Fly Leasing Limited
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fly Leasing Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to Matt Dallas with Investor Relations. Thank you. Please go ahead, sir.

[Matt Dallas:]

Thank you, and good afternoon. I'm Matt Dallas, the Investor Relations Manager of Fly Leasing. And I'd like to welcome everyone to our third quarter 2020 earnings conference call. Fly Leasing, which we will refer to as FLY or the company issued its third quarter earnings results press release today which is posted on the company’s website at flyleasing.com. We have a slide presentation that accompanies today’s call, which is available to participants on the webcast. If you are not accessing the webcast, you can find a copy of today’s presentation in the Investor Relations section of our website on the Events & Presentations page.

[Colm Barrington:]

Thank you, Matt, and welcome, everyone, to this morning's call and thank you all for joining us. As you all know, the last six months has been a time of great difficulty for the entire global aviation industry due to the continuing spread of the COVID-19 virus and the increasing restrictions on travel. Absence the loosening of government restrictions on travel, the difficult environment is likely to continue into the winter, which in any event is historically the low season for airlines. Fortunately, many governments who recognized the importance of air travel to their economic recoveries and to save as many jobs as possible, have extended support to the airlines and that now totals more than $160 billion worldwide. This government support has taken place alongside the measures taken by airlines themselves to conserve cash, enhance the liquidity during this very challenging period. Meanwhile there are green shoots. In particular, the long-awaited prospect of a viable vaccine now appear to be getting much closer. And hopefully, it will be having a positive impact maybe in a limited way by year-end and certainly as we proceed through 2021. This should have a positive impact on global traffic as it encourages governments to lift restrictions and gives consumers confidence to get up and go again. Even without a vaccine, domestic travel is gaining momentum in several jurisdictions. Reports suggest the travel within major markets such as China and Russia is now back at or close to 2019 levels. While in the United States, TSA daily records for October show that more than 1 million people traveled, the first such daily total since March. While this is still less than 50% of passenger volumes compared to the prior year, it is a positive trend.

[Julie Ruehl:]

Thank you, Colm. FLY is reporting a net loss of $8.1 million or $.26 per share for Q3 2020. The sustained and unprecedented impact of the COVID pandemic on the airline industry is causing airlines continued financial distress and it’s heightened distress is now affecting our top line due to the non-recognition of revenue for certain losses. During the quarter, FLY also granted $5 million in lease restructuring, $2.5 million of which impacted revenue for the quarter. Further, the year ago quarter included $39 million of sales gains while there were no sales in the current quarter. FLY's net spreads suffered due to the revenue decline coming in at 3.8% for the quarter. Despite lower lease revenue, Q3 cash receipts were up sequentially over Q2. FLY’s unrestricted cash balance was $285 million at quarter end, which was bolstered by an additional cash infusion post September 30 from the new $180 million five-year term loan. We have used approximately $77 million of cash since quarter end to repurchase some of FLY’s 2021 unsecured notes on the open market and plan to call the remaining outstanding 2021 notes before the end of the year. While no aircraft sales were completed in Q3, we expect to complete some aircraft sales in the next few months and we'll consider additional opportunistic aircraft sales in the near term which would further enhance FLY’s liquidity position.

[Colm Barrington:]

Thank you, Julie. So in summary, FLY has many defenses against the current difficult industry conditions. First, we have an attractive fleet comprised predominantly of the most popular narrow body aircraft. Secondly, we have no near-term capital expenditure requirements, no commitments to aircraft manufacturers and no pre-delivery payments tied up with them. Thirdly, we have low financial leverage of 2.1 times net debt to equity. Fourthly, we have cash in unencumbered assets totaling $655 million pro forma following the raise of our term loan debt. And finally with the world leading aircraft and lease management from BBAM with this global scale of airline and financing relationships and shareholders significant interest in FLY’s stock. While we will undoubtedly face further turbulence over the coming months, there have been some positive developments with the successful vaccine trials, the rising demand the domestic air travel as well as more airlines and airports providing acceptable COVID testing to allow travelers to bypass quarantine requirements. We believe that FLY is well equipped to benefit from the improved conditions ahead. With that, we will now take your questions.

