Fly Leasing's (FLY) CEO Colm Barrington on Q1 2016 Results - Earnings Call Transcript

| About: Fly Leasing (FLY)

Fly Leasing Limited (NYSE:FLY)

Q1 2016 Earnings Conference Call

May 18, 2016, 9:00 am ET

Executives

Matt Dallas - Manager, IR

Colm Barrington - CEO

Gary Dales - CFO

Steve Zissis - President & CEO, BBAM

Analysts

Gary Liebowitz - Wells Fargo

Jamie Baker - JPMorgan

Richa Talwar - Deutsche Bank

Jason Arnold - RBC Capital Markets

Kristine Liwag - Bank of America-Merrill Lynch

Bill Mastoris - Baird & Company

Operator

Good day, ladies and gentlemen, and welcome to the Fly Leasing First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Matt Dallas, Investor Relations. You may begin.

Matt Dallas

Good morning. I'm Matt Dallas, the Investor Relations Manager at FLY Leasing, and I'd like to welcome everyone to our first quarter 2016 earnings conference call. FLY Leasing, which we will refer to as FLY or the company issued its first quarter earnings results press release which is posted on the company's website at flyleasing.com.

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

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 the 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 otherwise.

An archived webcast of this call will be available for 90 days on the company's website. I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

Steve Zissis

Thank you, Matt, and welcome everyone to FLY’s first quarter earnings call. As you may have heard from other industry participants, the airline industry is generating record profits as airlines continue to benefit from low fuel prices, strong demand for passenger air travel and healthy financing markets.

We expect this trend to continue through 2016 and in fact IATA reported Q1 traffic growth of 7% worldwide. While oil prices have moved up recently off historic lows, we expect oil prices to remain relatively low for the remainder of the year.

As I reported last quarter, we do not see any signs of an imminent downturn. Our lessees continued to perform well and demand for our aircraft remains strong. In fact, we have only one aircraft coming off lease in 2016 and that's in December, which still needs to be remarketed. The aircraft is a 737-800 and we anticipate no problems in moving that aircraft.

We see stable lease rates as any excess supply of available aircraft are quickly absorbed. A good example of that is the aircraft that have recently come out of struggling South American airlines that have moved quickly to other airlines without any disruption to market conditions. We saw the same process happen previously with the aircraft moving out of Russia.

For the past several quarters, I've reported our progress in transforming FLY’s fleet and improving its profitability. I’m pleased to report that the fleet transformation is nearing completion and a result of that effort along with various cost saving initiatives accomplished over the past couple of years are contributing to continued improved financial performance.

We have fundamentally transformed FLY's fleet with a combination of aggressive sales of mid-life aircraft and purchases of one in-demand aircraft with long remaining lease terms. The average age has dropped by almost two years and the average lease term has increased by more than 70% from 2011. In addition, we divested many out-of-production aircraft that had poor GAAP accounting attributes that negatively impacted our earnings. More importantly, we reduced our future remarketing and refinancing requirements through these sales and significantly increased our liquidity to continue growing our fleet with attractive young in-demand aircraft.

We ended the quarter with purchasing power of more than $2 billion, as always we intend to be judicious in making aircraft commitments and won't speculate on market conditions by placing new orders with manufacturers. Because we are focused on finding attractive assets as opposed to growing for the sake of growing, our acquisitions will be lumpy.

Last week, we closed our first aircraft of the year. It's also the first acquisition to be financed with our new acquisition facility. We are targeting $750 million of acquisitions for the year and by the end of June, we expect to have closed about 60% of our full-year budget.

Before handing the call over to Colm, I want to report that in the first quarter, BBAM stakeholders completed open market purchases of FLY stock totalling $10 million, and that our combined ownership of FLY now stands at more than 12%. I believe this demonstrates our strong commitment to FLY’s success and underscores the deep value we see in the company's shares.

Now I’ll hand the call over to Colm for his comments.

Colm Barrington

Thank you, Steve, and good morning everyone. As FLY moves into the second quarter of 2016, having accomplished several strategic objectives. This includes the sale of 45% of our fleet including mostly older aircrafts. These sales generated today’s book value and provided FLY with significant liquidity to continue our fleet renewal program.

We also completed an attractively priced $385 million aircraft acquisition facility during the quarter which, along with our unencumbered aircraft and cash balance, gives FLY the resources to acquire over $2 billion of aircraft, as Steve has just mentioned.

