Fly Leasing Limited
Q3 2015 Earnings Call Transcript

Published: 12 Nov 2015

[Operator:]

Good day ladies and gentlemen and welcome to the Fly Leasing Third Quarter Earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your first speaker for today’s conference, Matt Dallas. You may begin, sir.

[Matt Dallas:]

Thank you and good morning. I’m Matt Dallas, the Investor Relations Manager at Fly Leasing and I’d like to welcome everyone to our third quarter 2015 earnings conference call. Fly Leasing, which we will refer to as Fly or the company throughout this call, issued its third quarter earnings results press release earlier 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 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; Steve Zissis, the President and CEO of BBAM, and Wesley Dick, Senior Vice President at BBAM. I’d like to begin the call today 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 the current expectations 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. An archived webcast of this call will be available for 90 days on the company’s website. I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

[Steve Zissis:]

Thanks Matt. Good morning to those of you listening from the U.S., and good afternoon to all of you in Europe. Thank you all for joining Fly’s third quarter earnings call. Let me begin with an update of industry conditions. Little has changed since our last earnings call. Forecasts for air traffic growth remain strong at about 5% a year for the long term, with 2015 growth expected to be closer to 7% worldwide. Most major airlines globally are reporting improved earnings with some carriers, particularly those in the U.S., announcing record profits. Lower fuel prices and generally strong demand for passenger traffic continue to be the key drivers of these results. On the last call, I reported that Fly agreed to sell 33 primarily mid-age aircraft. These sales have a very positive impact on Fly’s fleet metrics and future accounting results. We have since announced an agreement to sell 12 additional midlife aircraft which will similarly improve our fleet metrics and accounting results. These two transactions combined with previously announced sales means Fly has contracted to sell 57 aircraft in total. This represents approximately 45% of our fleet at the beginning of 2015. In addition to these sales, Fly has acquired $1.5 billion of aircraft since January 2014. These aircraft have an average age of two years and average remaining lease term of 10 years. The combination of sales and acquisitions has immensely improved fleet metrics and positions Fly to greatly improve operating results in the coming years. Aside from this fleet transformation, we are announcing today our intention to replace the dividend with an accelerated return of capital through a $100 million share repurchase program. This program is intended to enhance Fly’s long-term prospects while immediately boosting the net book value and earnings per share. I’m also pleased to report that BBAM shareholders have informed Fly that they intend to invest a further $10 million into Fly stock to further align interest to Fly and BBAM, and underscore the value in Fly’s shares. It’s important to note that Fly’s strong liquidity position, even with $100 million share repurchase program, Fly still has adequate resources to acquire an additional $2 billion of aircraft. The timing and pace of new acquisitions will be entirely dependent on finding appropriate transactions to enhance fleet metrics and improve return on equity and earnings per share. Be assured, Fly will not deploy capital just for the sake of growing top line revenues and assets under operating lease. While it’s difficult to predict with certainty which aircraft we will buy, we are targeting young narrow body aircraft and select 787 and A350 wide bodies. We are aiming for $750 million of acquisitions per year; however, we will wait for the right opportunities. In fact, because we will also target Neos and Maxes, the commitment and acquisition schedule next year will likely favor the latter half of 2016. We will not change our basic strategy of [indiscernible]. I’m very proud of the progress we’ve made the last two years transforming Fly’s fleet, improving operating performance, and enhancing the liquidity position for future acquisitions. I’m also confident we will continue to be successful improving returns and growing earnings per share over the coming years while maintaining a young and in-demand fleet of aircraft. I’d now like to hand the call over to Colm to go through our third quarter activities and the details of the $100 million share repurchase program.

