Fly Leasing's (FLY) CEO Colm Barrington on Q2 2016 Results - Earnings Call Transcript

| About: Fly Leasing (FLY)

Fly Leasing Limited (NYSE:VLY)

Q2 2016 Earnings Conference Call

July 28, 2016 9:00 AM ET

Executives

Matt Dallas – Manager, Investor Relations

Colm Barrington – Chief Executive Officer

Gary Dales – Chief Financial Officer

Steve Zissis – President & Chief Executive Officer, BBAM

Analysts

Jason Arnold – RBC Capital Markets

Bill Mastoris – Baird & Company

Helane Becker – Cowen

Jamie Baker – JPMorgan

David Schrager – Morgan Stanley

Gary Liebowitz – Wells Fargo Securities

Kristine Liwag – Bank of America Merrill Lynch

Richa Talwar – Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to the FLY Leasing Second Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that. [Operator instructions] I would now like to introduce your host for today’s conference, Matt Dallas. Sir, you may begin.

Matt Dallas

Thank you, and good morning, everyone. I’m Matt Dallas, the Investor Relations Manager at FLY Leasing, and I’d like to welcome everyone to our second quarter 2016 earnings conference call. FLY Leasing, which we will refer to as FLY, or the Company, issued its second quarter earnings results press release, which is posted on the Company’s website at flyleasing.com. We 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 today’s presentation in the Investor Relations section of our website on the Presentations 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 on 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.

Before I begin the call today, I’d like to start by reading the following forward-looking statements. 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. An archived webcast of this call will be available for 90 days on the Company’s website.

And with that, I will now 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 second quarter earnings call. I’d like to bring you up to date on the general industry conditions and the current outlook for FLY. As you may have heard from the industry participants, airlines continue to generate strong profits, benefiting from lower fuel prices and healthy financing markets. This translates into strong demand for our aircraft, and in fact we are at 100% utilization, with all our aircraft on lease.

For the past several quarters, I’ve reported progress in transforming FLY’s fleet and improving its profitability. We made additional fleet improvements in Q2, which Colm and Gary will provide further details on during their prepared remarks. Over the past 12 months, which is basically from the time we made our first public announcement about transforming our fleet, FLY has sold 57 aircraft valued at $1.3 billion and having an average age of 14 years.

Besides significantly improving FLY’s fleet metrics and profitability, these sales reduced our leverage and generated significant cash to allow us to acquire newer aircraft at more attractive prices. We ended the quarter with $2 billion of capacity to grow our fleet. Despite this capacity, we’ve been very prudent in committing to new deals. In our industry, buying right can entrench competitive advantages for the life of the aircraft. Buying wrong can have the opposite effect. That’s why we only do deals we believe will enhance FLY’s earnings in both the near-term and the long-term.

We have sourced new deals for 2016 covering $510 million of our $750 million capital budget, of which $450 million has already closed. Our 2016 acquisitions and identified pipeline will generate an ROE significantly higher than our historical levels, and will produce in excess of $21 million pretax income on a pro forma annual basis. While not every future acquisition will produce such returns, this pipeline serves as an excellent example of how we are executing on our strategy of replacing older aircraft with newer and more profitable assets.

Speaking of buying right, at current trading levels, we see deep value in FLY’s shares. FLY is in the market repurchasing shares on a daily basis. During the second quarter, pursuant to our Board’s authorization, we initiated a new open market share repurchase program. FLY’s Board has just approved an increase to the size of this program to $75 million. This new program is in addition to the $25 million program we completed in the first quarter, and the $75 million tender offer completed in the fourth quarter of last year.

Since we announced our tender offer, we’ve spent over $106 million in share buybacks and reduced the number of shares outstanding by approximately 20%. Between buying new attractive assets and buying our own stock at significant discounts to net book value, we will continue to drive earnings per share and FLY’s net book value per share higher. BBAM’s shareholders who currently own approximately 13% of the Company, share with FLY’s other shareholders the goal of enhancing shareholder value.

I’d like now to hand the call over to Colm to go through our recent achievements and our prospects.

Colm Barrington

Thank you, Steve. As Steve has reported, FLY has continued its fleet rejuvenation and share repurchase programs in Q2 and into Q3. In Q2, we sold six aircraft, and have four additional sales scheduled for Q3. The six sales generated a small gain over our net book value and added significantly to our unrestricted cash. At the end of the quarter, FLY had nearly $318 million of unrestricted cash, and over $530 million of unencumbered aircraft, giving us significant firepower to continue our fleet rejuvenation.

