Fly Leasing Limited
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good day ladies and gentlemen and welcome to the Fly Leasing Fourth 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 follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Matt Dallas. Sir, you may begin.

[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 fourth quarter and full-year 2015 earnings conference call. Fly Leasing, which we will refer to as Fly or the company throughout this call, issued its fourth 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; 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 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 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. With that, I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

[Steve Zissis:]

Thanks, Matt, and good morning everyone and thank you for joining Fly's fourth quarter earnings call. Let me begin with an update on industry conditions. 2015 was a record year for the global airline industry sparked by traffic growth 6.5%, and low fuel prices. IATA is projecting another strong year for our customers in 2016. Airlines are benefiting from the lower fuel prices and aircraft lessors benefit from a customer base that is healthy and growing. What especially noteworthy is that strong traffic growth in some regions of the world appears to be decoupling from weaker GDP growth. We're seeing this equate to strong demand for aircraft types and Fly's fleet. Many airlines are looking to lease aircraft as well extend current leases. The strength of the industry is evident at Fly. Our receivables at year-end are at record low and we only have one aircraft remaining to remarket in 2016. Fly has taken advantage of strong demand for aircraft and abundant market liquidity to transform its fleet, disposing a 44 aircraft with an average age of 13 years. This is a vital step for the company. Through the combination of disciplined aircraft sales of primarily older and less profitable aircraft and the accretive acquisition of younger, we have reduced the average fleet age by almost two years over the last four years. We have achieved this while increasing the average remaining lease term by nearly three years. We now have a younger portfolio with 92.5% of our fleet in in-production aircraft. I would also like to discuss how we plan to grow our fleet from here. Fly has unprecedented liquidity and currently has the ability to approximately double its fleet. Our philosophy has always been to take a value oriented approach to grow through sale leaseback and other opportunistic acquisitions rather than forward orders with the manufacturers. This allows us to be nimble regardless of market conditions. In 2016, we're targeting $750 million of acquisitions which we will source mainly in the sale leaseback markets. We remain prudent and we'll only acquire aircraft that deliver attractive adjusted returns. Currently, we're seeing some interesting opportunities for Fly to finance four order positions for the airlines for Neos and Maxes delivering in 2017 through 2019. I'm pleased to announce we have committed to acquire five Neos in 2017. Additionally, we are seeing opportunities to acquire 787 at attractive prices. The Fly executes its growth strategies; we expect that our fleet metrics and profitability will continue to improve. Our management team has worked together for nearly three decades. In that time we have successfully navigated several industry cycles. We are keenly aware that this is a cyclical industry and we have set up Fly to take advantage of these periods. While we do not currently see signs of an eminent downturn, we do believe cycles provide opportunities for strong returns. During the 2008/2009 financial crisis, Fly's flexible strategy allowed it to buyback 20% of its outstanding stock from 2008 to 2010 and 20% of its corporate debt in 2009. Following that, Fly executed a large portfolio of acquisition nearly doubling the size of its fleet. We're proud of this track record of creating value for stakeholders through cycles. With its young in-demand fleet, strong capital position, and few long-term commitments, Fly is well positioned for whatever cycle it brings. I'm also pleased to report that the BBAM stakeholders increased our combined ownership in Fly to 12% in the first quarter. I'll now turn to hand over to Colm.

[Colm Barrington:]