[Colm Barrington:]

Thank you, Steve, and good morning everyone. Thank you for joining us today. Fly is reporting positive and ongoing improvements in EPS, shareholder returns, and shareholder value. We have contracted to sell 57 aircraft with an average age of 13 years. We have already delivered 27 of these aircraft and expect to deliver most of the balance by year-end. Since the beginning of 2014, we have purchased 31 aircraft with an average age of two years. The sales of older aircraft and the purchases of newer models has improved our fleet metrics significantly. The sales of underperforming older aircraft and investment in higher yielding assets will continue to improve our EPS and returns on equity. In fact, the aircraft that we have acquired since the start of 2014 have a net margin of 3.7% compared of a net margin of 1.1% from the 57 aircraft that are being sold in 2015. We are also continuing to actively manage our liabilities. In the last 12 months, we’ve reduced the cost of our secured debt by 32 basis points, and in the same period we have reduced our adjusted SG&A by 19% largely driven by the recently agreed $5 million annual reduction in the management fee payable by Fly to BBAM. Fly is taking advantage of the current strong market conditions for selling midlife aircraft. These sales have generated strong gains and significant amounts of cash. By year-end, we expect to have close to $1 billion in cash and unencumbered aircraft. Fly has the resources to continue to execute its growth plan and to accelerate the return of capital to shareholders through today’s announced $100 million share repurchase plan. The highlights of our third quarter results include adjusted net income of $32.3 million or $0.78 per share, and net income of $19.9 million or $0.47 per share. At the end of the quarter, our net book value was just over $700 million or $16.95 per share. During the quarter, we invested $214 million in new aircraft with a further positive impact in our fleet age, which was approximately seven years at the end of the quarter as compared to eight years at the end of the prior quarter. We contracted to sell an additional 12 aircraft in the quarter for a gain of $12 million above our net book value. These 12 aircraft have an average age of 13 years, and we expect that the majority of the sales will be completed by year-end. Of the 57 aircraft contracted for sale in 2015, we have completed the sales of 15 aircraft in the September quarter. We are well on our way to completing the balance of the sales. We’ve also acquired a total of just over 400,000 shares in our prior share repurchase program. These shares were purchased at an average price of just over $13 per share at a total cost of approximately $5.5 million. Finally, today we are announcing that our board has approved a $100 million share repurchase program to replace our dividend. This new and significant repurchase program, which will be launched next week, will involve a $75 million modified Dutch tender offer and a $25 million open market share repurchase program. These programs will replace both Fly’s previously announced share repurchase program under which we have spent the $5.5 million referred to earlier, and our current dividend. Since Fly’s IPO in 2007, we have returned cash to shareholders in a systematic manner. We have paid regular dividends and have from time to time repurchased shares in the open market or through privately negotiated transactions. As we look forward and make every effort to increase the value of the business, we have decided to suspend the dividend and instead accelerate the return of capital to our shareholders through a large share repurchase program. The total repurchase program announced today is equal to 2.4 times the annual dividend amount. This decision has been taken with the single purpose of driving EPS and ROE higher on the premise that this will be reflected in the share price. Despite having monetized more than 45% of the company’s fleet at a premium to book value, our shares continue to trade at a discount to book value. We see significant value in our shares and will continue to explore every possible strategy for creating long-term value for our shareholders. I would like to stress that the change in dividend policy and the share repurchase program announced today does not constitute a change in the company’s strategy. We are first and foremost an aircraft leasing company and the growth of the company’s ROE and profitability would be primarily driven by the acquisition of attractive aircraft. With more than $1 billion in cash and unencumbered aircraft projected at the end of the calendar year, Fly still has ample capacity to acquire more than $2 billion worth of aircraft in addition to the share repurchase program announced today. As already discussed, we have driven down the SG&A of the business, reduced our funding costs, sold older and underperforming aircraft, and acquired higher margin aircraft all on the last year. Again, the change in capital allocation does not constitute a change in strategy but instead a supplemental initiative to further grow the earnings of the business on a per-share basis. As mentioned by Steve, BBAM’s shareholders have informed our board that they will purchase an additional $10 million of Fly shares over the coming months. This is a further endorsement of the value in Fly’s shares and is a further alignment of the interests of Fly and BBAM. The repurchase of a significant number of shares will be immediately accretive to both EPS and shareholders equity per share. This slide reflects what our Q3 EPS and shareholders equity would have been if we had repurchased $100 million of shares on July 1 at yesterday’s closing share price. As we grow EPS and shareholders equity, the impact of the share repurchases will be even greater. Fly has paid a total $8.12 per share in dividends since we launched the company on the New York Stock Exchange in 2007. We have not taken lightly the decision to replace the dividend with these other initiatives. We believe that Fly and its shareholders will be better served by this large return of capital and the improved EPS, ROE and book value per share. With that, I will hand it over to Gary Dales to take you through the Q3 and year-to-date numbers. Gary?

