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Fly Leasing Limited (NYSE:FLY)
Q3 2019 Earnings Call
Nov 8, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fly Leasing Third Quarter Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Matt Dallas. You may begin sir.

Matt Dallas -- Investor Relations

Thank you, and good morning. I am Matt Dallas, the Investor Relations Manager of Fly Leasing, and I'd like to welcome everyone to our third quarter 2019 earnings conference call. Fly Leasing issued its third quarter earnings results press release earlier today, which is posted on the Company's website at flyleasing.com.

We have a slide presentation that accompanies today's call, which is available to participants on the webcast. If you are not accessing the webcast, you can find a copy of today's presentation in the Investor Relations section of our website on the Events and Presentations page.

Representing the Company today on this call will be Colm Barrington, our Chief Executive Officer; Julie Ruehl, our Chief Financial Officer; and Steve Zissis, the President and CEO of BBAM, the company that manages and services FLY's fleet.

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to statements regarding the outlook for the Company's future business and financial performance. Forward-looking statements are based on the current expectations and assumptions of FLY's management, which are subject to uncertainties, risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and are described more fully in the Company's filings with the SEC. Please refer to these sources for additional information. An archived webcast of this call will be available for one year on the Company's website.

And with that, I would now like to hand the call over to Colm Barrington, the CEO of Fly Leasing. Colm?

Colm Barrington -- Chief Executive Officer

Thank you, Matt, and welcome everyone. I'm happy to say FLY is again reporting excellent results for the third consecutive quarter this year. We can ascribe this success to the development of the strategy that we put in place over the last few years. And which has been executed expertly by BBAM and supported by continuing strong industry conditions.

The fundamentals of our industry remain positive, supported primarily by continuing strong growth in global air passenger traffic. The International Air Transport Association continues to report constant growth numbers each month, including 3.8% growth in September and is predicting air traffic growth of 5% for all of 2019.

Meanwhile passenger load factors in IATA airlines, which is a very important metric for the aircraft leasing industry as it shows the supply demand relationship for aircraft, continues at record highs. Including all-time high of 8.0 [Phonetic] 85.7% in August. IATA continues to predict worldwide airline profits of $28 billion for 2019 despite some pressure on yields and on the profitability of some carriers. World air traffic and prosperous airlines each support a strong aircraft leasing industry.

The recent bankruptcies of the Thomas Cook Group received a great deal of media publicity due mainly to the number of holidaymakers that had to be repatriated. However, Thomas Cook's demise, and the recent demise of some other very minor airlines had a very -- has had very little impact on the aircraft leasing sector. As the number of aircrafts involved is negligible in relation to the total leased portfolio, strong demand for aircraft has ensured that the aircraft previously leased to Thomas Cook have been picked up rapidly.

Thomas Cook's demise is primarily due to structural changes in the European travel industry that are seeing more and more passengers moving away from traditional inclusive tour operators toward expanding low fare airlines such as EasyJet, Ryanair and Wizz. It's interesting that it was Ryanair that was reported to be actively pursuing the aircraft returned from Thomas Cook. So that Ryanair could use them in its Malta subsidiary.

FLY had a single aircraft leased to Thomas Cook Group. This aircraft is still on lease with German Airline subsidiary of the Group, that continues to operate and which has been supported by large working capital loan from the German government agencies. FLY has also released all three aircraft that were returned following Jet Airways bankruptcy, earlier this year.

Overall, and for the reasons just stated, we continue to see strong demand for leased aircraft from airlines in most of the world's regions. We're also seeing continued strong demand for sales of aircraft from our fleet. FLY has been availing of these strong market conditions and in nine months through September 30th, FLY sold a total of 25 aircraft that's an aggregate 13% premium to our book value. In addition, FLY has 16 more aircraft contracted for sale, of which nine are expected to close in quarter four with the remaining seven are expected to close in the first quarter of 2020.

