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Aircastle LTD (NYSE:AYR)

Q1 2013 Results Earnings Call

May 2, 2013 10:00 AM ET

Executives

Frank Constantinople - Senior Vice President, IR

Ron Wainshal - Chief Executive Officer

Mike Inglese - Chief Financial Officer

Analysts

Richa Talwar - Deutsche Bank

Gary Liebowitz - Wells Fargo Securities

John Godyn - Morgan Stanley

Helane Becker - Cowen Securities

Justine Fisher - Goldman Sachs

Scott Valentin - FBR

Glenn Engel - Bank of America Merrill Lynch

Operator

Good day. And welcome to the First Quarter 2013 Aircastle Limited Earnings Conference Call. Today conference is being recorded. At this time, I would like to turn the conference over to Mr. Frank Constantinople. Please go ahead, sir.

Frank Constantinople

Thank you, Carla. Good morning, everyone. And welcome to Aircastle Limited's first quarter 2013 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 8072225. 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’d 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 we’ll now turn the call over to Ron.

Ron Wainshal

Thanks, Frank, and welcome to the call. In my prepared remarks, I’ll discuss Aircastle’s transaction activity and financial results for the first quarter of 2013. I’ll also cover our views on the current business environment and talk about our plan for the rest of the year. Our CFO, Mike Inglese will then Aircastle’s financial performance, then we'll open up the call to questions.

During the first quarter, we once again demonstrated the strong asset management skills that distinguish Aircastle. We secured lease or sale commitments for all of the aircraft we took back during the first quarter or otherwise head off lease. We also disclosed profitably our several end-of-life aircraft, being good investors in just about buying it’s also about selling and validating investment thesis.

In terms of investments, so far this year we’ve closed or entered into commitment to acquire more than $450 million of aircraft capitalizing on our strong cash position and our ability to identify new business around the world. I expect these transactions to close during Q2 or early part of Q3.

Beyond these commitments, we are encouraged by the flow of new investment opportunities for this year and believe we’ll meet or exceed the $150 million to the new investment that we achieved last year. We continue to be disciplined value-oriented investors, focusing on opportunities where we believe we have a competitive advantage and can also earn cash ROEs that are 15% or better.

During January, we also continue to repurchasing shares, buying back $8.6 million in common stock. In addition, our Board declared a $16.5 per share second quarter dividend, our 28th consecutive dividend payment, demonstrating a balance approach deploying capital for the benefit of our shareholders.

We are also pleased to welcome Mike Kriedberg on Board as our Chief Commercial Officer rounding out the senior management team. Mike has a wealth of experience in originating well structured transactions with airlines around the world. And he is very well known and respected in the aviation finance community. We’re looking forward to his contributions.

With the growing investment pipeline, a very capable organization and proven access in the capital markets, I believe we are in very good shape to capitalize on an attractive acquisition environment and well priced capital. These conditions don’t often come together at the same time. We are excited about the opportunities to grow Aircastle accretively and further increase our base of distributable earnings.

As we discussed on our Investor Day last month, we are cautiously optimistic about the business environment for this year. In our view, demand for leased aircraft is fundamentally driven by GDP. We believe that in general aircraft lease rates and prices will benefit from a pickup in global GDP and also from historically low interest rate environment.

As we look at the International Air Transport Association statistics, we continue to see healthy growth in the passenger market. IATA lease forecast for 2013 calls for 5.4% increase in revenue passenger kilometers, which we think it was good measure of demand.

Clearly though there are very big differences in growth rates around the world and that has been -- also been shaping the geographic distribution of our fleet, where Asia-Pacific business now accounts for 34% of our portfolio, up from just 20% at the beginning of 2010.

IATA’s most recent forecast also calls for modest resumption of growth in the air freight market this year. After two years where demand has measured by freight ton kilometers contract about 3%. We expect demand to pickup as business confidence increases. In our view there is a fundamental demand to transport high value time sensitive good to be here. The big challenge in this market currently is one of our oversupply and this is issues will be through in time.

