $73.8 million in Q1 2020 and $70.1 million in Q2 of 2019. FAD was $47.3 million in Q2 2020 versus $96 million in Q1 of 2020 and $86.9 million in Q2 2019.

On a normalized basis, excluding sale proceeds and nonrecurring items, Q2 2020 FAD was $38.2 million compared to $50.1 million in Q1 of 2020 and $42.7 million in Q2 of 2019.

During the second quarter, the $47.3 million FAD number was comprised of $82.1 million from our aviation leasing portfolio, negative $6.7 million from our infrastructure businesses, and negative $28.1 million from corporate and other. Now let's turn to aviation.

Aviation had a pretty decent quarter given the circumstances, $77.5 million in Q2 EBITDA after an estimated $20 million negative impact in Q2 from COVID-19. And further, more than half of the impact resulted from fewer hours and cycles flown, which means the hours and cycles are still available and have significant value.

Somewhat offsetting the negative, we recognized $8 million in income from early lease terminations, where we proactively took back 7 aircraft and separated the engines as we believe engine demand is and will return faster than airframe demand.

During Q2, we negotiated rent deferrals on approximately 20% of the portfolio, averaging 3 months of deferral and return for 3 months of lease term extension. Overall, we collected approximately $75 million in cash from customers, which is approximately 85% of a more normalized run rate without the effect of a pandemic..

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

And our first question comes from the line of Brandon Oglenski with Barclays..

Joe, you mentioned that during the quarter, you had a 20% deferral rate on some of your leases. But it does sound like your prospects are much more, I guess, relatively bullish looking ahead.

Can you just remind us again the utilization estimates that you're running in 3Q? And any deferral or default rates that you're expecting going forward?.

As I mentioned, on the engine side, we expect Q3 utilization to be about 65% to 70%, which is sort of a -- we always have targeted 50% to 75%. So we think that will be strong and improving.

And as I also mentioned earlier, with the lack of airlines doing shop visits, we expect over the balance of the year that the engine market is going to get even stronger. And sometime next year, we even think there'll be a shortage. So the outlook is very good there.

On the airframe side, the utilization we actually -- as I mentioned in the remarks, we took back 7 aircraft early. And it was because we felt like either the credits were weak, and they weren't going to survive, or there was a lease term coming up shortly, and it was advantageous for us to get those assets back early.

And we took those 7 narrow bodies, and we've scrapped the airframes and put the engines in the engine lease business. Because overall, I think the supply of airframes is going to take longer to use up than the supply of engines.

So we think being in the engine market will be better, quicker to get those assets deployed than in the competitive airframe market. On the deferral side, we did say 20% of our portfolio, we gave deferrals. Most of those deferrals or the biggest portion of those were in the 757 and 76 market.

Because, as I mentioned, a lot of those operators are just not flying. So that's where probably the highest stress, but it's only about 15% of our portfolio. And ultimately, we think the values of 75s and 76s will be fine because cargo is still very strong, and most of those planes, the excess of those planes will end up being converted to cargo..

Okay. Really appreciate that response, and then you did highlight, I think, at the end of your prepared remarks that you're getting close these engine products. I think one product is coming up sooner than one towards the end of the year.

Can you just update us on the approval process? And then how does that fit into your commentary about potential -- I think you said a JV partner, MRO structure.

Is that something just for your own fleet? Or is this something you want to sell externally too?.

So I'll start with that. On the MRO side, it's mainly for our own fleet because we're going to have several products. We mentioned 2 that are in development, and we'll have another 3 that we will have in 2022, we'll have about 80% of the oil -- the airfoil portion of shop visit in this joint venture.

And we'll have a substantial -- approximately $2 million cost advantage. And we wanted to have a shop that was really dedicated to us to manage our shop visits and make sure there's no interruption and that we have a priority place in the queue. It's not an ownership position. So it's simply a partnership.

But with the dramatic change in the MRO business, we've been looking at this for over a year. Now the MRO shops are largely empty. We actually got a significantly better deal with a very large company. And I think it will address all of our needs for our own fleet for the CFM engine over the next 10 years.

