Aircastle Limited (NYSE:AYR) Q2 2022 Earnings Conference Call October 12, 2022 9:00 AM ET
Company Participants
James Connelly – Senior Vice President, Corporate Communications
Mike Inglese – Chief Executive Officer
Roy Chandran – Chief Financial Officer
Conference Call Participants
Robert Smalley – UBS
Operator
Hello and welcome to the Aircastle Second Quarter 2022 Earnings Call. My name is Laura and I will be a coordinator for today’s event. Please note that this call is being recorded and for the duration of the call your lines will be on listen-only. [Operator Instructions]
I will now hand you over to your host, James Connelly, to begin today’s conference. Thank you.
James Connelly
Thank you. Good morning, everyone, and welcome to Aircastle Limited’s second quarter 2022 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 on the line and they’ll be available during Q&A. We’ll begin the presentation shortly, but I’d like to remind everyone that this call is being recorded and a replay will be available through our website at www.aircastle.com. There you can also find the 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’ll now turn the call over to Mike.
Mike Inglese
Thanks, Jim. Good morning, everyone, and thank you for joining us today. I’d like to start off by sharing a few brief observations on the global aviation marketplace, next I’ll cover a few highlights from our second quarter, and then pass the call over to Roy, who will walk you through our results in more detail.
Since we last spoke in July, we continue to see sustained improvements across the aviation marketplace balanced against indications of some future risk. IATA reported a [68] [ph] average increase in global RPKs in the three months, which comprise our second quarter as compared to the same period in 2021. In North America, Latin America, Europe and India, flight volumes are near and in some places even over 2019 level.
As more restrictions are being eased, Asian markets are seeing improvements, especially in Australia and Japan. There’s clearly post-pandemic demand for travel with leisure travel demand outweighing business. The more challenging issue in many markets is the more on the supply side with airlines and airports having a hard time keeping up with demand. Globally, low cost carriers have bounced back the quickest. Airlines in North America have returned to profitability and the European majors look to be headed in the same direction.
Along with these positive trends, however, our customers are dealing with inflation, fuel, labor, and currency risks that dominate the headlines as of late. These challenges do not appear to be going away anytime soon. Inflation, the strength of the U.S. dollar and high energy costs have created a consensus that 2023 could be a recession year for most major economies.
Over the past two years, the aircraft leasing sector saw significant growth by offering liquidity solutions to airlines during the pandemic. That growth continues. Combined with the manufacturer’s supply chain disruptions, we’re seeing a very competitive landscape for lessors looking to acquire new technology narrow body aircraft.
In the second quarter, we’re pleased to report an increase in portfolio of activity. We invested 285 million in seven single aisle aircraft. Among these acquisitions were 737 MAX 8 and an A321neo, two of the most efficient narrow body aircraft development. In addition, during the second quarter, we delivered the [seventh E2] [ph] of our 15 aircraft order for KLM Cityhopper. Two additional E2 aircraft delivered since the close of the quarter and we’re proud to share the milestone of Embraer’s 1,700th E-Jets delivery.
As of August 31, 2022, new technology aircraft comprised 21% of our overall fleet by net book value, an increase of almost 60% over the last 12 months. Consistent with our disciplined portfolio management philosophy, this quarter we sold five aircraft with an average age of approximately 15 years. These sales brought in proceeds of 113 million and the net gain of 10 million is reflective of the strong market for secondary aircraft.
As disclosed in our first quarter 10-Q and discussed in our prior call, there were two 747 Freighters that we continue to hold on our books, which were previously on lease to Russian lessees. During the second quarter, we were able to successfully repossess one of these two freighters. The other freighter remains in Russia and we concluded during the quarter that we do not expect to regain possession of this aircraft.
We therefore wrote off the remaining value of this aircraft. And as of August 31, the net book value of all nine of our aircraft that physically remain in Russia have been written down to zero. We believe none of our Russian or Russian affiliated aircraft will be returned and this effectively concludes any Russian exposure on our books.
In September, we sold one freighter aircraft we repossessed from a former Russian lessee along with another [747 Freighter] [ph] aircraft from our fleet. These sales and the sale of one 777 also in September, will yield a gain on sale of approximately 53 million. After these sales, Aircastle’s fleet will be comprised of approximately 94% narrow body aircraft.
