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FLY Leasing Limited (NYSE:FLY)

Q2 2013 Earnings Conference Call

August 01, 2013, 09:00 AM ET

Executives

Matt Dallas - Investor Relations Manager

Colm Barrington - Chief Executive Officer

Gary Dales - Chief Financial Officer

Steven Zissis - President and CEO, BBAM

Analysts

Gary Liebowitz - Wells Fargo

Richa Talwar - Deutsche Bank

Helane Becker - Cowen & Company

John Godyn - Morgan Stanley

Glenn Engel - Bank of America Merrill Lynch

Andrew Light - Citigroup

Operator

Good morning. My name is Lushaira and I will be your conference operator today. At this time I would like to welcome everyone to the FLY Leasing Limited Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer question. (Operator Instructions). Thank you.

Mr. Dallas, you may begin the conference.

Matt Dallas

Thank you and good morning. I am Matt Dallas, the Investor Relations Manager at FLY Leasing. And I’d like to welcome everyone to our second quarter 2013 earnings conference call.

FLY Leasing, which we will refer to as FLY or the company throughout this call, issued its second quarter earnings results press release earlier today, which is posted on the company’s website at www.flyleasing.com. Representing the company today on this call will be Colm Barrington, our Chief Executive Officer; Gary Dales, our Chief Financial Officer; and Steve Zissis, the President and CEO of BBAM, the company that manages and services FLY’s fleet.

I’d like to begin the call today by reading the following Safe Harbor statement. 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 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. FLY expressly disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views and expectations, or otherwise.

This call is the property of FLY and cannot be distributed or broadcast in any form without the express written consent of the company. A replay of this call is available for one week from today. An archived webcast of the call will be available for 90 days on the company’s website.

I'd now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

Steven Zissis

Thanks Matt, and good morning everyone. Consistent with my comments on prior calls, the market continues to show gradual improvement with steady demand and slight improvement in lease rates. As we sit here today demand has firmed up somewhat for Airbus narrow body equipment albeit open after low level.

We had as of yet to see significant increases in lease rates from these assets, although the supply demand dynamic was much healthier than it did at this time last year. Boeing narrow body equipment continues to be a solid performance for the lessor community.

We've had a lot of re-marketing activity in 2013, with a total of 29 aircraft extended with existing lessees, transitioned to lessees or being sold. Of these 29 aircraft we delivered nine to new customers extended 10 aircraft with existing customers and sold three aircraft. Of the remaining seven aircraft three aircrafts are subject to LOIs for delivering the fourth quarter and two 15 year old aircraft are expected to be sold approximately at book value in the fourth quarter.

We are left with two unplaced aircraft for the second half and expect these to be delivered to new customers by the end of the fourth quarter. As you can see it's been busy on the re-marketing with almost 30% of our fleet turning over. This positive progress on remarketing will be helpful to the company's revenue in the future quarters as previously off-lease aircraft start generating rent.

Despite this progress on the remarketing front, we believe that it's necessary for the company to grow its business through the acquisition of new aircraft. Growth will ensure that we are growing the revenue of the business as well as the per share earnings and cash flow of the company.

To this end, the company is well positioned to take the advantage of attractive opportunities to acquire additional aircraft. As of June 30, the company had approximately $140 million of unrestricted cash on its balance sheet and through the sale of new shares the company received another $173 million in July for a total [audio gap] 1.2 billion when combined with our warehouse facility.

We have an identified pipeline of aircraft with an aggregate purchase price of 600 million. We have already acquired six aircraft for approximately 330 million. Over the medium to long term, we intend to drive FLY's fleet aircraft portfolio by 10% to 15% per annum, net of depreciation and aircraft sale.

Finally a quick word about financing market. The acquisition of aircraft at good prices and with good lease rates are pre-requisites for long term success in this business. But often overlooked is equally important to securing attractive financing for the portfolio. We have long held the belief that lessors are best funded with long term secured debt arrangement. We own long lived assets and we want long term debt in place on these aircraft to manage any refinancing risk and to lock in our profit spread through our anticipated investment horizon.

