Q4 2021 AerCap Holdings NV Earnings Call
Yes.
Good day, and welcome to air caps fourth quarter 2021 financial results.
Today's conference is being recorded and a transcript will be available following the call on the Companys website.
At this time I would like to turn the conference over to Joseph Mcginley head of Investor Relations. Please go ahead Sir.
Thank you operator, and Hello, everyone welcome to our fourth quarter 2021 conference call with me today is our Chief Executive Officer, <unk>, Kelly and our Chief Financial Officer, Pete U S. Before we begin today's call I would like to remind you that some statements made during this conference call, which are not historical facts may be forward looking statements.
These statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.
A couple of undertakes no obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
Further information concerning issues that could materially affect performance can be found in aircrafts earnings release dated March 32021.
A copy of our earnings release and conference call presentation are available on our website at Aercap Dot Com. This call is open to the public and is being webcast simultaneously at Aercap dot com and will be archived for replay.
We will shortly run through our earnings presentation, and we'll allow time at the end for Q&A.
As a reminder, I would ask that analysts limit themselves to one question and one follow up.
I will now turn the call over to Angus Kelly.
Good morning, everyone.
And thank you for joining us for our full year 2021 earnings call.
I am pleased to report full year earnings of $8 68 per share excluding transaction related expenses.
2021 was a milestone year for Aercap as we close the <unk> transaction on November 1st this transaction significantly enhanced and diversified our business.
Broadened our customer base and geographic reach increase.
Increase our product offering and added outstanding new talent.
Combination of which will lead to increased revenues earnings and cash flows for years to come.
This along with the continued recovery in air travel in many parts of the world puts aercap on a positive trajectory heading into 2022.
Now before we talk about Aercap and the year ahead.
I do want to address the tragic events unfolding daily in Ukraine.
Like all of you our thoughts are with the people of Ukraine.
More important than any potential financial impact is the clear and very serious humanitarian crisis, taking place in that country.
Which is impacting the lives of millions of innocent people.
Our hope is for a peaceful resolution as soon as possible.
As a result of the far reaching sanctions against Russia imposed by various governments aircraft lessors, which of operations through the EU U S and various other countries are prohibited from supplying aircraft and aircraft components to Russia.
In compliance with these sanctions aercap is terminated all aircraft and engine leases, we had entered into with Russian entities and will fully comply with the sanctions.
Prior to these sanctions being introduced Aercap had 135 owned aircraft as well as 14 engines on lease to Russian Airlines.
We had no helicopters on lease to Russian Airlines.
This represented approximately 5% of our fleet value.
As you would expect we've taken aggressive steps to recover these assets.
And so far have repossessed 22 aircraft and three engines from Russia.
In addition, we had seven aircrafts on lease in Ukraine, and five of those have been recovered.
We had zero aircrafts in Belarus.
Let me add that our lessees are required to provide insurance coverage with respect to leased aircraft.
And we are insured under those policies in the event of a total loss of an aircraft.
We also purchased insurance, which provides us with coverage when our aircraft or engines are not subject to a lease.
They are subject to a lease.
But our lessees policy fails to indemnify us.
We intend to vigorously pursue all of our claims under these policies with respect to our assets leased to Russian airlines as well as all other legal remedies that may be available to us.
Away from events in Russia.
It is important to highlight the strength of Aercap and how the overall aviation leasing environment has improved in the last 12 months.
Driven by the reopening of markets in Europe , and the U S with.
With more expected to come in Asia throughout the year.
I also want to update you on the <unk> transaction and highlight the diversification our enlarged business benefits from and.
And also how our customer interaction has changed since the closing of the transaction.
On the integration front I am pleased to report that we've made tremendous progress.
We have filled all of the senior leadership positions and I am pleased to welcome several new members to our management team, who bring with them a wealth of knowledge and experience.
I would like to acknowledge the work that is being done to integrate the two companies so seamlessly.
And to make a special mention to all of our new colleagues, who have integrated so well into the Aercap team.
Many of whom have changed locations our roles at what was an uncertain time.
I, thank them for their hard work and dedication.
Without such a seamless transition we would not have been able to sign 158 lease agreements as well as 72 asset sales and purchases in the fourth quarter alone.
No other leasing company comes close to this level of execution.
This record level of activity shows that we hit the ground running just like we did eight years ago.
And it is the demonstrable proof of the efficiency and the effectiveness of our integration process.
Another important feature of the acquisition of <unk> has been the addition of four new areas of focus for the company.
Engines cargo helicopters and materials.
Each of distinct benefits and synergies that add to the overall aercap value proposition and offer new lines of revenues and opportunities to support our customers.
What I've noticed in particular in the five months that we've now been a combined company.
Is that the level of customer engagement has really stepped up.
And that we are in a position to provide solutions to airlines and manufacturers, which no one else in the wild cat.
Our two engine leasing businesses have performed well and provide us with a broader reach into our airline customers significant.
Significant optionality in how to manage older aircrafts and valuable revenue diversification.
Our 100% owned engine leasing business is comprised almost entirely of general electric and CFM engines.
The most liquid engine types that power the world's most popular and in demand aircraft, including the Airbus <unk> hundred 20, Neo Boeing 737, Max 737, LNG Airbus <unk> hundred 20, Boeing 787, I'm following triple seven 300 ER aircraft.
Our engine leasing business has deep relationships with two key Oems GE aviation.
And CFM international known as <unk>.
Some of you may know and others may not that CSI is a joint venture between general electric and Safran.
This joint venture was established almost 50 years ago.
And it produces every engine that powers the 737 family the 737 Max family.
50% of all <unk> hundred Twenty's and 50% of all <unk> hundred 20 Neo family aircraft.