It'll also allow us -- facilitate us managing the parts.

One of the things that we will have an opportunity to do is if we take our engines into shop and we put in these new joint venture parts, we could sell some of the used serviceable material that comes out of that engine, the OEM parts, and that's something also that we want to be able to manage and control as that could be a significant source of income and profits for us going forward, given the volume of business that we see being able to do.

The -- and the approval process is, we have been working very collaboratively with the FAA and through this whole period. So there's been a lot of back and forth and a lot of sharing of information, a lot of adjusting, as I said, in terms of what was needed. So with the conclusion of this, the parts are actually made, they've been reviewed.

They're being produced tests have been completed. So with the first part, as I mentioned, it's substantially complete. Now it's just up for the final review of the final package. But all of what has been submitted has been seen before. So there's nothing new. So we're very hopeful and confident that, that will all move smoothly as it has to date..

Okay. I appreciate that. Then last one, can you just talk about your current liquidity position? And how that compares to, I think, the 30 aircraft you mentioned in the pipeline that you're looking to acquire.

And any commitments on the infrastructure side?.

Yes. So we just did a $400 million bond deal last week. So that paid down the revolver in full, and we have $150 million-ish, $170 million of cash. So the 2 deals that I mentioned, 30 aircraft, roughly if you ballparked the aircraft at $8 million to $10 million per aircraft, you -- we have plenty of liquidity to close on those deals.

With respect to infrastructure, I think the remaining commitment we have is to Repauno was about $10 million for finishing of the ship -- rail-to-ship loading system. So that's -- that will happen in Q3.

And Jefferson, the pipeline project, we're anticipating financing all of that in Q3 and Q4 with nonrecourse debt financing at Jefferson as we did in the Q1 of this year in the tax-exempt market. So no significant needs at infrastructure..

And our next question comes from Justin Long with Stephens..

Maybe to follow-up on that last question.

Joe, could you just talk about how the recent bond deal was received? And going forward, as you think about the different areas you could deploy capital, what's the update on where you would feel comfortable taking leverage going forward?.

Yes. So the bond deal we did was higher cost, it was probably 300 basis points higher than what we had typically, traditionally done in the high-yield market as a result of the being in the aviation business is not great on a fixed income side and then also with energy exposure. So -- but having said that, the reception was very, very strong.

We had over $900 million of orders for the $400 million deal that we did. We launched $300 million and then increased it to $400 million. So very, very good reception. Bonds have traded up. So we're very pleased really to be able to access capital at this point at that pricing.

The way on the return side, though, the returns have gone up more than 300 basis points. I would estimate we're seeing higher returns on aviation in the order of 1,000 basis points.

So 10 percentage points higher than historically, given that the industry has been tremendously -- never been more distressed, and we're only doing deals right now on CFM engines with government-owned airlines and that have substantial backing. So it's hard to imagine a better set of circumstances for that given that we're not even factoring.

When I talk about yield return, I'm not even factoring in the upside from having the joint venture parts that we will have next year -- starting next year or the end of this year. So it's a dream in terms of being able to buy these assets at these prices from government-backed airlines.

And I think the reason that it's happening is, a, there's very little competition for us. Nobody else is buying 17-, 18-year-old airplanes; and b, the governments, if you're an airline that's owned by a government, you only have 2 choices.

You can go find people like us and that allows you to go back to the government and say, I don't need as much money. I can take less and -- or conversely, if you don't do the deal, you have to go ask the government for more money, which is not very popular. So that's why I think the deals -- the market is so attractive.

In terms of leverage, we've always targeted 50%. We're on a nonrecourse debt basis, we're about 50.6%, I think, or something. So we're right at the level we've targeted. Obviously, this environment is one where you'd want to have lower leverage, not higher leverage.

So I think we'll look again to potentially issue preferred stock as we've done before to bring some of the leverage down and then just take advantage potentially of monetizing asset sales as we did with Long Ridge and CMQR last year.

We could potentially sell minority stakes in some of the infra or do other things to raise capital but not really looking to take leverage up much from here..