[Gary Dales:]

Thank you, Colm. We are reporting net income of $19.9 million or $0.47 per share. This compares to $15.4 million or $0.37 per share reported in the same period in the previous year. For the nine months ended September 30, 2015, we’re reporting a loss of $21.1 million or $0.53 per share, reflecting the impairment charge of $65.4 million taken in the second quarter. On an adjusted basis, we are reporting $0.78 per share for the third quarter of 2015 and $1.65 per share for the nine months ended September 30, 2015. For the three months ended September 30, 2015, our total revenues were $106.2 million. Last year’s revenue included $14.2 million of end of lease income, whereas there is only $1.3 million in the current quarter. Operating lease rental revenue increased 7% to $104.4 million, reflecting aircraft that we have added over the last 18 months. Also included in our third quarter revenues is $7.2 million of gains from aircraft sales. On Slide 8, as Colm mentioned, in Q3 we sold 15 aircraft and have since delivered another nine aircraft. Twenty-seven aircraft have now been delivered and we expect the remaining 30 to deliver over the next few months. The next slide shows how the portfolio sales are reflected in our results. When we announced the sale of a 33 aircraft portfolio in June, we indicated that the gain from sale would be approximately $35.4 million, and that assumes all the sales were consummated on June 30. A portion of this gain is recognized now in our operating results. As we work to deliver these aircraft to the buyer, we have continued to collect and recognize rent and paid interest expense and servicing fees associated with these aircraft. The rents collected minus these expenses is shown on this slide as a pre-tax margin. During the third quarter, the aircraft in the June portfolio generated a pre-tax margin of $16.7 million. The next column updates our guidance for the fourth quarter. Actual results will vary depending on when these aircraft actually deliver; nevertheless as you can see, the contribution these aircraft make to our results will slightly exceed the originate estimate. The same is true for the sale announced in September. Overall as we look to the fourth quarter, we believe we will be reporting about $20 million in gains on aircraft sales. Total expenses for the third quarter of 2015 were $84.7 million. This compared to $88.1 million for the same period in the previous year. No depreciation was recorded on aircraft held for sales. This explains the significant decrease in depreciation expense which was partially offset by depreciation on aircraft acquired. Our interest expense has increased to $2.5 million as a result of the issuance of the senior secured notes in October of last year. Selling, general and administrative expense is down $2.1 million, reflecting the $5 million annual reduction in our management fee. This quarter, we also have $3.2 million of debt modification and extinguishment costs, and expense of $3.2 million for ineffective, de-designated and terminated derivates. Both of these charges relate to debt that has been or will be repaid in connection with the contracted sales of our aircraft. On a year-to-date basis, total expenses are $355.5 million, which compared to $260 million for the same period in the previous year. Current year expenses include the $65.4 million impairment charge taken last quarter. This charge covers 16 aircraft, 10 of which have been sold or will be sold. Before I get to guidance, let me briefly cover a few items on our balance sheet. There are 33 aircraft with a net book value of $796.1 million held for sale. At June 30, we also had 33 aircraft held for sale. Twelve of those aircraft have been sold and another 12, part of the sales transaction we announced in September, have been added to the held for sale aircraft. Now to guidance. Let me cover a few items for the fourth quarter of 2015. We are expecting operating lease rental revenue to be between $86 million and $88 million. The exact amount will depend on how quickly aircraft are delivered to the buyers. As we’ve discussed, while under our ownership we will continue to recognize rental income from these aircraft. We expect that lease incentive amortization will be between $4 million and $5 million. As mentioned, we are anticipating more than $20 million in gains from aircraft sales, which include some gains that we originally expected in the third quarter. End of lease income will be more than $20 million and could be as much as $30 million if the aircraft are delivered as anticipated at the end of the current leases. Depreciation expense is expected to be between $30 million and $32 million. Aircraft held for sale are not depreciated. We expect interest expense of between $32 million and $34 million. We will expense between $12 million and $14 million in debt modification and extinguishment costs, all associated with debt repaid as part of our sales transactions. Maintenance and other expense are expected to be between $3 million and $4 million. I call your attention to the appendix, where we have the detail of our adjusted net income and adjusted SG&A expense. Also in the appendix is a table showing the components of our capital structure and 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 continue to focus on making further improvements to Fly’s earnings, returns and shareholder value. These measures, specifically our sales of older aircraft and the resulting generation of liquidity, our reinvestment in new aircraft, and the significant return of capital to shareholders through the share repurchase program announced today are a continuation of the strategy that we’ve been pursuing at Fly for the past two years. We expect this strategy to add further to shareholder value. With that, we are now ready to take your questions.

