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Fly Leasing Ltd. (NYSE:FLY)

Q4 2012 Earnings Call

March 7, 2013 9:00 AM ET

Executives

Matt Dallas – IR Manager

Steve Zissis – President and CEO, BBAM

Colm Barrington – CEO

Gary Dales – CFO

Analysts

Richa Talwar – Deutsche Bank

John Godyn – Morgan Stanley

Gary Liebowitz – Wells Fargo

Helane Becker – Dahlman Rose

Jamie Baker – JP Morgan

Glenn Engel – Bank of America

Operator

Good morning. My name is Aldus and I will be your conference operator today. At this time, I would like to welcome everyone to the FLY Leasing Limited Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After speakers’ remarks, there will be a question-and-answer question.

(Operator Instructions) Mr. Matt Dallas, you may begin.

Matt Dallas

Thank you, operator. Good afternoon, everyone. I am Matt Dallas, the Investor Relations Manager at FLY Leasing. And I’d like to welcome you to the fourth quarter and full year 2012 earnings conference call.

FLY Leasing, which we will refer to as FLY or the company throughout this call, issued its fourth quarter and full year earnings results press release earlier today, which is posted on the company’s website at www.flyleasing.com.

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 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 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.

This call is the property of FLY and cannot be distributed or broadcast in any form without the express written consent of the company. A replay of this conference call is available for one week from today. An archived webcast of the call will be available for 90 days on the company’s website.

I will now hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

Steve Zissis

Thank you, Matt, and welcome, everyone, to our fourth quarter earnings call. In my prepared remarks today, I will touch on demand for aircraft from our airline clients, the financing environment, and I’ll also speak about the amount of capital flowing into the sector, and the impact this capital is having on market pricing.

But let me first make four high level comments. Given the macroeconomic backdrop, we believe the long-term prospects for the sector are stronger than they would have – than we would have expected. Industry fundamentals continued to improve, despite a background of economic uncertainty in many parts of the world. Interest rates are at historic lows and lease rates are either stable or increasing across virtually all in-production aircraft types. This means that the fundamental economics of our business are improving. And we expect them to continue improving over the next several quarters.

Second, we made strong progress at FLY over the last 12 months. We have grown FLY’s fleet with attractive aircraft acquisitions, sold multiple aircraft at premiums to book value, increased the company’s dividend on the back of healthy free cash flow after debt service, produced substantial book profits, executed on our financing plan, and, most importantly, grown our unrestricted cash, so that we’re in a position to grow more aggressively in the coming months. In fact, as it relates to growth, we’re targeting $300 million to $500 million in new aircraft acquisitions in 2013.

We expect the growth will come from a mix of new or nearly-new aircraft and selected acquisitions of mid-life in-production aircraft. The new or nearly-new equipment, particularly from Boeing, represent in our view a relatively safe corner of the market to deploy capital for predictable returns.

Investments in mid-age equipment represents strong prospects for attractive returns with reasonable downside protection from current pricing levels. As always, we seek our relative value and remain committed to being nimble and agile in what is a dynamic sector. We expect this growth to translate into top line revenue growth and commensurate growth in income.

Third, we brought a great partner – brought a great, long-term investor into our business with the recently announced Onex related transaction. When you combine the management team’s direct and indirect shareholdings with those of Onex, on a combined basis, we hold more than $50 million worth of stock at today’s closing price. Excluding the Onex investment, your management team alone holds more than $22 million of the company shares on a market cap of $375 million.

As this is stock we have acquired, not through share grants, equity awards or option plans, but instead through the investment of our own after-tax cash savings, the management team is fully aligned with our common shareholders and has a long-term commitment to the business. Evidence of this commitment can be found not only through our large shareholding, the largest by insiders as a percentage of the company across all publicly-listed lessors, but also through the long-term lockup agreements we’ve signed at the end of last year. We expect to hold our shareholdings for many years to come and are dedicated to growing the long-term value of this business on a per share basis. We have a track record of executing on this strategy and we will continue to do so.