Thank you, Steve, and thank you everyone for joining us today. As you can see from the information that Steve has just given you, 2015 was a truly transformational year for Fly, as we continue the strategy which we started in 2012 of replacing older and less popular aircraft with newer models. Last year, this had the effect of reducing our fleet age by more than one year from 7.8 years at the end of 2014 to 6.6 years at the end of 2015. As importantly, the replacement of older aircraft with newer models has also increased our average lease term by more than one-year from 5.3 years at the end of 2014 to 6.5 years at the end of 2015. We're continuing our fleet rejuvenation in 2016. In Q1 2016 we expect to sell 14 more aircraft with an average age of 14 years and average lease terms of three years. As of March 3, we had already delivered 10 of these aircraft to their new owners and expect to deliver the remaining four aircraft by the end of the quarter. Meanwhile, we have a pipeline of $360 million of acquisitions for the first quarter. These aircraft average less than two years of age and have remaining lease terms of 12 years. Transactions will further reduce our fleet age, increase our lease term, and enhance the quality of our aircraft and lease portfolios. As Steve mentioned, for 2016 as a whole, we are targeting $750 million of new aircraft acquisitions mainly through sale leaseback transactions. And as you can see, we are now well on our way towards meeting that target. We plan on continuing our fleet rejuvenation for the remainder of 2016 and beyond. Our strategy is producing tangible results. In 2015, Fly reported adjusted net income of $131 million, a $3.17 per share, each 63% increase from 2014. We took the opportunity of using our healthy sales gains in 2015 to write-down the value of few older aircraft in our portfolio. And this non-cash charge resulted in the lower reported net income figure of $6.6 million for the year. As you've seen from our published figures, fourth quarter net income was a healthy $27.7 million or $0.68 per share. 2015 also produced attractive shareholder returns with the adjusted return on equity at 18.7% as compared to 10.7% in 2014. We expect to be able to continue to generate high returns based on the fleet changes already discussed and the other initiatives which I will discuss momentarily. Of particular significance is that Fly is benefiting from the strong industry conditions as Steve referred to earlier. We're experiencing strong demand from our airline clients for our aircraft and our clients are in a strong position financially. These factor affected in our lease and re-lease of 20 aircraft in 2015 which represents approximately 25% of our current fleet. Secondly, the fact that we have already re-leased all but one of our 2016 redeliveries which is a 737-800 coming off lease in December, but our year-end 2015 receivable balance of $124,000 was much lower than it has been ever before. Despite doom and gloom being forecast by some commentators, we don't see any signs of softness in our industry; in particular, low fuel costs are reducing airline costs significantly. These lower costs are allowing airlines to offer lower fares stimulating passenger traffic and creating demand for aircraft. As you're aware, the OEMs are sold out for many years on many of their popular aircraft types which leaves us lessors in a relatively strong position. As regards to fuel, it is noteworthy that many airlines adopt fuel hedging strategies that lock in the fuel cost on a reducing basis for periods of approximately two years. As a result, many airlines did not start getting substantial benefits from lower fuel costs until towards the end of 2015. Assuming they have continued their fleet of hedging strategies, these airlines will now have the benefit of lower fuel prices through 2016, and well into 2017, even if cost should drive later this year. As a result, we expect to see a continued healthy and profitable global airline industry for the foreseeable future and the resulting continuing robust demand for leased aircraft. As part of our strategy to increase earnings per share and return on equity, we decided in 2015 to suspend our quarterly dividend and instead return capital to shareholders through an aggressive share buyback program. In November, we announced that we would initiate a $75 million modified Dutch Tender Offer in quarter four 2015 and a $25 million open market share repurchase program in quarter one 2016. At the same time, the principals of BBAM confirmed that they would purchase an additional $10 million of Fly shares, following completion of the tender offer. In our discussions with shareholders, we had established that many of them did not subscribe value to the dividend; it did not appear to be providing support to our share price. As a result, we concluded that would be a much greater value to our shareholders to allocate funds to share buyback rather than to dividends, with the resulting improvements in ROE and EPS that will help our share price over time. In the same time, we knew that some of Fly's shareholders were focused on dividends. We believe that it was in all of our shareholders interest to give these shareholders