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Fly Leasing Ltd (NYSE:FLY)

Q1 2012 Earnings Call

May 3, 2012 9:00 am ET

Executives

Matt Dallas – Investor Relations Person

Steven Zissis – Director

Colm Barrington – Chief Executive Officer and Director

Gary Dales – Chief Financial Officer

Analysts

Gary S. Liebowitz – Wells Fargo Advisors LLC

John D. Godyn – Morgan Stanley and Co. LLC

Andrew J. Light – Citigroup Global Markets Ltd.

Glenn David Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Helane R. Becker – Dahlman Rose and Co. LLC

Joe R. Gill – Bloxham

Jon R. Evans – Portfolio Manager, Edmunds White Partners LLC

Operator

Good morning. My name is Wendy and I’ll be your conference operator today. At this time, I would like to welcome everyone to the FLY Leasing Limited First Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

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

Matt Dallas

Thank you and good morning everyone. I am Matt Dallas, the Investor Relations Manager of FLY Leasing and I’d like to welcome everyone to our first quarter 2012 earnings conference call. FLY Leasing, which we will refer to as FLY or the Company throughout this call, issued its first quarter earnings results press release earlier today, which is posted on the Company’s website at www.FLYleasing.com.

Representing the company today, on this call, will be Colm Barrington, our Chief Executive Officer, Gary Dales, our Chief Financial Officer and Steve Zissis, the President and CEO of BBAM, the company that manages and services FLY’s fleet.

I’d like to begin the call today by reading the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to statements regarding the outlook for the Company’s future business and financial performance.

Forward-looking statements are based on current expectations and assumptions of FLY’s management, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to factors that are summarized in the earnings release and are described more fully in the Company’s filings with the SEC. Please refer to these sources for additional information.

FLY expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise.

This call is a property of FLY and cannot be distributed or broadcast in any form without the expressed written consent of the Company. A replay of this call is available for two weeks from today, and an archived webcast of the call will be available, for one year on the Company’s website.

I’d now like to hand the call over to Steve Zissis, the President and CEO of BBAM, to give you his insight and views on the aircraft leasing industry. Steve?

Steven Zissis

Thank you, Matt. And thank you for joining us today. As we progressed into the peak demand season for new and used aircraft, we’re delighted to report the demand remains solid and most of the excess supply thrown into the market from the bankruptcies reported last quarter has now been absorbed, removing a large supply overhang from the market. However, this supply situation, especially for Airbus narrow-bodies resulted in lower lease rates and weaker lease terms.

Lease rates (inaudible) remain firm with only a small change from prior-year re-marketings. But indicative demand suggests that lease rates will remain firm and possibly move up, as expected demand outstrips supply.

As I indicated, leased rates for Airbus narrow-bodies remain weak with rates down some 20% to 30% from prior-year rates. However, these declines are partially offset by lower interest rates. The situation, especially in a competitive global economy, should not last and we expect this market to firm in the next few quarters, provided no additional unexpected supply is thrown into the market.

We continue to see opportunities on the sale leaseback front, although new aircraft sale leasebacks remain actively bid by aggressive capital sources. We see more attractive opportunities in the used and mid-life aircraft markets, where less capital competes and available financing is very limited.

On the wide-body front, we’re starting to see some attractive deals as less capital is willing to compete in this area and mainline credit start a heavy program of new deliveries in 2013. As we reported on our last call, our traditional aviation banks remain active, albeit at a slower pace and with more conservative lending parameters. However, on a more positive note, the US capital markets have finally awakened. And as evidenced by a flurry of deals in the past six months, we expect the capital markets to play a bigger role in financing lessors in 2012.

Given the BBAM size in the history of aviation, we provide a very scalable platform for FLY to grow and capture opportunities, not otherwise, available to smaller leasing companies. We managed 450 aircrafts on lease to 58 airlines around the world with an active management team comprised of 110 people.

I’d now turn the call over to our CEO, Colm Barrington.

Colm Barrington

Thank you, Steve. Good morning, everyone and thank you for joining us on this morning’s call. I would like to address four aspects of FLY’s Q1 quarter activities this morning: our earnings, our cash generation, our financings and our dividend.

You have seen FLY’s positive earnings in this morning’s press release and Gary will take you through these financial results in more detail in a few minutes. However, our positive financial outcome and more significantly our very attractive EPS and adjusted net income per share is substantially a result of the increases in our portfolio size from 60 aircrafts at the beginning of 2001 to a 109 aircraft at the beginning of this year, an 82% increase.

