AerCap Holdings N.V. (NYSE:AER)
Q2 2016 Earnings Conference Call
August 09, 2016 09:00 AM ET
John Wikoff - Investor Relations
Aengus Kelly - Chief Executive Officer
Keith Helming - Chief Financial Officer
Peter Juhas - Deputy Chief Financial Officer
Helane Becker - Cowen and Company
Gary Liebowitz - Wells Fargo Securities
Nish Mani - JPMorgan
Vincent Caintic - Macquarie
Rajeev Lalwani - Morgan Stanley
Kristine Liwag - Bank of America
Mike Linenberg - Deutsche Bank
Andrew Light - Citigroup
Moshe Orenbuch - Credit Suisse
Christopher Nolan - FBR & Co.
Darryl Genovesi - UBS
Welcome to today's AerCap Holdings' Second Quarter and First Half Results Conference Call. At this time, all participants are in a listen-only mode. This call is being webcast, and an audio version of the call will be available on the company's website. The call is also being recorded for replay purposes.
I will now hand the call over to John Wikoff, Head of Investor Relations. Please go ahead.
Thank you, operator, and hello everyone. Welcome to our 2016 second quarter results conference call. With me today is our Chief Executive Officer, Aengus Kelly; our Chief Financial Officer, Keith Helming; and our Deputy Chief Financial Officer, Peter Juhas.
Before we begin today's call, I would like to remind you that some statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
AerCap undertakes no obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AerCap's earning release dated August 09, 2016. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be available for replay.
I will now turn the call over to Aengus Kelly.
Thank you, John. Good morning, everybody, and thank you for joining us for our 2016 second quarter earnings call, where I am delighted to be reporting another strong quarter of stable earning.
During the second quarter, we generated adjusted net income of $291 million and earnings per share of $1.53. Furthermore, in the first half of 2016, we generated $3.06 of EPS which is consistent with our record EPS in the first half of 2015. And this number does not yet fully reflect the benefits of the buyback program.
We finished the first half of 2016 with assets of $43 billion and a very healthy net spread which is critical measure of our operational performance of $833 billion. Our net interest margin was 9.5% driven by the attractive financing terms available to AerCap, the capabilities of our platform and the quality of our portfolio.
Now moving on to some operational trend, during the second quarter, AerCap fleet utilization remained high at 99.4% and we completed 68 aircraft transaction. We continue to prude our portfolio of older and less efficient assets with the sale of 32 aircraft for $630 million. More than 40% of these aircraft were widebodies that at an average age of 14 years. This brings our total aircraft sales tally for the first half to approximately $1 billion and we expect to sell another $1 billion of aircraft in the second half.
Our ability to sell this amount of aircraft at a gain, demonstrates the continuing robust demand for aircraft in the secondary market and we are taking advantage of this demand to reposition our portfolio and generate additional excess capital. The sale of so many aircraft has of course resulted in an impact on revenue, but this is more than offset by the impact of share repurchases and the improved quality of our portfolio.
During the first half of 2016, we leased or sold 52 widebody aircraft. That is two widebody aircraft a week. And based on this level of activity, we can tell you that there continues to be demand for used widebody.
As far as our placement activity goes, our widebody fleet remains fully places for the remainder of 2016 and we only seven 777 and A330 aircraft that need to be placed through the end of 2017.
Looking at the placement starts to afford orders and used aircraft coming off lease through the end of 2018, we are in a very healthy position. We have tremendous top line visibility as all OEM delivery through the end of 2017 are placed as our 90% of new deliveries through 2016 all with an average lease term of 12 year.
In addition, the vast majority of our used aircraft coming off lease in the next 18 months have been placed. The result of this leasing activity is that most of our revenue has been contracted for the next seven years. This gives the business of preselected stability and the level of our daily interaction with the market gives AerCap unique and inside into end user sentiment and demand for all aircraft types around the world.
AerCap [indiscernible] deliveries during the second quarter including the first A350 to Cathay Pacific and Ethiopian Airlines.
Now, we expect to generate over $900 million of excess capital during the course 2016. This is the case despite the various macroeconomic and political development since we last spoke in May that these include recent events in Turkey and the number of unfortunate access terror recently seen around the world. No doubt, these events will have some localized impact on demand for air travel as we have seen several times before, most recently with the downturns in Russia and Brazil, as well as current events may result in a degree of softness in passenger growth in certain regions. The long term outlook remains robust underpinned by the decade’s long trends of positive passenger traffic growth and this will continue.
It is also very important to keep in mind that AerCap is a global platform that has been built to withstand multiple trouble spots in the world at any given time. The aircraft leasing industry remains robust and we have an extremely durable business that is built to withstand multiple economic cycle as evidenced by our tenfold growth in assets, 12% annual average EPS growth since 2007 through all economic cycle.
