Q2 2019 Earnings Call
Thank you operator, good morning, everyone and welcome to Aircastle Limited's second quarter 2019 earnings call.
With me today are making glaze Chief Executive Officer, Aaron Dulcie, Chief Financial Officer, and Doug Winter Chief Commercial officer.
I would like to point out that statements 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 earnings release for the full forward looking statement legend and will now turn the call over to Mike.
Thanks, Frank and welcome to Aircastle second quarter 2019 earnings call.
As usual I'm going to discuss our second quarter results and then review market conditions and our strategy for the second half of the year.
Ill, then turn the call over to Aaron to cover our financial results for the quarter, followed by Q and a.
Before I get into specifics I'd like to highlight the following.
First we had a strong second quarter with quality core earnings and gains from sales expected in Q2 that will slip into the third quarter.
We've completed the task of Repossessing and re leasing the aircraft, we had with hobby ACA, Brazil, and jet and expect our utilization and net interest margins will be back to historical levels. During the second half of this year.
Overall, the market environment continues to be robust with continued demand for leasing of our mid life narrow body aircraft and strong demand in the secondary market.
While we don't own or have commitments to acquire Boeing 737, Max aircraft. We are closely monitoring the situation. The grounding has created more strength in interest in our 737 ngs, but the benefits for us are modest given that most of our fleet is already on fleet.
Let me quickly start with our Q2 results for the quarter, we reported diluted EPS of 41 cents per share and adjusted net income per share of 48 cents.
Our book value per share at the end of the quarter was 20 696 per share up 7.4% versus a year ago.
While the cash return on our shares IDR dividend yields averaged 5.9% over the past 12 months.
This represents a total 12 month return of 13.3%.
Our trailing 12 months cash ROE was 11.8% and our after tax GAAP ROI was 10.3%.
There continues to be strong secondary market demand for aircraft, meaning it's a good time to be selling mid aged aircraft. There are multiple bids prices are strong and there is abundant available financing.
Since the beginning of 2015, we've sold 116 aircraft for total gains of $201 million.
We had several aircraft that were expected to close in Q2 flip into the third quarter and we estimate that this timing shift reduced our Q2 19 diluted EPS by about a nickel.
Alan will cover the timing of our sales in a few minutes, including our guidance for gains on sale in the third quarter.
There are many more narrow body operators in wide body operators. There are more routes, where these aircraft to be used and there is less operators different customization.
This supports continuing demand for narrow body aircraft and makes it easier to move them from one month to another.
For this reason our acquisition strategy has been focused on identifying narrow body aircraft investment opportunity, where we see the best value in liquidity and market depth.
In many instances we are assuming that we are acquiring aircraft on their last lease and plan to part them out at least in.
Substantial majority of our recent aircraft acquisitions have involved other aircraft lessors, who are seeking to manage their liquidity leverage and portfolio metrics.
We have complemented this with the number of transactions with airline customers involving appropriately price special situation.
For the full year 2019, we have closed or committed to close 40, narrow body aircraft or about $1.2 billion.
During the second quarter, we acquired tenant craft for $325 million and for the second half we have committed to acquire an additional 16 aircraft were $404 million, our professional reputation and capability as a reliable counterparty enable us to continue to find situations that play to our competitive strengths speed and execution Sir.
At the end of the second quarter. Our total fleet of owned aircraft increased to 268 units with 238 or 89% of the total representing narrow body.
We quickly place the aircraft, we present from our Bianco, Brazil, and jet Airways underscoring our placement capability and the demand for aircraft in our fleet.
We told you on our first quarter call that our utilization rate would be impacted by the aircraft that were previously on lease with these airlines.
I'm pleased to report that we leased all 18 aircraft that we repossessed and deliver 17 of those aircraft for the next operators.
The only undelivered aircraft is undergoing maintenance work and we expect to deliver to this new customer during the third quarter.
Utilization in the quarter started to improve and came in at 94% as the grounded aircraft began gradually transitioning during the latter part of the quarter.