Our earnings have also been positively impacted by $1.9 million of equity earnings from our unconsolidated subsidiaries, principally our 15% interest in BBAM. These earnings alone represent approximately $0.07 per share in the quarter pre-tax. Our investment in BBAM continues to perform very well, and we have received a total of $7 million in cumulative distributions on our $8.8 million investment in 2010. Also having BBAM as our external manager, provides us with resources, expertise and scale, more than commensurate with the size and scale of FLY.

In the quarter, we grew our total cash by $28 million from $380.5 million at December 31 to $408.5 million at March 31. In the same period, our unrestricted cash increased by $77 million to a total of $159 million. The increase in cash was as a result of the cash total from our enlarged portfolio, combined with $53 million of net cash generated by the successful resale of our securitization notes, which we had previously purchased at a significant discount to face value. It should also be noted the increase in cash was after we had funded the equity portion of the two aircraft purchased in the quarter.

The high level of cash held by FLY gives us significant flexibility in the near term, including for the purchase of more aircraft and the deleveraging of our portfolio as we’ve reduced some of our existing credit facilities, which now brings me to our financings. In the March quarter, we extended our existing $600 million facility that was due in November 2012 by a further six years to November 2018. This facility, which we took on with our 49 aircraft portfolio acquisition in October 2011, is on very attractive terms, and we’re particularly pleased of being able to extend it for six more years. This is a very positive outcome.

We had our focus on refinancing our $402 million term facilities that falls due in 2013. We expect that the resulting deleveraging from the refinancing of this facility will have a positive impact on our balance sheets and on our ongoing earnings

Finally, you’ll have noted from this morning’s press release that we have decided to increase our quarterly dividend in respect to the second quarter by 10% from $0.20 per quarter to $0.22. This increase reflects our larger portfolio, which was required without increasing our equity capital base, from our positive earnings in the March quarter, our view of continuing earnings this year and our strong cash position. We expect to declare this increased dividend in respect to the second quarter in early July.

FLY’s strategy is to provide our shareholders with both growth and income. FLY remains committed to growing the company, but also returning capital to shareholders in the form of an attractive dividend. FLY has now declared 18 consecutive quarterly dividends and has paid a dividend every quarter since the IPO in 2007.

Our current annual dividend represents a dividend yield of over 6% based on yesterday’s share price. We believe that next quarter’s increased dividend emphasizes our continuing focus on shareholder value, which has been demonstrated since the company’s formation through our dividends, our share buybacks and our significant growth funded entirely from the internally-generated resources. We remain positive about FLY and its prospects and expect that this would be reflected in our results over the coming months.

I would now hand you over to Gary Dales for deeper dive into the financials.

Gary Dales

Thank you, Colm. We are reporting net income for the quarter of $20.4 million or $0.78 per share. This compares to net income of $2.8 million or $0.10 a share for the first quarter of 2011. First quarter 2012 results includes $15.9 million of end-of-lease revenue. Adjusted net income for the first quarter of 2012 was $26.8 million or $1.04 per share, which compares to $3.7 million or $0.14 per share for the same period in the previous year. The increase is primarily due to the additional aircraft in our portfolio.

Our total revenues for the quarter were $104.5 million and include operating lease revenue of $102.4 million, earnings from our equity investments of $1.9 million and interest and other income of $200,000.

Included in our operating lease revenue is $86.5 million of rental revenue. This represents more than an 80% increase over the same period in the preceding year and institute to the aircraft acquired in the GAAM transaction.

Total expenses of $81.5 million have increased 76% over the same period in the previous year and consist of depreciation expense of $34.2 million, interest expense of $37 million, selling, general and administrative expenses of $9.4 million, and maintenance and other costs of $900,000. The increase in these expenses is primarily due to the increase in the number of aircraft in our portfolio, consistent with the revenue increase.

Included within the first quarter 2012 interest expense, is $4.6 million of non-cash amortization expense, resulting from application of purchase accounting to the debt that was assumed in the GAAM transaction. Excluding share-based compensation, selling, general and administrative expense was 8% of total revenues.

Our provision for income taxes for the first quarter of 2012 was $2.6 million, representing an effective rate of 11.5%. The effective rate for the same period in the previous year was 20.2%.

At March 31, 2012, our assets totaled $3.2 billion, of which $2.8 billion is invested in flight equipment held for operating lease. As Colm mentioned, our total cash balance is $408 million, of which $159 million is unrestricted. In our press release issued this morning, we’re reporting adjusted net income, plus depreciation and amortization, in place of our available cash flow metric.

We believe this measure reflects ongoing cash earnings from which capital investments are made, debt is serviced and dividends paid. We define adjusted net income plus depreciation and amortization as net income plus or minus the ineffective portion of cash flow hedges, aircraft impairment charges, non-cash share based compensation and adjustments related to the GAAM portfolio acquisition comprised of amortization of fair value adjustments recorded in purchase accounting and acquisition transaction expenses.