an opportunity to exit the stock in an orderly manner. The tender offer was completed in quarter four 2015. The shares repurchased by Fly in 2015 totaled $5.8 million at an average price of $13.89 per share. This was a 23% discount to our year-end net book value of $18.04 per share. Fly has now completed its open market share repurchase program. As of March 3, Fly had repurchased an additional 2.1 million shares under this program. Because of the turmoil experienced in global equity markets in the first two months of 2016, these shares were purchased at an average of approximately $12 per share or 33% discount to year-end 2015 net book value. With completion of this program, Fly's share count has been reduced from 41.4 million shares at the end of 2014 to approximately 33.6 million shares today, a reduction of nearly 20%. Fly has announced a new $30 million open market share repurchase program. Over the coming months, management will evaluate opportunities to execute this program as against opportunities to further rejuvenate our fleet. Our share purchases will obviously have further positive impacts on Fly's net book value per share, on our earnings per share, and on our return on equity. We expect that these improvements will positively impact shareholder value. Fly has ample financial resources to continue its fleet development. In 2015, our fleet sales and operations generated significant liquidity. At the end of 2015, we had approximately $300 million of cash available at approximately $600 million of unsecured aircraft. And Fly continues to generate liquidity in Q1 2016 from our contracted aircraft sales and our aircraft leases. Meanwhile debt funding remains readily available, Fly has just closed a six-year $385 million aircraft acquisition facility on very attractive returns. Incidentally, this financing was arranged to Fly by BBAM no cost apply without the use of external advisors. As a result, Fly saved several million dollars in set-up cost. We are finding that the secured debt markets are active and enthusiastically looking for new deals. Fly continues to be able to finance its acquisitions in the secured debt markets on increasingly attractive terms, and meanwhile Fly has no significant near-term debt maturities. As a result of our cash position, our unencumbered aircraft, and available financing, Fly has the resources to acquire over $2 billion worth of additional aircraft and so we can meet our acquisition targets well into 2018. These resources could be further enhanced by additional aircraft sales. Our strategy is to remain nimble and to avail of opportunities as they arise. In this regard we have no commitments to purchase aircraft from the aircraft manufacturers and so have no commitments to make pre-delivery payments, have no unfunded purchase commitments, but no unleased future aircraft deliveries. We believe that our nimble strategy which was verified by our major aircraft sales initiatives throughout 2015, and we took the opportunity of strong markets for mid-life assets to turn aircraft into cash is the best way to create shareholder value through the cycles that our industry faces. Our strategy is developed and supported by our servicing arrangements with BBAM. BBAM principals have been together for nearly 30 years that experience several industry cycles in that time. This experience is available to Fly on a daily basis. BBAM with its fleet of approximately 400 aircraft under management also provides Fly with industry scale as company of Fly's size could not otherwise aspire to. This is particularly important when it comes to sourcing new aircraft acquisition opportunities. But BBAM's long-term airline relationship and its reputation for reliability, Fly's access to opportunities are not available to some other newer entrants. It also provides us access to BBAM's global network when it comes to remarketing aircraft. Also BBAM has been a significant player to secure debt markets for aircraft lending and has a significant positive reputation in these markets. Fly continues to benefit from these relationships as evidenced by our continuing access to attractive secured debts and our reducing debt costs. The alignment of interest between Fly and BBAM continues. The BBAM principals have informed the company that during Q1 2016 increase their shareholding in Fly by an average of $10 million. Together they now hold approximately 12% of Fly's outstanding shares. This positive alignment is also being reflected in Fly's cost base. In 2015, BBAM agreed to reduce its base management fee charged to Fly by $5 million per annum. As a result, Fly's SG&A expenses as a percentage of revenues are lower than our peer average. This reduced management fee will have ongoing benefits to Fly in 2016 and beyond. We believe that our relationship with BBAM will have further benefits to Fly particularly as our improved EPS and ROE metrics continue to improve as a result of our fleet rejuvenation, our reducing debt and SG&A costs, and our reduced share count. We believe that our nimble acquisition, financing, and capital structure strategies will improve these metrics further. With that, I will hand over to Gary Dales, to take you through the Q4 and full-year 2015 numbers.

