Aircastle Ltd. (NYSE:AYR) Q1 2021 Earnings Conference Call July 14, 2021 9:00 AM ET
Michael Inglese - Chief Executive Officer
Aaron Dahlke - Chief Financial Officer
Doug Winter - Chief Commercial Officer
Frank Constantinople - Senior Vice President, Investor Relations
Conference Call Participants
Ian Snyder - JP Morgan
Doug Runte - Deutsche Bank
Good day and welcome to the Aircastle first quarter earnings call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Frank Constantinople, SVP of Investor Relations. Please go ahead.
Thank you Operator. Good morning everyone and welcome to Aircastle Limited’s first quarter 2021 financial update call. With me today are Mike Inglese, Chief Executive Officer, and Aaron Dahlke, Chief Financial Officer. Also on the line are other members of the management team who will be available during Q&A.
We’ll begin the presentation shortly, but I’d like to remind everyone that this call is being recorded and a replay will be available through our website at www.aircastle.com, along with the press release and our PowerPoint presentation.
I would like to point out that statements made today which are not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain facts that could cause actual results to differ materially from Aircastle Limited’s expectations are detailed in our SEC filings, which can also be found on our website. I’ll direct you to Aircastle Limited’s press release for the full forward-looking statement legend.
With that, I’ll now turn the call over to Mike.
Thanks Frank. Good morning everyone, and thank you for joining us.
Since our last call in April, Aircastle has continued to strengthen its operating platform, liquidity position, and credit profile. In early June, we successfully priced $400 million of preferred shares at a dividend rate of 5.25%. With the closing of this transaction, our pro forma common and preferred equity increased by almost 25% to $2.1 billion.
We were pleased to see strong demand for the preferred shares with the transaction coming in more than four times over-subscribed. Simultaneous with the launch of this capital issue, Moody’s upgraded our credit outlook to stable, and to remind everyone, we are rated investment grade by all three major rating agencies.
During the three months ended May 31, 2021, we delivered two Embraer 195 E2 aircraft to KLM Cityhopper, the first of 15 Embraer E2s to be delivered to KLM City from our order book. We have two more aircraft scheduled to deliver to KLM later this year with the balance of deliveries expected between 2022 and 2024. We’re proud to be helping KLM meet their goal of reducing their carbon footprint by at least 50% by 2030.
Following the quarter end close, we delivered the first of four A320 Neo aircraft to Frontier Airlines with another three expected to be delivered later this summer. We look forward to being a valued and trusted partner to KLM and Frontier for many years to come as they continue to grow and prosper.
In addition to our acquisition activities, we’re remained highly active on the portfolio management front. We sold three aircraft and eight engines for $63 million of proceeds and a total gain of around $9 million. We also signed several dozen lease extensions and amendments. As of the end of June, the New York court managing the LATAM bankruptcy proceedings has approved LATAM’s position to keep and extend the leases on our three 777 300 ERs and our 10 A320s with the airline.
With the widespread rollout of vaccines, confidence in travel safety has begun to rise. As a result, we’re observing positive developments in the aviation market with a strong economy releasing pent-up leisure demand for travel and recovery in traffic in larger domestic markets. However, while airline finances appear to be getting better, the industry’s financial condition remains fragile.
COVID-19 has changed the air travel world significantly and it will take several years for airlines to adapt, and they’ll need to adapt in many ways. As an industry, airlines have burned massive amounts of cash and have created over $250 billion of new debt. The industry lost $126 billion in 2020, which is almost as much as the $162 billion they earned in the five years pre-COVID. IATA is forecasting the airline industry will lose an additional $48 billion in 2021 which will further add to their debt burden. Revenues are expected to remain under pressure and Mackenzie is projecting the industry’s debt to revenue ratio to decline from 75% pre-COVID to somewhere between 110% and 125% by 2024.
The industry’s historically most profitable components, business customers and long haul travel, will be slower to recover, but both are expected to recover eventually. According to CAPA, business travel accounts for 12% of airline passengers but 20% to 30% of airline revenues. Between April and December 2020, global spending on business travel fell by 68% from $1.4 trillion in 2019. This dwarfs the 11% decline after the 9/11 terrorist attack and a 7.5% decline during the global financial crisis.
Business travel is essential for the return of profitable long haul international travel and for the recovery of the wide body market. Reduced travel budgets, technology substitutes, i.e. Zoom, fewer city pairs and employee hesitancy and ambivalence may further slow the recovery. As with every other downturn, we remain convinced there is no substitute for face-to-face meetings and business travel will eventually return. Although wide body aircraft rents and values will remain under pressure in the near term, we expect longer range single aisle aircraft will benefit from more point-to-point travel.
