Q2 2020 FLY Leasing Ltd Earnings Call
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Now I'd like to have the conference over to your speaker today, Matt Dallas with Investor Relations. Thank you and please go ahead Sir.
Thank you and good afternoon, and good morning, good afternoon to our investors in the UK and good morning to our investors in the U.S. I am not Dallas with Investor Relations at fly we think.
You're welcome everyone to our second quarter 2020 earnings conference call.
Flywheel thing, which we will refer to as fly or the company.
Issued its second quarter earnings results press release earlier today, which is posted on our website. That's why we think dot com.
We have a slide presentation that accompanies todays call, which is available to participants on the webcast.
If youre not accessing the webcast you can find a copy of today's presentation in the Investor Relations section of our website on the events and presentations page.
Representing the company today on this call will be Collin Barrington, Our Chief Executive Officer, Andrew We rule, our Chief Financial Officer.
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 flies 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 FCC.
Please refer to these resources for additional information.
An archived webcast of this call will be available for one year on the company's website.
With that I would now like to hand, the call over to column Barrington, but chief Executive Officer fly column.
Thank you, Matt and welcome everyone to this morning's call. Thank you all for joining us.
Well I don't think I need to spend too much time, the continuing severe impact the cobot 19 is having a global aviation.
Indeed on every aspect of life throughout the world.
So reductions in airline traffic in airline operations and airline profitability and liquidity are all well documented other databases.
As is the impact on aircraft, an arrow engine manufacturers, resulting from the virtual cessation of orders for new aircraft.
Some cancellations of previous equipment orders.
There was an expectation that the impact of the pandemic would be with its for several years.
But some forecast, suggesting that air travel with no not returned to its 2019 level onto 2023 or beyond.
And even that being contingent on the development and gold production of effective unacceptable vaccine against the bars.
Until that happens it seems likely to strictures on travel will continue.
And the potential airline customers for both business and leisure would be reluctant to travel.
As a result, the progress towards recovery of global aviation is likely to be slow.
Negative picks up the virus unlikely to linger for several years.
Fortunately many governments aware of the gravity of the situation not the importance of radiation to national and global economic recovery.
That's a result, providing significant financial assistance to airlines within the jurisdictions.
Hopefully this will allow many airlines to survive. The current crisis, then ramped up their operations, one restrictions are lifted and consumer interest and confidence returns.
To date, the only brightness is the domestic travel has been increasing in many major markets.
I also reports the China.
Domestic Chinese domestic traffic as we're turning towards normal that is 2000 to 19 levels.
But all the major markets such as Europe, the United States, Latin America, and most international routes are still depressed.
That's an example here we are the mid what the summer vacation period, especially new transatlantic traffic very few trans Atlantic sites.
Fortunately side benefits from the robust business model.
Which provides us with levels protection from the current adverse business conditions.
We have always focused on season, there was popular narrow body aircraft types.
In particular, Airbus Athree hundred Twentys and Boeing 737 next generations.
These type comprised 86% about peak by number.
67%, but net book value.
We expect that the demand for relatively new mid life hates, we twentys and seven to seven Ngs, which for trust, which as I said form the core Flys fleet will be the first recover I'd say satisfied domestic and regional airline operations.
Demand for these types will likely also be strengthened by continuing lower fuel prices.
Well I also has a good way seem to financially sound lessees.
50% of our rents coming through flag carriers and U.S. majors.
And one of our largest let's see exposures is fully covered by a government guarantee.
We've also maintained a strong balance sheet, but significant levels of cash unencumbered aircraft long dated financing and low leverage.
Also applies no significant debt maturities until the fourth quarter 2021.
Slides 2.1 times net debt to equity ratio at the end of June was a record low for the company.
Reflects a strategy of aggressively selling aircraft during the last two years, but markets for aircraft sales were strong.
Flies no aircraft or what are some of the manufacturers fly has consistently shoot skewed making speculative aircraft orders.
Basis Thats in our cyclical industry, we can't predict the band and lease tell Tourette cropped you wouldn't be delivered several years out.
Well the financing environment at the time of delivery.
I believe that this strategy has been indicated.
As regards the current situation fly.
We can report that we've collected 84% rents due in Q2.
It's really too and that's really too low value aircraft to be new turned Ellie Q2 airline restructurings.