Okay. That's really helpful. And going back to what you said on the COVID headwind. I guess, now you're expecting it to be $50 million or less.

As we think about these aviation deals that are in the pipeline, if you just get 1 of these 2 deals done, do you think that's enough to kind of fill the COVID hole this year?.

Yes. The first deal with Air France, I would -- it's approximately $20 million of additional EBITDA. And the second deal we're working on right now is probably $40 million, and the third deal is about $25 million. So if you add all that up, you get well above the $50 million..

And our next question comes from Ari Rosa with Bank of America..

So Joe, I was hoping you could address the variability in demand patterns for aviation assets across regions and just offer some thoughts on what you think the lingering effects of COVID could be in terms of the types of negotiations that you have and not necessarily specific to FTAI, but also just kind of across the industry.

How the experience of COVID kind of changes those negotiations and the overall market for aviation leasing?.

Yes. Sure. So several points. I think regionally, I mean, our view isn't dramatically different than anybody else's. And that it's -- Asia has recovered the fastest, and you can see it in China, Vietnam, Korea, other markets in Asia have done pretty well considering on the domestic side.

So I mean, long-haul international is going to be challenged for many several years. And so I would not want to own a lot of 777s and A330s and we don't own any. So then Europe is now sort of coming on where a lot of countries have gotten the virus largely under control, and the flights are opening up.

And domestic flights in Air France, Alitalia, THY, Lufthansa, they're all starting to add in the domestic markets, which is what I -- we care about the most. Long term, what I mentioned is I wouldn't necessarily want to be facing a lot of new deliveries of aircraft in the next few years.

Because you can imagine that's not going to be very -- that's going to be hard, given that there's going to be surplus equipment. So putting a new asset on lease of almost any kind is going to be difficult. But when I look at our -- where we're positioned is we're the engine people.

And what has happened previously in crisis, and this is one, but it's much bigger is that airlines stop putting engines through major overhauls. And we've seen -- we've had that discussion with every big airline. They all confirm it. You see articles confirming the same thing. You see maintenance and repair shops are emptying out. So it's happening.

But at the same time, people are flying those airplanes and they're using up the green time. So that, for us, means that sometime in early 2021. There's going to be increased demand for leased engines once people use up their green time in their existing fleet, and there'll probably be a shortage.

So that's perfect timing to have our products that we're developing, which we expect to get approved this year, our maintenance joint venture, which we hope to announce this quarter and finalize very close. And we're trying to add as many CFM engines at good prices as we can right now. That's what the Air France deal was and the other 2 deals.

We're looking at are all the same, CFM 56 engines. So that's where we're focused and headed. And I think it's a great -- it's actually not that you want to benefit from this. But I think that being positioned there where you can see that's where the puck is going to be, and that's what we're trying to skate to..

Got it. Understood. So it sounds really exciting for FTAI, and congratulations on navigating, obviously, a very difficult market. So turning to the FAD.

It continues to be well in excess of the dividend -- or maybe not well in excess, but comfortably in excess of the dividend in what's probably one of the most difficult quarters that anyone will face in the kind of businesses that you're in.

Any thoughts on either increasing the dividend or thoughts around kind of uses of capital for that spread between where FAD is coming in and where the dividend is at?.

Well, we have great aviation investment opportunities. So with these returns, that's where my -- our priority would be to invest in CFM engines just like we're doing. So I see those -- the airlines are not going to get out of distress quickly. It's going to go on. So I think there's going to be more deals. So we have good uses.

In terms of the dividend, I mean, it's been always been an important part of our shareholder investments thesis and maintaining that. And this quarter was important for us, and we've done that.

And so I think that, that feels like a great place to be to have gone through what is arguably one of the worst environments ever for both aviation and energy and not reduce the dividend and also have great investment opportunities. So I feel like we're in a good spot..

And our next question comes from Josh Sullivan with The Benchmark Company..

Congrats on the quarter. Just a question on the PMA part opportunity in commercial production.

