Fly Leasing Limited
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good day ladies and gentlemen and welcome to your FLY Leasing, Second 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 may be recorded. I would like to introduce your host for today's conference Mr. Matt Dallas. Mr. Dallas, please begin.

[Matt Dallas:]

Thank you. Good morning. I'm Matt Dallas, the Investor Relations Manager at FLY Leasing and I'd like to welcome everyone to our second quarter 2015 earnings conference call. FLY Leasing, which we will refer to as FLY or the company throughout this call, issued its second quarter earnings results press release earlier today, which is posted on the company's website at www.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 the presentation in the Investor Relations 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 computer as there will be a slight delay in the webcast audio. 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. I'd like to begin the call by reading the following safe harbor statement. 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 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 are 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. A replay of this call is available for one week from today. An archived webcast of this call will be available for 90 days on the company's website. With that, I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve.

[Steve Zissis:]

Thank you Matt and welcome everyone to FLY’s second quarter earnings call. Before getting into the specifics of the exciting and positive changes being implemented at FLY, I’d like to provide a quick update to our industry conditions and how recent trends are driving our corporate strategy. First, the short and long term outlooks for global air traffic remain robust with growth forecasts of 6% to 7% for 2015 and approximately 5% for 2016 and beyond. Growing traffic demand combined with higher airline profits has led to a strong demand for FLYs aircraft and continuous strength in our lease rates. Financing markets remain healthy with adequate capacity in both the bank and capital markets to enable FLY to sufficiently meet its growth targets. Most importantly the market for mid-life aircraft remains robust, which has allowed FLY to successfully accelerate its fleet renewal strategy. Specifically last year we announced a sale of eight older 757s as they come off lease. The 757 sales are scheduled to occur during the second half of the year and in fact the first sale occurred last week. While Colm will provide further details later in this call, last month we announced entering into an agreement to sell 33 aircrafts, which will generate a gain of approximately $35 million. The gain will be recognized as the aircrafts are solid, which are scheduled to occur over the next two quarters. These two announced sales transactions which totaled 41 aircrafts were approximately one third of our fleet. We’ll generate cash of approximately $450 million and allow us to deliver on our promise to improve our profitability by selling underperforming assets and reinvesting in newer aircrafts, which are immediately accretive to our cash flow and earnings. In addition, these activities immediately improve our fleet metrics in terms of lowering our average aircraft age, reducing less seat concentrations and lengthening our remaining lease terms. The sales also reduced our future remarketing requirements. While we are extremely pleased with our sales activity to-date, we will continue to efforts to improve FLY’s fleet composition and we expect to announce further progress in the next quarter. On the remarketing front, we significantly reduced FLY’s near term remarketing exposure. As shown on this slide, we’ve already placed all four of the 37 aircrafts that were scheduled to be remarked in 2015. We don’t foresee any difficulties in extending or remarketing these remaining four aircrafts. Similarly in 2016 and beyond, we significantly reduced FLY’s remaining remarketing requirements. Before turning the call over to Colm, I’d like to touch on last item that will attest the BBAM commitment to FLY and its alignment with FLY’s shareholders. Last month BBAM agreed to reduce to its annual management fee by $5 million, reducing it from $10.7 million to $5.7 million. This represents a 47% reduction. As one of FLY’s largest shareholders, BBAM is committed to FLYs success and this fee reduction is just the latest example of the steps BBAM will take to ensure FLY delivers value to its shareholders. I am pleased to report that FLYs heading into the second quarter of 2015 and the full year of 2016 in excellent share with ample cash to meet its gross targets and approved its profitability. I would now like to hand the call over to Colm.