In fact, we find it but the majority of realize what to keep the leased aircraft.
We're prepared to I'm not prepared to work with us to find ways of doing this.
This is reflective of the fact that since March we assigned for lease extensions and two new leases.
I suppose outlines only five aircraft, representing 3% about sleep book value to walk through the remainder of this year.
And 10 aircraft, representing 7% Rafiq book value in 2021.
We're also finding that there was continuing interest from certain parties and acquiring aircraft from us and we do expect to complete at least one saved in the coming on.
But consequent additional benefits to our liquidity position.
We will continue to focus on enhancing liquidity to management of rented taros pursuit of additional aircraft sales and opportunistic liability management.
That's importantly, we will continue to ensure that our asset values have been tamed, but not sacrificing aircraft condition in the pursuit of maintaining current or generation future rentals.
Fly is really fortunate benefits in the experience of the be then team.
It's a 30 years' experience and as many deviation assets to several industry crises.
Feed them as a foodservice global lease manager with strong and positive relationships, but most of the world's airlines and financing institutions.
The ban has a strong partner to help fly navigate through the present situation.
The alignment of interest to fly and beat them greatly enhanced by the fact that BBAMS shareholders now 23% to fly stock.
By far the largest insider holding of any publicly traded aircraft leasing company.
Like all less source, we have received requests for rent apparel, it's the most about lessees.
Working closely with our airline customers.
We know that we will succeed only for customers succeed also.
We are expecting a bevens for at least partially rent apparel and so that lessees, representing approximately 65% seat.
The average to several periods as seven months and the majority that fairly bonds to deferred amounts due to we'd be repaid by the end of 2021.
Julie will give you a little more insights into the speakers Lisa.
In the second quarter, it's like would you satisfactory financial results based on total revenues of $80 million.
Should be noted that's our 11 billion dollar adjusted net income was is that the benefit of any aircraft sales gains, which have recently been significant contributor to our net income.
Our adjusted EPS of 37 cents in the quarter contributed to increasing our book value per share $29.46 quarter end.
Our strategy is baseline strong financial position position to face the present challenges.
At the end of June fly had cash and unencumbered assets of $887 million into the under strict cash of $289 million, an unencumbered aircraft a $598 million.
At quarter end up financial leverage equaled, it's all time low to put one times net debt to equity a shock and positive declined over the preceding 12 month.
And our debt has an average term a 4.3 years with no near term refinancing needs.
Well the future it certainly on certain lie is well positioned to face it but to see.
We have a long term debt with no near term refinancing needs.
We have zero capex commitments to aircraft manufacturers.
No cash tied up in pre delivery payments.
Well, we've proven in Texas <unk> financing flexibility.
Strong track record our diversified financing sources.
With that I will hand held to Julie to take you through the Q2 financial results in detail Julie.
Thank you column.
Why is reporting net income of 9.6 million or 32 cents per share for Q2 2020.
We believe these are solid financial results during these challenging times.
The quarter's financial results compare favorably to the year ago quarter, given the 45 million of combined end of lease income again on aircraft sales in Q2 2019, while in Q2 2020, there was a very little end of lease income and no aircraft sales.
We continue to believe the quality of earnings as strong as demonstrated by Flys net spread which stands at a healthy 7.1% for the quarter.
Overall, our Q2 results keep fly on sound financial footing with 280, not knowing that unrestricted cash at quarter end and we will remain highly focused on liquidity as the recovery and air travel develop.
Well no aircraft sales were completed in Q2, we will consider opportunistic aircraft sales in the near term, which should further enhance liquidity position.
In addition to capital markets remain open and we are receptive to financing our refinancing opportunities that may be available at attractive terms.
Turning to the revenue comparison to the prior year quarter flies operating lease rental revenue in Q2 2020 decreased to 79.8 million driven by the sale of 41 aircraft since the beginning of 2019.
Rent deferrals largely did not impact revenue as we continue to accrue revenue.
We believe collectability is reasonably assured.
Total revenues for Q2 were 80 million, which includes a small amount of end of lease income from one scheduled lease expiration.
On the expense side Q2, depreciation and interest expense expenses decreased as compared to the prior year quarter due to aircraft sales.
In addition to the lower debt levels driven by aircraft sales interest expense also declined as a result of lower weighted average cost of debt.
