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FLY Leasing Limited (NYSE:FLY)

Q2 2014 Results Earnings Conference Call

July 31, 2014 09:00 AM ET

Executives

Matt Dallas - IR Manager

Colm Barrington - Chief Executive Officer

Gary Dales - Chief Financial Officer

Steve Zissis - the President and CEO of BBAM

Analysts

Gary Liebowitz - Wells Fargo Securities

Richa Talwar - Deutsche Bank

John Godyn - Morgan Stanley

Helane Becker - Cowen & Company

Jason Arnold - RBC Capital Markets

Justine Fisher - Goldman Sachs

Bill Mastoris - Baird & Co.

Mark Streeter - JP Morgan

Operator

Good day ladies and gentlemen welcome to the FLY Leasing Second Quarter Earnings Call. At this time all participants are in a listen only mode. Later we will have a question and answer session and instruction will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded. I would now like to turn the call over to Mr. Matt Dallas, Investor Relations Manager. Sir, the floor is yours.

Matt Dallas

Good afternoon, thank you. I’m Matt Dallas, the Investor Relations Manager at FLY Leasing. And I’d like to welcome everyone to our second quarter earnings conference call.

FLY Leasing, which we will refer to as FLY or the company throughout this call, issued its second quarter earnings results press release earlier today. Shortly after there was a corrected version issued, which is posted on our company’s website at www.flyleasing.com.

We have a slide presentation today that accompanies the call which is also available on our website and to participants on today's webcast. If you are not accessing the webcast, you can find a copy of the presentation in the Investor Relations Section of the 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 by reading the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding the outlook for the company’s future business and financial performance. Forward-looking statements are based on current expectation and assumptions of FLY’s management, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and are described more fully in the company’s filings with the SEC. Please refer to these sources for additional information. FLY expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise.

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 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 to our second quarter 2014 earnings call. As we close out our second quarter 2014, demand for in production narrow bodies remained strong. Lease rates continue to consolidate at a higher level as the managed seat supply and as airlines across the globe reports strong traffic growth.

Looking forward into 2015, we see more and more airlines eager to execute their growth plans and commit to lift into 2015 and ‘16. To this point, we can confirm that out of the 30 aircraft available for remarketing in 2015, 13 aircraft or 43% of our backlog has been committed for remarketing.

Let's review the score board for FLY shareholders. Since our IPO, we have returned $270 million of capital to our shareholders in the form of stock buybacks and dividends. We have sold 29 aircraft for a total gain of $68 million, while also liquidating our minority shareholding in BBAM for several times above the cost.

In addition, the BBAM management team owns approximately 4% of FLY. This 4% shareholding was purchased with after-tax cash, non-share grants or options from FLY and is completely in line with our shareholders.

As we think about capital allocation going forward, we continue to focus on deploying capital into immediately earning aircraft assets. The investments we are originating in the current year are delivering attractive cash and IRR yields. This is primarily driven by attractive financing terms even though the underlying lease metrics have tightened from prior years. Lessors make money from net spreads during the investment term or the difference between revenue and aircraft related expenses. The low interest environment and ever more aggressive credit environments are driving higher returns on invested capital through a larger net spread for asset owners.

To-date, our projected acquisitions are coming in at our stated goal of 15% fleet growth, Colm will run through the details later in the presentation.

In light of the heated lessor new order activity at the London Air Show a few weeks ago, it’s worth emphasizing that FLY does not make forward orders for aircraft. Our acquisition policy is not to grow for growth sake but to work every corner of the market to seek out relative value and attractive returns.

And assets we buy are and will be immediately accretive to EPS and cash flow per share. We believe this gives FLY competitive advantage over other lessors. We are able to moderate our growth depending on available deals and condition of the overall marketplace without forward capital commitments. In addition, while our competitors allocated significant part of their available capital to new orders, we believe they are less likely to compete the sale leaseback marketplace.

In addition to focus on growth, we’re also focused on rebalancing the portfolio by selectively liquidating those assets that we determine to be fully priced due to excessive liquidity or where we can free up capital for more attractive returns. In this respect, we have sold 29 aircrafts since listing the business in 2007. These sales have generated gains of approximately $68 million. Of these sales, 12 aircraft come from the original portfolio of 47 aircraft that we started with in 2007.

In our view, one should not be complacent about liquidating assets during this time of plentiful capital and full valuations. When we started the company back in 2007, we had 18 out of production aircraft on the portfolio, representing 20% of the company’s net book value. By the end of 2015, we expect to be down to 8 aircraft, representing approximately 7.9% of net book asset value. I will now hand the call over to Colm and Gary.

Colm Barrington

Thank you Steve and thank you everyone for joining us this morning.