[Colm Barrington:]

Thanks Steve and good morning everyone. During the last few months we completed several significant minestrones in our ongoing program of rejuvenation FLY’s portfolio and improving reported earnings and ROE. As we achieve further milestones in this program during the remainder of this year and the next year, we expect to see an enhanced portfolio of aircraft leases. That along with cost deductions will produce significant improvements in FLY’s financial returns. Our strategy for improving ROE has focused on four main areas. First, selling aircraft and leases that are underperforming; secondly, activity managing our liabilities; thirdly, reducing selling generally and administrative expenses; and fourthly, investing in higher yielding aircrafts and leases. To-date in 2015 we have made substantial progress in all four areas. Our fleet rejuvenation program is focused on selling older and underperforming aircraft and then replacing them with newer models that will produce higher financial returns and book earnings. With the aim or addressing these issues, in the second quarter FLY executed an agreement to sell a portfolio of 33 aircrafts. These 33 sales were to be completed during the remainder of this year, as the aircraft are transferred and the leases are novated to their new owner. As Steve mentioned, this sale is a milestone in our ongoing fleet rejuvenation plan, producing a pretax gain of approximately $35 million, generating approximately $450 million in cash, substantially reducing our financial leverage, decreasing some of our larger less exposures and eliminating certain legacy accounting issues that have negatively impacted FLYs GAAP financial results. Combined with our previously announced sales, FLY has now sold and agreed to sell a total of 44 aircrafts in 2015. These 44 aircrafts have an average age of 12.2 years and their sales substantially reduces our fleet age, while also reducing the number of aircrafts aged over 10 years from 61 to 33. We expect to be able to announced further sales of older and similarly underperforming aircrafts as the year develops, availing what are currently very attractive market conditions for the sale of mid-lift aircraft. We also continue to activity manage FLY’s liabilities. In the last 12 months the cost of FLY’s secured debt has been reduced by 40 basis points and now stands at 3.83% per annum. Considering FLY’s total secured borrowing were $2.3 billion at the end of June, this 40 basis point reduction is having and will continue to have a positive impact on earnings. The two major factors influencing this reduction in secured borrowing costs with the closing of our aircraft acquisition facility in March are the re-pricing of our term loan in April. The terms of the acquisition facility no longer affected current market conditions and considering the significant amount of cash we have generated from our aircraft sales and also our levels of unsecured borrowings, we consider that it no longer made sense to keep this facility in place. In April we reprised our term loan reducing the interest margin by 75 basis points to 2.75% and reducing the LIBOR floor from 1% to 0.75%. This reprising will have an annual interest saving of approximately $4 million or $0.10 per share. We have also focused on reducing our overhead expenses. Our adjusted SG&A as a percentage of total revenue reduced from 10.4% in the first half of 2014 to 8.4% of total revenues in the first half of 2015. This percentage compares well with our industry peers who have continued to be an area of focused. From July 1 of this year our SG&A will be further reduced following BBAM’s agreement to reduce its annual management fee from $10.7 million to $5.7 million annually. This is a $5 million or 47% annual reduction. This reduction reflects the reduced number of aircrafts in our portfolio following our recent aircraft sales and BBAM and FLY’s aligned goal of maximizing returns of FLY’s shareholders. FLY received tremendous advantages in the economies of scale through its partnership with BBAM. As the world’s third largest manager of commercial least aircraft and with an established 25 year record, BBAM provides FLY with global breadth, debt and experience. Also BBAM shareholders own approximately 8% of FLY’s equity, demonstrating the ongoing alignment of BBAM with FLY’s shareholders. The fourth and major part of our strategy is our ongoing reinvestment in newer and higher yielding aircraft and leases. In this regard we are well on track to achieve our $750 million aircraft acquisition targets in 2015. FLY had $350 million of unrestricted cash at June 30 and together with the $450 million to be generated from aircraft sales already announced this year, FLY will have approximately $800 million to reinvest in new aircrafts. Even assuming modest leverage and there is currently ample availability of well priced secured debt, this gives a substantial fire power for further acquisitions. So far in 2015 we have either acquired or identified for acquisitions, a total of 12 aircraft at costs of approximately $460 million. These aircrafts have an average age of 2.2 years, and once acquired will be immediately accretive to FLY’s earnings. Before I hand you over to Gary Dales for the financial review, I would like to note that relating to our recent sales activity we performed a fleet impairment analysis as of June 30 and have decided to take a $65.4 million non-cash aircraft impairment charge in the second quarter. Gary will go into this in more detail in a few moments. Meanwhile our adjusted net income of $36 million or $0.87 per share for the half year is similar to the level reported from the same period of last year. Finally on July 15, we announced the declaration of the quarterly cash dividend of $0.25 per share to the second quarter of 2015. The dividend will be paid on August 20, 2015 to shareholders of record on July 31, 2015. I will now hand you over to Gary.

