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Aircastle Limited (NYSE:AYR)

Q4 2012 Earnings Call

February 21, 2013 10:00 AM ET

Executives

Frank Constantinople - Senior Vice President, Investor Relations

Ron Wainshal - Chief Executive Officer

Michael Inglese - Chief Financial Officer

Analysts

Isaac Husseini - Barclays

Gary Liebowitz - Wells Fargo Securities

Helane Becker - Dahlman Rose

Richa Talwar - Deutsche Bank

Mark Streeter - JPMorgan

John Godyn - Morgan Stanley

Scott Valentin - FBR

Arren Cyganovich - Evercore

Operator

Good day, everyone, and welcome to the fourth quarter 2012 Aircastle Limited earnings conference. And at this time, I would like to turn things over to Frank Constantinople, Senior Vice President of Investor Relations.

Frank Constantinople

Good morning, everyone. I'm Frank Constantinople, and I'd like to welcome all of you to Aircastle Limited's fourth quarter 2012 earnings call. With me today are Ron Wainshal, Aircastle's Chief Executive Officer; and Mike Inglese, our CFO.

We'll begin the presentation shortly. But I would like to mention that this call is being recorded and the replay number is 888-203-1112 from within the United States and Canada, from outside of the U.S. and Canada the number is 719-457-0820. The replay passcode for the call is 5347970. This call will also be available via webcast on our website at www.aircastle.com along with the earnings press release and a PowerPoint presentation.

I would like to point out that statements today, which were not historical facts, maybe deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain facts that could cause actual results to differ materially from Aircastle Limited's expectations are detailed in our SEC filing which can also be found on our website. I'll direct you to Aircastle Limited's earnings release for the full forward-looking statement legend.

And will now turn the call over to Ron.

Ron Wainshal

Thanks, Frank, and hello to those, joining the call. During my comments today, I'll first discuss the business environment for Aircastle. I'll then comment on the company's fourth quarter and full year 2012 results. I'll finish up by addressing Aircastle's plan for 2013 and beyond; and then our CFO, Mike Inglese, will address our financial performance. Then we'll open the call up to questions.

2012 was a good and eventful year for Aircastle. We successfully executed on our business plan and took advantage of attractive investment opportunities, while sourcing low priced growth capital. Revenue in 2012 increased 13% year-over-year, thanks to $843 million in new investments as well as effective portfolio management in face of a challenging business environment.

We transformed our capital structure, raising $1.6 billion in new debt and increasing the proportion of unsecured debt. This provides the company with greater flexibility to pursue new investments and to manage our assets optimally. With each new bond issuance, we're able to decrease our cost of funding. This will enhance our net interest margin over time.

In doing so, we also increased our unencumbered asset base to more than $2 billion in aircraft and in excess of $600 million of unrestricted cash at yearend. Our growing operating cash flow allowed us to provide value for shareholders in the form of higher dividends and share repurchases.

We increased the dividend during the third quarter of 2012, a total of three times over the past two years for an overall increase of 65% during this period. With the 16.5% per share dividend declared for this quarter, I'm pleased to say we'll pay the dividend for 27 consecutive quarters.

Following a $20.5 million share repurchase in August, when our founding shareholder exhibited, we also bough back 20 million of our shares in December and January. In fact, over the past few years, we've completed nearly $140 million in share repurchases. We ended our 2013 with significant investment capacity, but also with a commitment to declare a capital in a discipline and accretive manner. We have a sense of cautious optimism about demand for leased aircraft and are bullish about the investment opportunities for Aircastle 2013.

Now, I'd talk about the business environment. The overall business environment in 2012 was mixed in absolute terms, but relatively good considering the economic and political challenges experienced during the year, particularly in Europe and United States.

Passenger air travel grew 5.3% during 2012, which was in line with the long-term historical growth rate. This is surprisingly strong and it reflects the increasing role of the global transport market played by the faster growth emerging economies. The more economically sensitive air cargo market contracted 1.5% in 2012.

There have been some positive signs in recent months, but we believe this sector will remain weak until there is a clear pickup in global trade flows and in business confidence. Having said that, we do think this sector will eventually recover as world GDP growth improves.

Over the past year, supply side pressures from increased aircraft production levels offset through relatively strong demands side performance. We remain concerned about increased production, particularly for narrow-body and freighter aircraft.

Having said that, so far this year we're sensing a modest uptick in lease demands, as customers appear to be a little bit more confident about business prospects, that's important to remember, there are some big differences in regional growth expectations. I expect this improving sentiment will allow rentals for current technology aircraft increase modestly during the year. Although, I would anticipate some types like 319, 320s, their levels will remain low despite some recent improvements.

High and volatile fuel prices and a greater availability of new-generation aircraft will continue to drive older technology models out of service, as others find it hard to cover the operating cost and to make sense in investing in the maintenance cost necessary to keep these planes in the air.