Turning to passenger aircraft, we are seeing an improved ton and demand and a little more competition from potential new leases for our aircraft as they come off lease. This is also the case from modern widebodies, given the better supply and demand dynamic to such as aircraft. While the story is still for third-generation widebodies in our view increasing production levels will to some extent offset the benefit from demand growth.

Turning to our first quarter 2013 results, Mike will discuss this in more detail, but I wanted to highlight a few statistics. Revenue growth and cash flow were strong, lease rental revenues including finance leases were $160.5 million during the quarter, up 5% from a year ago.

Adjusted EBITDA which is a good measure of cash flow generation was $169 million for the quarter, up 11%. For the quarter net income was $23 million and adjusted net income was more than $27 million. Cash ROE was 12.8% for the past 12 months.

Portfolio performance was strong despite several early returns as I mentioned earlier. Q1 ‘13 utilization was 97% and rental yield was 13.6%. During our call to discuss the Q4 and year end 2012 results, we mentioned taking back several aircraft. I’m pleased to say that we have commitment to lease or sale each of them. Three aircraft consisting of mid-age A319 and two older 767-300ERs have been or in the process of being disposed on a part out basis. At a modest profit after netting out maintenance revenue. The four aricrafts have leased or subject to lease commitments including one 747-400 freighter.

In addition the actively I just mentioned we are also sold the 737-300 Classic and disposed some engines during the first quarter. Our realized gain from the sales completed during that the first quarter was $1.2 million. This activity demonstrates our skills as an asset manager and also as an investor.

We have 16 aircraft with scheduled lease expirations for this year, representing less than 5% of our total fleet net book value and we believe this plays in task is long hand. We expect half of this aircraft mostly older 767, 757, and 737 Classics will be addressed to be a part out sales since we view this to be the most efficient -- most capital efficient approach.

In this regard, we have only one freighter aircraft coming off lease and A310 which we expect to dispose on our part out basis as it comes off lease. Here again in aggregate I expect we’ll be able to dispose such asset to the modest profit.

Of the remaining aircraft left to place five are in demand 737-800 coming off lease later in the year. Regarding new investment activity we are of to a good start. The $450 million of closed or committed investments we sourced are relates to 10 aircraft.

Consistent with our investment activity over the past three years, roughly two-thirds of these investments were made in aircraft -- we will be made in aircraft to less than two years old. Mostly, widebody aircraft subject to long leases with good counterparties.

We also continuously good value mid-age aircraft pursuing them as well. Our ability to sort through and find well valued investments across a very broad market continues to set Aircastle part from other large aircraft leasing companies. Since our inception, we’ve purchased aircraft from more than 60 counterparties.

As of most market, we believe that what constitute good investment value evolves over time and over market cycles. Our approach is to have a platform and a financing structure flexible that enable us to capital on such changes.

As we look ahead for the reminder of the year, we’re encouraged by level of attracted new business opportunities and we’re seeing -- we are seeing that combined with the strength in the capital markets. As I said earlier, these conditions don’t often come together.

We are well on our way toward matching last year’s new business levels and we’ll keep growing if we find the right investment and financing mix. I’d like to emphasis our commitment to grow in a discipline and return driven matter in order to increase our cash flows and equity -- the cash returns on equity.

U.S. capital markets remain very active and current conditions are quite favorable. Aircastle will continue to take advantage of the bond market as we build on our fleet, while also increasing our unencumbered asset base which currently stands at $2.8 billion, including unrestricted cash. We’ll also look for opportunities to further improve our capital structure.

Consistent with that, we will also be continuing to work on managing our existing portfolio to get the best risk-adjusted results we can. Our placement needs for the year are largely address, as I noted, our ability to get good results from part out dispositions is an important skill set to which we dedicate a lot of human capital.

We have a top-notch experienced team with an ability to grow efficiently, flexible capital structure and a great opportunity set. We are well-positioned with close to $700 million in unrestricted cash at the end of Q1 and no significant maturities until 2017. We are excited about our potential to grow the company accretively in the current environment and for the opportunities to increase our base of distributable earnings.

I’ll now hand the call over to Mike.