These continuing sales which now total more than 100 aircraft for the last four years, and all of being a significant premium to book value shows that FLY's ability to trade aircraft at significant gains continues, and is not limited to any one-time period. It also demonstrates that one, there is value in FLY's balance sheet and two, that BBAM our Manager continues to add significant value to FLY.

The scale experience and contacts that our Manager BBAM provides are major assets to the Company. The BBAM platform provides FLY of the distinct scale advantage of buying, leasing and selling aircraft. This was particularly evident last year when BBAM's relationships allowed us to partner with other BBAM clients in completing our large portfolio acquisition. An acquisition that was probably too big for any of our single competitor, and continues today as we partner with other BBAM clients acquiring aircraft, and then selling them into ABS transactions.

BBAM's global network of long-term cost relationships with airlines, investors and lenders are significant assets to assist FLY at leasing, acquiring and financing our fleet.

And BBAM development of the horizon [Phonetic] ABS structures now totaling three has provided another avenue for the sale of FLY's aircraft. And FLY and BBAM continue to have a strong alignment of interests due to the more than 17% ownership of FLY's stock by BBAM shareholders.

Before moving on to FLY's third quarter results, I'd like to comment on two situations regarding Boeing 737 models. Regarding the 737 MAX, there is still uncertainty about the certification. The low to several airlines have announced that they are not putting the MAX back into their schedules until the first quarter of 2020. However this uncertainty has had a little impact on FLY, as we have only two MAX aircraft in our fleet, both of which regard under purchase of leaseback transactions, and both of which are long-term leases that remain current.

We do not have any MAXes on order. Meanwhile uncertainty regarding the MAX continues to give support demand and lease rates for other Boeing 737 models, and A320 family aircraft, which comprise the core or majority of FLY's fleet. There have also been issues reported regarding cracks in the structures behind the wings and the fuselage of older 737 next-generation aircraft. These issues have required immediate inspection of aircraft that have accumulated 30,000 or more flight cycles. An inspection within the 1000 flight cycles for aircraft that accumulated 22,600 or more cycles. Of the 39 Boeing 737 next-generation aircraft in FLY's fleet, only two aircraft have accumulated over 30,000 cycles requiring this immediate inspection. Both aircraft have been inspected and neither have any signs of cracks. Other aircraft in our portfolio will be inspected, as they approach the mandated flight cycle level.

Clients continue to maintain a consistent strategy based on four main principles. Disciplined aircraft acquisitions, conservative financing, active fleet management, and above all, an emphasis on consistently enhancing shareholder value. We are rigorous on pricing, refusing to overpay for aircraft, refusing to accept unprofitable lease rentals or to add less popular models merely to build our fleet size.

Experience tells us that popular aircraft which is purchased at the right price will provide positive returns in virtually all market conditions. Aircraft that are purchased at competitive prices also produce gains when they're sold on to third parties. FLY's sales of its aircraft to substantial gains quarter-after-quarter and year-after-year show the validity of its strategy, and the fact that we've been executing it in a consistent and disciplined way.

FLY's financing is also conservative, based principally on long-dated amortizing of secured debt. We've also demonstrated that we can reduce leverage in an accelerated manner choosing us from four times equity of January 1 this year following completion of a large portfolio transaction to 2.6 times equity at September 30th, nine months later. We expect a further small reduction in leverage by year-end.

Our positive financial outlook has recently been recognized by one-notch upgrade in our corporate ratings from Standard & Poor's, and an upgrade to CreditWatch Positive from Moody's. These factors, along with our strong earnings and balance sheet are expected to have a positive impact on FLY's funding costs going forward.

As mentioned earlier, our active fleet management allowed us to consistently sell aircraft to gains to book value to generate funds to purchase new aircraft and to pertain a young fleet. Our active sales programs achieved these objectives and now leaves FLY in a strong financial position with relatively low leverage and abundant capacity to fund significant pipeline of A320neo family aircraft that we'll be acquiring over the coming months and years. Our rigor on pricing -- on pricing and adaptive fleet management are core aspects of our business. They also demonstrate FLY's continued emphasis on enhancing shareholder value to producing double-digit ROE, steadily growing book value per share, and actively purchasing shares when we can do so at significant discounts to book value. We expect to continue to execute on these four pillars of our strategy.