A key part of the <unk> joint venture is it spare engine leasing business known as Ses.
As part of the <unk> deal Aercap, just over <unk>, 50% share of SCS and signed a 20 year agreement with Safran regarding SCS.
Engine lease utilization continued to increase through 2021 as a result of strong demand for spare engines.
This demand is driven by increased engine utilization.
Information Aercap has access to on a daily basis.
And it is clear from our data.
That many airlines continue to delay investments in new engines and shop visits as a way to preserve cash.
This has helped demand for our short term leasing product as well as demand for spare parts.
Our materials business for Refurbishments.
As long haul travel continues to reopen in Asia in particular, I would expect to see further demand for this product in the year ahead.
Moving onto the cargo business, where we are the leader we have observed a structural increase in the demand for cargo aircraft driven by the rise in E Commerce and global supply chain issues.
Due to the structural change <unk>, which has been a global leader in cargo leasing for 20 plus years.
First it in a joint venture conversion program for the Triple 700, 300 E or with our partner Israel Aerospace industries known as AI.
This joint venture is called the Big Twin freighter program, which involves the conversion of the Boeing Triple seven 300, ER aircraft into long haul large capacity freighters.
This is the latest in a series of partnerships with III dating back over 20 years, which includes the conversion of the Boeing 737, 300, 400 as well as 767 three hundreds.
We see strong demand for this program and we have a clear first mover advantage as G. <unk> III launched this JV in 2019.
Airlines are attracted by the strong unit economics of the aircraft and the excellent payload range performance.
Given where commodity prices are I.
<unk> further demand to come in the year ahead as operator switch from four engine aircraft like the 747.
On the helicopter side.
We observed improving demand throughout the second half of 2021.
The movement in commodity prices has provided a further tailwind for demand since the beginning of 2022.
This combined with tighter OEM supply in the last number of years has helped firm up lease rates and demand.
I was able to see this level of interest and enthusiasm firsthand when I attended the <unk> Expo event in Dallas, Texas earlier this month.
And I am confident this sector will further strengthen in 2022.
The expansion into new utility missions has also been a positive driver for helicopter demand.
Two examples would be defense.
One of our larger customers provide support to the U S Navy and search and rescue which includes the growing area of aerial firefighting.
Given recent events it is likely that energy independence is going to be an ongoing theme for the foreseeable future.
And our helicopter business will help to support this trend with various new campaigns underway.
So with the stronger macro backdrop.
Wider mission capability and tighter supply the business is well positioned to capitalize on increased demand.
Now turning to passenger aircraft, we continue to see a robust improvement in demand as COVID-19 restrictions around the world are unwound.
For example, domestic travel in Indonesia, Thailand, the Philippines, Malaysia and Vietnam.
Is already back to approximately 80% of 2019 levels, which is around 30000 flights a week.
In contrast, however.
International travel in those countries remains low at only 17% of 2019 levels, our 2300 flights per week.
So there is plenty of room for growth there as restrictions ease, which will feed into future wide body demand.
Now turning to the impact of higher oil <unk>.
Certainly in the short term it is clear that the pent up demand for air travel is extremely strong given two years of lockdowns around the world coupled with high levels of household savings.
If higher commodity prices persist, we will have to see what impact they have but please bear in mind the industry was able to cope with $100 oil between February 2011, and September 2014.
Airlines in Europe benefits from higher average fuel hedging than their north American counterparts, and recent statements from the airlines suggest they are confident that they can pass through higher oil prices as yields remained strong.
One recent example was that Delta had their highest ever day of sales despite being at approximately 80% of 2019 capacity.
So what we can clearly see on a global basis is that the propensity to travel has not diminished and that the industry has proven itself to a higher oil prices, even following the financial crisis.
We have every confidence that it will do so again this year.
In summary.
The integration of <unk> has been extremely successful as demonstrated by the level of deal activity 230 deals in 90 days, which is unprecedented for the industry.
In 2021, Aercap generated tremendous earnings of over $8 per share and adverse circumstances and executed the largest M&A deal in the industry's history.
As we look forward the rebound in demand for air travel and our strong balance sheet I would like to the benefits of the <unk> transaction sets aercap up for many years to come.
I'll now hand, the call over to Pete for a review of the financials.
Thanks, Scott Good morning, everyone before going through our fourth quarter results I'd like to give you an overview of our Russian exposure from a financial standpoint.
As Gus mentioned prior to the Russian invasion of Ukraine, and the imposition of sanctions Aercap had 135 owned aircraft and 14 owned engines on lease to Russian Airlines. These assets generated monthly lease rents of approximately $33 million based on the month of December 2021.
The net carrying value of these assets on our balance sheet was approximately $3 1 billion as of December 31, 2021 that includes the net book value of flight equipment maintenance rights assets on balance sheet maintenance reserves that we hold against them and other related assets and liabilities and that rep.
Presents around 5% of the total net carrying value of our assets.
Of course, we intend to fully comply with all applicable sanctions.
We've issued termination notices in respect of all of our aircraft and engine lease to Russian Airlines, and we've taken aggressive steps to recover our assets.
As of today, we have removed 22 of our owned aircraft and three of our owned engines from Russia.
Net carrying value of the assets that we've removed to date is approximately $400 million.
And we are currently assessing the condition of these aircrafts.
We have approximately $260 million of letters of credit related to our Russian assets that are not on our balance sheet for.
For the most part these represent security deposits that were not paid in cash, but rather provided us a letter of credit with a bank that can be drawn upon in an event of default.
We presented a request for payment to all of the banks, providing these letters of credit.
So far we've received approximately $175 million from these banks and we're pursuing payments of the remaining amounts and enforcing our rights under the remaining letters of credit.