Depreciation and other amortization and deferred income taxes are also added back. FLY’s definition of adjusted net income, plus depreciation and amortization, may be different than those used by other companies. It should be used as a supplement to and not as a substitute for financial measures determined in accordance with Generally Accepted Accounting Principles.

You may find the reconciliation of both adjusted net income and adjusted net income, plus depreciation and amortization, to net income, the most directly comparable GAAP measure at the end of our press release issue this morning.

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

Colm Barrington

Thanks, Gary. So as you note, we’ve now been inside a very good first quarter as a result of our larger portfolio and the increment cash turn-off by it. We’re very pleased with this positive financial result, and it has allowed us to increase our dividend by 10%. We’re also pleased that the capital markets are showing very positive signs, which should present FLY with greater opportunity adoptions for both refinancings and for financing our growth in 2012 and beyond.

We’re now ready to take your questions. Operator, if you would open up. If you would open up the line for questions.

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions). Your first question comes from the line of Gary Liebowitz.

Gary Liebowitz – Wells Fargo Advisors LLC

Thank you, operator. Gary Liebowitz with Wells Fargo. Can you hear me?

Steven Zissis

Yeah, hi, Gary.

Colm Barrington

Gary, welcome.

Gary Liebowitz – Wells Fargo Advisors LLC

Thank you, good morning. Colm, can you give a little more color on the update to your refinancing plans? And should we be inferring from the dividend and buyback announcements that something might be imminent at favorable terms?

Colm Barrington

Well, as you know, we have our acquisition facility which currently has a balance just over $400 million, and we are required to refinance that starting in early 2013. So with the opening of financial markets, generally, much more liberally, we are feeling quite optimistic about refinancing that facility during the course of the next few months.

Gary Liebowitz – Wells Fargo Advisors LLC

Okay. Also could you, and Steven mentioned the sort of the pressure on A320s. Can you give a sense as to the declines in the lease rates that you’re seeing in the planes that had been with the Kingfisher and Spanair that you’re now looking to place?

Steven Zissis

Gary, its Steve. On the Spanair aircraft, we’ve signed up an LOI. And the lease rate approximately is 20% below the prior lease rate that we had on that aircraft. And on two of the Kingfisher A320s that we have taken back, one aircraft is also signed up to an LOI and expected to deliver in early June, and that is only 5% below. And these numbers that I am calling to you Gary, these are adjusted for our interest rates, so it gives you a like-for-like.

Gary Liebowitz – Wells Fargo Advisors LLC

Okay.

Steven Zissis

So you could see, one was dramatically down, the other one held fairly steady. And I’ve mentioned on my earlier remarks that lease rates, in general, for 320s are down 20% to 30%.

Gary Liebowitz – Wells Fargo Advisors LLC

And then, just one last one, the press release mentioned you’re at a $360 million annual lease run-rate. Does that include or exclude the three planes that were not on lease at the end of March?

Gary Dales.

It excludes those. It’s just current contracted rates.

Gary Liebowitz – Wells Fargo Advisors LLC

So for second quarter, I should be thinking of sort of a baseline of $90 million plus whenever you’re able to return to service.

Gary Dales.

Yes, I think that’s fair.

Gary Liebowitz – Wells Fargo Advisors LLC

Thank you, very much.

Colm Barrington.

Thanks, Gary.

Operator

Your next question comes from the line of John Godyn.

John Godyn – Morgan Stanley & Co. LLC

Hey, guys. Thanks for taking my question. Just a few here. I just want to start out with, I guess, some of the sources of the beat in the quarter though, it just seems like the amortization add-back and some of this end-of-lease revenue kind of played a big role in that. And I was hoping that you could just sort of speak to maybe what some of those factors look like going forward. How long are we going to be adding back this $6 million plus or so in amortization into the numbers?

And in terms of end-of-lease revenue that you got in the quarter, there were some good rationale for that. But I don’t know if you have a sense for what something like that could look like and how that might impact lease revenue in the second quarter? Does all of that come out, or does it kind of step down, because maybe there was something else in there.

Colm Barrington.

Okay. Well, on the amortization, Gary, correct me if I’m wrong, I understand it’s a five year term and it will be declining on an annual basis over that five year period. But it will continue with some of that write-back for the adjusted net income for five years.

Gary Dales.

Colm, you’re absolutely right. And it declines under an interest method, so each period is a little less than the fair period. And I think, it goes out through 2018. And in our 6-K that will be filed in the next week or so, you’ll get a little more flavor of that. I think, we have a table in there that will help you understand exactly how that amortizes.

Colm Barrington.