We expect utilization yield and cash net interest margin to return to more normal levels in the second half of 2019.
In addition, our aircraft monitoring list remained at zero at the end of the second quarter and we continue to have a strong liquidity position with minimal forward commitment.
We've made significant progress on our 2019 capital allocation plan by acquiring more than $1.2 billion of narrow body aircraft paying a quarterly dividend to our common shareholders that has yielded on average 5.9% over the past year and repurchasing $12 million of our common shares year to date at an average price of $18 to 29 cents.
Aircastle has generated $5.5 billion of operating cash flow from 494 aircraft acquired since its formation and we remain focused on creating long term value by growing the business in a responsible and profitable manner.
We believe that our strategy and market approach maximizes value for our investors and minimizes the leverage liquidity risk associated with large forward commitments and potential capital flight associated with some unforeseen market events.
Given our philosophy of providing a regular return of capital to our shareholders Aircastles Board approved the company's 50 threerd consecutive quarterly dividend of 30 cents per share payable on September 16.
Since 2011, we've increased the dividend nine times tripling to pay extra 10 cents a share per quarter to 30 cents per share.
Turning to the current business environment. According to the World Bank 2018, Global GDP was 86 trillion dollars up 3% over 2017.
The aircraft leasing industry continues to perform well the most recent ayada air traffic results showed 4.6% RPK growth through the first five months of the year down slightly from 7.4% in 2018 and 8.1% in 2017 I added is forecasting full year air traffic growth of around 5% compared to global GDP growth of about 2.7% for 2009 feet.
Air traffic growth continues to outpace both capacity growth and global GDP growth.
There continues to be strong demand for current technology mid aged narrow body aircraft as industry wide passenger load factors reached a record high in may of 81.5%.
Year to date passenger load factors were also very high at 81.3%.
As we've been saying for some time wide body aircraft continues to be oversupplied and far more challenging to place at attractive rates.
Mid a single aisle rental rates remain solid, especially compared to rents for new aircraft and values are robust due to available liquidity and low interest rate.
In the second half of 2019, we plan to selectively sell aircraft into this continued market strength.
Strong traffic growth limited near term aircraft availability due to issues surrounding the Max and relatively low oil prices have strengthened the overall marketability of current generation aircraft.
The decline in interest rates since year end and financing availability have also enhance the attractiveness of investing in aircraft and a general sense.
To summarize our strategy remains focused on disciplined and intelligent capital allocation, we will invest in aircraft that we expect to deliver solid shareholder returns and we'll continue to opportunistically sell aircraft to reduce residual value risk and crystallize gains.
In summary, we will continue to run our business in a disciplined fashion.
We havent experienced focused and nimble team that will take advantage of accretive aircraft investments and sales opportunity.
We have an investment grade rating with access to attractively priced capital to drive profitable growth.
And were defensively positioned with a conservative capital structure and minimal forward commitment.
I'll now turn the call over to Aaron to briefly review our results for the quarter, along with our guidance for Q3.
Thanks, Mike.
As Mike mentioned Aircastle had a solid second quarter with quality core earnings.
For the quarter total revenues were $223.4 million up 9.4% versus Q2, 2018, mostly due to higher lease rental and maintenance revenue.
Lease rental and finance lease revenues were $201.1 million up 7.4% versus Q2 last year.
Primarily reflecting the partial period impact of 23 aircraft purchase in 2019, and the full period impact of 33 aircraft purchased since April one 2018.
We reported maintenance revenue of 26.6 million associated with 11 aircraft transition of the $17.6 million with associated with seven aircraft that we repossess from general ways and more than offset a $7.4 million transactional impairment we incurred on these aircraft.
We closed new aircrafts fell during the quarter, which lowered our second quarter diluted EPS by five cents and these sales close in the second quarter as originally expected adjusted diluted EPS would have been 53 cents in line with the midpoint of the guidance, we provided from last quarters call and the consensus estimates for the second quarter of 52 cents.
Driven by the timing of these so you'll notice that we are guiding to a gain on sale range of nine to 15 million for Q3.