[Operator:]

[Operator instructions] Our first question or comment comes from the line of Helane Becker with Cowen & Company. Your line is now open.

[Colm Barrington:]

Good morning, Helane.

[Helane Becker:]

Hi guys, good morning. Colm, you really loved your dividend and that was a big part of all of your presentations. I’m just wondering, the change in the way you’re going to allocate capital, is that from shareholders who would prefer a share repurchase program to a dividend, or how should we really think about that, because one of the comments in your press release is that you may or may not complete the program by the end of next year, you know what I mean?

[Wesley Dick:]

Hello Helane, this is Wes. Let me just jump in. I think that’s standard legal disclosure. We have full intentions to execute on the full $100 million program, split $75 million into the modified Dutch tender and $25 million in the follow-on open market repurchases.

[Helane Becker:]

Okay, so we should think about it as shareholders who are really preferring the share repurchase? Is that it?

[Wesley Dick:]

Well, I’m not sure that we’re necessarily thinking about who has a preference for which form of return of capital. What we’re very much aware of is the sector being traded largely on an earnings basis and that we’ve pulled almost every lever that we can in the business in order to drive EPS higher and drive ROE higher. This is a continuation of us making every effort to do that, so when we see our shares trading at such a substantial discount to book value after having monetized such a large percentage of them at or above book value, we see tremendous value in our shares, and even as importantly we see the per-share metrics going forward as we deploy the rest of our capital only being expanded by pursuing this strategy.

[Helane Becker:]

Got you, okay. My other question is on the BBAM shares that you guys are buying, is that new shares or existing shares?

[Wesley Dick:]

Helane, as I think you know, the BBAM ownership group is, I think, Fly’s combined largest shareholder currently, so this will be an expansion. I think today we own about 8% of the business, BBAM shareholders do. Pro forma for the completion of the tender offers, we’ll be well into the double digits in terms of percentage ownership, and we will grow--both in nominal dollars and in percentage ownership, we’ll only grow that position by acquiring another $10 million in open market purchases.

[Helane Becker:]

Got you, okay. Then I just have a question on Slide 9. If I look at that slide, the top line says gain on sale of aircraft, and then it says variance at the end, $15.8 million. What is--how am I supposed to think about that difference between the guidance and announcement, and the revised guidance?

[Gary Dales:]

Helane, this is Gary. It is a little bit of a confusing topic, and what we were trying to show on this slide is that some of the gain that we announced back in June is actually recognized in our operating results. So we’re now recognizing that in the third quarter as revenue and has some interest expense and some servicing fees, which we estimated was $16.7 million. So you really need to combine both of those lines as you think about how that compares back to the $35 million we announced back in June when we initially announced that sale, and the variance is actually the difference between what that sale would have generated had we closed it on June 30 and the actual results we’ll generate as each of those aircraft actually sell. I know that’s a little confusing, and I hope--

[Helane Becker:]

I think I have no way of knowing, right, what your lease rate revenue was in the third quarter on those aircraft held for sale, do I? Or will that be in the Q? Will I be able to adjust that?

