Aircastle - Q4 2024

Transcript

Operator (participant)

Good day and welcome to the Aircastle Limited fourth quarter and full year 2023 financial update call. Today's conference is being recorded. At this time, I would like to turn the conference over to James Connelly, SVP of Corporate Communications. Please go ahead, Mr. Connelly.

James Connelly (SVP of Corporate Communications)

Thank you. Good morning, everyone, and welcome to Aircastle Limited's fourth quarter and full year 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 will begin the presentation shortly, but I would 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 will 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.

Michael Inglese (CEO)

Thanks, Jim. Good morning, everyone, and thank you for joining us. Today I'll start with some general thoughts on the commercial aviation marketplace, and then I'll share some key highlights of what Aircastle accomplished in our fourth quarter and fiscal 2023. Roy will then cover our financial results in more detail, followed by Q&A. In the past three months, I've had the opportunity to participate in conferences in New York, Dublin, and Austin. The broad consensus at these events shared by lessors, airlines, and investors alike signaled optimism for our sector, but with ample caution about the world at large. From a macroeconomic perspective, forecasts for 2024 indicate a slight ease to inflation, a continuation of relatively low unemployment, and hopes for eventual interest rate reductions. But these upsides must be balanced with continued geopolitical uncertainties, especially in the Middle East and Eastern Europe.

Economists are also keeping careful watch on how a significant number of major elections around the world could impact the balance and flow of global trade. If we've learned anything from the past few years, it's that geopolitical volatility can change your outlook quickly and unexpectedly. Overall, 2023 was a good year for airlines. Despite pressures from high fuel, financing, and labor costs, successful airlines are meeting the high demand for travel, generating profits, and strengthening their balance sheets. Earlier this month, IATA's air passenger market analysis reported that the airline industry achieved full recovery in total passenger traffic in February 2024, surpassing the 2019 thresholds by 5.7%. Domestic travel continues to be the core driver of this improvement. IATA reported a 13.7% domestic traffic increase versus 2019 levels and noted that there was significant improvement in Asia.

International traffic was reported at a modest but positive 0.9% growth versus 2019. I'd like to note that the United States is seeing the most notable growth, and it's now Aircastle's top country concentration at 11.4%. As 2023's success continues into 2024, many airlines would like to add aircraft to their fleet. This will be a challenge because the demand for new aircraft continues to outstrip the supply that OEMs are able to provide. This is especially true for narrowbody aircraft. Although Airbus managed to increase production in 2023, Boeing's deliveries are still lagging, and Boeing continues to deal with a number of quality control issues. Despite the fact that we don't have an order book, delivery delays on new aircraft do have a downstream impact, which we feel in the secondary market, and there's significant competition among all aircraft traders.

The global narrowbody supply is further hindered by the Pratt & Whitney powder-metal issues experienced with their GTF engines. Currently, hundreds of aircraft are grounded, requiring maintenance. Estimates are that this could render them inactive for up to nine months. The resulting fleet constraints for airlines are expected to continue into 2026. For aircraft lessors trading in the secondary market, these enduring GTF issues continue to drive significant demand for placements and extensions of current technology aircraft. An analysis published by Ishka earlier this month reported market values and lease rates for 10-year-old A320ceos and 737-800s as being higher than both 2023 and 2020 levels. Following these trends, we're also seeing high lease rates and market values for narrowbody engines such as the CFM56 or the Pratt V2500s.

Overall, despite cyclical geopolitical risks, which always seem to be an unavoidable part of doing business around the world, it's a good time to be an aircraft lessor with extensive secondary market experience. Last quarter, we shared with you how we began to put new shareholder capital to work for us in the fourth quarter. We acquired 16 aircraft for $587 million, resulting in a fiscal year total of 30 aircraft acquisitions representing investments of approximately $1.2 billion. All acquisitions were narrowbody passenger types, and 73% was new technology. Although current-tech aircraft have a reduced level of significance in our long-term investment strategy, current-tech assets can continue to deliver high returns for us while they meet the fleet needs of our customers.

On the funding side of our business, during fiscal 2023, we sourced $1.7 billion in new financing in the form of two successful issuances of unsecured senior notes, along with expanded and extended revolving credit facilities. In July 2023, Marubeni Corporation and Mizuho Leasing announced a new $500 million joint shareholder commitment to fuel our future growth. $200 million of this commitment has been received and put to work. We expect the remaining $300 million within the next few months. Roy will provide some more details on our funding success in a few minutes, but I'd note that we finished the fiscal year with about $3 billion in total liquidity. Our success has always come from our ability to maintain a conservative debt profile with ready access to diverse funding channels.

