Fly Leasing Limited
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the FLY Leasing First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call could be recorded. I would now like to turn the call over to Matt Dallas. Sir, you may begin.

[Matt Dallas:]

Good morning everyone. This is Matt Dallas with Investor Relations at FLY Leasing. And I’d like to welcome everyone to our first quarter 2017 earnings conference call. FLY Leasing, which we will refer to as FLY, or the Company, issued its first quarter earnings press release, 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 IR section of our website on the Presentations page. If you are listening to both the live call and the webcast, you may want to mute your audio on the computer as there will be a slight delay. Representing the Company today on this call will be Colm Barrington, our Chief Executive Officer; Gary Dales, our Chief Financial Officer; and Steve Zissis, the President and CEO of BBAM, the company that manages and services FLY’s fleet. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding the outlook for the company’s future business and financial performance. Forward-looking statements are based on the current expectation and assumptions of FLY’s management, which are subject to uncertainties, risks, and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and described more fully in the company’s filings with the SEC. Please refer to these sources for additional information. FLY expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations, or otherwise. An archived webcast of this call will be available for 90 days on the company’s website. And now, I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

[Steven Zissis:]

Thank you, Matt, and welcome to FLY’s first quarter earnings call. It’s been just over two months since our last report. So there isn’t a lot of news to update you on. But let me start with industry conditions. Similar to last quarter, we continue to see strong underlying fundamentals in our business. Airlines around the world continue to report healthy earnings and strong demand with record load factors. Audit net income forecast for the industry in 2017 are approaching $30 billion generating a 4% net margin. Oil prices have remained relatively low and steady and despite some geopolitical pressures in certain parts of the world, air travel demand remains healthy and appears on track to grow 5% to 6% for the year. More importantly, many of our key emerging markets Southeast Asia and India are on track to grow much faster than that. We’re quite pleased with demand from our European customers as economic conditions there seem to be improving not worsening. As a result, we are seeing strong demand from our customers for new and used aircraft and steady or rising lease rates generally across our fleet. The delays on certain New Year deliveries are also providing us with some new remarking opportunities to keep our planes and fleet there longer. Our fleet is at a 100% utilization and while we have minimal remarketing requirements in the near term we are already seeing multiple offers on each of the planes, we do have to remarket later in this year. We are seeing the same kind of demand across the entire BBAM managed fleet. For about the last two years I’ve discussed how FLY has been transforming its fleet to younger aircraft with a longer lease terms that yield a better earnings profile. That process is basically now complete and we are starting to see some positive impact on those efforts showing up in our financial statement. While Colm and Gary will go through the numbers in more detail, you will find that we are generating more revenue from a smaller fleet, which underscores the quality of the younger aircraft that now comprises fleets wisely. Also, historically lumpy end of lease revenue is less important to our ongoing revenues, meaning our earnings before any trading gains has become more predictable and we have continued to drive down costs improving our return on equity. To be sure, competitive landscape for sale lease pacts with tier 1 credits remains fierce, but we have been successful in the last couple of months procuring new deals. As I have made clear in the past, we don’t chase the market or grow for growth sake but rather are highly selective and laser focussed on funding, on finding attractive deals for flying. Deals that in our view have above market adjusted returns that will immediately and positively impact FLYs earnings and cash flow. Despite the progress we’ve made in the last couple of months committing to approximately $300 million in new deals we still have significant free cash and financing available which we will be able to acquire another 2.5 billion [ph] of aircraft. So when we find the right deals, we are ready to act. Our shares continue to trade at a significant discount to book value. So in addition to acquiring aircraft, we continue to actively buy, FLY’s shares in the open market under FLYs share buyback program. I am pleased to confirm that we will continue that program throughout 2017. Colm will go through the details of our repurchases so far in the year. Now I’d like to turn the call over to Colm Barrington FLY’s CEO.

[Colm Barrington:]

