Aircastle Limited (NYSE:AYR)
Stephens, Inc. Fall Investment Conference
November 16, 2011, 08:30 a.m. ET
Michael Inglese - CFO
Thank you. Good morning everybody. A regulatory forward-looking statement. A quick overview for some of you who don’t know us. Aircastle is one of the top 10 leading commercial airline lessors in the world ended the third quarter with 138 aircraft and leased to 61 customers in 34 countries. Have a modern fleet financed with conservative capital structure and we think we are in a very good position today to capitalize on opportunities as they emerge in the business.
From an investment highlight perspective, we think we have number of assets and attributes that are very attractive here, very positive long-term industry fundamentals. Two suppliers and wide operator based through assets and long-term growth trends that would track a little bit higher than GDP historically, and will be driven largely overtime by the emerging markets as well as the re-fleeting needs for the North America and developed country airline.
As I mentioned a very modern aircraft portfolio, 93% of our fleet is latest generation technology and we have focused on both passenger and freight.
Operators which is a differentiation for us amongst the leading leasing companies in the world, fundamentally only a couple of other players play in this segment and we will touch on that a little bit further on.
We have a very strong servicing and origination track record we managed only our own fleet. Have completed more than 145 leases in our six year history and we have acquired our fleet through 79 different transactions with 60 different counterparties over that time period.
Strong management team drawn from industry players and a very stable cash flow profile and a conservative capital structure that we think allows us to continue to grow the business overtime and generate incremental earnings and cash flow for investors.
A couple of quick slides on the industry. As I mentioned long-term growth in transport traffic has attracted about 1.5 to 2 times GDP historically. This is the latest statistics from IATA, the International Air Transport Association, and their outlook for 12, 13, 14 somewhere in the low to mid 5 for both freight and cargo traffic. And as I said both Boeing and Airbus is the two fundamental suppliers for the 100 plus seat commercial aircraft industry. They are expecting somewhere in the neighborhood of 27 to 31,000 new deliveries over the next couple of decades, driven both by growth in emerging markets as well as the substantial re-fleeting that’s going to be needed for lot of the airlines in the world.
Lessor market share has increased pretty steadily overtime from its beginning somewhere around 40 years ago to today where lessors control over 35% of the global fleet. It's a very attractive value proposition for airlines; it gives them off balance sheet, financing, transfer, residual risk, people who are more suited to deal with it overtime. And it helps them manage fleet capacity, as they think about the configuration of their fleet and how it evolves with their root structure overtime.
And fundamentally lessors overtime have produced significantly more stable operating margins and cash flow in their business model than their airline customers have which as many of you know is very [volatile] and fundamentally low margin business.
Over the last four years Aircastle has maintained about 98 to 99% fleet utilization across its assets, number of days available for revenue service and in revenue service divided by number of days available. And has maintained a pretty consistent somewhere in the neighborhood of 14% lease rental yields, simple lease rentals collected over the carrying value of those assets on our book. This is a very important attribute. For being a lessor is being able to move aircraft between lessees, minimize downtime and keep yield high in that process.
Our lease profile is very well disbursed over the coming years, we have a couple of aircraft left that 2011 expiries that we are marketing for sale of lease. As for 2012, we had 24 aircraft which is about 15% of our portfolio value, expiring in 2012 we have put away about 13 of those which represented about 9% of NBV. So, we have about 6% left across 11 aircraft, which were a mix of about new generation aircraft the few 737 classics and a number of 767-300ER that come off lease during 2012. Beyond ’12 we can see at the bottom of this chart, the scheduled expiries and the percentage of net book value that presents in the context of fleet. So, it's only about 30% across those three years, and that further outlook giving us a very good profile in terms of revenue visibility and cash flow visibility for the business.
Our portfolio is spread across both geography which I will touch on in second as well as the aircraft type, we have fundamentally focused in new gen narrow bodies, our freight aircraft comprised about 30% of the net book value of our business at the end of September spread predominantly across 747-400s both production and converted freighters as well as some A330 production freighters which we have taken delivery of and our on lease with Hong Kong Airlines in affiliate of the Hainan Group during 2010 and in the first part of 2011 this year.