FLY continues to deliver excellent results. In the third quarter, FLY produced adjusted net income of $59.8 million, equivalent to $1.93 per share. And generated an adjusted return on equity of 31%. This EPS and ROE figures, which are also reflected in our GAAP results are among the best quarterly results delivered by FLY.

We also increased our book values to $25.80 per share at quarter end, 20% increase since the start of the year and a $3.85 premium to yesterday's closing share price. Despite significant increases, FLY's share price continues to trade at 85% of our book value, a book value that have consistently exceeded when we sell aircraft.

Our results -- these results reflect significant developments of FLY over the last three years. Selling older and less performing aircraft, optimizing our capital structure and most importantly, upgrading our fleet with newer and more profitable aircraft. We plan to continue these activities.

Our Q3 financial results are significantly ahead of the same quarter a year-ago with a 162% increase in adjusted net income to $59.8 million, and a $1.18 increase in adjusted earnings per share to $1.93, more than 2.5 times last year's Q3 result. These improved results are based on substantial 33% increase in total revenues, along with a 7.1% increase in net spread, which was 7.5% in the quarter.

As previously mentioned, our book value per share has also showed a significant increase and $25.85 per share is 24% ahead of where it was a year-ago. This increase can be ascribed to FLY's positive earnings over the 12 months. Along with our share repurchases.

Since the beginning of the year, we have repurchased 2 million shares at an average price of $16.29 per share. And representing over 6% of FLY's outstanding shares on January 1. These repurchases have had a further positive impact on the enhancement of shareholder value that I referred to earlier.

FLY continues to acquire aircraft having purchased two more Boeing 737 next-generation aircraft in Q3, thus bringing our acquisitions year-to-date with total four aircraft for an investment of over $100 million. We've commissioned to purchase nine more aircraft, comprising one A320 , and eight 737-800s. We expect six of these aircraft to be delivered to FLY in quarter four, and the remaining three will be delivered in the first half of 2020. These nine aircraft will represent an investment of approximately $250 million.

We are particularly excited about our 21 committed Airbus A320neo family purchase and leaseback aircraft, first of which is scheduled to deliver in December subject to manufacturer meeting its delivery schedule. We have seven more A320neo family aircraft, a mixture of A320neos and A321neos scheduled for delivery in 2020, and 11 more in 2020 -- 2021, with the last two aircraft in this program expected in 2022.

So FLY now is a $1.3 billion pipeline of committed aircraft deliveries. All of which are, either unleased or committed to lessees. We are also focused on additional acquisitions -- we will buy more aircraft if they meet the rigid investment criteria, that I referred to earlier.

We've also continued to pursue an active aircraft trading program, and sold eight aircraft in quarter three, for a gain of nearly $39 million, which is a 17% premium to our book value. Looking ahead, with 16 more contracted aircraft sales. We expect nine of these contracted sales to close in quarter four of 2019. The remaining seven to close in quarter one, 2020. These 16 contracted sales were further positive impacts on FLY's earnings, book value, leverage and fleet age.

This is the sixth straight quarter in which FLY has produced double-digit return on equity. So the momentum that we have reported in previous quarters continues. For the year-to-date FLY has produced adjusted net income of $168.9 million, which is $5.28 [Phonetic] per share. As Julie Ruehl will report in a few moments, we have a very positive outlook for the fourth quarter. And therefore, for the year as a whole. This positive outlook is based on our modern portfolio, our densified growth, our contracted sales, our financial capacity and our limited refinancing risk.

And with that, I'll hand you over to our CFO, Julie Ruehl, to take you through our financial overview.

