Fly Leasing Limited (FLY) CEO Colm Barrington on Q4 2017 Results - Earnings Call Transcript

Fly Leasing Limited (NYSE:FLY) Q4 2017 Earnings Conference Call March 8, 2018 9:00 AM ET

Executives

Colm Barrington - Chief Executive Officer

Julie Ruehl - Chief Financial Officer

Steve Zissis - President, Chief Executive Officer of BBAM

Matt Dallas - Investor Relations Manager

Analysts

Gary Liebowitz - Wells Fargo Securities

Catherine O’Brien - Deutsche Bank

Scott Valentin - Compass Point

Helane Becker - Cowen

Nish Mani - J.P. Morgan

Jason Arnold - RBC Capital Markets

Gary Liebowitz - Wells Fargo Securities

Operator

Good day ladies and gentlemen and welcome to the FLY Leasing, Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Matt Dallas. You may begin.

Matt Dallas

Thank you and good morning. I am Matt Dallas, the Investor Relations Manager of FLY Leasing and I’d like to welcome everyone to our fourth quarter 2017 earnings conference call.

FLY Leasing, which we will refer to as FLY or The Company issued its fourth quarter earnings results press release earlier today which is posted on the company’s website at flyleasing.com. We have a slide presentation that accompanies today’s call, which is available to participants on the webcast. If you are not accessing the webcast, you can find a copy of today’s presentation in the Investor Relations section of our website on the Presentation’s page. If you are listening to both the live call and the webcast, you may want to mute your computer as there will be a slight delay in the webcast audio.

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

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to statements regarding the outlook for the company’s future business and financial performance.

Forward-looking statements are based on current expectation and assumption 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. An archived webcast of this call will be available for one year on the company’s website.

And with that, I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

Steve Zissis

Thank you, Matt and welcome to FLY’s fourth quarter earning call. As many of you know, last week we signed a definitive agreement with AirAsia for the acquisition of a large portfolio of aircrafts and engines. We are very excited about this deal, which we view as a landmark transformative transaction for FLY. Under this deal FLY has agreed to acquire portfolio 55 Airbus narrowbody aircraft and seven engines on lease to the AirAsia Group airlines.

This includes 34 A320ceo’s that will close in the second and third quarters of this year, and the sale lease back of 21 A320neo family aircraft that will start delivering in 2019. In addition, FLY has options to acquire 20 brand new A320neo family aircrafts which will start delivering in 2019.

It goes without saying that we are really excited to be in business with AirAsia, which is the largest low cost carrier in Asia. The AirAsia Group consists of five separate airlines operating in Malaysia, Thailand, Indonesia, India and the Philippians. We are excited to have AirAsia as a significant shareholder in FLY and to partner with them as they continue to grow.

I believe this deal is transformative in three ways. First, was day one impact on our growth and scale; second, we have committed three year sale lease back program of new technology aircrafts starting in 2019; and third, FLY has the option to acquire additional and new technology aircrafts without having any upfront or pre-delivery payments or an obligation to take delivery of an aircraft in a bad market.

You’ve heard me in the past talk about being prudent and patient with our capital to source opportunistic acquisitions. This deal was optimal for us to pursue. This is the first times in FLYs history that the company has had a pipeline of new aircraft acquisitions identified this far in advance and it is a significant growth pipeline.

In total, FLY has committed in potential investments of more than $3 billion for the next seven years. In addition, the options for the new neo delivers do not require any PDPs, which is a unique and very attractive attribute of the deal. It is at FLYs sole discretion whether it chooses to exercise these options. Should we decide that these options are no longer attractive, then FLY has no obligation to take delivery of the aircraft.

Colm will give you future details on the impact of this deal on FLYs financial outlook. But I would like to take a minute to highlight BBAMs role and long term partnership with FLY.

