Aircraft leasing is a highly lucrative business as Doric Nimrod Air Three Ltd (LON:DNA3), listed on the London Stock Exchange Group Plc (LON:LSE), has proven. Doric Nimrod launched with the goal of purchasing eight Airbus A380’s, which it would then lease to Emirates. Cash from the IPO along with some debt funded by Goldman funded the acquisitions. Its stock is preferred and is targeting an annual dividend payout of 8p per share, or 8 percent based on its issue price of 100p. The preferred stock effectively trades like a bond, chucking cash from aircraft leasing operations.
Aircastle offers an interesting, valuable aircraft leasing opportunity
Unfortunately, although targeting an 8 percent yield and already up 8-9 percent from its issue price, Doric Nimrod does not yet offer value. Indeed, the company has not even completed its aircraft acquisitions yet. However, larger U.S. peer, Aircastle Limited (NYSE:AYR) offers an interesting, valuable aircraft leasing opportunity.
Aircastle Limited (NYSE:AYR) has similar traits to Doric Nimrod Air Three Ltd (LON:DNA3), however, as the company’s stock is ordinary, the market has placed a discount on the stock. Currently the stock trades below that net asset value per share, an opportunity that is unlikely to arise from Doric Nimrod’s preferred stock.
Aircastle Limited (NYSE:AYR) has a fleet of 158 passenger and freight aircraft on its books with upwards of 60 different clients, to some extent removing liquidity and default risks. Moreover, Aircastle leases its aircraft to the effect that the lessee must pay operating expenses accrued or payable during the term of the lease. This includes, but is not limited to, maintenance, insurance, aircraft registration, replacement of certain high-value components or complete overhaul.
Structuring the lease in this way allows Aircastle Limited (NYSE:AYR) to avoid the most costly factors of owning aircraft. With these expensive ‘aftercare’ costs removed, Aircastle has nothing to do but collect its cash from its customers. As a result, Aircastle is cash generative, pocketing an operating margin of 19 percent on revenues of $337 million during the first half of this year.
What’s more, during the first half of this year on revenues of $337 million, the company’s operating cash flow was $193.4 million and CAPEX spending was a lowly, $45 million. Additionally, even though the company offers an above average dividend yield of 3.8 percent, the cumulative cost of this payout was only $22 million during the first half of the year – giving Aircastle plenty of room to increase its payout.
That said, building a large fleet of aircraft costs money and Aircastle Limited (NYSE:AYR)’s debt is high at 61 percent of assets or 2x equity. Still, the company has plenty of cash flow to pay down debt, and interest costs were covered 3.8x by EBITDA during the second quarter.
What’s really appealing though is Aircastle’s current discount to net asset value. Aircastle’s fleet is worth around $21.50 per share, up slightly from $21 per share at the end of the second quarter after the company paid off some debt, thanks to a cash injection from Marubeni Corporation, covered below.
Marubeni entered into an agreement with Aircastle
Marubeni Corporation, one of Japan’s major integrated trading and investment businesses and back in June of this year, entered into an agreement with Aircastle to purchase new shares, the value of which equated to $209 million, or 15.25 percent of Aircastle’s share capital. Since then, Marubeni has been aggressively purchasing additional shares, increasing its holding to around 20 percent of Aircastle Limited (NYSE:AYR)’s outstanding stock. Marubeni’s total holding is now worth around $250 million.
Aircastle is an attractive play on the lucrative aircraft leasing
All in all, Aircastle Limited (NYSE:AYR) is an attractive play on the lucrative aircraft leasing business and its stock is currently trading below the net asset value of its lease fleet.