Mike Inglese

Thanks Ron. Aircastle’s success implementing its value-oriented investment approach and investing $1.8 billion over the past two years has enabled the company to increase both its earnings power and cash returns. Specifically over the past 12 months our cash ROE increased to 12.8%, compared to 11.8% for 2012, and 11.4% in 2011.

Lease rental revenue and finance lease revenue for the quarter was $160.5 million, up $8.2 million or 5% year-over-year, due primarily to the net impact of aircraft acquisitions and dispositions.

Total revenues for the quarter were $176.2 million, an increase of $11.3 million or 7% from the prior year, reflecting higher operating lease rental revenue of $4.3 million, higher revenue from finance leases of $3.9 million, higher maintenance revenue of $4.2 million and increase other revenues of $4.3 million, reflecting interest from our purchase of secured loan during the first quarter of 2012, and $1.7 million of early lease termination fees, partially offset by $5.5 million increase in amortization.

Adjusted EBITDA for the quarter was $168.6 million, up $16.7 million or 11%, primarily driven by higher lease rental revenue, maintenance and other revenues totaling $16.8 million.

During the quarter we recorded $6.2 million of impairment charges associated with the part out of several aircraft that were returned to us. These charges were offset by end of lease maintenance and other revenue related to these aircraft totaling $9.8 million.

Adjusted net income for the quarter was $27.4 million, down $5 million year-over-year and reflects higher revenues of $11.3 million, higher gains from sale on aircraft of $1 million.

These increases were partially offset by higher aircraft maintenance charges of $6.2 million, higher depreciation of $5.4, higher adjusted interest expense of $3.9 million and higher maintenance SG&A and taxes of $1.7 million.

Interest expense net for the quarter was $59.2 million, an increase of $10.2 million over the prior year. Cash interest increase $4.5 million, mainly due to higher weighted average debt outstanding.

We also had $1.6 million increase in non-cash hedging effectiveness and $4.2 million increase related to the non-cash amortization of deferred swap losses associated with the payoff of Term Financing No. 1.

SG&A for the quarter was $13.3 million, basically flat from the prior year and depreciation was up $5.4 million that’s roughly $70 million, reflecting the growth in the portfolio.

Our first quarter tax provision and effective tax rate was $3.6 million and 13.4% respectively. Our tax rate in the first quarter of 2013 increased from the first quarter of 2012 as a result in the shift of the mix of our business in higher tax jurisdictions during the quarter. We expect the tax rate to range between 11% and 13% in the second quarter of this year.

At the end of the first quarter, we owned 158 aircraft with an annualized lease rental run rate including finance leases of $644 million, of which $293 million was associated with 72 unencumbered aircraft with a net book value of approximately $2.1 billion.

During the quarter we sold two aircraft, weighted average age of 20 years and some engines for net sale proceeds of $20 million, which resulted in a net gain on sale of $1.2 million.

Since Aircastle’s formation we've sold a total of 42 aircraft or gross proceeds of approximately $950 million producing an unlevered internal rate of return of approximately 12.1%. We continue to manage the portfolio and we will maintain our focus on cash flow based economics of this investment and reinvestment decision.

Turning to our capital structure, at the end of the first quarter our unrestricted cash balance was $693 million. Our operating cash flow, which includes collections from finance leases was $94.6 million in the first quarter and $453 million over the past 12 months. This is a 23% increase over the prior 12-month period ended March 2012.

Our unencumbered aircraft totaled $2.1 billion or 44% of the net book value of our flight equipment. This is essentially flat with year-end and up from $677 million or 15% of the end book -- net book value of our flight equipment at the end of 2011.

Total borrowings at quarter end were $3.5 billion down from $3.6 billion at year-end and our net debt outstanding was $2.8 billion which is approximately 60% of the net book value of flight equipment at the end of the quarter.

Ratio of unsecured debt to total debt was at 50%, up modestly from 49% at year-end 2012 and up from 15% at the end of 2011.

Our net debt-to-equity ratio excluding the mark-to-market on our interest rate derivatives was approximately 1.9 times and we are in compliance with all applicable covenants in all debt facilities.

