AYR - Aircastle Limited (AYR) Q2 2023 Earnings Call Transcript
2023-10-11 10:34:04 ET
Aircastle Limited (AYR)
Q2 2023 Earnings Conference Call
October 11, 2023 9:00 AM ET
Company Participants
James Connelly - Senior Vice President of Corporate Communications
Mike Inglese - Chief Executive Officer
Roy Chandran - Chief Financial Officer
Doug Winter - Chief Commercial Officer
Conference Call Participants
Mark Streeter - JPMorgan
Doug Runte - Deutsche Bank
Presentation
Operator
Good day, everyone, and welcome to the Aircastle Limited Second Quarter 2023 Financial Update Call. Today's conference call is being recorded.
At this time, I would like to turn the floor over to James Connelly, SVP of Corporate Communications. Mr. Connelly, you may begin.
James Connelly
Thank you. Good morning, everyone, and welcome to Aircastle Limited’s second quarter 2023 financial update call. With me today are Mike Inglese, Chief Executive Officer; and Roy Chandran, Chief Financial Officer. Other members of the management team are also on the line, and they will be available during Q&A.
We'll begin the presentation shortly, but I would like to remind everyone that this call is being recorded. And the replay will be available through our website at www.aircastle.com. There you can also find a press release and PowerPoint presentation that accompany this call.
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. Certain facts that could cause actual results to differ materially from Aircastle Limited’s expectations are detailed in our SEC filings, which can also be found on our website. I'll direct you to Aircastle Limited’s press release for the full forward-looking statement legend.
With that, I will now turn the call over to Mike.
Mike Inglese
Thanks, Jim. Good morning, everyone, and thanks for joining us today. I'd like to share an overview of Aircastle’s perspectives on the business environment and our areas of focus for the near and medium term future. Roy will then cover our financial results for the fiscal quarter and then we'll open it up for Q&A.
In their second quarter update for 2023, IATA reported current flight travel volumes exceeding 2019 levels, driven by the steady increase in narrow-body passenger volumes. IATA also reported August 2023 RPKs increasing 28% industry-wide. Strong employment numbers across the advanced economy seem to be providing some resistance to the onset of a recession. Despite ongoing concerns about interest rates and fuel prices, consumers are still prioritizing experiences and travel.
Airlines are looking to expand capacity to meet demand, but are held back by limited availability of narrow-body aircraft and engines. The broader aviation ecosystem is further being impacted by bottlenecks in the maintenance supply chain, shortages of pilots, air traffic controllers, and airport capacity. Bus aviation is a complex business, ramping up capacity requires considerable lead time, so it is likely that these constraints will continue for some time.
As aircraft lessors, we're seeing increased demand and improved lease rates for current and new technology aircraft. This upside is to some degree offsetting higher costs for funding and transition and maintenance. Over the summer there was a lot of media coverage about aircraft being grounded due to defective engine components found in several types of new technology aircraft. Although the impact from these issues to our own fleet is minimal, these groundings present significant resource challenges to many airlines. As a result of these unforeseen groundings, aircraft lessors like us are experiencing continuing demand for current technology aircraft as customers scramble to extend existing leases and source incremental lift.
Now I'd like to share a few thoughts about where we've been balancing our investments in new versus current technology aircraft and how we see that playing out over the longer term. Aircastle is known as the leading secondary market aircraft lessor. The number of new technology aircraft in our fleet has grown considerably over the past few years, as we've intentionally shifted our fleet mix towards a larger proportion of new tech aircraft as a secondary market emerges for these assets. New Tech now composes about a third of our fleet by netbook value. These investments have kept us in alignment with industry trajectories and the most attractive aircraft assets from any of our customers.
The number of new tech narrowbody aircraft, however, is still significantly less than current technology aircraft. Prazer's forecast that will take another five to seven years for the new tech aircraft population to overtake current technology in the marketplace. It's worth noting that while newer tech aircraft have smaller carbon emissions footprint, current tech aircraft are still very efficient and a clean form of transportation. The engine groundings I mentioned resulted in increased demand for current tech narrowbodies in the near-term.
Looking ahead, we forecast ongoing demand for current technology will remain strong as production delays continue at Boeing and Airbus. In short, we're able to service customers as a secondary market leader, whether they want new tech or current tech aircraft.
Turning to Aircastle's liquidity, we see this as another source of optimism. On our last call, we announced an additional $500 million equity commitment from our shareholders, Marubeni Corporation and Mizuho Leasing. In July, we received $200 million of this commitment, and the remaining $300 million is expected to be funded in the first fiscal quarter of 2024. We believe this commitment strongly demonstrates not only our shareholders' optimism for Aircastle’s medium and long-term growth, but their firm believes that Aircastle is a core member of their respective leasing and finance businesses.