So I add this forecasting modest improvement in airline profitability during 2013. Earnings margins remain quite low on the industry-wide basis. And as we've seen in each of the past few winters, several small-to-mid size airlines have gone out of business, particularly in areas with weaker economic conditions.

Consolidation will be an important role as illustrated by the recent merger of American Airlines with U.S. Airways, which is one of our biggest customers. Consolidation can serve as a positive for us, improving financial health and stability, and fostering greater capacity discipline.

A great example of that can be found right here in the U.S., which is a slow growth market, but one where industry profitability has improved, thanks to the new competitive landscape. Given the airline industries challenges and improving profit margins, the capital intensity of the business and the increase in the number of new aircraft deliveries, we believe there will be many good opportunities for leasing companies to support the industries growth.

We believe that to a large degree lessors will serve as financial market intermediaries for airlines that are less able to access capital efficiently. We think companies that are able to draw on low priced flexible financing will succeed. With respect to financing, the big story last year was the strength of the U.S. capital markets.

During 2012, more lessors in airlines turned in this direction, as we first did in 2010. However, for this market, particularly with respect to unsecured debt, the barrier to entry is having a strong credit rating. As for credit agency back debt continue to support a significant percentage of new aircraft deliveries in 2012. Real indications are that this large role will continue this year, despite the doubling and the cost of guarantee fees.

We expect bank financing will continue to be available on reasonable terms for new aircraft delivering to top tier operators. However, small airlines will find it harder to source financing. And additionally, asset-based financing for mid-age or older aircraft will remain scarce, and we expect airlines and lessors with bank balloons will have a more difficult time rolling over these financings.

Now, I'll make a few comments about our 2012 results, starting with topline performance. Our lease revenues were strong, primarily reflecting the growth of our portfolio, but also good asset management. For the full year, total lease revenue was $632 million versus $508 million in 2011, that's a 9% improvement. Our portfolio utilization rate remained strong at 99% and our rental yield continues to be approximately 14%.

For the fourth quarter, we reported adjusted net income of $36.4 million or $0.52 per share, and ANI or adjusted net income was $57 million or $0.80 per share for the year. Adjusted EBITDA was nearly $648 million in 2012 versus $608 million during the preceding year.

Aircastle was an active investor during the year. We made $843 million of aircraft investments, including five aircraft that we purchased was $235 million during the fourth quarter. About two-thirds of our 2012 investments were in aircraft leased to Asia-Pacific carriers, reflecting their growing portfolio in the industry. To that end, at yearend, Asia accounted for 34% of our portfolio, that's up from 26% two years earlier.

About half of our investments during the year were newer modern light bodies on long-term leases with good operators. We also invested in high yielding mid-age aircraft and purchased a total of four new Embraer E-Jets also on long-term leases. Thanks to these 2012 aircraft acquisitions and $1 billion of investments in 2011, we're gradually reshaping our portfolio, decreasing the proportion of younger or wide-body aircraft, and lowering the average age roughly modestly.

In fact, $1.2 billion or roughly two-thirds of the $1.8 billion in aircrafts investments we made over the past two years is less than five years old. Also the average remaining lease term has increased to five years. For the same reason our acquisition activity was good in 2012, aircraft sales activity was lower, and we're focused on end of life aircraft this year.

During 2012, we sold or disposed eight aircraft, with an average age of more than 17 years. Also during 2012, we completed 39 lease extensions, placements for dispositions of aircraft that come off lease. This was our busiest year ever. While the majority of this was scheduled, we successfully work through several bankruptcies and airlines restructurings, demonstrating our team's asset management skills.

At yearend, we had two aircraft off lease, a 767-300ER and a 747-400 freighter, both of which were marketing actively. In each case, we thoroughly evaluate placement alternatives, looking for the most efficient deployment of capital after considering the risk and returns.

Turning to the task at hand for 2013. We have 17 aircrafts to schedule lease expirations. This represents about 5% of our total net book value of flight equipment. Compared to last year, this is a very matchable task, and added the only freighter aircraft scheduled to come off lease in 2013, there's net return that we plan to part out.

In addition, our work of share includes five aircrafts that we took back during the first quarter due to financial issues with three largest customers. We are actively marketing the aircraft and now withstanding these early terminations. We anticipate being able to achieve a portfolio utilization rate of 97% or better during the first quarter. As I mentioned earlier, we're cautiously optimistic about lease demand improvements during 2013, where we intend to carefully review the alternatives for our aircraft with the approach to lease expirations or other improvement events.

Looking ahead, we're bullish about our ability to grow profitably, with a strong balance sheet, with significant amount liquidity, which we can put to work on new investments. We also don't have any refinancing requirement until 2017, nor do we have OEM order book commitments or progress payment obligations.

