AerCap Holdings N.V.

Good day and welcome to the AIRCAP's third quarter 2019 financial results call. Today's conference is being recorded and a transcript will be available following the call on the company's 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 third quarter 2019 conference call. With me today is our Chief Executive Officer, Ingus Kelly, and our Chief Financial Officer, Pete Newhouse. 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. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. ERCAP 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 ERCAP's earnings release dated November 8, 2019. A copy of our earnings release and conference call presentation are available on our website at ercap.com. This call is open to the public and is being webcast simultaneously at aircap.com and will be archived for replay. We will shortly run through our earnings presentation and will 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 Ingus Kelly.

Thank you, Joe, and good morning, everyone. Thank you for joining us for our third quarter earnings call. I'm pleased to report another quarter of strong earnings, During the third quarter, AirCap generated $2.01 of earnings per share and net income of $217 million. It is, of course, the platform of AirCap and its people that underpins our success. During the quarter, the AirCap team executed 108 aircraft transactions, made up of 72 lease agreements, 16 aircraft purchases, and 20 aircraft sales. Furthermore, 23 of these transactions were for wide-body aircraft. On the purchases side, we took delivery of nine A320neos, four 787-9s, two E2s, and an A350-900. These aircraft remain the most in-demand variants of their types, which helps us to place them further and further out into the future. The key to AirCap's purchasing and portfolio strategy is to buy aircraft that our customers want, not whatever Boeing and Airbus want to sell. With regard to the MAX, we did not take any deliveries in Q3. Boeing continues to work with the civil aviation authorities to ensure the MAX is safe return to service, and Boeing continues to assume that they will obtain regulatory approval in the fourth quarter of this year. Ultimately, though, the FAA and other regulatory authorities will determine the timing, and we may see variations by jurisdiction. As a reminder, we have taken delivery of only five MAX aircraft to date, and we do not expect to receive any for the remainder of this year. On the sell side, we continue to be active sellers of midlife and older assets. During the quarter, we sold 19 owned aircraft at an average age of 14 years and achieved a gain of sale of 8%. However, much more importantly, what this gain equates to is a premium of almost 30% to the book equity associated with these aircraft. And this is approximately the premium to book equity that AirCap has been earning on aircraft sales for the last 13 years. These sales have resulted in a further reduction in the average age of our portfolio to 6.2 years from 6.6 a year ago, and our average remaining lease term is now 7.5 years up from 7.1 12 months ago. Next Monday, I will go into much more detail at our Capital Markets Day on why we believe AirCap's portfolio strategy over the course of the last 13 years, has consistently created the best fleet in the industry, and today is no exception. On demand, the utilization rate in the quarter for air cap was 99.8%, as demand for our fleet remains high. IATED data shows that RPKs grew 4.5% through the first nine months of this year to September 30th. While these levels are lower than prior years, we believe this growth rate has been impacted by supply side issues. During the summer, thousands of flights were cancelled due to both the max grounding and importantly A320 NEO delays. In summary, this was another strong quarter for AirCap with EPS up 12% year on year. Our consistent growth in earnings and book value per share is the result of our people, processes, procedures and a relentless focus on execution. With that, I will hand it over to Pete before we have the Q&A.