As you can see, FLY now has significant unused financial capacity on its balance sheet. As we deploy this capacity into new transactions, which would be both aircraft purchases and share repurchases, we expect to see much improved shareholder returns. In Q2, we purchased one brand-new A320, the sale leaseback transaction. Since the end of the quarter, we’ve acquired five more aircraft, which include three Boeing 787 Dreamliners in a long-term sale and leaseback with Air India. This transaction is guaranteed by the government of India.

We also purchased two Boeing 737 and 800s from a South American airline, and have leased these aircraft to another airline on long-term leases. I should emphasize that we have not pursued every aircraft transaction that we have uncovered. Our strategy has been, and will continue to be, to remain patient and to complete only those transactions that will make positive additions to FLY’s EPS and ROE. In uncertain times, we believe that our policy of not speculating on new aircraft orders, but instead patiently purchasing only attractive and accretive transactions, will stand to the benefit of FLY’s shareholders. The six aircraft that we’ve acquired so far this year are great examples of that, and which I will discuss in more detail later.

In Q2, we also purchased an additional 251,500 shares, and again I will discuss our share repurchase in more detail later. As you can see, we’ve continued our fleet renewal program through the sales of older, less profitable aircraft. The six aircraft we sold in Q2 had an average age of 18 years and an average remaining lease term of one year. These sales have further contributed to our aircraft sales gains, which totaled $5.6 million in the first half of 2016.

We have four further sales slated for the current quarter. These aircraft have an average age of 16 years, and are on leases that average five years. One of these sales has already closed in the quarter. As a result of these sales of older aircraft, our fleet metrics continue to improve. In the 12 months through June 30, 2016, our average fleet age has reduced from eight years to 6.8 years, and our average remaining lease term has stretched out to 6.3 years.

FLY is already well on its way towards a $750 million aircraft acquisition target for 2016. To date in 2016, we have closed and circled a total of $512 million of acquisitions involving eight aircraft. These eight aircraft have an average age of two years and average lease term of 11 years. $43 million involving one aircraft was closed in Q2, $408 million for five aircraft has already closed in Q3, and $61 million with two more aircraft is due to close later this quarter.

We are really proud of these great deals. The eight aircraft will add over $21 million in annual pro forma pretax income, which is equivalent to approximately $0.60 per share. Some of these additional earnings will accrue in Q3, with a full quarterly contribution in Q4 and beyond. These acquisitions are great examples of FLY being patient and seizing on attractive opportunities rather than buying merely to grow our asset base.

As mentioned earlier, FLY has the financial capacity to continue this lease rejuvenation. We have also demonstrated that we have the patience to acquire aircraft prudently, ensuring that we improve fleet metrics and generate improved returns. FLY has also continued its share repurchase program, which we commenced in late 2015. Since September 2015, we’ve repurchased 20% of our outstanding shares. Thus far in Q3, we have purchased approximately 400,000 more shares at an average price of just over $10.50 per share. And yesterday, our Board of Directors approved a new $75 million share repurchase program that replaces the previously authorized $30 million program.

Our share repurchases have had a positive impact on FLY’s financial condition, and particularly on our net book value per share. At the end of Q2, FLY’s net book value per share had increased to nearly $19 from $18.42 at the end of 2015. As Steve mentioned earlier, BBAM shareholders have continued to show the confidence in FLY’s future through the acquisition of more shares in the Company. In the first quarter of 2016, they purchased an additional $0.9 million of FLY’s shares. At June 30, BBAM’s shareholders owned approximately 13% of FLY’s stock.

This is a significant insider stockholding and demonstrate BBAM’s alignment with FLY and their confidence in its future.

I’ll now hand you over to Gary Dale to take you through our Q2 financials.

Gary Dales

Thank you, Colm. We are reporting net income of $4.7 million, or $0.14 per share for the second quarter [indiscernible] $43.7 million or $1.06 per share for the same period in the prior year. The results for this quarter include a $4.1 million impairment charge. For the three months ended June 30, 2016, our total revenues were $77.9 million. This includes $4.9 million of end-of-lease income and approximately $400,000 in gains from the sale of six aircraft. The restated amounts for the same period in the previous year are unchanged from what was originally reported.