I’d like to recognize the impressive performance of commercial aircraft as an asset class over the last several years to what is now broadly recognized as a period of virtually unprecedented economic distress and dislocation. Many investors, banks, asset owners, asset managers, and analysts have recognized that commercial aircraft investments have produced steady returns through this period of substantial stress and experienced relatively little volatility. This is a fundamentally safe asset class.

Over the last five years, FLY has produced positive free cash flow and positive adjusted net income in every single quarter. And many of those who look forward at the prospects for this sector recognize that the asset class will deliver the same steady returns in the future with the added prospect for significant upside, should we enter into an inflationary period.

Now, for a few comments about demand. As we enter the seasonally strong period of spring for aircraft, we’re witnessing good demand for used aircraft from prior year period. This demand is causing lease rates for Airbus narrow bodies to firm, albeit at a low level, and rates for Boeing 737-800s to uptick from prior period. We’re encouraged by this increase in demand, as FLY has placed seven aircraft in the fourth quarter of 2012 and remarketed 22 aircraft for the full calendar year of 2012, leaving us with only one unplaced aircraft from the fourth quarter, which will be remarketed in the first quarter of 2013.

As we begin 2013, we have 24 scheduled redeliveries and four unscheduled repossessions. As of today, of that total 28 aircraft that are available, eight of these aircraft had been extended, 10 aircraft have been committed to new lessees, two aircraft have been sold, leaving us with eight unplaced aircraft for 2013, six which are in the first half of 2013 and two in the latter half of 2013.

As I mentioned, lease rates for Airbus A319s and 320s have firmed, while lack of quality 800s for spring delivery have caused rates to uptick from prior levels. Although we always remain cautious about future demand, given the challenging world environment, we do feel that many regions have rationalized capacity and we expect to see steady growth going forward.

Many lessors have large budgets for acquisitions in 2013. And we’re seeing prices bid up as lessors chase sell-leasebacks on quality narrow bodies. We expect these conditions to continue as lessors chase assets to build up their portfolios. As prices increase for new aircraft, we’re seeing increased demand for used aircraft, as liquidity leaks over to the better valued assets.

Available financing for aircraft continues to improve for both the markets – from both the capital markets and traditional aviation banks. Many of the traditional aviation banks have reentered the market in 2013 with decent budgets, while at the same time we see new banks, primarily from Asia, entering the market and forming long-term commitments to the business as they develop their aviation teams and expertise.

The capital market continues to be a viable avenue for financing the aviation portfolios. And FLY has utilized this market by tapping a $395 million term loan in third quarter of 2012, followed by 100 basis points re-pricing improvement in the fourth quarter of 2012.

Finally, in terms of aircraft sales, we continue to look for opportunities to trade our aircraft where we see opportunities to harvest attractive gains, generate free cash after debt repayment and to balance our fleet by aircraft type and age, look for FLY trading activity to continue as we move forward in 2013.

I’ll now hand the call over to Colm who will run you through more details.

Colm Barrington

Thank you, Steve, and good afternoon, everyone. FLY had a particularly strong year in 2012, following on some significant fleet developments that we announced a year ago. In 2012, we increased our leasing revenues by 63% as a result of a much larger portfolio. This was despite incurring aircraft downtime from some premature lease returns and non-earning periods between leases, which resulted in fleet utilization of 95% for the year.

We’ve put the majority of the previously on leased aircraft back to work in late 2012 and in the first quarter of this year and are seeing a positive impact on our lease revenues. As of today, all but one of our aircraft are on lease or committed to new lessees. As you will be aware, the majority of such additional lease revenues will flow directly to the bottom line.

Our increased leasing revenues, opportunistic sales, which involves four aircraft with an average age of 13 years, produced a pre-tax gain of $8.4 million, allied to a $36.9 million gain on the sale of our 50% interest in BBAM, all had a very positive impact on our 2012 earnings.

Adjusted net income for the year was $116.3 million or $4.48 per share. This compares to $35.8 million or $1.38 per share in 2011 and represents 225% increase in the per share measure. Adjusted net income is defined in the earnings press release that we issued earlier today.