We also completed two major share repurchase programs buying back 7.9 million FLY shares representing 19% of shares outstanding. And these were bought at a significant discount to net book value. As a result of these initiatives and our ongoing fleet renewal program, FLY is in a position to produce further improvements in its core net income, its EPS and its ROE.

During the second quarter, FLY devoted resources to address the SEC's comments regarding the accounting for aircraft required by FLY with leases in place and specifically how maintenance rights should be dealt with. FLY's prior accounting for such acquisition was consistent with industry practice. However, the SEC’s comments suggested that maintenance rights should be accounted for separately from aircraft assets.

FLY has accepted the SEC comments as we restated our financial statements for prior periods. The effect of the accounting change was to increase net income and net book value.

In the quarter, we completed the sales of 10 older aircrafts for a gain of $5.1 million and generated liquidity of $60 million from these sales after repayment of the debt related to the 10 aircrafts. Meanwhile, as Steve has mentioned, the world’s airlines continue to be in a healthy state as they benefit from strong global traffic and low fuel cost. As a result, 2015 global airline profits was a record level and the expectation is that would be even higher in 2016. These positive factors are reflected in FLY’s nearly 100% fleet utilization during the quarter and our negligible lessee receivables and the now minimal aircraft remaining for remarketing.

For the quarter, FLY reported adjusted net income of $16.2 million equivalent to $0.47 per share. We’re continuing our fleet renewals. In quarter one, we completed 10 aircraft sales averaging 14 years of age, which aircraft were on leases with remaining terms averaging three years. These older aircrafts are generally less profitable. In Q2, we have already sold four more aircraft, closing two sales of our previously announced and two previously unannounced deals. We have four more sales to close in the quarter again, including two sales previously announced and two more unannounced deals.

The average age of these eight aircrafts is 17 years and their average lease term is three years. As a result of the completed and contracted sales of older aircraft, FLY’s average fleet age decreased from 8.1 years, a year ago to 6.8 years today. While our average remaining lease terms increased from 5.1 years to 6.3 years. AS our fleet rejuvenation continues in quarter two, we expect our fleet age to reduce to less than six years and our remaining average lease term to exceed seven years.

In the same period, we built an acquisition pipeline of $445 million and we expect to close in the second quarter. These six aircrafts have an average age of approximately two years and average lease terms of approximately 11 years.

As a result of these contracted acquisitions, FLY is well on its way to meeting its growth targets of $750 million in 2016. FLY will continue to focus its acquisition strategy on the most popular and liquid aircraft type used by the world’s airlines. This liquidity is characterized not only by the number of any aircraft type that is in use, but also by the number of operators on their global spread.

It’s likely that the majority of FLY’s future A320 and Boeing 737 acquisitions will be the Neo and Max versions and in indeed we have already signed up for our first A320 Neos in sales and leaseback transaction with deliveries in 2017.

As I mentioned earlier, FLY has bought back 19% of its shares since September 2015. In quarter one, 2016 we bought back 2.1 million shares at a 36% discount in net book value. At the end of quarter one, FLY had 33.6 million shares outstanding. As Steve mentioned, BBAM principals purchased nearly 900,000 FLY shares in quarter one and now own 4.2 million shares representing over 12% of FLY’s shares outstanding.

FLY has a new $30 million share repurchase program in place and management will continue to evaluate additional share repurchases carefully over the coming months. As a result, the initiatives referred to above, and our lower share count, FLY’s net book value of the share the end of quarter one was $18.83.

We believe that our fleet renewal strategy combined with our reduced cost of debt will have a positive impact on the future EPS and ROE and demonstrate the value in FLY’s shares. And this would be particularly so as we deploy our excess cash and our financial resources into new aircraft acquisitions.

Gary will now take you through the financial overview.

Gary Dales

Thank you, Colm. Earlier this month, we filed our annual report with the SEC which included restated financial statements for the years 2014 and prior. In those financial statements, we recognized maintenance rights on aircraft purchased with in-place leases whilst the return conditions in the lease required the aircraft to return in a better maintenance condition than as maintenance conditions on the acquisition date.

Recognition of the maintenance rights will have no impact on our overall earnings profile or our cash flows, nor will the change impact our acquisition strategy. The recurring impact of recognizing maintenance rights is a reduction in recurring depreciation expense.