Thanks, Gus. Good morning, everyone. Aircraft produced a very strong performance in the third quarter. We had earnings per share of $2.01 and net income of $270 million. We were upgraded to BBB flat by S&P in October and placed on positive outlook by Moody's in August, so we continue to have a positive ratings trajectory. Our utilization rate was very high, as Gus mentioned, at 99.8% for the third quarter, and we completed 108 aircraft transactions in the quarter. That included purchases of 16 new tech aircraft during the quarter and sales of 19 of our older and mid-life aircraft. Our average lease assets increased by $2.4 billion year over year, and our average main lease term is now seven and a half years, one of the longest of any major lessor. Our book value per share increased by 13% over the past year to $69.24 as of September 30th. We've continued with our share repurchase program, and in the third quarter, we bought 2 million shares for $104 million. So far this year, we've bought 9.1 million shares for a total of $438 million. So altogether, it's a very strong quarter that reflects our consistent operating performance, power of the AirCap platform, and our disciplined approach to managing our assets and allocating our capital. We're also announcing today a new $200 million share repurchase program that will run through March of next year. Turning to slide five, our EPS increased by 12% year over year to 201 for the third quarter. This increase was driven by higher lease rents resulting from higher average assets in 2019 compared to 2018, as well as to a higher gain on sale of aircraft during the quarter. On slide six, our total revenues for the quarter were $1,194,000,000 and increased from $1,167,000,000 last year. primarily driven by the increase in our average lease assets. Our basic lease rents increased to $1,067,000,000 for the third quarter. Our maintenance revenues at $73,000,000 were lower in 2019 due to lower maintenance revenue recognized as a result of lease terminations. Gains on sale were higher based on the higher volume and the composition of aircraft sales in the quarter, and other income was flat year over year. On slide seven, Our net interest margin was $758 million for the third quarter. The increase over last year was due to growth in our basic lease rents, driven by higher average lease assets. Our average cost of debt for the third quarter was 3.9% before debt issuance costs and fees of around 30 basis points. Including those costs and fees, it was 4.2% for the third quarter with a slight increase from 2018 driven primarily by the roll-off of fair value of debt related to purchase accounting. Our net spread was 8% for the third quarter, and our net spread less depreciation was 3.5%, up from 3.3% last year. Our net spread less depreciation was higher than normal in the third quarter because we had lower maintenance rights amortization expense this quarter than we would normally see. The average age of our fleet decreased from 6.6 years to 6.2 years over the past year. We achieved this through a combination of purchases of new tech aircraft and sales of older, current technology aircraft. The average age of our new tech aircraft, which represent 55% of our fleet today, is 2.2 years, while the average age of our current tech fleet is around 11.1 years. So effectively, in the third quarter of 2019, we generated higher returns on a better positioned portfolio the lower average age, a higher proportion of new tech assets, and a longer average remaining lease term. Turning to slide eight, our net gain on sales was $40.5 million for the third quarter. We sold 19 of our owned aircraft, including 14 narrowbodies and five widebodies with an average age of 14 years for a total of $561 million. And as Gus mentioned, our gain on sales margin was around 8% for the quarter. Turning to aircraft purchases, in the third quarter we took delivery of 16 new aircraft per capex of around $1.3 billion. On the next slide, our STNA expenses were around $65 million for the third quarter, about the same as last year. This includes all stock compensation expense and is around 5.4% of revenues, which shows the efficiency of our platform. Our maintenance rights expense was $14 million for the quarter, down from $34 million in 2018, This was primarily driven by the lower maintenance rights asset balance as that asset continues to roll off, and it's also impacted by the level of maintenance activity. Our other leasing expenses were $30 million for the quarter, a decrease from $51 million last year, and this was due to lower expenses related to lease terminations compared to the prior year period. The asset impairments in the third quarter related primarily to lease terminations, and were largely offset by maintenance revenue recognized upon termination. On slide 10, we continue to maintain a very strong liquidity position. As of September 30th, we had available liquidity of $9.1 billion, which includes our cash, our revolvers, our other undrawn facilities, and our contracted sales. In October, we amended and extended our main revolving credit facility. We kept the size of the facility at $4 billion and extended maturity until 2024. Our total cash sources of $12.2 billion are twice our cash needs over the next 12 months, which amounts to excess cash coverage of just over $6 billion. And we'll talk more about our approach to liquidity on Monday. Finally, our shareholders' equity at the end of September was $9.175 billion, and our book value per share was 69.24 compared to 61.24 last September. That's a 13% increase over the past 12 months, And through our operating performance and capital allocation strategy, we can continue to generate strong growth in book value per share year after year. So in summary, we had another very strong quarter. Our EPS was up 12%. Our utilization rate was high. Our fleet continues to grow with the addition of new tech aircraft replaced far out into the future. And we continue to sell used aircraft at attractive prices. We ended the quarter with a strong level of liquidity. And through our operating performance and capital allocation strategy, we continue to generate strong double-digit growth in book value. And we've continued to maintain our positive ratings trajectory with the upgrade from S&P in October and the positive outlook from Moody's in August. And with that, now we'll turn it over for Q&A.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 at this time to ask a question. We'll pause for just a brief moment to allow everyone an opportunity to signal for questions. We'll now take our first question over the phone from Mouchet Orenbutch from Credit Suisse. Please go ahead, your line is open.

