Fly Leasing Limited
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Fly Leasing Fourth Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. Thank you. I would now like to hand the call over to your speaker today, Mr. Matt Dallas. Sir, please go ahead.

[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 Fourth Quarter and Full Year 2020 Earnings Conference Call. Fly Leasing, which we will refer to as FLY or the company, issued its fourth quarter and full year earnings results press release, which is posted on the company’s website at flyleasing.com. We will 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. Good evening, everyone, and thank you for joining us on our call. Well, 2020 was certainly a challenging year for the global aviation industry. And for many other industrial sectors, particularly in travel and for millions of individuals who succumb to the COVID virus and for their families and friends, our thoughts are certainly with them. Airlines, aircraft lessors and manufacturers have all gone through a torrid time with airlines worldwide where our customers being the front line and suffering most as their businesses declined. While the first quarter of 2020 was largely unaffected by COVID, in the last three quarters, many airlines saw the passenger traffic drop, in some cases, by more than 90% as compared to 2019. For 2020 as a whole, global air traffic was down by nearly 70% as compared to the prior year. During this time, the aircraft leasing sector has shown its resilience and durability. Strong financial management among the lessors aligned to conservative and well-capitalized balance sheet has allowed us to manage through this crisis as we did indeed during the global financial crisis 12 years ago. As a relatively small lessor, FLY has been fortunate to have had the support of the large and experienced BBAM team to bring us through this difficult period and to avail of the limited opportunities that arose. The medium-term outlook is certainly improving as vaccines are rolled out and the numbers of COVID cases and COVID-related deaths is dropping significantly. As more and more people are vaccinated, with many countries aiming to have most of the populations done vaccinated, in fact, by mid-summer, we expect to see a relaxation in government restrictions on travel. This should lead to a return of consumers, who appear to have a continuing strong desire to get up and go.

[Julie Ruehl:]

Thank you, Colm. For Q4, FLY is reporting a net loss of $107 million, driven by an impairment charge of $115 million relating primarily to two wide-body aircraft expected to be returned early. The net loss equates to $3.51 per share as compared to earnings per share of $2.43 in Q4 2019. The impact of the COVID pandemic on the airline industry is directly correlated to the impairment charge, and the ongoing challenges being experienced by airlines continuing to affect FLY’s top line, although, to a lesser extent than in Q3 due to the non-recognition of revenue for certain lessees. End of lease income and gains on aircraft sales were also both down dramatically versus Q4 2019. FLY’s net spread came in at 5% for the quarter. FLY’s year-to-date net loss was $67.4 million or $2.21 per share as compared to net income of $225.9 million or $7.12 per share in 2019. The impairment charge I mentioned a moment ago was the most significant driver of the year-over-year changes. End of lease income and gains on sales of aircraft were down significantly as well. Net spread for the year decreased to 5.9% on the revenue decline. FLY’s operating lease rental revenue in Q4 2020 decreased to $64.3 million, driven by the non-recognition of revenue for certain lessees and FLY’s smaller fleet.

[Colm Barrington:]

Thank you, Julie. So FLY has come through a very difficult year in good shape, primarily because of our prudent business model and our experienced management team. Our attractive fleet of mainly narrow-body aircraft maintained its value well. During the year, we sold eight aircraft, representing nearly 10% of our portfolio by number, and as 19% premium to book value, demonstrating that the market for aircraft sales recognized its value and was prepared to pay for it. Importantly, we have maintained a book value per share of nearly $26, which is more than twice our current share price. For the future, we have no near-term CapEx commitments have low leverage and no near-term debt maturities. A result, we have financial flexibility, and are free to pursue our opportunistic acquisitions strategy when market conditions support it. And with that, we will take your questions.

[Operator:]

Your first question in queue comes from the line of Catherine O'Brien from Goldman Sachs. Catherine, please ask your question. Your line is now open.

[Catherine O'Brien:]

Hi, everyone. Thanks for the time.