That leaves us the net remaining exposure after the letter of credit proceeds already collected and based on the net carrying value of assets already removed of approximately $2 $5 billion for our assets that remain in Russia.
Of course, we continue to make efforts to repossess additional aircraft and engines from Russia, but it is uncertain, whether we will be successful in these efforts and many of these aircraft are now being flown illegally by our former airline customers.
We expect to recognize an impairment on the aircraft and engines that remain in Russia, which may occur as early as the first quarter of 2022.
I also need to review for impairment the assets that we have removed from Russia.
As Gus mentioned earlier, our lessees are required to purchase insurance coverage under our leases and we also purchased our own insurance to provide contingent coverage as well as coverage when our aircraft are off lease we will vigorously pursue our rights under all of these policies last week, we submitted an insurance.
Claim for approximately $3 $5 billion with respect to our aircraft and engines remaining in Russia.
We also plan to pursue all other avenues for the recovery of the value of our assets, including other legal claims available to US. However, it is uncertain whether these efforts will be successful.
So to sum up the total net carrying value of our assets on lease to Russian Airlines was $3 $1 billion. This.
This will be offset by the value of assets that we're able to remove from Russia and the payments that we receive under our letters of credit and.
And of course, ultimately our economic exposure will also be offset by any recoveries that we obtain from insurance or other claims.
Now I will turn to the fourth quarter results, which is the first quarter to include the results of the legacy <unk> business.
The fourth quarter includes results for <unk> for the two months starting November one the date, we completed the transaction through December 31.
Our total revenues for the fourth quarter were $1 $442 million, an increase of 40% from the fourth quarter of 2020.
This increase was primarily due to the inclusion of basic lease rents from the legacy <unk> business the.
The impact of cash counting in the fourth quarter was $68 million, which is a reduction from the impact during the third quarter. Notwithstanding the fact that we now also have some legacy <unk> aircrafts on cash accounting.
Maintenance rents were slightly lower in the fourth quarter as we had a lower number of lease terminations in the fourth quarter of 2021.
We continue to see positive momentum with our customers from the global recovery in air travel our operating cash flow for the fourth quarter was $1 7 billion, which was helped by the collection of $409 million related to our the Tam claim.
Our cash collection rate was over 100% as we had net repayments of deferrals during the quarter.
Our deferral balance at the end of December was $587 million, which was higher than the $427 million that we reported at the end of the third quarter due to combining the two businesses. However for both aircraft and legacy <unk>, we saw a reduction in deferral balances over the past several quarters and we would expect this trend to.
Continue during 2022.
During the fourth quarter from our owned fleet, we sold 19 aircraft two engines and three helicopters for a total of $412 million. The average age of the assets that we sold was 15 years and our net gain on sales for the quarter was $25 million or a 6% gain on sale margin.
Other income was $38 million for the quarter, which increased due to higher management fees and other items.
Turning now to expenses, our total expenses were $1 $353 million for the fourth quarter, an increase due to the <unk> acquisition. The main areas that increase were depreciation and amortization due to the larger fleet interest expense due to the larger debt balance other leasing expenses and SG&A.
Because of the increase in the size of the business.
We also recognized expenses of $139 million in the fourth quarter related to the <unk> transaction.
This primarily represents the amortization of the remaining cost of the bridge financing facility that we put in place last March as well as legal and other fees related to the transaction.
Excluding the costs related to the <unk> transaction net income for the fourth quarter of 2021 with $211 million or $1 <unk> per share.
For the full year of 2021 aircraft generated net income of just over $1 billion or $6 71 a share.
Excluding GE cash transaction related expenses net income for the full year was $1 $294 million or $8 68 a share.
We continue to maintain a strong liquidity position as of December 31, our total sources of liquidity were approximately $18 billion.
Which resulted in next 12 months sources to uses coverage ratio of two two times well above our current target of one five times and gives us excess cash coverage of approximately $10 billion.
As I mentioned earlier, our cash collections continued to be strong at over 100%.
Operating cash flow was $1 $7 billion for the fourth quarter.
We continue to maintain a very strong balance sheet, our leverage ratio at the end of the quarter was $2 66 to one which is slightly below our target of two seven to one and which is well ahead of what we forecasted when we announced the <unk> transaction. This time last year.
Our secured debt percentage was approximately 15% of our total assets the lowest level in the company's history.
That's also a significant decrease from 23% as of the third quarter prior to completion of the <unk> transaction.
Finally, our average cost of debt has come down significantly and is now three 2% compared to three 8% for the fourth quarter of 2020.
As many of you know when we acquired the <unk> business, we were required under GAAP to fair value all of the assets and liabilities.
The net asset value of the <unk> business on their closing balance sheet was $33 5 billion. We paid GE total consideration of $30 2 billion, which was comprised of $22 6 billion in cash $1 billion of notes issued directly to GE and $6 6 billion of equity, which is a 100.
11, 5 million shares multiplied by the stock price on the closing date.
So that 32 billion is the total amount of value that we had to allocate through the purchase price allocation or PPA process.
As you would expect the largest amount of value is allocated to flight equipment. It's important to note, though that in purchase accounting we are required to separate the metal value of flight equipment assets that is based on the actual physical condition that they are in as of the closing date and other assets related to the lease contracts.
We have in place for that flight equipment.
We have $24 $4 billion of flight equipment based on the physical condition of the aircraft engines and helicopters.
In addition, we also have a further $4 billion of related maintenance rights assets. So altogether. The total value of flight equipment assets is $28 4 billion.
We have another asset of $3 billion that reflects the prepayments on flight equipment, or Pdp's, which <unk> made to the Oems for future orders.