[Gary Dales:]

Sorry Helane, I’m not completely following the question.

[Helane Becker:]

You just said that the variance, that the guidance announcement versus the revised guidance included--you know, that I have to look at that number and remember that you guys took rental revenue in the third quarter associated with it and continue to do so until you actually deliver the aircraft to the new owner. So what I’m wondering is, do I have any way of knowing what the revenue is on those particular aircraft in the quarter, or is that--

[Gary Dales:]

I can tell you it was around $27 million for the aircraft that are held for sale, is the amount of rental revenue they generated.

[Helane Becker:]

Okay, so the $19.6 million plus the $27 million gets me to something over the amount that you were estimating you would get from selling the aircraft, right?

[Gary Dales:]

Yes.

[Colm Barrington:]

It is pretty complicated. Do you want to get us on the line later on, perhaps?

[Helane Becker:]

Yes, maybe that would be a good idea, but actually I kind of got it now. I just wanted to be sure I understood what you were talking about here, so thank you. I’ll move on to the next questioner. Thanks guys.

[Colm Barrington:]

Thanks Helane.

[Operator:]

Our next question or comment comes from the line of Gary Liebowitz with Wells Fargo. Your line is now open.

[Gary Liebowitz:]

Thanks Operator. You guys did not talk about your aircraft pipeline, and if I look at your recent capex, it’s skewed very heavily towards freighter aircraft. It sounds like, Steve, you were sort of backing away from a hard capex target for next year. Has it become meaningfully more difficult to source assets, passenger aircraft assets with satisfactory returns?

[Steve Zissis:]

Yes, I think our view of the marketplace is that there continues to be a lot of aggressive capital, especially from Asia, chasing the Tier 1 type of deals. It has become much more competitive over the last 18 months, and we’ve taken the position that we’re not just going to grow Fly’s portfolio for the sake of growing it, that we’re looking for deals that are accretive to EPS and ROE, and when we find those deals, we’ll execute on them. So when you think about, Gary, the last couple earnings calls, we’ve indicated $750 million for 2015 as our target for acquisitions, we’ll probably end the year around, I’m going to say $550 million to $600 million, depending on what we close in the fourth quarter here, and that’s because we just didn’t find those right opportunities. When we do find the right opportunities, we will accelerate our growth plans. So we’re going to be patient, and as a major shareholder in the company, we think that’s the wisest way to deploy our capital.

[Gary Liebowitz:]

Is it possible that you actually in 2016, you might see even more selling opportunities? Could the portfolio further shrink from here?

[Steve Zissis:]

Look, I think there are still a handful of deals that we wouldn’t mind selling if we got the right kind of offers on, but generally from here on out, Gary, we’re looking to grow our business. But again, we’re going to do that patiently and look for the right type of deals.

[Gary Liebowitz:]

Okay. Also, can you talk about the two planes you had at Transaero? I guess they came back to you subsequent to the quarter end, and as you’re going to remarket those planes, what kind of appetite is there out there for the oldest of the 738s?

[Steve Zissis:]

So we had two 737 800s - those were at Transaero for quite a few years. We did take those back once Transaero got into trouble. It took us about two weeks to get them out of Russia with the records and everything, so actually the legal system and repossession in Russia worked quite well for us. Those aircraft are now being offered in the marketplace and we expect to remarket those for sale or lease in the first quarter, Gary. Demand for older 800s is--I would say it’s mediocre. It’s okay, but it’s not as strong as the newer vintage 800s and A320s.

[Gary Liebowitz:]

Okay, and then one on the buyback, two related questions. Was there any consideration given to maintaining a small token dividend [indiscernible] investors can remain in the stock?

[Steve Zissis:]

Yes--sorry, go ahead, Gary.

[Gary Liebowitz:]

Oh, and the follow-up would be, when do we see the terms of the Dutch tender?