Great, thanks. I guess first from a high-level perspective, given that you've seen some increase in industry M&A with one of your competitors being acquired relatively recently, any thoughts about whether that presents opportunities in some respects for AirCap in the coming months?

Well, Moshe, I think it demonstrates once again the big discrepancy between where aircraft trade in what we will call the private market, i.e. not in the public equity market, where a very, very small minority of aircraft leasing occurs, i.e. ourselves and Air Lease now being the only two listed companies. But in the private market, where there is huge amounts of capital in this industry and tremendous interest in the business, what we have seen is that For the course of the last five years, AirCap has pretty much sold two and a half times the entire size of AirCastle. And we've done it at a premium to book of 130%. And because we're selling airplanes at an 8% gross margin, this business is levered three to one. That's how you get your 30% premium is what we have been consistently selling our assets at in the secondary market. And of course, then where appropriate and applicable, we've been using those proceeds to buy up our own shares at about 84%, 85%. So, so long as that arbitrage continues to exist, we will exploit it.

Right. And you've actually done a really, really strong job with respect to that. My second question is just a little more basic. I mean, your spread less depreciation was strong. Could you talk a little bit, I mean, because now you're getting probably closer to where the you know, the fleet getting younger has less of an impact on the yield, maybe the runoff of some of the debt costs in the lower interest rate environment. Can you talk about that sustainability of that 3.5% as we go forward?

Yeah, well, Moshe, so we do expect to sustain that above 3%, but I think I'll cover that on Monday in the Capital Markets Day when we have more time to go through all the dynamics there.

Okay, thank you, Peter.

Ladies and gentlemen, if you do find your question has been answered, you may remove yourself from the queue by pressing star two. We'll now take our next question from Jamie Baker from JP Morgan. Please go ahead, your line is open.

Good morning, this is Abdul Campbell on behalf of Jamie Baker. Just a quick one for me. With a growing focus on ESG, can you just touch on what kind of discussions you may be having with customers to alleviate their concerns and how this may impact your long-term strategy going forward?

Sorry, I couldn't quite hear the question. Would you mind repeating it?

Yeah, just with a growing focus on ESG, can you just touch on what kind of discussions you could be having with the customers to alleviate these concerns and how this could potentially impact your long-term strategy going forward?

Sure. Well, clearly on the environmental side, we've done a tremendous amount to reduce the carbon footprint and fuel burn of our fleet. We have spent more money than anyone in the world on acquiring new technology assets. We spent $23 billion in the last five years buying the most advanced fuel-efficient airplanes that there are in the market. And so we continue to have those discussions with our customers. So we're doing as much as we can. However, it has to be said, of course, when you're an airline, margins are thin. It's a large-scale business with relatively thin margins. And while many of our customers are doing all they can to reduce the fuel burn that they have. By the same token, they also have an obligation to their shareholders as well. And so there is still strong demand for current technology assets, good variants of current technology assets, which would be the 320, the 737, the 777, and the A330. Got it. Thank you.

We'll now take our next question from Helen Becker from Cohen. Please go ahead, your line is open.

Hello?

Hello, Helen.

Oh, hello?

We can hear you.

Hello? Oh, yes, okay, sorry about that. So here's my question. I have actually two questions. My first question is, and I don't mean to be stupid, and I apologize, but when you talk about the gains that you report and the fact that you had an 8% gain on the sold aircraft, is that a pure gain on your cost or is that a gain after writing assets down? I don't understand how to think about that, like the difference between the two. Do you know what I mean, Pete or Gus?

