Description

Price (7-29-13): $13.97

Market Cap: $588mm

Dividend Yield: 6.30%

EV / CMV ~1.1x (based on Ascend estimates)

Price / 2014E (consensus): 9.6x

FLY Leasing Limited ("FLY") is an interesting value investment opportunity for investors that are looking for long term dividend holds.  The Company is a Dublin, Ireland based global owner and lessor of commercial jet aircraft.  They are managed by BBAM, the world's third largest aircraft leasing manager.  Private equity firm Onex and management recently completed a $25mm investment into FLY in January and own ~11% of the Company.  They are subject to long term lock up agreements and so would not be sellers anytime soon.  Onex also owns a 50% interest in BBAM.

The Company employs a low risk business model by focusing on narrow body planes that can serve a wide range of operators.  The Company’s portfolio consists primarily of the Airbus 320 family and Boeing 737 aircraft, which are the most popular aircraft in the world, and are easy to re-market once a lease expires or an operator faces financial distress / bankruptcy.  Interestingly, operating performance of the leasing aircraft industry has not had as much correlation to the airline industry as one would initially expect.  Going back the last 10-15 years, the leasing aircraft industry's operating margins have remained healthy (50-60%) even during times of financial distress for airline industry.  As of June 30, FLY had 97 narrow body and 6 wide body planes.  The Company's acquisition strategy is to acquire aircraft through sale leasebacks from airlines and other third parties and so the Company does not have an order book.  Management's view is that direct OEM purchases are not the most efficient use of capital because the OEMs often require an upfront pre-delivery payment ("PDP") and usually save the best deals for existing airline customers.  With that said, management has also had success selling its aircraft at a premium to net book value, though I am not sure if this will continue.

FLY’s customer base is highly diversified.  The Company’s aircraft are leased to 50+ airlines in 30+ countries around the world.  No single customer represents more than 6% of revenue and the top 10 customers represent less than 45% of revenue.  Geographically, revenues are split: 42% Europe, 29% India, Asia & South Pacific, 15% North America, 8% Latin and South America, 6% Middle East and Africa.  FLY has a staggered lease expiration profile.  The remaining lease term on its contracts is ~3.7 years.  9 contracts expire in 2013, 17 contracts expire in 2014, and 27 expire in 2015.  

Funding for the business appears to be stable: (1) Since acquiring the GAAM portfolio in 2011, management has reduced leverage down from 5x net debt to equity down to around 3x today, (2) there are no significant maturities until 2018, (3) FLY’s funding costs are decreasing, and (4) access to the capital markets remain strong as the Company is able to utilize a number of options (securitizations, commercial bank debt, etc.) to fund its growth.  The Company also recently upsized its Aircraft Acquisition Facility to $450mm and completed a $395mm term loan in late 2012 to fund growth.  Management is targeting $300-500mm of aircraft acquisitions in 2013, with growth fully funded for without the need for any additional equity issuance.  The majority of contracts are fixed rental rates, and management often pursues a predictable cost structure by utilizing interest rate swaps to lock-in fixed rates on borrowings.  The Company also pursues long term lease contracts.  The Company is positioned to perform well should interest rates rise in the future.

Industry macro trends are very positive for this stock.  Global airline traffic has enjoyed strong industry growth (1.5 – 2.0x global GDP) since the 1970s and this trend is expected to continue.  Boeing and Airbus are forecasting that global passenger and cargo traffic will grow annually by ~5% over the next 20 years.  A significant driver of growth for this industry will be the growing middle class populations in emerging markets.  Along with this development, leasing has also become a popular trend (market share of lessors has increased from sub 5% in 1980s to mid 30% market share today).  Factors contributing to this trend include lower upfront capital investment (~3% of aircraft cost) for airline companies, fleet flexibility (lease terms of 3-10 years), and zero residual value risk.  The popularity of the low cost carrier model over the recent years has boosted demand for leasing, as start-up operators would rather lease than buy aircraft given the upfront capital commitment.

Lastly, I believe management will do a good job managing its capital in the future.  FLY has had a very good track record of enhancing shareholder value to date.  Since going public in 2007, the Company has paid out 23 consecutive quarterly dividends, of a total of $5.90 per share.  The Company has also repurchased nearly a quarter of its IPO shares.  

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