[Steve Zissis:]

So on the latter question, you’ll see the terms early next week. We’re working on legal documents now. On the first question of whether to pay a nominal dividend or no dividend, that is a question we spent a lot of time researching and discussing with our advisors before we made a decision. I think really the view here is that as opposed to making a token gesture, that we really wanted to put every cent we could forward on a share repurchase program, because we see an overwhelmingly larger amount of value delivered to our shareholders with that strategy relative to a dividend, so that’s the way we went.

[Gary Liebowitz:]

Thank you, guys.

[Operator:]

Our next question or comment comes from the line of Nathan Hong with Morgan Stanley. Your line is now open.

[Nathan Hong:]

Hi, thanks for taking the question. I just have a few follow-ups here. I know that buybacks kind of pushes forward the return of cash to shareholders, but I was wondering if you could offer your thoughts on whether or not Fly may eventually bring back a dividend in the future, or I guess just general thoughts on where you stand on capital returns after these buybacks are executed.

[Colm Barrington:]

Well Nathan, this is a pretty significant move we’re announcing today, so that’s going to take us through the next quarter or two. Certainly dividends are not off the table and we will continue to review dividends and other initiatives for returning capital to shareholders, but let’s proceed with this one for the time being.

[Nathan Hong:]

Okay, got it, that’s helpful. I guess maybe a question for Steve. Just wondering if you could give us updated thoughts on the BBAM and Fly relationship, considering that BBAM’s stake will eventually move up higher here. Is there a potential that one day BBAM might purchase all of Fly, or is that something that’s not part of the strategy?

[Steve Zissis:]

No, look - our strategy is to enhance shareholder value here, and if at the end of the day it entails selling a major part of the portfolio or all of Fly, that’s something we will consider. Obviously Fly is an important aspect of BBAM’s business, and BBAM and its shareholders at BBAM have a large equity stake in Fly, and as Wes had indicated earlier, that stake is going to grow over 10%, and as long as the shares are trading at what we believe is fair value, you can expect BBAM to acquire more.

[Nathan Hong:]

Okay, that’s helpful. If I could just sneak in one more, I think last quarter you guys mentioned that you were looking at a total of--I think it was around $6.1 billion in total transactions. Obviously the hit rate isn’t that high, but I’m curious to hear if this level of transaction has actually moved up or down over the last three months.

[Steve Zissis:]

Yes, I guess for the rest of the people that are on the call who are not familiar with what Nathan just mentioned, the $6.1 billion that we mentioned was the total number of deals in the marketplace that we were considering for Fly. Of that 6.1, our average hit rate was about 10% historically. Going forward, we’re actually seeing that number increase somewhat significantly. There are quite a few transactions for the Neos and A350s and 787s in the marketplace when you look out into ’16 and ’17. Now having said that, Nathan, the market is much more competitive, so I think our hit ratio from 10% will probably go down a bit from there, say 7 or 8, but while the transaction volume is probably going up to $7 billion or $8 billion now. So we see definitely some good opportunities in the latter part of ’16 and early ’17, and you can expect us to grow the portfolio in a region of $750 million in ’16 and ’17.

[Nathan Hong:]

Okay, that’s really helpful. Thanks for the time. Appreciate it.

[Colm Barrington:]

Thanks Nathan.

[Operator:]

Our next question or comment comes from the line of Justine Fisher with Goldman Sachs. Your line is now open.

[Justine Fisher:]

Good morning. The first question that I just had was on the asset sales. Can you remind us what kind of aircraft again are held for sale, and what would not allow you to sell the remaining 30 aircraft by your expected time frame?

[Colm Barrington:]

Well, nothing that we can envisage will stop us selling those remaining 30 aircraft, Justine; but as you know, when you’re transferring an aircraft and a lease, you have to get lessee consent to novate the lease, so that’s an ongoing process - you have to novate the insurance, et cetera, so a lot of paperwork to be done, and that’s just in process. You can only handle so much at a time between the buyer and the seller, so it’s all happening in [indiscernible] have been delivered by year-end. The aircraft in that group are basically probably a cross-section of our portfolio - A320s and 737s. There’s probably a slight preponderance of Airbus over the Boeing aircraft.

[Steve Zissis:]

And they may be a little older than the ones in our fleet.