The majority of our debt is structured to be a limited recourse to the aircraft debt fulfillment, allowing us to be economically rationale when making a refinancing decision. Given the greater reliability of the secured debt market, the lower cost at which we secure debt through the cycle and the amortizing nature of more secured debt arrangements we continue to focus our efforts on this funding strategy.

However we remain open to opportunistically considering unsecured funding strategy but not as part of any wholesale change in our funding strategy. That said I'm pleased to report that the secured debt financing markets are very healthy.

The capital markets for secured debt whether in the form of asset-backed securitization term loans, or bonds are strong. The bank market has also been exceptionally attractive and -- active in the first half of 2013. Most of the European banks have dominated bank money in the aircraft leasing business since the industry history have returned with larger budget in 2013 following the credit crisis.

But just as importantly we're seeing attractive financing available for new entrants to the market as the Japanese banks, Australian banks, U.S banks and other banks from other jurisdictions kind of increase their appetite for new deals. This is important for FLY, because we can grow the business, we are confident that we can put long term max funded debt on our books to fund the growth. Refinancing has very attractive all in interest rate, advance rate and amortization profile. This gives us the comfort in our ability to grow the free cash flow of the business over the long run plus enabling us to grow the dividend over time as well.

I will now hand the call over to Colm Barrington.

Colm Barrington

Thank you Steve and good morning everyone and thank you all for joining us on today's call. Since our last call in March, FLY has made major progress in several important areas of our business. First we have completed the acquisition of six aircraft for a total consideration of $333 million. The aircraft are five Boeing 737-800 and one Boeing 777-300ER.

These six aircraft, four of which including the B777 were new have met several corporate objectives, in particularly we are meeting our 2013 portfolio growth targets. In fact from the combination of the aircraft that we've acquired already and which we are committed to acquiring, we now expect to add aircraft valued as more than $600 million in 2013, representing a fleet growth rate of more than 15%.

We hope to continue this rate of growth into the future. These transactions will be accretive to our shareholders in terms of EPS and cash flow per share as we progress through 2013 mid 2014. We also have a positive impact from the average of our portfolio and then the average length of our leases and they will converge well to the unproductive balance sheet cash into earnings aircraft asset.

Secondly, in July we raised a $173 million of secondary placing of our shares. When added to the $139 million of unrestricted cash that we held at the end of June, FLY now has adequate funding to complete our 2013 acquisition program and to carry us through our planned program for 2014. This piece done that's the cash that FLY generates and the debt which is currently available from a variety of sources, FLY now has the ability to grow its fleet by approximately $1.2 billion.

We believe that the merit of raising additional equity at this time for investments in new aircraft will allow us to generate additional earnings and cash plus share that will be accretive to all of our shareholders. While the sale of shares was at a discounted book taking a medium term view, we believe this is the right course of action and we would not have proceeded with the placing if we did not see it as a way for hugely economic returns for all of our shareholders. In this regard, it is worth noting that FLY senior management invested $2 million of their own funds in the placing.

The placing also achieved two further objectives in that it substantial increases FLY's market capitalization and to increase number of shares outstanding by nearly 50%. The increased market capitalization and share count combined with the entry of several new shareholders groups on to our register has already been affected in increased daily trading live shares, which makes our shares more attractive to a larger audience of potential shareholders.

And thirdly with increased demand by acquisition facilities from $250 million to $450 million, we have extended the term of the facility and have reduced the margin by 50 basis points. This extended facility along with the additional financing in the bank market which Steve has already mentioned will give FLY sufficient debt to fund our new aircraft purchases.

In this regard, it is interesting to note about the $333 million of purchases to-date this year, over $125 million was financed outside our acquisition facility from the bank market. As Steve said, there are now a relatively large number of European banks who are determined to financing leased aircraft provide some investment opportunities which are attractive compared to other asset classes and as a result they have decided to increase their exposure to our factor.

The de-leveraging of our existing debt facilities combined with our reduced margins and reduced market rate, is also having the effect of reducing our interest cost from facilities related to our historical portfolio. These factors have the impacted reducing the negative impact of the lower leased rate experience during the last three years.