[Gary Dales:]

Thank you, Colm. We are reporting a net loss for the quarter of $58.3 million after taking an impairment charge of $65.4 million. On a per share basis the loss was $1.42. On an adjusted basis which excludes the impairment change and other non-cash charges, we are reporting earnings of $9.5 million and $36.1 million for the three and six month periods ending June 30, 2015 respectively. On a per share basis adjusted net income was $0.23 and $0.87 for the same periods. These results compare with net income of $21.7 million and $25.2 million for the same periods in the previous year. The second quarter 2014 results include an $18.9 million in gains from the sale of aircraft. As Colm noted, during the second quarter we recorded an impairment charge of $65.4 million. The impairment charge relates to three light body aircrafts that are nearing the end of their economic lives and 13 older narrow body aircrafts. We have evaluated the remaining aircrafts in our portfolio with similar characteristics and there is no further impairment charge required. Now let’s move to the top portion of our income statement. For the three months ended June 30, 2015 our operating lease revenue was $101.7 million, a 13% increase over the same period in the previous year. During the same period operating lease rental revenue increased 9.3% to $103.4 million. These are our basic lease rents. For the three months ended June 30, 2015 end of lease revenue amounted to $3.7 million. As mentioned there were $18.9 million in gains on aircraft sales during the three months ended June 30, 2014 and no closed sales in the current quarter. Total expenses for the second quarter of 2015 were $167.8 million and include the $65.4 million impairment charge. Our core operating expenses were $98.6 million for the three months period ended June 30, 2015, an increase of $9.8 million over the same period in the previous year. This increase is primarily due to the acquisitions made in the prior year. Depreciation expense is up $7.6 million and interest expense is up $3.4 million. During the second quarter we reprised our term loan, reducing the spread by 0.75% and the LIBOR floor by 0.25%. The reprising will save us approximately $4 million in annual interest costs. There are two months at the lower rate in the current quarter’s results. SG&A is down approximately $700,000 despite the increase in the size of our portfolio. Before I get to guidance, let me briefly cover a couple of items on our balance sheet. We have classified $934 million of aircraft as held for sale. These are the 33 aircrafts being solid that we announced earlier in June. They will be transitioning to the buyer over the second half of the year. Our cash balance at June 30, 2015 was $462.1 million of which $350.2 million was unrestricted. Further at June 30, 2015 we had 15 unencumbered aircrafts with a net book value of approximately $560 million. Now let me cover a few items of guidance for the third quarter of 2015. We are expecting operating lease rental revenue of between $100 million and $102 million. The exact amount will depend upon how long it takes to novate the aircraft that are being sold. While under our ownership we will continue to recognize rental income. However, this rental income reduces the purchase price that the buyer pays to us. There is no change to the economic gain. We also continue to amortize lease incentives. We expect that lease incentive amortization will be approximately $6 million in the third quarter of 2015. We are anticipating about $20 million in gains from aircraft sale. Again, this could be higher or lower, depending upon the aircrafts that are novated. End of lease income could be as much as $2 million, although it could slip into the fourth quarter as the leases on the two aircraft generating this income expire very late in the quarter and it could be that the aircraft over turned during the fourth quarter. Both of the aircraft will be sold at the end of their current leases. Depreciation expense is expected to be between $31 million and $33 million and is dependent upon the pace of our aircraft acquisitions. There is no further depreciation expense associated with the 33 aircraft classified as held for sale beyond June 30, 2015. We expect interest expense of between $36 million and $38 million. We will expense between $8 million and $10 million in debt modification and extinguishment costs. As the aircraft are sold, certain of the proceeds will be used to repay debt. When the debt is repaid, any associated unamortized loan issue cost and unamortized debt discount will be written off. Maintenance and other expenses will likely run between $2 million and $3 million for the third quarter of 2015. I call your attention to the appendix where we have the details of our adjusted net income and our adjusted SG&A expense. Also in the appendix is a table showing the components of our capital structure and the respective contracted costs of our debt facilities. With that, let me turn it back to Colm for his closing remarks.