[Justine Fisher:]

Okay, and how old were those Transaero 737 800s?

[Colm Barrington:]

They, I believe, are late teens.

[Steve Zissis:]

1998s.

[Colm Barrington:]

‘98s, yes.

[Justine Fisher:]

Okay, so when you said that the market for that age of an aircraft is mediocre, that’s the market for narrow bodies that maybe have one lease term left. How would you characterize the market for late teens versus a 10-year-old? Is there a marked difference there?

[Steve Zissis:]

Yes, I think when you get into the younger aircraft, the demand profile does improve. There are a limited amount of carriers and credit quality that are picking up the older aircraft. Having said that, I think on our last couple calls, we indicated that the 737 800 market was very robust [indiscernible] come off now and lease rates have softened a bit on the 800, while on the A320, that market has definitely firmed up, so you’ve kind of seen the market switch a bit here. We expect that to continue through ’16.

[Justine Fisher:]

What do you think have been the drivers of that?

[Steve Zissis:]

It’s all supply related.

[Justine Fisher:]

Okay. The last question I had was on the opportunities that you see. I know you said that you have actually seen fewer opportunities that were attractive enough to act on, but are we right to assume that the bulk of this is still in the sale-leaseback market? I mean, you guys are not necessarily looking to buy more midlife aircraft. I know that a lot of the recent purchases that you have done are sale-leasebacks. Is that still where we should expect Fly to be focused on?

[Steve Zissis:]

That’s correct. We’ll stay in the sale-leaseback market primarily in the newer stuff. Occasionally when we see something that we think is mispriced or off the run, that produces outsized returns, you’ll see us do midlife stuff; but that’s not our core focus.

[Justine Fisher:]

Okay, great. Thanks very much.

[Operator:]

Our next question or comment comes from the line of Kristine Liwag with Bank of America. Your line is now open.

[Kristine Liwag:]

Hi, good morning everyone. For your [indiscernible] strategy, what metrics are you looking at to evaluate whether or not the asset you will purchase is at a favorable price? Is there a lease rate factor that you are targeting, and if so, can you please share with us?

[Steve Zissis:]

Well, it’s hard to generalize about lease rate factors because it is correlated to the price of the aircraft. You also want to look at your security package and the lease term, and obviously the spec of the aircraft, so it’s very hard to just generalize on lease rate factors.

[Kristine Liwag:]

So if there are other metrics that you’re looking at, can you just give us an idea of what those metrics are, so then we could evaluate whether or not the airplanes that you plan to purchase will provide solid return for your shareholders?

[Steve Zissis:]

At the end of the day, we’re a leasing company, so we’re looking primarily towards the asset and the re-marketability of that asset, either on an early termination or at the end of the lease. Finally, we’re looking at the ability of that asset to improve ROE and earnings per share as we add aircraft to our portfolio, so it’s those metrics that inform us on whether we should do a deal or not. Obviously there’s other considerations - leasing concentration, geographical concentration, and credit exposures, but those things are not primarily the driver at the first instance.

[Kristine Liwag:]

Then there is concern in the market that right now there is an over-capacity of airplanes, and because of the new airplanes coming to the market, the over-supply continue for the next few years. When you look at your acquisition strategy and you think about the opportunities there are in the marketplace, is now really the right time to buy new airplanes, in your view?

[Steve Zissis:]

Well, we get this question a lot, and all I’d like to say is that we’ve been in the business 25 years and every year we hear the same thing - that it’s not the right time to buy excess aircraft, and the market continually goes up. There are occasions when there are blips in the trend of our industry, and that’s when there’s a good time to pick them up, but the general trend over the 25 years has been a consistent upward sloping pattern. So you know, will there be some excess aircraft? Yes, there’s some excess aircraft now, especially on the wide body 10 to 15-year-old stuff that’s harder to move. But in demand commodity-type aircraft, especially on the narrow body side, the A320s and 737 next-gens are core aircraft, and aircraft that are in demand with most of our clients around the world.