The current quarter’s rental revenue of $73.9 million was generated from 77 aircraft, whereas the $103.4 million from the second quarter of 2015 was generated from 129 aircraft. Total expenses for the second quarter of 2016 were $70.7 million. This compares to a restated $151.4 million for the same period in the previous year. The decline in depreciation expense reflects aircraft sales. Our interest expense decreased $7.7 million, reflecting more than $800 million of debt repaid from proceeds of aircraft sales and regular amortization.

Selling, general, and administrative expense is down $3.2 million, reflecting the $5 million annual reduction in the management fee. This quarter’s SG&A expense includes approximately – or includes $851,000 of legal and accounting expenses incurred responding to the SEC comment letter and restating our financial statements to recognize maintenance rights and the related litigation. Both of these items are excluded from our adjusted SG&A. You’ll find that reconciliation in the appendix to today’s presentation.

Let me cover a few items of guidance. For the third quarter of 2016, we are expecting operating lease rental revenue of between $78 million and $80 million. We expect to recognize $5 million in gains from three aircraft sales, with the lion’s share of that gain associated with the aircraft sale that closed earlier this week. We expect amortization of lease incentives to be between $1 million and $2 million. Depreciation expense is expected to be between $31 million and $32 million. We expect interest expense of between $30 million and $31 million. Maintenance and other expenses are, again, expected to be $1 million or less. And adjusted SG&A expense will be between $7 million and $8 million. I call your attention to the appendices, where we have our cap table, remarketing requirements, and reconciliations of our adjusted net income and adjusted SG&A.

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

Colm Barrington

Thank you, Gary. As you can see from our earlier remarks, FLY’s rejuvenation program continues positively. It continued to benefit from strong industry conditions, which has meant that all our aircraft are on lease, and the availability of low-cost capital to move on our older and less attractive aircraft. In the meantime, we have continued to purchase new aircraft prudently, ensuring that our new acquisitions generate attractive returns on equity and enhance our earnings. In parallel, we’ve continued to repurchase our shares at a significant discount to their net book value, further enhancing EPS and ROE, and adding to net book value per share.

We now have a new $75 million share repurchase program and will continue to acquire our shares as we see attractive market opportunities. Finally, FLY’s balance sheet has a significant level of unused capital, much of it generated by our aggressive and successful aircraft sales over the last 18 months. As we prudently deploy this capital, we expect to generate improved returns and shareholder value. We are confident in the success of these efforts, a confidence that is supported by our significant insider shareholding, which is by far the highest of any public aircraft lessor.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jason Arnold with RBC Capital Markets. Your line is now open.

Jason Arnold

Hi, good morning. Nice results here. Just wanted to ask on the detail you gave on the Q3 acquisitions was solid, looks like some pretty good numbers there. But, I was just wondering if you can speak in a bit more detail on what you’re seeing as attractive in the acquisition pipeline kind of as we head here into the back end of the year with the remainder that you look to acquire this year.

Steve Zissis

Yes. Jason, it’s Steve. So, going forward, as you know, we have a $750 capital budget this year. About $510 million of that is committed. We do find the market still to be generally overpriced, with too much cheap capital chasing deals. But, given the relatively small amount of money that we need to put to work for the second half of the year, we’re fairly confident that we’ll find a few deals to finish out the budget.

Jason Arnold

Okay. And does it feel kind of more similar focus, narrow-body, than it’s something that’s younger, high-demand aircraft versus anything else?

Steve Zissis

Correct, majority of our focus is on the younger side. We are not purchasing midlife aircraft. We’re looking for younger stuff, five years and younger. We like both the wide-body and the narrow-body market. And as you know, we’re bringing in our first neos in 2017, and there’s a chance that we may accelerate those depending on the delivery schedule from Airbus.

Jason Arnold

Great. And then, just one other follow-up. Just wondering if you can speak to how you’re currently thinking about the balance between sale leaseback opportunities with flag carriers versus some of the airlines at present right now, as well.

Steve Zissis

Yes. Look, as I’ve said on many of these calls, Jason, doing sale leasebacks with the flight carriers is – numbers that really do not support the return targets for FLY. That’s really kind of capital for some of the Asian players who have much more cost-effective capital, if you will. So, we’re looking at more the two-tier, tier two type of airlines, some jurisdictions that maybe are a little bit more challenging than some of the new lessors are willing to do. So, we have to be careful about where we originate stuff and where we can find deals that work for us. But, as I said before, we have a relatively small budget to complete, and there are plenty of deals out there that will meet our targets, going forward.