I think, John, on the end-of-lease income, as our portfolio has grown, I think you’ve seen that being a more recurring part of our income statement. And possibly generally weighted towards the first two quarters of the year where there are more lease renewals than later in the year, generally speaking, not always, but generally speaking. But I think now that we have 110 aircraft, 111 aircraft in the portfolio, we’ll be rolling over 15 of those a year, probably on average, maybe 20 some years. So you will actually see more of this end-of-lease income coming into our financial statements.

John Godyn – Morgan Stanley & Co. LLC

Do you have a sense of what sort of a normalized number looks like for end-of-lease revenue on, I guess, a quarterly or annual basis, just assuming no surprises for delinquencies or anything like that?

Colm Barrington.

Yeah, I think, if you look back over our financial statements for the last few years, you will see that there has been ongoing end-of-lease income. With our portfolio now 80% higher, bigger than is was before, this is obviously going to be a bigger number. As I mentioned earlier, it will be generally weighted towards the first two quarters versus the third and fourth quarter.

John Godyn – Morgan Stanley & Co. LLC

Okay. That’s helpful. And if I could just kind of move to just a couple of questions on dividends. It’s fantastic that you guys raise your dividend. I was just hoping that you could help us think about sort of the dividend philosophy going forward. Are you using some sort of payout ratio? How do you think about future dividend increases?

Colm Barrington.

We don’t have any particular methodology, John. I mean, we look at how the company is doing, what the dividend yield is, what the cash is now, what the cash forecasts are. So we look at this each quarter. And as you see, we have paid a dividend every quarter since the company was formed. We expect and hope that we can continue to do that. And we’ll look at further increases down the road. But we don’t have any firm policy right now that you could actually judge where the dividend’s going to be at.

John Godyn – Morgan Stanley & Co. LLC

Okay. And then in addition to dividend, you have this opportunistic buyback. Could you just give us a sense of you know when executing buybacks, when you guys think about it going forward, how do you weigh the price-to-book discount that the stock is trading at versus what you’re seeing in terms of aircraft acquisition opportunities in the market?

Colm Barrington.

Yeah, I think as we’ve said on some of our individual investor calls and meetings, we don’t see a huge potential for buying back our stock right now. There’s very little liquidity in our stocks. It’s very difficult for us to get our hands on stock. So we will only see limited purchase of our stock, if we see very good opportunities going forward. While our stock is currently trading at a significant discount to net book value, I think net book value carries close to $18 a share now, we don’t see great opportunities for buying the stock because there’s so little liquidity in it. And we’d like to increase that liquidity rather than reduce it by buying in stock frankly.

John Godyn – Morgan Stanley & Co. LLC

Okay, that’s helpful. And just last question here on the financing environment. I know that this question gets asked often, but just an update how has appetite for financing among your European banks evolved recently? Are you seeing any change there, any inflection? Are any of those concerns having a broader impact on the financing market? Just your thoughts there would be helpful. Thanks

Colm Barrington.

I mean, we’ve financed two aircrafts this year to date with bank financing from the European bank markets, is that right, Steve. And we see still appetite, but it is definitely at a lower level than it was a year ago and two years ago. But I think, where we have seen and you’ve seen with ILFC and the other companies, there has been huge capital market financing, debt financing over the last few months. And we see that market continuing for the foreseeable future.

John Godyn – Morgan Stanley & Co. LLC

Okay. Thanks for the time guys.

Colm Barrington.

Thank you, John.

Operator

Your next question comes from the line of Andrew Light.

Andrew Light – Citigroup Global Markets Ltd.

Hi, good morning.

Colm Barrington.

Hi Andrew.

Andrew Light – Citigroup Global Markets Ltd.

I’ve got a couple of questions. First of all, debt maintenance revenue of $15.9 million, to what extent is that boosted by the Spanair and Kingfisher? And to what extent will that probably lead to higher maintenance costs in the next couple of quarters as you bring the planes back into service? Would you expect those kind of (inaudible)?

Colm Barrington.

Yeah, I think, we have enough reserves and security deposits from the aircrafts we’ve had to repossess in the last quarter to cover all our projected costs in relation to those aircrafts. As you know, the way the accounting works is, we would have to capitalize some of that expenditure which would have obviously a higher cost going forward, but some of it will be current expenditure and some of it will be capitalized. But we do have enough reserves and maintenance reserves and security deposits to comfortably cover all of our expected expenditures in those aircraft.

Andrew Light – Citigroup Global Markets Ltd.

Right, so their maintenance cost is likely to be higher than what you’ve reported in the first quarter, in the next couple of quarters?

Colm Barrington.

But spread over, another four, five, six years, depending on the new lease of those aircraft, yeah.

Gary Dales.