Despite the confidence of which we operate, we remain conservative when it comes to managing risk. And this is particularly true of the way we choose to finance AerCap. There is no better way of demonstrating this then by highlighting this stent which we have used excess cash to reduce our debt-to-equity ratio to 2.8 times to 1, achieving a return to investment-grade status with both Standard & Poor's and Fitch.
When it comes to deploying the excess capital AerCap is generating, we adopt a flexible and nimble approach whereby capital is deployed in the manger that generates the greatest long term value for our shareholders. We do not deliver growth for growth sake. In the current environment, we believe that effectively purchasing our own fleet to share repurchases generates greater value that purchasing aircraft in the open market.
Since June 2015, we’ve increased our book value per share by 15.1%. Moreover, since the ILFC acquisition in May of 2014, we’ve generated $2.3 billion of on adjusted net income and effectively returned a total of $4.2 billion of capital to equity and debt investors. As long as our share repurchase program delivers the best long-term return on the excess capital aircraft generate, we expect to continue to repurchase stock.
I would like to close by saying that we have a highly robust business model that generates high levels of earnings visibility and strong predictable cash flows and we continue to see an attractive long-term growth trajectory for AerCap.
With that, I will hand the call over to Keith and Pete for detailed review of our financial performance.
Thanks, Gus. Good morning, everyone. Our net income for the quarter was $291.6 million on an adjusted basis and $233.3 million on a reported basis. For the first half, adjusted net income was $593 million and reported net income was $456 million.
As another quarter, the main difference between adjusted and reported net income was the adjustment for maintenance rights related expense which accelerates the amortization of the aircraft asset value over the remaining lease term rather than the remaining useful life of the aircraft as required under purchase accounting. The other major adjustment item was AeroTurbine results including restructuring expenses and periodic losses.
Although not shown on the slide, our return on equity for the quarter on an adjusted basis was approximately 14%, and on a reported basis, it was approximately 11%. The principle driver of the decreases in both adjusted and reported net income from 2015 was our sales of older aircraft during 2015 and the first half of 2016. Since June 30, 2015, we have sold 105 aircraft for approximately $2 billion. These sales reduced our average lease assets by $1.5 billion in to 2Q and reduced our basic lease rent.
The proceeds from the sale of these assets have provided us with capital for a committed CapEx for the deleveraging and share repurchases. Other drivers of the variance were lower gain on sale of assets, slightly higher interest expense and lower other income.
Slide 8, our earnings per share for the quarter were $1.53 on adjusted basis and a $1.22 on reported basis. For the first half, adjusted earnings per share were $3.06, and reported earnings per share were $2.35.
As you can see, our first half 2016 EPS on the adjusted basis was comparable to our very strong first half in 2015 and does not yet reflect all the benefits from the capital that have been reallocated for share repurchases. The decrease in EPS for second quarter was primarily due to lower gain on sale of assets and lower other income in 2016 versus 2015. Other factors can turn into this for lower average assets and higher interest expense.
Slide 9, our book value for share at the end second quarter was $45.26. Over the past year, we have grown book value for share by over 15%. We have done this through a combination of earnings as well as share repurchases. We’ve reduced our share count by 6.4% since last June, as in the beginning of 2015, we have reduced our share count by approximately 29 million shares are over 13% of our total shares outstanding. We have returned over $1.25 billion to shareholders since beginning of 2015.
Now let me pass it over to Pete, who will take you through the rest of the financial results.
Thanks, Keith. Good morning, everyone. Starting on Slide 10, our total revenue for the second quarter is $1.239 billion versus $1.337 billion for the second quarter of 2015. As Keith mentioned, our aircraft sales during 2015 and the first half of 2016 reduced our average lease assets by $1.5 billion. This led to lower basically lease rents and was the primary driver of the decrease in revenue year-over-year. Our maintenance revenues were basically flat year-over-year, our net gain on sales was $38.4 million compared to $54.6 million a year ago, which was our highest quarter of gains in 2015.
We successfully sold 32 aircraft this quarter that were 14 years old on average and over 40% widebodies. Our other income was $23.9 million for the quarter compared to $48.6 million in 2015. The decrease resulting primarily from AeroTurbine downsizing, as well as some other onetime items that led to higher than normal other income in the second quarter of 2015.
Turning to Slide 11, our net interest margin was $833 million in the second quarter compared to $910 million in the second quarter of 2015. The main drivers of this difference with a lower basically strength resulting from having a smaller portfolio and slightly higher interest expense which had two components. First, we issued new longer term debt to replace the short-term ILFC debt that was maturity. This maturity ILFC debt had lower reported interest expense as a result of purchase accounting for the ILFC acquisitions. As a result, our average reported cost of debt increased from 3.5% to 3.7%, although our cash interest expense decreased.