Thank you Steve and thank you everyone for joining us this morning. As Steve has already mentioned we continue to operate in a very positive industry environment, with strong global attractive growth and most of the world’s airline showing positive financial results. This has resulted in a positive environment to the aircraft leasing sector also which in the case of FLY a strong demand for leased aircraft being affected in a 100% fleet utilization, our negligible receivables balance and our minimal near term remarketing requirements. The only negative recent industry events that bankruptcy as Alitalia which frankly has been in the card for many many years. FLY does not lease any aircraft to Alitalia. The strong industry conditions allowed us to rejuvenate FLY’s fleet by selling many mid-life aircraft. As a result, we’ve reduced our portfolio size to 76 aircraft as compared to 83 aircraft a year ago and to build a balance of $537 million for unrestricted cash and $361 million of unencumbered assets at the end of March. That is nearly $900 million in total and represents 26% of our total asset. We are focussed on doing aircraft acquisition deals that are right for FLY. As a result, we have deployed our resources quite deliberately and as further results, earnings growth has been a little slower than what might have been expected. Fortunately the growth outlook for the remainder of 2017 is looking positive. Now that today we have a growth pipeline of $291 million, which comprised seven aircraft including two new Boeing 737 Maxus. These new aircraft of popular types have an average age of 1.4 years and an average lease term of 10.5 years. The aircraft are expected to contribute approximately $30 million in annual revenues and $9 million in annual pretax income. As a result, the returns on equity are in the low teens. Following these acquisitions, FLY has 2.5 billion of additional buying capacity. We continue to pursue potential acquisitions but we have maintained our disciplined approach. If we continue to do this and achieve our acquisition targets and deploy our available resources, the impact on FLY’s net income EPS and ROE will be significant. Our balance sheet has the capacity to more than double the size of FLY’s portfolio in dollar terms which will allow us to more than double earnings as we deploy our liquid resources. Meanwhile, we have continued to execute our $75 million share repurchase program. Today in 2017 we have repurchased over 660,000 shares for $8.5 million, and which represents approximately 2% of our outstanding shares at the start of the year. As we continue to execute our repurchase program, we will see a significant and positive impact on EPS and NBV per share. Our estimates show that the completion of our present repurchase program at share prices similar to those we are currently experiencing will result in a 19% improvement in our EPS and a 6% increase in our NBV per share. As we add more aircraft these percentage improvements will become significantly more relevant in dollar terms. FLY has always maintained a conservative financing strategy with the objective of broadly matching our debt maturities with our lease terms. In this regard our interest rates are substantially hedged and our weighted average debt maturity of 6.5 years is very close to our average lease of 6.6 years. We have no significant debt maturities until 2020. Meanwhile FLY continues to be well regarded in the debt market. In April, we took advantage of this to reprice, extend and upsize our term loan, which is our largest secure debt facility and now has a balance of approximately $450 million. The repricing resulted in a 50 basis point reduction in the margin, which is now 2.25% and the term is extended by one year to 2023. The $50 million upsizing will allow us to repay another more expensive facility. All-in-all this transaction will save FLY approximately $2.5 million in future annual interest expense. There will however be some upfront expenses recorded in the June quarter. With that, I will now hand you over to Gary to take you through the finances.

[Gary Dales:]

Thank you, Colm. As represented [ph] in following slides, we are reporting net income of $5.1 million or $0.16 per share for the first quarter of 2017. This compares to a net income of $7.1 million and $0.21 per share for the same period in 2016. The declines are due principally to the lack of gains from sale of aircraft and a decline in the end of lease revenue. Our operating lease rental revenues are up 6.3% to $79.3 million, a $4.7 million increase on fewer aircraft. The aircraft acquired during 2016 are producing higher rents than the aircraft sold during that same year. Our lease rate factor has picked up period over period. During the first quarter of 2016, we reported $3.2 million in end of lease revenue and recognized gains of $5.1 million from the sale of 10 aircraft. No aircraft was sold in the first quarter of 2017. Total expenses are down just under $1 million, a decline in debt extinguishment cost is partially offset by increases in depreciation and interest expenses, primarily related to the new aircraft in the portfolio. We shortened the lives of certain wide bodied aircraft last quarter which is also increasing depreciation expense. Within the $8.3 million of selling, general and administrative expense in the first quarter is $1.6 million of broken deal cost. Now let me cover a few items of guidance. For the second quarter of 2017 we are expecting operating lease rental revenue to be between $80 million and $81 million. We expect amortization of lease incentives to be approximately $2 million. We do not expect any end of lease income. Depreciation expense is expected to be between $33 million and $34 million. We expect interest expense of approximately $31 million. We expect to have between $2 million and $4 million of debt extinguishment costs and selling, general and administrative expense will be approximately $7 million. Before I turn the call back to Colm, I want to call your attention to the appendices where we have our cap table and a reconciliation of our adjusted income. With that, let me turn it back to Colm for his closing remarks.