The other thing I’d mention, Jason, is Colm had mentioned on the call that we bought two naked aircraft from a South American carrier, and we immediately put them into a long-term client in Asia with no downtime and no integration. And I think that just shows the power of kind of the BBAM-FLY franchise, given our ability to do not only sale leasebacks, but opportunistic deals that really enhance the value for FLY.

Jason Arnold

Excellent. Thanks for the color there, Steve, appreciate it.

Steve Zissis

Yes.

Operator

Thank you. And our next question comes from Gary Liebowitz with Wells Fargo Securities. Your line is now open.

Gary Liebowitz

Yes. Thank you, operator. Steve, you have on Page 12 your remarketing overview. I wonder if you could just give us an overview of the types of assets that require remarketing, the one this year and the eight next year. And are they the types of planes that you still find pretty good demand for?

Steve Zissis

Yes, Gary. And so, the one aircraft that we have remaining this year is a mid-life 800 that comes back in December. And as you know, we’re already in the marketplace, and there’s plenty of demand for that. The eight aircraft next year are a mix of NGs and narrow-body Airbus aircraft. And as I’ve indicated on prior calls, we expect about half of those aircraft to be extended, and the other half will be actively remarketed. The only ones that we find challenging still are the 319s, not because there’s not demand. It’s just that the demand is at very low lease rates. So, one thing that we have done in the last year is to reduce the risk profile of FLY by selling a lot of aircraft. So, we’ve reduced our remarketing load at FLY significantly for 2016, 2017, and 2018.

Basically if you looked at that Slide 12, we’ve cut our remarketing exposure in half, going forward, and we’ve improved the credit quality of the portfolio by getting rid of a lot of older aircraft that were at weaker credits.

Gary Liebowitz

Okay, great. Thanks for that color. You mentioned that you’re still comfortable in reaching that $750 million target for the year, but it sounds, Steve, like you have even better opportunities on the sell side. I mean, could we see the selling program continue in the second half of the year?

Steve Zissis

Look, we’re selectively in the market reviewing what we can sell certain aircraft for. So, you could expect a handful of aircraft to be targeted for year-end. But, I don’t think at this point, Gary, that we’re going to do anything significant in terms of the disposition of additional aircraft, so maybe you should think about it as maybe five or 10 more midlife stuff. But look, if somebody offers us a great price on some of our premium stuff, we’re never shy about taking profits.

Gary Liebowitz

Okay. And then maybe just a couple of accounting cleanups for Gary. The tax rate in the quarter seemed unusually high. How should we think of that, going forward, and why was it so high in the quarter?

Steve Zissis

Thanks, Gary. You’re right, the tax rate is a little higher than the statutory 12.5% you would be expecting. And that’s because we needed to record some valuation allowances on some deferred tax assets that reside at some of our subsidiary companies. And as we look to the future, you can expect that we’re probably going to have to record some additional valuation allowances as these subsidiaries will be generating some book losses. Probably not as significant as the valuation allowance for this quarter, but you can expect a little higher effective tax rate than the 12.5%.

Gary Liebowitz

What does [indiscernible] yourself in our shoes. Are we talking, like, a 15 or a 20 or?

Steve Zissis

Well. I would say probably closer to the 20%. We haven’t really got a forecast that goes out too far on that. And it’s difficult to predict because, if these generate earnings, then of course there’s no reason to provide any valuation allowance.

Gary Liebowitz

Okay. And the gains on sales were a little bit lighter than you had guided to a few months ago. Is that just the more higher margin aircraft sales slipped into Q3, so just a timing issue?

Gary Dales

It’s all timing. The $5 million in our guidance for the third quarter is really the same $5 million of guidance we had at the end of the second quarter. And the one aircraft we sold last week was the lion’s share of that gain. And so, that’s in the books now for the third quarter.

Gary Liebowitz

Okay, then just one more accounting one. The $4 million impairment, can you just go over what that related to, and reversal to expect, or the partial reversal?