The current business environment offers the unusual combination of good opportunities to make acquisitions at an attractive price, while also allowing for excellent financing terms for those who have positioned themselves to access the capital markets, as I believe we have. We view ourselves to be value-oriented investors, specializing in aircraft. Aircastle applies a rigorous, disciplined approach to investing, and we're not afraid to take a different view than the rest of the pack.

We're emphasizing superior risk adjusted returns of our quantity. More specifically, we're targeting incremental cash ROEs at 15% or better. Our focus is on situations, where our competitor advantages give us a better chance of running business. Also our investment approach is not fixed and we use a strong and virtual platform to adapt changing market conditions.

So far in 2013, we find letters of intent or made commitments to invest $210 million in five aircrafts. I expect roughly half of that amount will be deployed during the first half, while the other half relates to new aircraft delivering in December. Additionally, our investment pipeline is building well.

For the full year 2013, we'd expect to invest an amount comparable to 2012, and if the right situations are available, we'll do more. We intend to increase the capital efficiency of our fleet and we'll continue to put aircraft in the portfolio when reinvesting would not generate a satisfactory return. We're also regularly revisiting opportunities to improve our capital structure.

Also we expect to continue to increase unencumbered asset base in the year to further improve our liquidity and credit profile. We have a solid profile of aircraft that we expect will continue to generate strong cash flows. We're committed to deploying our capital intelligently to generate good risk adjusted returns for our shareholders. This will include optimizing aircraft acquisition strategy, repurchasing our securities where appropriate, and increasing the dividend over time as our earning base grows.

With that, I'll turn the call over to Mike.

Michael Inglese

Thanks, Ron. Our investments over the past two years continue to perform well during the quarter, enabling us to generate strong topline growth and increased cash flow from operations. In addition, we continue to successfully access the unsecured debt markets, further strengthening our balance sheet and providing additional growth capital for 2013.

For the fourth quarter of 2012, lease rental revenue was $158.1 million, up $8.2 million or 6% year-over-year, due primarily to the net impact of aircraft acquisitions. Total revenues for the quarter were $176.6 million, an increase of $19.7 million or 13% for the prior year, reflecting higher lease rental revenue of $8.2 million, higher maintenance revenue of $4.2 million, and an increase in other revenues of $8 million, reflecting our purchase of secured loan in the first quarter of 2012 and revenue from finance leases from acquisitions in 2012.

Adjusted EBITDA for the fourth quarter was $172.3 million, up $10.5 million or 6%, reflecting higher lease rental revenue, maintenance and other revenues totaling $20.5 million, partially offset by a $7.4 million year-over-year decline in gains in the sale of aircraft.

During the quarter, we reported $7.7 million of impairment charges largely from an A320 that came off lease during the quarter. These charges were for the most part offset by end of lease maintenance revenue related to impaired aircraft totaling $7.5 million.

Adjusted net income for the quarter was $36.4 million, down $6 million year-over-year and reflects higher revenues of $19.7 million offset mainly by higher aircraft impairment charges of $7.7 million, lower gains in the sale of aircraft of $7.4 million, higher depreciation of $6 million, and higher SG&A and adjusted interest expense of around $4 million.

Interest expense net for the quarter was $55.6 million, an increase of $1.8 million over the prior year. The increase includes a $5.2 million increase related to higher average debt outstanding and $1.9 million increase related to lower capitalized interest. Partially offsetting these items was a decrease of $4.7 million resulting from lower weighted average interest rate on our borrowings.

SG&A for the quarter was $11.8 million, approximately $2 million higher compared to the prior year, reflecting higher personnel cost and professional fees. Depreciation expense for the quarter was $69.9 million, up $6.1 million from the prior year, reflecting the growth in our aircraft portfolio.

Our fourth quarter tax provision and effective tax rate was $1.9 million and 5.9% respectively. For the full year our 2012 effective tax rate was approximately 5.7%, when you exclude the impairment charges recorded during the year. Our aircraft portfolio at yearend consisted of a 159 aircraft with an annualized lease rental run rate including finance leases of approximately $650 million, of which $296 is associated with our 72 unencumbered aircraft, which had a net book value of $2.1 billion.

During the quarter we completed the part-out for one 747 aircraft and recorded a net gain of $2.7 million. Since Aircastle's formation we've sold a total of 38 aircraft, with growth proceeds of approximately $1 billion. We continue to manage the portfolio and were focused on a cash flow based economics of each investment and reinvestment decision.

Turning to our capital structure, as Ron mention, we raised approximately $1.6 billion of capital during 2012, which included $1.3 billion in the unsecured market. During the fourth quarter we issued $500 million of 6.25% senior notes due in 2019 at par, and we increased our unsecured revolving credit facility to $150 million, up from $50 million. This facility was undrawn.