[Colm Barrington:]

Thank you, Gary. Having substantially completed our major aircraft disposition program, although we do expect to see some limited aircraft sales during the coming quarters, FLY is now well-positioned to create shareholder value from its current level. We have the second youngest fleet of U.S.-listed aircraft lessors with an average the age of 6.4 years, with an average lease terms 6.6 years. We are not focused in acquiring more newer aircraft and as we make such investments our fleet metrics are expected to improve further. As evidenced by our current $291 million pipeline with its 1.4-year average age and 10.5-year average lease term. As stated we have substantial financial capacity which will enable us to acquire 2.5 billion additional aircraft as we maintain a conservative financing strategy with interest exposure substantially hedge on an average temperature was 6.5 years. Additionally and reflecting this conservative policy we continue to improve our secure debt cost, which are now 3.73%. As we deploy our free cash and accretive aircraft acquisitions and share repurchases, we expect to see significantly increase in our earnings per share and our net book value per share. Thank you. And with that we are now ready for your questions.

[Operator:]

[Operator Instructions] Our first question comes from Gary Liebowitz from Wells Fargo Securities. Your line is now open.

[Gary Liebowitz:]

Thanks, operator. Good day gentlemen. If I look at your last slide on adjusted ROE in the first quarter it was 7.5%, I was wondering if you’ve done the math factoring in share buybacks and your CapEx pipeline and the lower debt cost. Where do we lease 2017? I assume it should be somewhat higher than 7.5%?

[Colm Barrington:]

Yes. I think, so Gary, as we continue our share repurchase program I think there will and as we add more accretive aircraft assets during the course of the year, I think you could find the ROE increasing. As I mentioned earlier, the $291 million pipeline has an ROE in the low teens. So I think when you add that to where are, you’ll see ongoing improvements.

[Gary Liebowitz:]

But do you get back to over 10% without the benefit of any trading gains?

[Colm Barrington:]

I believe we should. There are few aircraft in there which we – as we mentioned we have higher depreciation on the aircraft which we took impairment on last year because we shorten the life and reduce the residual of those aircraft, so as we dispose of those aircraft over time that will also have a positive impact. So we’re hoping that a few things like will get us into the overall ROEs in the low teens.

[Gary Liebowitz:]

And did you take the accelerated depreciation estimate up again during Q1, because looks like your Q2 guidance for depreciation is little bit, its somewhat ahead of where you actually were in Q1 and I don’t know if you’ve added any aircraft yet, but was there another estimate revision there?

[Colm Barrington:]

We haven’t yet. Well, we haven’t – no, we haven’t made any difference to the existing fleet, but we have added more aircraft in this quarter.

[Gary Liebowitz:]

Okay. And then last one, maybe for Gary, there was some end of lease revenue recognized during quarter. I think you had any schedule terminations or expiration?

[Gary Dales:]

That’s correct. The aircraft was scheduled to be return in December and carried over into the first quarter and so we ended up with some end of lease income on that transition.

[Gary Liebowitz:]

Okay, great. I’ll get back in the queue.

[Colm Barrington:]

Thanks Gary.

[Operator:]

Thank you. And our next question comes from Catherine O’Brien from Deutsche Bank. Your line is now open.

[Catherine O’Brien:]

Good morning everyone.

[Colm Barrington:]

Good morning, Catherine.

[Catherine O’Brien:]

Hi. So, are you still targeting 750 million in acquisition this year? I know we’re talking about 2.5 billion potential, but I’m guessing that now all met for 2017?

[Colm Barrington:]

Yes. We continue to target at 750 and as of today we’re sort of on track to achieve that. We’re on the fifth month of the year and with nearly 300 million. So we’re on that track to achieve this. However acquisitions are lumpy. We could have very good quarter or we could a quieter quarter, but we still making that our target for the year.

[Catherine O’Brien:]

Okay, right. And so just given your commentary and some of your competitors about how competitive the purchase leaseback market is? If you did not see aircraft available type of ROEs you’re targeting, would you ever consider expanding acquisition strategy that ordering directly from the OEMs or is that just not in line with your business model?

[Colm Barrington:]

It’s not in line with business model we’ve had today, Catherine. We don't rule out anything, and if there were some surplus aircraft we could pick up from one of the OEMs or two of the OEMs, we would do it. But I don’t think you’ll see us going into that market and making long term speculative orders.

[Catherine O’Brien:]

Okay, great. Then if I could just sneak one more in, I know you mentioned our Alitalia bankruptcy and maybe you’ll have any aircraft there, but do you think that bankruptcy and potential troubles Air Berlin because they present opportunities for purchasing aircraft from those companies?

[Colm Barrington:]

Yes. I it could do, I mean, for example, we made some acquisitions in Brazil from a carrier there who was having some problems last year and we were able to buy aircraft out of that carrier and then place them with new lessees, so that is a potential for picking up for MAXs, yes, definitely.

[Catherine O’Brien:]

Okay, great. Thank you for the time.