That will come through as depreciation. It’s likely we probably will have some maintenance expenses in the upcoming quarter related to the aircraft you mentioned. As you saw, we had about $900,000 of maintenance and other costs. This quarter, the lion’s share of that was related to costs associated with those aircraft, it had to be expensed. Colm was referring to cost we capitalize and that will come through in depreciation over the remaining life of the aircraft.

Andrew Light – Citigroup Global Markets Ltd.

Okay. And the next question, do you have a target for debt leverage, because it’s increased quite considerably following the GAAM acquisition? I guess, this was the debt that you basically assumed on that acquisition.

Colm Barrington.

Yeah, I mean, I think that’s sort of a good and bad news in that Andrew. I mean, the leverage was relatively high because we got the equity at a very significant discount from the original purchase price of those aircraft. So the fact that we did a very good deal on buying the aircraft and then leverage, which we assumed with that acquisition was relatively high. But as I mentioned in my prepared remarks, we would be expecting to do some deleveraging on that portfolio and on our existing previous financings, as we refinance. In that $600 million facility that we’ve renewed, we did some deleveraging in that already. And so, we’d expect to do more of that over time.

Andrew Light – Citigroup Global Markets Ltd.

Does that therefore constrain your ability to buy further aircraft and...

Colm Barrington.

Well, obviously, if you spend money on one thing, it’s going to constrain your ability in the other. But we think we’ve a little bit of cash there to do all the things. And so, we have recently aggressive growth targets for this year. We’d hope that in the course of the year we’d increase our portfolio by give or take 10%.

Andrew Light – Citigroup Global Markets Ltd.

Okay. And just a final question, you’ve had mentioned I think on the last call, the utilization was going to be about 96% in the first quarter. If that’s indeed the case, then what would you expect in the second quarter?

Steven Zissis.

It actually ends up being a little bit higher than that. And that’s just related to the timing of the aircraft that came back.

Andrew Light – Citigroup Global Markets Ltd.

And the second quarter, as you see it?

Steven Zissis.

I don’t know. We haven’t looked at it but, yeah, the aircraft that are being released are going out towards the end of the second quarter. So we will have a few off-lease during part of the second quarter.

Andrew Light – Citigroup Global Markets Ltd.

Okay, great. Thanks very much indeed.

Steven Zissis.

Thanks Andrew.

Operator

Your next question comes from the line of Glenn Engel.

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Good morning. A couple of questions on the financing market. Can you talk about when you borrow money against planes, how the loan-to-value has changed? Where is it now versus where it was maybe a year or two ago? And similarly, just what’s just happened to credit spreads for you?

Colm Barrington.

Steve, you want to talk about that?

Steven Zissis.

Sure. Glenn, its Steve. I think, if you go back two years or maybe a little bit more before the financial crisis started, a typical lender was quite happy with doing 85% loan-to-value. And in the current market place, you’re seeing between 65% and 75% depending on the asset type and the financial terms of the lease. Because you could see it has come down quite a bit. At the same time, obviously, margins have gone up. But the overall interest has probably stayed about the same as interest rates have gone down. So, as I say, you know margins in 2.50% to 3.50% category depending on your credit. And that’s probably up at least a 100 basis points from where was it was prior to the crisis?

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Are you moving towards trying to get a credit rating soon to take advantage of the capital markets?

Colm Barrington.

We’re certainly looking at all possibilities, Glenn, yeah including the potential for credit rating.

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

And can you talk about planes that are coming off lease this year, and when those occur? And do you have people for all those planes coming off lease?

Steven Zissis.

Yeah, let me give you kind of a snapshot of it. We have 23 aircraft that were scheduled to come off lease this year. Of those 23, 11 of them were signed up to either re-marketings or extensions that have already been done. And those are done in the last half of last year. Six additional aircrafts are now signed up to LOIs. We’ve got 17 aircrafts that are now placed. And we basically got six aircrafts remaining. Of those six aircrafts, we’ve got three 319s, one 700, one 800, and one A320.

And of all those aircrafts, we expect to have, and by the way, all those six aircrafts were at the end of year. So we expect to have all those signed up. And as I mentioned in my earlier remarks at the beginning of the call, really the only aircraft that we’re concerned with the A319s. But still a difficult market and there’s quite a bit of supply out there. But the other aircraft are getting pretty good demand.

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

And finally, on the maintenance revenue issue, which of those planes ends up resulting in maintenance revenues? The ones that find a new home, or even the ones that are re-let? How do we view timing maintenance revenues with planes coming off lease?

Gary Dales

It occurs on both aircraft that come off lease, either early or at the scheduled expiry, a go to a new lessee. So if the lease with that lessee terminates and there are maintenance reserves that do not need to be refunded back to the lessee, that results in the fleet’s revenue.

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, so the 11 of the 23, those nothing happens, but the six LOIs and the possible six recurring at the end of the year, those would be ones that’d be subject to potential maintenance revenue numbers?

