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FLY Leasing Limited (FLY)

Q4 2010 Earnings Conference Call

March 2, 2011 9:00 a.m. ET

Executives

Matt Dallas – Investor Relations

Steve Zissis – President and CEO, BBAM

Colm Barrington – Chief Executive Officer

Gary Dales – Chief Financial Officer

Analysts

Gary Liebowitz – Wells Fargo Securities

Helane Becker – Dahlman & Rose

Joe Gill – Blackstone

Operator

Good morning. My name is Leticia, and I will be your conference operator today. At this time, I would like to welcome everyone to the FLY Leasing Limited Fourth Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Dallas, you may begin your conference.

Matt Dallas

Thank you and good morning, everyone. I am Matt Dallas, the Investor Relations Manager of FLY Leasing and I'd like to welcome everyone to our fourth quarter and full year 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 Web site 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 the 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 expressed written consent of the company. A replay of this call is available for two weeks from today. An archived webcast of the call will be available for one year on the company's Web site.

I will now hand the call over to Steve Zissis, the President and CEO of BBAM to give you his view on industry conditions.

Steve Zissis

Thanks, Matt and thanks everybody for joining us today. Demand for leased aircraft from airlines continues to improve month to month with continued strong demand from India, South East Asia and Latin America, and to a lesser extent, North America, China, Russia and Europe.

Lease rates for a newer 737-800's are approaching pre-crisis levels while Airbus narrow bodies, let lag during the early part of 2010 are now showing signs of good demand with [indiscernible] increases and lease rates.

Although we remain confident, we are in the early stages of a cyclical recovery that could typically last three to four years. We are concerned about the sudden increases in oil prices that will certainly dampen demand and perhaps cause a slow down in the market.

As we have indicated in several previous calls, capital continues to flow into the market-seeking sell leased backup opportunities and aircraft subject to leases. Although this new capital is making it more challenging for FLY [indiscernible] attractive deals, it is adding liquidity to our existing portfolio. This was evidenced by several aircraft we sold in 2010, above our book values.

Doing some recent sell lease back campaigns, we noticed pricing being done at levels approaching pre-crisis levels for new, narrow body aircraft types, before adjusting for the current interest rate environment.

Although it's difficult to predict how long these conditions will last, we do expect things to calm down as capital sources exhaust their budgets and airlines increasingly look to the lessor market to finance the heavy schedule of new deliveries in 2011.

Supply may be further compounded by airlines seeking leasebacks on older aircraft in order to safeguard their balance sheet from any temporary liquidity issues caused by the sudden increase in fuel prices. Obviously, this is a moving target and one we continue to monitor on a daily basis.

The [indiscernible] continues to be more attractive in aircraft leasing business. Not only bank that more readily available today than it was same time last year but credit marketers are decreasing and terms are improving across the board for borrowers. Capital market conditions are also improving steadily.

I'll conclude my comments with a quick few words about BBAM's operations and platform. In addition to servicing FLY's 60 aircraft portfolio, at the world’s third largest aircraft leasing and management company, BBAM also services an additional 340 aircraft for other third parties.

The size and scale of BBAM platform gives FLY access to market information and trading opportunities that would not otherwise be available to a company of this size. We plan to employ BBAM's significant resources to grow FLY prudently over the coming months.

And now I'll hand the call over to Colm Barrington.

Colm Barrington

Thank you, Steve and thank you everyone for joining us on our fourth quarter and full 2010 year earnings call.

FLY is reporting another strong financial performance for 2010 with net income of $52.7 million and earnings per share of $1.86. These figures compare to $89.1 million and $2.89 in 2009 when our earnings benefit from an $82.7 million pre-tax gain of the purchase of our notes payable.

In 2010, our results of benefits from a pre-tax gain of $13.4 million for the sale of four aircrafts. A $12.5 million pre-tax gain from the sale of an option to purchase our notes payable that we acquired in 2009 and $2.9 million of equity earnings from our investment in BBAM LP.

All in all, we produced a diversity of earnings in the year, which we believe will add further strength to the company in the years ahead.

Our available cash flow, which we refer to as ACF was $166 million or $5.85 per share in 2010. This compares to $126 million or $4.08 per share in 2009, an increase of 43% in ACF per share.

A reconciliation of ACF to net income is available in today's earnings release.