Second, we increased our liquidity by $3.4 billion from the second quarter of 2015 for our higher upcoming CapEx needs during the second half of this year and in 2017. This also led to increased interest costs.
These two factors the natural rollout of the ILFC debt and the increase liquidity also drove the change in our annualized net spread from 9.9% to 9.5% for the quarter. Both our average cost of debt and our net spread were in line with our expectations and with the forecast that we gave at our Investor Day at last September.
Turning to Slide 12, we sold 32 aircraft from our owned portfolio in the second quarter and our net gain on sale for the quarter was $38 million. As I mentioned earlier, the average age of the aircraft we sold was 14 years with over 40% widebody content. This brings our total sales for the first half of the year to just over $1 billion. We’ve also entered into contracts to sell an additional billion worth of aircraft that we expect to close during the second half of this year.
In the second quarter, we also reclassified three older aircraft that we put out on long-term leases as finance leases. We took delivery of six aircraft during the second quarter two A350s and four 787s bring our total purchases to 12 aircraft for the first half this year and we expect to take delivery of 31 new aircraft during the second half of the year.
Slide 13, our leasing expenses decreased to $143 million for the quarter, down from $173 million in 2015. This expense decrease was primarily due to lower maintenance rights expenses resulting from fewer maintenance events during the quarter.
Our SG&A was $86.5 million for the quarter, down from $91.5 million in 2015. This expense drop was primarily due to the continued downsizing of AeroTurbine.
We reported asset impairments of $10.5 million in the second quarter, all in connection with aircraft sales. These are related to three aircraft that were part of a portfolio sale during the quarter. The overall portfolio was sold at a profit but these three aircraft were sold at a loss as a result of the way the purchase price was allocated. Because the sales of these three aircraft didn’t close during the quarter, they were treated as held for sale and as a result the $10.5 million shows up as an asset impairment rather than a lost on sales. And finally, the transaction restructuring expenses of $3.5 million in the quarter all related to severance and terminations costs that were part of the AeroTurbine downsizing.
Next page, we ended the second quarter with a record liquidity of $10 billion. You can see that this represents a $3.4 billion increase over our liquidity at the end of the second quarter of 2015. We increased our liquidity in order to prepare for our upcoming CapEx schedule. We have $4.2 billion of cash CapEx coming up over the next 12 months. The increase in liquidity came primarily from an increase in our undrawn facilities as well as from holding additional cash. We’re currently at a ratio of 1.5 times next 12 months sources to use as coverage given excess cash coverage of $4.4 billion. We continued a target a level of at least 1.2 times sources to uses which is an investment grade standard.
So overall for AerCap, this was another quarter of strong operating and financial performance. Our $3.06 of earnings per share for the first half the year was consistent with our expectations and consistent with our record earnings year of 2015. And that EPS number does not reflect the full benefits of our capital deployment total share repurchases which we will see coming through fully in future quarters.
With that, I will now turn it over to Q&A.
Thank you, sir. [Operator Instructions] Our first question comes from Helane Becker from Cowen and Company. Please go ahead, your line is open.
Thanks very much, operator. Hi, guys. Thank you so much for your time. I appreciate it. Just a couple of questions, can you say just how pricing is holding up on the widebody aircraft as you look, I had - I mean I guess the 2016 and 2017 are placed but as you’re thinking about the - when more aircraft are coming off retirement, how is pricing holding up for those?
Well, we’re continuing to move 2018 even 2019 Helane through aircraft sales as well as through aircraft leases. And as I said, there’s still a good demand mount out there for used widebody aircraft. For sure, lease rates have moved down year-on-year with the movement in interest rates that’s a given as you’ll see that as treasuries of the yields have fallen and so the lease rates. But some aircraft exhibit debt and strong resilience in the face of that, others less. So, but overall as we look out over the coming years, we don’t see anything in the widebody market that’s materially changing how we look at the profitability of the company.
Okay. And then I just have another question. You guys have a lot of aircraft out to Turkish and I know if government, some of it is government backed I guess and I just wonder if you’re concerned about that at all thinking about taking aircraft out of the market and putting it elsewhere?
We are certainly not concerned about Turkish Airlines. We don’t see any credit issues there. Whatsoever, in fact, we like a lot more carriers with that type of financial strength and backing behind them. Unfortunately that’s not the case. What we will see of course in Turkey no doubt is for sure some decline in passenger growth and we’ve seen this before in other markets. And as I said in my prepared comments, we like to see something out of the U.K. also. But I think relatively modest from there but this is nothing new.