Gary Dales

Exactly, the ones that would go to new lessee.

Glenn Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thank you very much.

Colm Barrington

Thanks Glenn.

Operator

Your next question comes from the line of Helane Becker.

Helane Becker – Dahlman Rose & Co. LLC

Thanks a lot. Hi guys, thanks for the time. Maybe a question for Steve, on the aircraft side, you are kind of worried about the 319s. Would you be more inclined to sell the aircraft? And maybe you can talk about the market for aircraft sales make more sense than just trying to re-lease them?

Steven Zissis

Helane, generally not, right. These are younger aircrafts. They’re not that old. So they’ve still got quite a bit of life into them. And as I said in my earlier remarks, we do expect that market to recover over the next few quarters. Now, it’s probably not going to recover to the level that we’ll be happy with, but we do expect demand/supply equation to tighten up a bit. So they’re not ideal aircraft to sell at this point.

Helane Becker – Dahlman Rose & Co. LLC

Okay. I mean, I’ve heard that something like A318s, which are also young aircrafts have gone into the breakers. So, I don’t know if it makes sense...

Colm Barrington

Yeah, I think, Helane you do hear some episodical stories about that. But remember there are what? Something like 5,000 of these things out there. So you may hear stories about one or two, but you know there’s still a big population of A320s, A319s, even A318s flying out there quite successfully. So I’d say, you hear one or two stories, but it’s not a trend.

Helane Becker – Dahlman Rose & Co. LLC

Okay, all right, thanks. And then, just one another question. So three aircrafts – so the utilization rate, can you just give me that number? It was just three aircrafts (inaudible)?

Steven Zissis

Yeah, for part or the book, so the resulting number rounds to 99%.

Helane Becker – Dahlman Rose & Co. LLC

Yeah, I was going to say, I sort of thought, it might be around 97%, 98%, but okay, thank you. Well, thanks very much for the time.

Colm Barrington

Thanks, Helane.

Operator

Your next question comes from the line of James Ellman.

Unidentified Analyst

Yes, good morning. Concerns have been building that the Boeing and the ADS have...

Colm Barrington

Sorry, James, we are not hearing you very well. Could you speak up please?

Unidentified Analyst

I’m sorry, can you hear me now?

Colm Barrington

Yes.

Unidentified Analyst

Okay. There have been concerns that are building that Boeing and the ADS have been overbuilding new commercial planes versus likely demand. And that will likely lead to large cancellations in the order book or potentially lower lease rates for mid-life aircraft that you own. Could you comment on your outlook there?

Steven Zissis

Yeah, this is a hotly debated topic within the industry, obviously. It’s something that we keep our eye on. There is no secret that Airbus probably continues to produce at a rate that maybe is not desirable for us lessors. So they keep producing at a rate that is probably above market. But on a flipside, James, the Boeing production has been pretty steady. And it’s a very balanced market. And even to my surprise, the market is doing better than I expected at this point. Now, looking forward, everybody is talking about increasing rates. And I think, it’s a good case given how broad and deep the market is now that those could be supported. But I think everybody looks at it with a bit of a skeptical eye and is cautious about it.

Unidentified Analyst

All right, thank you. And also it seems that the market does not really put any value on FLY’s ownership stake in BBAM. How would you suggest we think about valuing that stake?

Colm Barrington.

Well, I mean, you could multiply the earnings by and the earnings being very good, we’ve said we’ve got $7 million in cash from the investment over the last two years at annualized $3.5 million a year. So you can apply some multiple to that. BBAM has been around for 25 years. It’s a very successful company. It doesn’t have exposures to assets, and doesn’t have debts, and it’s a very stable business. So I think, you could apply roughly a higher multiple to the earnings you see.

Unidentified Analyst

All right. Thank you very much.

Operator

Your next question comes from the line of Joe Gill.

Joe Gill – Bloxham

Good afternoon. I’ve just got two or three questions, please, mainly around aircraft and the airline sector. First in relation to aircraft, could you talk a little bit about the state of the market for A340, Boeing 717 and Boeing 757 equipment, especially in the current environment with high oil prices? And secondly, in relation to the narrow-body Airbus market, you mentioned that the A320 family went back about 20% to 30%. Should we take it that the A319 is even worse than that? And if it is, what sort of extents is the gap between the sort of A320 models?

Thirdly, in relation to this whole issue of used aircraft prices on the Airbus family being weak, does that actually provide more of an investment opportunity for you to buy good quality mid-life aircraft with fairly higher returns plausible from them? And my last question is in relation to the airline industry, generally, given that Cimber Sterling went bankrupt overnight, and we have Spanair and Malev in Q1. From where you’re sitting, how does the overall airline market looks from a risk perspective? Are risks elevated at present compared to normal? Should these three bankruptcies be taken as sort of an aberration? Thank you

Colm Barrington

That’s good long list Joe. Steve you want to start with the A340, 717 and 757?