Can you give us a flavor of how deep in discussions you are with airline customers at this point? Do you have any LOIs or orders from airlines or other customers? And then how do you see the go-to-market strategy unfolding with the joint venture?.

one is reducing costs, and this is a way to do that; and secondly, reducing any capital investment. And so the opportunity for us is to offer a total solution to an airline and say, we will manage the shop visit for you.

We'll put in our proprietary products into the engine and lease them to you on a power, almost like a PBH, power by the hour, business.

So that, I think, will get a very, very good reception once we're through a little bit more of this and people are, sort of, back to a more normal environment, which I think will be the end of this year, by the end of Q4..

Got it. And then just turning over to the cargo market. What's the timing calculus between returning passenger value capacity, freighter conversions. We have seen some cargo rates come back to Earth. But if IAD and others are looking at, say, kind of a 2023 return of global passenger traffic.

How should we think about the tightness in the cargo market between now and then?.

I think it's going to be tight. I mean it's just hard to add a lot of supply of cargo airplanes.

So to the extent you've got this excess demand, and which is coming really from -- the 2 things that are happening is, one is the passenger planes are not flying as much on those international routes, which is a lot of the capacity, but also e-commerce is growing very rapidly.

So we see demand, particular, a number of 737-800 aircraft that we were looking at, where people are looking at converting them and putting them into China in the domestic market in China, which has barely scratched the surface. So I think the outlook for cargo is pretty good for the next 2 to 3 years.

I think anybody that forecast longer than that in aviation is sort of kidding themselves. But it does feel like there's 2 -- those 2 fundamentals are pretty strong. And it's hard to create a lot of cargo aircraft capacity that quickly..

And our next question comes from the line of Giuliano Bologna with BTIG..

Congrats on successfully navigating a pretty tough environment here. I guess jumping in on the aviation side. Obviously, as you built out the portfolio of CFM56s, you become an increasingly relevant player in that market.

I'd be curious where you are in terms of the number of CFM56 engines that you have in the portfolio with Air France? And then where you could go with the other transactions?.

Do you have that number, Scott?.

I can -- Yes, I just don't have it right off the top of my head here. I can get it a second though..

In the interim, I'll jump in on the -- kind of switching over to the Engine Repair JV topic.

I'd be curious, since you have some orders, I believe, on for some of the parts, how fast could you ramp up and ship some of those products and start recognizing your 25% share of the economics on those?.

So our partner has been preparing for production all along and is in very good shape to produce products quite quickly, and there's not a significant bottleneck in the production. The only thing when you do start up production, what typically happens is your yield starts out a little bit low and that increases as you make more of the parts.

So in the beginning, there'll be more scrapping and then the production will ramp up very quickly. So the facilities, the capability, the castings, the machining and the coatings are all readied and available for a very quick ramp-up..

That makes sense. And kind of switching gears a little bit here. I realize that asset values on the infrastructure side are probably not back yet, and will probably take some time to recover.

But if you're able to get some deals done with Long Ridge and potentially start scaling Jefferson, would you consider selling the remaining 50% stake in Long Ridge or selling a partial stake in Jefferson in the near term, call it, a year or 2 years and redeploy some of that capital either into aviation assets or related investments like an MRO type of platform that would help scale the leasing business?.

Yes. I think we're going to have a great MRO deal without having to buy an MRO, which is what I -- that would be my preference. But yes, we would be open to that. And I do think that probably the time to sell Long Ridge is when it's operating. And it should be -- they're targeting -- is now saying potentially September.

It was originally promised for November of 2021, and they're saying September now and maybe August. So we should be -- could be operating in a little over a year, which would be great. And that's when I think -- that's where we have the longest contract coverage, and you take away the issue that some buyers have.

They just don't buy things that are not operating. So you get access to potentially the lowest-cost capital in the infrastructure world, which is fully contracted and operating. And so I think that would be -- that's something that we would definitely think about.

Jefferson as well, it's -- these pipeline projects are a huge step change for the capabilities of the terminal. And what it does is allows us to compete in much bigger projects. So it's not just crude by rail or refined products to Mexico, it's serving refineries and exporting refined products for the 2 largest refineries in North America.