As you would see from our earlier release, in the second quarter FLY had earnings of $5.9 million and revenues of $90.5 million. For the year-to-date our earnings were $38.8 million on revenues of $204.9 million. This equates to a diluted earnings per share of $1.35 for the six month period.

Our adjusted net income for the six month period was $49.8 million equal to $1.76 per share and our adjusted net income plus depreciation and amortization which is broadly equivalent to our operating cash flow was a $135.7 million or $4.81 per share.

On May 20, FLY paid a dividend of $0.22 per share up 23rd consecutive quarterly dividend. And on July 15, we declared a further quarterly dividend of $0.22 per share. This dividend will be paid on August 20 to shareholders of record on July 30.

FLY has demonstrated consistent record of paying dividend and we remain committed to returning capital to shareholders. Indeed as we deploy our new capital and to generate additional returns on cash, we expect to consider a dividend increase in early 2014.

I will now hand you over to Gary Dales to take you through the financials.

Gary Dales

Thank you Colm. As Colm mentioned we are reporting net income for the quarter of $5.9 million, or $0.20 per share. This compares to $25.7 million and $0.99 per share for the same quarter of the previous year. The decrease in net income and earnings per share is due to decline in operating lease revenue, gains from aircraft sales during the second quarter of 2012 and higher expenses incurred during the quarter, in connection with the delivery of aircraft to new lessees.

For the six months ended June 30, 2013, our net income was $38.8 million or $1.35 per share as compared to net income of $46.1 million and $1.77 per share for the same period in 2012.

Adjusted net income for the second quarter of 2013 was $11.2 million or $0.40 per share as compared to $30.9 million or $1.19 per share. For the six months ended June 30, 2012 adjusted net income was $49.8 million or $1.76 per share which compares to adjusted net income of $57.7 million or $2.23 per share for the same six months period in 2012.

Total revenues were $90.5 million in the second quarter of 2013, a decline of $20.4 million from the second quarter of 2012. Current quarter revenues do not include any aircraft sales, whereas revenues for the second quarter of 2012 include $8.5 million of gains from the sale of three aircraft and $1.9 million in equity earnings from our investment in BBAM which was sold in December 2012.

Operating lease revenues decline approximately $10 million. Revenue from aircraft that were sold in 2012 and earlier in 2013 make up $6.7 million of the decrease. Also contributing to the decrease is a lack of revenue from aircraft that were off-lease for some part of the quarter. Included within operating lease revenues for the second quarter of 2013, is $17 million of end of lease income. End of lease income for the same period in the previous year was $14.1 million. End of lease revenue is lumpy and difficult to predict. However at this time we are not anticipating any end of lease revenue in the third quarter of 2013.

As a result we expect the third quarter total revenues will range between $76 million and $80 million assuming no aircraft sales. For the six months ended June 30, 2013 operating lease revenue were $196.2 million which compares to $201.4 million for the same six month period in 2012. This is a decrease of $5.2 million or 2.7%.

Total expenses for the second quarter of 2013 were $83.3 million. This compares to $80.9 million for the same period in the previous year. The increase is primarily the result of maintenance costs, incurred transitioned aircraft that were off lease to new airline customers. The increase is partially offset by reduction in our interest expense, which is driven by new leveraging and lower interest rates.

For the six months ended June 30, 2013 our total expenses were $160.4 million compared to $162.4 million for the same six month period in the previous year, a decline of $2 million. Expenses were negatively impacted by upfront maintenance expenses incurred in connection with the delivery of aircraft to new lessees offset by reduction in interest expense. Looking forward to the third quarter, we are expecting these upfront maintenance costs to decline by approximately one half compared to the second quarter of 2013.

Our provision for income taxes for the second quarter of 2013 was $816,000. This represents an effective tax rate of 12.1%. The effective rate for the same period in the previous year was 14.3%.