[Colm Barrington:]

Thank you Gary and thank you everyone for your attention. As you will have seen from our presentation this morning, we are continuing our focus on making further improvements to buy some returns. We believe that these measures, specifically our sales, all the impairments to aircrafts and leases that are underperforming, continuing active management of our debt liabilities, reducing SG&A and are continuing investment in newer and higher yielding aircraft will have benefits to our bottom line, which will become apparent as we continue through 2015 and into 2016. With that we are now ready to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Helane Becker with Cowen & Company. Your line is open. Please go ahead.

[Helane Becker:]

Thanks very much operator. Hi everybody, thanks for the time. So I just have a couple of questions. In terms of CapEx, you have identified you said I think $460-ish million of aircraft and so you said that leaves you about $300 million. Can you just talk about either sorts about aircraft type of geography that you might be looking at?

[Steve Zissis:]

Helane, its Steve. So to kind of give you a broad view, we are currently looking at approximately a $6.1 billion of possible transactions. Our historical hit rate is about 10% and most of these deals are in foreign jurisdictions outside the U.S., so Middle East, Eastern Europe, parts of Asia, India and for the most part I would say two-third are narrow body and one-third are wide body and all of them are on the newish side. So that should give you a kind of a good sampling of that. Of that $6.1 billion we’re actively in second or third round LOI discussions on about $550 million. So that kind of gives you an idea and that’s our typical kind of hit rate. So we expect to be at that $750 million CapEx by the end of the year.

[Helane Becker:]

Great. So just to understand that – I mean, maybe a different question. How is the pricing? Are you seeing pricing pressures at all or is the pricing still kind of in the reasonable range?

[Steve Zissis:]

Well look, it’s all over the board. Obviously for the Tier I, highly in demand, long term sale leasebacks. It’s very competitive, because you’re up against very cheap capital that’s still coming from certain parts of Asia and some of the public source. But there are pockets of deals that we would call kind of off the run that do meet our return requirements and again, that’s why I’m saying that our hit rate in general is about 10% of stuff that we consider. So in those deals we’re able to meet our returns, but I don’t want to mislead anybody. It is very competitive out there, because there is still aggressive capital chasing deals and the liquidity of our business has dramatically improved over the last three or four years as more and more, [indiscernible] entered the space.

[Helane Becker:]

Okay, and then just with respect to the management fee, so it’s being reduced because the number of aircraft is declining. So does that mean as the fleet increases we should expect the management fee to go back up?

[Colm Barrington:]

Yes Helane, I mean the management fee is now being placed – we filed information on this, with our most recent filing. The management fee will be in relation to the net asset value of the portfolio. So rather than being and sort of going up in lumps, it will go up gently as the portfolio increases or can go down as the portfolio decreases. It can’t go below $5 million, but it can go down to that level if we decrease the portfolio further.

[Helane Becker:]

Okay. And then just on the asset impairment charge, is that for the aircraft that you’re selling or is that for the entire fleet of aircrafts. I’m trying to figure out how to think about that charge.

[Colm Barrington:]

It’s got nothing to do with the 33 aircraft sales we just announced. It is related to our review of the balance of the portfolio based on the information we’ve gathered during that sales process. We have three older wide body aircraft very near the end of their lives which we’ve decided to impair and a group of another 13 odd mid life, older, narrow body aircrafts that we’ve also decided to impair.

[Helane Becker:]

Okay. So it’s not like this is a charge and then it gets reversed when you get the gain on the sale of the aircraft. This is just for aircraft that you’re continuing to own, but some may have…

[Colm Barrington:]

Potentially – I mean we could potentially make some small gains if we sold those aircrafts for more than their current carrying value, but we believe we’ve impaired them to the level, to the market value as we said in our statement, to that current market value.

[Helane Becker:]

Okay. All right, when are you filing the Q or the K?

[Steve Zissis:]

Yes, I think it’s going to be next Monday. Next Monday is the day we are getting to file the 6K.

[Helane Becker:]

Okay, perfect okay. Thank you I’ll let someone else go at it.

[Colm Barrington:]

Thanks Helane.

[Operator:]

Thank you. And our next question comes from the line of Gary Liebowitz with Wells Fargo Securities. Your line is open. Please go ahead.