So that's what this will allow us to do. And I wouldn't want to sell without getting the benefit of all the work that we've done to get it to this point. So -- but that's definitely something that we would consider as well as we did last year. And the markets are coming back.

I think there were a number of sale processes, which were -- as people were thinking of launching in April and May, and they stopped. Obviously, it is not a great M&A market, but we see them restarting now. So people are confident that values are back. And so I think that the M&A market will start to pick up.

And in particular, there's a tremendous amount of infrastructure capital that's still being raised. There's a lot of it now being raised in Europe. European companies are looking to invest in North America. So I think the infrastructure, from an M&A standpoint, will be strong, particularly, with 0 interest rates for the next -- who knows how long..

That's great and then just -- that makes a lot of sense. And then just pivoting over to the dividend kind of a payout. I realize that there are a lot of opportunities on the investment side, they're extremely attractive.

So there's probably a balance in the -- at least in the near term in terms of talking about moving the distribution and also getting the recovery as you invest more into other aviation assets and get more accretion and also get the -- and as the impact of deferrals roll off, you should see a significant boost in kind of both EBITDA and FAD probably into the end of the year and into '21.

I'd be curious what kind of levers you're looking at in terms of drive -- potentially driving an increase in the distribution?.

Well, we've always said we wanted 2:1 coverage. So once we exceed that, that's when we would look at raising the dividend. And as -- you're right, there's a potential that it could ramp meaningfully late this year or early next year..

Yes. And just for the follow-up with respect to the CFM engines. Currently, we have 145 CFM engines and then pro forma for the 2 new deals, we'd have over 200 plus..

So 200, and I would say that there are 22,000 CFM56 engines out in the world. So just to give you a sense of the total market, is enormous. And we're still -- we are one of the bigger players, but we're not, by any means, close to being considered that big and a market mover yet..

And our next question comes from Frank Galanti with Stifel..

Congrats on the strong quarter. I wanted to follow-up on the engine business. I was actually pretty surprised that you guys expect to get back to utilization above 65% in 3Q. So to that end, good job on that.

But those 40 new leases that you signed in the quarter, can you give us a sense for who those lessees were kind of geographically, end market? And then what those rates were comparable to a year ago or, I guess, the end of last year?.

The biggest uptake is Europe. And the rates are comparable. I mean there's not a lot of rate pressure on engine leasing right now. And I don't foresee it happening. I just see it going the other way potentially..

Okay. And so the -- I guess, to follow-up on the aviation market, the leasing market. Obviously, the largest toggle for anybody's investment case in FTAI and aviation assets specifically is based on expectations around effectively aircraft utilization and the implications that will have for the burn rate on green time that currently exists.

To that end, would you be able to add any color on how much green time exists for the engines that you guys focus on?.

Yes. We actually -- we did our own analysis, and then we hired an independent appraiser to do an independent analysis. And we looked at both, the CFM56-5B, which is on A320 and the 7B, which is on the 737NG.

And both our numbers and the expert's numbers came out saying that sometime around the end of Q1, the available supply of engines will be less than the demand for those engines, so Q1 of 2021. So by the end of this year, people expect probably 75%, 80% of the A320 and 737 aircraft to be flying globally.

And then assuming that happens, then you basically, with the limited number of shop visits, you basically are out of engines by the end of Q1. We can share that information with you. We have that available. I think it's in the slide deck, or one of our decks..

That would be great. I'll follow up off-line..

Yes..

And our next question comes from Devin Ryan with JMP Securities..

Most questions have been asked here. But I want to just come back to the sale-leaseback transactions and the opportunity. So Joe, you walked through what's driving them right now, which makes sense. There's not a lot of competition, which is a pretty good position to be in.

Do you see the window of opportunities like these closing just as economies reopen and flying increases? Or is this kind of a several year opportunity? And then I'm assuming that you guys are probably getting a fair amount of attention in the market for these deals, especially if these other couple come together.

So I suspect that could actually drive more to you to the extent, there's going to be more activity like this in the market?.