Aircraft leasing will remain an important source of aircraft finance, but it will become increasingly important for lessors to remain strong balance sheets with manageable leverage, and for lessors to pick the winners from the losers during this period of structural change. With the onset of the COVID downturn, the aircraft leasing industry prudently raised significant amounts of liquidity at very cost effective levels and the rating agencies have remained supportive.
Both the lessor and the airlines have been able to work with the OEMs to restructure their order books with further enhanced liquidity in both industries. In the current uncertain environment with limited contractual commitments, significant liquidity and strong sponsorship, Aircastle remains well positioned to grow in a disciplined and profitable manner. While the airline industry will experience structural change, we believe the long term fundamentals for air travel are intact and Aircastle has deep management teams with multiple cycle experience and the bench strength to take advantage of the turnaround.
Our current liquidity position remains very strong. As of July 1, we had total liquidity of $2.9 billion versus one-year contractual obligations of $1.2 billion. This represents liquidity coverage of about 2.5 times. While nobody anticipated a crisis as severe as the COVID-19 downturn, our historically conservative and proactive portfolio management approach allowed us to significantly improve our fleet quality in the years leading up to the crisis. Wide bodies declined from a peak of 54% of our portfolio in mid-2014 to 18% at the end of our first fiscal quarter. Our fleet is now heavily weighted towards in-demand single aisle aircraft, 233 out of 259 owned and managed aircraft.
The fleet is also very well diversified by lessee and geography. We currently own and manage aircraft fleets to 77 airlines in 43 countries. Most importantly, Aircastle’s credit strength is enhanced by very low on and off balance sheet financial leverage, balance sheet reserves for maintenance, security deposits, and letters of credit from banks representing 11% of net book value and 44% of common equity. These reserves are multiple times the level of reserves a money center bank would have against a bank loan portfolio.
As a privately held company, we also enjoy the strong strategic sponsorship of Marubeni Corporation and Mizuho Leasing. Founded in 1858, Marubeni has 135 offices in 70 countries with global revenues of over $58 billion and a market cap of around $15 billion. Mizuho Leasing is an affiliate of Mizuho Financial Group, the 15th largest bank in the world by assets.
In summary, the widespread rollout of vaccines is leading to increased confidence in safety and the economic rebound is releasing pent-up leisure demand for travel. Air traffic demand in large domestic markets is recovering at an encouraging pace; however, with the spread of the delta variant and cases rising in areas with low vaccination rates, cross-border travel is recovering at a much slower and more uneven pace despite considerable pent-up demand. In time as vaccination rates increase around the world and travel barriers fall, market conditions will improve further and help solidify the airline industry’s recovery.
While the airline industry has been better managed during this crisis versus previous downturns, COVID-19 was such a massive shock it will require drastic changes for many airlines to survive. Government support and capital access will remain essential to ensure that survival. Airlines without either will struggle and this will probably lead to some consolidation. Airlines that had struggles before the crisis began will remain more vulnerable during this downturn. Without profits, investors are likely to be less willing to provide airlines with additional capital and we sense that government financial support will also become more selective. Low cost carriers in domestic markets, however, are likely to prosper, and legacy carriers with strong market positions and government support are likely to benefit from such consolidation.
Let me now turn the call over to Aaron, who will spend a few minutes on our financial results for the quarter.
We had a solid first quarter. During the first quarter of 2021, collections represented 89% of rental and direct financing and sales type lease revenues, and this represented an improvement compared to 80% collection rate we reported in the fourth quarter of 2020.
For the first quarter, we reported cash flow from operations of $70 million. This represented a sequential improvement versus the fourth quarter of 2020. We anticipate this upward trend will continue into the second quarter of 2021 as we see consistent payments from our core customers and the repayment of deferrals.
For the first quarter, we reported a net loss of $10 million. This represented a sequential improvement versus the fourth quarter 2020 net loss of $96 million, and it was also narrower when compared with a net loss of $27 million for the first quarter of 2020. Our lease and finance lease rentals were $135 million for the first quarter, which is significantly down compared to the fourth quarter of 2020 primarily related to non-accrual customers and deferrals.
Total revenues declined sequentially $32 million in the first quarter versus the fourth quarter, primarily due to lower maintenance revenues. Excluding non-cash impairments, total expenses for the first quarter were down $6 million compared to the fourth quarter of 2020, which is primarily due to lower interest and depreciation expense.