As you can see from our press release which we issued FLY has continued to make strong progress in the second quarter in terms of fleet growth, profitable aircraft sales, high aircraft utilization, increased operating lease revenues and an increase in net income to $21.7 million or $0.51 per share. Also in the first half of 2014, FLY acquired 11 aircraft and since the end of the quarter we've acquired one further aircraft and signed purchase agreements with three more. Our total spend on commitment on aircraft in 2014 through today is approximately $636 million and we have an additional identified pipeline of $158 million. As a result, FLY is well on track to achieve it's 15% fleet growth targets in 2015.

In the second quarter we sold 7 aircraft for an aggregate gain of $19 million or 16% above our net book value. These 7 aircrafts have an average age of 12.4 years and so in addition to the substantial benefit to our net income, the sales also further increased our fleet age, which was 8.7 years at the end of the quarter. Since its formation, FLY has sold a total of 29 aircraft for a total gain of $68 million or 14% premiums the net book value of the aircraft sold. These sales continue to demonstrate several factors about our industry and about FLY.

First, they show that there continues to be a buoyant market for aircraft sales, including for older aircraft. Secondly, this is worth noting the 13 of the aircraft sold by FLY were originally acquired 13 of the aircrafts sold by FLY were originally acquired in 2007 and 2008 before the depth of the financial crisis.

And thirdly, FLY has continued to demonstrate that the market value of its fees exceeds its net book value. A further achievement of the second quarter was our 100% fees utilization. This maximum utilization combined with our fleet growth resulted in a 26% increase in operation and lease rentals as compared to the second quarter 2013. Also our gross rental yield for the quarter was 12%, which contributed to a healthy net income.

The highlight of 2014 to-date is continuing high level of fleet growth being achieved by FLY. In the first half we acquired 11 aircrafts for total of $308 million. And since the end of June, we have announced one more acquisition and a commitment to purchase three additional aircrafts costing a total of $328 million. These 15 aircrafts are on relatively long-term leases to 10 different airlines in eight different countries. And we'll contribute a further $72 million to FLY's annualized operating lease revenues.

As Steve has mentioned we've identified four additional aircraft acquisitions closed by year-end costing a total of $158 million. And these aircrafts will contribute a further $15 million of annualized rentals on lease term on average for 8.2 years. Meanwhile we are comfortable about our ability to fund this growth having $253 million of unrestricted cash and $325 million available under our acquisition facility.

At the same secured and unsecured debt markets remain buoyant and FLY continues to have access to them. We will however continue our practice of not entering into unfunded commitment. Based on the sale of the acquisition transactions identified to-date, FLY will grow its fleet to approximately $3.5 billion by year-end, a 15% increase from the prior year-end. As a result, we’re now comfortable that we will achieve our fleet growth targets in 2014.

As I mentioned earlier FLY’s consistently and profitably monetized older aircraft. At June 30th, we’ve sold the total of 29 aircraft with an average age of 12.5 years for total gain of $68 million above the net book value. These aircraft sales are completed during and since the global financial crisis and demonstrate that throughout the cycles as continued to be a demand for used aircraft and as importantly the funding to finance this demand.

For FLY these sales have helped us to retain a younger fleet as the company has matured and the generation captures have helped us to maintain our growth strategy. FLY will continue to seek opportunities to sell aircraft particularly in order to reduce the age of our fleet to generate gains and to provide additional liquidity to support growth.

We believe that the investment community to treat gains on the aircraft sales with the same wage are starting to rental income. In aircraft fleeting trading is a routine and integral part of business, indeed an aircraft operating leasing unless I cannot declare an overall gain on any aircraft that purchases until such time of that aircraft is sold profitably. In this regards FLY’s record is [exemptery].

On July 17th, FLY declared a quarterly dividend $0.25 per share. This dividend will be paid August 20th to shareholders of record on July 31st. The dividend is FLY’s 27th consecutive of quarterly dividend and continues FLY’s current annual dividend policy of $1 per share. Since 2008, FLY's paid total dividends of $6.87 per share.

Before I offer Gary to take you through the second quarter and half year numbers, I think this is worth making a few comments on slides end of lease income and how it impacts our quarterly earnings. In 2012 and 2013, FLY recognized 49.8 million and 47.6 million of end of lease income respectively. In 2014, we expect to recognize 30.7 million rent of lease income of which 3.9 million has been recognized to-date. As we've noted in the past FLY only recognizes end of lease income at the expiry of any lease. This treatment may result in volatility in our earnings from one quarter to another.

Thank you for your attention. And I will now ask Gary to explain the second quarter and first half numbers in more detail.

