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FLY Leasing Limited (NYSE:FLY)

Q3 2012 Earnings Call

November 8, 2012 4:30 PM ET

Executives

Matt Dallas - Manager, Investor Relations

Colm Barrington - Chief Executive Officer

Gary Dales - Chief Financial Officer

Steven Zissis - President and Chief Executive Officer, BBAM

Analysts

Helane Becker - Dahlman Rose

Michael Coleman - Wells Fargo

John Evans - Edmunds White Partners

Operator

Good afternoon and welcome to the FLY Leasing Limited third quarter 2012 earnings conference call. (Operator Instructions) At this time, I would now like to turn the show over to Mr. Matt Dallas.

Matt Dallas

Good afternoon, everyone, and thank you for joining us. I am Matt Dallas, the Investor Relations Manager of FLY Leasing and this is our third quarter 2012 earnings conference call. FLY Leasing, which we will refer to as FLY or the company throughout this call, issued its third quarter earnings results press release after the market closed 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 press release and are described more fully in the company's filings with the SEC. Please refer to these sources for additional information. FLY expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views or expectations, or otherwise.

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 conference call is available for two weeks from today. An archived webcast of this call will be available for one year on the company's website.

I will now hand the call over to Steve Zissis, the President and CEO of BBAM, for an update on the aircraft leasing industry.

Steven Zissis

Thank you, Matt, and good afternoon, everyone. In general, the overall supply and demand dynamics in the industry are largely unchanged since the last quarter, when we last discussed the market on the second quarter call. Given that the aircraft leasing industry is still influenced most heavily by activity in the Northern hemisphere, the fall season tends to be a seasonally weaker period than other periods in the calendar year.

As we look forward in the first half of 2013, we are encouraged by what appears to be a relatively normal demand from our airline customers for aircraft and operating lease. We continue to see good demand from emerging economies, particularly Southeast Asia and South America. The U.S. Airlines continue to show discipline in managing capacity, leading to improved profitability, despite concerns about slowing macroeconomic growth in the U.S.

We've had a lot of planned and some unplanned remarketing activity in FLY fleet in 2012, and we've made good progress in recent months in getting the aircraft signed up to new lessees and backend service. We are optimistic about being able to deliver a near fully utilized fleet in the early part of 2013, given a good demand from airlines for spring and summer season of 2013.

Although, lease rates on A320 families remain soft, we are starting to see firming of lease rates, as we move into the first quarter of 2013. This recovery in the A320 family aircraft is being driven by two different segments of demand. First, airlines that operate much older equipment have come to recognize that lease rate being offered in the current market on these types of aircraft, represent a compelling economic opportunity to replace last generation less-fuel efficient aircraft with current generation equipment.

Second, many airlines have focused in the recent history on brand new equipment, recognize that some of the current generation mid-life aircraft represent good relative value, as they think about growing their capacity. Demand for Boeing narrow-body equipment continues to hold up very well, and we see no deterioration in lease rates for these types. Under recent circumstances we see lease rates inching upward, as we work our remarketing projects for 2013.

In terms of fleet growth through aircraft acquisitions, we continue to look for good value in both new aircraft and mid-life aircraft. The new or nearly new equipment, particularly from Boeing, represent in our view a relatively safe corner of the market to deploy capital for predictable returns.

And given some of the supply demand factors, I've just described in the overall market, we continue to see good relative value in mid-life equipment. In many deals, we are seeing in today's market, investment in mid-life equipment represent strong prospects for its active returns with reasonable downside protection from current pricing levels.

Finally, in terms of aircraft sales, we continue to look for opportunities to trade our aircraft, where we see opportunities to harvest attractive gains, generate free cash after debt repayment and to balance our fleet by aircraft type and age. Look for FLY trading activity to continue as we move towards through the balance of 2012 and into 2013.

Now, I'll turn the call over to Colm.

Colm Barrington

Thank you, Steve. Good afternoon, everyone, and thank you all for joining us on today's call. Since our last call in August, FLY has completed two positive financing transactions.