[Colm Barrington:]

Hi, Catherine.

[Catherine O'Brien:]

Hey, there Colm. Maybe a couple on the impairment charges, just to start. I know that impairments are tied to the decision to sell. But perhaps that decision triggered some of these impairment charges. And I know on the A330, it was – it seems more tied to the fact that those aircraft are coming back early on lease. But in the same quarter, you also sold several aircraft at a gain. So I’m just trying to like solve the out the puts and takes on those A330s. Of course, the backdrop is continuing to change. But I think, last quarter, you noted you were comfortable with the book value of your fleet. So really just trying to understand better, what’s triggering this A330 impairment? I don’t know if it’s just you’re marking to market for – where rentals are on that coming back? Would just love some additional color.

[Colm Barrington:]

Julie, do you want to take this? I mean, I think you’ve sort of explained the GAAP measures we have to take. So would you want to maybe just summarize that again, perhaps?

[Julie Ruehl:]

Sure. On the A330s specifically, during the quarter, during Q4, it became highly likely that those aircraft would be returned early, and that’s sort of what changed and triggered it in Q4. Prior to that, it didn’t appear to be highly likely they would be returned early. And just in the current environment, there’s a possibility, they could remain off-lease for a period of time. And the rate – rental rates on those aircraft are depressed. So that’s what really drove us to record the impairment in the quarter, is a strong likelihood those will be returned early in 2021.

[Colm Barrington:]

And I think the other factor was that – is that you have to discount the cash flow, the projected cash flows in those circumstances, whereas until – while they are still on lease, you actually can deal with undiscounted cash flows.

[Catherine O'Brien:]

Got it. And so...

[Julie Ruehl:]

Yes, I mean, the – sorry, go ahead, Catherine.

[Catherine O'Brien:]

So do you have to – like when you take – once you move to the undiscounted cash flow measure, do you have to mark-to-market for prevailing rates or are you able to forecast out some type of recovery, or is this really just – you’re remarketing it and those are the types of rates you’re seeing, and you have to bake that in going forward?

[Julie Ruehl:]

No. We can take a long-term view. And we don’t have to assume that the rates that are available today will stay in place for the rest of the life of the asset. So we use various third parties that predict out future lease rates. We use those in our cash flow projections.

[Catherine O'Brien:]

Okay. And one more. Apologies for just harping on this, but if – I understand that you guys did a pretty comprehensive fleet review, but if – are there any other aircraft where – thinking through prevailing rates today, where – if they were returned early, you could see another impairment charge like this or just see – narrow bodies, I know you were mentioning throughout the call that those values are recovering, so maybe not, but just would love to hear your thoughts.

[Julie Ruehl:]

Yes. So obviously, we can’t predict the future, but in general, we’re comfortable with the quality and marketability of the fleet, which is predominantly the most popular aircraft types, A320s and Boeing 737 NGs. But you did touch on what I think could be a driver of future impairments, which would be an early termination of leases. I mean, I doubt that it would be as significant as the charge we’re seeing this quarter. But again, it’s difficult to predict what might change in the future. But overall, we are pretty comfortable with our fleet.

[Colm Barrington:]

Yes. In particular, I think, Catherine, that if you had a narrow-body returned prematurely by lessee, you would not expect to – you would expect to release it more rapidly than you would with a wide-body at the present time.

[Catherine O'Brien:]

Understood. Thanks for all that color. I’ll hop back in the queue. Thanks.

[Operator:]

Our next question in queue comes from the line of Jamie Baker from JPMorgan. Jamie, your line is now open.

[Jamie Baker:]

Hey, thanks. Good afternoon everybody. So, Mark and I are still trying to wrap our heads around a $53 million impairment per A330 and how that’s even possible. Could you give us perhaps the age of the aircraft? And very importantly, what percentage of the book, the write-down, represents? Also, are there any LTV tests in the secured facilities that might be impacted by the impairment?