Gary Dales

Thank you, Colm. As Colm mentioned, we're reporting net income for the quarter of $21.7 million, or $0.51 per share on total revenues of $109.5 million. This compares with net income of $5.9 million and $0.20 a share for the same period in 2013. The primary driver of the increase is the increase in operating lease revenues as a result of the increase in the size and improved utilization of our portfolio.

The second quarter 2014 results include $18.9 million of gains from the sale of aircraft, whereas in the second quarter of 2014. Those results include a $70 million of end of lease o. these two amounts more or less offsets.

For the six months ended June 30, 2014, our net income was $25.2 million or $0.58 per share. As compared to net income of $38.8 million or $1.35 per share. Last year’s figures include $47.6 million of end of lease revenue with only $3.9 million present in the current six month period.

As you can see operating lease rental revenue has increased 19% year-over-year again driven by the aircraft required over the last 14 months. During 2014 we recognized gains of $18.9 million on the sale of seven aircraft. During the same six month period in 2013 there were nine aircraft sales and they generated gains of $6.5 million.

Total expenses for the second quarter of 2014 were $84.9 million this compares to $83.8 million for the same period in the previous year. The increase in the expenses is primarily due to depreciation of aircraft acquired during 2013 and 2014 and the increase in interest expense associated with our senior unsecured notes issued last December partially offset by a net gain on the extinguishment of debt and a reduction in our maintenance expenses.

As you can see our interest expense has increased by $4.4 million due to the interest on our senior unsecured notes issued last December, this increase is partially offset by an interest reduction from the repricing of our term loan and reduced interest resulting from principal repayments.

It is worth noting that our interest spent in the second quarter included $4.4 million of non-cash charges reflecting amortization of fair value adjustments related to debt assumed in the GAAM transaction of regionally issued discounts and amortization of loan fees. Our SG&A expenses increased $1.7 million, primarily due to increased transaction expenses.

Our second quarter 2014 results include a $4 net gain on the extinguishment of debt, which we have reflected as a contract expense. There is many reduction in our maintenance and other expenses of approximately $7 million, when comparing the second quarter of 2014 to the second quarter of 2013.

During 2013, we repossessed 5 aircraft and had several re-deliveries. As Colm mentioned for 2014, our utilization has been in excess of 99% with the 100% utilization achieved in the second quarter.

For the six months ended June 30, 2013, our total expenses were a $171.9 million compared to $160.4 million for the same six-month period in the previous year, an increase of $11.5 million. Similar to the quarter, the increase is primarily due to increases in depreciation expense as a result of aircraft that we have acquired and the increase in interest associated with our senior unsecured notes.

These increases were partially offset by declines in maintenance and other costs and net expenses associated with debt extinguishment. Our provision for income taxes for the second quarter of 2014 was $2.9 million; this represents an effective rate of 11.8%. The effective rate for the same period in the previous year was 12.1%. For the six months period ended June 30, 2014, our effective rate was 12.6%.

At June 30, 2014, our assets totaled $3.6 billion of which of which $3.2 billion was invested in flight equipment held for operating lease. At June 30, 2014, we had seven unencumbered aircraft with a net book value of approximately $250 million. Our total cash balance was $378.4 million of which $253.2 million was unrestricted. And as Colm mentioned, we have approximately $325 million of availability under our acquisition facility giving us ample resources to meet our growth target. We are including a statement of cash flows in our earnings press release for the first time.

During the six months period ended June 30, 2014, we generated $106.7 million of operating -- our cash flow from operations and used $215.7 million and $42.3 million in investing in financing activities respectively.

Finally, let me cover a few items of guidance for the third quarter of 2014. We are expecting operating lease rental revenue to be between $88 million and $91 million. We are anticipating $12 million to $13 million of end of lease income. Book interest expense is expected to be between $32 million and $34 million. And finally, maintenance and other expenses should run between $1 million and $2 million.

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

Colm Barrington

Thank you Gary and thank you everyone. I hope that over the last few minutes, we have given you the appreciation of the continuing progress we are making at FLY. Our enhanced lease utilization, our 2014 remarketing successes, our continuing success in selling aircraft at premiums to book value, the fleet growth that we've achieved year-to-date, and our significant growth prospects for the remainder of the year supported by our significant liquidity position. Meanwhile FLY has continued to pay dividends with the next dividend being paid on August 20th.

With that we’re ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Gary Liebowitz with Wells Fargo Securities. You line is now open. Please proceed with your question.

Gary Liebowitz - Wells Fargo Securities

Thank you, operator. Good afternoon, gentlemen.

Colm Barrington

Hi Gary.

Gary Liebowitz - Wells Fargo Securities

I might have missed it, the first time around, but did you say how many lease expirations you have for the second half of 2014 and whether all those planes have been either replaced or sold?