At yearend our unrestricted cash balance totaled $618 million and we had additional restricted cash of $112 million. In addition, the unencumbered aircraft totaled $2.1 billion or 44% of the net book value of our flight equipment, up from 15% at the end of 2011.

Total borrowings at yearend were $3.6 billion and our net debt outstanding was approximately $3 billion, which represent 62% of the net book value of our flight equipment. For the full year 2012, our cash flow from operations before working capital changes was $407 million, up 12% compared to the $365 million in 2011.

A ratio of unsecured debt to total debt at yearend was 49% up from 15% at the end of 2011 continuing the transformation of our capital structure to a more balanced mix of unsecured and secured debt. Our net debt to equity ratio excluding the mark-to-market on our interest rate derivatives was approximately two times, and as a reminder we have no asset coverage tax in our unsecured bond indentures, no LTV test in any of our financings and we are in compliance with all applicable covenants in all of our debt facilities.

We currently have $30 million remaining under our existing share repurchase authorization. We repurchased 4.1 million shares at an average price of $11.78 per share since August of 2012, and since the beginning of 2011 have repurchased 11.7 million shares at an average price of $11.87 a share.

Finally, turning to selected Q1 '13 guidance elements. We expect lease rental revenues of $154 million to $156 million and finance lease income with approximately $3 million to $4 million. Maintenance revenues are estimated to be $8 million to $9 million, amortization of net lease premium and lease incentives of $8 million to $10 million. Our SG&A level is expected to be between $12 million and $13 million consistent with our current run rate. Depreciation is expected to be $71 million to $73 million and interest net of $58 million to $60 million including hedge loss amortization.

In conclusion, we continue to successfully execute our business strategy, generate strong results and return capital to shareholders in the form of dividends and stock buybacks. As we enter 2013, we're well positioned with significant liquidity and proven access to capital to pursue our return oriented investment strategy and to continue to create value for our shareholders.

And with that operator, we'll now turn the call up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We'll hear first from Isaac Husseini of Barclays.

Isaac Husseini - Barclays

Ron, thanks for the color that you gave on the cargo market but I was wondering if I can tie that with some of the information that you gave in the presentation. It looks like the percentage of cargo aircraft in the portfolio has declined from 33% to 29% over the last couple of years. Is that a trend that we should expect to continue or is it going to reverse given some of the maybe opportunities that you can see in the freight market?

Ron Wainshal

It's a function of where we see value in terms of investments. Realistically, this year you'll probably see a continued reduction. But we don't have a specific target.

Isaac Husseini - Barclays

And then a question on ROE, I know you guys talk about maximizing ROEs when you look at incremental opportunities. But if we just look at the portfolio as a whole, and if you look at over a business cycle, how do you think of ROEs over a cycle for Aircastle?

Ron Wainshal

Well, last year we had a couple of things that brought down the ROE in terms of the impairments. I shall hope that's not a repetitive thing. We are seeing, as I said during the prepared remarks, these are cash ROE opportunities which are a little bit different than the GAAP. But cash ROEs incrementally at 15%.

We have some parts of our portfolio that are performing worse in that. So what we're trying to do at each juncture is to find what's the best deployment of capital, should we release the airplane, should we sell it? That's been a more discipline part of what we've been doing over the past year. And I think the A320 that we referred to during the prepared remarks also fits that. It's an airplane that the markets a little bit weak for.

But the rental has come back a little bit but the market for the engines, as spare part has been incredibly strong. And we found it better to get our money back basically and put it back to work in some other way. So the focus on our side is, add good incremental returns and do better with the portfolio.

Isaac Husseini - Barclays

And just a quick follow-up on the 17 planes that are going up for release in 2015, can you give us a sense of what assets types they are?

Michael Inglese

Yes, it's a real mix. I think there is a little bit of a bias towards some older aircrafts that we are seriously going to think about disposing of. There is I think three or four different 767 in that mix. There is a couple of 7-5s, those are all candidates for disposition, in addition to a classic and A310 freighter, as I mentioned as well. We have quite a number of 737-800s in the mix.

But what's important to note is that the really high value stuff was placed last year. And by that I mean a lot of bigger ticket items and that reflected the kind of an improving demand profile. So if we start the year with a scheduled placement list of only about 5% or 6% of our net book value. So it's a smaller layer in our portfolio.

Operator

And moving on we'll take a question from Gary Liebowitz of Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Ron, can you explain to me maybe how you compute asset utilization, you came out 99% for the quarter but it looks like you had seven early leased terminations, which is more than you had all year and then you had another eight schedule leased terminations during the quarter. I'm just wondering how you have 99% utilization with that level of turnover.

Ron Wainshal

Garry, simply revenue utilization is revenue earned on your assets if divided by the time available to be in revenue service. And when a lease terminates you have to take into account the construct of each lease. So if you have security deposits that take you for a full quarter, for a lease that terminates in early December, you're calculating it on the construct of the cash you have from that customer in the context of the available utilization for that asset.

