Fly Leasing's (FLY) CEO Colm Barrington on Q1 2014 Results - Earnings Call Transcript

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 |  About: Fly Leasing Limited (FLY)
by: SA Transcripts

Operator

Welcome to the FLY Leasing First Quarter Earnings Call. My name is John and I will be your operator for today’s call. (Operator Instructions) Please note that this conference is being recorded. Now I’ll turn the call over to Matt Dallas. Matt, you may begin.

Matt Dallas

Thank you, and good afternoon everyone. I’m Matt Dallas, the Investor Relations Manager at FLY Leasing. And I’d like to welcome everyone to our first quarter earnings conference call.

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

We have a slide presentation today that accompanies the call which is available to participants on the webcast. If you are not accessing the webcast, you can find the copy of the presentation in the Investor Relations Section of our website on the presentation’s 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.

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 call is available for one week from today. An archived webcast of the call will be available on the company’s website for 90 days.

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

Steve Zissis

Good morning, everyone and thanks for joining us today. Colm will take you through the company’s results in detail later on on the call. Let me start with a few highlights.

First, I’m pleased to report that our utilization improved to 99% for the first quarter and all our effort currently on lease reaching 100% utilization by the end of the quarter. Looking forward, we only have one aircraft remaining to be remarketed in 2014, and we expect it to be placed with no or little off lease time when it comes off lease later in the year. Generally, we’re continuing to see improved demand from new and midlife aircraft resulting in trimming lease rates as compared to a year ago. And the excess supply of narrow-body aircraft that existed a year ago has been absorbed over the last 12 months.

Second, we’re making excellent progress on our growth strategy. Today, FLY has acquired 7 aircrafts, valued at $176 million, and more importantly we’ve identified a pipeline of 10 additional aircraft, valued at over $550 million which we expect to close by year end. While the number of aircraft investors have increased over the past years, reflecting a growing recognition in the broad investment community, that the aircraft leasing business is an emerging and bonafide asset class in and of itself. BBAM has 25 year track record in aircraft investing and we remain confident in our ability to originate from a variety of sources and steady stream of attractive aircraft investments for FLY.

Lastly, we continue to actually manage our portfolio by disposing of aircraft and monetizing our built-in gains while trading out of older equipment and reinvesting in newer assets. If you lower that [ph], the average age of our fleet and extend our average remaining lease term. Even after adjusting for asset dispositions, we expect to achieve our targeted 50% fleet growth this year.

In light of recent developments in Russia and Eastern Europe, we continue to monitor the situation closely. We have one aircraft that is registered in the Ukraine that represents less than 1% of FLY’s book value, and less than 3% of FLY’s assets as measured by book value based in Russia. As of yet, we’re not aware of any alarming developments in our industry in this region but obviously we continue to keep a close eye on any further changes.

I will now turn the call over to Colm.

Colm Barrington

Yes, thank you, Steve, and good morning, everyone, and thank you for joining us on today’s call.

In quarter one and through today, FLY has continued to see improvement and growth program. We’ve acquired 7 aircraft so far this year of which two have been financed under our term loan, and the remaining five aircraft have been acquired for unrestricted cash, including the proceeds – some proceeds of our $300 million senior off secured notes that we issued last December.

In addition to the aircraft that we’ve already brought, and as Steve has already mentioned, FLY has an acquisition pipeline of 10 aircraft valued at more than $550 million, and we expect to close these transactions in 2014. As a result, we are comfortable in achieving our fleet growth targets of 15% in the current year. Again, as Steve has mentioned, FLY achieved a fleet utilization of 99% in the quarter, and at the quarter end all of our aircraft, all 100% of our fleet, was on lease. Our growth of rent/lease in the quarter and that is operating lease rentals divided by the book value of our aircraft on operating lease was 12% – 12% growth rental yield.

We have now remarketed 20 of 21 aircraft that have lease expires in 2014. The remaining aircraft, relatively new Boeing 737-800 has leased end to November, and we don’t expect to have any issues for marketing this aircraft once the current fee [ph] has made its intention clear. 2014 presented a significant remarketing task for FLY. We are pleased to have completed new leases with such a relatively large number of aircraft. Our 2014 remarketing achievements give us confidence that we can achieve high fleet utilization in the current year, and that we can successfully compete the future remarketing of the aircraft.