Offsetting the benefits of reduced depreciation is reduced end of lease income which is less predictable. Now let’s walk through this quarter’s results.

We are reporting net income of $7.1 million or $0.21 per share for the first quarter of 2016. This compares to a restated $19.9 million or $0.47 per share in the same period in the previous year.

The principal reason for the decline is reduction of end of lease income. Were it not for recognition of the maintenance rights end of lease income would been approximately $6 million greater this quarter. For the three months ended March 31, 2016 our total revenues were $81.2 million. This includes $3.2 million of end of lease revenue and $5.1 million in gains on aircraft sales.

The restated amounts for the same period in the previous year were $21.9 million and $2.6 million respectively. Operating lease rental revenue declined to $74.6 million reflecting the more than 50 aircraft we have sold over the last year.

Total expenses for the first quarter of 2016 was $74 million, this compares to $100.1 million for the same period in the previous year. The decline in depreciation expense reflects aircraft sales. Our interest expense has decreased $8.5 million reflecting the nearly $750 million in debt repaid from the proceeds of the aircraft sales and regular amortization. In addition the term loan was repriced last April saving us about $1 million in interest each quarter.

Our reported selling, general and administrative expenses remain level notwithstanding the fact that we have reduced our core SG&A which we refer to as our adjusted SG&A by $2.5 million year-over-year. Our reported SG&A includes the impact of non-cash foreign currency exchange gains and losses related to fluctuations in the euro-dollar exchange rate which impacted accounting to our euro denominated loans.

Last year our first quarter results reflected or included a $1.7 million favorable foreign exchange gain on this debt. In the current year, the foreign exchange impact has reversed and there is a $1 million charge. Additionally, we expect approximately $1 million of SG&A expense related to the SEC comment letter and restatement process of which approximately $300,000 were incurred during the first quarter. These expenses are included in our adjusted SG&A, although they are one-time in nature.

Finally, let me cover few items and guidance for the second quarter of 2016. We are expecting operating lease rental revenue of between $77 million and $79 million. We expect lease incentives to be between $2 million and $3 million. Depreciation expense is expected to be between $30 million and $32 million. Interest expense will be between $28 million and $30 million. Maintenance and other expenses will be less than $1 million and, finally, SG&A will be between $6 million and $7 million.

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

Colm Barrington

Thank you, Gary. I hope we have demonstrated this morning that FLY is making real strides to enhance shareholder value. Expect that our fleet renewal program, our acquisition targets, our committed acquisition pipeline, a reduced share count and our reducing cost base will combine to increase our EPS to ROE which will translate into greater shareholder value.

Thank you for your attention. And we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Gary Liebowitz of Wells Fargo. Your line is open.

Gary Liebowitz

Thanks, operator. Good morning guys.

Colm Barrington

Good morning, Gary.

Gary Liebowitz

Just first, a couple of P&L questions maybe for Gary, the gains on sales in the first quarter were about half of what you had guided through, is that a function of the maintenance accounting or did some aircraft sales slip or may be just explain what that variance was?

Gary Dales

Yes, it does follow from the recognition of maintenance rights, the bases of the aircraft is little higher although the aircraft book values are a little less because we allocated a portion of the purchase cost to the maintenance right. The maintenance right does not depreciate, so the aircraft basis for purposes of computing the gain or loss is a little higher, so that’s the difference.

Gary Liebowitz

And for the second quarter, you’re going to have between four and eight aircraft sales; we should assume no P&L effect in terms of the gain on those sales?

Gary Dales

No, I think we do expect some gain and I think we’re thinking it could be as much as $5 million really depending on the timing, if all those get closed within the second quarter.

Gary Liebowitz

Okay, great. Also maybe for Steve or for Colm, is it too early to start thinking about year 2017 lease expirations and do you see any challenging replacements whether they be out of production planes or wide body aircraft?

Steve Zissis

No, for 2017, we’ve got 11 aircraft available in the marketplace, of those 11 we’ve signed an LOI to sell one aircraft and as Gary said we’re not sure exactly when that will close but probably in the second half here. One aircraft has already been extended, so it gives us nine aircraft remaining. Of the nine, Gary, we’ve got four aircraft in the first half of the year that are available for remarketing. And then the balance in the second half of the year. Just to give you an indication how strong the market is, all of those aircraft are in active discussions for extension. And we expect a majority of those to be extended.