We believe that adjusted net income provides useful information about operation performance and period-over-period performance. We are particularly pleased that the major growth in revenues and earnings in 2012 was achieved without the need to raise any new equity capital. As a result, the impact on our earnings per share was truly dramatic.

In the fourth quarter, FLY took an aircraft impairment charge of $11.4 million in respect to three aircraft, two of which were Boeing 737 Classics. We have since sold all three aircraft. And from a combination of the sales proceeds and the end of lease income, which we retained, we have recovered all but $1.7 million of the pre-impairment book value of these aircraft. The sales proceeds and the end of lease income will be reflected in our March 2013 financial statements.

The sale of our 50% interest in BBAM to Onex and the investment of $25 million by Onex and BBAM’s principals into FLY was another positive outcome in 2012. The sale of the BBAM interest for $49.5 million generates a gain of $36.9 million on an $8.7 million investment made by FLY in April 2010. The sale proceeds and the new capital together generates $75 million of new and unrestricted cash for FLY, which will be an important ingredient in executing our future growth strategy.

We’re also excited about having Onex, one of the world’s most successful and reputable private equity groups, as a significant shareholder in FLY and a 50% shareholder in our servicer, BBAM. We believe that Onex’s shareholding in FLY, along with the increased shareholding from BBAM’s principals, reinforces the common interest of all three parties. We look forward to working with BBAM and Onex on the further development of our business.

Because of the growth and the scale of our business, the positive earnings and cash position of the company, it was decided during 2012 to increase our dividend by 10% to $0.22 per share per quarter. The total dividend paid in 2012 was $0.84 per share. FLY has now paid 21 consecutive quarterly dividends since we issued our shares on the New York Stock Exchange in 2007.

Our major fleet acquisition in late 2011 was financed by assumed debt and our free cash. The acquisition had a major impact on our financial leverage. And at the end of 2011, our debt-to-equity ratio had increased to over 5:1. Reducing this ratio was the major priority in 2012. And I am happy to report that by the end of the year we had reduced the ratio of debt-to-equity to 3.6:1. And we’re now well on our way to achieving our targeted leverage of 3:1.

This reducing financial leverage has a positive impact on the company’s creditworthiness and should also have a very positive impact on how the company is regarded in the financial community and is perceived by the rating agencies. These factors will help us to source new funding and reduce our future interest costs.

In 2012, FLY sourced $1.3 billion of new financings, including a $600 million secured bank facility and a $400 million secured and publicly-issued term loan. Both of these facilities mature in 2018 and replace other facilities that were due to mature in 2012 and in 2013. We also sourced a $250 million acquisition facility. Sourcing these new facilities meets several of FLY’s objectives: reduce financial leverage, finance near-term debt maturities, reduce average interest cost, and provide financial capacity to meet our growth targets.

Our balance sheet at the end of 2012 shows several significant improvements as compared to a year ago. Through a combination of depreciation and the sale of four aircraft, the value of our flight equipment held for operating lease reduced by $145 million to $2.6 billion. Meanwhile, our secured borrowings, and by the way all of our borrowings are secured, reduced by $274 million to $2.1 billion. FLY also generated significant cash during the year. And at year end, we had $163 million in unrestricted cash. Combined with our new acquisition facility, our unrestricted cash gives us the capacity to exceed our annual 10% growth target in 2013.

Our year-end shareholders’ equity was $532 million, an increase of $89 million in the year. Despite having issued 2.4 million additional shares in 2012, our shareholders’ equity grew from $17.25 per share at the end of 2011 to $18.97 per share at the end of 2012, a 10% increase in the year.

So, having effectively bedded in the major aircraft acquisition that we complete at the end of 2011, FLY is now in a strong position to grow its fleet. We will continue to focus on acquiring aircraft through sale and leaseback and secondary market transactions rather than by orders from the aircraft manufacturers for delivery in the future.