Helene. Our gain is simply the carrying value of our assets before any charges, write-downs, or anything like that, and what we're selling at a premium. So if we have an asset on our books for $100, unlike other leasing companies who've taken large impairments because they bought the wrong assets, AirCap never has. So the only impairments we've ever taken, as Pete just announced, was to do with small amounts to do with lease terminations where you're offsetting maintenance reserves. But the large-scale impairment that occurred from other leasing companies has never, ever happened at AirCap, and we only report unadjusted gap numbers. We don't give you any other metric except what money we actually make and what's available to distribute to shareholders. And so when we give you a number, if we say we sell an airplane at an 8% margin, if it was on the books for $100 million, that means we sold it at $108 million. However, because the equity component is 25 million we're levered three to one so in our 125 is equity we're actually selling at a premium to our equity component of over 130 so over the last 13 14 years aircap has consistently sold 800 plus airplanes at a margin of 130 approximately to its book equity

Okay, that's very helpful. Thank you very much. I appreciate that. And then just on my other question, there seems to have been a decline in the number of Chinese leasing companies that we've been seeing. And I'm kind of wondering if you guys are seeing that as well. Are you seeing fewer competitors when you're out there you know, competing for business. Are you noticing that?

Helene, it's fair to say that over the course of the last eight, nine years, there was an influx of startup capital into this sector. Much of it did come from China. And that capital was particularly focused on chasing new airplanes, either to the sale leaseback market, to buying airplanes off other lessors such as ourselves or in a small minority of cases ordering from Airbus and Boeing. Now what we have seen and we have observed over the course of the last 12 odd months is a reduction in the appetite that particularly Chinese lessors have. I think that's due to a combination of factors. Many of them are owned by banks where dollar funding may be slightly more challenging. Furthermore, some of them will have paid some significant premiums to get their hands on those assets. Those assets are now maturing. The leases that they bought them on, the leases are expiring, and they're having to place these airplanes themselves. And few of them have a platform capable of leasing aircraft. And so I think we have, well, I know we have seen at least a couple of these lessors start to sell off parts of their portfolio. However, there are still some, of course, that are very competitive in the market, but there's certainly a reduction.

Okay. Thank you very much. I appreciate that, and we'll see you Monday.

No problem.

We'll now take our next question from Ross Harvey from Davey. Please go ahead. Your line is open.

Hi. Morning, guys. Congrats on another good quarter. I'm going to leave more of the strategic questions to Monday. But on the housekeeping side, I'm just wondering, for Pete, what should we think about in terms of baseline maintenance rights, amortization expenses, and SG&A in the coming quarters?

Well, Ross, I'll cover all that stuff on Monday as well. But, I mean, basically, you know, it's been running at about lately 65 million or so SG&A. It probably could go up slightly from that, but it's going to be around that area, 65, 70 million. And then on the maintenance rights amortization, it was low this quarter at only 14 million. You know, typically that would be more like 20, 25 million or so. Maybe 30, but probably 25 million is a good number.

See you on Monday.

Thanks. We'll now take our next question from Katrin O'Brien from Goldman Sachs. Please go ahead. Your line is open.

Good morning, everyone. Thanks for the time. So a bit of a follow-up to Moshe and Helene's question earlier. You know, you're seeing, I guess there's been this continuing discussion over the past couple of quarters that new entrant competition has decreased or those in the market have gotten a little bit more rational, perhaps. You know, have we gotten to the point where you think there are more attractive opportunities for M&A or really just buying back your own shares? Is that still the most secretive option to grow earnings? Thanks.

Well, Catherine, as I said, look, if we're consistently able to sell our own airplanes at 130% a book, and buy ourselves back at 85 odd, that's a fairly big arbitrage. So that's highly attractive. But throughout the cycle, you have to be nimble and recognize opportunity where it comes from. We have obviously bought more airplanes than anyone in the world over the last five years. We've paid down more debt than anyone in the world. We've given back more money to our shareholders than anyone in the world. And over the last 15 years, we've done more M&A than anyone in the world. What you need to be is nimble to which alternative creates the best risk reward for your shareholders over the medium to long term. If that's M&A, well and good, as we've done a lot of it, but if it isn't, it isn't. You've just got to see what the opportunities are. We will talk a bit more about this on Monday as well, though.