[Gary Dales:]

Thank you, Colm. Before I begin my prepared remarks and take you through a summary of our financial results, I would like to take a few minutes to address on the important and recent development related to the purchase accounting methodology we have been using since our business was founded close to a decade ago. Well began late last year as a simple inquiry from the SEC in the course of its review of our 2014 Annual Report progressed just yesterday into a formal letter from the SEC stating that they believe we should change our approach on purchase accounting. As a result of this matter, the company will be delayed in delivering its 2015 Annual Report from our normal schedule. The results we are reporting today are consistent with our past accounting and don't reflect the SEC comments. I would also like to make it clear that we believe that we have been preparing our financial statements in accordance with GAAP and industry practice on this issue. We are in active discussion and seeking to resolve this issue over the next few weeks. Under the SEC's approach, the impact may be material to our previously issued financial statements and may require modification to our accounting for the current and prior year results that we're reporting today. The SEC has indicated that they believe when we acquire an on-lease aircraft we should account for the acquisition by allocating the purchase price between the aircraft and the maintenance right. The maintenance right would represent the difference between the aircraft in its condition at the acquisition date and the contractual return conditions all for in the lease. Under the SEC's approach, maintenance rights would be relieved into expense at an accelerated rate as compared to depreciation expense which is recognized ratably over the economic life of the aircraft. The expense of the maintenance right is a non-cash item and does not change the earnings profile of the company just the timing of expense recognition. Given that we only received the letter from the SEC, just yesterday, we are still working to quantify the impact, if any, to our financial statements. We should have more clarity over the coming weeks. Now, let me turn to the reported results. As Colm mentioned, we're reporting net income of $27.7 million or $0.68 per share for the fourth quarter of 2015. This compares to $15.5 million or $0.37 per share reported in the same period in the previous year. For the year-ended, December 31, 2015, we are reporting net income of $6.6 million or $0.13 per share reflecting the impairment charge of $84.3 million. On an adjusted basis, we're reporting $1.54 for the fourth quarter of 2015 and $3.17 for all of 2015. For the three months ended December 31, 2015, our total revenues were $139 million, a 16% increase over the same period in the previous year. Included in this quarter's total revenue is $37.9 million of end of lease income and $17 million in gain on aircraft sales. For the same period last year, the end of lease income totaled $21.7 million and there were no aircraft sales in the fourth quarter of last year. Operating lease rental revenue declined to $87.8 million as compared to the fourth quarter of 2014, reflecting the aircraft we have sold during the third and fourth quarters. Slide 12, total expenses for the fourth quarter of 2015 were $106 million. This compares to $102.3 million for the same period in the previous year. No depreciation expense taken on aircraft held for sale which is the primary explanation for the significant decrease in depreciation expense in the fourth quarter. Our interest expense has decreased $7.7 million as the result of repricing the term loan earlier in the year, terminating our old warehouse facility in the first quarter, and repayments of principal on outstanding debt. Our overall borrowing costs have remained low at 4.7% at year-end. This excludes amortization of debt issue and discounts. Selling, general, and administrative expense is down $3.2 million, principally due to the $5 million annual reduction in our management fee. This quarter, we have $8.1 million in debt modification and extinguishment costs reflecting early write-off of unamortized debt discounts and issue costs. During the fourth quarter of 2015, we also recorded impairment charges totaling $18.9 million. There are special circumstances to these three aircraft which are included in this charge. Let's move to the next slide and I'll explain the details. $7.9 million of our $90 million charge relates to two aircraft that were repossessed during the fourth quarter. As a result of terminating leases on these two aircraft, we have retained approximately $13 million in maintenance reserves. We have determined it is more prudent to sell these aircraft rather than spending the money on the aircraft. We expect to sell aircraft by the end of June. The impairment reduces our net book value to the anticipated sales proceeds for these aircraft but excludes retained maintenance reserves. When combined, the anticipated sales proceeds and retained maintenance reserves exceed our net book value by approximately $5 million. The other aircraft included in our impairment charge was an older aircraft that we contracted to sell earlier in 2015. When we announced our 33 aircraft portfolio sale last June, we reported the sale would generate a net gain of approximately $35 million. This aircraft was included in the portfolio at a price of $11 million less than its net book value. This aircraft will now be sold separately. The gain on the sale of the remaining aircraft in the portfolio will go up by $11 million, the same amount as recorded as an impairment charge. Now, let me cover a few items in our balance sheet. There are 15 aircraft with a net book value of $242 million held for sale. Subsequent to year-end, nine of these aircrafts have been sold with the remaining four to follow shortly. With respect to our liquidity, our unrestricted cash balance at year-end is $276 million. We have 10 unencumbered aircraft with a net book value of approximately $583.2 million. Lastly, we just entered into a revolving $385 million acquisition facility, which will allow us to opportunistically purchase aircraft. Slide 14 is an update on our portfolio sale which we announced in June. Through December 31, 2015, we had sold a total of 28 of the 33 aircraft. As we have discussed before, we continue to recognize rents up until the closing dates. These revenues reduce the sales proceeds and associated gains, but are reflected in our operating results. And it as just explained, the impairment of the one aircraft actually resulted in an increase in the gain on sale. Overall, we are $11.7 million ahead on this transaction as a result of carrying charge on the overall sales price. Slide 15 shows the same information for this September sales. Through December 31, 2015, we sold four aircraft in this transaction. Subsequent to year-end, we sold another five aircraft. Finally, let me cover a few items of guidance for the first quarter of 2016. We are expecting operating lease rental revenue to be between $74 million and $76 million. We expect lease incentives to reduce to about $3 million in the first quarter of 2016. The gains on sale of aircraft will reduce to between $9 million and $10 million. The amount of gains recognized depend upon when the sales actually close. As we have mentioned earlier, during the period before the sale closes, the rent received is recognized as revenue that reduces the amount of gain that would be reflected in our books. End-of-lease income will be between $9 million and $10 million, most of it relates to one aircraft whose lease is ended. Depreciation expense is expected to be between $30 million and $31 million and is dependent upon the pace of our aircraft acquisitions. The remaining aircraft held for sale are not depreciated. We expect interest expense of between $30 million and $31 million. Debt modification and extinguishment cost will be reduced to $2 million to $3 million. Maintenance and other expenses will be between $1 million and $2 million for the first quarter of 2016. And finally, selling, general, and administrative expense will be between $7 million and $8 million. I call your attention to the appendix where we have detail of our adjusted net income and the adjusted SG&A expense. Also in the appendix is a table showing our remarketing requirements over the next few years and a table showing the components of our capital structure and respective contracted cost for 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've seen from our presentations today, Fly made substantial and positive changes to its fleet in 2015. As a result, at year-end Fly had a super modern fleet with an average age of less than seven years, and average lease term of 6.5 years. These metrics compare very favorably with our public lessor peer group. The changes are continuing in 2016. We expect them to provide continuing positive benefits to Fly and its aircraft and lease portfolios. So Fly ended 2015 with its portfolio in great shape and with substantial liquidity and financial resources to continue our fleet rejuvenation program. Our $360 million in acquisition is expected to close in Q1 puts us well on our way to meeting our $750 million growth target for the year, and our policy of not making long-term commitments to future purchases from the aircraft manufacturers provides us with the financial flexibility to deploy our resources in a most productive manner to enhance shareholder returns. The 7.9 million shares that we have repurchased in the last six months has reduced our share count by close to 20%. This reduced share count will have ongoing positive benefits on our earnings per share and our return on equity. Finally, we are finding our global airline customers are experiencing positive demand conditions and are benefiting substantially from lower fuel costs. We expect these positive market industry positions to continue for the foreseeable future. With that, we are ready for your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Richa Talwar of Deutsche Bank. Your line is now open.