Turning to funding, we continue to maintain a conservative balance sheet with minimal forward orders and strong liquidity. Last month, a $100 million commitment from BMO Harris Bank brought one of our unsecured revolving credit facilities to $1 billion. As of October 1, we have a total of 1.4 billion available for borrowing under these facilities with additional coverage from projected adjusted operating cash flows.
Looking ahead to 2023, we’re realistic about the challenging interest rate environment. With our investment grade rating, we’ve had great success in the unsecured markets over the last decade. At the same time, we continue to evaluate other potential sources of debt financing to meet our liquidity and growth objectives.
For example, in September, Aircastle closed on our first ever [JOLCO Financing] [ph]. This deal was arranged by an affiliate of Marubeni Corporation and provides for an attractive source of financing in today’s challenging market conditions.
In addition to our current 1.4 billion in undrawn revolving credit facilities, we enjoy excellent banking relationships we can leverage should we choose to pursue opportunities in the secured lending markets as well. The broad consensus in the aviation industry is that globally airlines will not return to pre-pandemic volumes and profits until 2024. Fuel and energy driving inflation will challenge everyone. That being said, Aircastle has proven track record of proactive vigilance against the many challenges, which might be experienced by our airline customers.
Our deep team with multi-cycle experience has always found ways to creatively build solutions for our customers while protecting our asset values. Our growing fleet of new tech aircraft, which is consistent with the technology transition taking place across our customer base for helping us achieve sustainability goals.
At the same time, as OEM delays persist, lessees continue to express the dire for lease extensions. We believe our current tech aircraft continue to comprise a substantial presence in the market and that will be the case for the foreseeable future for all of our customers. We believe our conservative balance sheet, our investment grade rating and the strong support of our shareholders, Marubeni Corporation and Mizuho Leasing have us well positioned for future growth within the aviation and aircraft leasing sectors.
Now, I’ll pass the call over to Roy who will go through our first quarter results in more detail.
Roy Chandran
Thanks, Mike. Good morning, everyone. For the second quarter of fiscal 2022, we reported a net loss of 9 million and an adjusted EBITDA of 159 million. Year to date’s operating cash flows of 216 million, a 20% improvement from prior year and reflect a positive trend in collection performance. Customer collections in the second quarter represented 105 of lease rental and direct financing and sales type lease revenues.
In the six months ending August 31, [our] [ph] account receivables have decreased 32% and deferrals are down 34%. Lease rental revenues of 147 million represent a 6% improvement compared to the second quarter of 2021, primarily due to aircraft purchases and fewer customers on the [cash basis of accounting] [ph].
As Mike mentioned during the quarter, we rolled off the remaining balance of one freighter aircraft that remains in Russia, which resulted in an impairment of 28 million. We do not expect this or any of our aircraft in Russia will be returned. The sales of the two freighters and the 777 in September, which Mike mentioned will approximate a combined gain of 53 million and will be recorded in our third quarter. Excluding the impact of impairments, expenses are down 5%, compared to the second quarter of 2021, primarily due to lower interest expense.
Turning to our capital structure, our net debt to equity leverage is 2.8x, consistent with our fiscal year-end. At the end of the second quarter, our total debt was 4.6 billion of which 86% was unsecured. The weighted average rate on our debt was 4.16% at the end of August 2022, a slight increase from the last quarter, reflecting the elevated interest rate environment.
The liquidity position remains strong. As of October 1, we had total liquidity of 2.1 billion. This includes 1.4 billion of undrawn revolving credit, unrestricted cash of 300 million, and projected 12-month adjusted operating cash flows of 400 million. Our [next significant] [ph] debt repayment is not until April 2023.
Mike mentioned several global macroeconomic challenges and we are closely monitoring how these issues are impacting our customers. We believe our strategy of maintaining conservative leverage limiting extended commitments and focusing our portfolio on a liquid narrow body aircraft is the best long-term protection of portfolio value. With our long-term focused investment grade weighted shareholders, we are optimistic about the future.
And with that, operator, we are happy to open the call up to questions.
Operator
[Operator Instructions]
James Connelly
Hi. This is Jim Connelly. Just very briefly before the Q&A, we’re aware that there’s some issue with the website in terms of the materials being posted. So, we’re looking into that and I’ll get back to you shortly.
Question-and-Answer Session
Operator
Thank you, James. [Operator Instructions] Thank you. We’ll now take our first question from Ian of JPMorgan. Your line is open. Please go ahead.