As I said most recently, we have Russia, we have Brazil before that we had Mexico, before that we had India. We do see Russia turning the corner for sure at this point. Obviously India and Mexico are two of the best growth markets in the world. So there’s always some part of the world every year just because the size of the world that gets into trouble, but we don’t see anything from Turkey that isn’t what we haven’t seen before in the past in many other jurisdictions.
Okay. Well, thanks Gus, I appreciate your help.
You’re very welcome.
Our next question comes from Gary Liebowitz from Wells Fargo Securities. Please go ahead. Your line is open.
Thanks operator. Just there was no mention of the standing guidance in the presentation. I just want to know just to make sure that you’re still comfortable with your prior earnings target for 2015 as well as the three year earnings growth targets that you talked about before?
Hi, Gary. This is Keith. Yes, so 2016 is very much on track and as you know we have a very large amount of CapEx in the coming years and we are redeploying capital to share repurchase. Both are positive forward trends for the following years that we will discuss that in more detail in our expected upcoming Investor Day in November.
So the 7% to 9% is, how do you characterize that, it’s under review or this as still a good number?
Again we have very positive trends as I said with the CapEx and the redeployment capital and we’ve got to go into the detail in our upcoming Investor Day.
Okay, thanks. Also can you talk about the planes that are the new deliveries that are not placed for 2018, are they concentrated within a particular model type?
I mean Gary, this is a very small number of airplanes for someone of our size. We deliberately always hold back a few machines, two years out, we won’t put everything away, but it’s a very small number of airplanes. Predominantly on the A320neos obviously because of the volume we have that’s where it’s focused, but we have leased over 100 A320neos. There’s a great demand for the product.
Okay, Thanks. One last one for - Pete, you mentioned that there were some unusual items, a onetime items and other income in the quarter, can you tell us what those were and should we expect anything unusual in Q3?
No, Gary. We shouldn’t expect anything unusual in Q3, I mean other income I think we’ve talked about generally that step of a runs around $10 million a quarter now. It was higher in the second quarter of 2015 because we had some one-time items then. So in both 2015 and 2016, we had some one-time items. Those were greater in 2015 and we also have the AeroTurbine was a contributor there. So that’s really the difference year-over-year.
I’m sure, I understand towards AeroTurbine what lost the $11 million in the quarter and you’ve been generated maybe $10 million of management fees and interest income a quarter, just it seems to be about $25 million that can reconcile?
Yes, AeroTurbine results go through a number of different line items, so what goes through other income is there their sales and their inventory, so the margin that they made on their inventory. So that was a positive number in 2015. I saying we’re not recognizing the positive number for that any longer.
Okay, thank you.
Our next question comes from Jamie Baker from JPMorgan. Please go ahead. Your line is open.
Hey, good morning, guys. It’s actually Nish Mani on for Jamie. Can I ask you question about the asset impairment that you guys have booked the $10.5 million charge in the quarter, it was related to three aircraft that you said were sold at a loss. Could you provide any color on the model and vintage types of those three aircraft?
Well, I think Pete mentioned this in his prepared remarks, again this was relating to three aircraft they were part of a 37 aircraft portfolio sale, the sale itself without an overall profit. The loss on these three aircraft really just based on the allocation the purchase price that had input both from ourselves, as well as the buyer. So to be quite frank, the allocation of the purchase price is really not that relevant and so the individual aircraft amounts really are of any particular interest are value if you will.
The only reason it was recorded an impairment is because those aircraft had not yet closed right in the quarter. But because they hadn’t allocated a loss to view quarter’s impairment, so it’s a little bit of accounting requirements, but the make and model I think is relevant.
Okay, that’s fair. And then turning just a big picture question, we’ve see in the past couple of the months, production rates from both the OEMs come down to widebody side. I am just trying to get a sense and take your temperature on that issue, if you guys expect further production costs in the coming months and years, it’s kind of restore what would be your supply and demand balance of the marketplace, or do you think that the actions of Boeing and Airbus year-to-date kind of speak for themselves and that were kind of approached balanced market already?
Well, as I said before in the past, Airbus and Boeing will always ultimately match the supply with the demand, but they always have to overbook. And we said this for many years that you should ignore orders that the OEMs book and look at their deliveries. They have to overbook their deliveries all the time because they’ve no idea three or four years out which part of the world will be in trouble. They just know somewhere will or some airline will be able to take delivery of aircraft.
And I think what we’re seeing now is that the backlog in the widebody airplanes particular the 777s is now coming into line with what I’m sure the OEMs always knew what the real demand, as some people fly their positions into other widebody types. And I suspect that we probably will see further cuts, I don’t see many buyers for the end of line airplanes, it’s always the same. So I think we will continue to see that.