First, on August 9, we closed a $395 million six-year term loan facility, which substantially eliminates our refinancing requirement through 2018. And then yesterday, we finalized a new $250 million five-year warehouse facility, which provides us with the financial ammunition to execute on our growth plan. We put out a press release on this new facility a few hours ago.

The term loan refinanced $549 million of existing debt, including $389 million of our 2007 aircraft acquisition facility, which mature in 2013. As a result, the new facility has taken a major short-term refinancing commitment off the table.

At the end of 2011, following our acquisition of a significant portfolio of aircraft, our financial leverage increased more than 5 to 1. This has now been reduced to 4.2 to 1 at the end of September. Our scheduled amortization will further reduce this ratio, and we are well on our way towards achieving our financial leverage target of less than 3.5 to 1. In connection with the recent refinancing, we terminated to historical interest rate swaps associated with the previous financings.

Going forward, we will benefit from lower base interest rates on our new financing, without the ongoing drag of the cost associated with these historical swaps. Our breaking the swaps has resulted in a significant one-off charge of $32.3 million at the September quarter. We will see benefits in the interest line in our future financial statements.

Yesterday, as mentioned earlier, FLY closed a five year $250 million aircraft acquisition facility. This new facility combines with our own restricted cash of $115 million, gives us considerable fire power to add to our fleet a modern in-demand commercial aircraft over the coming months.

FLY is now well-positioned financially to execute our growth strategy of increasing our portfolio by 10% annually.

FLY's third quarter financial results were adversely impacted compared to the prior quarter by the sale of three aircrafts in the second quarter. In addition, FLY had several aircrafts off leased during the third quarter, with a portfolio utilization of 93%, less end of lease income.

During the quarter, we had eight aircrafts off leased at one or another, of which six aircrafts for non-revenue generation throughout the quarter. These six includes four aircraft that we have repossessed from an Indian Airline, all of which are now in our possession and are in the process of being prepared for new leases, and, two, 1992, B737-500 Classic aircraft that we intent to part out.

We also repossessed two aircraft from Polish Airlines that ceased operations on July 31. We expect that the B737-500 Classics would be sold during the next few months. And the other six aircraft, three would be delivered to new leases in November.

We also acquired two B737-800s in August 27. It will have a positive impact on our income in future quarters. Overall these acquisitions along with our other acquisition earlier this year, and the large portfolio acquisitions we completed late last year we'll continue to have a positive impact on FLY's core earning and EPS. In addition, our 15% interest in BBAM continues to make a very positive contribution.

October 15, FLY declared a quarterly dividend of $0.22 per share in respect to the September quarter. The dividend will be paid on November 20. This dividend is our 20th consecutive quarterly dividend since FLY was listed on the New York Stock Exchange. Our cumulative dividend to date is $5.24.

I will now hand over to Gary Dales who will take you through the financials.

Gary Dales

Thank you, Colm. We are reporting a net loss for the quarter of $29.4 million or $1.15 per share. As Colm mentioned the loss was driven by a $32.4 million charge to terminate 11 interest rates swaps and certain other expenses in connection with refinancing that we completed earlier in the quarter. Net income for the third quarter of 2011 was $3.4 million or $0.13 per share.

For the nine months ended September 30, 2012 our net income was $16.7 million or $0.63 per share, as compared to net income of $10.3 million and $0.39 per share for the same period in the previous year. This represents a more than 60% increase in net income over the same nine months period. The increase is primarily driven by portfolio growth partially offset by non-recurring charges incurred in connection with our third quarter refinancing.

Adjusted net income for the third quarter of 2012 was $5.4 million or $0.21 per share, as compared to $4.3 million or $0.17 per share for the same period in the previous year. For the nine months ended September 30, 2012, adjusted net income was $63.1 million or $2.43 per share. And for the nine-months ended September 30, 2011 adjusted net income was $15.1 million or $0.58 per share.

