Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aircastle Limited (NYSE:AYR)

Deutsche Bank 2nd Annual Aircraft Financing & Leasing Conference

September 5, 2012, 11:30 a.m. ET

Executives

Ron Wainshal – CEO

Analysts

Unidentified Analyst

Unidentified Representative

Ron Wainshal, I think most of you know him as Chief Executive Officer of Aircastle. Aircastle is a public lessor. Ron has a long, illustrious history in the business, including, as you may have gathered, some time in the hat house of [inaudible], so I’m very pleased to have Ron Wainshal here to present today. With that, Ron.

Ron Wainshal

Thanks, Doug. It’s hard to follow Mike, but I’ll give it a shot. I think a lot of you guys know who we are, but I’ll just kind of cover the basics and try to focus on what makes us different. Our portfolio is about 160 aircraft. It’s a large, diversified customer base. As I’ll take you through this briefly, we’ve done a pretty good job servicing this through some interesting times, and the contracted revenue stream is pretty long-term, it’s almost five years.

I think the approach we take is a little different in terms of how we integrate, the extent to which we integrate our capital structure and our investment approach, and we have to do that because we’re a stand-alone leasing company. We don’t have the big [inaudible] standing behind us or a big bank, and that’s been, the financing markets have been one of the most interesting and challenging parts of our business. But with that comes opportunity, particularly for those that have bond market access, and we do, and we also benefit from a good liquidity position. Having said that, we’re taking our time.

There’s things to buy, but we have defined that capital and we want to make sure we’re doing the best with it. So what are we buying and where do we see value, particularly in our own context? We like wide bodies, we actually think that they have a good value. There isn’t the supply side pressure in our view versus the narrow bodies. I’m really worried about that, and we also think that there is residual value pressure down the road from the new technology. Better credits, less competition, relatively speaking, and a better ability to finance. We’re looking at targeting ROEs that are basically in the mid-teens or more, as much as possible, within reason, and we do risk adjust.

Middle-aged aircraft. There’s always been a new car, showroom effect in terms of value, but more so now than ever, and there are very few people playing in this space, particularly as the bank market contracts. I’ll make a few comments about that later. Less competition, good airplanes, good demand, but we’re finding very little competition there. There we’re probably looking at financing aircraft with unencumbered bonds, unsecured bonds, so there’s nobody telling us, I don’t like this airplane or this maintenance is third rate, or [inaudible]. It’s our cash, and when we come into a situation where we’re cash buyers, it’s pretty powerful. We haven’t seen Mike competing with us in most of his deals.

We like the freight market. We’re a leader in this niche. The freight market’s under pressure today, so from a new business perspective, it’s not a situation where I’d take placement risk. In fact, I wouldn’t take placement risk on anything right now, new or used, big or small, passenger or freight. But there are better credits there, and there are good sale lease-back opportunities. Freight market I think will come back, it’s just a matter of time. It’s a little bit more volatile sector, but it’s more cyclically sensitive, but a lot less event risk sensitive, so if there’s, God forbid, a 9/11 or a flu pandemic, the boxes don’t get scared of getting on an airplane like passengers do. So we do think it’s an important part of what we do, and it’s something that sets us apart.

Now what are we doing in terms of acquisitions in this position specifically? So far this year, we’ve continued to focus on where we think we have an edge and where we have a different viewpoint, and in general looking at ROEs that are, as I said before, in the mid-teens or higher. As of June 30, we invested $0.5 billion and we had commitments to invest 200 million more. That was our target at the beginning of the year, so we matched that. We continue to see opportunities, but I think it’s going to be one of those markets where the opportunities will kind of ebb and flow, and we’re patient.

We have no new order stream aircraft left. So everything we’re going to do here is voluntary and only if we really get convinced about it. At the moment, I don’t think it’s a good time to buy new aircraft on spec, for two reasons. Placing the aircraft is more difficult, and rentals are lower, and I think the financing risk has never been higher. And I don’t think there’s any impetus for the manufacturers to give anybody a good deal right now. In terms of what we bought, it’s been basically about half new and half mid-aged or older, and we continue to see kind of that kind of mix in terms of our investment flow. In terms of dispositions, for the same reason, I think it’s a good time to buy, it’s a bad time to sell, particularly if you don’t have new narrow bodies, which we don’t. What we’ve been focusing on this year in terms of our sales efforts has been in exiting classic generation aircraft, because I think they’re basically on the way out, and that’s what we’ve done.