For the six months ended June 30, 2013 our effective rate is 12.9%. At June 30, 2013 our assets totaled $3 billion of which $2.6 billion is invested in flight equipment held for operating lease. Our total cash balance is $296.1 million, of which $139.3 million is unrestricted. This compared to total cash of $300.6 million at December 31, of which a $163.1 million was unrestricted.

The June 30, cash balances do not include the more than $170 million raised in our recent capital stock issuance. We have been focused on reducing our net leverage, which we define is the ratio of net debt to shareholders equity. We manage our net debt as the book value of secured borrowings, less our unrestricted cash and cash equivalents.

Our net leverage ratio was 3.2 times at March 31. At June 30, our net leverage ratio is 3.3 times reflecting the use of our unrestricted cash and draws on our aircraft acquisition facility to acquire three aircrafts in the second quarter. At June 30, we have more than $300 million available under our expanded aircraft acquisition facility, which along with our unrestricted cash is available to fund the growth target that Colm has discussed.

With let me turn it back to Colm for his closing remarks.

Colm Barrington

Thank you Gary. Well as reported FLY is on a positive growth trajectory having a [inaudible] of the 300 million of new acquisition already this year and being well on our way to exceeding $600 million of growth in the current year. The funds raised from our recent sale of shares, cash generation from our portfolio and our debt financing activities have given us the potential resources to complete this growth program in 2013 and 2014.

Finally we see our recent tactical sale of shares as having added a lot of positive to FLY including significant increases in our share flows and our market capitalization which is making FLY a more attractive investment proposition for more shareholder groups. We believe that prudent deployment of these funds for new aircraft will increase our EPS and cash flow for all our shareholders and will provide us with the resources to recommend an increased dividend in early 2014.

With that we are now ready to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions). Your first question comes from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo

Can you tell how many planes at the end June were not generating revenue and the timing of your expectations of when those planes get back into service?

Colm Barrington

Yeah, just to recap Gary, at the end of June we had seven aircraft that were available. Of those seven, two are currently on lease and expire at the end of 2013, and those two aircrafts have been signed on an LOI to be sold in the fourth quarter. That leaves with five aircraft. The five aircraft, three are now signed up with LOIs and expected to deliver at the end of the third quarter. And as I mentioned in my opening remarks we have basically two aircrafts that will not be producing revenue for the third quarter and will go on lease in the fourth quarter.

Gary Liebowitz – Wells Fargo

So if I look into Q3 your asset utilization probably doesn’t move up much higher from the 94%?

Colm Barrington

No, it should right, because by the time we get to the fourth quarter you should only have two aircrafts of the 106 in our fleet. So that’s more than 94%. I haven’t done the math but I am sure that…

Gary Liebowitz – Wells Fargo

Okay. Also so can you talk broadly about the CapEx strategy. Clearly there is shift to newer wide bodies, what, is it more because narrow bodies have become more commoditized and competitive or it's just the sort of the broader user base for some of these twin aisle planes, what’s behind the apparent shift in the CapEx strategy?

Steven Zissis

Look our thinking along that lines that we have always liked some of the wide bodies, not all of them. So certainly the 787 the 777, and the A330. We certainly like that investment but as when we started up FLY it was such a small company we didn’t think it was prudent to have many wide bodies in the fleet.

As we grow the fleet and we get it closer to the $3 billion to $3.5 billion size we think it’s a prudent strategy to have up to 25% of our fleet in wide bodies. So as we find attractive deals Gary we will be venturing into the wide body market. But you shouldn’t expect it to be more than 25% of our fleet.

Gary Liebowitz – Wells Fargo

Okay, thanks. And just Gary and this is the first time you said what the maintenance expenses for the third quarter should look like?

Gary Dales

Yeah, this is the first time we have said that. And what we are saying is we think they are going to be less than half of what they were in the second quarter.

Gary Liebowitz – Wells Fargo

Okay. Thank you very much.

Colm Barrington

Thanks Gary.

Operator

Your next question comes from Richa Talwar with Deutsche Bank.