[Operator:]

Our first question comes from the line of Catherine O'Brien with Goldman Sachs. Your line is open. If your phone is on mute, please unmute. Our next question comes from the line of Jamie Baker with JPMorgan. Your line is open.

[Jamie Baker:]

Hey, good morning, everybody. So Slide 7, you mentioned working with a handful of airlines on further restructurings. How should we think about that? Are those airlines that you are having first-time conversations with? Are they ones that you've already helped and they're trying to double dip now? And also, how does the ask from this group of airlines compare to the requests that you got early on? Are they any different in duration as its giving towards power by the hour? Any additional color there would be helpful?

[Colm Barrington:]

Julie, do you want to take this one?

[Julie Ruehl:]

Sure. Hi, Jamie, thanks for the question. It's a mix. I think most of them are airlines we’ve been in discussions with and have been granted some previous deferrals. And the discussion is now moving toward extending the deferral period perhaps going to power by hour. So it's a mix, but yes it's…

[Jamie Baker:]

Okay.

[Julie Ruehl:]

It's the same group of customers that we've been in discussions with and, in some cases, as I said, granted previous deferrals too.

[Jamie Baker:]

Got it. And then, Colm, this is more of a long-term question. But some of your competitors this earnings season have spoken about the potential for increased global leasing demand, as airlines try to become more variable in their cost structures. There has been discussions about what happens to lease duration in the future. I'm not faulting your deck or your prepared remarks today and you certainly identified some of the current green shoots. But there isn't much on the long-term is it that you have a differentiated view or you just are trying to make that point right now. I just want to make sure that the lack of longer-term optimism isn't driven uniquely by anything relative to what we've heard from some of the other lessors?

[Colm Barrington:]

Well, perhaps, Jamie, we haven't tried to divert from difficult market conditions that exist today. But I…

[Jamie Baker:]

Good answer.

[Colm Barrington:]

I agree. I agree that things are pretty bad with the airline industry right now. But we do see, as I say, the green shoots. I think that the medium to long-term, I can't see any reason why airlines should move away from the sort of 40-odd percent of their aircraft of their feet that are leased. And particularly, as we've seen quite a lot of retirements, particularly of the bigger aircraft, the A380s and the 747s and so on. So if as we hope and believe once the vaccine works on the pandemic dissipates, we think there will be a real boost in traffic again probably towards the middle of 2021. And if history is anything to go by and that would be when airlines would certainly want to pool up their fleets again and it's lessors they turn to. So I think the very good prospect that in the medium-term, there will be good demand for leased aircraft. Secondly…

[Jamie Baker:]

Yes. Go ahead. I’m sorry.

[Colm Barrington:]

…and airlines – a lot of airlines have had to take on additional liquidity to keep their – keep themselves going. So the balance sheet will be – balance sheets will be a bit bloated with debt. So I do think there will be prospects again in the medium to long-term for airlines taking on more leased aircraft rather than going back to the financial markets.

[Jamie Baker:]

And if I could just sneak in a third and this is revisiting sort of a pre-pandemic theme that you've been willing to discuss. But what do I tell clients when they ask me why should FLY even stay public? I mean, BBAM has more than adequate access to capital and the equity market is broken. Is the public market really the right place for FLY just given this persistent discount to book and discount relative to peers? It's kind of a throwback to what – what you've been at in the past. But I'm wondering if you have any new thoughts on it. Thank you.

[Colm Barrington:]

Yes. Yes. I don't thought of any new thoughts. We have certainly been frustrated by the company's market valuation for many years. The share price has been significantly discounted and that's been in both bull and bear markets and, of course, today is no different. We have been focused on a strategy of trying to unlock per share value. We've been cutting overhead. We've been borrowing cost. We've been selling assets for substantial gains to that book value. And we've been producing very good earnings, but over the view to expanding our ROE and making the business more profitable. However, the market has still lagged. The market value of the shares is still lagged, the book value. So we're open to any strategy that will unlock the value on a per share basis and including potentially a sale of sometime in the future if that makes sense.