Steve Zissis

Hey Gary, it’s Steve. We’ve got two aircrafts remaining in the fourth quarter of 2014, one is an A319 and the other one is an A320.

Gary Liebowitz - Wells Fargo Securities

So, just two planes and your second half of the year end of lease revenue is going to be something like $27 million?

Steve Zissis

Well those are the ones that are remaining to be remarketed. We have several other -- three other aircraft that are transitioning and those are going to generate the end of lease income in the second quarter. And as Colm mentioned, we’re also expecting end of lease income in the fourth quarter. And those are just regular redeliveries. In almost all the cases the new lessee has been identified and we’ve begun the transition process.

Gary Liebowitz - Wells Fargo Securities

Okay. That makes sense, thanks. Also just curious, was there anything unusual in SG&A; I saw it’s stepped up a little bit this quarter, does that go back to the $9.5 million, $10 million quarterly rate going forward?

Colm Barrington

Yes, it does. We expect third and fourth quarter SG&A to be around $10 million per quarter. And if you noticed SG&A was up in the second quarter. I mentioned little earlier in my comments it's due to the increase in transaction expenses.

Gary Liebowitz - Wells Fargo Securities

Okay, great. Thank you very much.

Colm Barrington

Thanks Gary.

Operator

Our next question comes from the line of Richa Talwar with Deutsche Bank. Your line is now open. Please proceed with your question.

Richa Talwar - Deutsche Bank

Hello everyone, good morning. I just have a few questions, first is sort of a house keeping one. Colm, after you discussed by 15% growth target, I was hoping you could just refresh us on your return target on these acquisitions and maybe give us an update on all the recent growth that you managed to achieve and that's in the pipeline, if that's in line with those return goal?

Colm Barrington

As we mentioned our goal is a 12% return, lease rentals as divided by the book value of the aircraft. I think if you seen our as we said in our tax was the aircraft we bought year-to-date and committed on year-to-date and we're more than our annualized rentals are more than that 12% return. In other words lease rentals factor, the month lease rental factor is more than 1% per month.

Richa Talwar - Deutsche Bank

Okay. And then Steve inline with your comments on continuation of strong credit market conditions, do you see any further opportunity to refinance additional debt and reduce your overall debt costs?

Steve Zissis

Yes. I mean, yes Richa, we do see opportunities and we have quite a lot of cash as you know from the high-yield issue that we did later last year which will be using on our acquisition program and that's what we've been comes today and I am using up those comes today because they did have a negative interest drag but we are looking financing opportunities on an ongoing basis, so and we have reduced our interest rate cost by 30 bps I think year-on-year. So we will continue to look at opportunities for refinancing, yes.

Richa Talwar - Deutsche Bank

Okay. And then maybe just one more give that your average remaining lease term is around four years I found in release and that’s right around the time where we are likely to start seeing a lot of new generation technology, especially related to narrow body deliveries come online. Can you just discuss how you address that as a risk and how you expect to navigate through that?

Colm Barrington

I mean I think that’s an average as you see all our latest acquisitions have much longer lease terms in that. We don’t, in any event see the new technology aircraft having a significant impact on the market, until very late in this decade and into the next one before there are significant numbers of those aircraft in operation. So that 4.3 is an average, really doesn’t this we think there is going to be still a very strong demand for the current generation aircraft certainly through the end of this decade and into 2020 and beyond. Because they just can’t make enough of them to satisfy the demand and for a five or six years after they start producing.

Richa Talwar - Deutsche Bank

Okay, alright thank you Colm.

Colm Barrington

It’s okay.

Operator

The next question comes from the line of John Godyn from Morgan Stanley. Your line is now open, please proceed with your question.

John Godyn - Morgan Stanley

Hey guys, thank you for taking my questions here. I was hoping that we could just plug into your perspective on some of the recent events kind of in the global marketplace so to speak and what I mean by that is we are in a situation here where across all aerospace related stock, the lessors included beginning with the Emirates cancellation, I want to say a month and half ago, a lot of these negative profit revisions from European airlines and some Asian airlines, what seems to be a soft patch here. People are getting uncertain about the cycle. And I was hoping that you could speak to some of the metrics that you track, credit metrics maybe across the customer base. What you are hearing? And even share your perspective on some of these recent events, just to help us plug into the way that you are interpreting this?

Steve Zissis

Well, I guess that make a couple of general comments and that is when you look at demand in 2014 and 15 for aircraft, it appears very strong John. We see it almost across the board, airlines to become more certain in their growth plans and become more definitive in what they want to do going forward.

And then I think if you look at what happened at the Airshow with the major lessors of reordering again with the manufacturers, I think that gives you further confidence that amongst the lessor community, they are seeing pretty steady demand for aircraft for the foreseeable future.