Julie Ruehl -- Chief Financial Officer

Thank you, Colm. FLY's reporting net income of $51.7 million for the third quarter of 2019, a $31 million increase from Q3 2018. FLY achieved ROE of 26.6%, the sixth consecutive quarter of double-digit ROE, and a more than 100% increase from the year-ago quarter. Earnings per share increased nearly 150% from $0.68 a year-ago to $1.67 in the current quarter. These strong financial results were fueled by significant gains from aircraft sales, as we continue to take advantage of a lively secondary market to self-select aircraft,.

In Q3 FLY completed the sale of eight aircraft, including seven aircraft in the 12 aircraft portfolio sale, announced in early July. As a result of FLY's superb financial results over the past several quarters and the rapid deleveraging enabled by selling aircraft at significant gains to book value, our net debt to equity ratio has declined from four times at the beginning of the year to 2.6 times at September 30, as Colm mentioned.

FLY's operating lease rental revenue in Q3 2019 increased 2.8% to $96.1 million, driven by the aircraft sales we have discussed on the call. Although operating lease rental revenue declined, we believe that our aircraft sales strategy have improved the quality of earnings, as demonstrated by FLY's increased net spread. Total revenue increased 33% to $139 million in Q3 2019 from $104.6 million in Q3, 2018.

In Q3, 2019,FLY recognized no end of lease income as compared to $3.1 million in the prior-year period. FLY recognized $38.9 million of gains on sale of aircraft in Q3 '19 from the sale of eight aircraft, which represents a 17% premium to net book value as Colm mentioned.

Turning to expenses, depreciation and interest expense are down as compared to the prior-year quarter due to aircraft sales. Although on a combined basis, these expenses declined by 8.9%, a larger decline than operating lease rental revenue at less than 3%. SG&A expense is up slightly in Q3 as compared to a year-ago, primarily due to lease related costs, a portion of which had previously been deferred and amortized and are now expense under the new lease accounting standard.

Loss on derivatives in Q3 2019 relates primarily to interest rate swaps that no longer qualify for hedge accounting due to debt prepayments associated with aircraft sales. Also in Q3, 2019, FLY incurred $1.6 million loss on debt extinguish, consisting almost entirely of non-cash write-off of debt costs. The debt extinguishment costs incurred were also related to debt repayments due to aircraft sales.

Overall, total expenses as a percentage of total revenues declined 25% year-over-year from 77% to 58%.

Now I'd like to cover our guidance for Q4 2019. Our gain on sale of aircraft guidance assumes that nine aircraft sales were closed in Q4, as Colm mentioned. Several of these sales are expected to be part out including our two A340s, which we expect to be disposed off at an economic gain.

As Colm also noted, seven additional contracted aircraft sales are expected to close in Q1 2020. For the fourth quarter of 2019, we are expecting operating lease rental revenue of $88 million to $90 million. We expect amortization of lease incentives of $1 million to $2 million. Gain on sale of aircraft is expected to be $14 million to $15 million. We expect end of lease income of more than $30 million.

Depreciation expense to be approximately $32 million to $33 million. We expect interest expense of $30 million to $31 million. Debt extinguishment costs are expected to be approximately $2 million. Maintenance and other costs are expected to be $1 million to $2 million. We expect SG&A expense of approximately $9 million without consideration of any foreign exchange gains or losses that may occur.

Overall, Q4 pre-tax income is expected to be more than $60 million. A further leverage reduction is expected by the end of the year, at which time we're expecting net debt to equity of approximately 2.5 times. And in our near-term outlook, we expect net debt to equity to remain below three times.

Our improved leverage profile coupled with a recent credit rating upgrade has positioned FLY well, as we think about refinancing opportunities for our long-dated debt facilities, as well as financing new acquisitions.

I'll turn it back to Colm now for his closing remarks.

Colm Barrington -- Chief Executive Officer

Thank you, Julie. Okay, well then let's recap of the highlights of quarter three, 2019. We achieved a 33% growth in total revenue to $139 million. We sold eight aircraft for a gain of $38.9 million, 17% above our book value. We produced $59.8 million of adjusted net income, $1.93 of adjusted earnings per share, and 31% adjusted ROE.