Our trading partners appreciate our experienced deal execution skills as well as our ability to efficiently close acquisitions without financing contingencies. Also, expanding on our focus on sustainability, two months ago, we shared the news of our investment commitment to the United Airlines Ventures Sustainable Flight Fund. Aircastle now joins 21 other corporate partners who represent various parts of the aviation supply chain. Together, we're supporting the growth of those companies developing the technologies required to meet significant future demand for sustainable aviation fuel. Later this year, Aircastle will be celebrating our 20-year anniversary. Over these two decades, our structure evolved from private equity to publicly owned to now where we're privately owned core business to Marubeni and Mizuho Leasing.

But what hasn't changed over the 20 years is the commitment and contributions of our global team, to whom I want to extend my thanks and appreciation on behalf of our senior leadership and our board of directors. To wrap up, we're pleased to conclude a successful fiscal 2023 and look forward to continuing that momentum into fiscal 2024 and beyond. The aircraft leasing sector has experienced positive macroeconomic tailwinds that look to continue for the medium term. With over 99% utilization at the end of the fourth quarter, our diverse fleet of narrowbody passenger aircraft are meeting the placement and extension needs of our customers.

Finally, I'd like to reemphasize that the $200 million equity commitment we received from our shareholders during fiscal 2023 and the additional $300 million we expect to receive this year are a demonstration that we're a core component of the Marubeni and Mizuho Leasing business, and we securely factor into their long-term investment horizon. Now I'll pass the call over to Roy, who'll go through our fourth quarter results in more detail.

Roy Chandran (CFO)

Thanks, Mike. For the fourth quarter, we reported a net income of $29 million on total revenues of $230 million. Our fourth quarter adjusted EBITDA was $203 million. This quarter, we acquired 16 narrowbody passenger aircraft. The net book value of our fleet at the end of our fiscal year is $7.2 billion, 81% of which is unencumbered. Our average fleet utilization was over 99% for the second quarter in a row. The new technology portion of our fleet is now at 37% by NBV relative to the percentage of all leased new-tech narrowbodies, which stands at 34%. New-tech now composes 27% of the global narrowbody fleet. This quarter, we also sold 10 aircraft with an average age of 19 years for proceeds of $163 million and gained some sale or disposition of $54 million.

This included $43 million in settlement proceeds relating to four aircraft formerly on lease in Russia. We continue to have ongoing settlement discussions for the five other aircraft still in Russia. However, we have no further update on that at this time. We want to remind everyone that there's no assurance that these discussions will result in any settlement, and if so, in what amount. We continue to pursue all legal avenues available to us in respect to insurance litigation and recovery. Turning to funding, in the fourth quarter, we issued $650 million of senior unsecured notes at a 5.95% coupon. We extended the maturity by two years for two revolving credit facilities that we maintain with Mizuho Marubeni Leasing and Meiji Yasuda Life Insurance Company and Mizuho Bank, respectively. In addition, our $640 million Asian-based RCF with 25 participants was also amended and extended by three years.

Finally, our $1 billion revolving credit facility with 10 global banks was extended by 3 years. The culmination of all these efforts brought our revolving credit facility capacity to $2.1 billion. We finished the fiscal year with net debt to equity of 2.5 times. At the fiscal year-end, total debt was $4.8 billion, of which 81% was unsecured. The weighted average interest rate on our debt at the end of the fourth quarter was 4.9%, approximately flat with the third quarter. We were successful with multiple investment closings in the fourth quarter because of our minimal contractual forward commitments and access to ample liquidity. As of April 1st, we had total liquidity of $3 billion, comprising $2.1 billion of undrawn facilities, committed capital of $300 million, unrestricted cash of $100 million, and projected 12-month adjusted operating cash flows and committed sales of $500 million.

Moving forward, our plan is to efficiently leverage our additional equity and deliver higher profitability through the acquisition of attractive narrowbody aircraft investments. Above all, we are dedicated to maintaining our IG ratings with the strong support of Marubeni Corporation and Mizuho Leasing. With that operator, we are happy to open the call up to questions.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star 9 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned on to allow your signal to reach our equipment. Again, press star 9 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. And again, it's star 9 to ask the question. And we'll take our first question from Mark Streeter with J.P. Morgan. Please go ahead.

Mark Streeter (Managing Director)

Okay, great. Good morning. Roy, on the Russia aircraft before that you received recoveries on, what percentage of the write-down did you recover back?

Roy Chandran (CFO)

Sorry, Mark. Do you mind repeating the question again? I didn't hear very clearly.