Gary Dales

Yes, Gary. This is an aircraft that we acquired five years ago as part of the GAM acquisition. In part of that transaction, we assumed some non-recourse debt, and there was very little purchase price allocated to this aircraft. The debt matured last February, along with the – coincided with the lease expiry. We were negotiating with the bank. We extended the lease. But, they wanted us to infuse more equity into this aircraft than we were willing to do.

The bank had the remarketing rights then, and so they planned to sell the aircraft, and we had to take an impairment charge, writing it down to its estimated sales proceeds. The aircraft will be sold in the third quarter. Those sales proceeds are actually less than the associated debt balance. And so, as you highlighted there, we’ll be recognizing a gain on the debt extinguishment. It won’t completely offset the impairment charge, and will be approximately $750,000. And again, that will be a third quarter transaction once the aircraft is actually sold and the debt discharged.

Gary Liebowitz

Thank you for the clarification.

Gary Dales

Welcome.

Operator

And our next question comes from Richa Talwar with Deutsche Bank. Your line is now open.

Richa Talwar

Hey, everyone, good morning.

Gary Dales

Good morning, Richa.

Richa Talwar

So, first, a quick one. I believe on your previous earnings call you indicated that $445 million of aircraft acquisitions were expected to close in the June quarter, but you ended up closing 10% of that. Just wanted to hear what happened there on timing relative to expectations.

Colm Barrington

Well, a large part of the $445 million was these three Boeing 787 Dreamliners that we’d done the sale leaseback transaction with Air India, and there were some technical things involving the government guarantee of that transaction, which did not get finished so we could do a closing in the second quarter, but which we completed in July, and that’s why those transactions have just recently been announced.

Richa Talwar

Okay, very clear. And then, second, on the buyback, I know you increased your buyback authorization considerably, and you mentioned it’s largely driven by the sizable discount of your shares versus book value. But, I’m curious to hear what you think about the little impact your share repurchases have had thus far, at least on your market price. You’ve bought back 20% of your stock since September 30 of last year, but your share price is off 15%, give or take, since then. So, wondering if you would, one, ever consider going back to introducing a dividend instead of pursuing these share buybacks, as it seems that your investor base may have appreciated that method of capital returns more. And two, how do you assess the various avenues of returning capital to shareholders in the context of your share repos having little impact on share price thus far?

Colm Barrington

Okay. Well, first of all I think, Richa, on your first point, I mean, our large $75 million Dutch tender offer, the closing of that coincides almost exactly with a very significant down-tick in the market. And I think if you look at all the aircraft lessor stocks since January 1, there has been a significant downturn. In fact, market in general is now edging up slowly in certain cases. So, it’s difficult to judge whether our falling share price was due to the suspension of the dividend or the share buyback, or just general market conditions. That being said, we continue to evaluate all possibilities. And because of the decline of the share price, where it is now significant discount to our net book value, we think certainly at the moment, share buybacks are a better option than any dividend reinstatement. But, as I say, we look at all options all the time, and maybe some time in the future we might consider reinstatement, but we don’t have any current plans to do that.

Richa Talwar

All right. And then, one more. Quickly punching through your guidance, I’m getting to a lower September quarter EPS estimate than in the June quarter. So, maybe this one’s for Gary. Even though the $470 million of this $510 million identified acquisitions for the full year 2016 is expected to close, I believe, in the September quarter. So one, Gary, is my quick math correct? And if it is, is it fair to think that the accretion from the new aircraft, the $0.60 of annual EPS benefit that Colm mentioned, really begins to kick in the December quarter, and they’re more back-end loaded?

Gary Dales

Well, there is some of that, where the full effect of the acquisition program won’t be in place until the fourth quarter. I don’t exactly have your numbers. I think we should be seeing some increase in the third quarter earnings compared to the second quarter earnings. And we probably need to work through the amounts that are in the reconciliation, as a few of those would not – they may be changing, which is why we’re not generating the adjusted net income that you’re computing.

Colm Barrington

But, I think it’s fair to say our numbers would not agree with yours. We do not see our EPS – our earnings of EPS being lower in the third quarter than they are in the second quarter.

Richa Talwar

Got you. Thank you.

Operator

Thank you. And our next question comes from Rajeev Lalwani with Morgan Stanley. Your line is now open.

David Schrager

It’s David Schrager on for Rajeev. So, just wanted to get your thoughts on the impact of Brexit, given your exposure to Europe. I mean, do you look to divest or move any assets in advance of any risks becoming more significant, or are you comfortable with this exposure?