We continued our track record of growing book value, which was $25.85 per share at quarter-end. That is 24% higher than a year-ago. Then looking ahead, we have a contracted pipeline of aircraft valued $1.3 billion, including 21 of the latest generation Airbus NEO aircraft. We expect to add to this pipeline through four further acquisitions.

And finally, we have given pre-tax income guidance of over $60 million for the December quarter. These outcomes are all highly positive and demonstrate that FLY continues to represent a real value proposition.

And with that we are now ready to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Helane Becker from Cowen. Your line is open.

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

Thanks very much, operator. Hi, everybody. Thanks for your time. So Colm, I have two questions, one question is with respect to the aircraft and the two A340s that you're -- I guess you're -- what parting out. Are you going to just sell the aircraft to a part out group or are you going to part it out and then sell the parts yourself?

Colm Barrington -- Chief Executive Officer

We are selling them to a third-party, Helane. And it's -- they are not actually quite sure what they'll do with the aircraft. But I understand they're parting in much.

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

Okay. And then the other question....

Colm Barrington -- Chief Executive Officer

We're part-out [Indecipherable] ourselves.

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

Right, got you. Okay. That totally makes sense. And then the other question I have is -- I was in Hong Kong earlier this week, the -- one of the conferences and one of the things that people talked about, including myself was the whole idea of ESG and how -- there's flight shaming [Phonetic] and then governments got involved yesterday, and I feel like if there is no -- if the industry doesn't take this on, obviously the governments are going to do it for us and we probably won't like it, which is my opinion, but my question -- sorry is -- as you think about your fleet and the sale leasebacks that you do and the way you are growing. Is it a focus on just new technology, will you just try to sell all the old technology aircrafts. How are you thinking about that and one and two, are your customers also coming to you with the idea that they've got to spruce up their fleet and get out of the old technology aircraft on a more timely basis. So sorry, for that long winded one.

Colm Barrington -- Chief Executive Officer

It's obviously a big issue, and it's certainly affecting airlines and people are concerned about higher taxes on fuel, etc, etc. So airlines are very focused on those and if they are focused and -- and we need to be focused also and we are. But as you can see, we are moving moving on a lot of our mid-life to older aircraft, and you mentioned the A340s, in particular, those two are -- aircrafts are gas guzzlers and that's why they have the -- they are being retired generally around the world. So, we are moving with airlines from older technology to newer technology aircraft, and we will continue to do that, because that's where the world is going.

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

All right. Got you. Okay, well thanks very much for your help.

Colm Barrington -- Chief Executive Officer

Thanks, Helane.

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

Of course.

Operator

Your next question comes from the line of Catherine O'Brien from Goldman Sachs. Your line is open.

Catherine O'Brien -- Goldman Sachs Group Inc., Research Division -- Analyst

Hi, everyone. Thanks so much for the time. So you know, you'll be acquiring six aircraft in the fourth quarter. Can you tell us where you are sourcing those from, and then any updates on where you're finding the most attractive acquisition opportunities or incremental aircraft on top of the AirAsia ones. Thanks.

Steven Zissis -- hief Executive Officer and President

Well, Catherine, it's Steve. Well, we can't tell you exactly who we are sourcing it from, but generally it's in the general marketplace. It is harder and harder to find deals. So we pretty much have to run, what you call the seams of the market to find deals that work for us. We have originated a few deals with start up airlines in Asia, which we thought were attractive deals. So in general, things are not as easy as we were expecting it, but we're still able to originate stuff as we go along.

Catherine O'Brien -- Goldman Sachs Group Inc., Research Division -- Analyst

That's great. And I didn't mean like by name, just maybe sale lease back from other lessors. Just like what general -- general pool is yielding those deals right now.

Steven Zissis -- hief Executive Officer and President

Yes, it's a combination of both, sale-leasebacks and purchasings, what we'd call secondary aircraft from passive lessors.