BBAM has managed FLYs fleet since its inception in 2007, including sourcing attractive aircraft acquisition opportunities and other marketing activities. BBAM has made this portfolio acquisition with AirAsia possible by tapping into its other managed capital pools, including NBB and Incline Aviation. This transaction is an $8 billion investment in total and therefore FLY on its own would not have had the financial capacity to consider this deal. This is why it is a unique growth opportunity for FLY and one that was possible due to its partnership with BBAM.

The interest of BBAMs managements are also strongly aligned with FLYs shareholders. BBAMs management team has grown its economic interest in the company over time, often acquiring more shares, on those occasions when FLY has undertaken strategic initiatives in the business. This time there is no exception. The management team together with Onex [ph] has agreed to invest $20 million in FLYs shares at a significant premium to the current stock price. Following this investment and the close of the AirAsia transaction, our ownership stake in FLY will increase to 17%.

Finally before I pass the call over to Colm, let me touch quickly on the overall industry fundamentals. In short, industry conditions are very good, with all the key drivers we have discussed on previous calls remaining intact. Most importantly, passenger demand continues to grow at levels well in excess of the already positive long term levels.

Global passenger traffic was up 7.6% in 2017 with growth in certain key developing markets well above this level. Looking forward to 2018, IATA is projecting an overall record level of global airline profitability and for the recent trends in passenger traffic growth to continue.

I can also confirm experiences with our over 200 airline relationships validate these headlines as airlines are growing their fleets, adding new routes and experiencing very healthy load factors. There is strong demand from our airline clients for additional aircraft and the lease rate environment for remarketing activity is very good.

The story on the financing side of our business is also positive. Aircraft lessors have become frequent issuers in the capital markets with almost weekly issuances from the industries players across the unsecured, the ABS and term loan markets. It is also fair to say that more global banks than ever before are keen to lend into the sector in the private loan market, and what continues to be very friendly markets for lessors who are seeking secured bank debt to fund their business. FLY is talking advantage of these positive financing conditions across all these markets.

Now, let me turn the call over to Colm Barrington, FLYs CEO.

Colm Barrington

Thank you, Steve. And good morning everyone and thank you all for joining us on our fourth quarter, full year 2017 earnings call. As you can see the slide up in front of you, we have continued to increase our operating lease for rental revenue at FLY as our aircraft acquisition program has began to generate additional revenues and co-leasing earnings. In the fourth quarter operating lease rental revenue was 7.6% higher than in quarter fourth 2016, but for 2017 as a whole it was 7.4% above the prior year.

Our adjusted ROE for the year was a satisfactory 11.7%. As FLY builds its portfolio with more attractive aircrafts we expect that we will continue to achieve double digit ROEs.

Our net income for the quarter was negatively impacted by a $21 million charge we took primarily in respect to the early repayment of $375 million of unsecure debt. We have partly refinanced that debt for $300 million in new less expensive notes and are satisfied with this charge as a good investment and that the replacement financing will reduce FLYs annual interest cost considerably.

Our improved adjusted earnings per share in quarter four was a product for our increased rental revenues which contributed to improved earnings from our core operations and our share repurchase program under which we repurchased a total of $4.3 million shares in 2017, which was 13% of our outstanding shares at the start of the year.

FLY continues to drive higher ROE and EPS. As you know we have been pursuing an active campaign of selling older and less profitable aircraft. We have largely completed this program over the last three years, selling 72 aircrafts with an average of just over 13 years. As a result at year end 2017 FLYs fleet had an average age of 6.4 years which was the second youngest fleet of the U.S. listed public lessors.

We also focused on reducing SG&A, including management fees payable to BBAM. In 2017 adjusted SG&A was reduced by 7% and compares well to the other U.S. listed lessors.

We’ve also worked on reducing our borrowing costs, which has produced a 23 basis point reduction in our overall debt cost in 2017 as compared to the previous year. We’ve also increased our debt term which now averages 6.5 years, which is similar to our average lease term. We will strive for further interest rate reductions in 2018.

We continue to seek out attractive acquisitions to add to and enhance FLYs portfolio. This patient strategy has lead to the transaction with the AirAsia Group which we announced last week and which Steve mentioned earlier. We are truly excited about this deal involving up to 75 more aircrafts with a positive impact that will have on FLYs future.