FLY ended quarter one with $387 million of unrestricted cash, and $325 million of capacity in our acquisition facility. We also ended the quarter with a debt to equity ratio of less than 3 to 1, and with four aircraft with over $120 million on incumbent. As a result, FLY has more than enough financial firepower to fund our growth objectives in the current year, and as we add additional aircraft, we also expect to take on new debt facilities which will allow us to fund our growth objectives well into 2015.

Our acquisition strategy continues to acquire new and young modern and popular aircraft types on these two airlines worldwide. Our focus is mainly on the most widely used narrow bodies, Boeing 737 next generation and Airbus A320 family aircraft. We will continue to add selective wide bodies provided that they are long-term leases to good credits. We don’t intend to wide bodies to exceed 25% of our portfolio. We will not place separate orders with the aircraft manufacturers considering this to be a high cost and high risk strategy because of the long lead times, delivery dates, which can be up to five years. This results first, in non-adding [ph] capital being tied up in pre-delivery payments, and secondly, in considerable financing on the safety and risks due to forward and unfunded capital commitments. We believe that our model of acquiring aircraft on lease backed [ph] in the secondary market, if most appropriate for publicly listed aircraft that’s sold.

While we continue to acquire aircraft from a predominantly distribution channels, as I mentioned principally to say the lease backed transactions with airlines, and from financial investors who for a variety of reasons choose to move on parts of their portfolios. We are finding that these channels provide lower cost aircraft and more certain transactions and economics than speculative and unplaced orders from the manufacturers.

In 2014 FLY has acquired and identified a pipeline consisting of 17 aircraft valued at over $740 million. These 17 aircraft have an average age of 2.4 years, and there are leases with an average remaining term of 8.9 years. The 7 aircraft acquired [ph] cost us $176 million, and there are leases with remaining terms averaging approximately 5.2 years. And they’ve reduced annual rents from approximately $23 million which gives us a growth rental yield of approximately 12.7%. The aircrafts include five Boeing 737 next generation aircraft and two Airbus A319s.

Our identified pipelines for the remainder of the year comprise of 10 aircraft costing more than $550 million. The aircraft are on leases averaging 10 years to six airlines in six countries, and produce annual rents of $59 million, which provides a growth rental yield, including rents from three floating rate leases of approximately 10.4%. FLY has the capacity to fund these acquisitions from its own resources, and in addition, we continue to see attractive debt financing opportunities, in particular, in the international airlines market.

FLY has consistently and profitably monetized aircraft from its fleet. In the last six years FLY has sold 22 mainly older aircraft for total price of $48.6 million, 14% above our net book value. Although new sales from the first quarter this year we’ve identified several attractive opportunities in the remainder of the year including one profitable sale that we have already completed. These sales have a positive impact on our earnings in quarter two and beyond.

FLY will continue to seek opportunities to monetize aircraft where there is an opportunity to increase earnings from either a satisfactory gain of the sale or an opportunity to re-use the re-leased capital more profitably or a combination of both. They may also seek sale opportunities for strategic reasons such as reducing our exposure to a particular airline.

FLY was established as a dividend paying company, and if we continue that policy, the leasing that’s returning capital to shareholders regularly is a valid and indeed admirable business strategy. Since FLY was launched at the New York Stock Exchange in September 2007, we have paid 26 quarterly dividends, totaling $6.62. Our current annual dividend rate is $1 per share, and this dividend is payable at the rate of $0.25 per quarter. Our next quarterly dividend will be paid on May 20, just less than two weeks from now. Our dividend is the highest in the aircraft leasing sector, and our dividend yield is over 7% based on our current share price.

Meanwhile FLY shares continue to trade as a discount of our book value, book value as we continue to demonstrate can be exceeded consistently by aircraft sales. We believe that FLY’s earnings and value will be enhanced by our growth strategy – a strategy that we are successfully executing, and for which we have the identified aircraft and the financial resources to continue to execute this year and its future.

I’ll now turn the call over to Gary.

Gary Dales

Thank you, Colm. We are reporting net income for the quarter of $3.6 million or $0.07 per share, on total revenues of $91.3 million. This compares with income of $32.8 million and $1.15 per share for the same period in 2013. The first quarter 2013 results included nearly $31 million in the end of lease income, whereas, for the first quarter of this year, end of lease income was $3.7 million. In addition, in the first quarter of 2013, we recognized gains on the sale of aircraft totaling $6.5 million, whereas we did not sell any aircraft in the first quarter of this year. These two changes make up the majority of the income difference between the two years.