Michael Inglese

Right. It's also dollar-weighted so if you have a very small ticket item, it's not going to have a big effect. The number of aircraft that you mentioned that came off lease early, five of those actually happened in Q1. So it had no effect on Q4.

Gary Liebowitz - Wells Fargo Securities

Ron, are seeing any aircraft portfolios that are coming out for sale, maybe five, ten aircraft at a time instead of sort of the one or two type deals that you've been more of lately?

Ron Wainshal

Yes. There is one comment I'll make about secondary market volume in general for 2012. 2012 was incredibly a dry year in that respect. It was the second worse year for secondary market transactions after 2009. I think part of it reflected an inability by sellers to get the prices that they wanted and I think that in turns is a function of the bank market being pretty limited as far as used aircraft.

I think the book value issues for some sellers is also a factor, both for lessors and for airlines, the currency effects are not small. If you have a, say, a European airline that has the balance sheet in euros and euro keeps on appreciating, it's really hard to make sense of the sale for dollar-denominated asset. Now, withstanding that I do think that there is going to be a little bit of pick up in volume in 2013 versus '12, not hugely so and we're certainly going to be in the mix.

Gary Liebowitz - Wells Fargo Securities

And then just one follow-up for, Mike, would be all the early terminations you've had in the first quarter, are you expecting any fees to be collected associated with those?

Michael Inglese

I think it's in the context of early terminations in the first quarter, I expect there will be some modest elements of fees associated with those customers. And in the context of any potential impairments I would expect if there is any, they would be offset by maintenance revenue.

Operator

Next, we'll take a question from Helane Becker of Dahlman Rose.

Helane Becker - Dahlman Rose

Just a couple of questions. Are there any change of control provisions with U.S. Airways and pending the merger with the aircraft you have out to them?

Ron Wainshal

No. That is difficult feature you would find in an operating lease. It's something you might find in unsecured bond but not in the operating lease.

Helane Becker - Dahlman Rose

And then in terms of some of the early terminations that came back in the first quarter, if you can't say who the airlines are, can you say the geographic distribution for them?

Ron Wainshal

Yes. I'll give you a little more color on that. We had one aircraft that came out, A319 that came out of Italy. Those are only remaining exposure in that country. We had two 737-700s that came out of Ukraine, and we had one A330 and one 767 that came out of the U.S. Military charter operators, it's a passenger aircraft. All three of those airlines have been on our watch list. And we've been sort of pre-marketing them for a little while. I expect by the way that one of those aircraft, the 767 might be sold on a part-out basis.

Helane Becker - Dahlman Rose

And then I think you had last year two aircrafts, 747 freighters out to southern. Whatever happened to those aircrafts? Did they come back to you or were they out on lower rates or what's the deal with those?

Ron Wainshal

We restructured one and the other is the aircraft that we had to place that had referenced as an AOG as of the yearend. We are looking at a couple of good opportunities for that by the way.

Helane Becker - Dahlman Rose

So there may be something would be forthcoming in the quarter or earlier in the next quarter?

Ron Wainshal

We should see.

Helane Becker - Dahlman Rose

One housekeeping item. What Mike, should our share count be for the first then?

Michael Inglese

Post buybacks, we were at about $68.1 million but I would refer you to read the 10-K when it gets published later today. And you can look through the details of what's out, what's restricted stock and for what you need to use for your modeling purposes.

Operator

And next we have a question from Richa Talwar of Deutsche Bank.

Richa Talwar - Deutsche Bank

I was hoping you could talk about the freighter. It might get a little bought more particularly on your 747 exposure. From your comments, it seems that the cargo market remains generally weak. And I was wondering, you felt that impairment risk for those aircrafts to 747 is greater today than it was, maybe a few months back considering that we may not see a bounce back in the market for sometime?

Ron Wainshal

I'll make a few comments, one is I'm not feeling any differently about the freighters in terms of the impairment versus before. The 747 market is definitely still feeling the effects of overcapacity. Having said that last year we had five aircrafts that came back at us and we restructured and released four of those five. So there is a tone to it, and we're pretty good at that.

Now, if you look at what's going on in the freight market over the last year, year and a half, we've seen global trade flows down significantly due to lower economic growth and weak business confidence. Weak business confidence drives inventory levels and the set that flies on an airplane versus a boat is very high value and time sensitive.

Now, if you look at the freight ton kilometers, which is sort of a measure of the actual demand, they've remained pretty steady. It's shrunk a little bit but not terribly. There has been some big shifts in the business. First of all, a lot of businesses has shifted towards the Gulf carriers, and that's very similar to what's happening with long-haul travel on the passenger sector. That's an important trend to note.