During January, we repurchased approximately 700,000 shares at the cost of $8.6 million. Since the beginning of 2011 we repurchased 11.7 million shares at an average price of $11.87 a share. We continue to have $30 million remaining under our existing share repurchase authorization.

And finally turning to selected guidance elements for the second quarter of 2013. We expect lease rental revenues of $156 million to $158 million and finance lease revenues of approximately $4 million.

Maintenance revenues are expected to be between $8 million and $10 million, amortization of net lease premiums and lease incentives are expected to be $8 million to $10 million. We expect to have a lease termination payment from a schedule lease termination in the second quarter of about $4.5 million.

SG&A is expected to be between $12 million and $13 million consistent with our run rate. We expect depreciation of $68 million to $70 million, and interest net of $58 million to $60 million, including approximately $5 million of deferred lots hedge amortization.

To conclude, we began the year on a strong note and our business performs well, and we continue to successfully execute our value-oriented investment strategy.

Going forward, our growth increased cash flow from operations and conservative balance sheet as Aircastle well-positioned to generate healthy return to the shareholders in the year ahead.

And with that, Operator, we’ll now open the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Richa Talwar with Deutsche Bank.

Richa Talwar - Deutsche Bank

Hello, everyone. Good morning. Thanks for taking my questions. First, I was hoping you’ll give us an update on where you stand regarding possible ongoing discussions with credit agencies. I know you recently pressed on this at your Investor Day, but I believe you said an investment credit rating could be achievable on coming years and I just wanted to know if you could provide an update on that in light of today’s reported results.

Ron Wainshal

Yeah. Look, there is no fundamental change in our view on that topic since three weeks ago. So our results continued to be strong. Our abilities to deploy our capital and address one of the agency’s issues in terms of having raise debt without specific application or proceeds, we think we will prove itself out. And we continue to drive the business and manage the capital structure to match things we are going to be investing in the balance of this year.

Richa Talwar - Deutsche Bank

Okay. Great. And then secondly, I was hoping you could talk a little bit more on your dividend policy. Now, how often you consider dividend raises and what factors you consider on making those types of decisions?

Ron Wainshal

Sure. I think, as we've been telling people over the past year, we are going to look to revisit our dividend sizing later this year and we will expect to do that sort of on a once a year basis in the construct of how we can grow the business and how we can grow the sustainable earnings of the business that goes with that growth. So we would expect probably to revisit it in the fourth quarter with our Board and based on where we think we will be and what we think the kind of year will look like at that point, we will size the dividend appropriately.

Richa Talwar - Deutsche Bank

Okay. Are there any particular ratios or anything that you look at, as we consider what a dividend increase might look like? I mean, what factors do you particularly pay attention to as you are making that decision?

Ron Wainshal

It’s really about, what is your portfolio, what’s a sustainable earnings base from that portfolio and what ratio of distributable cash do you think is appropriate in the context of deploying capital overall. We don't have a strict formulae like, X percent of some X number.

Richa Talwar - Deutsche Bank

Okay. Great. I guess that’s it from me. Thank you.

Operator

And we will take our next question from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Thank you, Operator and good morning, gentlemen.

Ron Wainshal

Good morning.

Gary Liebowitz - Wells Fargo Securities

Ron, it feels like over the last 6 to 12 months, there has been more of a trend to part out mid-life to older aircraft as opposed to putting them out on one more, shorter-term lease. Is that your sense and what do you think is driving that?

Ron Wainshal

I’m not sure if I would agree with that. I think that there has been more activity in our portfolio, but I think part of is just a reflection of the flow of leases. We, for 767s, have a view that that the future isn’t as bright and in that context. And in the context of very strong engine values, we made a decision to part out number 767 because it’s the best thing to do.

We've had in A320 and now in A319 that were mid-age, so we decided to part out. And here again, it was I think a play on engine values is more than anything else. I don’t know that I would draw a trend to that, but we have a team now that gives us the ability to benefit from the strength of engine values much more than that we did in the past as well.