[Gary Liebowitz:]

Thanks operator. Good day guys.

[Steve Zissis:]

Hi Gary.

[Gary Liebowitz:]

I was hoping you can perhaps give us some more color on the impairment charge. How much of it is related specifically to the old light bodies. I assume those were A340, but maybe you can confirm that. And also, usually your impairment charges come in the fourth quarter. What was the trigger for doing an earlier impairment test and should we expect more impairments in the fourth quarter?

[Steve Zissis:]

Look Gary, we don’t happen to actually have made any significant impairments in the history of the company. The impairment basely relates to our review of the entire portfolio releasing to the large sales process which we’ve been going through over the last months and therefore we decided to impair certain aircrafts to what we believe is at current market value. As of now we’ve reviewed the majority of the portfolio in great detail and we don’t believe there’s any further impairment is required.

[Gary Dales:]

Gary, just to clarify. This is Gary. The three wide bodies of the impairment charge related to three wide bodies and 13 narrow body aircrafts, the third wide bodies are close to their end of their lives and we have more visibility about what their value is going to be. That’s why we took a charge on those and as Colm mentioned, we do have information based upon the sales process we’ve gone through and we’ve looked at the aircraft in our portfolio and 13 of them, we felt we needed to make a charge to reduce their carrying values.

[Gary Liebowitz:]

Thanks Gary. Steve you mentioned that maybe a third of the planes that you’re looking at are wide bodies. Can you give a little more color on the young wide body market? With the manufacturers scaling back production rates on the A330 perhaps 777, also it looks like there could be a new slug of young suppliers about to hit the market. What’s happening with prices on those aircrafts and price of yield you can expect to see?

[Steve Zissis:]

Look, on the newer 787’s I mean that’s a very popular aircraft in demand and you have a lot of people chasing it. So pricing on 787’s tends to be very competitive. Obviously the A330 market has come off a bit and unless it’s a very long term transaction, 10 or 12 years, you’re seeing some leasers pull back on the valuations of those type of deals and I would say the 777 market is somewhat holding firm, but there is some concerns out there about the transition of the 777 into the 777X, so there is a lot more discussion about adjusting pricing on 777’s going forward. I would say for the most part Gary though it’s still fairly competitive with maybe a slight softening if you will, demand for our wide bodies from our source, just a slight touch.

[Gary Liebowitz:]

Thanks. And one last one, of the 33 aircraft in the portfolio you sell, how many do you assume in the guidance will close in the third quarter?

[Colm Barrington:]

It’s about just over half we’re going to close in the third quarter and the rest of the fourth quarter.

[Gary Liebowitz:]

Thank you very much.

[Colm Barrington:]

Thanks Gary.

[Operator:]

Thank you. And our next question comes from the line of Kristine Liwag with BofA. Your line is opened. Please go ahead.

[Kristine Liwag:]

Hi, good morning everyone.

[Colm Barrington:]

Good morning Kristine.

[Kristine Liwag:]

So back to the $65 million aircraft impairment, with the three wide body and 13 narrow body aircraft that you mentioned, can you specify the aircraft type and their corresponding ages. And then also in the future, can you talk about how you plan to change your strategies so you mitigate the risk of taking impairment charges in the future and also should you have been depreciating this asset at a higher rate in the past?

[Steve Zissis:]

With the aircraft, as we mentioned the wide bodies, it’s a mix. There’s a A340, a 747 and a 767. The narrow bodies are predominantly A319’s. Those are anywhere from 10 to 15 years old. The wide bodies are 20 years or so older and I guess with respect to the depreciation, that’s probably always the question when you take an impairment charge is to, should those have been depreciated. In the depreciation level lies the cost of an asset over its useful life. We are not seeing any change in the useful life of the aircraft. It happens to be for these specific aircrafts. We have more visibility to the salvage values and that’s really what led to our impairment charge. And as Colm mentioned, we looked at the rest of our fleet and we feel that the salvage values and depreciable lives for those aircrafts are appropriate and so there is no impairment charge related to those.