[Colm Barrington:]

And in terms of our portfolio, Kristine, our wide body aircraft are all on long-term leases, 10 to 12-year leases, so we’re very comfortable with our wide body exposure.

[Kristine Liwag:]

Maybe switching gears, can you provide more color regarding your depreciation assumptions and perhaps how you may have changed your methodology to prevent the significant aircraft impairment charges that you’ve recorded previously?

[Colm Barrington:]

Well, our basic depreciation policy is 25 years from new to 15% residual of the original aircraft cost when it was first produced. I think if you look at our portfolio and our record over the last seven years, Christine, you’ll find that those impairment charges which we took earlier this year were very much one-off events. We’ve continuously sold aircraft at well above our book value, and we’ve continued to do that recently. There were one or two aircraft in our portfolio--or sorry, a group of aircraft in our portfolio, particularly a Boeing 747 and some other older aircraft, which we thought it sensible to take an impairment on, but on balance we’ve continued to sell the majority of our older aircraft, our 13-year-old aircraft on average - we sold 57 of them at gains to book value. I think those 57 aircraft had a gain of about $45 million to net book value, so I think our depreciation policy is pretty robust.

[Kristine Liwag:]

Great. Final question for me - you guys mentioned a couple of times that you want to increase your return on equity over time. Is there a target that you’re looking at?

[Wesley Dick:]

Yes. This is Wes, Kristine. We think it’s feasible over the medium term that we can get back to kind of an adjusted ROE number that’s in the low double digits.

[Kristine Liwag:]

And in the medium term, is that within two years, three years?

[Wesley Dick:]

That’s a reasonable timeline, yes.

[Kristine Liwag:]

Great, thank you very much.

[Wesley Dick:]

It will pace--you know, the ROE will pace along with the acquisition pace on aircraft.

[Kristine Liwag:]

Okay, thank you.

[Colm Barrington:]

Thanks Kristine.

[Operator:]

Ladies and gentlemen, as a reminder, if you have a question or a comment, please press star then one. Once again, if you have a question or comment, please press star then one on your touchtone telephone. Our next question or comment comes from the line of Bill Mastoris with Baird & Company. Your line is now open.

[Bill Mastoris:]

Thank you. Steve, acknowledging that you have $100 million share repurchase program and obviously the whole notion of maybe accelerating maybe some of your investments, or--I shouldn’t say accelerating, but back-end loading your $750 million annual investment goal towards the tail end of 2016, how should we be thinking about leverage here over the next several quarters? Are we still going to grow in the three to four times range, or is that going to come down dramatically?

[Wesley Dick:]

This is Wes. I think it’s a couple of things to say here, first in terms of just giving you a long run view of the level of leverage we’re comfortable with. We continue to believe that somewhere between three and four times net debt to equity is the right long-term place for the business to be levered. We will end the year significantly below that because of a large amount of cash on the balance sheet that’s arisen from the aircraft sales. We see a little pop-up in leverage as part of the $100 million share repurchase program, but really over the long term, depending on how much capital after this $100 million we continue to return to shareholders, we should see that leverage come down.

[Bill Mastoris:]

Okay, great. Then I’d like to follow up on Justine’s question on the sale-leaseback market. One of your larger competitors indicated that the sale-leaseback market is becoming increasingly competitive and that margins are shrinking dramatically. Do you see that out there in the marketplace?

[Steve Zissis:]

Yes, I think for the most part, that’s a correct view of the marketplace.

[Bill Mastoris:]

Okay, and then finally your $1 billion in unencumbered aircraft at year-end, is that a new target or is that going to be a new stable for how much unencumbered aircraft you keep on hand going forward?

[Colm Barrington:]

No Bill, that was a combination of unencumbered aircraft and cash, we referenced the $1 billion. I think the unencumbered aircraft would be about $400 million and the cash about $600 million.

[Bill Mastoris:]

Okay, thank you for that clarification. That will do it for me.

[Colm Barrington:]

Thanks Bill.

[Operator:]

I’m showing no further questions or comments at this time, so with that, I’d like to turn the call back over to Matt Dallas for closing remarks.

[Matt Dallas:]

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