Unidentified Analyst
Hey, thanks team for the update. This is [Ian Slater] [ph] on for Mark Streeter. Just one quick question from us. Heading into a recession, can you please provide some examples about shareholders continuing to be supportive of the business and how it gives the Aircastle competitive advantage in this environment?
Mike Inglese
Yes. So, look, as we continue to say and we continue to believe our shareholders are here for the long-term. They stand by the business. They’re helping us arranging financing in the most recent example here of the [JOLCO] [ph] in the Japanese marketplace, and we continue to explore adding additional liquidity capacity in the Japanese and broader Asian market with the help of our shareholders. And in due course, over the next three to five years as we think about growing the business with the resumption of growth in this industry, at some point in the future, we would expect that the shareholders will continue to look for ways to increase their investment in Aircastle and help it grow and succeed over that timeframe.
Unidentified Analyst
Thanks. And just one more from me if I can slip it in. Are you thinking about 2023 refinancing given the turbulence in the capital markets?
Roy Chandran
Hey, Ian, it’s Roy. I mean, obviously, what we’re seeing in the current markets is not something anybody has expected. And so, all our peers are in a similar condition. One good thing obviously is, we’re investment grade and we fought long and hard to get our investment grade ratings. We have access. We have adequate liquidity. And I think our view is to sit [tight] [ph] and wait and get into the markets at the [optimum time] [ph].
So, apart from just unsecured market access, we have pretty good secured market access as well. And right now, we have undrawn revolvers of close to 1.4 billion. So, I think the combination of secured access undrawn revolver capacity and then ultimately [indiscernible] gives us comfort that we’ll ride through it, but obviously, the key point is we got to wait for the market to settle down and approach the markets judiciously and with some discipline.
Unidentified Analyst
Great. That’s all from me. Thanks a lot.
Mike Inglese
Thanks.
Operator
Thank you. We’ll now take our next question from Robert of UBS. Your line is open. Please go ahead.
Robert Smalley
Hi, good morning. It’s Robert Smalley. Just want to question about lease rates. Can you talk about the acceleration, the trajectory of lease rates, where do you see that going from here? Do we face a headwind even though travel has gone up? Do we face a headwind because of recession in oil prices and the ability for airlines to shoulder higher lease rates? How do you see that playing out over the next year or so? Thanks.
Mike Inglese
Yes. So, look, I think the fundamental issue [we’re seeing] [ph] this year is interest rates have gone up pretty dramatically and lease rates have not followed as of yet. There’s always or there’s typically a lag in their lease rate levels in the context of the financing environment in this industry, and we expect that lease rates will have to come up as we look across the next 12 months, but as you pointed out there, there are headwinds that will create tension with the airlines as all their other costs are rising as well in the context of inflation and fuel, etcetera. But fundamentally, this is a spread business. And in time, we think those lease rates will reflect the funding costs of the airlines, the banks, and the lessors in a way that will make sense across the value chain.
Robert Smalley
So, we haven’t missed the window by not raising lease rates in the first half of the year is what you’re saying?
Mike Inglese
Well, what I’m saying is, lease rates are not something that any one company does by itself. If you have a delivery of a new airplane, you negotiated a lease rate and a lease setting mechanism with that customer when you signed up that lease. If you are out looking to do a sale leaseback transaction, those rates get set by the competitive dynamics around who that customer is and how many investors are looking to do that deal.
There’s no club of investors saying, we think lease rates should now be this level, so let’s all bid higher. Unfortunately, there’s still a lot of investment dollars looking to be deployed in the aviation space, which is, as I’ve always said, a double edged sword, you need lots of liquidity in this business because it’s capital intensive, but it also leads to what many of us see sometimes as irrational pricing from people who are looking to put assets on their books.
Robert Smalley
Understood. Thanks for the answer. It’s helpful.
Mike Inglese
Thanks, Robert.
Operator
Thank you. [Operator Instructions] James, I don’t see any further questions in queue. So, I will hand it back to you to conclude today’s call. Thank you, James.
James Connelly
Thank you, everyone, for joining us. Again, apologies for the issue with the materials. A few of you reached out to me, I’ll get back to you individually, and we’ll have that information up shortly. Thanks.
Mike Inglese
Thanks, everyone.
Roy Chandran
Thank you.
Operator
Ladies and gentlemen, thank you for joining today’s call. You may now disconnect. Thank you.
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