[Colm Barrington:]

And Kristine, let’s put this into context. Over the last few years we sold nearly 70 aircrafts from our portfolio for gains of over $100 million above our book value. So in balance we’re well ahead in terms of value of our fleets and that’s why in general over the entire portfolio we’re very comfortable with our depreciation policy and with the – I’d assume, residual values.

[Kristine Liwag:]

Sure. In the $61 billion of pipeline of aircraft transactions that you mentioned, can you talk about the profile of the sellers and perhaps some color on their rational for selling, and also for the transactions that you are already in lease discussions, can you discuss the lease rate factors of those deals?

[Steve Zissis:]

The majority of those are direct sale lease back with the airlines. Now there are a handful of what we call secondary trades that we’re looking at with other leasers, but the majority of this $6.1 billion is directly with the airlines. And again, its two-third narrow body, one-third wide bodies scattered around the globe. Tier I and Tier II top carriers. Lease rates, if you look it varies on the purchase price of the aircraft, the term of the lease and the credit, right. So you can see lease rates from 1% all the way down to 0.75%.

[Kristine Liwag:]

Sure. And maybe one more just going back to the impairment piece. I guess what we would have thought that if oil prices have come down significantly from last year that maybe the end of the life salvage value of these earlier aircrafts would be better. Can you discuss maybe what industry dynamics have changed and what’s really driving the decrease in expected salvage value for these aircrafts that you mentioned?

[Colm Barrington:]

I think there are just some older aircraft types Kristine that are not as popular. As Gary mentioned, we have a 747 that’s 20 something, 22.5 years old. It’s very near the end of its life. It’s becoming to scrap value and that aircraft type is no longer as popular as it use to be. Similarly with the A340 type it no longer is popular as it used to be. The other, the narrow body aircraft were predominantly aired to market value and principally because of lease rates on those aircrafts which were lower than, which these leases were renewed over the last three years. The lease rates have been somewhat lower. They just purely reflect the market value of these aircrafts with the leases that are currently in place and that’s why we impaired them out to market value.

[Kristine Liwag:]

Great. Thank you very much.

[Colm Barrington:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Nathan Hong with Morgan Stanley. Your line is open, please go ahead.

[Nathan Hong:]

Hi guys, thanks for taking the question. Following the sales announced of the aircraft, FLY will eventually hold a larger cash balance than what your used to in the past and obviously you guys have even more capacity as you level up, so one would think that you would now be able to bid on potentially larger deals. So first, I’m kind of wondering about that comment [indiscernible] office from some comments here will be helpful. And second, if it is true, I’m not sure if you can quantify this, but just curious to just see if you can help us think about how many deals, why you had to walk away from in the past given maybe a lack of cash or financing options.

[Colm Barrington:]

Okay, Nathan yes, as you say we have $800 million in cash give or take once we complete these sales and we can leverage that up. So we see ourselves being able to meet our growth targets through 2015 and through 2016. So we are well cashed up to achieve our targets. As Steve said, he wins at about 10% of the deals that he looks at and very often that’s because of pricing and competitive factors. So we haven’t actually turned away from any deals through lack of resources. We’ve turned away from deals because we couldn’t get the terms we felt comfortable with. It was more a question of getting the numbers we wanted right from the availability of cash. With this cash we have we are not going to just blow it, we are going to spend it wisely and get aircraft and deals, getting some sort of returns we need.

[Nathan Hong:]

Got it. And this question might be for Gary. I think in the past you guys talked about growing the interest cost over time as some of this moss begins to roll off. Has there been any change to this view given the sale of the portfolio and prudential debt pay down. So I’m just kind of curious how we should think about interest cost on a go forward basis as you guys begin to rebuild the portfolio.

[Gary Dales:]

Yes, with the sale of the aircraft that requires to repay some of the debt, which means we won’t have the availability of the swaps rolling off at the lower rate. So I think we’ve probably reached a point where we maximize debt benefit and can expect the interest expense to be steady going forward, albeit the reprising of the term loan is not fully baked into our results that will come in overtime and we’re going to continue to look for lower cost financing on part of our acquisition program and some of the new debt that leverage that Colm talked about.

[Colm Barrington:]

And one of the good things Nathan is that with the availability of finance in the market today there are lower margins available. So as we do new deals we think we’d be able to bring down cost by pronouncing some results there.