[Colm Barrington:]

Thanks, Catherine.

[Operator:]

Thank you. And our next question comes from Helane Becker from Cowen and Company. Your line is now open.

[Unidentified Analyst:]

Hey, guys. It’s actually Steve on for Helane. Just looking I guess at your acquisition plans for the year, what guidelines are you guys using for acquisitions, any age or type restrictions? Is it all yield and credit focused? Anything you’re really focusing on there?

[Colm Barrington:]

I think Steve, we are most on the assets. We’re looking for popular aircraft that are widely used at both narrow-body and wide-body, and that is our primary focus. Then we’re looking for deals with relatively long-term leases, because that allows us to finance the aircraft less expensively and we’re looking for deals that will yield out decent return. And as I mentioned our present pipeline gives us a 12% plus ROE and we’re looking to continue to do this.

[Unidentified Analyst:]

Okay. And then are you guys seeing any of the lessors asking for credit quality declines or kind of yield compression in the purchase leaseback market. How do you guys stay away from those types of deals and just trying to get a higher ROE maybe giving away some return conditions?

[Colm Barrington:]

We certainly do not give away return conditions. That is one of the reasons why we maybe we haven’t bought aircraft as quickly as we have the capacity to do. So you won’t see us doing that. We’re very, very diligent on conditions and documentation, and as I said, the assets are the most important thing. If we get that right, we get the return conditions right and we get the purchase price right, then we’re in a pretty safe investment if anything than happens to our credit by lessee we could always redeploy the aircraft. We pay too much for the aircraft. If you don’t do proper maintenance, provisions, if you don’t do proper redelivery conditions, if you don’t have crews then you get yourself into trouble and we’re trying not to do this.

[Unidentified Analyst:]

Okay. And then more. Do you guys have any plans on selling more aircraft till the year? Is the market still attractive? Or do you not want to shrink the fleet any further?

[Colm Barrington:]

Yes. As I mentioned in my prepared remarks we have one or two aircraft – sorry, few aircraft targeted for sales during the course of this year. Aircraft that are not giving us great return, in some cases just surely because of gap counting reasons, but there is definitely still a strong market for midlife aircraft and as we see opportunities we’ll hope available during the course of the year.

[Unidentified Analyst:]

Perfect. Thanks guys.

[Colm Barrington:]

Thanks, Steve.

[Operator:]

Thank you. And our next question comes from Jason Arnold from RBC Capital. Your line is now open.

[Jason Arnold:]

Hi. Good morning. Just a quick follow-up on that last one. I guess from those comments, Colm. is it safe to say that kind of those midlife A340's, maybe the A330 that you guys mark down or something that you guys would kind of target for sale or is there something kind of else in that sale category there that you’re targeting?

[Colm Barrington:]

You certainly mentioned three of the aircraft that would be on our list and we one or two others that we might add to that. So, there are few aircraft in the portfolios, but I’d say mainly for GAAP reasons, don’t produce net income for us, they still produce good cash in many cash, but don’t produce great net income, so we would be targeting those two [ph].

[Jason Arnold:]

Okay. Super. Thank you. And then just one other one, great to see the funding cost improvement on the term loan B, I guess just curious looking out on the horizon here if there’s any other funding cost improvement opportunities that you guys kind of see here over the course of the next year or two?

[Colm Barrington:]

Well, we don’t actually need any significant funding, because we still have our warehouse facility which I think is nearly over $350 million availability of this. And so – and we do still have access to one-off financing, so we’ve no definite refinancing plans right now, but we obviously keep looking at the market on daily basis and we see opportunity that we’ll again we’ll grasp them, but we don't have any real needs right now.

[Jason Arnold:]

Okay. Great. Thank you very much.

[Colm Barrington:]

Thanks, Jason.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Bill Mastoris from Baird & Company. Your line is now open.

[Bill Mastoris:]

Thank you. Some of the airlines and even some of the lessors have indicated that there is some weakness in some midage wide-body models, selected wide-body models. I realize that would be a little bit against the grain of your overall portfolio metrics in the direction that you taken recently, but is that an attractive market for you now that the capital cost of actually acquiring that aircraft have dropped fairly dramatically?

[Colm Barrington:]

Yes. I think, Bill, I mean, first of all, our wide-bodies are all on long term leases. I think, I don’t have any wide-body at the lease for the remaining term of less than 10 years, so we’re in pretty good shape with our wide-body, so we’re not really focused on – sorry, one this is short and I’ll think of this, but we’ve just – what come from – which way that’s gone. And certainly if we saw good opportunities to pick up relatively in expensive wide-body and we could get good relatively long term leases on them and then we would certainly at that, but it’s not our primary focus. There might be some opportunistic deals there but wouldn’t be our primary focus. We won’t see many of them.