Yes. I think there'll be more because as I mentioned, airlines are not going to be unstressed for quite a while. So their mode is going to be looking at anything they can do to generate cash, and selling and leasing back some of their older equipment, which they plan to phase out, is obviously attractive.

Because several people are doing it, and I think more will do it. So I don't see it ending right away, but you can never be sure. Markets -- when markets get distressed, capital flows in and you don't want to wait around and assume that, that's going to be the case. So I think that these deals are here and now, and that's why we're acting.

But I do think that it's not going to be the end of it. And the beauty about our strategy is that we have 2 ways to monetize those assets, you can actually keep them as an airplane and lease them to somebody else. And by the way, whenever an airline tells you they're going to phase out an airplane, they almost never get the timing right.

They're almost always -- keep those assets longer than they think, I would say, 90% of the time. So that's an opportunity for extensions. But not that you count on that, but it usually happens. But we can -- we have the opportunity to keep it as an airplane or scrap the airframe, which is our base case and just lease the engines.

And I see a number of airlines on the horizon where we could develop leasing programs for the CFM56 engine for their entire needs. So they don't have to do any shop so as they don't have to do any acquiring of engines. They can rely solely on us. And we have a cost advantage in the shop visit.

We can manage that shop visit for $3 million versus a $6 million average industry cost. And so that delta is something that we're going to, obviously, point out and make sure that we can grow that business by taking advantage of that and still generate amazing returns..

Okay. And then just a follow-up here. I know this is our job as analysts here. But at $15, it doesn't feel like, at least to us, the valuation is getting a lot of credit for the forward opportunity, which I'm assuming you agree with. But I appreciate there's a lot of moving parts to the story right now.

So it can sometimes be complex from the outside to look at. As you evolve the firm to more of a vertically integrated aviation company, which it feels like is where we're headed here, given the opportunity set, need to deploy capital.

As you potentially exit some of the infrastructure assets, how are you thinking about what that does for, call it, the firm-wide valuation? What -- I'm assuming there has to be some calculus around as you have to think about allocating capital for the different opportunities?.

Yes. Well, it's a good question. We've acknowledged that sometimes, our story is too complicated, and we would benefit by simplifying it. And simplifying it as we grow the joint venture and the engine business, that could be a separate business, a separate company, which might be better as a stand-alone asset. So that's a goal.

Obviously, we didn't expect this kind of disruption that hit us. We had the best quarter ever in Q1, and then starting in April, the world shut down. So I think everything is -- on that side, it's a goal. It's something we'd like to move towards. Obviously, the stock is better now than it was in May.

But it is still not reflective of what we think it will be. But I'm not complaining. I'm just saying, we are going to work hard to get it there..

And our next question comes from Chris Wetherbee with Citi..

It's James Monigan on for Chris. Just wanted to follow up on that last question about the -- with respect -- the transactions. You described the sale leasebacks. I just wanted to understand you're still handling the maintenance on those engines and those assets.

Or are these more, sort of, financially opportunistic transactions? Just wanted to understand how these might be -- these transactions coming up might be different than what you typically do? And or if that's even the case and sort of how it might fit into your long-term strategy? Just kind of wanted to get your viewer thoughts there..

The transactions are very similar to what we have been doing. It's just -- I'd say 2 differences. One is they're bigger. We're acquiring more assets at one time. So you do a 15-aircraft deal instead of 1 or 2 airplanes.

And so larger transaction, they also involve government-owned airlines, which is something previously a lot of government-owned airlines would never have considered doing these transactions, but the financial reality today has changed enough that they are looking at everything. So that market opportunity is new to us.

But the fundamental deal is the same in that we're going to own an airplane. At the end of the lease, when it comes back to us, we will have an airplane with engines on it.

And what we've typically done is that gives us a choice if we're going to release it, we -- if there's people that want to release the whole airplane with the engines, we could do that. But alternatively, we've been able and very successful in selling off the airframes and then just leasing the engines.