The other thing that's important to note is that on the supply side Boeing has been cranking out the 747-A. That's a significant increase in capacity. And I think it's causing a little bit of indigestion in the market given the tone of the economy. As I said during remarks though, we're optimistic about the economy. We're optimistic that this sector in particularly given the sensitivity will bounce back. I'm not expecting it's going to happen right away, but that we still feel good about these as a long-term investment.

Richa Talwar - Deutsche Bank

And just my second question, as if you could just comment generally on the competitive market, we've recently seen some new players coming to the space, particularly in China, Japan. I was wondering if you are sensing a change in market conditions, because of new competition.

Michael Inglese

I think it's more of a continuation, the kind that we've seen for the last year or two. When you look at newer aircrafts, particularly in narrow bodies, it's incredibly competitive. Cash rental yields, if you will, are probably in the 7% or 8% per annum territory. And that's not a lot considering that these aircraft depreciate. For some time now, we haven't seen any value in new narrow bodies I should say, for that reason and also because we have a different view about investing in last off the production line models of any type.

But I think with fueling that competition is perhaps a different approach to residual value but also very low cost of debt by banking oriented institutions. I don't see any abatement to that. And so we're prepared to sit that dance out and focus our capital on places where we can make better returns.

On the wide body side, we have seen more competition. I think some of the same investors that I mentioned before have been looking for yield and shifting in that direction. But having said that I still find that there is some good opportunities there. We're not looking to invest billions and billions of dollars in a given year. It's very much quality versus quantity oriented and there is still big enough market for us to find some very good deals.

In the middle of the market, which is where we've had a lot of success over the years, there is still the absence I would say of competition with the same kind of financial resources that we have. Our unsecured debt makes it standout in that sector versus all the other participants. I don't see any of the big guys really playing in that space, not in the serious way, not as we have. And I think that's very difficult to replicate.

In terms of the part-out market, there has been a descent amount of activity over there. During my prepared remarks I mentioned that there is good trading values there, but that's very much of a platform-specific thing. I think it's probably going to slow down though in terms of the amount of money that's got into that versus, say, two years ago.

Operator

And next we'll take a question from Mark Streeter of JPMorgan.

Mark Streeter - JPMorgan

Two questions, one very big picture, I notice that Allegiant Air did a sale leaseback the other day with one of your competitors. And I sort of put them in the bucket of airlines that have been way too dependent on export credit. And I'm wondering with the export credit rules now tightening up for 2013 and going forward, are you starting to see more airlines that might have been either buying new or too dependant on export credit, starting to diversify a way, maybe more sale leaseback, maybe looking more into the used market, is that phenomenon taking hold yet?

Ron Wainshal

It's been really slow, Mark. I think that the biggest impediment to that is the advanced rate. Now, when you go and if you're buyer of a new airplane and you go to the Export Credit Agencies for financing support, the fees are now double. However, you can finance those fees. And if a buyer of aircraft has to write a bigger equity check, there is going to be much more pressure on them to do to look for alternative financing than at the moment.

So that's probably the biggest impediment to what lessors and another commercial finance that you're seeing, more of a market shift in our direction. I think in time that will happen. Somebody like Allegiant Air with the order strength that it has, really ought to be looking at the lessor market and the fact that they did something is a good sign, but it's going to take a little while for this to be discernible.

Mark Streeter - JPMorgan

And then something a little bit more specific to Aircastle, just looking through your slide, and noting on your progress throughout the year, I just think about the improvement that you're seeing in your debt cost, the reduction in secured debt, the strong portfolio result and so fourth. Moody still has this negative outlook on your credit, which I did scratch my head at. I'm just wondering if there is any update on that and why that disconnect still exists between sort of the story that I think everyone sees and how they view you?

Michael Inglese

Moody's put their outlook out when we did a bond deal in late November. Their specific attributes were raising debt without specific application or proceeds. We think overtime and over the course of this year, we'll address their main issues in that context and we'll see how their view point changes over time. We certainly agree with you, we've made significant progress in both transforming the capital structure, driving the cash flow from operations and we'll have to work our way through the Moody's outlook issue overtime and that's going to be dealt with through performance.

Ron Wainshal

There is a couple of things I'd just add to that. Moody's does have a financial company methodology, which makes it really difficult for any kind of financial institution, whether its an aircraft leasing company or anybody else to be a standalone investment grade, and there is nobody in our sector that fits that bill. Having said that when you look at how the markets reacted to our financings, I think it's been viewed positively, and I am not sure to what degree that factors in or not.

Our goal is to continue deliver on what we've told the bold market, which is we're going to increase the amount of unencumbered assets. It's over $2 billion dollars as of yearend. We intend to buy a lot more aircraft with the proceeds that we raised and that should grow. And for us probably more than other leasing companies, unsecured debt is an integral part of our strategy. Flexibility is important. So I think that's something that time will cure.

Operator

Moving on we'll hear from John Godyn of Morgan Stanley.