<unk> expense decreased 2.3 million in Q2, 2020 as compared to Q2 2019 due to the smaller fleet as well as lower legal costs related to leasing it other fleet activity.
Also in the current quarter, we established an allowance uncollectible operating lease receivables of 2 million.
Well I've been fortunate to this point have only been minimally affected by airline bankruptcies and restructurings. However, we felt it was prudent to record an allowance in the quarter when our accounts receivable have risen largely due to aircraft do direct deferrals.
Also in Q2 2025 recognize an unrealized loss of 1.1 million to write down marketable securities estimated fair value.
This expense item relates to flights investment in the equity tranche at aviation, maybe asking Nichols, commonly referred to with you know.
Following this write down five investment you know is 5.6 million as of June Thirtyth.
He securities are required to be marked to fair value each quarter, which may result in future income statement volatility.
I'll now take you through some information regarding flies rent deferrals.
Thank you to fly collect at 84% of rent due after giving effect to execute unexpected bees deferral arrangements.
To put cash collections in terms of pre deferred.
Pre deferral comp contracted Brent that percentage was 47% for the quarter.
Through the first half of 2020 fly had approximately 49 or front deferrals, which is included in receivables at June Thirtyth.
That's the made a deferral for the second half of the year, our 30 to 35 million or approximately 20% of operating lease rental revenue.
The table on slide 15 provides a detailed five period of rent deferrals or prepayments that we currently anticipate.
Why continues to work with lessees to complete the full arrangements and as a result, these amounts may shift over time.
Based on our current expectations rent deferrals will decline in Q3 and again in Q4 2020, and the majority of referrals slated to be repaid by the end of 2021.
I'll turn it back to call now for his closing remarks.
Thank you Julie.
Well in summary, slide as many defenses against the current difficult industry conditions.
Yes, we have ample liquidity it not encumbered assets together totaling nearly $900 million.
We have extremely low financial leverage at 2.1 times debt to equity long days in financing with an average term of 4.3 years and no near term refinancing requirements.
We have no near term capital expenditure requirements no commitments to aircraft manufacturers and no pre delivery payments tied up with them.
We have a strong customer base of which 50% is made up a flag carriers in U.S. major airlines.
We have a modest seat comprised predominantly the most popular narrow body aircraft types.
And do we have a world leading aircraft to lease management for the beat them with the scope of scale of airline and financing relationships.
We will undoubtedly face turbulence is over coming months, but believe that fly as well equipped to fly through this difficult period and benefit from the smooth the conditions beyond.
We will not take your questions.
Thank you.
And as a reminder to ask a question for me to press Star one of your telephone to withdraw your question. Please press the pound key please standby we can barbecue any roster.
And our first question comes from a lot of Catherine O'brien with Goldman Sachs. Your line is now.
Hi, everyone. Thanks, so much when the time.
Oh, so maybe just a couple on your deferrals for so you know I think last quarter. You had mentioned you expected deferral to reach 90 to 95 million, but today, you're calling out 83 million in small deferrals. I guess first you know you still expect to see deferral guns that 90 million range or are you now expecting alerts.
You know what are the mountain and what's driving that and that also of your remaining customers representing 35% of fleet without the program is currently are you expecting the majority of those to seek out in agreement with you and then maybe try that 83 million higher or are those airlines communicating to use they will not need deferral I'll stop there that's my follow up after.
Thanks.
Thanks, Catherine Judy would you like to take that one.
Yes, yes, I will.
Hi, Katie good morning on your first question on the <unk>. The number we gave last quarter 90 to 95 million and why that's come down.
That was a conservative definitely gave last quarter based on kind of initial request that the airlines had I think at the very kind of beginning of that at the crisis pretty much every airline that you know just raise their hand, they want a deferral so.
A few have I guess now decided that they don't need him. So art I think our cumulative number is you know in the 80 to 85 million dollar range now.
And you know we at this point we have.
We have signed up I'm about 14 of our lessees working to 15 axle signed agreements and some core looking to sign no six to seven more on that we've you know that.
I have agreed on some level of terms with at this point and I think at this point, we've gotten the request at least.
Yeah.
It's kind of standing still in terms of what request, we had in and we're not expecting that number to really grow the 83 million dollar number to grow at this point.
Okay understood very clear.
And then I guess you know.