But first let me discussion in more detail the progress you have made to our growth our EPS and ROE. To underpin our current operations and provide for future growth, we’ve been active in optimizing FLYs capital structure. In October 2017 FLY issued $300 million or 5.25% 2024 notes to discharge its 6.75% notes due in 2020.

So in addition to stretching out our debt maturity profile, this activity reduced FLYs annual cash interest cost by approximately $10 million, of which approximately $5 million comes from the coupon reduction and approximately $5 million comes from repaying $75 million of this relatively high cost debt. The debt extinguishment cost incurred in the fourth quarter with respect to this early repayment will be well rewarded by the ongoing positive impact on FLYs bottom line.

In 2017 also FLY again re-priced its largest debt facility, a $431 million Term Loan B. We reduced this margin on this facility by 75 basis points and as a constance reduced our annual interest cost by over $3 million. The margin on this facility is now amongst the lowest of any debt facility in our industry.

In late 2017 FLY also arranged a new $323 million eight year secured facility priced at LIBOR plus 1.65%. This reflects how well FLY proceeds in the debt markets. I believe these terms make this one of the leasing industries most competitive secured facilities.

Also in 2017 we acquired 10 aircrafts for $456 million. On the number of dollar volume of the acquisitions was less than what we would have liked, we are satisfied with the quality investments which have an average age of 2 years and the lease is attached to the aircraft which have remaining terms of 10 years. The aircrafts acquired include two Boeing 737 MAX 8 which were our first purchases of the latest generation narrowbody aircraft that will be supplemented by more latest technology aircraft over the coming years as more of these types enter airline service.

As you know we’ve stated disciplined in patient investor, husbanding our capital which has ultimately awarded us as we have the dry powder to invest in the attractive AirAsia transactions.

The 10 aircrafts acquired in 2017 will generate $49 million of annual rental revenue, equivalent to a 0.9% monthly lease rate factor. They will make $16 million contribution to FLYs core pretax leasing income and will produce a 12% ROE. Our measured approach to acquisitions continuing to grow rental revenue, an increase of 12.2% between quarters one and four and is contributing to core net income.

Now, let me give you some information on the transaction of the AirAsia Group which Steve explained earlier, and which was the most exciting development at FLY for several years. The transaction will be completed in three stages. The first stage involves the purchase for $1.1 billion or 34 current generation A320-200 Aircraft with an average age of 6.6 years and that are on lease to five separate AirAsia Group airlines in five countries. These leases average 6.2 years. This stage of the transaction also includes a purchase of seven CFM 56 engines. The acquisitions of the aircraft are expected to close in the second and third quarters of 2018 following AirAsia’s Group receipt of shareholder approval.

The second stage of the transaction involves agreement with AirAsia Group for FLY to acquire 21 new A230neo family aircraft, equipped with CFM lease engines, and to lease them to our Asia Group airlines on 12 year terms. These aircrafts will be delivered from Airbus starting next year with the last year aircraft coming in 2021. We are really excited that FLY now has a steam of newest technology narrowbody aircrafts delivering to us and that these aircrafts are all committed on long term leases.

This is important to note that FLY has not deviated from its policy of not making speculative orders for new aircrafts, but we don’t know the lease terms. It is also worth noting that these acquisitions do not require FLY to make any predelivery payments, thus enhancing the overall return and preserving our cash.

The third stage of the transaction provides FLY with exciting future potential and that we have acquired the option, but not for commitment to acquire up to 20 more A320noe family aircraft from AirAsia’s original orders from Airbus, the deliveries starting in 2019.

We are very excited about our partnership with AirAsia, which is possible that some of the option aircraft could go to support AirAsia Group airlines as they continue to grow. However the agreement will provide BBAM on behalf of FLY that clear marks in runway to find lessees for these aircraft, these very attractive latest generation aircraft if AirAsia dose not need them. Once again FLY has demonstrated its conservative acquisition strategy by providing the company with this really exciting growth opportunity.