For the year, we paid total dividends of $0.80 per share, representing 14% of ACF.

Our fleet, which is comprised mainly of modern, widely used fuel efficient narrow body aircraft performed generally well in 2010. By year end all our aircraft were either on lease or commissioned for lease with deliveries of four aircraft for lessees scheduled for March, April and May of this year. Of our scheduled 2011 returns, all are now commissioned for lease with minimal downtime expected between leases.

This improved leasing performance in 2011 reflects the general improvement experienced in the global airline industry in 2010 with the leasing industry tending to lag the airlines at all stages of the cycle.

Despite concerns about rising fuel costs, the positive airline trends are expected to continue into 2011, albeit at a slower pace than in 2010. We expect that this continuing positive trend in airline performance will have positive implications for the leasing business.

At year end, FLY had a portfolio of 60 aircraft including one new Boeing 737-800 committed for purchase and which was delivered in February of 2011. The aircraft in our fleet at December 31 are on lease to 34 airlines and 23 countries. Our current commitment annualized lease rentals are approximately $210 million. Based on our current lease commitments, we expect strong performance from our portfolio in 2011.

Our 2010 year end lease receivables was $1 million, which is less than one half of one percent of our annualized rental, compared favorably to the $3.9 million balance at the end of December 2009.

In April 2010, we invested $8.8 million for 15% interest in our servicing company BBAM LP. The majority of BBAM was acquired by a senior management team. At the same time, BBAM's management team purchased an additional one million shares of FLY, representing nearly 4% of FLY's year end capital. These two transactions represent a further alignment and strengthening of interest between FLY and its servicer and of course an additional line of business for FLY.

This investment has given FLY an interest in the management of these generated by BBAM and a portfolio of nearly 400 managed aircraft and has already proven to be a good one for FLY. These months since FLY made these investments it has recognized $2.9 million of equity earnings and we have also received a cash distribution of $2 million.

During 2010, we contracted to buy three new Boeing 737-800's in a sale and lease back transaction with flydubai, the low cost airline owned by the government of Dubai. We subsequently sold one of these delivery positions for a gain, took delivery of one aircraft in December 2010 and took delivery of the third in February 2011. These aircraft will have a positive impact on our EPS operating cash flow in 2011 and beyond.

Just after year end, FLY took an interest in a joint venture company that will acquire four Boeing 767 aircraft and lease two airlines in North America. On its completion, this transaction is expected to have further positive impact on future EPS and operating cash flows.

During 2010, we took advantage of the strong aircraft sales market to sell four aircrafts from our portfolio for net cash proceeds of $100.9 million. These four sales generated a total pre-tax gain of $13.4 million and it's particularly noteworthy that two of these four aircrafts were more than 15 years old and the sale, along with the purchase of the new aircraft described above has helped '02 lower the age of our fleet, strengthen our revenues and generate cash.

Due to strengthening financial markets in 2010, we did not find any attractive opportunities to purchase the company's dash [ph], which had had such a positive impact on our earnings in 2009. However, we did avail of an opportunity to sell an option to purchase 50 million face value of our securitized notes that we purchased in 2009. We made a cash gain of $12.5 million for the sale of this option.

Sale of the option also allows us to generate cash and income from our prior dash [ph] repurchase activities. We did purchase an additional 3.7 million of our shares at an average price of $9.64 per share. This price represented a significant discount to our year end total shareholders equity of $17.78 per share and of course through our current share price.

We have an ongoing share repurchase program in place, which at December 31 had 12.4 million still available. We have now repurchased nearly seven million FLY shares at an average price of $7.28 per share and representing more than 20% of FLY's original shares issues at the time of our IPO in 2007. At December 31, we were 26.7 million shares outstanding

The continuing prices of shares along with continuing dividends of $0.80 per share has been a positive factor in the strong, total shareholder return experienced by FLY's shareholders in 2010.

Another positive feature of FLY's performance in 2010 has been our strong cash generation. During the year FLY's total cash increased from $235 million to $329 million, an increase of $94 million or 40%. At the same time, our unrestricted cash increased from $96 million to $164 million, an increase of $68 million or 71%.