Last year we sold over $400 million, made a lot of money, almost $40 million in gains. I think that phenomenon will be much less this year. So, we have had a strategy of being kind of a mid-market lessor since the outset. And people say, “Gee, how do you place old aircraft? There’s no demand for them.” Well, either we’re really good or we’re magicians or that proposition isn’t true, because throughout the business cycle we’ve had 98 to 99% utilization, and about 14% rental yield. So when you take the two together, that’s pretty powerful. So I’m particularly proud of our servicing track record.

So, one last set of comments, and it’s about capital structure. I think that’s one of the areas where we’re different, particularly for a stand-alone company. We had lower leverage than most of our peers, and we kind of need to. I don’t count on a rich parent to bail me out if there’s a problem. We had decided back in ’09 and ’10 that the bank market was shrinking and wasn’t likely to come back anytime soon, and it was time to get a credit rating. But when you show up and you talk to credit rating agencies and say hey, I’d like to get a nice rating, they’ll say, how many assets do you own outright? And for most equipment finance companies, it’s cheaper to borrow the mortgage, so you have to kind of break the chain. So we did that and we got a rating and we started going out to the bond market, and gradually what we’ve done is we’ve built a pool of unencumbered assets, which is now 40% of our asset base, $2 billion or so. In the context of our capital structure, we’re also very sensitive to refinancing risk and not building any particular walls. That’s been an issue.

So at the moment, we have no debt maturities until 2017, and we’re worried and sensitive to making sure that we don’t build any big maturity walls beyond that. We are a repeat bond issuer. We did our last deal back in April for $800 million, and that’s, each deal has been cheaper and cheaper, so if you look at the numbers at the bottom, you’ll see a couple different things. You’ll see a secured debt portfolio that’s mostly cash flow track securitization debt that we’re rapidly paying down, very low rate for the most part, and you see financing on new rates [inaudible], which is also very, very cheap.

And the other part of it is the unsecured debt. Now it’s important to note that if I had a portfolio deal that was financed in the bank market and had a maturity right now, it’d be very tough, if not impossible, to refinance in the bank market, and I think that’s one of the reasons that [inaudible] went to the terminal B market. I don’t think that market is available for smaller companies. In fact, I think the changes in the bank market will probably mean small leasing companies will not be able to exist in the same way.

So I think we have a competitive advantage, and I think if we’re to continue to travel along the path we have, we’ll see that unsecured cost go down quite a lot. So with that, I’ll pause and open it up to questions.

Question-and-Answer Session

Unidentified Analyst (Doug)

Mike [Inaudible]?

Unidentified Analyst

[Inaudible].

Ron Wainshal – CEO

Both. Yes, our bonds – the last deal that we did was two different maturities, 5 and 8 years and they’re both trading quite a lot lower actually, 75 bits, is that about right?

Unidentified Analyst (Doug)

Other questions? I have a few. We just heard from a lessor with 1,700 airplanes, your portfolio is a bit smaller. What is the minimum kind of economy of scale for a lessor and broadly, conceptually what are the benefits to being bigger and how is that best done if in fact it needs to be done?

Ron Wainshal – CEO

It depends who you ask and – we have a few different constituencies and what you buy. If you’re buying brand new, it’s one thing. If you’re buying old, it’s another thing. But the three major constituencies that I think about are, particularly since we’re a public company, is our shareholders, number one. Number two, our debt financiers and number three, our customers. I think we’ve been critical mass for a long, long time with [inaudible] customers. There’s nobody that won’t take our visit and I think we will have a good reception than most any airline that’s out there. So I think that’s probably reputation, probably size, probably not just size but that you have money.