So what does all this mean for FLY? Well, with the committed growth from stages one and two or the AirAsia deal, we expect our annual operating lease rental revenues to grow to over $450 million. We expect that this revenue growth combined with all the other good things that we have done at FLY, will be reflected in significantly increased net income and EPS. We are projecting a run rate EPS of over $2.50.

Meanwhile FLY has adequate financial resources, cash, equity and debt to compete the acquisitions. We will however be exploring some aircraft sale opportunities to reduce our exposure to AirAsia Group airlines and also to reduce FLYs leverage. Our view is that there will be a strong demand from other lessors for aircraft unleased to AirAsia Group airlines and indeed we have already had several expressions of interest from the market.

The initial 34 aircrafts would be debt financed with approximately $580 million of commission state for financing and $90 million from FLYs existing acquisition facility. The balance will be funded with cash and equity, including the $50 million of FLYs shares that AirAsia will receive in part payment for the aircraft, and making AirAsia group one of FLYs most significant shareholders. As previously announced, BBAM shareholders will also subscribe for further $1.3 billion shares at $15 per share and provide the company with $20 million of additional equity capital.

So with that summary of the AirAsia deal I will hand you over to our CFO, Julie Ruehl who will take you through our financial review including quarter one 2018 guidance. July.

Julie Ruehl

Thank you, Colm. We are reporting a net income of $7.2 million or $0.25 per share for the fourth quarter of 2017. The operating results for the quarter include a $20.8 million loss on debt extinguishment, primarily related to the discharge of FLYs 6.75% senior notes due 2020 which was included in our guidance for Q4. In the year ago quarter FLY incurred a net loss of $63.8 million, primarily driven by a $92 million impairment charge. There were no impairment changes in Q4, 2017.

Our adjusted net income in Q4 was $30.9 million, a slight increase from $30.6 million in the prior year quarter. On a per share basis, adjusted net income was 109 per share in Q4 2017 versus $0.95 per share in Q4 2016, reflecting a positive impact of our share repurchase program. Our operating lease rental revenues in the fourth quarter increased nearly 8% to $89 million due to the growth of the fleet to 85 aircrafts at year end.

In Q4 2017 FLY recorded $16.6 million of end of lease income, which is solely related to the two aircrafts which has been leased to Air Berlin that will return to FLY in Q4. You will recall we took an impairment charge on one of these aircrafts in Q3. In Q4 we solid one aircraft that was subject to a lucky purchase option for a gain of $3.9 million as compared to $17.5 million of gains in Q4 2016.

Now let me cover a few items of guidance. Our guidance for Q1 does not include any impact from the AirAsia portfolio acquisition as we expect the acquisitions to close in Q2 and Q3 as Colm mentioned. For the first quarter of 2018, we expect operating lease rental revenue of $87 million to $88 million. We expect amortization of lease incentives of $2 million to $3 million. We expect no end of lease income. Depreciation expense will be between $34 million and $35 million.

We expect interest expense of $32 million to $33 million. Maintenance and other costs will be approximately $1 million. We expect SG&A expense of $7 million to $8 million without consideration of any foreign exchange gains or losses that may occur.

Before I turn the call back to Colm, I want to call your attention to the appendices where we have our cap table and a reconciliation of adjusted net income and adjusted SG&A.

With that, I’ll turn it back to Colm for his closing remarks.

Colm Barrington

Thank you, July. So as you will see from our presentation today, FLY has made huge progress over the last month, increasing our portfolio and reducing our cost base. We are particularly excited about our significant new transaction with the AirAsia Group that locks in FLYs future growth prospects and gives us access to 41 of the newest generation A230neo family aircraft. The combination of these initiatives provides FLY with the basis to achieve double digit ROE and EPS of more than 250 per share.

With that we are ready to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Gary Liebowitz of Wells Fargo Securities. Your line is open.