Our total revenues for the third quarter of 2012 were $86.4 million, and include operating lease revenue of $84.4 million, an earnings from our equity investments of $1.9 million. Revenues for the third quarter of 2012 consisted of $47.4 million of operating lease revenue, earnings from equity investments of $1.3 million and other income of $800,000.

The increase in operating lease revenue is due to our larger portfolio as a result of the aircraft required in the GAAM transaction in the fourth quarter of 2011, as well as six other aircrafts we have acquired over the last 12 months.

Included in third quarter operating lease revenue, is $5.8 million of end of lease revenue, whereas there was none in the third quarter of 2011. For the nine months ended, September 30, 2012, there is a $35.8 million of end of lease revenue, included in the more than $285 of total operating lease revenue.

This compares the only $2.9 million of end of lease revenue for the nine-month period ended 30, 2011. End of lease income is lumpy and difficult to predict. However, our preliminary estimate for the end of lease income, anticipated in the fourth quarter of 2012 is $15 million.

Total expenses for the third quarter were $117.8 million, and include depreciation expense of $34.3 million. Interest expense of $36 million, selling general and administrative expense are $11 .4 million, and maintenance and other expenses of $3.5 million. The increase in these expenses is due to the portfolio growth consistent with the revenue increase.

In addition, during the third quarter, we also incurred additional cost related to the refinancing, which have been expensed as part of selling, general and administrative expenses. These costs totaled approximately $1.6 million during the third quarter of 2012 and $1.9 million through the nine month period ending September 30, 2012.

Included, within third quarter of 2012, interest expense is $4 million of non-cash amortization expense, resulting from application of purchase accounting to the debt that was assumed in connection with the fourth quarter acquisition. For the nine month period ending September 30, 2012, we had non-cash amortization totaled $13 million.

The assumed debt was recorded in the financial statements and less than the face amount, reflecting its then current fair value. This discount is being amortized into interest expense over the life of the debt. Also included in third quarter 2012 interest expense is a write-off of $1.7 million of debt discounts and loan issue cost related to the principal repayments, associated with the three aircraft that were sold last quarter.

Additionally, going forward, we will be amortizing $24 million of fees and original issue discount over the six-year term of the new term loan. During the third quarter of 2012, we incurred $3.5 million of maintenance and other cost. These expenses include the cost associated with the early termination of certain leases and transitioning aircraft to lessees.

For the nine months period ended September 30, 2012, maintenance and other cost totaled $6.1 million compared to $4.1 million for the same period in the previous year. Our provision for income taxes for the third quarter of 2012 was a negative $2 million, representing an effective tax rate of 6.3%. The effective rate for the same period in the previous year was 15.9%.

At September 30, 2012, our assets totaled $3 billion, of which $2.7 billion is invested in flight equipment held for operating lease. Our total cash balance is $281.7 million, of which $115 million is unrestricted. During the third quarter, we refinanced $549 million of debt with a new $395 million term loan, secured by 23 aircrafts, and maturing in 2018. The refinancing addressed all of our remaining 2012 debt maturities as well as amounts due under our aircraft acquisition facility that was maturing in 2013.

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

Colm Barrington

Thank you, Gary. After some people, who have some difficulty phoning in, so I'll just summarize quickly some of the things I've said in my prepared remarks. First of all our quarter was highlighted by the raising two new facilities. A six-year term loan facility of $395 million, which we refinanced all our substantial debt maturities through 2018, and a $250 million five-year aircraft acquisition facility, which along with our $115 million of free cash will give FLY the ammunition to execution on our new aircraft acquisition program.

I also commented on the fact that, during the quarter we had several non-earning aircraft, which had some negative impact on our core earnings. Overall our larger portfolio, which particularly through the aircraft that we acquired late last year is having a very positive impact on our core earnings and our EPS.

And I think I've finished off by highlighting the fact that we just declared another $0.22 dividend, which is our 20th consecutive quarterly dividend, and brings the total dividend paid by FLY, since we launched it in the New York Stock Exchange to $5.24. So in summary then, our larger portfolio, which has nearly doubled in size last year and has been done without raising a new equity capital, this continue to have a very positive impact on our core earnings and on our EPS, and we expect this to continue.