[Nathan Hong:]

Got it. Thanks for the time.

[Steve Zissis:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Richa Talwar with Deutsche Bank. Your line is open. Please go ahead.

[Richa Talwar:]

Hello. Good morning everyone.

[Steve Zissis:]

Hi Richa.

[Richa Talwar:]

So my first question is when you announced the 33 aircraft sales originally you indicated that flightto make as much as $2 billion of investments over the next 24 months. I wanted to make sure that was still the long term target and somewhat related to some of your previous questions. If you can give us a sense of the cadence of those investments over the next few quarters, that will be helpful. I don’t know if that’s related to what Gary said regarding half of this 750 posing in the September quarter, but any more detail there would be great.

[Colm Barrington:]

Well, just backing for you last point first. I think Gary was referring to the sales Richa. Half of the 33 aircraft sales transaction we expect to close in the third quarter, but the other half by year end. Yes as regards to the $2 billion I think if you leverage up even modestly on the $800 million of cash, $2 billion is easily achievable. As we’ve said we’ve already acquired $460 million worth this year. We have either required or are at the process of accruing $460 million and as Steve has said, we are target to meet our $750 million for the full year. So on top of that then we have the ability to do the same or little more in 2016 depending on whether we can get deals and we are comfortable in closing.

[Richa Talwar:]

Okay, got it and then one more bigger picture one. I wanted to get your thoughts around trends in Latin America. Particularly one of your customers in the region TAM recently announced a gradual cut to domestic capacity in Brazil by as much as 10% in response to a weak macro backdrop. Last I checked you had a handful of older A320’s with them. I’m not sure if some of those were part of the sale you recently announced and maybe you can answer that first. But if they are in your fleet, how should we think about the impact of those assets and more broadly future opportunities for flying LATAM. Thanks.

[Steve Zissis:]

Well, I think LATAM has handled the recession in Brazil quite well. They are very proactive, have reduced their capacity and manpower in the region. I think Brazil will remain a challenge for most of the airlines in that region for the next year until Brazil can turn the corner. On the specifics to FLY, there was definitely one, maybe it was two – yes, there was two A320 and one 777 in the sales that we recently announced. So FLY has reduced its exposure to TAM in that respect.

[Richa Talwar:]

Okay, do you see opportunity to do more there or are you kind of refraining from that region given the economic issues?

[Steve Zissis:]

No, no I think it represents opportunities right. These counties, they go through ups and downs and eventually will recovery. So I think there is good opportunities to do transactions there and in fact we are looking at portfolio deals right now.

[Steve Zissis:]

And I think one of the logics we gave for that sale Richa was to actually reduce our exposure to some of these carriers, to give us the ability of doing more transactions with them. So we can do a deal with somebody like LATAM and then they sell on the aircraft at a profit. It gives the ability to do another deal and move on.

[Richa Talwar:]

Got it, very clear. Thank you everyone.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Bill Mastoris with Baird & Company. Your line is open. Please go ahead.

[Bill Mastoris:]

Thank you. How should we thinking about how you are going to manage leverage through your series of transactions. In the past you have targeted about 3.5 times on really a net debt basis or net debt to equity. I’m just wondering, you are going to have this huge reduction and then you are going to go in this very aggressive expansion plan. I’m just wondering how that’s going to be managed and what we might expect maybe by year end and maybe going forward.

[Colm Barrington:]

It’s got to go down Bill. I think Gary when you complete the 33 aircraft sales with no further acquisitions our leverage would go down to a little over 2.3 to 2.5 is where it’s going to be, but as you mentioned, as we are going to be firing our aircraft that leverage will go back up. We are still looking at a range of three to four times and so I think you will eventually see us back in that range as we work through these disposal transactions and then do subsequent acquisitions.

[Bill Mastoris:]

Okay, so really no change. It’s just going to vastly, maybe a little bit more over the next several quarters. Would that be a fair characterization?

[Steve Zissis:]

Yes, but I think it would take a while to get back up to 3.5 level on our current base for acquisitions.

[Bill Mastoris:]

Okay and then with the nice cash stash that you have, I’m just wondering, in terms of unencumbered aircraft in the past you have mentioned that $750 million to $1 billion is a target. Is that still applicable now with all these series of transactions or might that be a little bit higher going forward?