So, we have a good spread of aircraft mix, five year remaining weighted average lease term for the portfolio, almost seven years in the freighter segment and about 10.8 average age of our fleet. As I mentioned, we participated in a cargo segment, we think it's an attractive end market diversification in terms of portfolio diversity. Typically, cargo credits are stronger than the passenger airline credit around the world. Lease terms are typically longer, the assets have roughly a 25 or 30% of longer economic life and generates similar cash yields on an annual basis. So, we like this segment, it has performed very well for us overtime, had no issues with any of our cargo customers during the financial crisis in 2009 and ’10. And it's the place where we continue to look for value plays and acquiring new assets.
From a customer perspective as I mentioned 61 lessees in 34 countries around the world. Our largest customer is little less than 9% of the net book value of our assets. That is South African airways, they take in delivery of four new A330 passenger aircraft this year. The HNA Group or the Hainan Group our second largest customer operates three A330 production freighters, four 737 converted 300 freighters in their Yangtze River express subsidiary.
Emirates, the most profitable airline in the world operates two freight 747 from us. Martinair, our wholly owned subsidiary of KLM-Air France another freight operator, basically they are dedicated freight operation out of Amsterdam operates five freight aircraft and a good mix of others, AirBridge Cargo and you might not recognize it's the largest scheduled Russian freight operator and enjoys special route rights throughout Russia, operates a couple of 747 freighter aircraft of ours.
So, good mix with our strong customers, our geographic diversity is probably similar to most lessees, little less than half a book in Europe which has been diminishing over the last few years. Asia has picked up for us along with the Middle East and Africa. And then the balance which is split between North America and Latin America.
In terms of financial performance, you can see the average balance of flight equipment held for lease and lease rental revenue and EBITDA generation from this business over the last four years. Consistently, strong performance, have a strong run rate. I believe it's booked at the moment and a substantial portfolio today of assets that are unencumbered by any secured financing.
Capital structure, we have accessed capital over our life time through private and public equity. The asset backed securitization market, the bank debt market, the export credit support financing market for our A330 deliveries over the last few years, and the unsecured market which we passed in the first time last year, opening what we think will be an important source of capital overtime for us to perceive our focus on mid-aged narrow body aircraft that’s acquisition target given the state of the bank market and particularly people who are unwilling to lent freight aircraft that are basically beyond five years of age.
Our net debt to book equity of about 1.671 and we have been a dividend payer since our IPO in August of 2006, 22 consecutive quarters. Have increased the dividend this year by 50% from its starting point currently at a $0.60 annualized rate, and we completed a $90 million stock buyback program this year, taking in about 9.5% of our outstanding at about 11.92 per share.
Liquidity and long-term debt. We ended the third quarter with $266 million of unrestricted cash, 196 restricted. We have no scheduled debt maturities until June of 2015 which is our term financing deal. And recently we entered interest a new swap for our second securitization which reaches its 5th anniversary and its current swap expires in June of 2012, the current fixed pay plus spread rate is a 553, the new swap plus spread will be 158. Now let’s say it's about $30 million a year in interest expense for the first few years which will go towards increased debt amortization to rapidly delever that portfolio.
Our current investment focus which has been pretty consistent with our focus overtime mid-aged narrow bodies, we think we had and continue to provide good yield opportunities, given the lack of financing and the lack of competition we see from the investment environment in that segment of the market. We have recently found some good opportunities in the high quality wide body and recently purchased a 777-300ER on lease the Cathay Pacific airlines, where we are able to source attractively priced bank debt from a German bank during October. In spite o what’s going on in Europe for good asset and good credit quality lessees there is bank out there financing aircraft assets.
And as I mentioned the freight market continues to be a place where we like and see opportunities. So far this year we purchased three 747 passenger planes and we will be putting into the conversion process, the first two will be finished with their process and we will go on lease the Southern Air in the first quarter of 2012. And we continue to keep an eye on that segment as a place to find in source attractive.