And in large part, we get almost the same cash flow from the 2 engines as you get from a whole airplane and you end up putting money in your pocket by selling the airframe. So there's been great financially. And from a flexibility point of view, it's our core strength..

Got it. And then also turning to infrastructure.

I just wanted to get your updated take on crude by rail and sort of interest you're kind of seeing there, if any? And maybe so to get your view on if there will be and when there would be a rebound?.

Yes. So I think ignoring the shutdown of the DAPL, which we don't know if that'll happen. But if it did happen, there'd be a lot of crude by rail, all of a sudden, moving. That's out of the Bakken. But that's in the courts. And so we don't know the answer to that.

The other market opportunity is Canada, and that is coming back, and we see the spreads widening now back out to normal or showing in the forward market looking normal in Q4 of this year. And in talking with some of the producers and refiners, people are anticipating that crude by rail will still be in the mix.

And people are making commitments and looking at investments. And one in particular people are working on still, is -- we talked about the last time or 2 quarters ago was a diluent recovery unit, a DRU.

And that's where you build a processing plant in Canada, which strips out the diluent, so that what you're shipping is really undiluted bitumen, and that has to move in rail. So it's -- so if that happens, then we're looking at people making 10-year commitments to crude by rail, which we still believe that will happen. So we're still working on that.

But it's obviously, with the spreads down where they are now, there's not a lot of -- not great optimism, but it's definitely coming back..

And our next question comes from Rob Salmon with Wolfe Research..

A quick kind of -- and perhaps I missed it in the prepared remarks.

The asset impairment charge that you guys took in the second quarter, was that related to the 7 aircraft that you proactively returned? Or was this related to something else?.

Scott, do you want to answer that?.

Yes. Yes, that related to the early return of some aircraft that we took. We took back 6 aircraft as part of early release -- return of a lease. And then there was 1 engine included in that overall impairment..

That's helpful. And another clarification question and then a longer-term one, the clarification question is, when you guys were talking about the percentage of your book that's off lease. I want to say you had mentioned it was 20%.

Was that 20% of the 15% that is kind of exposed to the 757, 767 market? Or was that -- 20% is off-lease, and all of that market, basically, is kind of off-lease currently?.

Well, the 20%, I think you're referring to was the amount of rent deferral we gave to lessees in the quarter. And that was what was in the prepared remarks, if that's what you're referring to. And that's for the entire portfolio..

Yes, that was, Joe. Yes. And then I think you'd mentioned that the majority of that was in 757, 67s..

The most of this -- yes. Yes, I think 2/3 of that was in the 75 and 767 markets, which is 15% of our portfolio. But the biggest chunk of that deferral was for those aircraft. Because those are the aircraft that are the hardest to fly and lease right now. So the narrow-body fleet is actually performing very well. The engines are doing well.

Cargo is doing well. It's -- the 75 and 76 is the most challenged. But it will come back with the freighter market being strong and the leisure markets reopening. It's just slower to develop, but that's where the deferral -- most of the deferrals were there..

Got it. Helpful. And then Joe, bigger picture.

Just in light of COVID, could you kind of provide us an updated -- your updated thoughts with regard to the engine repair market opportunity for FTAI? Like how should we be thinking about kind of your ultimate share opportunity, potentially things getting pushed out, but maybe you've got a bigger end market now.

Just how should we think about those puts-and-takes?.

Yes. So I actually think it is it is a bigger market because, for instance, Air France doing a deal with us and then talking about engine leasing opportunities with us, Delta telling us they would entertain engine leasing. These are carriers that typically wouldn't have thought about -- they would would've done everything in-house.

But with the financial crisis and the cash crisis, they're much more open to outsourcing functions that consume capital, and engine shop visits consume a lot of capital. So with our products that we have coming, on the joint venture side, we can overhaul a CFM56 engine for under $3 million versus an industry cost average of $6 million.

And so where I would love to see us get to is being able to go to a larger airline. Obviously, we're going to do our own fleet the way we're doing it. But you could go to a larger airline and you could say, we'll do all of your CFM56 engines for you, and here's your hourly rate. And you're done, you're out of it, and you don't have to invest capital.