Our strategy allows us to evaluate all the relevant aspects of each acquisition transaction, the aircraft cost, the terms of the initial lease and the financing terms that are available, before we make each investment decision. It also allows us to make each investment decision based on our known resources rather than making commitments when the availability of future capital is uncertain. We believe that this strategy will be of greater benefit to the company and its shareholders than one involving speculative orders for new aircraft, when many of the transaction terms are unknown.

With that, I will hand over to Gary, our CFO, for deeper look at the financials.

Gary Dales

Thank you, Colm. We are reporting net income for the quarter of $31 million, or $1.17 per share. This compares with a loss reported in the fourth quarter of 2011. As Colm mentioned, the fourth quarter 2012 results include the $36.9 million free cash gain generated by the sale of our 50% investment in BBAM. The fourth quarter 2011 loss was driven primarily by the write-off of transaction fees and expenses associated with the acquisition of 49 aircraft at the end of last year.

For 2012, our net income was $47.7 million or $1.80 per share as compared to net income of $1.1 million and $0.03 per share for 2011. Our 2012 results are showing the contributions from the portfolio of 49 aircraft acquired at the end of 2011.

Adjusted net income for the fourth quarter of 2012 was $53.2 million or $2.04 per share as compared to $20.7 million or $0.80 per share in the same period in the previous year. The increase is primarily due to the gain on the sale of FLY’s 50% interest in BBAM and an increase in end of lease income. For 2012, adjusted net income was $116.3 million or $4.48 per share, which compares to $35.8 million or $1.38 per share. The increase reflects a contribution from the increased portfolio and additional end of lease income in 2012.

Our total revenues for the fourth quarter of 2012 were $130.9 million and include operating lease revenue of $90.6 million, a $36.9 million gain from the sale of our BBAM interest and $3.4 million of equity earnings from our unconsolidated joint ventures. Fourth quarter 2012 operating lease revenue includes $14 million of end of lease revenue, whereas there was only $33,000 in the fourth quarter of 2011. Although the timing and quantum of end of lease revenue can be difficult to predict, we’re currently forecast – we currently forecast approximately $30 million of end of lease revenue in the first quarter of 2013.

For 2012, total revenues were $432.7 million, an increase of $183.9 million over 2011. Operating lease revenue has increased 53% over 2011, reflecting the contribution from the 49 aircraft acquired at end of last year and the seven other aircraft acquired in 2011 and 2012. $49.8 million of end of lease revenue is included in the more than $376 million of total operating lease revenue. This compares to only $2.9 million at the end – in end of lease revenue for 2011.

At year-end, the annualized contracted rent was $326 million, which excluded six aircraft which were not generating rent, which we except to put back on lease within the next 60 to 90 days. These aircraft are expected to contribute approximately $12.5 million of annualized contracted rent when they are all back on lease.

Total expenses for the fourth quarter were $101 million. However, it includes $7.6 million of charges related to our refinancings and $11.4 million impairment charge across three aircraft. We have since received $8.4 million in end of lease payments in respect of one of these aircraft, significantly reducing the net economic impact of this impairment charge. The remaining impairment charge related to two older 737s which have been sold. Fourth quarter 2011 expenses include an impairment charge of $7.5 million and $16.1 million of fees and expenses associated with the acquisition of the 49 aircraft in addition to our regular operational expenses.

Total expenses for 2012 were $381.2 million and include the debt extinguishment costs and impairment charge I’ve already discussed and a charge of $32.3 million determining certain interest rate swaps that were taken in the third quarter. Included in interest expense is $17.1 million of non-cash amortization expense resulting from the application of purchase accounting to the debt that was assumed in connection with the GAAM acquisition.

The assumed debt was recorded in the financial statements at less than the face amount, reflecting its then current fair value. Our 2012 expenses also include $11 million of maintenance and other costs. These expenses include the costs associated with the early termination of certain leases and costs associated with transitioning aircraft to new lessees.

For 2012, our provision for income taxes was $3.9 million, representing an effective tax rate of 7.5%. We do not expect to pay any cash taxes on the gain on the sale of our BBAM interest. At December 31, 2012, our assets totaled $3 billion, of which $2.6 billion is invested in flight equipment held for operating lease. Our total cash balance is $300.6 million, of which $163.1 million is unrestricted.