Freighter acquisition opportunities, we have also been pretty active here as you see on the right side of this chart. Selling assets and realizing gains and redeploying capital in the context of portfolio. We sold some 737-400 freighters that we converted during the 2009 timeframe and puts them on a long-term lease to an affiliated Chinese (inaudible). And so those aircrafts are $10 million gain early in the year. We still have one of our A330 sort of new order positions in the second quarter of this year to one of our competitors through a $10 million gain. And still have one of the 747s we purchased out of the bankruptcy late last year. Bought it from the bankruptcy found a long-term lease with a strong agent carrier and put that plane this year for a $9 million gains.
So, we are very focused on creating value, realizing in places where we think we can, and redeploying that capital in better yielding assets as we move forward. So, we had a pretty strong year both on dispositions, has found a number of attractive acquisitions so far this year. And feel like fundamentally we are in good place, no scheduled maturities, no near-term liquidity needs, it's about finding value and then sourcing capital at appropriate rate to fund those investments going forward.
So, we feel very good about the business model, where we are in the industry, how we are positioned today, and then our ability to raise capital and invest smartly. We will continue to drive earnings growth, cash flow growth for the business.
So, with that I’m happy to it up for questions. Eric?
When you look at the world, (inaudible) separately the passenger markets are very different than freight market. You sort of tell us where in the world you are happy, where things are looking good and where in the world things are worrying you (inaudible).
I’m not sure that, I say, everybody has got a focus on Europe. We have some strong credits there, that don’t necessarily cause us concern in Martinair, Iberia, there are some smaller charter an regional carriers sort of around the periphery in Southern Europe, few in Italy, few in Eastern and Northern Europe where we have relatively modest exposure that we continue to keep an eye on. Despite the headlines, the actual passenger traffic through September, even in Europe has held up surprisingly well, but what we have seen in the freight sector is you had huge uptick in 2010 given the dismal comp in 2009. And you are still seeing basically year-to-date about flat traffic for the cargo sector, but you are actually underlying that, there has been some sequential declines year-over-year starting in about July of this year.
So, we are keeping a close eye on the freight sector. It's not a perfect correlation, but overtime the freight sector has been somewhat of a leading indicator for what translates back to the passenger segment overtime. So, we were keeping an eye on that, keeping close watch on what I call sort of usual suspect in our portfolio list of customer that we work regularly to make sure we are getting paid. But I think fundamentally we feel very good about our customer set, our portfolio. We have seen weakness in aircraft types, the A320 family, A319 have been sort of weaker performer, and they are probably priced at a wider spread today against the Boeing versions 737, then had historically been the case. So, we are in that scenario where we are focused on making sure we get assets put away, because we are seeing some weakness there.
Overall, in terms of lease rate, I think we have seen a good recovery from the trough in both the narrow body and mid body, wide body segments. But it seems to have sort of plateaued which was happening in the world over the last three or four months. So, we are focused on keeping the portfolio on lease, not looking to extract the last dime, if you will out of every lease place, and trying to find the best combination of credit in a rate for making sure that we get placements put away.
In fact when we look at our 2012, the 13 lease placements we have done in that group, 12 of those were extensions with existing customers which we know with the right rate and the right customer, is a great outcome, there is no downtime, no transition cost. And you are familiar with and know what you have in the way of customer set when you are doing that. So, it varies around the world, Asia we have seen better prospects, we have put some of our A320s that we took out of Egypt early in the year, are back on lease with the Philippine airline. And so the beauty of the business is you can move assets where there is demand and we continue to find opportunities to do that with the planes we owned.
Michael, you touched on in the presentation, can you talk about the financing market today, specifically you have seen some French banks start to write in their aircraft financing operations. Maybe just touch on that and whether or not you see that kind of as an opportunity or a challenge going forward.
Yes, I think there certainly has been pull back in European bank lending and the European banks have historically been a big supporter and financer of this industry and of the airline industry. It doesn’t necessarily directly affect us in the short-term in the context of raising money. We have not been sourcing that money other than the ECA backed financing for our new order which people are still willing to underwrite their underwriting a guaranteed loan and spreads are decent and so they all have gravitated their doing the crisis and there is still a large number of people willing to underwrite that business.