On your cash collection rate first yes, thanks, a lot for sharing what that was versus pretty kogut expectation, but none I was wondering if units give us some color on how that's trended over the last couple of them on and when do you expect cash collection to bottom based on your current umbrella agreement and then maybe just one more kind of the same thing.
And you know how do you already are you kind of a $7 million tupperware peanuts, you're expecting this quarter.
Okay.
Julien I told him on this.
Yes sure.
So in terms of the the trend I think its and.
Pretty consistent month month to month.
And what we're seeing so far in July is roughly consistent with what we've seen seen prior.
In the first few months in terms of the bottom of the deferrals I think <unk> Q2, what is the high point the peak of deferrals and it should only go down from there.
As we haven't moved through time, and then lastly on the expected repayments in Q3 7 million and those are more weighted toward the back end of the corridor and so it's a little bit early little bit early on those.
Report on how that's trending.
Okay, great. Thanks for the time.
<unk>.
Thanks Allison.
And our next question comes from a lot of Jimmy Baker with JP Morgan Your line is no.
Good morning, everyone. Now this is a dual campbell on behalf of Jimmy Baker, Mark Streeter could you just walk us through how you're thinking about impairments. So what would you have to see in your markets start thinking about that.
Sure Judy again, I think that's not on a view.
[laughter]. Thanks for the question Yeah. So you know no impairment charge in the quarter as I'm sure. You've noted we went through our typical quarterly rigorous process of.
Or impairment tests and as a reminder, impairment exist when these undiscounted cash flows.
From an outside or less than 10 book value.
You know to this point, we haven't really been affected by a lot of Caroline bankruptcies or aircraft retirements, one that the airlines are announcing their downsizing their fleets.
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So those are the types of things that could potentially and trigger an impairment in the future. You know if there was a bankruptcy or restructuring.
We don't have the type of aircraft in our fleet <unk> airline for general retiring so I don't see adopting a risk but it just is going to depend largely three aircraft specific and therefore very lessee specific.
I'm somewhat depend on.
You know what level of like restructurings and bankruptcies, we see down the road.
Understood just another quick one for me so how do you plan to refinance the 325 million in bonds coming due in October next year. There just seems to be some concern in the market as you can see this 15% yields and other trading prices well below par.
[noise], Judy do want to handle that one to the bomb Dior, yes, I'm. So we still have over a year before the maturity date were continuing to evaluate our our options. There we I'm encouraged by what we've seen our peers do an unsecured market.
Well, we continue to monitor that as you mentioned youre trading at a discount we would consider potentially buying some of those back at some point on that were just at this point, considering and continue to evaluate our options.
Thank you.
I think just turned out to that no. We have very significantly its liquidity in the company nearly $900 million of cash not encumbered assets have meant as mentioned in her presentation. So.
With the with the written collections, we have and we feel quite comfortable about our ability to refinance those bonds.
Thank you and our next question comes from a line of Helane Becker with Cowen Your line is no.
Thanks, very much high everybody on things things for the time here.
So actually.
You have quite a lot of cash available to you and a lot of unencumbered assets could you. Just you know talk about how you're thinking about where we are in this cycle and whether or not it makes sense to make some long dated commitments.
You know at this point in time, given that things are probably available at a discount.
Yes, Hello, I mean, I think our current focus is really very much on liquidity in maintaining liquidity and ensuring that we can be told our obligations.
And if we did come across from sale leaseback opportunities Weve, sorry, as we have done we would certainly examined them closely I think they'd have to be the rice aircraft type a they have to be an airline to an airline with good medium term prospects and I think I'd, probably as importantly would have to be able to finance the.
Yes, this at a relatively high level and that's attractive rates and so we're certainly looking at opportunities that will continue to look at opportunities, but we will be very stringent in a you know criteria before we tend to into anything.
Okay and then my other question is.
Have any has anybody who you know came too early on for lease deferrals come back to you and asked for further extensions.
I'm not aware of that Judy have you anything to add to that.
We have had a few.
I think on a quarter ago, we had given some statistics that the average deferral term was four months and now the average for alternative seven months I can be somewhat we currently expect so I think we have had a couple of come back and asked for an additional additional period and as that recovery.
As maybe a bit slower than we thought it would be a quarter ago.
Gotcha and then the only other question I have is.