Colm Barrington

Well, I think first of all, David, it’s a little early to say. We don’t quite know what Brexit is yet. We do know that the UK has voted to leave the European Union, but we don’t know what arrangements are going to be negotiated between the United Kingdom and the EU. Secondly, this is going to take up beyond two years before we know what exactly Brexit means. As you’ll see, the markets went down very significantly the day after the referendum, but they’ve largely recovered in the meantime.

We – if you listen to what the airlines have said, Ryanair, for example, is the largest low-cost carrier in Europe, and very significant operator out of the UK. Doesn’t seem to think Brexit’s going to have any negative impact on the business at all. EasyJet was perhaps a little bit more concerned. So, as I say, it’s a little bit early to say. We have not had any impact from any of our lessees to date. All our aircraft are operating, as you know. All our rents are being paid. Our receivables are at an all-time low. So, we haven’t had any impact from Brexit on our business to date. And as I say, I think it’s a little early to say if there will be any negative impact in the future, but we certainly don’t see it right now.

David Schrager

Fair enough. And just looking at some of your peers, they’ve made some margin expansion efforts in the form of more managed aircraft or entering into JVs. How do these types of strategies fit into FLY’s business model? And does the relationship with BBAM kind of muddy that up, or not?

Colm Barrington

I don’t think it quite muddies up. I think it actually makes quite clear. I mean, FLY is externally managed by BBAM, so FLY does not have its own management resources to take on managed aircraft, which we actually think would be a distraction to our business in any event. So, we’re very happy with that, to continue to be an aircraft owner, and BBAM is the aircraft manager, both for FLY’s portfolio and for other clients. Joint ventures in owning aircraft? Yes, we already have one small joint venture that owned four 767s, now two 767s. And there might be other possibilities of doing joint ventures in the future. It’s interesting that our recent transaction with Air India involved effectively a joint venture with another BBAM client, whereby we managed to bid on six aircraft and were successful at winning that between the two parties. And that sort of thing is where our relationship with BBAM helps us in acquiring transactions, going forward.

David Schrager

Great. Thanks for the time.

Colm Barrington

Thank you.

Operator

Thank you. And our next question comes from Jamie Baker with JPMorgan. Your line is now open.

Jamie Baker

Hey, good morning, everybody. So, lease rates are under pressure, which tends to spook equity investors, and leasing stocks are obviously still trading at depressed multiples. Year-to-date stock performance has been pretty poor across the space. But, if we set all this aside, so if we set equity investors aside, and we consider BBAM’s third-party management platform, what sort of interest are you seeing from other institutional non-equity investors, other pockets of money besides typical equity owners? And the reason I ask is that, when you consider that somewhere between 35% and 50% of the world’s government bonds are at zero or even negative territory, I’m wondering if it’s competition from, I don’t know, pension funds, sovereign wealth funds. I mean, could this be potentially shaping lease rate factors? That’s really the question.

Steve Zissis

Look, Jamie, it’s a really good question, and one that we debate internally constantly. Obviously zero interest rates, or negative interest rates in a lot of these Western world’s we think are having an effect on valuations. In addition, there is a lot of new capital that wants to be in hard assets that produce defined cash flows for a long time, such as aircraft.

Colm Barrington

Exactly.

Steve Zissis

And so, you’re seeing a lot of what we call this new capital, both from insurance companies, obviously the ABS market. Asian investors, especially Chinese, come into this market, and it’s changing the valuation. Now, that valuation, or what we would call liquidity in our marketplace, is a double-edged sword, right? It helps the value of all these assets that sit on these public leasing companies, but at the same times it makes it much more expensive for us to acquire deals in the future.

So, that’s why I think you see the way that we’ve approached the marketplace is to take advantage of that liquidity by selling a lot of aircraft, and then selectively acquire deals with a very modest growth target, going forward. We are not advertising a 50% growth target, even though we have the capital to grow it 50%, right? We’ve got a $750 million budget. We’re selective in where we find deals. And hopefully we can run kind of the seams of the marketplace to enhance the value. Now, for a small company like FLY, that’s a perfect good strategy. I think for the bigger guys, it’s a lot harder.

Jamie Baker

Yes. No, I tend to agree. I do appreciate that color. I really think this point is probably getting lost on a lot of your equity investors, and not just yours, I mean, the overall space. So, I really do appreciate you being willing to take on the topic. That’s it for me. Thanks.