I think fundamentally, some of the opportunities it may create or some of the European banks are in fact getting out of the business, looking to put a loan portfolio, some of them subsidiaries, that lease aircraft and there maybe opportunities in the context of potential acquisitions, those assets or portfolio over the near-term that may emerge from that.
You had some of the Japanese banks stepping in, in a bigger way back into the market over the last year or so, picking up some of that slack, but I think as we look at who is being using that market. And what it might mean going forward. Some of the new lessors have been building portfolio of new narrow bodies and have relied on acquisitions facilities from the European banks. To the extent those facilities are heading towards the end of the acquisition period and looking to term out, you may find less appetite for a longer term from that group which may extent those lessors back into the securitization market as a possibility to reopen that market with attractive portfolios of new narrow body aircraft. And I think you might see those folks also coming into the U.S. capital markets in the context of secured bonds or maybe even in the unsecured market as they think about refinancing some of those assets.
I think a lot of it's already priced into what people are doing and how they are buying, what’s coming off the line today and how people like us are buying used assets. I mean the first versions will start delivering in 16 and then 17. At that point in time, there will be looking to displace and install base of something like 6,000 aircraft, so if they are pumping out 500 a year, each of them and there is no growth they would take quite a while for them to displace without their, but with the reason of growth profile, you will still see a pretty long tail life for what’s already in the marketplace in the context of the current A320 family and the 737 family.
They are passenger aircraft, they are on lease to U.S. Airline, we bought them what we thought were extremely attractive prices given the lease profile of those. And we will look at them overtime and with our 75 fleet one of the end game possibilities for us is the possibility for freighter conversion or (inaudible) has been acquiring lots of 757s and putting them through the conversion process to expand and upgrade their fleet overtime.
I can’t speak specifically, I read their 10-Q, they have done a few big impairment charges in the last year and half. They have a 1000 plane portfolio that’s been accumulated overtime. So, it's a big number, but it's not outsized in the context of the scale of their business. I mean we do our own assessment every year on a full fleet basis, we have a shorter list of planes that we monitor on a much more regular basis. In fact, our third quarter assessment this year, we have decided to shorten the life on our A319 assets, we have half a dozen of those planes and when we look at current demand and lease rate in the context of what we own and when those will sort of naturally roll off lease and in a natural part of maintenance cycle. We shortened the life of those assets, about 2.5 years on average, because we just don’t think, ever built for a mission that doesn’t really exist short haul premium.
And so you can fly then A320 with a lot more people in the seat, that an equivalent overall cost of a much cheaper proceed cost. So, we think the A319 has some challenges and we made those adjustments to allow our fleet, and we also took down the residual value of our Boeing A320 classic aircraft across everything we own given where lease rates are and what we expect engine and part our values to be when those assets get to the end of their life.
So, we went through a similar exercise and a much smaller impact for us this year. It will accelerate depreciation by about 3.5 million annually from what our previous run rate was in our fleet. But obviously there is much more specific to what they have, what they are seeing and where they think it's going in the context of their business.
I think in the context of what we did this year in the stock buyback is certainly was a reaction to what we though the value of our stock was in the context, but what we think the value of the underlying business did. In the context of, we did a $90 million program, we finished it for this year, we have limitations in the context of our high yield indenture as to magnitude of those restricted payments. We still have enough probably similar in the neighborhood of 40 or $50 million more of room if you will today in that basket which will grow overtime. But we think today and with our recent dividend increase is that, dialing the dividend (inaudible) little bit and keeping a consistent return of capital to shareholders and continuing to look at that growing in the context of being able to grow the business. It's a reasonable allocation of capital. We will continue to look at buying new assets to the extend we think it make sense and we will revisit stock buyback from time-to-time as we see and think about what’s the best way to allocate capital going forward.
Our goal is to grow the business, earnings and cash flow and we would expect to be able to grow the dividend with that overtime.
We haven’t set a specific metric, and as we look at where we were today and think about here is what I own, here is how it's going to roll into next year, and here is how we think that translates into an earnings and cash flow base. We set a level that we think is comfortable and that will continue to evaluate as we move forward.
I think that’s all the time we have. Thank you very much. We are going to do a breakout next door in (inaudible), continue the discussion there. Thank you.
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