[Richa Talwar:]

So first just a couple of quick ones. Last quarter you said you were targeting low-double-digit ROEs, the $240 million you spent on three aircraft this past quarter, were you able to achieve those targets or that target?

[Colm Barrington:]

Yes, substantially. I think we have. I can't give you at the top of my head, Richa, the exact returns to the aircraft but we're on track. As you can see our overall return on equity for the year was substantially up and that trend is continuing, particularly as we've disposed some older less performing aircraft and replaced them with newer higher performing aircraft, you will see our returns of equity substantially rising.

[Richa Talwar:]

Okay, thanks. And then the new portfolio that you signed up for in 2017, the five aircrafts, could you tell us the size of that commitment?

[Steve Zissis:]

Well its five aircraft all delivering throughout 2017. I would estimate the prices are going to be between the total purchase price between $240 million to $250 million.

[Richa Talwar:]

Okay, great. And then that segways into my next question, we were at the ISAAC conference last week and some operators indicated that the current market differential between new and current generation narrow-bodies was around $2 million to $3 million versus initial market expectations of closer to $7 million. Given that you just signed for that new order, you may be well prepared to answer this but would you agree or disagree with those segways based on what you're seeing in the marketplace today?

[Steve Zissis:]

Well, I think the concern is that with the low oil prices there is a differential between the Cos and the Neos are not justified. And currently when oil is at in mid 20s or low 30s there is probably some valid concern there. But keep in mind that we're leasing these aircraft long-term. There are long-term leases to the airline and we're looking out 10 to 15 years on what the residual value would be on these aircrafts. So we're taking a longer-term view on them. Now, look if you had Neos and Maxes that are not placed with airlines, you're probably going to take a bit of a haircut on the lease rate just given where fuel prices are. So that's the way we kind of look at the market.

[Colm Barrington:]

I think also Richa it's worth noting that in our sale and leaseback acquisition strategy, when we buy an aircraft we get a lease rate to compensate us for that purchase price. So as long as we get a -- buy the aircraft at a reasonable price which we have done in this case and get a lease rate compensate us best on a rent long-term lease then we have a financially sound transaction.

[Richa Talwar:]

Got it. So just to clarify you are seeing a decent differential between what the deal you did on the Neos versus current Cos?

[Steve Zissis:]

No, we are not seeing any price differential upfront, right. What you’re hearing in the marketplace is noise on the lease rates for aircraft that they are looking for homes. Right, so unplaced Neos and Maxes are seeing some pressure on the lease rates just because oil prices are down. But we're not seeing any differential on the prices and primarily that's because nobody sells them at discount.

[Richa Talwar:]

Okay, thanks. And then a point about the record airline profits. Now I definitely agree that the global airline industry is a lot healthier financially than five years but I also would note that a big chunk of these record profits, approximately 60% in 2015, are driven by airlines in the U.S. and I know that's a much smaller portion of your overall portfolio. So I would be curious to hear in light of fuel potentially having kind of floor here and seeing some positive momentum in the past few weeks and with the U.S. dollar still being relatively strong which has an impact on dollar denominated cost for airlines including lease payments, are you seeing any sort of impact on demand or feeling any concerns around most recent trend, it sounds like you're not seeing an impact on demand yet but are you concerned at all at the trends we're seeing?