The shareholder support strengthens our investment grade status. Shortly after we announced this commitment, we successfully issued $650 million of 6.5% unsecured senior notes in July. During the quarter, we also expanded our revolving credit facility capacity to $1.9 billion. We're using this incremental liquidity to add additional investments in the second-half of fiscal 2023, and thus meet our shareholders' growth expectations for the business. We are investors with a unique point of view and expertise in commercial aviation. Not having a significant forward order book combined with our strong liquidity position enables us to move quickly and decisively, that's why Aircastle is known as an extremely reliable, confident, and nimble counterparty to airlines and lessors around the world.
We remain committed to pursuing value enhancing investments by maintaining conservative balance sheet, while allocating capital effectively and efficiently. We are well positioned for future growth, because of our unique business model along with our investment grade rating and the support of shareholders, who view us as core to their broader mission.
Now I'll pass the call over to Roy, who'll go through our second quarter results in more detail.
Roy Chandran
Thanks, Mike. For the second quarter, we reported net income of $6 million and adjusted EBITDA of $152 million. The net book value of our fleet is $6.8 billion, 77% of which are unencumbered. Our average fleet utilization improved to 98% during the quarter, which is approaching historical levels as we continue to play with aircraft on lease and limit downtime between transitions.
As compared to the second quarter of 2022, total number of new technology aircraft in our fleet has increased 61%. This quarter we also sold six aircraft with an average of 18-years or combined gain of $4 million.
Turning to our diverse funding sources, we issued $650 million senior unsecured notes at a coupon of 6.5%. We also expanded our revolving credit facilities by $130 million, resulting in total capacity of $1.9 billion as of August 31st. We finished the second quarter with net debt equity of 2.3 times and unrestricted cash of $726 million. In September, we repaid $650 million of senior unsecured notes at their stated maturity.
As of August 31, total debt was $4.9 billion, of which 81% was unsecured. The weighted average interest rate on our debt was 4.79%, a slight uptick of 10 bps from the first quarter. As of October 6th, we had total liquidity of $2.8 billion. This include $1.8 billion of undrawn facilities, committed equity capital of $300 million, unrestricted cash of $100 million, and projected 12-month adjusted operating cash flows and committed sales of $600 million.
In conclusion, we're looking forward to pursuing growth opportunities, while maintaining conservative leverage hosted by renewed shareholder support. Our limited forward commitments and strong liquidity enable us to engage competitively on transactions. Above all, we're dedicated to maintaining our IT status with the strong support of Marubeni Corporation and Mizuho Leasing.
With that, operator, we're happy to open the call up to questions.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Mark Streeter from JPMorgan. Please go ahead with your question.
Mark Streeter
Good morning, everyone. So, wondering, given everything going on with the GTF and so forth in the industry, what the flow through is to your portfolio in terms of lease extensions and how often you're seeing that what the prevalence of that is relative to sort of normal trends, you know, especially with your more midlife portfolio with your nine-year average age and so forth? Are you seeing more extensions and if so, what does that do to your return calculation? Can you maybe just sort of walk us through how that changes the calculus on how you think about, you know, aircraft through the life cycle if you get an extension that you weren't necessarily factoring in?
Doug Winter
Mark, this is Doug Winter. So just as it relates to the prevalence of extensions going through our portfolio right now, I would probably characterize it by saying I would say probably four out of every five aircraft as they reach scheduled lease expiries, we're seeing very strong extension interests and we're converting on the vast majority of those. We do have some aircraft coming up in fiscal year ‘24 that could go either way, probably about a good eight aircraft where they could be subject of extension or release, but otherwise the vast majority were converting on extension and I would say we're converting overall -- we're converting at or better than CMLR or we're getting other consideration that's valuable given that most of ours are mid-life aircraft, you know, which could be in the form of, you know, adjustments to return conditions or engine substitutions and swaps and so forth.
Mike Inglese
Yes [Multiple Speakers] I would just add, just generally speaking, an unplanned extension is typically a benefit to our, kind of, expected at that return as opposed to a transition which typically involves more transition cost et cetera.
Mark Streeter
Yes, and Mike that what’s I'm getting out and Doug is trying to understand right when you're extending that lease where, you know, you bought the aircraft or you came into the aircraft, not necessarily extended, you underwrote that there would be a transition. So, when you extend it instead and you push that transition off, what does that do to your return calculation? Is there a way to quantify it generically? Like how many basis points of yield or IRR it's worth?
Doug Winter
No, it's really hard to generalize, Mark. It's very aircraft specific and situation specific, but it's a benefit, generally speaking, but putting a basis point number on it is pretty difficult.
Mark Streeter
Okay. No totally get it. Okay, and then just looking at the 2024 maturities for Roy, you have $344 million of secured debt. How are you thinking about that, Roy? Are you thinking that you have the unsecured bond maturity as well? So are you thinking about, you know, taking that whole debt stack into the unsecured market? Do you think you'll roll the bank debt? Just sort of wondering how you're thinking about the secure component specifically?
Roy Chandran
So Mark, I think at the end of the day, I think, sort of, first [quarter] (ph) call is always the unsecured market and how fast it is, you know, how intention is to be back in the unsecured market based on demand a couple of times a year. Secure versus unsecured, I think the key criteria for us ultimately is trying to maintain some sort of upper limit on secure debt. Typically, I think the agency is, sort of, trying to guide users for less than 20%. So we'll stay within that boundary. But depending on the market, if there is an opportunity to do efficient secure financing, you know, we will. But I think we'll always, kind of, refer to the unsecured market as a preference in terms of trying to roll that.