[Jamie Baker:]

That’s great. Thanks for letting me ask so many questions. Appreciate it. Everybody, take care.

[Colm Barrington:]

Good to talk to you, Jamie.

[Jamie Baker:]

Thanks. Colm.

[Operator:]

Thank you. And our next question is from Catherine O'Brien with Goldman Sachs. Your line is open.

[Catherine O'Brien:]

Hi, everyone. Apologies. Some back to office growing pains, I just hung up instead of unmuted myself there. Thanks for coming back to me. So a couple for you this morning. Just on – a couple on the cash accounting. I guess, first, can you share some color on what drove the need to move to cash accounting? All of the impacted aircraft, are those still with airlines that are operating? And then have you had any discussions with these airlines and the likelihood of them continuing to operate these aircraft? Thanks. And I have a couple more after.

[Colm Barrington:]

Julie, do you want to take this one?

[Julie Ruehl:]

Yes. So in the - for the airline to put on non-accrual in the quarter and none have actually filed bankruptcy proceedings that they are all operating continuing to operate, there are a mix of factors that we considered and putting them on non-accrual, primarily payment history and having some discussions with a possibly lease restructurings, and we have had specific conversations about whether or not they’re going to keep the aircraft. I think these are evolving situations. We don’t have the firm answers on all of those yet, but I think it's just an evolving situation. We're going to - we’ll continue to evaluate.

[Catherine O'Brien:]

Understood. Thanks for that. And then maybe one little more forward-looking, so it seems like there's a lot of airlines looking for sale leaseback financing over the next couple of years. I guess, first, do you think the terms of these sale leaseback RFPs are likely to be more attractive to lessors than they have been over the last couple of years? And if so, are you - review that your balance sheet is well equipped to potentially capitalize on some of these opportunities? Or would you want to raise additional funding or perhaps wait for operating cash flow to cover a bit more? Just would love to know your thoughts on sale leaseback market in general and if you guys are poised to participate? Thanks.

[Colm Barrington:]

Yes. Well, it's all a bit speculative, Catherine, at this point in time. But I think airlines tend to be focused on the liquidity, although, we have seen some airlines doing sale leaseback transactions to generate liquidity. Certainly, we will look at further sale leaseback transactions over the coming years provided the assets are good, provided the credit is reasonably good. I suppose in the current environment and from where we are today provided, we can raise financing to cover a substantial portion of the capital cost of the assets. But certainly FLY is still open for business. We hope to continue to sell some of our older aircraft and we hope to continue to purchase aircraft in the sale and leaseback - newer aircraft the sale leaseback market. And hopefully the present conditions will put manners in some of the industry. And they want to bid down prices bid up prices whatever - they would have made these as competitive as they've made them in the past. So there will be more transactions that make sense for us.

[Catherine O'Brien:]

Understood, and I might just want to copy Jamie and ask a quick third one. For your 12 schedule lease expires next year what are conversations looking like on those any ballpark idea of how many of those are likely to be extended or are conversations on extensions happening later just given uncertainty. And that's it from me? Thank you so much.

[Colm Barrington:]

Yes Catherine it’s probably still a little bit early as you know operating leases tend to get extended at relatively short notice. And so while we are certainly having discussions with some of the airlines there is nothing really to report on any of those at this point of time. I think that's particularly the case now we’re a little bit more uncertain than it was a year ago. So we really won't have much report on those until we start getting closer and into 2021.

[Operator:]

And our next question comes from the line of Helane Becker with Cowen. Your line is open.

[Helane Becker:]

Just maybe two questions from me. One is you have the two 777 freighters and obviously the freight market has gone from not being great to being fairly great is - would you consider getting into that business in a bigger way?