Meanwhile, our recent financing initiatives have achieved three important objectives: first, fulfillment of our near-term refinancing requirement, resulting in no significant future refinancing until 2018; secondly, a significant reduction in our financial leverage, as we target getting this ratio to less than 3.5 to 1 from it's current level 4.2 to 1; and thirdly, closing of a five-year aircraft acquisition facility, that provide us with a capacity to meet our portfolio growth targets.

So I think with those final remarks, we're ready to taking your questions. Operator, if you could read the instructions for asking questions now.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Helane Becker with Dahlman Rose.

Helane Becker - Dahlman Rose

Here is couple of my questions, number one, I was wondering if you could comment on the overall market and what you're seeing in Europe. I know Hello of Switzerland recently filed, and I just wondered if there was any exposure there or if you could just comment generally on the market that you're seeing there?

Steven Zissis

With your particular comment about Europe, we would say that in general it's pretty much flat. And maybe even a few of those part of things is negative, but we don't see airlines really adding much. We did have one aircraft at Hello that we're in the process of taking back. But the general kind of atmosphere in Europe is pretty much flat.

In other parts of the world, we're much positive. We see modest growth in Asia, Latin America, Russia, and we see pretty much normal demand curve, if you will for aircraft in the first quarter of 2013. So obviously on balance, we're fairly positive.

Helane Becker - Dahlman Rose

And then can you say, how many aircraft that you have available or will becoming available in 2013 or if not in the full year, maybe, just the first half of the year that you'll be remarketing?

Gary Dales

Maybe, this would be helpful, plus I'll recap this for everybody. For 2012, we had 22 schedules redeliveries which are all have been placed. We had eight unscheduled redeliveries which are bankruptcies or early termination of leases, because of the financial problems of some of the clients. We had eight aircraft there. Of those eight aircraft, three have signed up to LOI's and another two are scheduled for placement in the fourth quarter. So we do have approximately four aircraft that we're still moving in the marketplace.

Helane Becker - Dahlman Rose

And then I've heard someone said two are being parted out?

Gary Dales

Yes, those are the Classics, Helane, it's for the two 1990s 737-500s which we've decided to part out, and those will be parted out in the next month. Those are that we had, I think three Classics in the total portfolio. Those two that we parted out, we have one left, it's on a longer term lease. And so as you know our FLY portfolio does not have a Classic exposure.

Helane Becker - Dahlman Rose

And then one is schedule for 2013, did you say that?

Gary Dales

So 2013, I'll give you just a summary there. We have 18 aircrafts coming off scheduled leases, eight of those aircraft have already singed up for extensions or remarketing, ten of the aircraft are in the marketplace currently for remarketing. Of those ten, six during the first half, four on the second half. And I'll give you little bit more breakdown of ten, three of them are going to be sold, and we expect two of those ten to be extended and then the other five, straight will be called remarketing to new customers.

Helane Becker - Dahlman Rose

Did you say how the lease rates are looking right now in terms of what you're seeing? Can you just talk a little bit about the A320 market, you're seeing some stabilization or so on what you're seeing in the rate environment?

Colm Barrington

I mean it's only the opening statement, but maybe just to give you a little continuity here because each time we get on these quarterly calls, it sounds like there is the same question over. So I'm trying to give people who are kind of more of a description what's happening in the market over the last 12 months.

So we have continually seen lease rates on the Airbus never bought it down and need to deteriorate. And we've seen that for the last 12 to 18 months. In the last call, we did indicate that we brought and we've sort of hit the bottom, and things were starting to firm up. We continue to believe that. We think that lease rates on 320s and 319s in particular have now hit the bottom and starting to a slight uptick.

As a demand seems to be firming as airlines see this mid-light aircraft needs, what we call depressed lease rates as very attractive opportunities. On the other hand, the NGs which are 737-800 and the 737-700, we actually see no softness in those markets. And things are ticking along quite well, as they were 12 months ago. So I think we're fairly positive on the NGs.