John Godyn - Morgan Stanley

We've seen some examples of airlines taking advantage of lower prices across older aircraft just as lower ownership cost offset efficiency, but not many. And at the same time, demand for new aircraft continues to be pretty robust. The numbers of lessors are talking about attractive sale leaseback opportunities in the next couple of years.

Just speaking to the airline customers, is there any growing willingness to more aggressively favor the secondary market opportunities to take advantage of, I guess, what might be an arbitrage there or there are reasons the market has bifurcated to this somewhat extraordinary degree, just structural in nature as far as your concern are going to stay in place for years to come here.

Ron Wainshal

It's a growing phenomenon. I think there are limitations to what you can do there. Somebody like Delta Air Lines isn't going to take a one-off airplane from the lessor somewhere. However, some of the moves that they've made and some of the moves that Allegiant and others are considering, I think is inevitable.

There is a bias. And I think from particularly from old line airlines towards I only want new, it's got to be one way or not. But anybody who is doing investments on new aircraft today needs to think about what's residual value will be, whether it's an airline or a lessor, and I think the growing number of airlines were thinking about these as investments which they are.

If you believe that everybody will only want new then the residual value chunks has been revisited. But airlines like Allegiant and like Delta have kind of picked up on the map. And I think that's something that will show up. The practical implementation of that's going to be more kind of sub-fleet oriented as opposed to one by one.

John Godyn - Morgan Stanley

And are there any catalyst that would drive that you're looking, just as you look out the next couple of years that they are thinking about that might drive maybe more of an uptick in some of these secondary market opportunities, I guess, more broadly maybe it's as simple as fuel need to fall significantly. And maybe we don't believe that but I'm not sure if there is more to it than that?

Michael Inglese

Well, I would say it's not just fuel falling but fuel being less volatile. But I think that would be a catalyst. I think just a basic difference between brand new versus used is the main driver. But it's important to remember, John, that when you look at certainly in aircraft, as it's gets older, it's a little bit more money to maintain and it's a little bit less fuel efficient. But the real big step change happened across generation. So if I were to look at an eight year old airplane that just ran out of shop, it's not that much different than something that's two or three years old.

And I think that's a fact that's lost on a lot of investors. I think more airlines are picking up on it, though. The other thing that's going to play out overtime is going to be interest rates. Interest rates pick up, the financing costs of the new plane are going to be that much higher and it will make the existing stock of aircraft that much more attractive.

John Godyn - Morgan Stanley

If we just sort of assume that some of these factors driving this bifurcation, just stay in place for the next two years. And then if you think about rising delivery rates and new technology around the corner, do you think that current asset prices for things like A320s or other aircraft types affected by this incorporate any sort of or enough of that tail risk that we might see on a multiyear basis or do you think that the prices are not there yet?

Ron Wainshal

In short, I think not there yet for the new planes. I think the secondary market airplanes, once you get out beyond five years there is a very clear difference. And that's why we've been finding good values there. When we look at investments, we have a bias, it's not shared by the industry but our bias is against last off the line. We don't think those aircraft will fly as long, simply because there will be lots of newer, and more efficient, step-change efficient airplanes.

We do think though that there is good value to be had because there is a lack of competition and because it's a lot easier to see your way towards getting the residual value, which is primarily engines from that first part of that production line. And I think we demonstrated that with the TAM transaction, the A320 that we took back. I think the cash-on-cash returns on these middle aged aircraft are so attractive, relative to the residual risk that eventually the market will correct, but for the moment we're happy that to kind of pickup what we can as buyers.

John Godyn - Morgan Stanley

And just last question on the topic I know that of course you have this kind of well communicated bias against last off the line and you don't have a lot of exposure there, but broadly just thinking that some of these asset prices have incorporated this tail risk, how do we get comfortable that your own current portfolio doesn't have more downside residual risk?

Michael Ingles

Look, I think the bias side, the buy prices that we've put on over the last few years have been pretty good. The asset management strategy we put on that that we've kind of developed over last years is also been pretty good. I think that that 320 is a good example. Remember the impairment test in U.S. is not a test on present value or on capital efficiency, it's based on sum of future cash flows.

And as we focus on doing the best we can with our portfolio base, selling an aircraft and basically breaking even, by the way, a lot of the things that are complicated by our industries accounting like the net book value not including the maintenance reserves and lease end compensation, kind of muddied the water little bit. When you look at how we've done on the asset dispositions, that we've actually put in the place over the last a year, two years, we were thinking mid-age older aircraft, and effectively broken even that should give you some comfort.

Operator

And our next question today comes from Scott Valentin of FBR.

Scott Valentin - FBR

Just, Mike, one quick question on the lease revenue guidance of the first quarter, how much impact does the five of those termination have on our lease revenue, is it little bit what were we looking for?