Total expenses increased by $33.2 million or 22% versus Q2, 18, due to higher depreciation driven buying aircraft acquisitions higher interest expense due to higher debt balances and higher maintenance expenses related to the transitioning of the copy on Brazil in jet aircraft.
As previously indicated we also had a transactional impairment with jet, which was more than fully offset by the maintenance revenue that we recognized for a net positive impact of 10 million.
We also completed our annual fleet review during the quarter with no impairments.
Net income was $31.1 million or 41 per diluted share.
Adjusted EBITDA was $211 million, an increase of $18.3 million or 9.5% versus Q2 18.
We estimate the impact of timing associated with the transition of the aircraft that we repossess from Brazil, and generally increase lease rental revenue by $8.3 million in the third quarter, which is reflected in our third quarter revenue guidance.
For the second quarter of 2019, our portfolio lease rental yield was 10.7% and our cash net interest margin was 7.4%.
Pro forma adjusted for the 8.3 million impact of obviously, Brazil and jet.
In the second quarter yield was 11.1 in the margin 7.8. This is directionally in line with what we told you to expect our first quarter earnings Conference call.
We continue to expect that net cash interest margin will recover in the second half of the year to around 8% by year end.
Due to the revenue impact from transitioning the aircraft that we prepare announcement, obviously, Brazil in January and the recent aircraft acquisition.
Turning to our capital structure, we raised more than 1.1 billion of debt during the second quarter.
We issued our second investment grade senior unsecured notes for $650 million with a coupon of 4.25%.
The transaction was significantly oversubscribed and was upsized from 500 million targeted at launch.
The annual expense savings from the 500 million of 6.25% coupon no. We repaid in mid July is $10 million or 13 cents per diluted share as an investment grade issuer, we have ample access to liquidity at attractive levels.
We also raised an additional $480 million of secured bank debt at a weighted average blended fixed rate of 3.45%.
The current average interest rate on our fixed rate debt is 3.98 versus 4.4 centers at year end 2018.
Lastly, during the quarter, we increased the size of one of our unsecured revolving credit facilities to 300 million.
280 million, bringing the total unsecured revolving credit facilities capacity to 1.1 billion.
Our net debt to equity ratio was 2.5 times total borrowings were $5.5 billion.
And so these 8% of our debt is unsecured.
Our weighted average debt was 3.6 years and a weighted average coupon of 4.8.
We ended the quarter with 500 million of unrestricted cash and $1.1 billion of unused revolving credit capacity.
On August 2nd our board approved a three cents per common share dividend payable on September 16 to shareholders of record on August Thirtyth as Mike indicated through August 2nd we repurchased $12 million of our shares at a weighted average cost of $18.29 per share.
This is 32 cents below our book value per share $26.96 at quarter end and about 9% lower than our average closing share price during the first half up $20.06.
Through the first six months of 2019, including dividends and share repurchases, we returned over $56 million of capital to our investors.
During the second quarter, the board authorized 100 million share repurchase program.
We have 97 million remaining under the current repurchase authorization, which we will continue to use opportunistically.
We provided our usual guidance elements for the third quarter 2019.
Our guidance reflects sequentially higher rental revenue, reflecting recent aircraft acquisitions net of aircraft sale the full quarter revenue generation from the outside Brazil, and jet Airways aircraft that we have now transition.
And it's also includes gain on sale, which slipped from the second quarter into Q3, along with a few additional plants out.
To summarize Aircastle had a strong second quarter.
Our asset management skill enabled us to minimize downtime and developed good momentum for profitable growth in 2019, we have a strong balance sheet and as Mike emphasized we remain committed to allocating capital for maximum benefit to our investors.
With that operator, we can now open up the call for questions.
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Hi, first question is from Jamie Baker with JP Morgan.
Please go ahead morning, everyone. Good morning, everyone actually it's Mark Streeter with Jamie as well just a question on well a couple of things first off your sweet spot is 737, Ngs Athree 20.