Mark Streeter
Okay, great. And then just the third one for from me and then I'm done I promise. Part of the buzz in London at the ISTAT EMEA conference regarding the new EU taxonomy was how it actually favors the lessors, the way the rules are written right now and interpreted that have older kit, because you can actually go down the path of showing the improvement in your portfolio, because you can flip out of older aircraft into latest generation aircraft and it's, sort of, backwards right in terms of what you would think the intent might be so there's a lot of speculation about what the role of, sort of, older aircraft would be people might hang on to them longer, so that you can then show that improvement in your portfolio metrics.
I'm just wondering if you've sort of thought about this, talked to your shareholders about that in terms of the pace in which you want to move towards new technology aircraft. I know it's kind of a crazy question, like are you holding back at all in light of these new rules, because of the way obviously some of the financing might be available or is it kind of just who cares, you're going to do the right thing? Just curious what your thoughts are.
Mike Inglese
Look, it’s -- we're not specifically targeting our operational or tactical approach to the world around the EU taxonomy. We're going to sort of follow where the customers and where the market goes. And so we're not going to backwards weight old tech just in the context of one parameter. It's obviously a topic that everyone in the industry and the world is trying to figure out and keep an eye on as we move forward. But it hasn't affected our approach to the market or what we think we'll be doing in the near-term, specifically related to that one.
Mark Streeter
That's what -- how I thought you'd answer. So thanks, Mike. Appreciate it. I'll turn it over. Appreciate all the answers. Take care.
Mike Inglese
Thanks, Mark.
Operator
[Operator Instructions] Our next question comes from Doug Runte from Deutsche Bank. Please go ahead with your question.
Doug Runte
Yes, good morning. Couple of questions, first a broad basically aircraft-financed math question. Your unsecured borrowing rates are now hovering around 7% as our -- some of your peers by most accounts including at ISTAT EMEA last week. It seems lease rates or the lease rate increases have not yet caught up with the rise in interest rates. I guess with that context, where do you see the best investment opportunities to put your new capital to work. How does the aircraft finance math work with borrowing rates where they are relative to lease rates? Or are you basically going to be making a bet on RVs going forward?
Mike Inglese
Look, it's kind of all of the above, Doug. Obviously, borrowing rates are higher today than they were a year ago, and nobody knows exactly where they're going to be in a year. So in the context of making incremental investments, clearly, we're looking to outearn our incremental costs. And some of that, we think opportunity is going to be available in CEOs and NGs in the context of what we're seeing in the marketplace. But it's not going to particularly push us in old tech versus new tech on a sort of single point of discussion topic at the moment.
Doug Runte
Great. That's very helpful. As airline finances continue to recover globally, just going back in time to the dark days of COVID and deferrals that were granted, where do they stand at this point? Have you been able to collect on all of the temporary deferrals? Are you back to where you should be in terms of repayments? Are people pretty much on schedule at this point? Where do you stand?
Mike Inglese
Yes. So look, I would say, by and large, short-term deferrals, most people lived up to what they signed up to. And in the context of some of the longer-term restructuring programs we did with some of our other customers, for instance, as Joel just announced that they finally achieved what they sought to achieve, and that was a combination of the far old and swapping those deferral amounts into equity and debt instruments going forward, and we had similar longer-term restructurings with some of our other clients in Southeast Asia, in particular. And so far, so good. People are honoring those and marching forward in the context of what they signed up for.
Dough Runte
Great. And then maybe finally, a follow-up on Mark's question on extensions. Extensions are always really nice as you highlighted. I know that you love all your customers and their long-standing partners, but I'm wondering if you can talk a little bit about, I mean, the balance of leverage between you as an aircraft owner with potentially options of moving the airplane away versus the airline as an operator that may want to keep it. Are you finding that, with the market getting tighter, that you're able to get better terms for some of the older kid in particular with a credible [Multiple Speakers] to move the airplanes?
Mike Inglese
Yes. Clearly, having alternatives for what you can do with your asset compared to the world we were staring at three years ago, makes those discussions a lot more balanced than they were. And we're always looking to balance the relationship with where something is, where we think that airline is going and what's in the best interest of Aircastle. And it's rarely black and white debt. We know the answer beforehand, we're always looking to work with customers in a way that makes sense for both of us. But clearly, having alternatives gives us a little more leverage in some of those conversations.
Doug Runte
Great. Thanks very much for those very helpful answers.
Mike Inglese
Thanks, Doug.
Operator
And ladies and gentlemen, at this time, and showing no additional questions. I'd like to turn the floor back over to James Connelly for any additional remarks.
James Connelly
Just want to thank everyone for joining the call. Please reach out if you have any questions. And hope you have a great day.
Mike Inglese
Thanks, everybody.
Operator
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.
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Aircastle Limited (AYR) Q2 2023 Earnings Call Transcript