There’s definitely no doubt though that Boeing could sell 777-300ERs, and we and many others would buy them. However, at the price we would purchase a brand new 777-300ER at the end of the line of 2016 or 2017 airplanes. It would mean that we would not buy 777 excess or what other customers of Boeing, and the same applies in the Airbus side. Therefore they would be borrowing from the future and would be an extremely expensive loan for them to take because they would effectively be cannibalizing their future sales of the X just for some near term small amount of profitability on the existing aircraft type.
Yeah, I mean I agree with that. Just kind of the logical follow-on to that would be going into a narrowbody technique, I mean what do you expect in terms of the potential for rolling back some of the production rate increases that people on market have been talking about over the past couple of months?
I’m sure they will, I just don’t know when. They’ve wonderful history of promising great levels of production and then cutting them back. So I would imagine that they will at some point in the future, of course they keep taking orders because they don’t know in 2021, which airline, which part of the world will be in difficulty if they have to overbook all the time. But they will be able to respond to that they always have been. And so as I said while they will produce as many aircraft as the market will take. They will not cannibalizing their own customers by forcing to take aircraft that will put them into bankruptcy because they know automatically happen is that supply will get regulated straight away in an uncontrolled fashions because the airline with the orders that goes into bankruptcy will go away and the order will disappear.
They have always acted as a rational duopoly and control that supply into the market like making sure their customers take as much as they can without pushing them over the edge. And that’s how they control supply in a rational basis versus the irrational situation where they push guys into bankruptcy and then the order book automatically recalibrate.
Okay. That’s great, very helpful color, guys. Thank you so much for that.
Okay, our next question comes from Vincent Caintic from Macquarie. Please go ahead, your line is open.
Great, thanks so much, guys. Have just two questions. First on the market value price of your aircraft, the last time you ran, you had a $55 share market value on your portfolio and just wondering if you’ve recently updated that.
We did another update at the end of March of this year and again the difference is positive, in other words current market values are in excess of our book value. A part of that $15 had run off just through the sales and other activity but a large part of it still remained. We’re going to do another review in September - at the end of September and again hopefully will have information to go through again at the upcoming Investor Day.
Okay, great. And the second question I had, Gus you alluded to some of the rental rates coming down a bit but your funding rate is also improved and I was just wondering how you might expect that to evolve overtime and importantly how your net spread trends over time? Thanks.
And the net spread is extremely robust, so you can have volatility of course in the lease revenue line and for different reasons, it could be in a particular region or aircraft type. But generally what you see is that the net spread the overall yield on the portfolio less the overall cost of our debt is relatively constant and fairly robust and we don’t see that changing over the long-term. It hasn’t changed over the last 10 years, not much really.
Great, that’s all I had, thanks very much, guys.
And next question comes from Rajeev Lalwani from Morgan Stanley. Please go ahead, your line is open.
Gentlemen, thanks for the time. Just the first question, as earlier said 79% earnings guidance or growth rather over the next few years, can you just maybe provide some color as to whether or not you’re seeing upward or downward pressure just to some of those figures I just worried that with the comments you made earlier with that we’re going to take it to that it’s moving down because you didn’t reiterate it? That’s the first one.
You shouldn’t take any of the comments as up or down to quite frank again. We talked about a positive outlook and there would be EPS growth in 2017 and 2018, we still expect the same. Again we know we have a significant amount of CapEx, so the assets we do expect to grow both 2017 and 2018. And I could say we are redeploying the other excess capital for share repurchases. So a lot of moving parts we just want to do a reevaluation of it obviously with other events have happened in the world today, but it’s nothing more than that.
Okay, great. Thanks. And the other question as it relates to the investment grade rating and the progress you’ve made there, what’s going to change us we look forward as it relates to your capital structure and specifically I’m just wondering if you’re going to do anything different with the large cash position you have on the books?
As a - as Pete mentioned and I mean we’re still going to maintain this coverage of 1.2 times sources the uses for the following 12 months or a little bit of an excess position now but we’ll be using some of that cash in the upcoming quarters as Pete mentioned. In terms of our funding approach, we’re going to continue to access the unsecured market continue use to secured market as we have in the past, we will limit again the amount of secured debt to 30% of total assets and look we do expect to now have even more access to the bond market and hopefully we’ll see some more pricing benefit there as well.
Thanks for the time.
Our next question comes from the Kristine Liwag from Bank of America. Please go ahead, your line is open.
Hey, guys, for the unplaced widebody aircraft in 2017 and 2018, and what should regions of the world do you see the most opportunity for these aircraft? And also I understand that each airline is unique but with your conversations with your customers, what are the common themes that are arising as you think about leaving the widebodies that this time?