Richa Talwar – Deutsche Bank

My first question is just on your, Gary I think you said one of the reasons revenue is low this year versus last year is a result of releasing aircraft at lower lease rates? I understand it’s the nature of the business that when aircraft comes off lease older and maybe subject to lower lease rates, but do you think that maybe there is some upside risk to your current portfolio given maybe positive trends you are seeing in the lease rate environment right now.

Gary Dales

We are seeing lease rates, certainly for the narrow body aircraft, Airbus aircraft starting to firm but as I said in my opening remarks I don’t this it’s strong enough yet to see any potential upside in those lease rates. It’s going to be a while and the Boeing narrow bus, narrow body market has been very firm and we haven’t seen much of a decline in those lease rates at all. So that’s been a healthy result for FLY.

Richa Talwar – Deutsche Bank

Okay, thanks. And then can you talk about the impact you are seeing if at all from raising interest rates on your business?

Gary Dales

Richa I don’t think we have actually seen interest rates decline significantly over the last few years. And as you know our policy is to lock in our interest rates related to the term leases. So we are not seeing any negative impact on our bottom line interest rates right now.

Richa Talwar – Deutsche Bank

Okay, perfect. And just one last one sort of a house keeping type of question. What does your net debt-to-equity ratio go to when you adjust for the equity raise on the deal, I would presume it goes much lower than the 2.2 times?

Gary Dales

Sorry, can you say that question again please Richa?

Richa Talwar – Deutsche Bank

Do you have any adjusted equity rate you just did on your net debt to equity figure?

Gary Dales

Yeah, I mean it will, having raised the equity it will have decreased to less than three but we are spending that money and we are adding on new debt as part of our acquisition program. So we expect that to rise again to over three times during the course of the year. You don’t see it exceeding four times at any point.

Richa Talwar – Deutsche Bank

Okay, great. Thank you.

Operator

Your next question comes from Helane Becker with Cowen Company.

Helane Becker – Cowen & Company

Hi guys. Thanks for the time. Just a couple of small housing keeping things, did you say that revenue for the third quarter was going to be down from second quarter although I missed what you said about revenue?

Gary Dales

Hi, Helane. Hi this is Gary. We said that we think total revenues will range between 76 million and 80 million for the third quarter.

Helane Becker - Cowen & Company

I am sorry can you give that again.

Gary Dales

$76 million to $80 million of total revenue.

Colm Barrington

And I think Gary also added today that he wasn't expecting any end of lease revenue in the third quarter.

Gary Dales

And the $88 million or so or $89 million of revenues we have, $90 million of revenues we have in the second quarter includes $17 million of end of lease revenue. So we are seeing an increase in revenue other except for the end of lease.

Helane Becker - Cowen & Company

Okay, that’s perfect. Sorry I was having issues with my phone. And the other question I have is I am not sure why interest and other revenue was up sequentially is that just because of end of lease revenues?

Gary Dales

No, our end of lease revenues are included in our operating lease revenue in that line and the interest and other is actually comparing back to 2012, the second quarter is relatively flat. So we haven’t really seen much change in interest and other revenue.

Helane Becker - Cowen & Company

Okay. But it was up from the first quarter?

Gary Dales

Yes, I believe it was, in the first quarter it was, I'll look back and see what it was for the first quarter, it was only 118,000 in the first quarter.

Helane Becker - Cowen & Company

Right, so what accounts for that increase?

Gary Dales

Well a good part of it is there was a true up in the proceeds we got on the sale of BBAM which is adding to that, just working capital true-ups. So that’s a big of the interest and other income for the first quarter.

Helane Becker - Cowen & Company

Okay, got you. And then okay that’s fine on those questions. And in terms of I guess I just want to understand one last thing and then I kind of good to go. The thought process behind raising so much, diluting the share count by selling so many share I should think about that as what offset by the fact that you are going to put that capital to work right away and then I guess some of amount of money back in my revenue line from you are buying like the 777 and so on is that how I should think about that.

