This is a Smith Barney report on FLY which I also like:
Global Aircraft Leasing Fundamentals and Opportunities Remain Strong - Aircraft values and lease rates remain strong, driven by emerging market demand and OEMs being sold out to 2012. Reduced credit market capacity could limit future growth for the industry, but B&B Air is advantaged after recently completing a $853m debt securitization and $1.2 billion credit facility. The recent 115 bps fall in LIBOR more than offsets any credit spread increase. * Attractive Aircraft Lease Portfolio - The initial portfolio of 47 planes is well diversified in terms of customers, regions, lease terms and aircraft types. Average age of 5.7 years compares favorably with a global average of 13 years. * Attractive Dividend Yield and Growth Characteristics - B&B Air differentiates itself from Genesis, its closest comparable, by targeting annual acquisitions of at least $700m, some of which is already contracted. It targets DPS growth of 10-15% p.a. versus 5-10% for Genesis. We expect 24% DPS growth in 2008. * Strong Backing of Babcock & Brown - B&B Air is more important to its sponsor than Genesis is to GECAS. Babcock & Brown is a specialist fund manager and has a track record. Conflicts of interest are possible but unlikely. * Initiating Coverage with Buy/Medium Risk (1M) Rating and $28.60 Target Price - Based on a yield of 12% applied to our 2008E forecast distributable cash flow per share of $3.43. This is equivalent to a dividend yield target of 8.0%. The shares offer a very attractive 11.1% current dividend yield. After falling 22% from its IPO price of $23, the shares offer aircraft assets at a 20% discount to market value with attractive funding in place.
We expect significant capital and dividend growth over the next two years, driven by B&B Air's intention to grow its initial portfolio of $1.47 billion by at least $700m (48%) per year. Initial capital growth is driven by B&B Air's aircraft acquisition rate, rising market lease rates and increasing leverage to its target level. We expect its dividend yield to be in the 8-9% range over time, driven by a 70-75% payout from distributable cash flow. At the current share price of $17.86, the dividend yield is an attractive 11.1% based on an already declared DPS of $0.50 for 4Q07 ($2.00 annualized). On our DPS forecast of $2.29 for 2008, the prospective dividend yield is 12.8%.
However, such a high payout ratio will require frequent equity and debt issues to fund aircraft acquisitions. The relatively low cash retention will also reduce capital growth beyond 2009, implying that equity investors will have to increasingly rely on income for their investment return.
Anyway, it's a good alternative. All of these companies require new cash to keep expanding. More to follow.