During 2012, we refinanced substantially all of our near-term debt maturities and have no significant debt maturities until 2018. In the first quarter, a $600 million in debt facility with maturity in November of 2012 was extended to 2018. In August, we issued our inaugural capital markets transaction with a $395 million term loan. The proceeds of this facility, which matures in 2018, along with our own cash, was used to repay our air acquisition facility and amounts outstanding under other facilities.

As our credit story and general market conditions improved, we re-priced a term loan in December 2012, reducing cash interest expense by 1%, which result in cash interest savings of approximately $4 million annually. Through these lease financings as well as scheduled amortization, we reduced our net leverage, defined as a ratio of net debt to shareholders’ equity, to 3.6 times. This ratio was 5.1 times at the end of 2001.

Over the next 12 months, we expect our leverage to reduce even further. We define net debt as a book value of secured borrowings, less unrestricted cash and cash equivalents. We are seeing the benefits of the refinancing and de-leveraging accomplished in 2012 and of our expanded portfolio in the fourth quarter results. And these trends are expected to continue into 2013.

With that, let me turn it back to Colm for his closing remarks.

Colm Barrington

Thank you, Gary. Well, to summarize, 2012 was a really good year for FLY with significantly increased revenues and earnings, greatly reduced financial leverage, elimination of short-term debt maturities, lower interest costs, higher per share net book value, and significantly increased year-end unrestricted cash. Meanwhile, the industry environment is strengthening and we’re finding good demand from airlines wishing to lease our aircraft. We expect these conditions to continue through 2013. As stated by Steve in his opening remarks, we have the financial resource in place to grow our portfolio and expect to exceed our stated target of a 10% net portfolio increase in 2013.

We are now ready to take your questions.

Matt Dallas

Operator, if you would read the Q&A instructions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richa Talwar with Deutsche Bank.

Richa Talwar – Deutsche Bank

Hello, everyone. Thanks for taking my question. First, I just wanted to touch on your growth target. I believe, Steve, you said $300 million to $500 million you’re targeting for acquisitions this year. And when I look at your $250 million acquisition facility and cash on hand, it seems that you might look to tap the financing market again. So I was wondering if we should expect a continuation of secured financings or maybe branching out of that and looking at other financing opportunities.

Colm Barrington

Hi, Richa. This is Colm. Thanks for your question. Yeah, I mean if we reach that target of $500 million, we will source other financings. I mean we do our financings in various ways. As you know, all of our financing is secured, including significant bank financing. And there is significant capacity available in that market as well. So we haven’t placed the free cash. We have the acquisition facility and we have the ability to tap all the markets, particularly bank markets for one-off transactions or small groups of aircraft transactions. So we will be looking at all possibilities.

Richa Talwar – Deutsche Bank

Okay, great. And then we were pleased to see your adjusted interest rate with average cost of debt come down a bit this quarter. And I was wondering as you de-lever the balance sheet, should we expect that trend to continue and do you have a particular target in mind for that?

Gary Dales

I don’t think we have a particular target in mind for our interest cost. We will see that trend down as the re-pricing of the term loan gets bedded in. We’re also continually repaying our indebted debt, which will have the effect of reducing our interest cost. And I think, as Colm said, we are benefiting from the lower leverage.

Steve Zissis

And as some of our swaps roll off, we will be swapping into a new lower interest rate environment swap. So I think you’ll see a gradual lowering. It’s difficult to give you a precise figure. But, as Gary says, I think you’ll see it lowering over the course of the year.

Richa Talwar – Deutsche Bank

All right, thank you. And then one more, if you could just provide an update on your watch list. What you’re seeing among the – among your customer base? Any consent there?

Colm Barrington

We don’t actually ever talk, Richa, about any specific clients. So I really can’t answer that question at this time.

Richa Talwar – Deutsche Bank

All right.

Colm Barrington

The environment – as Steve said, the general environment, I think we see a slight improvement. So we’re more positive about the environment starting 2013 than we were starting 2012.