Gary Dales

Yeah Helane, I mean I think as we said in our road shows we expect the deployment of that capital, that new equity capital along with the debt to have a positive impact on our EPS for all shareholders. So we have a new share count now just over 40 million shares. So we expect that deployment of that capital will actually help the EPS in all of those 40 million shares. It also helps the cash flow of those 40 million shares. So overall this had a very positive impact on all our shareholders.

While the shares were issued at discount to book we expect that the gains of those aircrafts to build up that book value overtime and probably take a few years to get back to where we were before per share. We expect that to have a positive impact on the net book value per share overtime also.

Helane Becker - Cowen & Company

Okay. So then what’s the share count I should use for the third quarter?

Colm Barrington

Do you have the exact number there, Gary?

Gary Dales

I don’t have the exact number I can calculate, of 41 million shares.

Helane Becker - Cowen & Company

Okay. Well it’s better that you calculate it then I calculate, because that way I get the right number. Thank you very much. I appreciate the time.

Colm Barrington

We will get back to the exact number of that, Helane.

Helane Becker - Cowen & Company

Okay, that's great. Thank you.

Operator

Your next question comes from John Godyn with Morgan Stanley.

John Godyn – Morgan Stanley

Hey thank you for taking my questions here. I was hoping you could just talk a little bit about the incremental ROE that you are either getting or targeting on the deals that you are looking at sort of on a go forward basis and maybe building on one of the prior questions if there is anything you can tell us just about narrow bodies and wide bodies kind of within that framework that will be helpful too.

Colm Barrington

Well I think all we can say John say at this point is that we expect that the deployment of capital will have mid teen IRR. And we also expect it to be accretive to all the shareholders. Each deal is somewhat different. In terms of wide body versus narrow body I think those views tend to be different too and certainly one of the wide bodies looking at has quite high IRR, one has somewhat lower. So it’s impossible to give you a precise answer on each deal because they’ve all different cost, a mid-teen IRR is [leveraging].

John Godyn – Morgan Stanley

Okay. That’s very helpful. And it certainly sounded from some of the commentary and just from some of the recent activities that you have a lot of confidence in the growth opportunities going forward. Can you just talk about some of the maybe the schematic points that are driving the durability in the growth opportunities just when we think about project over the next couple of years?

Gary Dales

I think it’s pretty basic John. It’s basically a lot of aircrafts are delivering over the next few years. We’re seeing more and more airlines enter the sale-lease stock markets either the financials of these deliveries or the surety of balance sheet. So we are seeing good opportunities there. And we’re seeing less competition from some of the Chinese competition out there. So given the combination of these events along with the better financing markets the returns on some of the opportunities we’re looking at are better than they were four months ago.

Colm Barrington

And I think as John and Steve referred in his prepared remarks, the debt side is very important, for getting -- we’re seeing higher advance levels we’re seeing lower margins, we’re seeing better [balloon] than we would have seen in the market two or three years ago. And that is having a very significant impact on our ability to make decent returns on some of these transactions.

John Godyn – Morgan Stanley

Got it that’s helpful. And certainly appreciate the fact that there is a lot of aircrafts being delivered over the next few years and the good guidance that creates on the growth side but how do we think about what that might mean for residual values or lease rates on older aircrafts when we kind of look out and we see rates continuing to step up, 737 among others, is there a concern or is there a risk that the capacity, that supply side kind of continues to offset may be some of the things that we’re hearing that are more upbeat on the demand side?

Colm Barrington

Yeah we’ve made a no secret John that on the 319s and 320s that we continue to be soft although we are seeing a firming. But we are concerned with kind of the residual value adds that go there, as they go forward given it is the commodity type aircraft we expect that market to adjust and to realize its real value over time. And with respect to the Boeing narrow bodies I mean that has been a very steady and reliable market for all the lessors which helps the returns and we still see pretty good demand on that side of the ledger. So in that respect we are pretty positive on the Boeing side.

Steven Zissis

I think John then on the macro bases still seeing good growth in air traffic globally and we’re seeing airlines doing better than before. I have been predicting a relatively good profitability for airlines this year. And then we’re seeing need to re-fleet particularly in North American markets where there are lot of, still very old traffic around in the sky. So I think while there is a lot of stuff being made there is lot of reasons why it is being used also.