Gary Liebowitz - Wells Fargo Securities

Okay. Thanks. And you both mentioned the cash ROE metric, I think to a greater extent than you have in the past. And I was just wondering that 12.8%, how that compared to sort of the total targets and do you think that number should continue towards the 15% number that you target from your incremental acquisitions?

Mike Inglese

Look, I think where we are today is a little bit below where we are using in terms of an underwriting standard and deploying additional cash. And so we would expect over time for it to continue to grow. It’s not going to go from where it is today to 15% in a short period of time. We have a $5 billion portfolio. So it’s going to take some time and it’s going to take investing new capital at higher rates and paring down some of the assets in the portfolio that don’t earn sufficient returns on the capital that’s deployed into them and redeploying that capital.

Gary Liebowitz - Wells Fargo Securities

Okay. Thanks, Mike.

Operator

And we will take our next question from John Godyn with Morgan Stanley.

John Godyn - Morgan Stanley

Hey, everybody. Thank you for taking my question.

Ron Wainshal

Hey, John.

John Godyn - Morgan Stanley

I wanted to follow-up on this 15% cash return concept as well. Obviously, there's sort of an advertising picking your underwriting standard and what you think is realistic within the market what the market will give you. But also a standard that’s attractive for shareholders. 15% isn’t that far off from your overall ROE year.

And we could obviously argue that if you chose a higher underwriting standard, we might see ROE expansion across the enterprise faster. Can you just kind of talk about the thought process that goes into that 15%? Why that’s the right level for the market and why that’s sort of the right level for shareholders?

Ron Wainshal

Hey, John. It’s Ron. A couple of things. One is, I think it’s important to remember the interest rate environment in which we live today were at all-time lows today versus a very different environment five years ago. So, we think 15% return on equity in this market is very attractive, first of all.

Now, in regards to the individual investment decisions that we do, there are a lot of factors that go in. It’s not just solving for return. We look at the risk and as you noted, there's a lot of judgment that goes into what constitutes return, particularly when you get through residual value assumption.

So we have, as we talked about on many occasions, but somewhat different perspective about the, what the future might hold for certain different types of aircraft. And so that return expectation is to a large extend driven by that as well. So, I think the target is a good target, if not before. When we do better, we try to do better. And then we weigh that against the riskiness of proposition.

John Godyn - Morgan Stanley

When i think about what we hear from other lessors, they would probably cite a similar target just as a concept. However, because of your cargo exposure and maybe some of your other exposures, I think investors sometimes look at Aircastle as sort of operating a riskier portfolio that should generate higher returns than the peer group if everything is kind of functioning the right way. Where is this sort of discontinuity happening? Is it because you guys just sort of look at it and say, well, our portfolio was actually not riskier than the peer group, that's why targeting a similar ROE is a good idea, or perhaps the 15% is just the conservative number that you have out there?

Ron Wainshal

John, I can’t really comment about our competitor’s target. I think 15% in an absolute sense is a very sensible one, particularly given our assumptions. We happen to think the risk return mix that we have has been quite good. We understand the concerns about freighter market.

But as we went through in quite some detail on Investor Day, the performance of our freighter portfolio has actually been, this is good as our passenger portfolio. In other words, we've had utilization of about 98% or so for the last several years on our freighters, which is better than most of our peers on their whole fleet. And we’ve had a rental yield, which is in excess of our peers on their whole fleet of freighters.

So look, I think our view on residuals is very different. We happened to have a view that the first to know part of a production aircraft will hold its value much better and don’t see the investment math making sense for the new narrow bodies. So time will tell whether we’re right or not. But we think they are pretty good target and we think our track record is pretty good.

John Godyn - Morgan Stanley

Fair enough. And could I just ask one more on sort of the buyback versus capital allocation. I'm assuming that the buyback decisions are sort of embedded through the same rents of a 15% target and you did buyback a bit here just recently. Is that correct or are there other reasons why you might be buying back shares irrespective of that 15% target? Perhaps you just sort of look at it today and say well, we need a balanced approach to the capital allocation in buying back a little bit, it’s just part of that. I’m just sort of curious if you could elaborate on the thought process there. Thank you.