[Colm Barrington:]

Julie, do you want to handle that?

[Julie Ruehl:]

Yes. Yes, of course. Jamie, thanks for the question. So on the age, age of the aircraft are just over seven years old each. We don’t typically comment on specific values of individual aircraft. But as you can imagine, it is significant to the pre-impairment book value of these aircraft. And I’m sorry, what was the third part of your question?

[Jamie Baker:]

Any LTV tests in your secured facilities that there can be a knock-on effect, given the impairment?

[Julie Ruehl:]

Yes, these – there are LTV tests, but we don’t anticipate any knock-on effect. They are based on appraised values. And in the case of these particular aircraft, they are in a facility that looks at base values. And we just haven’t really seen appraised values come down, certainly, base values and even current market values. So we wouldn’t expect an impact from LTV tests from the impairment – related to the impairment charge.

[Jamie Baker:]

Okay, that’s helpful. And Colm, somewhat of a repeat of what I asked last quarter, but it’s a hectic time in the business. Any new thoughts on how you’re thinking about an outright sale versus a go private type transaction versus the status quo? I mean, obviously, trading at less than 50% of book, the public market just increasingly doesn’t seem like it’s the right place to be.

[Colm Barrington:]

Yes. Well, as I said, and I think we said before, we look at options all the time. But we’re not going to comment on any sort of measures like this at this point in time, Jamie. So I’d rather not go any farther than that. There were some rumors in the newspapers and media, and we don’t comment on rumors.

[Jamie Baker:]

Sure. Well, let me squeeze in a quick one then, just kind of fine tuning. The slowing pace of deferrals granted in the fourth quarter was an encouraging data point. Do we assume that, that reflects fewer deferral sought or should we interpret it as you – as FLY simply turning – taking a harder line, for example? Like I assume, it’s fewer asks by the airlines, but I think it’s a fair distinction to ask about.

[Colm Barrington:]

Yes. Julie, correct me if I’m wrong, but my understanding is fewer asks at this point in time.

[Julie Ruehl:]

Yes, that’s right. The pace of requests has slowed down.

[Jamie Baker:]

Okay. Perfect. Thank you very much.

[Colm Barrington:]

Thanks, Jamie.

[Operator:]

Your next question in queue comes from the line of Helane Becker from Cowen. Please go ahead and ask your question. Your line is now open.

[Colm Barrington:]

Hi, Helane.

[Helane Becker:]

Thanks very much. Hi. How are you? So I’m assuming, from your comments and the slides, you’re not doing any deferrals past this year, and you’re expecting repayments next year, but new deferrals pass this year. Is that correct?

[Julie Ruehl:]

Helane, it’s Julie. Yes, that is correct. We have not granted any deferrals past 2021.

[Helane Becker:]

Okay. And then the other question I had was – actually I had two other questions, if I could squish them in. One is on the five impaired A319s. So you said, you’re going to sell them, but there’s no date associated with that. Is that a second half transaction? And then, the part outs on the A320s, are they second half too?

[Colm Barrington:]

Yes. Julie, we have – we normally don’t comment on sales until we have firm contracts. In the case of these seven aircraft, the five A319s and the two A320s, we do have letters of intent, which we hope means the sales will be generated in the next – in the coming months. But as I say, we don’t have firm contracts as yet. So we haven’t commented on them.

[Helane Becker:]

Okay. And then my other question, Colm, is, the freighter market is really hot right now, and you have no order book. Would you consider sale-leaseback transactions on freighter aircraft, or would you consider getting into that space?

[Colm Barrington:]

Well, we have – currently in our portfolio, we’ve got two large freighters on – which we did on the sale and leaseback transaction. We would certainly look at freighter aircraft on long – if we got them on long-term leases with good credits. But I think freighter market is hot because they’re very – there are less passenger aircraft flying around with selling capacity. When the market returns, as we hope it will during the course of this year, possibly the freighter market won’t be quite as hot as it is today. But look, if we can get a good freighter aircraft on a good lease and finances well, then we will look at it in the future as we’ve done in the past.