In addition, we recognized an accrued maintenance liability for amounts that we expect to reimburse our customers for future maintenance events and there are also some other assets and liabilities.
I thought it would be useful to explain a few of these key items and a little more detail for.
For those of you who are familiar with our acquisition of ISC. In 2014, we went through exactly the same process. This time and recognize the same types of maintenance rights assets. These premium assets and maintenance liabilities that we did back in 2014.
The flight equipment of $24 4 billion was based on the actual maintenance condition of each asset as of the closing date and the discounted cash flows over the remaining life of that asset.
This amount will be depreciated over the remaining useful life of each asset.
For most passenger aircraft that means over the remaining useful life until the aircraft is 25 years old.
The maintenance rights asset represents the difference between the physical condition of each asset on the closing date and the contractually required return condition at the end of the lease.
Many of you know the lessee is responsible for the maintenance of our aircraft while they are on lease.
Either make maintenance reserve payments to us on a monthly basis based on the utilization of the aircraft over the previous month, which is called a maintenance reserve contract.
Or are they make a payment to us at the end of the lease for the value difference between the actual return condition and the contractually required return condition, which is called an end of lease contract.
This maintenance rights asset is amortized over the remaining term of the lease not over the remaining useful life of the aircraft.
This effectively results in accelerated depreciation of the asset over the remaining term of the lease.
It is amortized when events occur rather than a straight line basis. So it can move around from quarter to quarter, depending on what events happened during that quarter.
When we calculate the fair value of assets, we have to look at the market as of the closing date, if we have a lease thats in the money in other words, where the rental rate and the lease agreement is higher than the prevailing market rate as of the closing date, we have to recognize at least premium asset at.
<unk> premium asset represents the discounted value of those differences between the contractual rate and the market rate and is amortized over the remaining term of the lease as a reduction to basic lease rents.
This has two impacts first it reduces the amount of revenue that we will report during the remaining term of the lease and second results and accelerated depreciation of lease assets over the period, that's because of the lease premium asset light the maintenance rights asset is amortized over the remaining lease term not the remaining useful life.
And finally, the maintenance liability is the amount that we expect to reimburse our lessees for maintenance events that occur during the remainder of the lease liability of $1 $2 billion will increase as we will receive future maintenance payments and will decrease when the maintenance events occur and we are reimbursed or less.
Yes.
So what does all this mean in practice it means that the purchase accounting rules have a significant impact on our balance sheet and our income statement to.
To give you an idea of this during the fourth quarter alone. Our revenue was reduced by a noncash amount of $129 million due to amortization of the maintenance rights asset and lease premium asset during the quarter.
I realize that's a lot of information on accounting topics, but given the sizes of these items and the significant impact on the financial statements I thought it would be useful to explain all of this in some detail.
So with that operator, we can open up the call for Q&A.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, everyone to ask a question. Please press star one at this time, we will pause for a quick moment to assemble the queue.
Alright, and we will take our first question from Jamie Baker with Jpmorgan. Please go ahead.
Hey, this is James on for Jamie and Mark who suddenly regards just wanted to start off maybe with one question on the older Order book and then a second question on Russia, but for the order book. This year can you just give an update on the placement of the book for 2022 I'm not sure. If you disclosed in the past but is.
As a percent of fleet that's aircraft on the ground.
But just any general color on the forward order book.
Sure on the order book, we're seeing very robust demand around the world.
Beat us in Southeast Asia, where we're starting to see the recovery start to take hold.
We look at South America, we've been placing aircraft there North America, we've placed aircraft there and in Europe , we're seeing the wide body new activity placement pickup as well with a couple of placements and.
The European Arena.
Now regarding 2022.
<unk> had no aircraft left to place.
Prior to the Russian sanctions, we will have a handful of airplanes now in place and we're seeing very good demand for all of those assets. In fact last week, we had several airlines looking for those slots. So those airplanes will all get place and the order book itself is.
90% focused on the narrow bodies predominantly <unk> hundred 20 Neo of course, and then to a lesser extent the Max So we up which we're also seeing improved demand coming in there and I think as we have seen elsewhere in the world.
The demand to travel has not gone away and it comes back faster than the airlines realize in every region.
And we're seeing that now in southeast Asia yesterday, I had a long discussion with them. The CEO of one of the largest airlines in Asia.
He was keen to see what we had observed as.
Coverage took hold in other parts of the world and they want to be ready to meet the demand that they believe will come throughout the end of this year.
Sorry, what was your second question.
Well I'm not sure if you disclosed the aircraft on the ground.
Essentially it.
Our aircraft on the ground I mean, it's de Minimis, excluding Russia.
Okay. That's helpful.
And then just moving to Russia.
I guess bigger picture how does this situation, Russia caused you to rethink how you.
Think about different markets across the world in terms of political risk or.
Yes.
How are you think about the risk premium globally across your portfolio.
I think look.
Our.
<unk> unique position in the industry uses tremendous diversification.
Beat us in the regular way passenger fixed wing business we're in.
We're pretty much equally represented in each major country in the world.
Or region that we would track global afk that would tend to match, where we are.
In terms of them are as a percentage of our fleet. There. So I don't see any major change there at the base is highly diversified and then post the <unk> transaction you have to look at the business now and say okay.
We have the passenger business, we have the freight business, we have the biggest engine business in the world with the biggest helicopter business in the World helicopter business is one that's been of course, a pleasant surprise given what we have seen a car in commodity prices, we've seen a significant uptick in demand for <unk>.
Over the course of the second half of 2021 that has.
<unk> increased significantly over the last couple of months as we see energy independence, and security, becoming more and more of a theme.
Okay.
Got it.