Catherine O'Brien -- Goldman Sachs Group Inc., Research Division -- Analyst

Okay, understood. And then just maybe I think -- I think in the guidance you have been expecting about $50 million plus in gains on sales in the quarter and ended up coming in a little bit shy of that. Is that just a matter of timing or transaction closes or some of those deals are not materializing. Any help there would be great. Thank you.

Julie G. Ruehl -- CFO

Hi, this is Julie. And it is solely due to timing. We had expected a few more sales to close in the quarter and those couple that didn't closed in the quarter out since closed in October. So it's strictly timing.

Catherine O'Brien -- Goldman Sachs Group Inc., Research Division -- Analyst

Great, thanks so much for the time.

Colm Barrington -- Chief Executive Officer

Thanks, Catherine.

Operator

Your next question comes from the line of Scott Valentin from Compass Point. Your line is open.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Thanks for taking my question. Just with regard to leverage, I mean, it's down 2.6 times. Now, I guess you guys point to 2.5 times leverage ratio by year-end. Is that a function of just and Steve, you mentioned the opportunities are challenging out there, is that a function of just lack of opportunities or is that related to -- you've got S&P upgrade. Are you looking for additional upgrades. And that's what's kind of limiting the leverage?

Colm Barrington -- Chief Executive Officer

Scott, we've been running the business rather than focusing on getting upgrades, specifically but hopefully, we have been running the business in a way that's also implied upgrades. Basically, we, as you know, when we acquired the big portfolio from the AirAsia transaction, we said at the time that we needed to deleverage from the four times that we are at the beginning of the year, and we're going to do that through various ways, but including selling some aircraft during the course of this year. We've now sold I think 25 aircraft in the course of the year to-date, and that has obviously contributed significantly to our equity. As you can see, our equity has gone up very significantly in the year by 24%. And it was also obviously, we paid down some debt as part of those transactions as well. So combination, paying down debt, increasing equity and we've now got in -- ourselves into a very low leverage situation. So we feel very comfortable with where we are today.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Agreed. I'm just wondering in terms like -- so when you think about return on equity going forward. One of the cut offs for investment grade I think it's 2.5 times leverage. The rest of it would be secured versus unsecured debt, and I know in the past you guys have run with more secured debt what I thought, I guess that it was too expensive to get to that investment-grade rating. Is that still the case or you guys -- have you changed your thoughts there or maybe I have misinterpreted, but are you looking for investment grade rating at some point or is it still going to be mostly asset based borrowing?

Colm Barrington -- Chief Executive Officer

I mean, I think we will likely to continue primarily with secured financing for the time being, we're not big enough yet to get investment grade. And therefore, there's no point in trying to do all the things to get investment grade, if we are not going to get there. So until we can grow the portfolio more significantly above its preset level and we're not going to do that stupidly, we're going to do it very conservatively. So until we can do that, we won't be pursuing investment grade per se.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Okay, and then just on the end-of-lease income, it spikes to $30 million on the guidance in the fourth quarter. What's driving that increase is lease terminations?

Colm Barrington -- Chief Executive Officer

Yes, well it's not actually -- it's mainly that A340 transaction that Julie mentioned, has had a very -- has very significant end of lease income, so we won't make any significant gain on the sale of the aircraft. But because of the crude maintenance accruals. We'll have very significant end of lease income out of those two aircraft in this quarter.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Okay. So the gain on sale then for the fourth quarter, again some margin should be lower than it was in the third quarter...

Colm Barrington -- Chief Executive Officer

Yes, well as you can see from the guidance, it's relatively low considering the number of aircraft that we're selling as lower than it has been. But that's mainly because of the A340s, but that's offset by the economic gain from the end of lease income as we have in the quarter.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Okay, thanks. And then just one final question, I'll get back in the queue. Steve, you mentioned the -- I guess it's challenging to find opportunities that meet the return thresholds that you guys set or require, others have said that maybe getting a little less competitive seeing some of the Chinese lessors pull back a little bit, maybe some shrinking or selling. I'm just wondering if you're seeing that. And then secondarily, would be as the MAX comes back into service. Do you expect a glut of aircraft maybe by the second half of the year as supply of narrowbodies picks up?