Richa Talwar – Deutsche Bank

Perfect. Thank you for that color.

Operator

Your next question comes from the line of John Godyn with Morgan Stanley.

John Godyn – Morgan Stanley

Hey, guys. Thanks for taking my questions. I’ve got a few here. Just a follow-up on the aircraft acquisition guidance of $300 million to $500 million. It’s great to kind of see you put a number like that out there. You mentioned there was going to be mostly new or nearly-new and then maybe some mid-age aircraft as well. Just when we think about the nature of the acquisitions in 2013, should we think about the mix of narrow bodies to light bodies staying the same? And how do you think about what could happen to aircraft age? I’m just trying to make sure I’m interpreting your comments the right way. Thanks.

Steve Zissis

Yeah. Thanks, John, for the question. It’s Steve. On the acquisition front, we are considering some wide body transactions. So I think as we grow into 2013 and 2014, you’ll see the mix slightly vary in our portfolio to a bit more wide bodies than we currently have. And those will be very new wide bodies, 777, A330s type aircraft that would be on long-term leases. And then on the narrow body side, we are looking at both new and, what you call, newish, five-year-old type of aircraft. And it really just depends on where the opportunities are for us to see how our portfolio will grow. But I would think that on average you would see the average age of the portfolio be reduced over the next year.

John Godyn – Morgan Stanley

Okay, great. That’s really helpful. Second question. It definitely sounds like, Steve, between what you and Colm said, as we’re looking at 2013, the environment is improving on the margin. On the other hand, Steve, I think, you mentioned that you still had six unplaced aircraft in the relative near-term in the first half that seems kind of like a large number given that things are improving. Can you just help me kind of understand those two comments?

Steve Zissis

Yeah. Look, in 2013, we have 28 aircraft that are coming on scheduled redeliveries or unscheduled redeliveries. So, I would say, 28 aircraft in total. Of those 28, eight aircraft have already been extended with the current lessees. 10 aircraft have already been committed to new lessees and then the process of delivering to them or have already delivered. Two aircraft have already been sold, which leaves us eight aircraft. But out of the 28 aircraft that we started with, and it’s only end of February, I would say that the market to us is pretty robust at this point. So we have six aircraft in the first half that remain available and two aircraft in the second half. And, John, we’re not really concerned at all. We think those will move quite easy.

John Godyn – Morgan Stanley

Okay, fair enough. And then just last question, just taking a step back, I think normally we think of the health of aircraft leasing and different markets tied to the aerospace cycles very much levered to the global air traffic growth. And we’ve certainly been in a sluggish growth environment both on macro and on global air traffic. On the other hand, a lot of airlines are sort of learning to be profitable in that kind of environment and you mentioned a bit of that in your prepared remarks. As we think about sort of the levers of leasing demand on a go-forward basis, are we in a world where perhaps airline profitability matters more in kind of predicting the strength of the market than air traffic growth? Could we be in a world where profits continue to be pretty robust, even with sluggish macro and sluggish traffic and that still nest to be quite favorable? How do you think about those factors?

Colm Barrington

Well, that’s a complicated one, John. But I think, first of all, can I just question your growth in world traffic? I mean I have the report that growth in world traffic in 2012 was over 5%. Cargo is obviously not so good, but passenger traffic had a pretty good strong growth trajectory in 2012. So – and they expect that to be, I think, a little better in 2013. So there still is pretty good strong demand and that’s coming, as you know, largely in the eastern parts of the world. I think airline profitability is generally good for us because the more airlines who are profitable more, they’ll tend to take on aircraft.

I think with the combination of goodish traffic, good airline profitability, higher fuel costs, which favor obviously the sort of aircraft in our portfolio, the modern fuel efficient aircraft, I think we’ll see a still pretty robust demand for aircraft leasing, particularly of the type of aircraft that we have in our portfolio. So we’re pretty bullish about that. So I think to come back to sort of final question, is airline profitability a thing of the future? I hope it is and I think that’s a positive thing for leasing companies.