But having said all of that, you have got to take into account the geopolitical situation, the fact that there is some softness in some of the low cost carriers in Asia especially, and also the fact that maybe when the lessors have peaked in the order cycle that we're start to hit the top. So we certainly have factored that into odd thinking here at FLY. And that's one reason that we decided to make the comments in the opening remarks that one thing that we think is unique about FLY is that we can accelerate or decelerate our acquisition pace, depending on where the market is trending.

Whereas some of the other reservoirs that have larger pipelines of committed yields going multiple years out are not able to do that. And so that's why I think one thing that is quite unique about FLY and I think will serve our investors well. Colm I don't know if you have?

Colm Barrington

Yes, I think John while you may have some concerns about certain cost of the industry. If you look at global aircraft taking the first six months of the year it was up 6.2% as compared to last year which is a point addition from sort of long-term industry trend. And secondly you see IATA forecasting the global airline profits going to be up nearly 50% this year to over 30 billion to 32 billion.

So on the macro basis which is where we operate the trends are still pretty positive. And if you play those trends cleverly as Steve has just pointed out by not committing yourself too far into the future then you should be able to adopt to those trends along the way. While there have been some airlines in Europe who have had some issues. I think mainly that's because they’ve found the low cost carriers have been taken away market share from them.

And for example Ryanair reported, biggest airline in Europe reported results just two days ago had fantastic results, easyJet reported a little before that had also excellent results. So I am not as negative about the trends in the world as you represent.

John Godyn - Morgan Stanley

Got it and it sounds like what I am hearing is more of the view that we're in a soft patch and need a continued up cycle rather than seeing the beginning of a turning cycle, is that fair?

Gary Dales

Well, no I wouldn't characterize it that way John. I wouldn't say we're on a soft head. I think we're in a fairly steady bullish demand cycle, but our thinking is colored by the geopolitical risk and the fact that there are diverging signs, diverging trends out there. So, we have and I think to be a little bit more cautious about how to think about growth and what we’ll commit to in the future rather than just loading up and buying a whole bunch of aircraft.

John Godyn - Morgan Stanley

Well Steve, what just because plug in to your thoughts it’s always so helpful, but what inning would you say we are in this cycle?

Steve Zissis

Well, look if I knew I would, I would be a forecaster. I can’t tell. I just know that in general our industry tends to be very cyclical. It tends to run on five to seven year cycles and I think you’ve got to factor that in that we’re already probably five years into a recovery. And maybe we’ve got a couple of more years, but it could go a lot longer than anybody expects.

John Godyn - Morgan Stanley

And just…

Steve Zissis

Look when the down cycle does come we’re going to be continuing to pick up good deals because that’s what we think the best time to deploy capital.

John Godyn - Morgan Stanley

Got it. And just to put a point on it credit metrics or anything that you’re seeing across customer base that you serve are those improving deteriorating a little bit flat, what would you say in terms of just kind of sequential change recently?

Gary Dales

I think John on the total fleet basis we don’t see any change. There are always pockets use your own words in any portfolio where you’ll have some issues and those continue. But as of today there was no major change in our portfolio from a year ago or six months ago even.

Colm Barrington

And as you see from our results we have a 100% of aircraft up and working as we speak.

John Godyn - Morgan Stanley

Got it. Very good, thanks a lot guys.

Operator

Our next question comes from the line of Helane Becker with Cowen & Company. Your line is now open. Pleas proceed with your question.

Helane Becker - Cowen & Company

Thanks very much, operator. Hi guys, thanks for the time. Just on the aircraft that are coming in. Where -- did you say maybe on this, where the aircrafts are coming from, where you source these aircrafts or can you speak to that geographically or whatever?

Colm Barrington

I think it's really all over, I think we've got some Asian ones we've got some European ones. So it's pretty well inline with the portfolio that we have at the moment.

Helane Becker - Cowen & Company

Okay. So well it change geographically?

Colm Barrington

There will probably be a little bit more constriction, Asia, of course our Asian percentage will rise slightly.

Helane Becker - Cowen & Company

Okay. And then the other thing is. Okay so you're out of 100% utilization and you've got some coming off into transition and then some coming in. So how should we think about utilization for the third and the fourth quarters?

Colm Barrington

Well, it's going to be very close to 100%, because even if we don't find homes for the two aircrafts that we still haven't placed in the fourth quarter they will have very little impact on our utilization for the third and fourth quarters. So we see utilization being high in those two quarters.