Steven Zissis -- hief Executive Officer and President

Yes, to the first part of your question, definitely the Chinese have pulled back from the marketplace. And that's been positive for some of the returns that you see on what we call the Tier 1 type of deals, but keep in mind, Scott, that really for FLY, we don't compete in that segment of the market, right. That's still a too thin of a return for us. So we have to go down market slightly older or more difficult credits, where the Chinese really don't compete to meet our returns. Our internal targets are in the mid teens. And so that's the type of deals that we're looking for. As respect with the MAX and whether there will be a flood of deals. Look, it's a good question. A lot of the capital has now migrated over to the NEO, and so it's pushed kind of values on NEOs and the price is higher because obviously, they can't -- can't do MAXes at this point. But as the MAXes come back in we expect that to balance out a bit. There might be a few opportunities for FLY in that segment of the market, but we really have to wait and see.

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Okay, thanks very much.

Operator

Your next question comes from the line of Jamie Baker from JP Morgan. Your line is open.

Abdul Turnbull -- JP Morgan -- Analyst

Hi, this is Abdul Turnbull [Phonetic] on behalf of Jamie Baker, thanks for taking my question. Most of my questions have been answered, but just to clarify from the last answer that you just gave. So have you already started seeing general impact on lease rates in the marketplace. So far, because of the MAX grounding and do you expect that to kind of change again once it returns back to service and starts getting delivered again?

Colm Barrington -- Chief Executive Officer

Yes, sorry, say that again -- what was your question?

Abdul Turnbull -- JP Morgan -- Analyst

So just to clarify from the last question, when looking at the MAX, you already mentioned that has limited -- FLY has limited exposure to the MAX. But can you just briefly talk about how it impacted general lease rates in the marketplace so far, and how you expect that to change when delivery start again?

Steven Zissis -- hief Executive Officer and President

Sure. So it's had a direct impact obviously on the NGs, we've seen a pickup in lease rate and demand for the NGs, as the airlines are finding themselves short sort of lift, so that's been positive for FLY. I think the question for all of us is how long that will last. Obviously the MAX isn't going to be resolved overnight, even if they get it recertified in the fourth quarter or first quarter next year. We expect this to play out over the next two years. So it's not going to be immediate kind of a flip back, right. So there'll be opportunities I think for the next couple of years in the NG side. And then on the MAX situation, it just depends where lease rates and values go and how fast that aircraft gets picked up in the general marketplace.

Abdul Turnbull -- JP Morgan -- Analyst

Thank you.

Operator

Your next question comes from the line of Koosh Patel from DB. Your line is open.

Koosh Pate -- Deutsche Bank AG, Research Division -- Analyst

Hi, good morning, guys. Just two questions here. One, are you seeing any delays from Airbus on the A320neos that you guys are expecting to be delivered in the next six months to 12 months. And then second, given that it looks like it's going to take a little bit of time to reabsorb all of the MAXes that are grounded back into the global fleets. Has that created any incremental opportunities for you with respect to some of the options you have on some of the A320neo looking out into the future years?

Steven Zissis -- hief Executive Officer and President

Yes. So look in general, we're seeing some delays on the NEO deliveries. But the schedule that Colm laid out in his presentation, where we're taking one in the fourth quarter of 2019 and then seven in 2020 and 11 in '21 is the rescheduled delivery proposal that's been revised by AirAsia, so we're pretty comfortable with other, it may slide by a couple of months each of those deliveries. But right now, we're pretty comfortable that -- those will deliver in those quarters. And what was your second question was...

Colm Barrington -- Chief Executive Officer

Uncertainty about MAX. Well maybe no doubt, I think, Koosh there are uncertainty about the MAX both in its timing and how it's going to be picked up by airlines has certainly helped the A320 NEO family aircraft and has certainly made us more enthusiastic about our options for those aircrafts. As you know we've exercised eight of the options, and we're looking at obviously more, but we don't, we don't have to exercise the balance all those options for quite a while yet. So there is no point in jumping in until we need to, but we're increasingly comfortable with the eight options that we have exercised.