Gary Liebowitz

Thanks operator. Hi guys.

Colm Barrington

Hi Gary.

Gary Liebowitz

Steve, can you talk a little bit more about some of the inbound interest you are getting from would be buyers of some of these aircrafts? Are they showing more interest in the younger planes, the older planes and then also if could remind us when do you have interest in someone wanting to buying the plans, how that allocation is made between FLYs and Incline. Thank you?

Steve Zissis

Yeah, thanks Gary. Look it’s still early days, but we have been receiving reverse enquiries based on the Press Release about the possibility of other lessors taking some of this investment that we are taking down from AirAsia.

As you know, the lessor community really doesn’t have much exposure to the AirAsia Group, because they primarily finance most of their aircrafts with debt and through this leasing company that they set up. So there is what we consider some pent-up demand for the name in the marketplace and we are seeing pretty much across board for the midlife and younger stuff having good interest in the aircraft.

In terms of allocating the sales, probably in the early days we will just go on an equal basis, 50/50 between both Incline and FLY, but as each of those portfolios develop and they have different strategies you may see us deviate from that.

Gary Liebowitz

Okay great. And then separately you are accounts receivable picked up a little bit from the end of September. Is that related to the HNA affiliated airline leases that you have and where does that stand?

Julie Ruehl

Yeah, this is Julie. That is largely related to three aircrafts we had on lease to AirAsia Group airlines and we have seen some collection since then and they are still paying late, but that has come down since December 31.

Gary Liebowitz

You say it’s the same roughly one month sort of delay that other lessors have been talking about?

Julie Ruehl

Yeah, that’s right.

Steve Zissis

Give or take, yeah.

Gary Liebowitz

Okay, I’ll get back in the queue. Thank you.

Colm Barrington

Thanks Gary.

Operator

Our next question comes from Catherine O’Brien of Deutsche Bank. Your line is open.

Catherine O’Brien

Good morning everyone. So on last week’s call on the AirAsia portfolio acquisition you mentioned that we could assume that portfolio had a mid-teens ROE that’s above your 12% target historically. Can you talk about how the ROE on this portfolio compared to other sale lease back deals you have been seeing in the market? I’m assuming a bit higher, but I just want to hear what you guys have to say.

Steve Zissis

Well, I think in general they are really not comparable, right because we are looking at if you will an $8 billion investment across a large number of aircraft that deliver over time. So it’s very hard to benchmark a near term sale lease back transaction with this overall transaction, but I think it’s safe to say that we were satisfied at the end of the day that we were getting the right discount for doing the bold transaction with the concentrated credit exposure.

Catherine O’Brien

Understood. And then just I think based on current comments again on last week’s call that this initial portion of the deal is going to drive $2.50 annual EPS. I think you said if you have not done this deal run rate EPS would have been something shy of $2 per annum. So how should we think about the impacts of the 21 aircrafts coming in stage two on EPS, you know just given the pluses and minuses of being fewer aircraft, but brand new, new technology aircraft.

Colm Barrington

I mean I think, Catherine the $2.50, I think we said in excess of $2.50 and that’s sort of our run rate when we do stages one and two. So I think you can expect to see $2.50 plus over the period as we take on those two parts of the portfolio.

Catherine O’Brien

Okay, understood. And then if I could just sneak one quick one in. Can you talk about how to plan to finance the $1.1 billion of CapEx for stage two and then does that include PDPs that AirAsia has already paid or is that just FLYs purchase of the aircraft from AirAsia.

Colm Barrington

Well we, on stage two we will just be, we do not have any PDPs. Those PDPs have already been made in the transaction AirAsia has with Airbus and as you know AirAsia is the largest customer for Airbus narrowbody aircraft. I believe their orders were close to 600 aircrafts, so we can only assume that they got a pretty good deal. So in our case we would be financing those aircraft with new equity and debt and we have no concerns about doing this as those aircrafts are delivered.

Catherine O’Brien

So we should expect to see more share issuance in the future?

Colm Barrington

What sorry?