As a result of the outcome and initiatives described about, FLY has finished 2010 in strong financial position. We entered 2011 with $164 million in unrestricted cash. Improving financial markets environment provides positive prospects for growth and further enhancements for shareholders returns and shareholder value.

Based on our strong financial position and the depth of industry experience provided by the BBAM team, which has been further aligned with FLY's shareholders, we have the tools required to achieve these value enhancements.

I will now hand you over to Gary Dales, our CFO to give you a deeper insight into our 2010 financials.

Gary Dales

Thank you, Colm. We are reporting net income for 2010 of $52.7 million or $1.86 per share. This compares to net income of $89.1 million or $2.89 per share for 2009.

As Colm mentioned, the 2009 results include approximately $82.7 million in gains associated with purchasing our notes payable and approximately $8.3 million from a lease termination settlement.

For the three months ended December 31, 2010 our net income was $10.6 million or $0.39 per share as compared to net income of $13.7 million or $0.45 per share for the same period in the previous year.

This quarter’s results include a pre-tax gain of $4.5 million from the sale of an older aircraft whereas the 2009 results for the quarter include $12.5 million gain from the purchase of our notes.

I will now discuss these results in more detail.

Our total revenues for the quarter were $59.9 million and include operating lease revenue of $52.2 million, equity earnings from our 15% investment in BBAM of $1 million, $4.5 million from the sale of a 21 year old aircraft and interest and other income of $1.6 million.

For the year ended December 31, 2010, total revenues were $253.7 million and consist of operating lease revenue of $219.7 million, equity earnings from our investment in BBAM of $2.9 million, pre-tax gains from the sale of four aircraft of $13.4 million, a gain from the sale of an option to purchase $50 million principal amount of our notes payable of $12.5 million, proceeds from a lease termination settlement of $2.3 million and interest and other income of $2.9 million.

Operating lease revenue increased $5.7 million or 3%, primarily as a result of end of lease revenue associated with leases that terminated in 2010, partially offset by the lack of revenue from aircrafts that were sold in 2010 or off leased for a portion of 2010.

Total expenses for 2010 were $190.8 million and consist of depreciation expense of $84 million, interest expense of $75.7 million, selling, general and administrative expenses of $25.4 million, amortization of an option to purchase our own debt of $947,000 and maintenance and other cost of $4.7 million.

SG&A expense for 2010 includes $2.2 million of expenses associated with our separation from Babcock & Brown. These expenses were paid for by Babcock & Brown and the reimbursement is reflected in or financial statement as a capital contribution.

Total expenses decreased $3.3 million from 2009, primarily due to a reduction in interest expense, and amortization expense associated with the 2009 debt purchase option, partially offset by share-based compensation expense.

Total expenses for the fourth quarter of 2010 were $47.6 million compared to $48.8 million for the same period in the previous year. And consists of depreciation expense of $20.3 million, interest expense of $19.1 million, SG&A expenses of $5.9 million and maintenance and other costs of $2.2 million.

Depreciation expense for the fourth quarter of 2010 was $20.3 million compared to $21.2 million for the same period in the previous year, a decrease of approximately $900,000 or 4%. The decrease is primarily due to the aircraft that were sold in 2010.

Interest expense for the fourth quarter of 2010 of $19.1 million, compared to $20 million for the same period in the previous year, a decrease of $900,000 or 4%. The decrease is primarily due to a reduction in the amount of debt outstanding.

Selling, general and administrative expenses were $5.9 million in the fourth quarter of 2010 compared to $5.2 million for the same period in the previous year, an increase of $700,000. The increase is primarily due to recognition of the non cash, share-based compensation expense of $900,000.

The equity incentive plan was adopted in April 2010.

Maintenance and other costs were $2.2 million for the fourth quarter of 2010 compared to $900,000 for the same period in the previous year. The increase relates primarily to accrued expenses associated with the aircraft previously on lease to Mexicana.

Our provision for income taxes for the fourth quarter of 2010 was $1.7 million, representing an effective rate of 13.6%. The effective tax rate for the same period in the previous year was 21.2%. The higher income tax rate for the year ended December 31, 2009 [ph] was mainly attributable to the higher tax rate applicable to the gains from the repurchase of our notes payable.

Our balance sheet remains strong. At December 31, 2010, we had total assets of $2 billion, of which $1.6 billion is invested in flight equipment held for operating lease.