John Godyn – Morgan Stanley

Great. Thanks a lot.

Operator

Your next question comes from the line of Gary Liebowitz with Wells Fargo.

Gary Liebowitz – Wells Fargo

Thank you operator. Hi guys.

Colm Barrington

Hi, Gary.

Steve Zissis

Hi, Gary.

Gary Liebowitz – Wells Fargo

I thought I’ve seen a news report that you are looking to re-re-price your term loan. Whatever happened with that?

Colm Barrington

We decided not to proceed with it, Gary. We think that the market conditions weren’t good enough to get us the sort of benefit that we would like to have got. We re-priced it, as you know, in the fall and got a one point rate improvement and that we look to have it again in January. And we found that the market wasn’t good enough. So we decided not to proceed with it. We still have the option to do that. It’s a six-year term. So maybe, down the road a bit we’ll go back to the – go and have another look at that.

Gary Liebowitz – Wells Fargo

Okay. On utilization, where do you expect that to be in Q1 given all your late 2012 and early 2013 placement activity?

Colm Barrington

It will be much different from Q4 2012, Gary. It’ll be a little bit better, I think, because the aircraft which we have re-leased are delivering as we come into the spring period to the new lessees. So the actual utilization in the first quarter will be similar to what it was in Q4 2012, a little better perhaps.

Gary Liebowitz – Wells Fargo

But then you’d expect a meaningful improvement going to the second quarter?

Colm Barrington

Meaningful improvement in the second and third quarters.

Gary Liebowitz – Wells Fargo

Okay. Also, of the $300 million to $500 million of target acquisitions – and thanks for putting out a number, by the way, how many of those planes have already been specifically identified out of the BBAM portfolio?

Colm Barrington

Steve I’d like to have that. But I think just – they were not out of the BBAM portfolio, Gary. These will be aircraft outside of the BBAM portfolio. But BBAM is obviously – being our servicer is the party seeking to buying these aircraft for FLY.

Steve Zissis

Yeah. I’d say, Gary, right now, we have about 10 aircraft that are under consideration, but none of those are secured by any commitments as of today.

Gary Liebowitz – Wells Fargo

Okay. There haven’t been any sales completed in the first couple months of this year yet?

Steve Zissis

That’s correct.

Gary Liebowitz – Wells Fargo

Okay. Thank you.

Colm Barrington

Thanks, Gary.

Operator

Your next question comes from the line of Helane Becker with Dahlman Rose.

Helane Becker – Dahlman Rose

Thanks very much, operator. Hi, guys. Most of my questions have been answered. I just have one clarification question. The one aircraft that’s off lease at the end of 2012, is that included in the 28 that you’ve given us for what are scheduled to be placed this year?

Steve Zissis

That’s correct.

Helane Becker – Dahlman Rose

Okay. So for the eight still to go, that’s included in the eight?

Steve Zissis

Correct.

Helane Becker – Dahlman Rose

Is how we should think about that?

Steve Zissis

Correct.

Helane Becker – Dahlman Rose

Okay. Perfect.

Steve Zissis

Correct. Yeah.

Helane Becker – Dahlman Rose

Yeah, okay, that’s it. I just have some other questions on the $300 million to $500 million I think that you just talked about – that you answered that to several different people. So you want to do it again? Thank you.

Colm Barrington

Thanks, Helane.

Helane Becker – Dahlman Rose

Thank you.

Operator

And your next question comes from the line of Jamie Baker with Bank of America – excuse me, JP Morgan he’s with.

Jamie Baker – JP Morgan

That’s quite right. These things do change. I wanted to start just with the quick apology that our conference this week did conflicted the board meeting. Among the peers that did present, one in particular really emphasized that leasing battles are primarily won and lost based on the ability to access capital. And that investors shouldn’t spend nearly as much time obsessing over aluminum and lease rates and what have you. Other lessors did, of course, prefer to focus primarily on the aircraft side. I have my own opinions but I’m just wondering sort of philosophically how you think about this, particularly as you’re out meeting with investors. And then I will have an aircraft related follow-up.