You don't have to manage that and you get a rate that saves you money and doesn't require you to invest capital in shop visits. So that opportunity, I think, is coming much, much faster than it would have otherwise because of the crisis. And as I mentioned, the CFM engine is 22,000 engines in the world.

It's not going away for the next 15 and maybe 30 years. They're still making the aircraft and there -- a lot of the 737-800s are going to be converted into cargo airplanes to replace the 757. So that -- that's going to have demand for many, many years. So I think the opportunity is fantastic for us.

And one of the things I mentioned also is we do want to have a maintenance MRO partner, and we're very close to finalizing that deal. So I think we'll have all the pieces in place to actually do this..

Our next question comes from Robert Dodd with Raymond James..

Congrats on the quarter. One more about aviation. And you mentioned, Joe, in the prepared remarks that the deal with the MRO could give you a -- part of it would be to get a preferential place in the queue, the shop. And you've talked before about how those can take a while if capacity isn't there.

And if we end up with a squeeze on availability for shop visits when green time runs out sometime next year, how much do you think that preferential -- if the deal gets done, that preferential price in the queue could add to kind of value or another way, if we put that plus your cost advantage on a shop visit plus potentially a preferential place in the queue, what could that do to kind of the yield on engine assets, either ROE, EBITDA yield, whichever way you want to look at it, say, a year from now?.

Well, that's, I mean, terrific question. There's a couple of elements. One is that the preferential treatment, and we're also working on price -- advantageous pricing under the deal and on a fixed basis. So a no surprise basis.

And also, one of the things we're focused on working together, and one of the reasons we want to do this as a partnership is we want to shorten the time an engine is in the shop.

Because often, an engine will go in, and everything is done in sequence, and you might be waiting months for a single section of the engine before the whole engine can come out. And so part of our design is to create module inventory. And as I've mentioned before, the CFM56 engine has 4 modules.

And so to the extent the work is needed primarily on 1 module, you could swap 1 module out of an engine and be out of the shop in 15 days instead of 6 months. So there's tremendous benefits. The other benefit, as I alluded to, was being able to monetize parts.

And to the extent we have our own MRO shop partner, we'll be better -- we'll be able to better manage the parts that come out of that engine and be more effective at that. So when you put all that together, if you think about today, you can earn 25% or 30% unlevered on an engine.

And if the average shop cost is $6 million, and our cost drops to $3 million, then we should earn 50% unlevered. And actually, those are not -- sounds high, but maybe somewhere between 25 and 50, but not -- it's definitely going to be going up, particularly if it's a tight market, and we can turn the inventory faster..

I appreciate that. And then one more kind of structurally. Obviously, the aviation business, you've mentioned might make sense as a stand-alone entity. It probably would make more sense as a stand-alone C-corp entity rather than an LLC. And if you were to sell off stakes or spin the other parts that could make sense.

So is that -- obviously, we've talked about a C-corp conversion before, is that still on the table? Any idea about the time frame for that? Would it make sense to do it while the infrastructure assets are still owned? Or can you give us any thoughts there?.

Yes. The goal would be to get rid of K-1s because we know that's not helpful. So yes, to convert to C-corp is definitely on the table. And it's something -- I don't have a specific time line on it, but it's rising up in terms of the priority level. We're working on it.

But -- and we do think it has value on multiple fronts, but I don't have a specific time line..

Our next question comes from Scott Buck with B. Riley..

Assuming you're able to close in the 2 aviation asset transactions.

Does that change the way you think about additional asset acquisitions for 2021? Or do you continue to be fairly active in the market next year?.

I think we continue to be active. Because as I mentioned, the CFM56 market is enormous. And our advantage is huge. And so I think we would continue to capitalize on that to the extent it advances the business, and you can generate those types of returns..

Great.

And have you seen any material change in the asset pricing in -- here in July versus the Air France deal back in April and May?.

No..

And I'm not showing any further questions at this time. I'd now like to turn the conference back to your speaker, Alan Andreini for any further remarks..

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

Thanks, everyone..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a good day..