Gary Dales

And I think, Gary, to pick up on one of your past year questions, there are no wide bodies in that renewal program.

Gary Liebowitz

Great, thank you very much.

Operator

Thank you. The next question is from Jamie Baker of JPMorgan. Your line is open.

Jamie Baker

Hi, good morning, gentlemen. So Mark Streeter and I were both wondering, one of the obvious changes since your last call is the apparent legitimatization of the C-Series given the recent Delta order. So I’m wondering if this in anyway influences how FLY thinks about slightly smaller gauge aircraft than what's currently in your portfolio. Any change in how you’re thinking about risk/reward in the call it 100 to 125 seat segment going forward?

Colm Barrington

It doesn’t change kind of our view on the marketplace. As you know we’ve been somewhat bearish on the 319s and the 737-700s which are the lower gauge.

Jamie Baker

Exactly.

Colm Barrington

Aircraft of those two manufacturers. We’ve been actively selling those type of aircrafts in the fleet, so you've seen over the last couple of years, we've reduced our exposure to those types of aircrafts fairly significantly. We had no intention of getting into the C-Series or the Embraer, so the regional jets. It's really not our cup of tea. That type of market trades on its own kind of parameters and it’s not something we think is appropriate for the size of FLY.

Jamie Baker

Got it, perfect. Second question, you talked about acquisitions being lumpy that obviously makes sense. We know you’ve been shedding older aircrafts, you mentioned the 17 year old [kit] [ph]. But in light of where fuel currently is, I can’t help but wonder if the sweet spot for FLY might actually be skewed a little bit back maybe slightly towards older assets again, I mean if you were going to take a stab, and this isn’t guidance, we won't hold you to it, but in two years time do you think your average aircraft age, your average weighted fleet age is going to be higher or lower than the 6.8 where it is today?

Steve Zissis

Yes, look that requires a longer discussion because I think it goes to our philosophy of balancing FLY’s portfolio vis-à-vis the liquidity of the portfolio versus the earnings power, right. And if you take into account, Jamie, that maybe there will be eventually some dislocation in the marketplace even in the capital markets or generally in the world because it seems like we're running on borrowed time, we want to keep FLY’s portfolio at the most liquid side of that curve, right, which means that we’re going to have a bias towards the younger stuff. We do recognize that the older stuff gives you higher lease rates and higher yielding assets but it comes at a cost and that cost is liquidity.

Jamie Baker

Got it.

Steve Zissis

We’re not going to say we’ll never buy older stuff, there is going to be deals out there that we’ll find attractive but right now, the way that we see it, we really want to stay on the younger side of the curve.

Jamie Baker

Excellent, very sensible answers. Thanks guys.

Operator

Thank you. The next question comes from Richa Talwar of Deutsche Bank. Your line is open.

Richa Talwar

Good morning. So first just a quick one on numbers.

Gary Dales

Good morning, Richa.

Richa Talwar

Hey. So quick one on the numbers, $751,000 increase in your receivable balance, I know it’s not much and it’s still very small relative to historic levels but just curious what drove that?

Gary Dales

I think there was a holiday in one of the countries and the payment came in over the weekend is the biggest part of that balance the end of March and I think everything has been paid. So as of today, the $751 million has all been received.

Steve Zissis

It is $751,000.

Gary Dales

$751,000, yes.

Steve Zissis

And I think Richa, it’s worth mentioning that the quality of our fleet has dramatically improved over the last year and our [Indiscernible] on late paying is very, very small. Doesn’t even register. I’m going to say in $100,000 range.

Richa Talwar

Okay. That’s good to hear and then, I guess a big picture one. One of your competitors recently indicated that the aircraft market particularly for brand-new current generation aircraft may remain challenged, given new technology aircraft coming online and they, therefore, prefer to use their excess cash flow to buy back shares which they effectively see as buying their own aircraft. I know you’re buying back your shares too, but you’re also continuing to invest in your aircraft.

So wanted to confirm that you do in fact have a different view on this topic and hear your updated thoughts on how you think the value of some of your recent investments will hold up as more NEOs and MAX aircrafts get delivered over the next few years.