Turning to our capital structure, on June 3 we priced $400 million of preferred shares. There was $1.7 billion of demand for the issue, which pays a 5.25 dividend and has no maturity. This brings our combined pro forma equity capital to $2.1 billion, which is 23% higher than our shareholders equity at the end of Q1. The preferred shares received 50% equity treatment from the rating agencies and reduced our net debt to equity leverage to 2.4 times pro forma versus the 2.6 at the end of the quarter.
At the end of Q1, our total debt was $5.2 billion, of which $4.4 billion or 86% was unsecured. You’ll recall on January 21, we priced $750 million of seven-year unsecured senior bonds at a record low coupon of 2.85%. As of July, the spread comparable maturity treasury securities declined from 230 basis points on the debt issuance in January to approximately 156 basis points. Over time, our overall funding costs have declined with the weighted average rate on our debt falling to 4.12% at the end of May 2021 versus 4.57% at the end of 2019.
As Mike mentioned, our liquidity position remains robust. As of July 1, we had a total liquidity of $2.9 billion. This included $1.3 billion of undrawn revolving credit, unrestricted cash of $1 billion, contracted asset sales of $103 million, and projected 12-month operating cash flows of $375 million.
We have agreed to defer certain near term lease payments with some airline customers. As of July 9, we have agreed to defer approximately $112 million in near term lease payments with 22 airlines. These airline customers have agreed to repay this amount over time. In exchange for this accommodation, we are generally restricting the leases to include longer terms, better security packages, or other valuable considerations. As of May 31, we held $78 million in security deposits, $524 million in maintenance payments, and $148 million in letters of credit from our lessees.
In closing, confidence in travel safety is on the rise with the widespread rollout of vaccines. The strong U.S. economy is releasing pent-up travel demand. Airline deferral requests and restrictions are slowing, and as cross-border travel barriers come down in 2022, global market conditions should improve further. We believe our long term strategy of maintaining conservative leverage, limiting long term financial commitments, and focusing our portfolio on liquid narrow body aircraft insulates us through an extended industry downturn.
Our portfolio of new technology and mid-life narrow body aircraft will remain attractive to airlines who are taking advantage of emerging market opportunities. With our long term focus, investment grade rated owners, we are optimistic about the future.
With that, Operator, we are happy to open up the call to questions.
We’ll take our first question from Mark Streeter from JP Morgan.
Mark, your line is open. Please go ahead. Please check your mute button. We’re unable to hear you.
Hi, this is Ian Snyder stepping in for Mark Streeter. Can you hear me?
Yes, how you doing, Ian?
Hey, I apologize for the delay there. I just wanted to ask a couple questions here. For us, your equity ownership is a huge part of your credit story. Just wanted to dig in a little bit more about the relationship with Mizuho and Marubeni and how it’s benefiting Aircastle at this point in the pandemic recovery, and whether there’s anything tangible to point to at this point.
Look, I think the biggest tangible is the rating agencies’ view of our credit, with them as our parent. I think it would be a different story if that had not happened last year and we were still a publicly listed equity on the New York Stock Exchange, so that’s the biggest, most tangible change for us in the context of what’s happened in the last 16 months.
In terms of other tangible things that are clearly helpful to us in the context of accessing financial institutions throughout Asia, introducing us to people in different countries where we had previously not done business and helping secure business with airlines, whether it’s placing assets or potential sale-leaseback opportunities. I think as we mentioned on the call, they have a physical presence in 70 countries around the world, particularly Marubeni given its history as a global trading company, and that and their view and their patience and their long term investment horizon are the things that we see as the most tangible benefits of having them as our owners.
Great, that’s very helpful. Then I just have one other question here, and a large portion of it was answered during the call, so thanks for that, but it’s regarding the restructuring process and where--the point you are with restructuring leases. I was curious if you had a line of sight as to the run rate cash flow you can expect from them once the revised terms are set, and do you think EBITDA has bottomed at this point?
Look, I’m not sure if anything has bottomed out at this point as we see the delta variant kind of raising in different places around the world. In terms of restructuring, as we’ve been saying for a number of quarters, now, Southeast Asia is still the part of the world as it affects our industry and our business, where things are moving forward at a much slower pace than anyone was hoping for 15 months ago, or even six months ago.
In terms of our cash flow, I think in today’s press release you’ll see our forward guidance around 12 months cash flow is $375 million - that’s up a bit from our $340 million that we talked about three months ago, so we think things are trending in the right direction but there’s still a fair bit of uncertainty, particularly around Southeast Asia as we do restructurings with some of our customers in Indonesia and Malaysia, Thailand, etc.
