Tuesday, August 08, 2006

Aircastle AYR in the sky with dividends

Of all the IPO's this week the most interesting is Aircastle Ltd (AYR), Air Castle was started by Fortress Investment Group, to participate in the lucrative world of aircraft leasing.

In October 2004, Fund III and certain coinvestors formed an aircraft investment and leasing company to take advantage of attractive buying opportunities within the aviation sector. Particularly among the major US carriers, competition from discount airlines coupled with high fixed costs and soaring fuel prices had driven operators into bankruptcy. As part of restructuring, many airlines underwent cost cutting programs and fleet rationalization using bankruptcy to return aircraft to lenders and lessors. Aircastle’s strategy is to acquire high-utility planes at attractive risk adjusted yields, lease those planes primarily in growing markets outside the US, and actively manage the assets to minimize credit and operating risks. Fortress’s thesis is that through detailed analysis of each plane and the use of modest leverage, Aircastle can generate attractive cash flows with limited volatility.

The first is that the company’s business model of financing leases via aircraft lease securitizations greatly reduces the amount of equity capital employed. Aircastle's business model is that of an Aircraft REIT. The core idea is to buy aircraft, put them on the street, while financing them with a self-liquidating securitization trusts.

Aircastle Ltd operates in the tax haven of Bermuda and so does not pay tax at the corporate level. Not paying corporate tax means more earnings are available for distribution and reinvestment. Aircastle does intend to pay dividends, and given that Fortress owns 80% of AYR, public shareholders can expect to get paid generous dividends. Just like those from Newcastle Investment Corp (NCT), Fortress' mortgage REIT. Currently Newcastle spits out $2.60 in dividends per share equivalent to a 9.80% annual yield.

Since NCT's IPO in 2002 investors have received a total return of 157%, equivalent to 29% annualized. No wonder Aircastle Ltd's (AYR) IPO opened at $27.45 a share, well above its offering price of $23.


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