Colm Barrington

Well, I think Richa, our philosophy of buying aircraft maybe different from that lessors. As you know, we don’t speculate on future orders from the manufacturers. We buy our aircraft primarily in sale/leaseback transactions. So as you can see, the aircraft that we’ve been buying have all been on long-term leases. So we’re not speculating on leased aircraft. So I think that remark from that other lessor probably doesn’t apply to FLY because of our different philosophy. We also put long-term financing in place prior to acquiring these aircrafts, so will not take any financing risk on any aircraft acquisitions.

And I think thirdly, we don't have to therefore pay any pre-delivery payments as we're not using up our cash resources in PDPs for new aircrafts. So I think if you look at our philosophy versus that other lessor, you’ll find that the way we do it is different and therefore we are not as affected by the concerns that he had.

Richa Talwar

I totally understand that but I guess it was implied that their excess cash flow wouldn’t be applied to aircraft in the sale/leaseback market because they see value of some of these new aircraft coming at risk given NEOs and MAXs delivering soon. So curious if how do you think your portfolio will hold up in that scenario?

Colm Barrington

Richa, if you look at our existing portfolio, I mean as of today, all our narrow body aircraft are the current most modern aircraft, except for one Boeing 737 which we've actually just agreed to sell. So we have moved gradually from the Classic 737 for example into next generation and now as MAX comes on board, we would be moving from the next generation to the MAX, similarly with the A320s. So it’s a gradual evolution and we will continue to sell older aircrafts and move into the new generation aircraft as they are produced.

Richa Talwar

Okay, thank you.

Gary Dales

Thank you.

Operator

Thank you. The next question is from Jason Arnold of RBC Capital Markets. Your line is open.

Jason Arnold

Hi, good morning, guys. Just wondering if you can talk a little bit about the composition of the planned aircraft sales and acquisitions coming here in Q2, just I think you did say narrow bodies, but just any color there would be helpful?

Colm Barrington

Yes, I mean the sales of aircraft in Q2, I think there is one older 767, there are two older much older narrow bodies 737s and one older A320, I think are the four aircrafts that we haven’t announced. And the aircraft which we’re buying are new or brand relatively new aircraft on long term leases some wide body, some narrow body. We’ll be announcing those sales as the aircrafts are delivered.

Jason Arnold

Okay, thanks, and then I guess just looking at the lease rate factor that you have on Slide 5 there I’d assume that most of the new stuff that you’ve got on the acquisitions side is kind of going on the flight carriers; is that a fair assumption?

Colm Barrington

Yes, I mean I think most of our in fact our new acquisitions are very strong carriers with very strong credit support in the case of our major transaction coming up.

Jason Arnold

Okay, great, and then just one other quick one funding cost outlook, obviously on the new facility and I’m just wondering if you kind of comment on where you think things will balance out here over the course of the year?

Gary Dales

Sorry, can you repeat that please, Jason, I didn’t quite get the gist of question.

Jason Arnold

Yes I’m sorry just funding costs, blended average borrowing cost based on which source of funding you're using, kind of an outlook there please.

Gary Dales

Okay. Well you can see with the new acquisition facility, which we've closed at $385 million of LIBOR plus 2%, I mean that compares very favourably with anything that has been done in the market today. We continue to finance our new acquisitions, we will use that facility obviously but we’re also back leveraging and subsequently and as we have relatively good credits with, relatively good aircraft on long-term leases, we are being able to fund those in the secured debt markets at relatively low rates. So I think you will see our cost of secure debt continuing to drop down.

We do have unsecured debt, which as you know is more expensive, but we will not be -- we don't see ourselves adding more to that in the near term, we’ll continue to use secure that market which are really competitive right now.

And interesting, there are new lenders coming in. Our new facility has insurance companies, it's got Asian banks, it's got Australian banks, it’s got a lot of different lenders in there beyond the traditional European banks which are still very active but there are new sources of secured debt coming to the markets.

Jason Arnold

Excellent, down on funding cost is always nice. Excellent, thanks very much.

Colm Barrington

Thanks, Jason.

Operator

Thank you. The next question is from Ronald Epstein of Bank of America-Merrill Lynch. Your line is open.

Kristine Liwag

Hey guys. Sorry, this is actually Kristine Liwag, hi.

Colm Barrington

Hi, Kristine.