[Helane Becker:]

Okay. That’s fair. Well, thank you very much.

[Colm Barrington:]

Thanks, Helane.

[Operator:]

Your next question comes from Koosh Patel from Deutsche Bank. Koosh, your line is now open.

[Koosh Patel:]

Hey, good afternoon guys. I wanted to take a minute to talk about how you guys think about risk management. Has risk been a function at FLY, which has traditionally been viewed as something that’s reactive in response to specific stress points in the market or has the process evolved since the onset of COVID, or I guess maybe to put it differently, what proactive measures are you taking to subvert the potential for further future impairments if the current situation fails to improve like we all are expecting it to in the next several months here?

[Colm Barrington:]

Well, Julie, do you want to comment on this or...

[Julie Ruehl:]

Sure. First, I guess I’d say, we’re in a very strong position going into COVID, having completed, I think, 43 aircraft sales and in 2019 and 2020 at 35 of those in 2019. So we try to be in a decision where we don’t have to be reactive and be prepared for the eventual down cycles. In terms of proactive measures, we’re just actively engaging with our lessees all the time and in certain – trying to work with them to make sure that if we can help them with the long-term survival, if they’re going to survive, we think they’re going to survive long term, we’re going to work with them. But if we need to move to protect our assets and we think we can deploy them elsewhere, we will work to do that.

[Colm Barrington:]

Yes. And I think, overall, Koosh, our greatest risk management is that we – 72% of our fleet by value is comprised of very popular narrow-body aircraft, which are – can move from one airline to another, which are still remaining quite popular. So I think having the majority of the very large majority of our fleet in that particular category of aircraft is perhaps our greatest risk protection.

[Koosh Patel:]

Yes. And then I guess just thinking along the lines of portfolio strategy, do wide-bodies have a place in the FLY portfolio over the longer-term as we look beyond COVID? Because it would seem that they carry a significantly greater degree of risk when you compare to the narrow bodies in your portfolio.

[Colm Barrington:]

Yes. And we’ve always said that FLY is likely to remain a predominantly narrow-body lessor, and that’s what we’ve done. I think we said before that, we will only acquire wide-bodies if they are on long leases to reasonably good credits and we can finance them inexpensively. We met that criteria with the two A330s. Unfortunately, the airline looks as if it’s going to let us down. And that’s why we had to take this impairment.

[Koosh Patel:]

Okay. Well thanks a lot guys. I appreciate it.

[Colm Barrington:]

Thanks, Koosh.

[Operator:]

Your last question in queue comes from the line of Catherine O'Brien from Goldman Sachs. Go ahead Catherine, your line is now open.

[Catherine O'Brien:]

Hi, again. Thanks for the extra time. One is like a forward-looking growth-oriented question. Any thoughts on the A320neo options you have that don’t need to go to AirAsia? Is it still too early to discern and there’s demand for those? When do you need to make a decision to buy on those or is it just seeming like maybe there’s more of an appetite for sale-leaseback financing versus additional lift? Would just love to hear your thoughts on maybe growth ultimately going forward.

[Colm Barrington:]

Yes, the A321neos that we agreed to do sale and leaseback with AirAsia, those deliveries have been pushed out beyond this year, as have the option aircraft. So we don’t have to make any decisions on those deliveries right now. We’re working with AirAsia on what might be the new delivery program for those, and we’ll have updates on that as the year progresses.

[Catherine O'Brien:]

Okay, got it. Thank you very much.

[Operator:]

There are no further questions in queue. Presenters, please continue.

[Matt Dallas:]

We’d like to thank everyone for joining us for our fourth quarter and full year earnings results conference call. We look forward to updating you again next quarter. You may now disconnect.

[Operator:]

Thank you, presenters. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. Stay safe, everyone. You may now disconnect.