Michael Inglese

Yes, it's clearly part of what you're looking at in terms of the first quarter guidance there is some impact on our expectation. For lease rental and as Ron mentioned in his remarks, we have some expected downward pressure on the utilization rate as well in the first quarter.

Scott Valentin - FBR

Is there a way to quantify whether or not it could be on the five aircraft?

Michael Inglese

I'm not going to get into specifics at this point.

Ron Wainshal

I think it's a function of how fast we get those back in service and when we look at that, there is always a trade-off if you take the first available deal or do you hold off for the best economics over the long-term.

Scott Valentin - FBR

Just follow up question on the 11 aircraft with U.S. Air, I know its early days with the merger but did you take any of those aircraft back or lease is terminated at all?

Michael Inglese

The merger doesn't have any affect whatsoever in that regard, Scott. If anything, it's a credit positive. The bulk of our exposure with U.S Airways or A330 is that we extended last year until 2018 or so. And I think those are looking pretty good to me. The other part of it is mostly 757s. We extended several of those last year. There is a number that come off, at least next year but those are wingleted and I think they're in pretty good shape, we'll see. The only aircraft that I think is a good candidate for coming back is a 767-200ER which is in our business plan a part-out at September when it comes off lease. Having said that, there is a possibility it might stay there a little longer.

Scott Valentin - FBR

One follow-up question, just in terms of balance sheet management, I guess you talked about trying to increase leverage a little bit, but also just looking at the cash balances, it's pretty right now. Just wondering what you guy view as being the necessary amount of cash you need to operate the company versus what you view as excess?

Ron Wainshal

Simplistically, we think the minimum operating cash balance is somewhere around $75 million or so is reasonable in context of the current size. So anything beyond that we view as available for investment to business.

Ron Wainshal

Right, and when we do bond deals, there is an efficient size to it, doing a small deal doesn't trade well. And it's important for us to have a good profile standing in the market. When we did our deal in the late last year, we viewed it as attractively priced and one where we were content to kind of lock that in and go hunting with that as far as new investments go.

Having said that, it's a long-term investment business and we're being very careful and disciplined about it. And so far we've got a little over $200 million of that committed. So the pipeline is looking pretty good. And I think the bulk of that's going to be put to work in new assets, and timing will sort of this be a function of how the deals come in. But we're gong to be very disciplined about it.

Operator

And moving on we'll take a question from Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore

Your big leasing revenue are stronger than expected this quarter and I think quite a bit above your prior guidance. Is there anything special in that that drove to be relative to your guidance last quarter?

Michael Inglese

I think a couple of minor factors. Number one, we bought a few planes in the fourth quarter that weren't part of our thinking when we put out our guidance in early November, and those planes were bought in December. And then also some lease transitions that I expected to take place during the quarter took a little longer, and therefore we had more collections from those customers before existing leases expired. Those are the two main drivers for that.

Ron Wainshal

Just a little bit on that second part, sometimes our leases require that the aircraft be delivered in certain conditions. And if those conditions are met, then this takes a little longer for the airline to do what it has to do, and that's kind of what gets to my second point.

Arren Cyganovich - Evercore

And then I just want to make sure the maintenance guidance of $8 million to $9 million in Q1 '13 that includes any expected early termination maintenance revenue from the five aircraft that are coming?

Ron Wainshal

My guidance assumes planes that are coming of lease naturally in the first quarter. The early terminations we've received, as I said before, when Gary asked the question, I would expect any maintenance revenue we have coming off of those planes to sort of net out with any potential impairment analysis. But we haven't done the work on those assets. So I'm not including either of those things in the context of my guidance for the quarter. But roughly speaking, I would expect those to be offsetting.

Arren Cyganovich - Evercore

And then lastly with the 787 issues, have you seen any I guess more of a short-term nature of question. But have you seen any increase demand or firming of lease rates for 757s or A330s, any of those impacts on the wide-body market?

Michael Inglese

Not really. There's a short answer to that, the more complete answer is there is a couple of situations that might pop-up for short-term leases. I don't know whether it's worth or not, because when you do a short-term lease, you've got to invest in the first part in terms of transitioning the airplane. And then it's not a long-term proposition.

That the hard part for anybody, who's an operator, but for that matter an owner of the aircraft, if not the operator is planning. And nobody sitting here today knows exactly when the problem will be rectified and how long it will take for it to be kind of implemented across the fleet. So there is a few situations that might give you different answer about it if things are not fixed in the near term. But at the moment I think the opportunities are very limited in kind of short lift.

Operator

And we have no further questions at this time. Mr. Constantinople, I'll turn the call back to you.

Frank Constantinople

Thank you for your time today. If you have any follow-up questions, feel free to call me at 203-504-1063. Have a good day.

Operator

Ladies and gentleman that does conclude today's conference. Thank you all for joining us.

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