Colm Barrington

Thanks, Jim.

Operator

Thank you. And our next question comes from Helane Becker with Cowen. Your line is now open.

Helane Becker

Hello. Thanks very much, Operator. Hi, guys. Thank you for the time. I just have, I think, two questions. One is on Turkish Airlines. You have three aircraft with them, and I know the airline is in fairly good credit bigger than the queue, given the coup and the disruptions that’s going on in the market over there. I know that they have seen a big decline in traffic. Are you having any issues with them? Are there any thoughts about taking those aircraft back and placing them with another operator, or any color you can give us on that?

Steve Zissis

Yes. Look, from our perspective, I think the situation in Turkey is still kind of developing. THY obviously will probably go into a cost control type of measure until it gets through the adjustment period, if you will. They are a great airline. They’ve been around for many years. they have excellent management, a great route network. So, longer term, we’re quite fine with them. And ironically, I think in a period of instability, the airlines that are partially or controlled by the government are the ones that will survive. It’s the private airlines that I think all of us need to be a little bit more worried about.

Helane Becker

Okay.

Steve Zissis

But, I think you’re going to see some adjustment definitely in that Turkish market, because it’s been a huge market for all the lessors. And it’s something that we’ll probably report in more detail in the next quarterly call.

Helane Becker

Okay. So, there would be more concern regarding, like, a Pegasus than it’s been shrink us?

Steve Zissis

Well, look, that’s my personal opinion. I think the private guys are going to have a much tougher time. I think the government will definitely rally behind its government-supported airlines.

Colm Barrington

But as you know, Helane, of our seven aircraft in Turkey, five are either with the state carrier or with a joint venture with Lufthansa. So, we have a pretty good credit share profile in Turkey.

Helane Becker

Okay, perfect. And then, my other question is on the 2017 remarketing. Are there aircraft – I think you said that – you said there were, what, eight and four were probably going to be extended, and four would be remarketed. Would those be candidates for sale?

Steve Zissis

Sure. We always look at the sale versus continue leasing, right? So, if we get a good lease rate, we don’t mind keeping them on the books. If we get the right sales price, we’ll also sell them. And look, Helane, if we put a good lease on it and we think it’s an appropriate aircraft to dispose of, we have no problem offering it to the marketplace.

Helane Becker

Right.

Colm Barrington

Yes. I think you’ll find that most of our sales of aircraft are with leases in place. The only time we’d really consider sales without a lease in place is end-of-life aircraft, aircraft that are very close to their final year of life.

Helane Becker

Okay. And then, should we view the share repurchases as kind of a stealth going-private move?

Colm Barrington

You can view it any way you like. We view it as a good opportunity for our shareholders to add value, because the share booths are trading at such discount to net book value.

Helane Becker

Right. No, we agree with you, so anyway, thank you very much for the time, guys.

Colm Barrington

Thanks, Helane.

Operator

Thank you. And our next question comes from Bill Mastoris with Baird & Company. Your line is now open.

Bill Mastoris

Thank you. Steve, you mentioned a little bit earlier that you like both the narrow-body and wide-body markets. It’s the first time in a long time that I’ve heard you specifically mention a wide-body market. Several days ago you announced that you’d purchased three Dreamliners. I’m wondering, is there a subtle shift that’s going on just in terms of the composition of your portfolio, or the aim of your portfolio? Historically, I think you’ve been roughly in the 80% range for narrow bodies. And then, my follow-up question relates to would the accelerated share repurchase plan – and it looks like the allocation of any free cash flow a little bit more towards share repurchases – have your long-term leverage goals changed at all from the 3.5 times to four times? Thank you for taking the questions.

Steve Zissis

Thanks, Bill. No, look, our outlook on the marketplace of wide bodies versus narrow bodies has not changed. Again, we’re looking for deals that we think are attractive. And when you look at kind of long-term wide-body deals that are on 12-year leases or longer, they do have a certain characteristic in that they’ve got long contracted cash flows that really protect our down side and give us optionality on the upside. And so, we kind of like that profile.

Now, we don’t want the whole portfolio looking like that, but certainly have a certain percentage of our portfolio in new technology. Wide bodies we think is a good thing for us. But, I don’t think you’ll be seeing us doing more than I think 30% to 50% of our portfolio. And I changed that percentage now from some of the prior calls just because our portfolio’s a lot smaller, so the wide-body percentage is probably going to tick up a bit as we go forward here. But again, the narrow-body commodity aircraft are really our bread and butter, and it’s where we tend to focus most of our energy and acquisitions.