And then if I can just sneak in one more.
A quick one hopefully.
Can you provide a breakdown of the exposure from state owned airlines versus private and do you think there is any difference in how that will be treated by insurance.
No there's no difference at all.
There is no difference whatsoever between the two.
Got it okay. Thanks, a lot for about 70%, yes, sorry, we're about 75% non state owned if you break it down by book value.
Got it great. Thank you.
Okay.
Alright, and we will take a question now from Helane Becker with Cowen. Please go ahead.
Yeah, Thanks, very much operator, hi, everybody and thank you very much for the time.
So.
I guess the question is with respect to cargo because that was not a business that you were in in.
And you commented about Youre surprised with respect to helicopters what about cargo are you surprised at the demand there and how are you thinking about that going forward and then the other question is on.
Things like EV Tal.
I don't think that's on your radar right now, but how are you thinking about that going forward as well or are you thinking of being a fast follower or how are you thinking about that thanks.
Sure.
So on cargo Helane.
G test has been a leader in the cargo business for the last Hershey years.
They have been at the forefront of every major cargo conversion program be that to 737 classics three hundreds to four hundreds favorite a launch customer on the 800 conversions the MD 11 conversions.
And so they had a much deeper knowledge of that business and then Aercap did and Thats why we are delighted that the entire cargo team.
It's still here with us and he is leading.
The growth of that business significant growth.
The thing that <unk> did and this is long before we saw the exponential growth.
In the demand for cargo, resulting from the pandemic was <unk> because of their knowledge entered into a joint venture agreement with III, we choose the most experienced cargo conversion house in the world.
Launching a cargo conversion program is a very difficult thing to do and it requires deep engineering expertise and knowledge of the markets. So <unk> entered into the joint venture with IAA.
And we have.
Clear first mover advantage there on the Triple 700, 300, EUR conversion program and we're seeing very good demand for that and we're going to see our presence in the cargo business grow over the years to come as well. So we're very excited about that on the EBITA is look our focus at the moment Helane is on our own business is that we have.
And we're very confident in those.
Yes.
Okay.
Fair enough. Thanks, very much those are my questions.
Welcome.
Alright, now well hear from Moshe Orenbuch with credit Suisse. Please go ahead.
Great. Thanks Pete.
Is there a way to kind of bridge how to think about.
Okay.
The revenue side of the equation from what you saw in the fourth quarter.
The major puts and takes as to how youre going to get into.
What is going to look like in early 2022, and what the trends are that.
We will be kind of influencing.
Influencing that quicker is there just a way to cut it.
Give a little bit of a bridge obviously you have got one months that she cast wasn't in there, but there also.
Of other sorts of things.
We should be aware of.
Sure Moshe look I think given the uncertainty around Russia at the moment, it's difficult to give guidance on 2022.
What I would say is if you look at the revenues for the fourth quarter I mentioned this in my in my remarks, but you do have some things coming through that affect those like the lease premium asset rate the amortization of that.
There are a number of other kind of let's say distorting things that happened in the fourth quarter.
So it doesn't make it that greater run rate to be looking at that from that standpoint.
I'd say overall, though if we look at kind of the trends that we've been seeing in terms of cash accounting and cash flows and things like that those have all been positive and we would expect those to continue right in terms of our deferrals coming down our cash collection rate was over 100% in the fourth quarter I think we will see a good rate in the <unk>.
First quarter as well so all of that continues to progress.
But.
Like we had said in previous calls I do think that revenues are going to climb like leaving Russia side revenues are going to climb during the course of the year as we continue to emerge from Covid.
Just to just to drill down on that for one second you did mentioned that.
Yes.
The maintenance rights.
<unk> premium are amortized over the remaining life of the leases versus the licensee aircraft what are those two numbers.
Thank you.
What is how big a difference.
Well I mean, what Youll see is hundreds of millions of dollars coming through from those two items combined right. During the course of the <unk>.
Each year really because when you think of the average remaining leases either several years right for five years. So most of that amount will be coming down over that period like if you. If you go back to Dialup see acquisitions Thats. When you saw those big numbers coming through that impacted our results and so that's why.
Went through that long and maybe laborious accounting tutorial there because I just think it's important for people to to recognize these items and to understand the impact. They have they are noncash items from an economic standpoint.
I think it's reasonable to look through them, but obviously, that's not how the accounting treatment works at both just had a very simple level. If we have two identical aircraft. One was aercap. One was GE cost with identical features identical economics purchase prices. What you will see is that post the transaction if the <unk> assets.
Which it would have had some maintenance rights asset and bleach premium modest then that will dampen the profitability of that asset artificially over the next couple of years.
Because it's just a noncash acceleration of depreciation that's that's what it is.
Okay.
Understand the concept I guess I'm, just trying to understand whether youre going to be able to call out those amounts specifically for us so that we can identify.
Yes look I think I mean, each quarter, we would plan to to to explain all of the factors that affect the results just like we did in this quarter Moshe I mean, we gave the number yes, yes I do.
Do you think that that's something that people should be considering.
At the moment, it's hard to predict it for 2002 as I said.
So we'll have to we'll have to come back to you later on that.
But it is it is fair to say that since it's on a remaining license of leases some of those leases are expiring each year. So.
On balance it should be declining.
<unk>.
Yes. So overall you are right I mean basically that.
I showed was an aggregate amount so you've got some where it's at least that lasts for a year or some three years 75. So it's all of those combined so you should see it rolling off over time as we did with Io, let's see transaction right.
What's harder to predict is the.
The maintenance rights asset gets amortized when events occur.
And that.