Steven Zissis

Yeah, well probably the best place to start is the 717s. Those are kind of one-off transactions that are on lease to Qantas long-term, and they’re on our books at essentially scrap value. So it’s really cash throw-off income play for us. It’s not an asset play. And it’s one of those things where you picked up those aircrafts as part of the GAMM portfolio. So, we say, Joe, that we don’t have much, either allocated asset value to it or expect much upside at the re-marketing of those, because they’re really written down at scrap value for us.

On the A340, it’s a similar situation. We don’t expect a lot of remarketing activity out of the A340-300, which is coming up in 2013. And that was also evaluated in that respect when we bought the GAAM portfolio. We do have two A340-600s, which are on long-term lease to Virgin Atlantic. And those go out until 2018, if you will. And those are amortized down to a pretty significant, or pretty low residual.

Colm Barrington

I think it’s down to the engine value, isn’t it Steve?

Steven Zissis

Yeah. So, we don’t see in those aircraft type, we just don’t see we’d have much risk in those assets, and it’s really not an asset that we would go out and allocate individual capital to. But as part of our portfolio acquisition, sometimes you have to include those in the process.

In terms of your questions about A320s and 319s, there’s been a persistent oversupply of 319s and 320s in the marketplace. It was exacerbated by the recent bankruptcies that you had mentioned. Lease rates, especially for 319s, have taken a significant dip in that 20% to 30% category. And there are signs that the market is now starting to react to that dip where airlines think they are relatively cheap and we see a lot of airlines now starting to either add 319s or replace their older MD-80s, if you will, or older equipment with them.

And in fact, you see actually a couple of start-ups looking at 319s because they’re just a cheap alternative to implement a start-up. So the market is reacting to the lower lease rates, which I think is a good sign. The 320 market isn’t as bad as the 319, but it is still off. And I think every lessor you talk to would complain about where lease rates are in the 320. But as I said in my opening remarks, we expect that market to firm a bit, provided there are no more bankruptcies, right. Because as soon as excess supply gets thrown on the marketplace, lease rates tend to have a bias towards the downside and dip fairly quickly until that supply is taken up. And then, Joe, I forgot what were your other questions.

Joe Gill – Bloxham

Just on the airline sector.

Colm Barrington

The Airline industry.

Joe Gill – Bloxham

Yeah.

Steven Zissis

Look, we’re always cautious and we’ve been in the business 25 years. We’ve seen airlines come and go. Obviously, no growth in Europe is not a healthy situation for some of these small airlines that are not adequately capitalized. But hopefully, as the European market consolidates a bit and stabilizes, we’ll see the ends to these airlines going out of business. In the rest of the world, it’s actually fairly healthy. I mean, you see the numbers in the US are very healthy, Russia is the booming market, Southeast Asia is very healthy, Latin American is very strong. And then, this is a global business, so I wouldn’t get fixated just on what’s happening in Europe.

Joe Gill – Bloxham

Thanks very much.

Colm Barrington

(Inaudible) Joe, some airlines in Ireland do quite well...

Joe Gill – Bloxham

One or two.

Steven Zissis

Yeah.

Colm Barrington

Thanks Joe.

Joe Gill – Bloxham

Okay thanks.

Operator

Your next question is a follow-up from John Godyn.

John Godyn – Morgan Stanley & Co. LLC

Hey, Colm, I wanted to follow-up on your comments on growth this year. It’s great to hear you’re kind of putting out that sort of 10% hope for the year. And I was hoping, number one, you could give us sort of a sense of when we would expect you to be active during the year in sort of acquiring aircraft towards that goal. It sounds like, if you are feeling like lease rates are sort of in the process of bottoming, then we might see some activity soon. But maybe I have that wrong. And then, secondly, when we look farther out, I mean, is 10% a general rule of thumb that we should be thinking about over the next two, three, four years?

Colm Barrington

I mean, starting with your second point, I mean that is our general plan at this point in time, to trying and grow the fleet by about 10% per annum. John, it could come though in lumps. We might buy a portfolio and it might be earlier in the year, or it might be later in the year. So it’s very hard to give you much indication, much help to make more projections for this year. But we have bids out in various aircraft and portfolios. And some of these may come home to roost sooner rather than later. But I can’t give you any promises at this stage.

John Godyn – Morgan Stanley & Co. LLC

Okay. And in terms of just.