John Godyn – Morgan Stanley

Definitely, fair enough. I guess what I was getting at is we’ve certainly seen at least in the indicators that we track more positive demand trends, the leasing trends and it sounds like the commentary echoes that. But I think one of the other sides is just that the improvement appears to be slow and gradual and I think you guys mentioned that in your commentary I am just sort of curious is there anything on the horizon that might kind of accelerate the improvement in fundamentals across the lessors within the context of all the positive trends that we seem to be seeing at face value?

Colm Barrington

I don’t think we see anything dramatic there John right now.

John Godyn – Morgan Stanley

Okay. So just a continued kind of grand higher improvement in ROEs that’s how we should be thinking about the world.

Colm Barrington

That’s reasonable.

John Godyn – Morgan Stanley

Okay, great. Thanks guys.

Colm Barrington

Thank you.

Operator

(Operator Instructions). Your next question comes from Glenn Engel with Bank of America Merrill Lynch.

Glenn Engel - Bank of America Merrill Lynch

Hi, traditionally you have preferred the mid-aged aircraft because you feel you are, you have a more competitive value there than you do in new aircrafts where it's all about financing cost. What change that's making you weigh more towards the new end?

Steven Zissis

Well John it's Steve I mean certainly the financings market that we had mentioned in the opening statements are making some of the newer stuff, much more financeable and therefore the returns much more attractive. But that doesn’t mean that we wouldn’t look at the more mid light stuff if it was appropriately priced because we do see opportunities there, there is lack of financing and as you know, as a public company we can tap to capital markets which will allow us to finance those types of mid-life aircrafts. So we will continue to look at mid light stuff as they come along.

Glenn Engel - Bank of America Merrill Lynch

But can your new cost of capital leverage compare with banks and some of these other Japanese players who are in the new markets that have really low cost schedule.

Colm Barrington

Good question right and there is a lot of aggressive capital what I right call on the top tier end. So the Chinese and the Japanese and none of the guys in the leasing business especially the public entities can see with that. We’ve dealt with that type of capital for 25 years and when those guys want what they consider a trophy deal they get it. You don’t have to compete there I mean there are hundreds of millions of dollars deals out there, you have just to pick and choose it. So we find plenty of opportunities for further investments.

Glenn Engel - Bank of America Merrill Lynch

On the wide bodies I think…

Steven Zissis

I am sorry Glenn just another aspect of that I think worth noting is a lot of airlines were using U.S. and European export credit financing up to this. As you know those that financing has become more expensive and the terms more restricted. So that as a source of financing that was available to airlines, isn’t there, or was it's there but it's more difficult for them to source and more expensive to source. So that I think gives a financial advantage in certain transactions now.

Glenn Engel - Bank of America Merrill Lynch

On the wide body side aircraft do you find attractive and not so attractive?

Colm Barrington

So on the wide body side we’re going to stick with the 787, both dash 8 and dash 9 as they come out, the 777-300ER and the 330-300 we won’t venture beyond that.

Glenn Engel - Bank of America Merrill Lynch

And finally the net debt to equity what is your goal to -- range to stay within?

Gary Dales

I think as we said earlier in response to another question Glenn, we somewhere over three now we expect that we’ll stay below four times during our current acquisition program.

Glenn Engel - Bank of America Merrill Lynch

So you want to stay within the three and four range?

Gary Dales

Yeah.

Glenn Engel - Bank of America Merrill Lynch

Okay. Thank you.

Colm Barrington

Thank you.

Operator

Your next question comes from Andrew Light with Citigroup.

Andrew Light - Citigroup

Good morning.

Colm Barrington

Good morning, Andrew.

Andrew Light - Citigroup

I think first question is kind of similar to the last, there's has been several WBCs on non-U.S. airlines, British Airways and I think Ryan Air think of taking one as well and may be others, so I was just wondering if you saw as the that likely change may increase, right, I know there is relatively little U.S. airline operation in the past because of the their access to WBC? And my second question is on maybe you are not going to capture market and do you have this scenario where may be one day we go back to the portfolio to check while the complex portfolio securitization that was done so including the one in your…?