[Bill Mastoris:]

Okay. Thank you.

[Colm Barrington:]

Thanks Bill.

[Operator:]

Thank you. And we have a follow-up question from Gary Liebowitz from Wells Fargo Securities. Your line is now open.

[Gary Liebowitz:]

Thanks. Just, Steve, there were four I think narrow-bodies that expire this year. Those still have not been extended but you’re seeing good interest in those, did I hear that correctly?

[Steven Zissis:]

That’s correct. We’ve got -- in November, December we’ve got two A320s and two A319s and there was plenty demand for.

[Gary Liebowitz:]

Okay. Also just…

[Steven Zissis:]

The NEO [ph] delays, right, so you can imagine people were scrambling to backfill.

[Gary Liebowitz:]

Right. Of the 291 that’s committed pipeline how much of that hits Q2?

[Steven Zissis:]

Probably about 100 million, about a 100 million I would say, Gary.

[Gary Liebowitz:]

Okay. And Steve, do you have any thoughts on the news on the MAX that came out over the last 24 hours or so, maybe those just hoping to do right?

[Steven Zissis:]

No, we’re down on taking a first deliver of MAX for FLY, so our guys are on the ground waiting and we expected to be a couple of week delay, but it doesn’t sound like its a serious issue.

[Gary Liebowitz:]

All right. And lastly when you talk about the income you expect to generate from this 291 million of CapEx, what kind of leverage or LTV are you assuming in that calculation?

[Gary Dales:]

We’re assuming as -- is simply enough 3

[Gary Liebowitz:]

Okay. Thank you very much.

[Colm Barrington:]

Thank you.

[Operator:]

Thank you. And we have a follow-up question from Catherine O’Brien from Deutsche Bank. Your line is now open.

[Catherine O’Brien:]

Hi, everyone. Thanks for the follow-up. So just one quick one. I know that airbus delays are trying to give you good opportunity to extend the leases on your current fleet. But as you look at acquisitions this year, do you think that could impact the timing or potential for some additional acquisitions?

[Colm Barrington:]

Yes, it’s already how Catherine we had a less of intent on the five A320neos to close this year which will be now happening, though it’s actually would set back our acquisition programs somewhat. We would be very well on our fate of our target but not for that delay, but unfortunately that hasn’t happened. Yes, it will make it a little more difficult to achieve there what we are trying to achieve.

[Catherine O’Brien:]

Okay, great. Thanks for that.

[Colm Barrington:]

Thank you.

[Operator:]

Thank you. And we have another follow-up from Bill Mastoris from Baird & Company. Your line is now open.

[Bill Mastoris:]

Thank you. Last time on your last conference call you indicated that you are frustrated with your stock price and you indicated there would be a possibility of maybe some type of leverage buyout or some fact similarly that would be close to it. I’m wondering what would be the criteria if you were to go forward on that basis.

[Colm Barrington:]

Well you know Bill, I think we mentioned on the last call that we are looking at various options and the role with evaluation options. But there is certainly no current plans to take [Indiscernible]. You know we have worked very hard to transform our fleets and we’ve reduced our cost of capital and we’ve cut our cost, we are now the second youngest fleet among the less or – we have a lot of capital that we think we put this capital to work buying aircraft and purchasing shares and so we’ll try and improve the company’s ROE and net book value per share and hopefully the share price will follow us up overtime. So we continuously look at privatising the company, but certainly its only one of many options we are looking at. We are basically focussed on trying to make the company more profitable, get better returns for shareholders, how to improve the share price overtime and if out of them comes some acquisition or disposition possibility we’ll certainly look at it. But we know, we don’t have any definite current plans on any of those initiatives right now.

[Bill Mastoris:]

And so you plan to keep your net debt leverage in that 3.5 range, 3.5 to 4 times range?

[Colm Barrington:]

Yes, I mean as I mentioned in the prepared remarks we have a very long debt, relatively long debt maturities and it most of our debt is secured as you know so we don’t have any impending major debt repayments over the next few years but we feel comfortable operating in the 3, 3.5 times debt to equity level.

[Bill Mastoris:]

Thank you.

[Colm Barrington:]

Thanks, Bill.

[Operator:]

Thank you and I’m not showing any further questions at this moment. I would now like to turn the call back to Matt Dallas for any further remark.

[Matt Dallas:]

We’d like to thank everyone for joining us for our first quarter earnings call and we look forward to updating you again next quarter. You can now disconnect.

[Operator:]

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.