You basically have to forecast out and say okay. When are those events can occur. So it can move around a lot and it can be lumpy from quarter to quarter. That's what makes it more difficult, but moshe as we said we will show you every quarter what it was and of course as we said, it's an accelerated charge is noncash and it has no economic impact on the business.
Perfect. Thank you very much.
Sure.
Alright, and our next question will come from Vincent <unk> with Stephens. Please go ahead.
Hey, Thanks. Good morning, Thank you for taking my questions.
And then just kind of a follow up to moshe's question, but.
Primary.
<unk> I'm getting from investors. This morning is.
When I take the when we take the dollars for adjusted EPS for the fourth quarter.
Is that a good run rate when we think about 2022, so that would be annualizing to about $5 a share of EPS.
In 2022.
And then relatedly.
If you can help us think about that maintenance right asset that lease premium asset.
The impact to 2022, I know, it's kind of lumpy, but if I remember correctly previously yes.
<unk> in the proxy so any help you can give us.
Whether fourth quarter before the impact of Russia.
Good run rate when you think about GAAP earnings.
Some of the moving parts to it.
Sure So look overall.
In terms of guidance I think it's difficult to give that at the moment across the board but.
In terms of those two items, yes, I mean look I would say I expect that to be over $100 million.
Our quarter combined for those two.
And it could be well over 100 in certain quarters. So I don't think its necessarily about run rate to be using in that regard starting most readouts with a run rate of the earnings not the charges the charges I'm talking about the chart yes.
Those charges Moshe.
Thanks Ryan.
Yes.
And then just in terms of the earnings for the fourth quarter I would say.
It's <unk>.
A messy quarter, because you do have a number of things coming through there right in terms of the transaction itself. There are certain you saw the transaction related expenses. There are other things that you have to book just under the accounting rules that.
That kind of complicates it for the fourth quarter. So it is not a great run rate from that perspective.
I guess, the one thing that I could do from a in terms of thinking about the year is give you an idea of some of the drivers right like Capex. For example, so capex I think will be a little over $4 billion for the year sales were expecting 1 billion and a half obviously that will depend on how the sales market plays out but that's.
What we.
Expecting.
And then SG&A because that really shouldn't be affected by any of these other things I think that will run at probably a $110 million a quarter, including stock based comp. So if that's helpful and one other thing in the fourth quarter Moshe was a number of charges were not allowable for tax purposes. So that drove up the tax rate to an unusually high rate in the fourth.
Quarter, which won't be the case going forward, we went to 20 almost 22% in the first fourth quarter, which won't be the case in the rest of the year no I mean, I think so overall, our effective tax rate was 14, 2% for 2021 and I think it will probably be around that for 2022 I think between $30.
<unk> percent, which is consistent with what it was before.
Okay. Thank you yeah, I appreciate all that detail and I understand there is a lot of moving parts. So thank you for that.
Maybe second question.
If you could talk about your thinking about impairing the aircraft that are in Russia. If you could maybe help us think about how to frame that and how how insurance comes into play when you think about that impairment. Thank you.
Sure.
So look we expect that we'll have to take an impairment based on the fact that the leasing has been terminated the airlines aren't returning our aircraft and in many cases as I mentioned they are continuing to fly them.
So we will do our impairment review when we prepare our first quarter results, but under the accounting rules, we may not be able to immediately recognize any recoveries from insurance claims if they're contested and in this case, we expect them to be contested just given the large sums involved across the industry.
So thats why we wanted to highlight for everyone. What the exposure is and to give people an idea that that may occur in the first quarter as I said, it's not we haven't gone through that whole analysis, yet, but just wanted to make sure that people were aware of it.
And obviously, we've submitted a claim of $3 $5 billion and we believe the full amount of our $3 5 billion claim is valid.
Great. That's very helpful. Thanks, very much guys.
Sure.
Alright next we'll take a question from Ross Harvey with Davy. Please go ahead.
Hi, Thanks, guys.
Just wanted to dive into the insurance standpoint, Okay. So you have $3 5 billion, Sam and I'm just wondering.
Is that net of any of the money in such a already recovered or the aircraft's jabar cohort and I'm just wondering as well are there any overlaps not insofar as you claimed through the airline's insurance on SAP rates for your all contingent insurance on just where might that net awesome.
Also just to.
Todd in SaaS.
In terms of the accounting for Q1, if you works have been looking at impairments on the aircraft.
That are based in Russia, which you havent recovered.
Would you be allowed to put unexpected insurance claim into your expected cash flow models on those aircrafts to the degree that you might have expected insurance payouts I'm just wondering what we're likely to see in Q1.
Thats potentially at a later date in terms of insurance.
It's just the timing of any of the impairments.
Gains on us.
Sure Ross So first the three $5 billion figure that relates only to the aircrafts and engines, which have not been recovered. So those are the ones that are still in Russia, and that's a claim under our policies will also have to look at other policies the airlines policies and others.
To evaluate those for claims as well.
And in terms of.
When could those when could we receive those amounts I think we will just have to wait and see its very too early to do that obviously, we just filed that claim.
Last week.
As it relates to the impairment and whether you can count the insurance.
Proceeds.
Against that when looking at the assets and doing the cash flows. So as I said, we havent done our review for the first quarter, yet so I don't want to prejudge that but our understanding is that as long as insurance claims are contested that you cannot count them right and I just think it's reasonable to assume that they will be contested in this.
Case, and so that's why I think what we're likely to see is a timing mismatch between when you have to do that impairment analysis, and when youre likely to get recoveries under the insurance claims or other things that we may get.
Okay. Thanks, Pete just in the area of accounting then if I may so I'm just trying to look at the reevaluation of GE costs assets as it compares to the pro forma figures that you gave in November and protect her I think theres been a.
Pretty big increase in terms of the.