They are all keen to have, Kristine, I mean we move 52 widebodies in 26 weeks. Now no one in the world has anywhere close to that insights into the widebody market. And so for us to have to move seven airplanes over the next 18 months isn’t a huge task. What we would say is that the widebody market generally follows where the traffic is. Having said that though, you will see quite a bit of it in Europe as well as in obviously in Asia Pacific, but it’s both of those areas a little bit on the 767 side coming out of North America for sure and some A330s. But by and large that would be coming out of Asia and Europe.
Great, and a few of your peers have taken advantage of pop-ups from OEMs, some aircraft deferrals recently, how much of a discount in aircraft prices would you need to see in the market for you to consider these incremental aircraft?
Well, of course we look at our own, we would say well, of course we get offer those slots by the OEM but what we would look at ourselves before we deploy activity of capital is what’s the price of buying our own airplanes, we already have A320neos on order. So if I’m trading at a discount to book, I’m automatically buying them below the already low contracted price I have with the OEMs. So for us to be attractive to a pop-up slot, it would not only have to be cheaper than the current contracted price we have, but it would have to be cheaper such that it would account for the discount to book value that the company is currently trading at.
That’s very helpful. Yeah. And maybe last one for me. Can you discuss the pricing and competitive dynamics on sale leaseback transactions compared to pricing and what you’re getting on your order book placements?
When you look at the yield I guess Kristine, and what you will find it’s a function of several inputs. Just because you order airplanes doesn’t mean that you’re going to be any decent money out of us. If you paid too much for it you’re yield will be low anyway. The key when you’re looking at the order as what that I pay for us in delivering dollars and what rent I’m getting. Now we would say that that is, as a good premium to the stay at least back market today a very healthy premium we would say, that’s a function of what we pay for the aircraft and also the capability of the platform. I’m of course what we pay for the aircraft is also a capability of the platform.
The sale leaseback market at the moment is more competitive, there’s no question about that. Having said that those things can change too, you need to be flexible as we said. There can be very attractive moments in the share leaseback marker to also as we haven’t really down for some people like American Airlines and Latam. So at the moment, we’re certainly getting a better premium out of the order book but that’s not to say it’s always be like that and you have to keep your discipline and it also comes to how you deploy your capital as well. Do you hold an airplane? Do you sell the airplanes? Do you buy back stock and off? You want to look at all these things when you’re spending the shareholders’ money.
Great. Thank you.
Our next question comes from Mike Linenberg from Deutsche Bank. Please go ahead, your line is open.
Yes. Good morning everybody or good afternoon. Yeah, Gus just I want to go back on the sale/leaseback market and we’ve heard on previous calls about how competitive it has become and how guys who plan the states have seen returns, under pressure and I’m just curious if it would feel like given your global platform in a fact that you really are a lot bigger than a lot of other less stores, we sort of the EU as the fleet solutions provider that a lot of the I should say some of the sale/leaseback campaigns that are out there right now or they could be coming down the road or bit more complex to the extent that there may be that barrier to entry their own if you guys who can play in them.
And so on one hand you have people out there disparaging that market, on the other it does seem like that there are real opportunities and so I guess my question is the campaigns that you intend to play and my sense is that the pricing is probably going to be are the returns are going to be a lot better than maybe just a traditional garden variety still least that campaign. I mean can you –just your thoughts on that and maybe that’s how the market has bifurcated, how we should think about it?
Sure. Obviously if you have a big platform complexity is an opportunity, if you don’t it’s a threat, so very few platforms out there are true global platform with real distribution capability and the ability to move large numbers of aircraft quickly. So the regular ways their lease back you know there is looking up one this morning, they put a bid in, we’re pretty confident we won’t win and we are not bothered about us and we put a bid in where we would be happy enough win but there will be another one in a few days’ time no double and we’ll see how that one goes, but you are right, where an airline comes and look we need something else to happen in our fleet, that immediately fettles down the field of very few operators, that’s a fact. And for that extra risk that you are being off to take, you have to get paid for us, you have to price us and you have to look and to use that in the interest of the shareholders et cetera.
And for us you know the target is always at the moment looking at buying our own aircraft via the repurchases, first is buying in the open market.
Okay, thanks for that. And just a second one, where your thoughts and maybe this is more of a board decision but where your thoughts are with respect to a dividend, I mean you are generating a lot of excess cash, is it - you are still too young of a company, how do you think about that at least at the management level?
If the board managing, we are always there thinking about capital distribution and what is the best way to allocate capital in the business. I think it’s a relatively reason phenomenon that we have been able to distribute capital. We have made it clear when we announced the acquisition two years ago that the priority of the business was to deliver, to get back to investment grade. That has been done this year but it’s only a few months ago. And since then - only since then how we’ve been to distribute capital which we done, where that in time, we felt the best use of the shareholders’ capital is to buy out stock as it represented strong value. But it is very recent now as we go forward, we will continue to examine that, but as we see where we are at the moment where the buyback program is and where the price is, it’s - at the moment that is by far the preferred alternative.