Helane Becker - Cowen & Company

Okay. So yes, as I think about that, when I look at your numbers and I look at the gain on the sale of the aircraft in the quarter and I mean when did those get sold. So is it and what I'm trying to sort out, I guess this how much in operating lease revenue was from those aircrafts versus selling them perhaps at the end of the quarter or middle of the quarter, I mean does it matter to think about it that way?

Colm Barrington

Yes, I think I have a number. Well, I can tell you what impact they had this quarter compared to last quarter. So in other words, they were only in our results for a partial quarter. And they had about an effect of decrease in revenue this quarter about 1.6 million. And Helane, I’ll also remind you that we’ve provided some guidance on our operating lease rental revenue. So next quarter, we think is going to be between $88 million and $91 million of operating lease rental revenue and that factors in, all of the acquisition sales that we have anticipated.

Helane Becker - Cowen & Company

Okay, sure. The ones that left, were they at a higher lease rate than the ones that are coming in, is that how I should think about that?

Colm Barrington

No, I don’t think they were any different. I would say they were all pretty average.

Helane Becker - Cowen & Company

Okay, alright. Well, thanks for your help there. Those are all my questions.

Colm Barrington

Thanks Helane, good to talk to you.

Helane Becker - Cowen & Company

Of course. Thank you.

Operator

Our next question comes from the line of Jason Arnold with RBC Capital Markets. Your line is now open. Please proceed with your question.

Jason Arnold - RBC Capital Markets

Hi, good morning guys. I was just curious if you could talk a bit more about the Q3 acquisitions and pipelines specifically on aircraft types comprising of acquisitions kind of where you see the most appealing opportunities there as well on type?

Steve Zissis

Well, I think we have announced the acquisitions through the end of June, Jason. Since the end of June, we bought one more 737-800 and as we announced day before yesterday, we signed contracts to purchase three A330-300s in sale leaseback. The pipeline for the rest of the year is, give or take 737-800s again.

Jason Arnold - RBC Capital Markets

Okay. And then I mean, I guess A330 price looks great, aircraft type is something that you find appeal for or maybe just kind of big picture thoughts on type wide body versus narrow-body et cetera?

Steve Zissis

Well, as you know, we are primarily a narrow-body lessor, but we have said, as we'll have up to 20% of our portfolio, our book value in wide bodies. And we just came across some good opportunities to buy some wide-bodies, attractive wide-bodies and A330-300 is the most attractive one around the A330 models and we're very comfortable with the aircraft, we're comfortable with credit, we've got satisfactory lease terms. So, it's a good opportunity to us from wide-bodies to our portfolio.

Jason Arnold - RBC Capital Markets

Perfect. Okay, thanks. And then just one other follow up, any leasing specific concerns associated with Russia sanctions or kind of anything around that you see big picture was?

Colm Barrington

We have no aircraft subject to sanctions right now, Jason. I mean [moments] obviously all the time, but there is nothing that we -- we have no aircraft subject sanctions. But that is an evolving and changing situation, so we’ll obviously have to keep very close to this.

Jason Arnold - RBC Capital Markets

Okay. Thank you.

Colm Barrington

Pleasure

Operator

Our next question comes from the line of Justine Fisher with Goldman Sachs. Your line is now open. Please proceed with your question.

Justine Fisher - Goldman Sachs

Good morning.

Colm Barrington

Hi Justin.

Steve Zissis

Good morning.

Justine Fisher - Goldman Sachs

The first question I have is just to clarify a comment that I think -- I can't remember the comments that Steve made at the beginning of the call that underlying lease metrics have tightened versus the prior year. What did you mean by that? Was that a comment on general directions of lease rates or terms, what was the specific color around that comment?

Steve Zissis

Justine, it’s Steve. That's correct I mean there is a lot of capital out there, especially what we would call may be first timer passive capital chasing the premium type of deals out there. And therefore they are pushing down lease rates and slightly increasing prices. So, the basic metrics for deals has been deteriorating but what has been improving quite dramatically are the financing terms that one can get.

Justine Fisher - Goldman Sachs

Okay. So that's why your net spread is obviously improving or at least the same?

Steve Zissis

Correct.

Justine Fisher - Goldman Sachs

Okay. The second question I have is just going back to John's questions regarding the cycle. One question that we get a lot from investors, especially those who have started to look at the leasing space as it's grown but have not looked at it in previous cycles is that, if the cycle turns or when the cycle turns, what part of the supply chain is going to bear the burns of that? Obviously if it's in a shock like a 09/11 or something like that, everything goes down and it's problem for everybody. But if it seems to be just a gradual supply demand imbalance of growth that it will be a gradual process and at some point someone in the chain is going to get squeezed. We're not of the view that this is an eminent possibility but we get the question as to who that will be. Will it be Boeing or Airbus who can’t sell aircrafts which I don't think that will be the case? But will it be lessors that can't place aircraft or the lessors place the aircraft but at much lower rates or they place the aircraft at decent rates but just have to take residual write-downs? I mean what's the metric or the part of the chain that you think in this type of when the cycle turns based on what it seems -- based on the supply demand balance potentially that will get squeezed?