Operator

And your next question comes from the line of Michael Coleman with Wells Fargo.

Michael Coleman - Wells Fargo

Could you tell us along the similar lines of Helane's question, where do you see utilization levels in Q4? And if you think, we might get closer to 100% going into Q1 of 2013?

Gary Dales

I think I made at the opening remarks, we expect in the first quarter of 2013, pretty much on the 100% utilization of the fleet. As Colm had indicated, right now we're about 93% utilization with four aircrafts that are basically parked in, where looking for homes right now.

Michael Coleman - Wells Fargo

Are the Kingfisher aircrafts also a part of that?

Gary Dales

Yes, they are. Those aircrafts are now back and fully in our possession. We have four of those aircraft. One aircraft was signed up to an LOI, expects to deliver in about 20 days. And the other three are prepared actively in the market.

Michael Coleman - Wells Fargo

And if I can also ask about the credit facility you announced today, has that thing taken out for a specific portfolio or series of transactions that you focused on, or is it for general purposes going forward?

Colm Barrington

It's the general purposes Michael. And it is for basically newer and older aircraft, but it's for general acquisitions purposes at a two year revolving facility with a three year term at the end of this.

Michael Coleman - Wells Fargo

And if you could also just quickly comment on the sale lease back market, right now?

Gary Dales

On the sale lease back market, we still think there is some attractive opportunities there. As you know we are fairly active in that market looking for deals. And we expect to originate some opportunities there in the next 12 months.

Operator

And your next question comes from the line of John Evans with Edmunds White Partners.

John Evans - Edmunds White Partners

You have to get to the 3.5 leverage, before you will pull the trigger on the acquisition, since you have 4.2 now and you stated those 3.5, so you have to be there or below before you lever back up or could we walk in and you make it sometimes later this year?

Colm Barrington

We're not in any huge rush, John, to get to the 3.5. We will work there on a planned basis, as we pay down principal on some of our existing facilities as it's required under the term of those facilities. But for example, we have plenty of cash to add to the $250 million of new credit to fund our acquisition program. But that will not actually have a significant impact on our leverage.

John Evans - Edmunds White Partners

And then the other question I would have for you is relative and maybe I missed this, did you say that you're going sell three planes, and if I heard you correctly do you assume that you will get above the book value that you have on the balance sheet?

Colm Barrington

You're talking about 2013 now.

John Evans - Edmunds White Partners

Sure, because I believe you said that you're going to sell three planes, correct?

Gary Dales

Correct. We have three aircraft that we're targeting to sell. We haven't signed anything up yet on those for 2013, but we're targeting to sell those rather than to remarket them for a lease. And obviously, we always expect to get more than upward price.

John Evans - Edmunds White Partners

And then the last question I'd have for you Colm, obviously we've been shareholders for long time. You raised the dividend. It's near and dear to our hearts. I'm just curious your guy's thought process on when potentially you'll look to raise the dividend again if you continue to grow. Is it after it's been a year from the existing raise or is it when you get to the 3.5 or what's kind of the mechanism for you and the board to discuss?

Colm Barrington

I think we look at it all the time. John in relation to the capital needs of for the company. And plus the share prices, trading asset returns, and competitive competition, the whole bunch of factor. We raised it after the first quarter of this year, though we certainly probably wouldn't be thinking about till sometime into next year at the earliest.

John Evans - Edmunds White Partners

And then on the IRRs of acquisitions in the market, because rates are so low right now, and the sale lease back market is so strong. Are you finding IRRs are coming down on potential acquisitions or they still kind of in the area that you talked about in the past.

Colm Barrington

I think John its bit like asking how long the pieces string. The last two aircraft we bought we got them under very favorable term and we have very, very high decent IRRs on those. But generally if we're looking to lease back market, we're looking in the mid-teens as usual.

Operator

And there are no further questions at this time.

Colm Barrington

Thank you everyone for joining us. We look forward to updating you again next quarter. Bye now.

Operator

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

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