Despite rent collection levels trailing its peers, Irish lessor FLY’s bonds are trading at a wider premium than their underlying credit strength implies, according to an analyst note by JP Morgan.
FLY’s Q2 results said that it was collecting 47% of its pre-pandemic planned rent, a figure which rose to 84% adjusted for deferments. In its note, JP Morgan’s analysts said that these numbers “trail [its] peers”, however they also pointed to a more positive future collections outlook and welcomed its commitment to transparency.
“Note that management improved its deferred rent forecast from last quarter’s $90-$95mm to the current $80-$85mm cumulative estimate. Management expects (for now) to collect $14mm (~17%) of the total estimated deferred rent balance by the end of 2020, $37mm (~44%) in 2021, with the remaining $32mm (~39%) collected in 2022 and beyond. Kudos to FLY for leading the sector in disclosure – we hope other lessors are paying attention,” said JP Morgan.
Despite this current weak collection data, JP Morgan said FLY’s equity and credit valuations are being subject to a discount which is, “simply too severe”.
The analysts said that FLY’s equity is trading at a discount to tangible book value, both on an absolute and relative basis, which JP Morgan said was “far too onerous”, while it noted that FLY’s two B1/BB rated bonds are currently trading at yields as wide as 15%.
“With $887mm of cash and unencumbered assets at book value…we continue to expect FLY to pay off these bonds at par. As we’ve noted with peers, it’s ugly out there for the lessors given the pandemic, and FLY is certainly not immune as evidenced by lagging rent collection metrics. The question is how to price FLY risk relative to peers – and we think the market has overshot to the downside,” said JP Morgan.
The vote of confidence in FLY was backed by Cowen, which said in an analyst note that firm’s core results were “solid”.
“We are reiterating our outperform rating on the common shares of FLY Leasing,” said Cowen. “FLY reduced deferral level expectations...but extended repayment terms to seven months from four. The company sold no aircraft in 2Q, but remains opportunistic around aircraft sales, purchases, and sale leasebacks. FLY has no orderbook, which will put a ceiling on near-term growth, but may be able to pick-up aircraft coming to market at a discount, should the debt markets allow for capital raising at decent rates.
FLY reported net income of $9.6 million for Q2. This compared to $54.1 million for the same period in 2019.