Great, very good, thank you.
Our next question comes from Andrew Light from Citigroup. Please go ahead, your line is open.
Hi, good morning. You always cost the debt noised up a little bit with 3.7% that fallen quite significantly I think even 3.95% coupon downturn values already trading at around 3%, do you see any midterm significant opportunities producing refinancing at an average profit down again?
Well, we expected our average cost of debt as we talked about in the Investor Day last year, we expect it will continue to go up a little bit as the ILFC debt rolls off. So if you think about it, since last April for incidence, we have repaid about little over $4 billion of debt and the reported interest rate on that reported cost was under 2%, the 1.7%. We put new debt on an average at about 4%. So just that factor is really that’s what contributed the entire increase.
We’ve seen offset, we’ve seen benefit because we are able to lower our cash interest expense. So because of the - as you mentioned the timing of our spreads and the lower debt cost generally right we’ve been able to mitigate that. But I still think it will probably go up to about 4% then level off.
It should be noted Andrew, as Pete said in his comments that the debt that we replace the ILFC debt is much longer duration debt, that’s obviously 18 months, two year debt that we replace with longer duration debt. So of course you are going to pay more first. And secondly with the upcoming CapEx, we have increased the amount of liquidity the company has and that also came through the higher interest expense.
Right, are you guys see an real time opportunity to capitalize on this yield?
The point is you are seeing us, what we are saying to you that we are taking on a lot more liquidity because of the upcoming CapEx. So implicitly without that you have higher cost of debt and we put in, if we had kept the tender of the debt the same, of course the cost of debt would have gone down further but we wanted to go for longer duration debt instead of short term debt.
Okay. And can I just ask question on AeroTurbine, you are confident that the kind of restructuring and lost has not come to end at least kind of a breakeven situation?
Relating to AeroTurbine, yes, sort of downsizing with AeroTurbine is progressing, actually the balance sheet has been reduced by nearly 50% as of the end of the second quarter. In the second half of this year, we are going to continue to see some of these period losses and some moderate restructuring expense but again nothing significant. And again this will continue until effectively do businesses down to the size that we plan to maintain it going forward, which is hopefully be nearly complete by the end of 2016.
Okay, thank you very much.
Our next question comes from Moshe Orenbuch from Credit Suisse. Please go ahead, your line is open.
Great, thanks. Most of my questions have been asked and answered. But just a follow-up on the net spread, I mean it sounds like if you got extra liquidity on the balance sheet and you’ll be adding higher yielding assets that there should be some improvement in the coming quarters all other things equal that if they’re kind of observation?
Well, what we’ll see on the debt - on the average cost of debt side that will tick-up, so we expect that to go to around 4% and the level off there. Now, we are as we mentioned holding a high amount of liquidity at the moment that will actually come down overtime as we start to take deliveries some of these aircraft. So we are holding the 10 billion that should go down to between 8 and 9 later this year. So we’ll see some benefit of that because right now, the net spread is being affected by the addition cost of holding that.
And of course once we start purchasing this large amount of CapEx that we’ve contracted, obviously the assets portfolio would start to grow again and then of course that spread will increase as well.
And that starts during the third quarter?
Right now we have 31 scheduled aircraft to purchase in the second half of this year, so that should start to increase our portfolio size, yes.
Got it. And just how should we think about the capital return during that period because you’ve been in a period of substantially less investment?
Well that’s for the second half of the year as we said in my prepared comments, we expect to have in excess of $900 million of excess capital for the full year based on the CapEx that we see, based on the contracted sales, based on our net income. We put those three together, that’s what we expect to see for the full year in excess of 900 million.
Our next question comes from Christopher Nolan from FBR & Co. Please go ahead, your line is open.
Hi, thanks for taking my questions. Quick - any - can you give any guidance in terms of the amount of CapEx in the second half of the year please?
Yeah, it’s about 2.3 billion against 31 aircraft. So it’s 2.3 billion of cash Chris and 2.6 billion of the value of aircraft on delivery for the second half.
And then your current share repurchases authorization in September 30th given the rise in CapEx, should we expect that they will not be renewal for the fourth quarter?
No, as we said, we expect to have for the full year in excess of $900 million of capital available. We will look at the position where we are at the expiry of the existing program and we would expect that there will excess capital available.
Alright. Gus, strategically looking at Europe, it accounts for roughly one third of your revenues in 2015, Lufthansa have reported adjusted profits which were down year-over-year because of everything that you mentioned on your prepared comments, how do you see the airlines responding to, is it softness in the Transatlantic traffic or the traffic within Europe and are there cutting capacity, are they cutting price, can you give a little color on that?