[Gary Dales:]

Gary. We currently have approximately $500 million, $600 million of unencumbered aircraft and I think we’ll probably keep it around there for the time being.

[Steve Zissis:]

A few of those aircraft are part of the 33 aircraft transaction, so obviously we won’t have those aircrafts any more, but then as we acquire aircrafts, we expect some of those will be unencumbered as well. So it’s still a target to have, some level of aircraft that are unencumbered.

[Colm Barrington:]

And you know that cash gives us great flexibility to go and bid on deals and acquire and then leverage them subsequently, which is obviously our strategy.

[Gary Dales:]

Okay. So really the new target is somewhere between $500 million and maybe $600 million. Did I state that appropriately?

[Colm Barrington:]

We haven’t really set a precise target. It could go higher than that, yes, with all the cash we’ve generated and the unsecured debt it could towards $1 billion all right. But let’s see how that works out over the coming months.

[Gary Dales:]

Okay, thank you.

[Colm Barrington:]

Thanks Bill.

[Operator:]

Thank you and our last question comes from the line of Gary Liebowitz with Wells Fargo Securities. Your line is open. Please go ahead.

[Gary Liebowitz:]

Yes, thanks. I didn’t see a utilization number for the quarter. Can you tell us what it was and also of the 96 aircrafts how many were grounded at the end of Q2.

[Steve Zissis:]

Yes, we have utilization for the second quarter. It was 97.5%. And the end of the quarter we had four aircraft that were not on lease or five aircrafts that were not on lease, two of those are the aircrafts, the 757s that are being solid. So one has already been closed and the other will sell next month. The two aircraft are with a Asian carrier and one is paying rent, but they don’t have a lease yet, so that lease is being finalized and they are both going to that same carrier with leases to be documented. One is already documented in July and the next one will be documented in the next few days, which really leaves us just one aircraft that is being marketed and we think we have a less fee for that, although again we are awaiting documentations. So really on ground without hone is just one aircraft.

[Colm Barrington:]

And that’s the aircraft we possessed from Russia, alternate other carrier.

[Gary Liebowitz:]

So if I look forward to Q3, maybe utilization somewhere closer to 99 would be the right assumption.

[Colm Barrington:]

I would say that’s much closer, yes, because it’s only going to be the short period of time from June 30 until we actually get the leases documented for those few aircrafts.

[Gary Liebowitz:]

Okay. Also Colm a lot of your presentation talked about the different levers your pulling to achieve a higher ROE and disclose a – the first half of the year the adjusted ROE as you measured was just about 10%. What order of magnitude of ROE improvement are we talking about once the cash is fully deployed and all the refinancing opportunities are utilized.

[Colm Barrington:]

I don’t think we gave and adjusted ROE number actually Gary. I think we gave an SG&A number as a percentage of revenues. But the market out there at the moment is give or take somewhere around 10% return on equity, maybe a little more. So that would bet the target we would be aiming for going forward and hopefully as we expand the portfolio with newer aircrafts and more newer aircrafts we’ll be achieving higher levels of ROE in future quarters. So certainly we would be going into 10% ROE range.

[Gary Liebowitz:]

And then compared to that 10% metric, where do you think you are today.

[Gary Dales:]

Look Gary, we reported it for this quarter, we recorded a 5.2% and again that’s in the press release on the page with our adjusted net income and there is a lot of noise within this quarter and so I think shooting for something like Colm was talking about, 10% or even a little higher is where we expect to be.

[Colm Barrington:]

I mean as we said Gary, we’ve eliminated a lot of the underperforming aircrafts. We are acquiring more. Well aircrafts are producing good returns and then we are focused on both the liabilities reducing the interest costs and reducing the SG&A expense.

[Gary Liebowitz:]

Okay. Thank you.

[Colm Barrington:]

Thank you.

[Operator:]

Thank you. And this does close today’s Q&A session and I would like to turn the conference back to Matt Dallas for any closing remarks.

[Matt Dallas:]

We’d like to thank everyone for joining our second quarter earnings conference call. We look forward to updating you again next quarter. I’ll disconnect.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.