On page 9 you can see that we now have a more detailed presentation of our lease revenues. Operating lease revenue is recognized on a straight line basis over the term. Operating lease rental revenue has increased $10.4 million or 13% over the prior period. The increase is primarily due to the aircraft that we acquired in 2013 and 2014, and is partially offset by the loss of rent from aircraft that were sold, declines in lease rates on aircraft whose leases have been extended, and in aircraft that have transitioned to new rent lease.

End of lease revenue consists of retained maintenance reserves at the end of lease, as well as payments from lease [ph] in compliance with return conditions contained in respective leases. Much of 2013 end of lease revenue related to leases that were terminated prior to their scheduled maturity. We had no early terminations in the first quarter of 2014. End of lease revenue is lumpy and difficult to predict, however, this time we believe end of lease income will range between $4 million and $6 million in the second quarter.

The other components in our breakdown of operating lease revenue are amortization of lease incentives and other. Lease incentives are obligations that we have to the lessee, and in most cases relate to a cost sharing arrangement associated with the first maintenance event incurred on during new lease. We amortize this cost over the lease term as a reduction of lease revenue. Amortization of lease incentives has increased from $1.9 million in the first quarter of 2013 to $3.4 million in the same period of 2014, reflecting the increased remarketing activity that occurred in 2013, and thus far in 2014. Amortization of lease premiums and lease discounts, and other adjustments to operating lease revenue are included in the other category.

Total expenses for the first quarter of 2014 were $87 million. This compares to $76.6 million for the same period in the previous year. The increase in the expenses is primarily due to depreciation of the aircraft acquired during 2013 and 2014, and the increase in interest associated with our senior unsecured notes issued last December.

At March 31, 2014, our assets totaled $3.7 billion, of which $3.1 billion was invested in flight equipment held for operating lease. At March 31, 2014, we have four unencumbered aircraft with a net worth value of approximately $120 million. Our total cash balance was $520.2 million, of which $386.5 million was unrestricted. As Colm mentioned, we have approximately $325 million of availability under our acquisition facility giving us ample resources to meet our growth target.

Finally, let me cover a few items of guidance for the second quarter of 2014. We are expecting operating lease rental revenue to be between $86 million and $89 million. Additionally, we are anticipating $4 million to $6 million of end of lease income. We expect book interest expense to be between $32 million and $35 million. Maintenance and other expenses should run between $1 million and $3 million. Since quarter end we have sold two aircraft secured by the facility that was restructured last year. Profits [ph] from the sale of these aircraft are used to discharge the associated debt in full and we’re recognizing a gain on the extinguishment of debt of between $3 million and $4 million.

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

Colm Barrington

Thank you, Gary. Thank you, everyone for being with us, and I hope that over the last few minutes we’ve given you an appreciation of the continuing progress we are making at FLY. That includes our enhanced fleet utilization, our 2014 remarketing successes, our continuing success in selling aircraft at premiums to book value, the fleet growth that we have achieved year-to-date and our significant growth prospect for the remainder of the year supported by our significant liquidity position. And of course, meanwhile FLY has continued to pay attractive dividends with the next dividend being paid on May 20.

With that, we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Richa Talwar from Deutsche Bank.

Richa Talwar – Deutsche Bank

Hello gentlemen, good morning.

Colm Barrington

Good morning, Richa. How are you?

Richa Talwar – Deutsche Bank

I’m good, how about yourself?

Colm Barrington

We’re great, thank you.

Richa Talwar – Deutsche Bank

Okay, so just a couple of questions. First, we’ve been hearing that the financing environment for used aircraft is picking up, especially as the market for the new aircraft gets a bit crowded. I realize that could be double-edged sword as it may talking about competition, but I was wondering if that’s creating more opportunities for you to pursue older aircraft? You’ve historically focused on your aircraft and Colm you’ve kind of reiterated that today. But just curious about your thoughts about maybe getting some older aircraft to gain some more yield.