Catherine O’Brien

More new shares issued above and beyond the $4.7 million?

Colm Barrington

No, no we don’t expect to issue any new shares. All of those aircrafts will be financed with new debt and with free cash and with cash generation by the early part of the transaction.

Catherine O’Brien

Alright, thank you so much for all time.

Colm Barrington

Take care.

Operator

Our next question comes from Scott Valentin of Compass Point. Your line is open.

Scott Valentin

Thanks very much. Good morning everyone. Just a quick question on the debt guidance, the debt expense guidance for the first quarter. It’s a little bit higher than I would have thought given the refinancing that took place in the fourth quarter. You guys starting to maybe take on debt early in anticipation of stage one closing in part of 2Q.

Julie Ruehl

No, it’s not related to the transaction. Just we have back-levered some assets that were previously unencumbered. So maybe that’s why it picked up a bit from what you would expect.

Scott Valentin

Okay thanks. That helps. And then just on the tax rate, I guess the amortization, the charge this quarter affected the tax rate. How should we think about tax going forward, still kind of mid-teens level?

Julie Ruehl

Yes, that would be appropriate. That’s generally what we would model, mid to upper teens.

Colm Barrington

As you know we are subject to a 12.5% tax rate in Ireland, and by the way we don’t pay any cash taxes. So this is purely a book item. But we are subject to 12.5% tax in Ireland. But because of some of our international structures that we do pay slightly higher or we do accrue slightly higher than this in taxes.

Scott Valentin

Okay and then just one final question. Colm I think you mentioned the goal to lower the cost of funds some more in ’18. I’m just curious looking through the cap tabled in page 15, is it mostly that the base secured debt on the bank side you will be going after, because it looks like the bonds or notes are a little bit longer data maturities.

Colm Barrington

Yeah, I mean we are paying down some of our more expenses older debt, and as you know as you saw from our, heard from our presentation, we had been refinancing or raising new debt at very low rates, 200 basis points in case and 165 over in another. So we expect to have more of that.

Scott Valentin

Okay, all right. Thanks very much.

Colm Barrington

Thank you.

Operator

Our next question comes from Helane Becker of Cowen. Your line is open.

Helane Becker

Thanks operator. Hi team, thanks very much for the time. I just have I think two questions. One is, other than HNA related airlines, do you have – are there any other airlines that might be on your risky watch list that we should think about?

Colm Barrington

Nobody that we are concerned about right now, Helane. Usually in our business there is a few days late from some airlines from time to time, but there is nothing significant other than the HNA airlines.

Helane Becker

Okay and then my other question is, you know as you think about the portfolio and aircraft sales this year perhaps, you have two A340s I think still in the fleet. Are those candidates for sales do you think?

Colm Barrington

I think unlikely, we’ve extended the leases of those aircrafts through 2019 now and we’ve maybe extend them a little longer for all you know. But we are very happy with the leases now. We took a big impairment of those aircraft last year, so the lease is not producing reasonably good returns. So we are quite happy to hold up those aircrafts for the time being.

Helane Becker

Okay and then I think my last question is just with respect to the 85 aircrafts that you have in the fleet now. How many are subject to renegotiation this year if any?

Steve Zissis

We have five aircrafts still to remark this year; two in the sprint, both of them older aircraft. I think one is a 2002 and 2003 aircraft. And then we have three 737-800s to remarket in November, December this year.

Helane Becker

Okay. Thank you.

Colm Barrington

Thanks Helane.

Operator

Our next question comes from Nish Mani of J.P. Morgan. Your line is open.

Nish Mani

Hey, good morning guys. I was hoping to dig a little deeper into stage one of the transaction and to get a sense of the $1.1 billion purchase price. If you could help us kind of order of magnitude to understand asset values kind of on a lease encumbered basis relative to what you're paying for the actual lease value. And kind of to flash that out a little further, I was hoping to understand kind of your thought process on what these assets could potentially be worth, either less or more, if you had a more diverse counter-party group as opposed to being concentrated with just the AirAsia Group.