Wonderful, that was very helpful, and that’s all for me. I’ll jump back in the queue.
Just a reminder, if you’d like to ask a question at this time, please press star, one.
We’ll take our next question from Doug Runte with Deutsche Bank.
Yes, good morning. Thank you very much for the presentation.
Good morning Doug.
Good morning Mike. In your presentation, you highlight the strength provided by your maintenance reserve collections. I’m wondering what percentage of your fleet or customers are maintenance reserves payors versus ELL, and are, I guess, the right customers maintenance reserves payors from your perspective in the restructuring process?
Honestly, I don’t think I have an accurate number of the mix between the two in front of me, Doug, and I don’t want to guess for the sake of guessing. Who is a maintenance payor and who is not today is probably a little bit different than anybody in the leasing industry would like as a practical matter, but we, as our peers do, try to get--try to use it as a credit enhancement tool in the context of our leases. But as a percentage of our fleet compared to 10 years ago, it’s definitely a different mix with fewer people around the world as maintenance payors than you would have seen a decade ago.
Okay, thank you very much. I’m wondering if you can talk a little bit about lease expirations for the remainder of ’21 and ’22, what is the status of possible extensions or replacements.
Doug, you want to touch on that a little bit?
Yes, hi Doug, it’s Doug Winter here. As we look through the balance of our fiscal year ’21, which runs into obviously February of ’22, we’ve got approximately--what is it, I think it’s about nine aircraft with scheduled expiries, and we still have approximately eight aircraft off lease.
I can tell you that we have, just even in the last 10 days or so, signed LOIs for three aircraft. We’ve got also a couple of aircraft where we think we’re very close to closing out LOIs. As Mike alluded to in his comments, as did Aaron, we are seeing a pick-up in activity and interest as airlines start to look forward to a more vibrant, or at least the hope of a more vibrant 2022 time frame, so we are seeing a pick-up in activity even during our Q1. We closed out either the delivery of or signed leases or signed LOIs for approximately a dozen aircraft, so things are moving at a steady, if not even somewhat more active pace. But I would caution, as Mike did as well, that there does remain pressure on lease rates as we continue to work through the supply overhang that still pervades our space.
Thanks very much, Doug. One last one, Mike, you touched on Southeast Asia as an area of concern with, I guess, some potential restructuring still going on. I’m wondering if you can provide a little bit of color about what you’re seeing in other regions - what direction are they going, the speed of that direction, your deferral requests, where are they coming from. If you could just provide a little bit more color on other geographies, it would be helpful.
Yes, look - I think it would be no surprise to anybody, North America is doing pretty well. Latin America, country by country is still a bit of a mixed bag. In the context of our LATAM restructuring, the court has approved the restructured leases for our 10 A320s and now our three 777s, and so in time as LATAM comes out of that, we should be in a good position there. It’s a mixed story in Argentina as the economy continues to struggle. Colombia, same thing - Avianca is taking a bit longer than I think some folks would have imagined not long ago to work through their restructuring and find their way out of their bankruptcy proceedings.
Other than that, in terms of requests for deferrals, we still see some smaller folks looking for some help on a short term basis through this summer as things haven’t picked up a little bit as they may have expected three or six months ago, but the pace, the size and the duration is different than it was six to 12 months ago, and in the context of, as I said, Southeast Asia--you know, Garuda has hired a restructuring team to figure out what they want to do with their airline. We’re still working through things in the context of how Lion’s proceeding, the Air Asia group. Thailand is moving slowly through its restructuring process. Philippines Airlines is working with their creditors to try to get something done to do what I would expect to be a pre-pack, if they get there.
It’s a mixed bag for the rest of the world, but by and large it’s a better dynamic than we’re seeing in Southeast Asia.
Great, thanks very much.
I don’t know, Doug Winter, if you want to add anything?
Yes Doug, I would just maybe add to elaborate on one element of Mike’s comments. In terms of some of the deferral or restructuring requests we’re receiving, they’re not necessarily coming from new parties. In most instances, it is working with people we’ve already worked with to agree some sort of deferral or restructured framework, and we’re looking, or they’re looking to modify or extend those terms, so we’re not seeing a growth in the number of customers looking for help, certainly not in a material way.
Great, thanks very much.
Again, if you have any questions at this time, please press star, one. Again, that is star, one for questions.
It appears there are no further questions at this time.
Okay, just want to thank everyone for joining us today. We look forward to seeing you hopefully in person on some of the aircraft and investor conferences in the fall, and enjoy the rest of your summer. Thanks everybody.
This concludes today’s call. Thank you for your participation. You may now disconnect.