Ron Wainshal

It is a mix of math and judgment. I think the best way to say. Yes, we look at that similar rents of 15% and we look at where it’s trading and what we think use of capital can be. Share repurchases again we think are reasonable tactical used in allocation of capital from time to time.

John Godyn - Morgan Stanley

That’s very helpful. Thanks guys.

Operator

And we’ll take our next question from Helane Becker with Cowen Securities.

Helane Becker - Cowen Securities

Hi. Thank you very much, Operator. Hi guys. Thanks for the time.

Ron Wainshal

Hi Helane.

Helane Becker - Cowen Securities

Just a question on India and what your thoughts are there? I know you have according to slide nine anyway, six aircraft out to Jet Airways. And I know that the country or the government is not really being cooperative. So is that, you have no interest in putting aircraft into India anymore? What are your thoughts about what they're doing?

Ron Wainshal

Well, we've had a, kind of, underweight view on India for some time. And the most recent difficulties in removing aircraft that of Kingfisher are on the margin not helpful. We think India has tremendous promise in the future. And I wouldn't rule out doing business in India. This would have to be with higher returns and otherwise and with the right collateral protection. In other words, big security deposit or maintenance reserves or some other structural features that get us comfortable.

Now with Jet Airways, we’re encouraged by the news about the developments with Etihad there. So we’re comfortable with our situation there. But it’s a broader country, it's a place we continue to look and we will be careful.

Helane Becker - Cowen Securities

Okay. So you wouldn’t necessary rule it out but it won’t be your first choice?

Ron Wainshal

It’s a higher standard.

Helane Becker - Cowen Securities

Okay. That’s there. All right. Also, yeah, everybody else kind of went through the questions I had and you were very thorough on the conference call. I appreciate the time.

Ron Wainshal

Thank you, Helane.

Operator

And we’ll take our next question from Justine Fisher with Goldman Sachs.

Justine Fisher - Goldman Sachs

Good morning.

Ron Wainshal

Hey, Justine.

Mike Inglese

Hey, Justine.

Justine Fisher - Goldman Sachs

I just want to first of all ask a clarification question on CapEx. So I know that you said you had $450 million of commitment as of now. And I was just wondering how we’re going to see that flow through on the cash flow statement? Will most of that come through under cash flow from investing, I guess, in the second, third and fourth quarter.

Now, I’m assuming it refinanced with withdrawings on the warehouse facility. Based on that, how we should think about it, given that we didn’t really see a big CapEx number in 1Q despite the fact that there were a lot of commitments?

Mike Inglese

I think you’ll see most of that money go through the aircraft investments line. I mentioned during prepared remarks, I expect most of it and all of that to close by the early part of Q3.

Justine Fisher - Goldman Sachs

Okay. And then, I just wanted to ask about the wide-body market. You saw that you’re seeing more competition for wide-body deals because of what’s going on in the narrow-body market. Are you seeing increased desire to finance wide-bodies from the financing community as well. I mean, I don't -- they may not have necessarily been a unique lack of desire to finance wide-bodies previously. But I know that they were frequent to narrow-bodies and sometimes financers aren’t as excited to finance us. But as you get more lessors, you are looking at the wide-body market or are you seeing more banks and other sources come and ready their financer’s point?

Mike Inglese

I think there has been a modest shift towards wide-bodies’ greater demand over the last year too as more of our competitors feel as we do about the end of the line in production increased effects on the narrow-bodies. This has been a very competitive market on the new narrow-body side. And people are naturally migrating.

As far as finance, few years ago, I would say that post the A330 and a 777 are considered to be very desirable assets from a lender perspective. But the bank market as we talked about in the past has been shifting. And I think if you were to find an opportunity to finance a brand-new high-quality wide-body on a long-term lease with a good customer, you’d have good demand. I think if they were short-term lease and not a brand-new airplane, it starts becoming a little bit patchier.

So it depends on the situation. I think the best way to characterize it is a good new deal will have good demand. And we've been able to cap into that over the last several years with our wide-body investments.