Kristine Liwag

For the aircraft acquisitions in the pipeline you mentioned that those are going to flagship carriers. So I guess for strong credit airlines it sounds to me like a 0.86% lease rate factor is a very robust figure, I would have expected some of those transactions to be priced more at 7 range from what we’re hearing in the market, can you talk about may be other terms of those contracts that we should be aware of like maintenance payment structures, return conditions and reserve requirements?

Colm Barrington

No, Kristine, we can’t go into obviously that’s confidential agreement that has got between our sales entity and the airlines. But I can assure you that FLY doesn't give away conditions in leases like maintenance, return conditions in exchange for higher lease rate factors, we ensure that our contracts are all with very good redelivery conditions, very good maintenance provisions, very good lease term. So we haven’t sold the shop in exchange for higher lease rate factors.

There are, again BBAM has been in the sale/leaseback market for nearly 30 years, it’s got a very good reputation this market for delivery and the one big transaction which we’ll be announcing because of BBAM's scale that FLY has been able to secure that transaction.

Kristine Liwag

Great, and may be if I could do a follow up, can you talk about the geographic exposure of those airlines that you have for aircraft acquisitions to the pipeline?

Colm Barrington

Some Europe, some Asia.

Kristine Liwag

Great, thank you.

Colm Barrington

Thank you.

Operator

Thank you. The next question is from Bill Mastoris of Baird & Company. Your line is open.

Bill Mastoris

Thank you. I know in the past you spend a considerable amount of time on some of the sale/lease back transactions which we increased here from some of your competitors that market seems to have dried up. So would be fair to assume that most of the transactions going forward that are going to be much smaller in nature and with those truncations, I think you alluded to at the may be with the a few more flagship carriers? And then I do have a follow up.

Colm Barrington

And, yes look there is still whole range of transactions out there, Bill, I mean one deal we just closed was a single airline narrow body with one carrier and the transactions which we have in the pipeline which we hope to close by the end of the second quarter is a three aircraft transaction within all the carrier.

So there is still a whole range of deals out there. As you know a lot of aircraft being bought by airlines. So there is still a lot of capacity out there in the markets, it’s well did in many cases but those are transactions which we’re finding attractive enough to put into FLY's portfolio.

Bill Mastoris

So are you still engaging in sale/leaseback transactions actively pursuing those?

Colm Barrington

Absolutely, yes I mean it’s we have a target of $750 million this year which would be mainly sale/leasebacks and we have over $400 million that in the pipeline hoping to close by the end of this quarter.

Bill Mastoris

Okay, and then the follow up and just has to do with as you talk about this transition of the fleet and as we quickly review maybe take a snap shot of some of your lessees two years ago versus where we are today, if you talk a little bit about the change in the credit quality of the portfolio as far as the lessee, from the lessee perspective, and again I think you did touch on flagship carrier. So, versus two years ago where are you today, do you feel like you about the same do you feel like you have a stronger, if you will, credit quality lessee I mean where are you in that process?

Steve Zissis

Well I would say the credit quality of FLY’s portfolio has dramatically improved over the last two years. And look this is all kind of subjective how you look at credits but I would say the 90% of our portfolio is Tier 1, 8% is Tier 2 and the balance is Tier 3 and that, that probably doesn’t give you a good indication but I would say if go back two years ago, it was more like 50% was Tier 1, 40% Tier 2 and the balance Tier 3. So as you can see with selling of a lot of the aircraft that we’ve done in the last 12 months, we’ve dramatically improved the credit quality of the portfolio and that’s also shown in our arrearages. As I said earlier, our late payments are practically zero in the portfolio.

Bill Mastoris

Okay, so Steve, if you could kind of refresh my memory here, when you talk about Tier 1 I assume you talking about the credit quality of the lessees would that be correct?

Steve Zissis

Correct.

Bill Mastoris

Okay and then…

Steve Zissis

Yes, I would say the subjective is right so, Tier 1 in lessors' nomenclature is totally different than probably a bank's but we consider Philippine Airlines, Jet Airways, VirginAtlantic, Travel Service, Ethiopian, Philippine Airlines, we consider those all Tier 1 from a lessor standpoint.

Bill Mastoris

Okay, thank you very much.

Operator

Thank you. And now I would like to turn the call back over to Matt Dallas for closing remarks.

Matt Dallas

We’d like to thank everyone for joining us for our first quarter earnings conference call and look forward to updating you again on our second quarter earnings call at the end of July. You can now disconnect.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.

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