See I was just wondering if you can comment a little bit about for the acquisition pipeline how difficult. It is to source those given the engine delays and the Max situation any impact at all on your business model from what's going on with the single aisle market right now.
I don't know that its dramatically change the.
Market environment, our investment target environment for us.
Frankly, it's a competitive market. It has been for quite some time and that dynamic hasn't changed for the better or for worse throughout this year.
The the the Max Neo issues as I said in the prepared remarks, maybe have created some modest.
Benefits in terms of customers looking to extend.
Who might not otherwise have if their planes were delivered on time, but so far I don't see a significant impact for us in.
What we've actually been dealing with versus what we've seen recently or what we expect to see in the near term.
And then how are you thinking about just credit quality in the portfolio amongst your lessees South African comes to mind are you How's Your watch list look at this point what sort of everyone always has the next shoot a fall what's your sort of your next shoe to fall and how are you trying to manage those risks.
Well look we see our portfolio up frankly in overall in better shape, and I think a higher credit quality than it was 24 or 48 months ago.
There's certainly a few customers who south Africa has been a customer of ours. Since 2009 2010 timeframe. They are dealing with their challenges as an economy as a country and as an airline our four athree hundred Thirtys, that's why there.
I have been a core part of their fleet and so we are in discussions with them and keeping an eye on the situation and frankly looking to find ways to extend our existing assets with the airline going forward.
Okay, Great and just a final one Mike either for you or for Erinn, just you pivot it a little bit on the funding side with the secured bank debt.
In the quarter, just sort of wondering about the rationale there was it simply just cost savings and trying to keep diversified funding in place. It's you know you've been such a primary sort of unsecured funding. It was a significant amount of secured debt that you did raise.
Yes look it's really about managing overall funding cost managing funding sources and not you can't go sort of a 100% in any one direction for any.
Extended period of time in the world and in the marketplace in which we compete so it was just looking at.
Some of the assets, we had and trying to balance the overall funding mix between secured and unsecured and the.
The benefits in terms of simple cost realities unsecured financing.
Okay, great. Thanks very much.
Thank you.
Our next question is from Scott Valentine with Compass point research.
Oh good morning, everyone. Thanks for taking my question.
Just with regard to the the 1.2 billion I guess Uncontracted acquisitions is there room for upside there and do you anticipate continuing to be active.
In the secondary market.
You know Theres always room for upside I, you know sitting where we are today and you know the first week of August .
I would expect to be able to find some things in the next four months of the year, whether in fact, I do and to what extent I do I've I don't have anything concrete today.
But historically, we've been able to find fourth quarter deals from people who.
Looking to get things done by year end, but I'm not planning on it but I will be continuing to keep our pipeline wide and look for opportunities as we move throughout the year.
Okay, and then just you mentioned the competitive environments no no significant changes.
But we've heard at the margins, maybe a little less competition coming from from China, I don't know if that that plays into your opportunity set maybe in the back half of the year, if things remain challenged in China.
Look at what's going on in China, and what's happening with a few different leasing companies.
Are not all the macro picture is certainly a lot more volatile what that means it remains to be seen overall it hasn't impacted us in it specifically, we have very limited China exposure.
At this point in time, and CMG selling some portfolio assets I CBC selling some portfolio assets.
And in the former case effectively getting out of this business.
But I would emphasize it wasn't because of their aircraft portfolio that they were looking to sell aviation assets. It was because of other issues in their overall investment business.
And I see BC is just I think naturally looking too.
Sort of manage ensuring capital in the context of being a big leasing company with an order book.
You have to sell assets eventually and I think it was natural time for them to do it and it appears that they've sold somewhere in the neighborhood of 40 aircraft to a number of different players in the space. So.
The China dynamic I don't think has Jim.
Materialize for us in the context of what we're seeing and the competitive dynamic or the marketplace at this point in time.
Okay. Thank you and then one final question and I think you mentioned.
Maintenance other costs this quarter were little bit elevated.
Because of the transition so I assume that should come down in the third quarter. I don't think you could you guys provided guidance metric for maintenance and other expenses, but just the trend should be.