Sure. I mean there is a lot of different factors that impact. There are larger carries in Europe or the smaller carries in Europe, some of them very regionalized issues particularly those that are very focused on the Turkish leisure market, they are impacted. No doubt some of the carriers that focus on very price elastic customers in the U.K. will have some impact with the decline in the value of sterling, so they will be localized impacts. I think we will see as usual some deferrals with the OEM, that’s nothing unusual. But I don’t see anything, it’s a very large market obviously which I have to remember there is other parts of Europe that are growth quite quickly as well which are immerging markets, Poland, Romania, Bulgaria et cetera and we are seeing things turn in Russia too.
I was in Moscow a few weeks ago, and for the first time since December of 2014, we are starting to see airlines talk about expansion plans in 2017 as oppose to contraction plans. So there is a lot of puts and takes to us, but overall recently confident about the European market.
And how do you see pricing for leases, one of your competitors mentioned that they are starting to see some price competition in more price sensitive customers, I mean?
I got to meet a customer how is loss in price sensitive. I’d love to meet him. But I can assure you they’re all price sensitive but I mean joking aside is there more price competition now than there has been I think that not particularly, we don’t see any great difference in the level of competition. There’s always competition out there that’s a fact and you have to deal with it and we’ve dealt with it pretty well.
So I don’t see anything unusual there in that regard. It would depend on the aircraft type of course and certain aircraft types if you are niche airplane types. And for sure you will face a lot more competition and there will be a lot more pressure. That competition primarily will come from other aircraft types rather than competitors and if you’re in a niche asset or if you’re moving out with the end of the line, if you’re buying into the line assets you tend to compete with the OEM. And if you’ve got a brand new end of the line airplane the OEM would generally be head-to-head with you all the time because they’ll be desperate to fill up a few slots here and there. So that’s where the only competitor that would be difficult to play against is the OEM, and they’re really they tend to play much harder when they’re trying to sell out the end of our slots.
Okay, thank you for taking my questions.
We’ll now take our final question from Darryl Genovesi from UBS. Please go ahead, your line is open.
Hi, guys, thanks for the time. Keith or Pete, one of your peers last week adjust its escalation assumption it five year CapEx forecast I realize that you only update yours annually rather than quarterly. But would you give us a little more color around what the escalation assumption that you’ve got in your CapEx forecast and whether or not you’re seeing actual pricing come in much different from that on I don’t know whatever historical time period is convenient for you to reference?
Are you referring to the escalation that the OEM charge versus the escalation we charge to customers?
No, no, just the assumption they use in the filing when you come up with the CapEx forecast.
All right, okay. Well, I mean look on that one the escalation moves around is a lot of components to the escalation, you have engine OEM escalation, you have airframe escalation, you have other vendors of escalation. It is into material difference in the context of the numbers we’re talking about.
Okay. And then this is probably a little bit more of an investor question as well like that have been, but just simplistically when you think about the roughly $2.5 billion to $3 billion ramp in the CapEx that you’re going to be incurring here over the next couple of years. I mean should we basically think of that as at what your repurchase or else it’s something like you’re not playing on increasing your debt to equity ratio, I guess there are a couple ways you could fund that right, one is with more faster the fossils and the other is with less share repurchase. So is there - it’s kind of the one way or the other as you look out over the next two three years? Thank you.
Well, of course obviously we’re going to support the contracted CapEx we have in place and we’ll continue to generate excess capital as we talked about the both the 2016 as well as years in 2017 and 2018. So obviously based on where we’re at today, it’s the choices obviously to buy back shares. But obviously we’ll have to see how the markets look in 2017 and 2018 to make a decision then.
I think the key message of the whole company is that you have to always think about capital allocation, what in the best long-term interest of the shareholders. That’s always on our minds is buying airplane the right time from order from manufacturers. Is it buying in the used market, is it buying new and sale leaseback, is it buying our own airplane, it is a paying down debt and also it’s selling airplanes that you currently have to create additional capital or to reduce risk. These are the issues you have to think about all the time in running the business and you can’t be so wedded to one way of doing business.
If you are sooner or later you make the wrong decision to continually evaluate all the options you have to protect the business for the long-term because we know in the long-term, this industry is going to grow structurally, this thing will grow, and grow and grow. And the customer will always need us and we don’t have that many competitors. And as we mentioned in prepared comments, if you look at the history of the business over the last ten years from the office by tenfold EPS of compounded growth rate of 12% per annum, those opportunities are out there gentlemen, but they may not be just in a linear fashion, but they will be there for the patience investor.
With that, I’d like to conclude the call, there the call. Thank you very much for your time and we look forward to seeing you at the next call or in the Investor Day. Thank you very much.
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