Mark Streeter (Managing Director)

What percentage of the write-down on the Russia aircraft did you recover back?

Roy Chandran (CFO)

We don't really disclose that, Mark, but I think just to give you an order of magnitude, we got back we took 4 aircraft. The settlement was on 4 aircraft, 4 narrowbodies. We have another 5 to go, and you can go back and look at our total write-down, right?

Mark Streeter (Managing Director)

Yeah. I'm just wondering if you could make it easier for us and just give us a number. But okay, if we can go back and look if it was disclosed. So second question I have is relative to market expectations about a midlife portfolio and just where the market is headed because there's always been a knock against Aircastle and the industry about midlife aircraft versus brand new, fresh aircraft. Would you say that returns right now relative to sort of prior I'm just trying to get a sense for where's the sweet spot in the market right now? Is it with a brand new, fresh portfolio? Is it with a portfolio that is in that midlife age? Is it in a portfolio that's even older just given all the constraints that we have on the supply side?

Michael Inglese (CEO)

Yeah. Look, Mark, there's no simple answer. Look, everybody has kind of a different investment thesis and time horizon. So we are managing a business that's going to celebrate its 20th anniversary in the context of having a long-term view about what do customers want and how will the value of those assets and those investments play out over time? So it's a mix of in our investment strategy in the last couple of years of somewhere in the neighborhood of 2/3-3/4 of new tech as the market has been evolving versus prior tech. And the mix and return expectations for each of those is a little different. And in the context of the current market, I'm sure people would argue that prior tech can give you a bigger-looking headline IRR.

And the question on that is always going to be, what's that time horizon, and how are you going to actually monetize and realize those returns over time? So we're investing and following the market with an expectation of being here for a long time. Others do this in a different way and build something and sell it quickly or are in the trading market where they're more exposed to the movements that can sometimes be rapid in the context of today's value of an engine or an older aircraft. And clearly, those assets are in high demand today as you're seeing and reading in the results of some of the other people in this industry.

Roy Chandran (CFO)

Mark, I think just to add, I don't think you can disconnect sort of what the financial markets are doing and leverage, right? So if we had a capital structure which is kind of backed by a sovereign or a highly rated entity, and I can lever 4-5 times as opposed to 2.5 times, my end results can be much better, right? So baseline returns, I think to Mike's point, on average, midlife portfolios are yielding better than on an unlevered basis, right? But once you layer in cost of capital, there's friction cost, right?

Mark Streeter (Managing Director)

Yeah. And so where I was heading is that you've done a great job of cleaning up the portfolio over time. It is younger and so forth, but it still compares a little bit older relative to the peer set and so forth. And what I'm trying to get a sense is, has the market come a little bit your way, if you will, in that given how supply-constrained we are right now and the fact that everything's being extended in terms of lease rollover and so forth, is that something that favors you more than it favors maybe one of your peers that has a younger portfolio? From that very point, Roy, right, which is a return perspective when you factor in leverage.

And really, it ties to my sort of second part of this question, and then I'm done, which is with Standard & Poor's, you still have a standalone rating on Aircastle that is high double B with two and a half turns of leverage. And to me, given that the market has changed now, obviously, you get your one-notch upgrade to triple B minus on the bonds. But isn't it time that the standalone rating of Aircastle with S&P move to investment grade? Are you pushing for that hard? Because it seems like you're so much more dramatically improved in your credit standing than where you were when that rating was first put in place.

Roy Chandran (CFO)

Absolutely. I mean, that's going to be our number one priority. We continue to beat the drum. There's no good reason why our standalone rating should be a double B plus. I think if you look at our metrics going back from 5 years ago to where we are today, right, the fleet has dramatically transformed from 30% widebody freighters to effectively predominantly narrowbodies with 37% new tech, right? So yeah, you're preaching to the choir, Mark. We've made that case a number of times, and I think we'll continue to make that case.

Mark Streeter (Managing Director)

Well, and what I'm hoping is that as the whole sector moves higher in rating and you move higher in rating as well, the beta, if you will, in your credit spreads, which has been higher relative to your peer set, hopefully, that is lessened, right, as you move up the rating scale. So we're pulling for you. So good luck with that. That's it for me. Thank you.

Roy Chandran (CFO)

Thank you, Mark.

Operator (participant)

As a reminder, it is star nine to ask a question. It appears that there are no additional questions at this time. I'll turn the conference back to James Connelly for any additional remarks.

James Connelly (SVP of Corporate Communications)

I just want to thank everyone for joining the call today. Please reach out if you have any questions, and hope you have a great day.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.