[Steve Zissis:]

I think the way that I would put that is I tend to be probably more conservative than someone like peers in the marketplace and I've actually been quite surprised on how resilient the demand has been in the last two quarters, giving how strong the dollar is and some issues in Latin America, Russia, Ukraine, I would have thought demand would have softened a bit, but we've been quite surprised how things have stayed relatively resilient here on the marketplace. I think we share people's concerns about the strong dollar, but that's pretty much offset by the lower fuel prices around the world and so demand has kept pretty steady for us.

[Operator:]

Thank you. Our next question comes from Gary Liebowitz of Wells Fargo Securities. Your line is now open.

[Gary Liebowitz:]

Well, thanks operator. Can we talk a little bit more about the SEC review; can you tell us how many of your 80 planes would fall into the category of having been acquired with in-place leases?

[Gary Dales:]

I don't have the number at top of my head but probably 80% of our aircraft are acquired with in-place leases.

[Colm Barrington:]

But Gary, if you acquired aircraft with a relatively new lease and relatively new aircraft with a relatively short-term lease then this new provision would have very little impact. We think it will have limited impact in aircraft. It's only when you buy mid like our aircraft which are halfway through or beyond the lease terms that begins to have a more significant impact.

[Gary Liebowitz:]

So do you have an estimate of how many of your planes would fall to that category where they weren't acquired new or very young and there could be a material restatement?

[Gary Dales:]

Gary, it's really a matter of the condition of the aircraft at the acquisition date and not so much the age of the aircraft. So we are still going through our analysis to figure out exactly what that condition was at its acquisition date.

[Colm Barrington:]

And as we said this thing only came up yesterday, so it's little premature I think Gary we wouldn't like to mislead you by giving any information we have today that we might have to correct subsequently.

[Gary Liebowitz:]

Okay. Would the share repurchases be effectively on pause until this is resolved?

[Colm Barrington:]

I don't think there is any impact on the share repurchases. I mean we have completed our two big programs, our $75 million Dutch, a modified Dutch tender offer and our $25 million open market repurchase. Those are complete and yesterday we, the Board authorized a new $30 million program. So -- but I don't think this is anything to do with the SEC situation.

[Gary Liebowitz:]

Okay. And then a couple of accounting questions, on the fourth quarter depreciation came in somewhat higher than the guidance and it seems like it's a one-time spike based on your first quarter guidance book, what happened in there?

[Gary Dales:]

We looked at aircraft in particular and adjusted residual value and so it had some excess depreciation in the current quarter.

[Gary Liebowitz:]

And should that continue into subsequent quarters though?

[Gary Dales:]

Yes, well our -- the guidance actually reflects the recurring depreciation on that particular aircraft, so there was a little bit of catch-up on this aircraft.

[Gary Liebowitz:]

Okay. And then, Steve, last quarter you talked about a not so great remarketing, sorry not so great market for the 738s that were coming back from Transaero. Can you just give your thoughts on those midlife to older 738s?

[Steve Zissis:]

Yes, I guess that's why it's good to do these quarterly updates. So definitely the excess supply of 800s has tightened dramatically in the last quarter and we're now seeing airlines start to push lease rates back up because they can't find enough 800s. So that market has definitely turned and has firmed up pretty dramatically since the last time we talked.

[Operator:]

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

[Helane Becker:]

Thanks operator, hi gentlemen, thanks for the time this morning. So when you're looking at or actually when we look at your numbers from 2015, I think you round up closing something on the order of $570 million, $600 million in aircraft purchases and we're just kind of wondering about the size in the market to be able to close $750 million in transactions. Have you -- you identified about half may be a little more, so maybe it's not that difficult but are you seeing a robust RSP in the market?

[Colm Barrington:]

Look there are plenty of opportunities out there and we've already circled about $400 million for the year and that doesn't include the Neos that we committed to in 2017.

[Helane Becker:]

Okay.

[Colm Barrington:]

And so to finish out our acquisition budget this year of $750 million is going to be quite easy.

[Helane Becker:]

Okay. And then should we think about that as kind of average ongoing rate for the next three or four years?

[Colm Barrington:]

Well certainly from the next two years --

[Helane Becker:]

Especially given your --

[Colm Barrington:]

Yes, certainly for the next two years that's what our budget is --

[Helane Becker:]

Okay, great.