Steve Zissis

Hi Richa, its Steve. On the older used aircraft, we are selectively looking at a few opportunities in that area but it’s not a broad strategy of FLY to acquire more of those. The only exception would be if there were older aircraft on longer term leases that really lent itself to a financing solution. Most of the activity that we see in the – towards the end of lease live stuff [ph] is now with what we call the part out kind of crowd that has somewhat migrated to being traditional less – but not actually buying the aircraft to part them out in the near term, they are actually buying them to hold them and continue leasing them for another two to four years. So the market is starting to change a bit in that area, but again, we don’t see it as a broad strategy to buy end of live stuff [ph] unless we find really good opportunities.

Colm Barrington

But I think with rather that Steve, on the positive side I think the availability of financing for older aircraft gives us more opportunities to move on some of our older aircraft, and we found that buyers – our potential buyers of our older assets have no problems in raising financing for those acquisitions so that we find quite positive.

Richa Talwar – Deutsche Bank

I get the point [ph]. Okay, and then you seemed very committed to hitting your 15% growth target this year, but at the same time we’ve also been hearing a lot about heightened competition, especially from the smaller players in Asia. There are two questions, first, do you think that these small businesses are becoming an increasing competitive threat for your business, I mean you’re able to secure on deals? And second, how do you distinguish yourself in the market, I mean is the market just about the best price or is there more value add that you can bring by being more established brand in space? And Steve, you kind of spoke to this with the issue that BBAM has in the space but I was hoping you could elaborate.

Steve Zissis

Sure, sure. Look there is a lot of what we would call new semi-types of capital coming out of Asia that’s looking to invest in this space. Primarily, we see this as a result of the increased liquidity around the world and people chasing yield, and wanting to diversify their asset ownership. So we are seeing increased competition. But I think the thing to recognize Richa is that most of these guys do not have either the expertise or the ability to originate direct with the airlines. So what they are tending to do is going to the traditional resource and buy existing deals that are on lease and therefore paying a premium for that. So a lot of the established resource will benefit from this, including FLY, but we don’t see it showing up directly in the sale leaseback market as of yet.

Richa Talwar – Deutsche Bank

Great, thank you.

Operator

Our next question is from Gary Liebowitz from Wells Fargo.

Gary Liebowitz – Wells Fargo

Thank you, operator. Good afternoon, guys.

Colm Barrington

Hi Gary.

Gary Liebowitz – Wells Fargo

First of all, thanks again for all the extra details in the presentation, it’s very helpful. I was wondering is it too soon to start thinking about the 2015 lease explorations, you have a substantial number of leases that expire next year, I was wondering if there are any indication that where we progress there? And if you’ve seen customers are looking more to extend that to – as oppose to returning the aircraft.

Steve Zissis

Gary, its Steve. In 2015 we’ve got 30 aircraft that are on scheduled expertise [ph]. Of those 30, seven of those aircraft have already been signed up primarily for extensions. And if I had to estimate Gary, I would say, I would expect 70% of our 2015 lease to be extended and then the rest to be remarketed to new lessees. So I think it is a good indication that the market continues to improve as we see airlines wanting to extend the equipment that they have on lease with us.

Gary Liebowitz – Wells Fargo

So 70% extension rate would be a little bit above historical norms?

Steve Zissis

I believe that’s correct.

Gary Liebowitz – Wells Fargo

Okay, that’s helpful. Also, Steve, you’re seeing some articles about possible changes to – in the Japan [ph] market, perhaps some legislative changes that affects the depth [ph] of that product. Do you have an update on that? Or you’re seeing…

Steve Zissis

Sure. As you know, we’re the – we’ve got a player in the Japanese market and most of that is – as you’re saying, there were some discussions about changing the tax laws for the depreciation profile for the Jalcos [ph], but that’s not in the works and if it did get legislated that’s three or four years away.

Gary Liebowitz – Wells Fargo

Okay, thank you very much.

Operator

Next question is from Helane Becker from Cowen. Please go ahead.

Helane Becker – Cowen

Thanks operator, hi guys, thanks for the time. Just a couple of questions, on the one slide where you talk about the pipeline here, and – let’s say, I’m not sure which slide it was but I think you said that you have a pitch $11 million [ph] Q2 acquisitions to be in 10 aircraft in the pipeline. Is that – can any of those aircraft also come in the second year, I mean in the second quarter, or are they all designed for second half of the year?

Colm Barrington

The pipeline aircraft Helane – I don’t believe any will come in second quarter, so it would be very late in the quarter, so I don’t think they will have any material impact.