Colm Barrington

I think historically Justine, if you look back, you will see that what has happened is out of production aircraft tend to get hit first and hardest. So, Classic 737s, 757s, older aircraft types are less efficient will be the first to get hit. Certainly from a lessors’ point of view that’s what you would worry about most. And that’s why for example, we are selling. I think we sold all but one of our Classic aircraft and we’re selling older aircraft along the way. So, to try and just be sure that we are protected, if that should happen. So, I think that will be the first hitch in the chain from our perspective.

Justine Fisher - Goldman Sachs

And is it possible that lease rates don’t go down as much but the residuals are written down such that there is a non-cash impact but not as much of a cash impact, is that even possible?

Steve Zissis

Well I think you’ve found in past again, these lease rates have tend to decline in a recession. The last recession they were -- we were helped considerably because interest rates went down as well so that two were somewhat in parallel and that saved some of the shock. But I think you’ll find lease rates go down then following that aircraft value is tend to follow them, follow lease rates down. But as I say, it will be the older less efficient aircraft first.

Justine Fisher - Goldman Sachs

Okay. And then one last question on the financing for the remaining acquisitions for the rest of the year, it makes sense that if you had the unsecured bonds on your balance sheet from the fourth quarter that you don’t want to have that neither carry, you want to use that capital to make acquisition. So, that explains the cash use for the quarter. And if we look at where your cash balance had been previously, it seems as though you could use another $50 million or $60 at least in the second half of the year to finance acquisition as opposed going out and sourcing debt. But with the $158 million of additional identified opportunities, it seems though the company might have to go and source more debt. So I was wondering number one, if that is the case or if we should expect it to come out those, financing to come out of cash. And then number two are you guys already looking into the secured debt market or can you give us any color as of now as to how you're looking to finance or us to those aircraft?

Colm Barrington

Well, I mean some of the aircraft if we require in a recently we have actually financed with secured debt. As we mentioned in the call, we do have considerable capacity in our acquisition facility. But we actually have enough cash and facilities to finance our program through the end of this year, but obviously we want to keep this company moving, so we will be looking at other debt facilities both secured and unsecured during the remainder of this year.

Justine Fisher - Goldman Sachs

Okay, great. Thanks very much.

Steve Zissis

Thank you.

Operator

Our next question comes from the line of Bill Mastoris with Baird & Co. Your line is now open. Please proceed with your question.

Bill Mastoris - Baird & Co.

Hi, thank you. Some of my questions have already been asked. But I’d like to follow-up a little bit on Justine’s question. Given your comments about the number of attractive opportunities you have out there and that could expand to 2015, 2016. And your statements about, you certainly would like to have a war chest for when the downturn does come, because you can't pickup very attractive aircraft. I'm wondering if we look out into the future, how do you view, if you will construct that war chest. Is this something where as you touched on a little bit earlier maybe there is an additional unsecured issue and the pipeline or you just go ahead you take that acquisition facility and expand it a little bit? Any additional color that you could provide would be greatly appreciated?

Steve Zissis

Yes, I think Bill we look at everything, I mean as I mentioned earlier, we have taken almost secured debt this year were using up unsecured debt we raised last year. We are selling aircraft which is generating both cash, free cash and freeing up facilities. We will certainly look at further secured and unsecured debt during the course of this year. So we want to be prepared to keep our pace of growth going through 2015. So we will continue to look at everything.

Bill Mastoris - Baird & Co.

Okay. And my follow up question has to do with you indicated that you see some diverging traffic trends and certainly that’s been consistent in some of the other comments that we have heard from other lessors, I am wondering do you have any change in how you kind of view the mix of your portfolio, my recollection is in the past, you wanted to keep it roughly right around 75% narrow body, has that changed at all?

Steve Zissis

No, we still think for our leasing company, the widely used narrow body aircraft, the aircraft to have in your portfolio because they are so much easier and less expensive to move one lessee to another. And we don’t see anything changing this. If we get some good attractive well priced wide bodies on relatively long-term leases, at least what we have done recently then we will invest in some wide bodies, but we still have 75 (inaudible) in narrow bodies.

Bill Mastoris - Baird & Co.

Okay and then just following up a little bit kind of on that thought process, when the inevitable downturn does come, you did mention that you believe we are 5 years into maybe 5 to 7 year cycle. What becomes more available, the wide bodies or the narrow bodies in your opinion, and how might that shift, if at all?