That's great. And then maybe one of your competitors noted last night that Boeing is providing financial assistance to some of their lessees impacted by the grounding of the MAX, in some cases helping them, you know, pay their monthly leases. Are your lessees also receiving financial assistance from Boeing? Thanks.

It varies by customer and the needs of each customer, what is happening with Boeing. And there's a wide array of discussions going on at the moment. And they're very much I would say, in the first innings of those discussions. There's a fair bit of wood to chop.

Got it. I'm going to sneak maybe one quick modeling one in. Any update on the 660 to 680 EPS outlook for this year, X gains?

No, we'll be providing a new update for this year and for next year on Monday.

Okay, great. Looking forward to it. Thank you.

Thanks.

We'll now take our next question from Scott Valentin from Compass Point. Please go ahead. Your line is open.

Thanks for taking my question. Gus, you mentioned the 737 MAX, the timing of the return is up to the regulators. But when it does come back, do you expect there to be a glut of aircraft? Do you think that it might depress, given the increase in supply of aircraft, narrowbodies particularly, might depress gain on sale margins for a little bit until the market clears?

I don't. I think, look, everybody knows this airplane will come back It's planned into the schedules for some point in the new year. Certainly there will be differences by jurisdiction, but ultimately the airlines are expecting the airplanes they have to get back in the air and for deliveries to resume. The pace at which they resume remains to be seen. Will Boeing be able to deliver at the rate they've indicated? Perhaps, perhaps not. But I do think that the process will stretch out over time and that The customers are assuming these airplanes are coming, so I don't see these aircraft leading to a glut in supply in the market.

Thanks. Just a follow-up also. Airbus is having their own issues at the Hamburg plant. I'm just wondering how you think about CapEx, and if there's delays, do you step into the secondary market and maybe do sell-leaseback transactions, or do you just let it work through the system and, you know, you said you can buy back stock and do other things with it? with the capital?

We would never, ever go out and buy airplanes for the sake of growth, ever. We will only ever spend our shareholders' money if it makes a sensible long-term return for our shareholders. If we do not receive airplanes from Boeing and Airbus as scheduled, it would be an act of gross stupidity to go into the market to buy overpriced sale leasebacks in order to satisfy a quarterly growth target. And this company will never do that. And what we will do is look at what are the best possible alternatives available for us with the capital that is not being used. That could be buybacks, it could be just waiting for the airplanes to come, but never under any circumstances. would we go into the market to buy suboptimal or overpriced assets on the spur of the moment because you're not getting deliveries from Boeing and Airbus?

Okay. Thanks. I appreciate the response. Thanks.

Our next question comes from Kush Patel from Deutsche Bank. Please go ahead. Your line is open.

Hey guys, I just had one on aircraft types. Now that the Airbus A220 has continued to gain some traction with airlines, how do you guys think about how that asset might fit into the AirCap portfolio? And maybe more broadly speaking, is that the right asset for a public lessor portfolio?

Look, I think now that the A220 has been, it was obviously under Bombardier, the big concern everybody had was Was Bombardier a viable entity standalone? That was highly questionable if the manufacturer would survive. So everyone was extremely reluctant to purchase that airplane because if the OEM failed, then the value of the asset would tank. Now that Airbus have it, certainly that issue is long gone and it has the Airbus muscle behind it. I think the long-term success of the airplane will probably be the next variant if there's a new family of Airbus airplanes or if this airplane is modified to have more commonality with the 320 family itself.

Great. Thanks a lot, guys. Great.

Thanks a lot. Ladies and gentlemen, this concludes today's question and answer session. Mr. Kelly, I would like to turn the conference back to yourself for any additional closing remarks.

Thank you very much. Look, in closing, we produce another very strong quarter of earnings and profits. This is achieved through a very proactive risk management policy and a disciplined approach to portfolio management, but above all, a relentless focus on execution in all parts of the business. As you all know, we'll be hosting the 2019 Capital Markets Day next Monday in New York at the St. Regis Hotel, and we hope we'll see as many of you as possible there on Monday. Thank you very much, everyone.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.