These premium assets, they look like they're about $500 million higher.
The maintenance rights assets look like they are about the same can you just comment on how there was reevaluation between October and now represent just the case of getting in to look at the actual contracts themselves related side. I think you gave a figure of $1 9 million at the end of the prepared remarks I'm just wondering does that relate to the.
What we would remember from the ILS eight days is that is that like the additional maintenance rights asset amortization of above and beyond what would have been there from a DNA perspective on on the aircraft.
Yes, so on the second one yes effectively that is the that is the same thing that you would have seen in the LSC acquisition.
So when we did the purchase price allocation for the pro forma is pro forma is you have to do under different rules right and there are assumptions about the date of those and I would say, even though we had access to all the contracts before and got to see them, obviously during our due diligence.
The the pro forma is where based on the information that we had then factor in diligence and so you have to basically roll all of that forward and look at the actual condition. So that was based on some estimates there and when we looked at the actual condition as of November one when the transaction closed that's when you'd have to go into.
Into detail on those and so it really it really just reflects a differing maintenance condition for the most part I mean, you also look at the <unk>.
<unk> environment at the time, but I don't think that was really a big driver of it at that point.
And I would say just just for everyone's clarity because the transaction closed on November one.
And the Russian Russian invasion and sanctions all happened in February that didn't affect the PPA at all so that was all that was all done in unaffected by this because this was the Russian thing is really a subsequent event.
Thanks.
If you don't mind I'll, just get one more follow up if that's okay.
Just in terms of the SG&A and the leasing expenses in Q4 can you just try and break out first a little bit more what.
Kind of so-called transient factors that are in there.
Just what we should be looking at us in terms of the run rate into Q1.
Sure. So look at SG&A as I said, I think that I think that a reasonable number to assume on a quarterly basis $110 million.
Which is encompasses the stock based comp too right. So all SG&A plastic stock based comp.
I think in the in the fourth quarter it was probably.
Elevated by $15 million to $20 million or so SG&A, just given kind of onetime things that don't strictly fall under transaction expenses, but really our transaction expenses for all intents and purposes and then on the leasing expenses side, I'd say that was probably elevated by $60 million to $70 million for <unk>.
Similar things so as I said, there is a number of.
The things that the accounting rules just require you to do.
Those are some of the effects that we saw one other thing and for in the fourth quarter.
Came out of the accounting rules and is there were quite a number of instances where <unk> contracted a sale at a gain.
Under the accounting rules, what we must do is key.
<unk> Dot office at the sales price. So no gain is recognized but what happens is that of course, you have more money to write down assets that remain on your balance sheet. So that at a further dampening effect on the earnings of the fourth quarter for the company because there are quite a number of airplanes that.
Hot gain.
Gains built into them, where they were in staffing for values that were higher than the <unk> cost carrying values and of course, we bought the assets at lower than the GE cost carrying values.
Got you. Thanks, Thanks both.
Sure.
Alright, and our next question will come from Katie O'brien with Goldman Sachs. Please go ahead.
Hey, good morning, everyone. Thanks, so much for the time.
Not to belabor this.
Just one more on the Russia impairment accounting.
5% net book value at least thrush Airlines at year end 2000, and since then I think you bought back just under $600 million of that value.
Offset through letters of credit repossessions.
On my math that leaves about 4% of your book value exposed, but how do you think about further offset set 4%.
Potential book value hit if any does that already include cash security deposits.
On sheet, and then obviously totally understand theres some accounting practices.
Where there might be a mismatch between insurance proceeds and you guys have a good day.
The impairment, but down the line what any insurance proceeds come in at a gain potentially offset impairments taken anytime real estate like a couple of questions in one there.
Yes, sure no problem so the.
The net carrying value of $3 1 billion.
You can see this on slide six that I went through but that incorporates the net book value of the assets.
<unk> asset and other things these premium assets that I mentioned.
And it also incorporates the maintenance reserves.
Roughly 700 million. So those are the reserves that we got for it and then in addition to that we've got that $260 million of letters of credit, which are which are also protections that we have and we're drawing on them, but we don't put them on our balance sheet, because it's not a cash reserve that we hold its just its a letter of credit that we can draw on.
And so.
If you the way I would look at it is I would say take that $3, one net carrying value subtract the amounts of.
Letters of credit that we've received to date and we expect to continue to get these.
And then subtract the carrying value of the.
Aircrafts that we removed from Russia, right, so roughly $400 million and that gets you to around two 5 billion.
So that's what I would look at it as the net exposure there.
And and in terms of and I guess, maybe just to frame. It in terms of what does that mean for US right. So if we had to write down that entire amount, let's just say we had to write down that entire amount in the first quarter the impact on us would likely be to take our leverage ratio up to about three to one right. So obviously thats a setback from where we were.
We're today, which is just under two 7% to one.
But we have to keep in mind. It is about 5% of the fleet or a little under given those offsets and so you know we would expect to delever. During the course of the year back towards our target level of two seven to one.
So I think that from that standpoint, while as I said, a setback, it's a manageable one and the overall trajectory of the business isn't really affected I.
I should say also because we have gotten some questions in terms of financial covenants.
Unemployed as well, we're well below any thresholds on that front.
So now in terms of the insurance recoveries right. So let's say you had to take that if we took that write down during the first quarter than any insurance recoveries coming in would just come in as other income.
So it's not necessarily a gain is just other income that you would be recognizing when when you receive it or when it is probable overseas.
And as Pete mentioned, there the three to one ratio that we would go to in that scenario.
What we told you we would be us once we close the <unk> deal at December 31.
What has happened of course is that the <unk> transaction has been a big success. We've seen there was a very strong earnings between March and December of 2021.