We typically don't guide on NAFTA here right the bulk of that costs on the transitions.
Prerogative done.
All right thanks very much.
As a reminder, press star one if youd like to ask a question. If you find your question has been answered you can press star to turn lose yourself from the queue.
And our next question is with Cushe Patel with Deutsche Bank.
Guys.
The the composition of your portfolio change following the 17 aircraft transitions from hobby into Brazil, and chat is the shift is this somewhat a shift in the business model or how do you think about asset concentration with one particular customer or two particular geography following year.
Experience with IP into Brazil jet does that change how you think about that at all.
Not really we've always managed our business with a set of a portfolio guardrails as we call them into context of.
Customer concentration geographic concentration lease expirees asset types et cetera.
And so in that instance in Brazil. It look our biggest customer had a problem. We took our planes and we brought them some place else and another at a better credit and they will be flying for a long time in the same region with a better customer.
And in the context of jet in India.
It's the same dynamic we have expanded our relationship in the last couple of years with Indigo who is the most profitable.
And significant player in India.
And in the context of jet we had a handful of aircraft that had some near term expirees that they didn't quite make it too but the composition of the country exposure there will change in time as we look at the lease expiry profile of the assets flying in India today.
Understood and then also just wanted to get an update on your.
To order book and what you're seeing on the demand side there.
So on the twos I would say, we are seeing increased activity and conversations.
As I think John Slattery was has been talking about out publicly over the course of the last few months I think we're all expecting and starting to think that the benefits of the Boeing joint venture there will bring some additional focus certainly a competitive space Airbus has made great progress in early days with theory to 20 play.
I don't have anything more concrete to report today, despite our intentions when we were thinking about the world six months ago.
But we have three or four active campaigns and we hope to make some significant progress over the balance of 2019 on the two places.
Great. Thanks, a lot guys.
Our next question is from Marsh Orenbuch with credit Suisse.
Great. Thanks.
I'm, hoping I'm Aaron maybe you could talk a little bit about when you said the.
You know the margin would get back to historic levels. You know you talked about some things that youve actually already done pretty much on the debt side.
Can you talk about like what the impact that will have and then and then perhaps what might be going on on the yield side in that in that discussion.
Sure.
I think the most of the impacts really related to the.
The revenue yield.
Hi, I'm getting the aircraft back on to Brazil, and generally speaking the surface quickly is going to help bring the yield back up and that's going to be the biggest driver there obviously on the debt side.
Driving down the range is helping us, but the biggest impact right now to revenue.
Hi.
Gotcha, Gotcha, and and anything else that you would kind of like call out in terms of trends with respect to revenue on the remainder you know the remainder of the portfolio kind of over the next several quarters.
I mean with the excellent asset acquisitions that we have coming online which is reflected in our guidance.
For Q3, I think that'll continue to be kind of in that trend line.
Most of the acquisitions that we have in play are coming in in the third quarter and then on the disposition side do we also forecast as you know its most of the acquisitions. This year are kind of on a weighted on the backend. So thats also reflected in the guidance. So I think that overall, you're going to see a kind of a steady state over Q3, the Q4 guide.
Thanks, so much.
Yes.
Yeah.
Our next question is from Catherine O'brien with Goldman Sachs.
Hey, good morning, everyone. So my question. Thank you Hey, good morning, CEO , Mike you already alluded to this a little bit earlier in the call, but sound like as of right now the mix of the seller. They are acquiring aircraft from its primarily weighted towards otherwise sort of a few airlines started there.
Can you just talk about how that's changed over the past six to 12 months and then kind of a follow up to an earlier question you know it sounds like a couple of your peers or are noting a little bit of increase discipline in the sale leaseback market is that something you might be interested going forward. Thanks.
Yes, so we look at the last few years and our mix varies year to year, but I would say in 17 and 18, our acquisitions were probably two third one third two thirds being bought from other lessors in the third.
Sale leasebacks with airlines and of the billion two it's about the same mix that we're looking at today about two thirds one third.