[Colm Barrington:]

Helane we look at every opportunity. It could be that - one of the reasons why the freight business air freight business is very good at the moment is that it's because there is so little passenger. So - reduced number of passenger flights, so there is not much daily capacity traveling around the world. So freighters have become more attractive. Will that trend last for good, I don't know. But we'll certainly look at opportunities. But I don't think you will see FLY taking on a significant portion of its portfolio in freighter aircraft in the future.

[Helane Becker:]

Fair enough. And then the other question I had on the - I understand why you wouldn't need to write down the 777s because they're freighters. But on the A330s, can you just talk about the fleet and I mean I know you talked about the book value being what it is. But I think one of the issues for investors is that concern that when you go to sell an aircraft it's maybe not worth what you're carrying them on the books for and that's why the stock gets marked down? I mean, I don't disagree with you and Jamie that maybe the discounts a little aggressive right now. But I think that's one of the pushbacks I get on the company is what about write-downs on fleet. So, little long winded question, but wonder if you could just talk about the way you're thinking about that?

[Colm Barrington:]

Okay, well Julie has been very much involved in all of that analysis. So Julie, would you like to respond to that one.

[Julie Ruehl:]

Yes, hi Helane how are you. So we have three A330s in the fleet. And one of them is nearly 20 years old which has been impaired previously in prior years. So the book value on that is pretty low. The other two A330s are about six years old each. And they along with the rest of the entire fleet have gone through our robust impairment review process this quarter - again this quarter. And as a reminder the U.S. GAAP requires that we look at on discounted cash flows versus the net book value. So we utilize expected cash flows appraised values for lease rates and residuals on these. And at this time, we haven't recorded any write-downs on those. But as you know it doesn't mean that we could sell them to that much today because of the GAAP requirements used on discounted cash flows. So, I think something we're going to continue to watch as we move forward.

[Helane Becker:]

Okay, that’s helpful.

[Colm Barrington:]

And Helane on a more general basis, I'm just wondering once traffic rebounds again considering all the aircraft that have been retired to be the larger aircraft the A380s and the 747s that I referred to earlier. I'm just wondering will that be a good strong demand for A350s, 787s and modern A330s in the future. So, I wouldn't be as negative about A330s as I might have been before and again because of the retirals of - older very large aircraft.

[Helane Becker:]

Yes I don't disagree with you. Thanks Colm. Thank you very much. That's helpful.

[Operator:]

Our next question comes from the line of Koosh Patel with Deutsche Bank. Your line is open.

[Koosh Patel:]

Just on the nonaccrual counting just prompted this question. Are there any cash flow related debt covenants which you may face breaching or is there anything that concerns there?

[Colm Barrington:]

Julie, do you want to take this?

[Julie Ruehl:]

Yes, yes hi Koosh. We have one facility that has a debt service coverage ratio requirements, but it’s doesn't result in a default. And it's just going to - it just puts the facility into a cash sweep. And so that means there is no like any excess cash to the company based on cash coming in each month or each quarter. So - there is only just - one facility that could affect.

[Koosh Patel:]

Understood. And then, just as a follow-up, could you just give us an update on your exposure to the AirAsia Group and anything that investors might want to be privy to there? Just because it's a complex situation, I think that is involving many different jurisdictions some of which have provided government support and some of which haven’t. So just wanted to get your take on that?

[Colm Barrington:]

Yes well, our predominant exposure is to AirAsia, Malaysia and Thailand both of whom have received support. So, we are comfortable enough that those two airlines will be with us sometime. As you know AirAsia has informed the market that this won’t be taking any new deliveries for - quite some time. So, we don’t see our exposure there increasing in the near-term. So, we’re reasonably comfortable where we are with the AirAsia Group as a whole.

[Koosh Patel:]

Okay great. Thanks a lot guys.

[Operator:]

And I’m not showing any further questions. I’ll now turn the call back over to Mr. Dallas for closing remarks.

[Matt Dallas:]

Thank you everyone for joining us for our third quarter earnings call. We look forward to updating you again next quarter. You may now disconnect.

[Operator:]

Ladies and gentlemen, this does conclude the program. Thank you for participating. Have a wonderful day.