Colm Barrington

Sure, well I mean, yeah I think Andrew WBCs are -- seem to becoming available for everybody. But I mean as all capital market transactions have become more available and less expensive over the last six months. And we look at those markets all the time.

In terms of securitization done, there hasn’t been anything major done since ours in August 2007. I think there have been some smaller ones done. It’s quite a complex structure. If assemble the large portfolio and we’re able to put it all together, we would certainly look at it but as of now we see other opportunities. So we are certainly not reasserting our planning on securitization although I understand there are some being contemplated in the markets.

But it’s quite a complex thing you got to assemble your portfolio, it takes a long time to get it raised and all that, so it’s something which you need to have quite a good portfolio of planes before until there.

Andrew Light - Citigroup

Okay. Just a follow-up question. And just on your question 7878 -- 787-8 and also you called out a risk associated with that plane at the moment. I mean this is your view in the leasing market this is a risky planning or is it an opportunity because airlines say it is risky and that will allow you to do more operational leasing of the plane, any thoughts you have on it?

Colm Barrington

Yeah, Andrew you are referring to the technical issues with the aircraft?

Andrew Light - Citigroup

Yes, is it too early to talk about?

Colm Barrington

Yeah I think anybody that's in this industry realizes that those things are just temporary clichés and they work them over time and the market’s not reacting at all in terms of values or trading of those aircrafts. So it’s a non-issue.

Andrew Light - Citigroup

Okay. Thanks.

Operator

You have a follow-up question from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz -- Wells Fargo Securities

May be one for Gary. I do happen to have what the schedule principal pay down for the rest of 2013 looks like it was the numbers of 2014, out of the $2 billion debt balance as of the end of June is going to get pay down?

Gary Dales

I think I have something I can share with you. See we are I mean I have it handy, in our annual report we did list the scheduled payments for the next five years. So we don’t have that and I am trying to remember exactly what that was. We don’t have any significant maturities until 2018 so we don’t have any significant amount of bullets coming through, it's just regular scheduled payment.

Gary Liebowitz -- Wells Fargo Securities

I understand. And then as a follow-up on maybe for you or for Steve have you had a chance to review the latest exposure draft for lease accounting and are you planning to submit comments to the accounting boards?

Colm Barrington

On the latter I don’t know that we’ve strictly decided one way other. We are aware of the lease announcements come out and as you know we’ll have rather significant effect to financial reporting for aircraft lessors. And we’re not sure it’s an improvement in aircraft lessor financial reporting but it’s -- we haven’t decided whether we will participate in the comment.

Steven Zissis

But we’re in the dialogue with them, but it's obviously not now.

Gary Liebowitz -- Wells Fargo Securities

Okay. Thank you.

Operator

You have a follow up from Glenn Engel with Bank of America.

Glenn Engel - Bank of America Merrill Lynch

One if you give you me the -- I didn't see it anywhere the CapEx for the first half of the year?

Gary Dales

Yes, we have spent accounts to 333 million which set back -- strike that, that’s through today for the six months ended we have just the three aircrafts in by as the end of June, and that was 130 plus million. And then with the aircraft we added subsequent to that we’re up to the columns may be 333 million and plan to add more over the balance of the year.

Glenn Engel - Bank of America Merrill Lynch

And when I remember that 10-K it looks like there was a little more than this year you had a fair amount of releases next year is it relatively lighter only a little more than in the 10% to 15% range?

Colm Barrington

It’s about 20 aircrafts next year.

Glenn Engel - Bank of America Merrill Lynch

Okay. That's relatively heavy. Okay, thank you very much.

Gary Dales

Yeah, thank you.

Operator

There are no further questions at this time.

Colm Barrington

Thank you, everyone for joining us for our second quarter earnings conference call. We look forward to updating you again next quarter. Bye now.

Operator

This concludes today’s conference call. You may now disconnect.

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