You know when you maintain your watch list have you moved to anybody from you know like yellow status to read status or where you have gone to them and said you know, maybe we'll take back or aircraft sooner rather than later.
Because of you know concerns about their liquidity.
Okay.
We don't comment Helane on any specific airlines, but.
As I think we said in our prepared remarks, I mean, the aviation industry and the add on industry is in isn't severe difficulty worldwide. So there are lot of airlines says we are concerned about and I think everybody should be concerned about them and that's you know we will continue to work with them or you know if our customers.
Works then we work if our customers survive we survive. So we certainly continue to work with every airline and that's a customer twin Trident health and showed their success and which will lead to our success the long run.
That's very helpful. Thank you.
Thank you.
Our next question comes from them on Who's Patel with Deutsche Bank. Your line is now open.
Hey, good morning, guys I'm, just a couple of land you know as a part of any of the deferrals or restructurings that you guys have participated and have you been able to negotiate for any reached extensions.
In conjunction with any of these.
Yes.
Yes, Coos I mean, I think we have reported that with.
We felt were range I think a for lease extensions since the end of March so lease extensions wouldn't be part of the our discussions with ER with any airline seeking to Farrell.
Okay, and then with the 15 aircraft you have three market between now and the 2021 could you just give us yeah, maybe a little bit more about the mix of these assets and maybe what your expectations are around you know the lease rates based on some of the discussions you've been having with airlines right now.
Yeah, well first of all their old narrow bodies, so were comfortable about about that which is good.
No.
It's hard to judge I mean, it's a question how long is a piece the string across get a little older. Every time, you released them interest rates change. So a lot of variable is the markets certainly the supplied to bandwidth relationships today are not as good as they might have been a year ago.
So we would expect that there will be some to diminishing in lease rates, but you know these are not athree AC is no seven four sevens not MDACC. So all good quality aircraft and we expect of and we expect that a domestic a regional operations will recover more quickly than everything else.
Yes, so we think there will be a continuing good demand rates, we twentys and 737 next gens again supported by lower fuel prices over the coming years.
I understand and then finally as.
As the Oems have kind of slowed down production across the board both from Airbus and Boeing how does this impact the option, but do you have with Airbus. This you know give you does this give you additional time to make decisions on those or would that not have any impact.
Well, we don't expect to take delivery of any of the option aircraft. This year.
And as you know where Airasia has already said, it's not going to take any Airbus deliveries this year.
So where we continue to work with Airasia the whole situations quite fluid, but we continue to work with them to support them and as they and we adapt to market conditions. So.
No. This was include a working with their Airasia stay reprofile their order book with with Airbus. So I think so little bit already to comment on any specifics of that's at the moment to push.
Okay. Thanks Lucas.
Thank you.
And we do have a follow up which is our last question from a lot of Catherine O'brien with Goldman Sachs. Your line is open.
Hey, Thanks for extra time, so so just on the new leases signed over the last couple of on you know what are the term looked like on those deals versus what you would have expected pre co bid in and we're the discussions on the new leases you know Ari started before the impact of 'cause it or are these agreements.
Up recently and then maybe just you know as your and then separately as you're assessing or deals necessarily back market. You know what a turned their look like maybe compared to your though I'm, assuming more favorable for leaking trainee, but maybe your mom. Thanks.
Well look as I said earlier [laughter] <unk> F cropped age interest rates change. So a lot of factors change and certainly market conditions are a bit loosen how they were a year ago. So these rates, although certainly not as good as they would've been this time last year, but would come to.
With the race, we golf as I said interest rates are lower so a cost of debt are lower so you know what comes with the rates, we golf and.
Looking forward, we just not quite sure what's going to happen as the whole industry the coming here, but so far we're finding airlines want to keep the aircraft they have and they don't want to get back to leased aircraft if it all possible.
So we're comfortable that we'd be able to get those aircraft away that's reasonable reasonable rates of course fully supported by the whole feed them engine, the PBM machine, which with its global spread of the airline come Texan an experience of over 30 years. So.
I think we were comfortable enough with the rate to go to guess therefore, those aircraft over the coming here and Uh huh.
Okay, great. Thank you.
Thank you.
Ladies and gentlemen, this does conclude today's question and answer session I will now, let's turn the call back to Matt Dallas for any closing remarks.
Thank you everyone for joining us for today's call. We look forward to updating your again next quarter by now.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect [noise].
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