[Colm Barrington:]

-- is projecting.

[Helane Becker:]

Okay. And then I think you mentioned that you're targeting aircraft like the 787s and I guess what Neos and perhaps the Max. Can you just may be flush out what specific aircraft you're thinking about?

[Colm Barrington:]

Look it's going to be pretty consistent with the type of portfolio that we have at Fly. So there will be some NGs and Cos as we see opportunities in the next couple of quarters. But the focus going longer-term is definitely going to be the Neos and the Maxes followed by 78s, 350s, and just may be some opportunistic deals on some additional freighters.

[Helane Becker:]

Okay, okay. That's kind of interesting freighters kind of away from your core portfolio isn't it?

[Colm Barrington:]

Well it is, but they represent some good opportunities for us. As you know we have a 75 freighter in the fleet, then we've got two 777 freighters in the fleet that are 12-year leases. The 777 freighter I think represents a unique opportunity because there is nothing that competes with a 777 freighter. So it's -- we think it's a very good long-term asset and there is nothing on drawing board to replace it.

[Helane Becker:]

Okay. And then just one other or two other questions one with respect to debt financing should we -- what you've done so far and that's to kind of get you through the year or should we be looking for perhaps other opportunistic transactions coming our way?

[Gary Dales:]

I think we will see I mean we have our new acquisition facility of $385 million that confirmed substantially through this year, but then we will be doing other one-off financing transactions on individual aircraft acquisitions. And that's the joy of the secured debt market with banks. We can go to the appropriate banks for each individual transaction and finance them individually. For example a $360 million worth of aircraft which we have just mentioned as closing in this quarter are -- sorry contracts to close in this quarter are already financed with bank separate from the acquisition facility.

[Operator:]

Thank you. Our next question comes from Justin Fisher of Goldman Sachs. Your line is now open.

[Justine Fisher:]

The first question is just on the three aircraft that you bought for $240 million in the fourth quarter. I apologize if I missed it but what type of aircraft were those?

[Steve Zissis:]

Gary, do you want to?

[Gary Dales:]

That was the one 777 freighter, there was A330 and two --

[Colm Barrington:]

Well you're trying to pin us down to a quarter, Justine, we will --

[Justine Fisher:]

Yes, no, no, just the three because I looked at three aircraft for $239 million and it's just -- the whole planet seems to be worried about wide bodies and so I was just wondering what are you guys do wide bodies in the fourth quarter, obviously we don’t know what the specific price per aircraft was. But is what's driving you into the secondhand wide bodies the fact that you’re seeing pretty good deals on them and I'm not asking you to make Delta Airlines type of comment, where you say, oh yes, we got it so cheaply. But it was just interesting to mean because it seems as though people or lot of the lessors tend to be kind of shying away from the wide-body market and lessor have a massive new order book?

[Colm Barrington:]

I think Justine, I'm not sure of the exact timing, it may have concluded the two 777 freighters in that number.

[Justine Fisher:]

Okay.

[Colm Barrington:]

I think we just --

[Justine Fisher:]

Okay. Do you I mean it seems like you’re looking at the sale leaseback market I mean are wide bodies that secondhand wide bodies that might be a little bit older but might come at attractive prices, are those on the cards for you guys, I mean when we ask lessors this question is everything has a good price but that doesn't mean that you guys will look at or do you just think there is still too much of risk in the secondhand wide-body asset class right now?

[Colm Barrington:]

Yes, we would not be significant buyers of older wide bodies. As you can see, our average age of our acquisitions in 2015 was less than two years and that's included some wide bodies. So we're not in the market for older wide bodies.

[Justine Fisher:]

Right, okay. And when I look at the lease terms on the aircraft that you have acquired I mean they are pretty long right -- 11, 12-year lease terms is that are we seeing a change in the market in terms of how long airlines are willing to lease in because if you look at average lease terms they have historically tended to be lower. So is this a structural change in the market where airlines may be because sale leaseback market has improved and airlines are willing to take the aircrafts on longer leases or should we typically expect to see a longer lease term for a sale leaseback as opposed to an airline leasing an aircraft from a lessor when it was lessors own order book?

[Steve Zissis:]

Look I don't think anything has changed in the marketplace. I guess the way I would describe it has been evolving over the last three or four years where airlines especially wide bodies, we tend to lease them longer-term. Most lessors were a bit hesitant to finance wide bodies on shorter-term, so the way that the lessor community and the airlines could make these deals work is to go longer-term therefore reducing your residual exposure at the back end, so most of the wide bodies in our fleet are on 10 to 12 year leases.