Steve Zissis

Well, that’s hard to predict. It will depend on how quickly that cycle turns and where it turns and how it turns. But again looking back at history, it has been much better or lessors to come straight on narrow bodies than on wide bodies. The wide bodies can sit around the long-long time between leases certainly as compared to narrow bodies in recession. But again it’s the older less attractive aircrafts that sit for longest.

Bill Mastoris - Baird & Co.

Thank you very much. I appreciate it.

Operator

Our next question comes from the line of Mark Streeter with JP Morgan. Your line is now open, please proceed with your question.

Mark Streeter - JP Morgan

Good morning or good afternoon gentlemen, I have Jamie Baker here with me. Question on potential Axiom bank shutdown, would that be good or bad for FLY and for the leasing industry in general, curious for your thoughts?

Steve Zissis

That would be very good for leasing business. I mean simply there is less missed price capital out there. And where leasing companies do provide capital to the airlines in the industry and to the extent they don't have to compete with the government entity it's to the positive.

Colm Barrington

Yes, I mean generally the financial crisis, Mark the U.S. Axiom and the European export credit agencies were providing some very attractive terms which was causing airlines to choose that sort of financing over and above for available in the leasing and even the bank markets. So we think they were often too attractive returns as compared to what we could offer. So we’d be happy if they closed down.

Mark Streeter - JP Morgan

Thanks Colm. I tend to agree. I know Fitch and some other agencies have made some comments to the contrary that it would be bad because it’s a source of funding that dries up for you. But you and the other lessor don’t really rely on export credit funding for your own portfolio to a large degree, because it's rather inefficient I am imagining right relative to some of the other funding options you have.

Colm Barrington

Well, we don't have any extra credit funding Axiom or the European agencies.

Mark Streeter - JP Morgan

Exactly and that's not in your plans, right. That means Axiom funding is not something that you are seeking correct?

Colm Barrington

If we both, new aircraft we certainly look at asset as an option. And we had that choice quite recently, but we chose not to go that route.

Mark Streeter - JP Morgan

Okay. And then Colm, a question for you on some of the portfolio sales that are out there, a lot of headlines about marketing the portfolio. There are some other portfolios we are hearing about, that's why do you have any interest in those portfolio type transaction or should we consider you sort of looking at, sort of pick and choose your spot in terms of how you are acquiring aircraft.

Colm Barrington

We look at everything.

Mark Streeter - JP Morgan

Is there a size that's too big for you or is anything on the table?

Colm Barrington

I think that is on the table I mean look we added, we nearly doubled our portfolio when we did the transaction in late 2011. So I don’t see any reason why we shouldn't and look at Kelly did with aircraft and see anything is possible so yes, we look at anything.

Mark Streeter - JP Morgan

Got you. And then just last question from me just following up on some of the other teams, I mean there has been some research and discussion on the call and so forth about the decline in airline industry profitability expectations and so forth. And then a lot of concerns about the interest rates and I guess people assume I think that there is a very quickly action in the weekly market that if airline profits come down a little that lease rates go down or if interest rates adjust, lease rates adjust. I am just wondering if you can talk about the speed in which you think the market reacts either slowing GDP or the rise in interest rates kind of gets into obviously your lease duration and so forth. But just anecdotal commentary on how quickly you think the market reacts to any sort of change in wins when it comes to either airline profitability or interest rates?

Steve Zissis

Well first of all I think we should just tell the myth. I mean as we said early in our call growth in airline traffic on a global basis this year through May was 6.2% whereas the long-term trend of around 5%. World GDP since the growing airline traffic seems to be related to that I often as predicting that airline profits will be higher by close to 50% this year than they were in 2013 which was higher than in 2012.

So we don't see these trends that you referred to. In terms of interest rates, lease rates first of all we our average term was at 4.3 years. So we have a lot of our aircraft locked in for a long period. Our interest rates were hedged through the terms our leases so change in interest rates doesn’t have an immediate impact on us.

And then lease rates will -- future lease rates will depend on supply and demand in the marketplace and it will all depend on when if the cycle turns and what happens in 3, 4, 5 year if there are changes. But as of now and Steve has said, we see airlines is really trying to get capacity into the fleet for 2015 and 2016 so the trends are currently quite positive.

Mark Streeter - JP Morgan

Great. Thanks Colm. I completely agreed I am glad we clarified that. I appreciate the time.

Colm Barrington

Thank you.

Operator

Ladies and gentlemen, this concludes the Q&A portion for today. I would like to turn the call back over to speakers for any closing remarks.

Colm Barrington

I’d like to thank you all for joining us for the FLY Leasing second quarter earnings call. And we look forward to updating you again next quarter. Good bye.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a good day everyone.

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