On the second question, I’ll let Colm address that one.

Colm Barrington

Yes. Well, as you know, Bill, we are not – we’re not concerned about leverage in the three to four times range because of the way we finance our debt. We don’t have big chunks of unsecured debt maturing in big blocks, and we tend to have secured debt, which amortizes over the life of the aircraft. So, we’re not as concerned about leverage as maybe a company that has more unsecure debt might be. So, we could see the leverage going up. I mean, we have plenty of cash at the moment, but we could see the leverage heading up back towards three, 3.5 at to one over the coming months as we complete our acquisition program.

Bill Mastoris

Great, thank you.

Colm Barrington

Thank you, Bill.

Operator

Thank you. And our next question comes from Gary Liebowitz with Wells Fargo Securities. Your line is now open.

Gary Liebowitz

Thanks. Steve, now that they’re a 10% customer for you, can you tell us a little bit more about Air India, your history working with them, and why you’re comfortable doing such a large deal that does not require maintenance reserves?

Steve Zissis

Look, it pretty much boils down to the fact that they decided after 12 months of negotiation to provide a government guarantee. Otherwise, we wouldn’t have done it, Gary. So, the government guarantee made the financing possible, and made the returns that we needed possible, and is the only way we would have considered that deal.

Gary Liebowitz

Okay, great. Thank you.

Operator

Thank you. And our next question comes from Ron Epstein with Bank of America Merrill Lynch. Your line is now open.

Kristine Liwag

Hey, guys, it’s actually Kristine Liwag instead of Ron Epstein. My question is, in the past five years, we’ve been in a period in which oil was over $100 per barrel, and it certainly felt like it was going to stay above $100 forever at the time. And now we’re in a period in which some believe that oil will never go above $100 per barrel. On a high level, can you discuss some of the topics when you talk to your airline customers, about their fleet planning, what’s different in the two environments that they’re thinking about, and maybe what stayed the same in their long-term fleet planning, short-term fleet planning, et cetera?

Steve Zissis

Well, look, I’d just make a quick comment, and Colm can give you his colors on it. But, in most of the airlines that we speak with, given the inability for them to hedge out fuel long-term, and when I say that long-term, I mean beyond three years, most airlines have the view that oil eventually will come back at a higher level, and therefore are more inclined to take on the more fuel efficient aircraft even though current fuel prices are at a lower rate. So, I think the way to kind of sum that up is that, yes, everybody realizes that fuel’s come off from its highs of $100, but there are very few people that we come across, especially in fleet planning, that have a projection that it’s going to stay that low and is willing to gamble their airline on fuel staying that low.

Now, if there was an effective way, and a cost-effective way to hedge their fuel 10 years out, I’m sure that view would change. But, I haven’t come across anybody that’s ever said they can do it effectively.

Colm Barrington

And then, from the airline’s point of view also, Kristine, I mean you’re seeing yields going down somewhat worldwide, and yet airlines are still recording super profits. And therefore, I think airlines are using lower oil prices to allow themselves to offer lower fares, which is actually helping to stimulate traffic in what might otherwise be regarded as difficult times. So, I think if fuel stays down, it’s going to be good for our business because it’s going to stimulate airlines to release more aircraft to new leases, and even to keep their existing fleets a little bit longer. And as you know, we don’t have orders for brand-new aircraft way out into the future, so from our point of view, as long as the airlines keep releasing existing aircraft, that’s very good for us.

Kristine Liwag

Great. And on the 787s that you guys leased, do you have a lease rate factor that you’d want to share, or maybe a range, to help us understand what the market environment for that aircraft is like?

Steve Zissis

Well, we do have a lease rate factor, but we don’t like to share them.

Kristine Liwag

Well, I thought I’d try. Well, thank you very much.

Steve Zissis

Yes, it’s a good try.

Colm Barrington

Good try.

Operator

And I’m showing no further questions at this time. I’d like to turn the call back over to Matt Dallas.

Matt Dallas

Thank you. We’d like to apologize today for the call inadvertently dropping, and we appreciate everyone for sticking with us through today’s call. And we look forward to updating you again next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.

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