Our total cash is $329 million of which $164 million is unrestricted. These amounts compare to $235 million and $96 million at the end of 2009.

Our ACF was $165.6 million in 2010 compared to $125.8 million in 2009, an increase of 32%. The increase is primarily due to gains from the sale of four aircraft and the gain realized from the sale of the option to purchase our notes payable in the first quarter.

On a per share basis, ACF was $5.85 per share in 2010 compared to $4.08 per share in 2009.

For the fourth quarter of 2010, our ACF was $37.7 million compared to $29.1 million for the same period in the previous year, an increase of 29%. On a per share basis, ACF was $1.41 in the fourth quarter of 2010 compared to $0.96 for the same period in the previous year. The increase is primarily due to the gain from the sale of the one aircraft and earnings from our investment in BBAM.

We define ACF as net income, plus depreciation, amortization of lease incentives, and debt issue cost and deferred income taxes, all non cash charges.

Non-cash gains resulting from the purchase of our notes payable and other one-time, non-cash items are excluded from ACF. We believe that ACF provides a meaningful measure of FLY's capacity to reinvest in our business and to execute other initiatives designed to create shareholder value.

However, actual cash available for distribution may differ from our ACF measure because of other cash proceeds and expenses that are not reflected in net income. You will find a reconciliation of ACF to net income, the most directly comparable GAAP measure at the end of our press release issued this morning.

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

Colm Barrington

Thanks, Gary. Well, from that plethora of figures you've seen that FLY had another good year in 2010. In addition, we've built up a strong balance sheet from our activities during 2010 at the previous year. And out of a strong fixed cash balance to add significant future capital commitments. As a result, we're in a position to avail of value enhancing growth opportunities that will arise from the strengthening aviation and financial markets in 2011 and beyond. And we hope and expect to report on these during 2011.

So with that, we are now in a position to take your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Gary Liebowitz from Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Hello. Can you hear me?

Colm Barrington

We couldn't hear you for a moment. Start again, please.

Gary Liebowitz – Wells Fargo Securities

Okay. I had a question. You guys have probably seen by now, last week Odyssey reported, obviously reported a rather large impairment charge saying that that's going to be pressure on aircraft values and lease rates as a result of the A320 NEO. I was curious what your reaction was when you saw that and obviously you do have a few older, narrow bodies in your portfolio. You didn't book any impairment charges. Maybe you could just give us your thinking on that?

Steve Zissis

Gary, this is Steve. As I first commented, I'm not sure that's what Odyssey really said but we're not here really to make comments about what Odyssey thinks about the market and the NEOs. I can tell you that our book depreciation policy at FLY, both our Airbus and Boeing are fairly conservative. And that the whole NEO story still has a lot of discussing to be had before people are going to decide what to do.

Its way too early in this whole process to really decide whether it's time to adjust your values on 320s because the NEO's are coming our or not. We've got four or five years before it delivers. We have a lot of airlines that we've talked to that are evaluating the NEOS. So, I think all this discussion, to tell you the truth is quite premature.

Gary Liebowitz – Wells Fargo Securities

Okay

Colm Barrington

Traditionally at the end of each accounting period, we do an impairment analysis on our top portfolio and we haven't been required, or haven't needed to make any impairment charges.

Gary Liebowitz – Wells Fargo Securities

All right. Great. I understand and also the aircraft that you sold in the fourth quarter, was that a freighter aircraft or a passenger plane?

Steve Zissis

Fourth quarter, let's see. The 75 was a passenger aircraft but that was sold to an airline that's converting it to freighter.

Gary Liebowitz – Wells Fargo Securities

I see. Okay. Well, thank you very much.

Operator

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

Helane Becker – Dahlman & Rose

Thank you very much, operator. Hi, gentlemen.

Colm Barrington

Hi, Helene.

Helane Becker – Dahlman & Rose

Thanks for taking my question. Just a couple of things here. Number one, on the balance sheet. Actually, I think there's this aircraft note payable. Is that, can you just say what that's related to and if that will just be there going forward?

Colm Barrington

That will be there going forward. It's related to the first flydubai aircraft we purchased in December.

Helane Becker – Dahlman & Rose

Okay. That's the one that you're going to continue to manage. Not the one that you bought and sold?