Colm Barrington

It’s a bit of a hypothetical question, because I mean it’s very difficult to get sort of standard pricing for the aircraft. It depends on the age of the aircraft, the type, the specification, the maintained condition, the lease terms, the lessee, I mean a whole lot of factors. So I think it’s very hard to give you a definitive answer to that question.

However all I can say is, we are happy with the prices we paid in terms of the market values of the aircraft, the price we pay is compared to appraised values and we are happy with the lease terms and we are happy with the financial results we are getting from the portfolio, so maybe that’s all we can probably tell you at this stage but we are very comfortable with what we have done. And as you know, we have been very conservative, prudent buyers. So the fact that we committed this amount of capital to this portfolio that means we are very comfortable with that we are getting.

Nish Mani

Sure, are you able to share what the appraised value us when you guys did your assessment part of the transaction.

Colm Barrington

I’m not able to share that with you, because I can’t remember what it is, but I’m sure you can you know what the aircraft are and I’m sure you can actually see appraised values for them.

Nish Mani

Al right, that is it from me, thank you so much guys.

Colm Barrington

Pleasure.

Operator

Our next question comes from the Jason Arnold of RBC Capital Markets. Your line is open.

Jason Arnold

Hi guys. After the changes in the debt capital base, what’s your run rate blended average borrowing cost and then Colm you had mentioned the room for improvement in 2018. Any order of magnitude on potential improvement, any thoughts around that?

Colm Barrington

If you go to our side deck to the Appendix Jason, page 15, you will see that in 2018 our total average debt cost blending for a secured, non-secured was 4.3% and that was down from 4.53% in the previous years, a 23 basis point reduction.

Now we have – we’ve now replaced some of the more expensive unsecured debt, with cheaper unsecured debt, so there will be a reduction, I believe in that interest cost, during the course of 2019 – its 2018 excuse me.

Jason Arnold

Okay, I mean I guess just order of magnitude, I mean I got the table there, has some impact. Still I got from of the higher cost stuff I’d assume in earlier part of 2017 before you did the debt trade there. But guess any order of magnitude on thoughts on improvement that you get to see in 2018.

Colm Barrington

The figure on page 15 of the presentation is actually the blended rate at December 31. So that is the rate we are currently incurring.

Jason Arnold

Okay.

Colm Barrington

Unless we do significant changes, that would be the rate through most of this year.

Jason Arnold

Okay. Thank you, and then you know I guess any unusual factors you need to consider with the managing of the seven engines out of lease. That’s something you would anticipate kind of continuing over time or maybe down the road, selling out those engines?

Steve Zissis

No we like the lease engine space and our intention right now is to keep those. They are good assets and they don’t depreciate as quickly as aircrafts. So, it’s probably something you will not see us trading in the near future.

Jason Arnold

Okay, thanks very much for the color guys.

Colm Barrington

Thanks Jason.

Operator

[Operator Instructions]. Our next question is a follow-up from Gary Liebowitz of Wells Fargo Securities. Your line is open.

Gary Liebowitz

Thank you. July can you give us a breakdown of the $26 million of traction cost and just confirm that, that would include the $60 million of management fees that get paid to BBAM.

Julie Ruehl

It does include that fee which we expect to be capitalized. It also includes financing cost, roughly $8 million and then another couple of million legal type fees that we do expect to be expensed.

Gary Liebowitz

Perfect. Thank you.

Colm Barrington

I think it’s important to remember this traction Gary that we did not use an investment banker, an investment advisor. This was all done by BBAM as part of the BBAM service to FLY and they are all included in the BBAM fee. So I think we’ve actually got a very good deal of this.

Gary Liebowitz

Okay, thanks Colm.

Operator

There are no further questions. I’d like to turn the call back over to Matt Dallas for any closing remarks.

Matt Dallas

We’d like to thank everyone for joining us today. We look forward to updating you again on your first quarter earnings call. Thank you. You may now disconnect.

Operator

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