Which gave us a significant boost in our business that outperformed the base case there.
Got it.
Great color.
Really just a bit of it.
<unk> mismatch obviously.
With all the uncertainty I understand there is some concern, but but good to now.
And then maybe just a longer term one so as we think about you guys combined combining the two fleets in the next couple of years should we expect to see something similar to what we saw both I, let's see you guys.
The fleet for a couple of years to clean things up the gains on sales to Delever.
Different this time around and then if we do see the fleet get a little bit smaller over the coming years as it as you go through those transactions.
To what extent should returns improve or maybe we see shareholder returns that even if the fleet is getting a bit smaller we might see.
Value per share EPS per share. However, you want to think about it improve from here.
So much for the time.
I think that's driven by the fundamentals of the business.
And if you look at the nine months from March to December .
Which will hurt the business was owned by us.
It outperformed what we thought as we go forward I think youre going to continue to see that trend that's going to grow book value per share that's going to enhance our ability to allocate capital as we see best and we've been very disciplined and careful stewards of your money to shareholders over the last 10 12 years, if you've seen.
And we will always do what we think is in the best long term interests of the business on a risk reward basis as I said look we came into the end of the year in December and an extremely strong position way ahead of where we thought we'd be.
At $2 66 to one on the debt equity, where we had originally guided 3% to one now as Pete mentioned the events of Russia are certainly a setback, but they are a very manageable setback and the core of the business is still extremely strong as I said, we're seeing the recovery in aviation is continuing to occur.
Half a.
A diversified business now a leading position with the engines and to.
To come back to asset sales youre going to see a very similar playbook I would imagine to what you saw eight years ago.
That's great lot to look forward to you. Thank you so much.
Sure.
And there are no further questions in the queue actually we'll take one more question here I apologize, we will hear from Ron Epstein with Bank of America. Please go ahead.
Okay. Thanks, guys.
Last but not least hopefully.
Couple of questions for you one question a quick one I've gotten from some investors is what are your thoughts on capital deployment I mean, how should we think about share buybacks going forward you guys did generate a bunch of cash in the quarter.
Well I mean, Ron I think as I just said there.
We obviously came in to the year end at an extraordinarily strong position way ahead of where we would expect it to eight.
The events in Russia have satisfactory little bit, but I think our priority now as we said is we want to move up on the racing spectrum as well, but we have always been extremely disciplined around the best use of capital at how to deploy that capital B with <unk>.
Share buybacks or asset acquisitions, M&A, but I do think it's worth noting wrong.
I started here when we did our first earnings call the basis had about $3 5 billion of assets today, It's got 75 billion.
And.
Along with that has come with very disciplined deployment of capital.
Got it and then maybe a second question a quick one.
So, Russia, clearly violated Cape town.
What does that mean going forward to place airplanes into emerging markets as theyre going to be some sort of increased risk premium that's got to get priced into leases.
Yeah.
Russia is clearly a black Swan event and over the course of 50 60 years of aircraft leasing and we haven't seen an event of this magnitude.
<unk> I think <unk> and.
All the other countries we're in.
Yeah.
The lessees comply with the rules of the land.
And so.
I think that there is a temporary aberration here related to Russia of course.
But I don't believe that that will have an impact on other jurisdictions around the world and the long term.
Got it got it and then maybe just two quick airplane questions. What are you expecting the jet 780 Sevens I mean.
There's still haven't been delivered I mean, when do you think we could start seeing them delivered and when do you expect to get yours.
Well, Ron I guess.
From our own unique position in.
And the industry as the largest marginal supplier of capacity to the airlines.
On the supply side.
The longer airplanes don't deliver the more positive it is for us.
That's a fact simplified.
However, I do believe the 787 is a great airplane and we look forward to getting us.
When they will start to deliver again.
And indeed, I guess, Ron its off when they start to deliver really is the pace at which they deliver and the same is true of the Max and the pace that it can be deliver and we will have to see on the Airbus side as well.
The impact supply chain out there the other part of our business on the supply side that has been extremely constrained over the last five years has been the helicopter side and again, we are at the marginal supplier of capacity to that industry too.
So as I look at supply side.
Given as I said aircraft's unique position.
The key marginal supplier of lift to the industry.
Where we have supply hiccups, it's not always about thing for us.
Got it got it and then maybe just one final one if I can.
It looks like the 737, Max seven and 10 might not actually get certified in time.
Do you expect that to impact the deliveries of those airplanes.
Timing and pace at which they can be delivered.
It may but it's very difficult to say at this point, what I can tell you about the Max at the.
The Max eight is in strong demand out there right now the Max eight is an extremely capable aircraft.
And that airplane is seeing strong demand out there for that matter is the 737 800, which is a tremendous airplane to notwithstanding the tragic events of <unk>.
That occurred in China, China Eastern but.
And what we have seen a bit surprised by is the Max eight that we've seen the gap on the lease rates pretty much close now between an <unk> hundred 20, neo and the Max eight or they're not that far apart at all where there was a significant gap for much of the last couple of years.
Got it thank you very much.
Thank you all very much.
And that concludes the Q&A session for today I'll now hand, the call back to Angus Kelly for closing remarks.
Thank you all for joining us today for the call.
As you can see we're very excited about the future for this business.
We saw the capability of the company over the course of the last nine months.
2021.
Notwithstanding the events in Russia, which as I said are are certainly a setback, but a very manageable one and we are very confident in the future as we see the recovery in air travel gain traction around the world with the Covid restrictions being unwound.
Again, thank you very much for joining us on the call and look forward to speaking to you again in a couple of months' time.
And this concludes today's call. We thank you again for your participation you may now disconnect.
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