So we are and we continue to look at sale leaseback opportunities that it feels like maybe it's bottomed out I'm not sure I declare it getting.
All that much better just yet, but we continue to look for opportunities to do stuff in the sale leaseback market.
In recent history, it's been a mix of both Athree hundred Twentyneos at Indigo and CEMEA current technology.
With other airlines and what that mix in the sale leaseback market will produce remains to be seen but we're looking at both.
Neos and and existing Ceos in Ngs in the context of sale leasebacks with airlines as well.
Okay, great. Thanks, and then I think last quarter I believe you noted that while you didn't have an exact target for aircraft sales.
Stop proceeds from sales this year might be somewhere between what would the company did in 2017 and 2018.
Is that still about where you're at now to some of those more back half weighted or or any thoughts given maybe increase Smith.
No I would say overall magnitude, it's probably similar it will be somewhere between what we did in the last few years with gains probably in the same neighborhood, maybe a little better but that all remains to be seen and obviously given where we are.
In the first half of a fair bit and that will be second half weighted based on.
Transactions in conversations we're having today.
Great. Thank you very much.
Our next question is from Christine Leung with Bank of America Merrill Lynch.
Hey, good morning, guys.
Hi, good morning.
When you look at your customer exposure today, what would you say makes up.
Good credit versus bad credit or ugly credit in your portfolio, and then where was that a year ago and do you have a target proportion in mind.
I would never use the term ugly to talk about my customers, but Uh huh.
Look I think our overall portfolio credit quality rating is probably higher today than it was 12 or 24 months ago, and let's be honest some of my.
Less desirable credits died along the way so.
With that factor as well as some of the transactions, we've done with higher credit Airlines in terms of lease placements as well as new acquisitions.
I have improved the overall quality of the portfolio and and yes, we have guidelines as we think about our portfolio guardrails around.
Different credit ratings on our own system here of airline credits.
How much we would consider doing with any particular credit and limits on that and limits on credit bucket.
In aggregate. So we continue to employ those credit metrics in guardrails and as I said, it's our assessment is that the overall portfolio quality.
Is better today.
And then it has been.
When you look at your shift to higher credit customers on I mean, this usually has an effect on portfolio yield right. So when you mentioned in your prepared remarks, and I just want to make sure I heard this right. If you adjust out for jet and adjust out for Ive younger Brazil portfolio yield was 11.1% and.
Last year. It was 11.5% should we think about this shift towards higher credit customers are the costs of that is something like 50 basis points in yield is that a fair way to look at it if not how would you suggest we look at that.
Look I think it's reasonable to think that better credits are going to put pressure on top line yield and so I don't know if 50 basis points is the exact number but directionally its probably not an unreasonable way to think about better credits may have lower yield, but we think it's the right trade off in the context of the overall management of the business.
And where would you say you are today in this journey are you at the proportion that you like in terms of your credit exposure or will you continue to migrate towards higher credit customers and therefore continue to see more pressure on your yield.
Look I think the distillate yield pressure is not just a customer a rating its market dynamics and what what happens overall in the marketplace also but I think in terms of our mix of customers I'm not I'm not on a journey to just have.
The highest credit portfolio in the world, it's going to take a mix across the entire portfolio, especially as someone who specializes in the secondary market to make sure overall, we produce the kind of returns that our investors expect.
That's really helpful and if I could squeeze one more when I look at Jack could you discuss your total net effect of that transaction in terms of the deposits that you received a maintenance reserves that you have and then youre.
Transition costs and impairments. So what's the net effect of that transaction for you was that a net positive not negative any guidance you could provide there would be helpful.
Hey, Chris Antero and like I said in my prepared remarks, the net impact to us was positive about $10 million.
Great. Thank you.
Thank you.
Oh Good reminder.
As a reminder, you can press star one if youd like to ask a question.
And there are no further questions in the queue.
Oh, Okay. Thank you very much for your time today feel free to reach out if you have any additional questions.
We look forward to talking to you soon bye now.
This concludes today's call. Thank you for your participation you may now disconnect.