Justine Fisher - Goldman Sachs

Okay. And then, is it possible for you to give a little more color about what drove the early returns of the aircraft that you had this quarter. Was it an airline that’s suffering just from the general macro conditions in Europe. For example, was it something specific to that airlines such that we shouldn’t expect this to be potentially reflective of a trend in some small airlines or other airlines that you might have on counterparty risk with?

Mike Inglese

Well, I presume you’re talking about Q1 right.

Justine Fisher - Goldman Sachs

Yeah.

Mike Inglese

So during Q1, we took back five aircraft during the first quarter. Two of them were from an airline that did military charters that leased operations. The military charter market has been under a lot of pressure as the pullback from Afghanistan and Iraq is taking place. And so I think that’s just a kind of market segment issue.

I mean, obviously, each of these situations has some individual airline specific things. But that’s probably the more market-oriented thing. The other aircraft we took out were from Italy and from Ukraine, both of which are suffering from economic issues. We have no aircraft left in Italy. In fact, I would generally characterize our exposure to Europe at this point is actually very comfortable.

Part of it is because the exposure is widespread and generally, the bigger exposures over the pretty strong counterparties. But I think part of it is also a reflection of working through weeding out these issues.

Justine Fisher - Goldman Sachs

Okay. Thanks very much.

Mike Inglese

Sure.

Operator

And we’ll take our next question come from Scott Valentin with FBR.

Scott Valentin - FBR

Good morning. And thanks for taking my question.

Ron Wainshal

Hi Scott.

Scott Valentin - FBR

So just with regard to the targeted aircraft acquisitions for the year, I believe, you could manage with $800 million as a target for the year?

Ron Wainshal

Well, we’ve referenced last year’s amount which is around $850 million.

Scott Valentin - FBR

Okay. $850 million. And then so the $450 million, I guess, I’m trying to figure out, are you seeing more aircraft available. Generally, I think, the $450 number in terms of closely committed unchanging rentals. Few weeks ago you had your Investor Day but just wondering, increasing more aircraft become available and just -- if you couple that with 850 number?

Ron Wainshal

In short, yeah. There is more deals that are out in the market. As always, we’ll have to see how our price expectations match up with the sellers. But I’m reasonably optimistic for this year. It feels pretty good. Now, there is a couple of market color points I’ll add. One is the production of new aircraft has been increasing steadily every year. And so there is just a bigger pie for everybody to pursue.

The secondary market has been going through some big changes in large measure because of the drying up of bank debt financing. Last year, it was the second worst year ever in terms of used aircraft trading. We’re seeing that pick up a little bit and I think our situation in terms of not relying on banks and being able to fund through the bond market gives us a leg up. So I think we’ll do more than our fair share in that part of the market.

Scott Valentin - FBR

Okay. And just a follow-up question on just the availability of capital. Clearly, you guys have access to capital with the capital markets. But just wondering, is it getting -- is there too much access, do you have any fear that the capital now that everyone is seeking, the investor is seeking yield are handing out credit to almost anybody and therefore you’re seeing more competition for aircraft acquisition?

Ron Wainshal

Well, first of all, I think the access to capital is reflected by our bond prices on one hand. I think we’ve been delivering on a story we started talking about investors in 2010 being pretty early on into the unsecured market and by growing our unencumbered asset base to $2.8 billion when you count the cash, that’s actually been delivering on it. So I think we get a little bit of market reception for that. And I think the way our bonds are trading is very attractive.

Now, in terms of competition, there is a lot of different guys coming into the market playing the opportunities at many different ways. There have been a few new funds that are going after aircraft that are mid-aged. And I think they are doing so with the low return expectations in traditional private equity model, which I don’t think really works -- that really worked very well in our business.

I think a lot of those guys are credible smart folks. They don’t have the team and capital markets access that we do. So I still feel good about our competitive situation. I think the biggest change there has been on the brand new narrow-bodies where we’re seeing a lot of interest, a push-up in prices in corresponding return drop. And some of that is fueled by very low interest rates.

There are some players in that market that just have ultra-low debt cost and that might make sense for them. It doesn’t make sense for us. And for that reason, we’re kind of step aside and let that market do it does.