So that’s probably 50 to 100 aircraft. Of course, if they’re all 737 300s, that’s not the right number. But I’d say 2, 3, $4 billion from the servicing perspective. From a buy-market perspective, I think there’s definitely penalty that you get for being less than 7 or $8 billion so we’re under size in that respect. I don’t agree with it, but that doesn’t matter.

Having said that, I think there are good opportunities to grow, but I think that’s kind of the efficient frontier from the S&P and Moody’s perspective. And they will never tell you that outright in terms of here’s a bright line and I’m sure it’s not a bright line but it’s kind of an area that you kind of hear. And then there’s the equity market and I think that each of the public companies today is undersized. We’re small-to-mid cap lessors and there’s a limitation trading buy. I think that’s one of the things that effects our stock price. So being bigger would be better, I don’t know what is the right size and a lot of people speculate by [inaudible] and how they come and how they’re valued and you know, I don’t have much to add there, but it would certainly be bigger.

Unidentified Analyst

[Inaudible].

Unidentified Analyst (Doug)

There’s a question, for those who couldn’t hear, was concern about the narrow-body market, when will be begin to see a turnaround?

Ron Wainshal – CEO

My view of the market right now I terms of placement is it’s pretty weak across the board. New, old, like I said before, and I think the fundamental promise is business confidence. It was probably the case six months ago, for example, that business confidence in Asia, for example, is higher. It’s been pretty weak in Europe and here. But I think what’s different today versus say six months ago is that that’s – that lack of confidence is broader and airline fleet planners react to how they feel about the world. When you look at our lease roll off, we’ve had the most success placing – doing short-term lease extensions and basically that’s the kicking the can exercise for an airline fleet planner because it costs money to exit an aircraft and nobody wants to make big commitments here on the margin beyond what they’ve already committed.

So I think in the case of narrow-body markets, there’s just more supply. My perspective is that there’s too much of it and that’s a problem that won’t correct itself for many years baring a huge economic recovery.

Unidentified Analyst (Doug)

Over here.

Unidentified Analyst

[Inaudible].

Ron Wainshal – CEO

For those of you who couldn’t hear, the comment was about us existing the classic market and our thoughts about it. One way to measure the viability of an aircraft type is to look at the number of aircraft in that fleet that are parked. The classics have about ¼ of the fleet parked and that’s a huge number. In comparison, the number of NGs, 737 NGs is like 1%, maybe even less. And I haven’t seen much of a recovery in the classic market for a long time, so what happens with any aircraft, particularly as you get downstream, is you have maintenance visits becoming an increasingly big portion of your investment and so with some of our aircrafts, we get to a point where we say, you know, it really doesn’t make sense to reinvest, let’s keep the cash we have, let’s sell this stuff that’s run out and let’s move on. We did that. For example, in August, early-August, we sold our oldest airplane, it was a 1985 737-300, Southwest operated it and flew it – they had very good utilization and that wasn’t going to be anything other than spare parts. And we got out of it breakeven and that was fine. It wasn’t worth getting that back out in terms of releasing.

Unidentified Analyst

[Inaudible].

Ron Wainshal – CEO

Well, let me be clear that the ROEs that are running out are not GAAP, they’re accounting, they’re economic. And there’s a lot of – I think Mike – I walked in on the last part of Mike’s comments and there’s a lot of – a lot of movement and noise in terms of GAAP numbers. I get them two ways. When I look at new wide-bodies, I can finance those directly, they’ll have access specific debt. And it’s just a matter of being disciplined waiting for that situation. Now, a big part of that return for any aircraft is what the residual value is and that’s where the guess work is. I’d say whoever’s telling you they’re making a return of this, that and the other thing is making a big assumption about what that asset is worth at the end of the lease, that’s just the facts of our business. We could be wrong, but in general, we tend to have a more negative view as you can already surmise from our comments about narrow-bodies [inaudible] wide-bodies. In terms of the mid-aged aircraft, we don’t have specific leverage on that, but if you assume that you’re making a 12% return on asset, that’s easy to measure, you still have a residual assumption and you assume 2/3s debt on 6% debt and I’m making a return that’s probably 20%. That’s algebra. I think that’s part of the market that’s underbanked and valued and I think – let me take a step back and make my kind of debt market comments that I alluded to. Maybe [inaudible] your questions, but I think there’s a long-term secular trend where the bank markets that once were so prolific and important long-term financers for our sector will shrink to being short-to-medium term lenders. They’ll be focused on credits rather than assets and they will be much more biased towards funding in their home currency. And that’s not an aircraft comment, that’s a broad comment. But I think it has a big impact in our market and it’s happening.