Koosh Pate -- Deutsche Bank AG, Research Division -- Analyst

Okay, great, thanks a lot, guys.

Colm Barrington -- Chief Executive Officer

Thanks, Koosh.

Operator

[Operator Instructions] Your next question comes from the line of Bill Mastoris from Baird. Your line is open.

Bill Mastoris -- Baird -- Analyst

Thank you very much. I'd like to begin with the deleveraging question which was actually touched on a little bit earlier. Several times throughout the course of the presentation, you talked about how much you've delevered and you even referenced the fact that you expect to be below 3 times on a net debt basis, is this a reset of the former target leverage ratio of 3.5 times to 4 times and we -- can we expect to see you now roughly right around 3 times going forward, is that the new target leverage ratio? That's my first question.

Colm Barrington -- Chief Executive Officer

Yeah, I don't think we've changed our target Bill, I think we emphasize the fact that we've got the 2.6 times from the 4 times in nine months, which was faster than we told the market we were going to do. So we're pretty comfortable with what we've done, and very happy with us. So I think we just -- we put some emphasis on that and we will actually be increasing -- decreasing the leverage slightly by the end of the year. But we and our Board have not set any new targets for future leverage.

So we've got to be on around that 3 times going forward, we reckon.

Bill Mastoris -- Baird -- Analyst

Okay. And that new target leverage and obviously the upgrades by S&P and the positive outlook by Moody's, that kind of bakes a question of, you do have a 6 and 38s [Phonetic] out there, which is currently callable and you could refinance that at considerably lower rates, do you have any updated plans for that right now, is that going to be replaced by secured financing or will this be a refinancing?

Colm Barrington -- Chief Executive Officer

Obviously, we -- we've just finished the quarter, we've just got the upgrade, we've just got some positive outlook and we are looking at all our financing facilities right now. As you say, that the call has gone away that, so that long-term, unsecured debt is one of the targets we're certainly looking at.

Bill Mastoris -- Baird -- Analyst

Okay. My final question is, with the strong secondary market right now that you have for leasing, I'm just kind of wondering what lease payments -- lease placements, do you have remaining for 2019 and how many do you have for 2020 at this point? And how many of those have been placed?

Steven Zissis -- hief Executive Officer and President

Yeah, so for 2019. We have zero remaining aircraft everything has been placed and leased. And for 2020, we have five remaining aircraft, two in the first quarter and three in the last quarter of the year, but for the most part, those look like all of them will be placed shortly.

Bill Mastoris -- Baird -- Analyst

Okay. And sorry if I could slip in one more, your level of unencumbered aircraft at the end of the quarter, what was that amount?

Colm Barrington -- Chief Executive Officer

Julie?

Julie Ruehl -- Chief Financial Officer

It's about $320 million.

Bill Mastoris -- Baird -- Analyst

Okay, thank you very much.

Colm Barrington -- Chief Executive Officer

Thanks, Bill.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Matt Dallas.

Matt Dallas -- Investor Relations

We'd like to thank everyone for joining us for our third quarter earnings conference call. We look forward to updating you again next quarter. You may now disconnect.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Matt Dallas -- Investor Relations

Colm Barrington -- Chief Executive Officer

Julie Ruehl -- Chief Financial Officer

Steven Zissis -- hief Executive Officer and President

Julie G. Ruehl -- CFO

Helane Becker -- Cowen and Company, LLC, Research Division -- Analyst

Catherine O'Brien -- Goldman Sachs Group Inc., Research Division -- Analyst

Scott Valentin -- Compass Point Research & Trading, LLC, Research Division -- Analyst

Abdul Turnbull -- JP Morgan -- Analyst

Koosh Pate -- Deutsche Bank AG, Research Division -- Analyst

Bill Mastoris -- Baird -- Analyst

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