Scott Valentin - FBR

Okay. The color is very helpful. Thank you.

Ron Wainshal

Sure.

Operator

And we’ll take our next question from Glenn Engel with Bank of America Merrill Lynch.

Glenn Engel - Bank of America Merrill Lynch

Good morning. Couple of small questions. First, the amortization of leases was $7 million and you were looking for $8 million to $10 million at the start of the quarter and you’re still looking for $8 million to $10 million in the June quarter. What’s the shortfall?

Mike Inglese

It’s not a shortfall, Glenn.

Glenn Engel - Bank of America Merrill Lynch

Good job.

Mike Inglese

Thanks. It’s just a reflection of two factors. One, part of that number is on acquisitions where you buy a plane that has a market lease rate higher than the current lease rates. You can only record the market rate as rental revenue and so this is an offset to that. So hardly enough, when you make a good investment and get a high lease rate, GAAP requires you to normalize that through your income statement.

The other factor is the concept of lease incentives. When you transition an aircraft to a new lessee and you make a commitment to contribute to the first major maintenance event in that next lease, you’re amortizing your expected CapEx over the term of that lease. And so it’s just a factor of our acquisition activity and the continued re-leasing activity in a larger portfolio.

Glenn Engel - Bank of America Merrill Lynch

And it was $2 million in light of your projections because you had less new activity.

Mike Inglese

The combination of timing of investing and also actual payouts on certain leases that didn’t materialized.

Glenn Engel - Bank of America Merrill Lynch

There was an airline, who, at least temporarily stop service Air Cargo Germany that is 2747 lease from you, what’s going on there? Are they current with their payments?

Ron Wainshal

Those are actually aircrafts leased to Martinair and they are subleased by Martinair to Air Cargo Germany. So those aircrafts are on lease and they are current. I can’t really speak too much for Martinair. I’m sure they are discussing where things go with Air Cargo Germany. But as far as we’re concerned, those are performing leases.

Glenn Engel - Bank of America Merrill Lynch

And on the leases, the eight planes that you’ve re-leased this year, how do those market rates compare to what they were before, and how does that compare versus history?

Ron Wainshal

There is a different story to each of those. I think in general, they’ve been pretty consistent with what our expectations were going into the year. The freighter aircraft is a little bit lower than what it was last year. We had a number of aircraft we took back last year, but I think still a reasonable result.

As I said before, the demand for the wide-bodies is quite strong and what I’d add in that respect, Glenn, is our leasing activity hasn’t been limited to those aircrafts. In fact, we signed up two A330s that were coming off lease next year to relatively long extensions, replacements. And that’s a sign of the strength in demand for the wide-bodies. I’d say on the narrow-body side, in general it’s been kind of flattish, maybe a little better.

Glenn Engel - Bank of America Merrill Lynch

And finally, the $850 million target this year is that a target of closing of that $850 million, or is that what you hope to reach agreements to and some of that CapEx will flow into 2014?

Ron Wainshal

It’s cash investment.

Glenn Engel - Bank of America-Merrill Lynch

Okay. Thank you.

Ron Wainshal

Sure.

Operator

And we’ll take our next question from [Derek Winger].

Unidentified Analyst

Yeah. What are the primary differences between the portfolio yield of 13.6% and the cash ROE that you’ve referenced at 12.8%?

Mike Inglese

The portfolio yield is simply lease rental collections divided by the carrying value of the flight equipment held for lease. The cash ROE takes your cash flow from operations and subtracts depreciation and adds or subtracts gains or losses on aircraft dispositions.

Unidentified Analyst

Okay.

Mike Inglese

So cash ROE is after paying your interest expense then all your debt outstanding.

Unidentified Analyst

Okay. Super. Thank you.

Ron Wainshal

Sure.

Operator

There are no further questions at this time. Mr. Constantinople, I’ll turn back to you for any further remarks.

Frank Constantinople

Okay. Thanks. Thanks for your time. If you have any follow-up questions, feel free to call me at 203-504-1063. Thanks, again and have a good day.

Operator

This concludes today’s conference. Thank you for your participation.

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