So the long-term financing market is going to shift to people who naturally do that, to pension funds, insurance companies and the like, and anybody who thinks otherwise, wait a year or two, it’s going to be even worse. That’s why it was so important to get a credit rating, that’s why you’re seeing more people do it and I think the shift is a very long-term one.

Unidentified Analyst (Doug)

Another big change in the financing market is export [inaudible]. I’ve mentioned it a lot in the last day and a half and it’s pretty profound. What’s your view on the new ASU and its impact on the market and the risk for opportunity for Aircastle in particular?

Ron Wainshal – CEO

The new ASU has the effect of more than doubling the upfront guarantee fee. And for those of you who are not familiar with that, the way it works is that if I go get X in the bank or the European equivalence to provide a guarantee on my acquisition, you know, guarantee a loan profile and they get paid a fee up front.

If you’re a BB credit, it’s probably 4 to 5% today, it’s going to be 11, 12, up to 14% next year, beginning January 1. Now, that fee gets paid out front, but you can spread it out over a 12-year financing with product seven-year life. So it’s not that bad, but if you choose to sell that aircraft before 12 years, it’s a lot more expensive. So two things, one is as a leasing company, I value the ability to have portfolio flexibility and I’m much more reluctant to step into something that becomes effectively very expensive financing if I choose to pull the trigger early.

Number two, it makes me a lot less excited about financing new aircraft. Why? In the past, whenever you make a new commitment to buy an airplane delivering several years down the road, you have to establish what the placement will look like, will the rents – what will the lease look like. You may know going in, you might not. But you probably don’t know what the financing is going to be, very few people make commitment too many years in the future. So the lender of last resort was the expert credit agency; if you’re paying a 3% fee, it’s not bad. It’s pretty good in fact. It may be that relatively speaking, that paying 11 or 12% isn’t that bad but boy, I would rather not do that. It’s made me a lot more reluctant to take those incremental risks down the road versus a hear and now deal. I think that’s a – that’s a change – the impact, the fee and the effect on secondary market liquidity and for that matter, the airline buyers fee flexibility is not [inaudible].

Unidentified Analyst (Doug)

You talked a lot about wanting flexibility and the mantra unsecured debt, you also touched in your remarks on you would like to see aircraft ABS transactions, aircraft ABS and flexibility usually don’t go together, but what’s your view of that as a potential financing structure and can you talk a little bit about run off of the two legacy deal?

Ron Wainshal – CEO

I keep hearing at every one of these conferences that actually we’ll be seeing ABS deals. I think an ABS deal, if it happens, probably happens because of the way the rating agencies think about it for a large pool of new narrow-bodies and we’re not interested in those. We’re just not competitive I should say. It’s a risky – you can’t fund without going in, it has to be something you already have in your portfolio so people with a large pool of unencumbered – large pools of new narrow-bodies great, have at it. There’ll be a process and we were, as Doug alluded to, fairly experienced with the ABS market back in the day. The first deal we did took us nine months and that was wrap so it took a lot of issues away from investors, no wraps anymore. The second deal was a repeat deal, it took us five months. Okay, so this is what you’re looking at beset case. I think it’s longer than that and there’s a role for this which I haven’t seen it happen and we probably won’t be the first ones doing it. But as far as our own deals, both of them are a cash flow trap and they’re very different. We have one that’s small that was, thanks to the rating agency set with a ten-year hedge from start so we have effetely a fixed rate of around 5 3/4s and if we were to peel it off today, we’d have a huge breakage fee so we’re managing through that.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aircastle CEO Presents at Deutsche Bank 2nd Annual Aircraft Financing & Leasing Conference (Transcript)
This Transcript
All Transcripts