Colm Barrington

Sorry, on your point about the lease rates, I think, if we look back historically, you’ll find that aircraft value tend to lag lease rate changes by six months to a year. So when lease rates go down, values don’t follow immediately. People like to hold on to the aircraft. So we won’t necessarily be seeing aircraft prices come down the same rate as lease rates for another six months or a year.

John Godyn – Morgan Stanley & Co. LLC

Okay, that’s helpful. And just as we think about you executing on these growth plans for the next few years, to what extend are you trying to manage down average aircraft age? Is there a target for that? How do you think about that?

Colm Barrington

Steve, you want to talk about it?

Steven Zissis.

Obviously, it is not a particular target, but obviously we’re focused on getting the average rate of the portfolio down. We do want to keep the average rates in that eight to kind of five year range if we can. But a lot of it’s going dictated by where we think opportunities are in the marketplace. We are not going to be able to compete with the most competitive capital out there, buying the brand new stuff. And we just know that we see that tax subsidized or kind of capital that is not requiring the mid-teens type of return, and we’re just not going to play in that area for FLY

John Godyn – Morgan Stanley & Co. LLC

Okay. Thanks again, guys.

Steven Zissis.

Yeah.

Operator

Your next question comes from the line of Jon Evans.

Jon Evans – Edmunds White Partners LLC

Hi, Colm. Thanks for your time. I appreciate it. First of all, congratulations on the dividend. We’ve been real critics, and really glad that you and the Board and the Management decided to raise it. That’s awesome.

Colm Barrington

(Inaudible)

Jon Evans – Edmunds White Partners LLC

And great job on the quarter. The question I have for you is this. And you said something that was interesting, but you’ve talked about you’ve done this $25 million that you have announced from the Board, but you’re not really interested in buying the stock. And I understand that you see there is deals out there to grow the fleet and, obviously, the cash that you put off from this fleet is pretty amazing. But, I guess, can you just help us to understand why you’d continue to buy assets when the best assets you have is your stock when it’s trading at significantly below book. Can you just help us to understand that?

Colm Barrington

I think two things, Jon. One is that we need liquidity in the stock. And the more we buy and the less liquidity there is. And secondly, we believe in the long run, the interest of the shareholders are greater if we grow the portfolio sensibly by buying new assets. So, you can’t just high order stock and end up with one share owned by you and me, I’m not sure which, we have to actually grow the portfolio as well if we are to be a progressive a company that will interact new capital and will interact the investors for our present capital.

Jon Evans – Edmunds White Partners LLC

Okay. And then, the other question that I have for you, then, so just to make sure I understand this, this new metric that you’re going to, if I take that and divide by the share count, basically you’re saying that your cash flow or the cash that you earned in the quarter was $2.62. Is that kind of the rough math that we should look at? That’s what the portfolio generated?

Colm Barrington

That is essentially the math that the portfolio generates. And it’s generated not only the portfolio but also our investment in the unconsolidated subsidiaries. And that cash needs to be used to fund the dividend, fund the principle payments on the debt, as well as new investment.

Jon Evans – Edmunds White Partners LLC

Got it. So you’re in $2.62 in the quarter. I mean, obviously, we can’t annualize that. But, I mean, you’re going to pay out now $0.88 in dividends. And so what’s your interest expense? Can you give me that on a per share basis, because the rest is basically cash that’s going into your coffers, right? Or am I missing something?

Gary Dales

I mean, you can see the interest expense on the financial statements.

Colm Barrington

So if it’s $37 million for the quarter, so divide that by 26 odd million shares.

Jon Evans – Edmunds White Partners LLC

Okay.

Colm Barrington

So that’s the interest.

Jon Evans – Edmunds White Partners LLC

So, I guess, the question that I’m really trying to get to is before you made this great acquisition, you guys were paying about 18% of your cash flow out in the dividend. And with this number, I mean, I think it highlights how accretive this acquisition is. And I know you raised your dividend by 10%. And that’s a great baby step. But do you think you’re going to get to that ratio again over time, or do you just see there is so many other places to use the cash? Does that make sense? You see where I’m trying to go at?

Colm Barrington

Yeah, I mean, I think, the $0.20 was somewhat historical. We’ve stuck with that for the last 3.5 years. We’re now trying to grow the company, grow the portfolio, grow the income, grow the cash and grow the dividend. So I hope that we’ll be able to add more to that $0.02 in future quarters.

Jon Evans – Edmunds White Partners LLC

Okay, great. Hey, thanks for your time. Great quarter, I appreciate it.

Colm Barrington

Thanks, Jon.

Steven Zissis

Okay. Thanks, Jon.

Operator

And there are no further questions at this time.

Steven Zissis

Thanks everyone for joining us for the first quarter earnings. We look forward to updating you again soon. Bye now.

Operator

This concludes today’s conference call. You may now disconnect.

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