[Justine Fisher:]

Okay. And when you look at sale leaseback opportunities in the market now what are the terms being discussed for narrow-body leases, like the tenure?

[Steve Zissis:]

Yes, I see narrow-bodies are typically shorter they are between six and 10 years but most of wide-bodies are 10 to 12 and even if coupled and done at 15 years.

[Justine Fisher:]

Okay. And then the last question is -- and this may be one that's tough to answer -- but we hear that the sale leaseback market is really competitive, and it still seems to be so. So, if I were to ask you, what do you think you guys won your business on? What do you think you win the business on with these sale leaseback deals versus numerous other competitors out there in the market?

[Steve Zissis:]

Well I think we've had this questions several times on the call, there is a lot of aggressive capital that faces the Tier 1 deals, and put out silly numbers right, because we just want to play in that space. BBAM has been doing this business for 26 years. We've had very close relationships with a lot of airlines around the world, we're known as being very reliable, and we're looking for certain opportunities where some of the premium capital from the new players doesn't compete. And so if you look at our portfolio in terms of composition of airline credits and type of assets, you'll see that most of it is away from what we call the Tier 1 airlines.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Kristine Liwag of BoA. Your line is now open.

[Kristine Liwag:]

Hey guys, historically residual values of current-gen aircraft decline once the NextGen aircraft is about 20% of the fleet. And I guess there are some studies that it's 20% or 50%. But I guess for narrow-body projected delivery rates, it looks like the Max and Neos will be 20% of the fleet by around 2020. How do you think about the long-term depreciation curve of these aircraft that you acquired? And what's your strategy mitigating aircraft impairment risks in the future for the existing NGs and CEOs in your fleet today?

[Steve Zissis:]

Well look that’s a good question. And I think if fuel prices weren't as low as they are today there would be a different response to that. But given where fuel prices are and a lot of the clients that we discuss our CEOs with where they want to extend them much longer-term. Our current feeling and projection is that the CEO values are going to hold up lot longer than we all expect. But look eventually, when you get into the mid-2020s right those values are going to drop off and probably drop off quicker than a lot of people expected.

[Kristine Liwag:]

And how would you mitigate that risk? I mean, oil is not really something you can control.

[Colm Barrington:]

No, but as you can see if you look at our portfolio we have positioned out of 737 Classics and the older A320s, we're now virtually exclusively 737 NextGen and modern A320s and we will continue to do that to sell the older aircraft and buy newer ones. And as Steve said we just made our first steps into the Neo market and we will continue to that with Neos and Maxes. So we will keep moving on as these trends develop over the coming years.

[Steve Zissis:]

But I think more to Kristine's point, I think more to your point Kristine is that we have our own residual forecast models and all of that has taken into pricing when we do a deal.

[Kristine Liwag:]

Sure. So, is it to say that the deals that you are doing now for end of life -- sorry, end of production line 737s and A320s, that's factored into your internal depreciation curve?

[Colm Barrington:]

Correct.

[Kristine Liwag:]

Great. And maybe just a clarification -- for the 13 aircraft held for sale at end of December, are these transactions now complete? And then, also, the aircraft impairment charges that you took in the quarter and the gains, are these factoring in expected pieces from these transactions or will these, whenever these close in the first half, this is when you would take those markups or markdowns?

[Colm Barrington:]

First of all, I believe of the aircrafts held for sale at the year-end, we have now delivered all but we delivered 10 of them.

[Gary Dales:]

Nine of them.

[Colm Barrington:]

Nine of them we have delivered all but four. So we expect to deliver the other four by the end of the month, all going well. As regard the impairments which we've referred to in our statements, all of those are locked in effectively. Those prices we have agreements to sell all three aircraft and those impairments reflect those transactions which we're now in the process of completing.

[Kristine Liwag:]

So, essentially the 13 held for sale as of the end of the year are now already factored into your statements for the 4Q 2015 results. So, we shouldn't expect any effects of these transactions in Q1 2016 -- is that right?

[Gary Dales:]

Well part of our gain that we give guidance on will include the sale of those 13 aircrafts. So we think there will be net gains when those aircraft actually sell.

[Operator:]

Thank you. And at this time, I'm showing there are no further participants in the queue. I would like to turn the call back to management for any closing remarks.

[Steve Zissis:]

Thank you very much for joining us for our fourth quarter earnings call. We look forward to updating you again next quarter. You can now disconnect.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.