Colm Barrington

Well, I mean we haven’t – I mean it’s interesting that you say that, Jamie. But certainly we don’t hear the same thing from our investors. So, we talk to our shareholders and they seem to think that the battles are won in the – with the – in the airlines and with the equipment. And I think in the last few years, there’s been no difficulty in raising capital. We found that, as you see from what we just said, we raised $1.3 billion of new debt capital in 2012 and also added some small amount of new equity. So currently we’ve got the firepower to meet our acquisition targets already within the company. So it really has not been an issue for us. And finally, we haven’t had shareholder questioned us.

Jamie Baker – JP Morgan

Okay, good, good. That’s helpful. Another theme that emerged in New York this week, Embraer 175s, 195s, these jets were really cited by all of your competitors as a pretty hot market right now. Just wondering if that’s the type we should look for in the future playing a role within your portfolio.

Colm Barrington

I don’t think you’ll see too many of those in our portfolio in the future. Jamie, it’s not really – it’s not an aircraft that we have a great interest in. I mean…

Jamie Baker – JP Morgan

Okay. Fair enough.

Colm Barrington

Transmission, but it’s not something which we find as widely enough used in the world marketplace as we would want to have too many in our portfolio.

Jamie Baker – JP Morgan

Okay. I appreciate the commentary. Take care.

Colm Barrington

Thank you.

Operator

Your next question comes from the line of Glenn Engel with Bank of America.

Glenn Engel – Bank of America

Thanks. Just few questions. On the 28 aircraft that need to be – are going to be replaced in 2013, what percent of net book value is that? Is that any different than the 20 – of the total of 28 over 109?

Colm Barrington

Wow. I would think it’s pretty typical but no wide bodies in it. Yeah, it’s one wide body. So I would say it’s pretty typical, yeah. I mean I’m sure that’s – that the answer is wrong to plus or minus 10% but it’s in that range.

Glenn Engel – Bank of America

That’s good. The debt price fixed versus variable, what percent?

Colm Barrington

I am sorry. Can you say it again, please, Glenn?

Glenn Engel – Bank of America

What percent of your debt is fixed versus variable right now?

Gary Dales

Well, we’ve swapped out – all of our debt or most of our debt carries a variable rate with it. We have swapped out almost 100% of the debt. So we are paying the swap rates.

Colm Barrington

Yeah. So effectively, you can say 100% o four debt is fixed rate.

Gary Dales

Almost. Well, we have – there is about, I think, 95% is it, are fixed rate leases and for that debt we fixed. For the leases that are variable rate, we do let the interest rates float on those. So there is a match of floating leases with floating rate debt and we match fixed rate leases with fixed rate debt. And that correlation holds pretty steady.

Colm Barrington

But only two or three of our leases are floating rates.

Gary Dales

I think there is a handful.

Colm Barrington

Yeah, it’s – you’re happy with that?

Glenn Engel – Bank of America

Yes. And then finally, just to make clear, in the first quarter, we’re going to see $30 million of extra revenue from end of lease revenue and we’ll see close to $10 million of gains reversing the $11 million impairment. Is that what you said?

Gary Dales

The $30 million – the reversal of the impairment is included in the $30 million. So there would not be a double up of $30 million end of lease and plus another $8 million or $9 million. So it’s – the total is $30 million.

Glenn Engel – Bank of America

And some of it will show up as a gain and some of it will show up as maintenance lease revenue?

Gary Dales

Most if it will show up as end of lease income.

Glenn Engel – Bank of America

Okay.

Gary Dales

You won’t see gains or losses on the…

Colm Barrington

Because I think what we did was we impaired down to the effective price at which we sell the aircraft and then the balance of the gain is the end of lease, Glenn.

Glenn Engel – Bank of America

Thank you very much.

Operator

There are no further questions. Are there any closing remarks?

Matt Dallas

We’d like to thank, everyone, for joining us for the fourth quarter 2012 earnings call. We look forward to updating you again soon.

Operator

This does conclude today’s conference call. You may now disconnect.

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