Colm Barrington

Correct. The one that we purchased and are holding and will manage.

Helane Becker – Dahlman & Rose

I'm sorry. What was that last part?

Colm Barrington

We will continue to own that aircraft, Helene.

Helane Becker – Dahlman & Rose

Yes. Okay, that's good to know. And then the other thing is, I noticed that IATA came out with their new lower forecast this morning and I think they said global capacity would be up around 6%? Can you just say, I don't know if you want to comment on that number specifically or say what you think about the capacity for cash in what you're seeing from the, I don't really see the U.S. airlines ordering so much as I see International airlines ordering? Any opportunities that might exist for you there?

Steve Zissis

Helene, its Steve. Prior to maybe the last two weeks where oil has spiked here. I think all of us have been witnessing a very, very strong demand in aircraft, really across the spectrum. Especially from the emerging markets. Now with this recent increase in oil prices, especially the sudden kind of spike. I'm sure some of our airline customers are going to start to rethink how many aircraft they want to bring on in '11. And as I said in my opening remarks, I think we continue to monitor that situation but you know assuming that oil doesn't move too much from here, I think we're looking at a very decent 2011.

Helane Becker – Dahlman & Rose

Okay. Do you have a lot of exposure to Egypt Air or other airlines in that part of the world?

Steve Zissis

No, we don't have any exposures to Egypt. We have a couple of aircraft in the Middle East. Two are at flydubai and then we have two aircraft at Ethiopian. Both from excellent, excellent [indiscernible] and they pay on time. So we have no concerns about our exposure in the Middle East.

Helane Becker – Dahlman & Rose

Okay. Thank you very much for your help.

Operator

(Operator Instructions) Your next question comes from the line of Joe Gill from Blackstone.

Joe Gill - Blackstone

Good afternoon, gentlemen. Just a couple of questions please. Just to come back on the point about NEO. What are you own views on the impact NEO is going to have on the overall markets over the next number of years, particularly in regard to residual values? And I see this morning, Boeing are indicating that they're going to go for another new plane around 2020. What your observations are on that and then secondly, in relation to a more general point.

Your investment in asset management and what it brings in terms of stability of income and being a capitalized type of part of the business model? Do you envisage the asset management side may become a bigger piece of the overall FLY story over time? Is that something that may make the stock even more attractive to equity investors?

Steve Zissis

Well, the second question first. I would say that BBAM itself, in my closing remarks manages some 360 aircrafts. So it does provide, if you will, a diverse revenue source for FLY in terms of the income that BBAM generates across a very, very large fleet. And as you know, we probably are a dominant player if you will, in the Japanese market, with our joint venture partner Babcock & Brown. And that goes back 25 years and that's been a major capital source for the airlines around the world for many years. So it does provide a very predictable, stable revenue base for FLY, which we think will grow at a modest pace over the next couple of years.

In terms of the NEOs and Joe, I'm not dodging your question but I really do think that it's too early to decide what the affects will actually be on the 320 market. We really are in discussions right now with several airlines to see what direction they want to go with it and they're evaluating the aircraft as we speak. Airbus has done some good marketing and has got some significant orders already in the pipeline. So it's gong to make a pretty interesting discussion in, I would say six to 12 months.

It definitely will have some impact on the marketplace. It's not going to be neutral I can tell you that much. But I think at this point it's a little premature for us to tell you exactly which way we think it will take the marketplace.

Joe Gill - Blackstone

Okay and just one final question. In your earlier commentary, you made reference to the fact that sale lease back opportunities were very competitive in recent times. I mean, what do you think might change that as the current oil price and the big sell off in airline share prices potentially going to create more opportunities for you?

Steve Zissis

I mean, look there's a lot of capital coming into the marketplace during the past 12 months bidding up sale lease backs. That doesn't seem to be abating but at some point you have to think that a lot of these guys that have budgets are going to exhaust them and there is quite a bit of new deliveries coming down the pike. And when you combine that with maybe some headwinds we're going to get on higher oil prices, you might see people start to back off on the type of numbers that they're bidding at, at these campaigns.

Joe Gill - Blackstone

Okay. Thank you.

Operator

There are no further questions at this time.

Colm Barrington

Thank you, everyone for joining us. We look forward to updating you again on the next FLY Leasing earnings call.

Operator

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

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