Helane Becker – Cowen

Okay. And then my second question is also on that slide where you have total acquisition cost in the second quarter of $94 million, $82 million in the first quarter and then $568 million, that’s – that’s how we should think about CapEx for the year, the total amount whenever…

Colm Barrington

You add those three together and I think that comes up about $740 million, and would be our total identified CapEx right now.

Helane Becker – Cowen

Got you. And then, the third question I have is on the aircraft that are sold, will there be any gain associated with those aircraft or is that already…

Colm Barrington

Helane I’m surprised that – I’m amazed – we’ve always have gains on our sales.

Helane Becker – Cowen

Okay, fair enough.

Colm Barrington

The one we have sold this quarter, we will have a gain on, or we have a gain on already. And on some of our perspective sales, yes, we do have gains on those also.

Helane Becker – Cowen

Okay. So we should think about that as we’re going to the model I suppose?

Colm Barrington

Yes.

Helane Becker – Cowen

Yes, okay. Thank you very much. Have a nice day.

Colm Barrington

Thanks, Helane.

Helane Becker – Cowen

Of course.

Operator

Our next question is from John Godyn from Morgan Stanley.

Unidentified Analyst

This is Nathan Horne [ph] on behalf of John. Thank you for taking my questions. Just wondering if you could elaborate on what you’re seeing in terms of credit risk across the customer base. It seems like airline profitability is on track, but there is some concern about emerging markets, so I’m just wondering what are your thoughts are out there?

Steve Zissis

Nathan, it’s Steve. So we are seeing in some of the emerging markets some credit difficulties, especially in India. But I think if the elections in India turn out would as everybody expects with Modi getting in power that India is going to be a very exciting and emerging market for aircraft resource as growth picks up and financing for those airlines improves. So we do see it as temporary right now but there is some issues there. And obviously I did mention the Russian, Ukrainian prices, I mean that is having – I think small impact on some players but nothing significant for us. But otherwise I think it looks pretty healthy across the board.

Unidentified Analyst

Got it. And if you could just update us on your thoughts on capital allocation, what’s the right way to think about the balance between buyback and less dividends, as well as free CapEx?

Colm Barrington

Well I think we’ve identified what our free CapEx is Nathan, identified free CapEx. And I think we’re pretty clear on our dividend as we will expect to continue to paying dividend at $0.25 a quarter. While we have a $30 million buyback authorization, we don’t revisit [ph] buying shares back right now. If we see good opportunity – I wouldn’t expect to see any significant shares buybacks. As you know, we only have 41.4 million shares outstanding, so we think there is a small off lows in our shares than we’ve liked and we don’t want to reduce that significantly.

Unidentified Analyst

Thank you.

Operator

And we have a question from Glenn Engel from Bank of America.

Glenn Engel – Bank of America

Good morning, a couple of question please. First question is just, Colm [ph] – you have about – I guess $20 million or $30 million of aircraft that you have extended the leases or changed the leases this year. What types of reductions from these rates do we tend to see on these lease renewals?

Colm Barrington

Glenn you’re talking about the 2014?

Glenn Engel – Bank of America

Correct.

Colm Barrington

Look, this question has come up several times in the call. They are ranging from 10% reductions to 30% reductions, depending on the aircraft type. Obviously, as we indicated, the 319 is the most challenging aircraft that’s been in our portfolio with large reductions in lease rates but as we’ve indicated in prior calls, these rates are starting to trend back up, they firmed at a much higher level, and the overall reduction is in the 20% kind of range.

Glenn Engel – Bank of America

And the second question is, sort of talked about – it’s that in the last call you also said that the Airbus and Boeing; A320, 737-800 values were – the gap is closing between Airbus and Boeing, and as that continued. And I think you also said the gap between the A319s and A320 and 700s and 800s had at least stabilized last time, is that also still true?

Colm Barrington

Look, it’s exceptionally correct Glenn, I mean it’s only been two months since we had our last call. So, not much really has changed in the two months and it’s been pretty consistent.

Glenn Engel – Bank of America

Thank you very much.

Operator

(Operator Instructions) I’m showing no further questions at this time.

Steve Zissis

We’d like to thank everyone for joining us for our first quarter earnings call. We look forward to updating you again next quarter.

Operator

Thank you. Thank you, ladies and gentlemen. This concludes today’s call. Thank you for participating. You may now disconnect.

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