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Executives

Frank Constantinople - Head, Investor Relations

Ron Wainshal - Chief Executive Officer

Mike Inglese - Chief Financial Officer

Analysts

Gary Liebowitz - Wells Fargo Securities

Isaac Hussani - Barclays

Richa Talwar - Deutsche Bank

Scott Valentin - FBR Capital

Moshe Orenbuch - Credit Suisse

Glenn Engel - Bank of America

Bill Mastoris - R.W. Baird

Aircastle Limited (AYR) Q2 2013 Earnings Conference Call August 6, 2013 10:30 AM ET

Operator

Good day, everyone, and welcome to the Second Quarter 2013 Aircastle Limited Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to the Head of Investor Relations, Mr. Frank Constantinople. Please go ahead, sir.

Frank Constantinople - Head, Investor Relations

Thank you, Lynette. Good morning, everyone, and welcome to Aircastle Limited’s second quarter 2013 earnings call. With me today are Ron Wainshal, Aircastle’s Chief Executive Officer; and Mike Inglese, our CFO.

We will 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 the U.S. and Canada, the number is 719-457-0820. The replay pass code for the call is 7828965. This call will also be available via webcast on our website at www.aircastle.com along with the earnings press release and PowerPoint presentation.

I’d like to point out that statements today, which are 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 filings which can also be found on our website. I will 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 - Chief Executive Officer

Thanks, Frank, and welcome to the call. In my prepared comments, I’ll discuss Aircastle’s financial results for the second quarter of 2013 as well as our business activities this year. I’ll also cover our views on the current business environment and talk about our plans for the future. Mike Inglese, our CFO will then address Aircastle’s financial performance. Then we’ll open up the call to questions.

Using transaction activity as a measure, the past few months have been some of the most active in our company’s history positioning Aircastle for growth while also enhancing our aircraft portfolio. So far this year, we have completed or secured more than $960 million of investment commitments for 2013, and we are optimistic about sourcing more business this year. We made very good progress with our asset management efforts addressing most of our aircraft placement needs this year and completing some important profitable sales.

On the financing side, we more than doubled the size of our unsecured revolving line of credit while enhancing its terms. Since the end of the quarter, we also completed the sale of 12.3 million shares, or 15.25% of our firm to Marubeni Corporation, one of Japanese premier trading companies. In doing so, we have gained a strategic shareholder with a long-term investment horizon, an informed view of the aerospace market, and a truly global mindset. We believe Aircastle’s earning power will benefit not just from the $209 million from capital that Marubeni provided, but also through the power of working together. I believe that will be an excellent partner, and I am excited about having them on board.

We are pleased with the second quarter results, and we are particularly encouraged by the steps we have made towards long-term success and increasing our future earnings power. We remain optimistic about our ability to source additional business that provides good value to shareholders. Having said that, we are committed to disciplined growth, a responsible capital structure, and a balanced approach deploying capital for the benefit of our shareholders, including paying dividends. To that end, I am pleased to say our Board of Directors declared a $0.165 per share third quarter dividend. This is our 29th consecutive dividend.

Turning to the business environment, global passenger traffic levels, which we think of is a good barometer for aircraft lease demand remained strong despite slower economic growth rates in several key countries such as China and India. According to the International Air Transport Association, or IATA, revenue passenger kilometers for the year through June are up 4.8%. Growth levels were particularly strong in the Middle East and Latin America. I’d also note IATA’s most recent market reports includes some interesting commentary regarding medium and long-haul routes contributing more to the total growth of international travel, and this factors into our investment outlook.

On the other hand, air cargo traffic measured in freight ton kilometers remains more abundant with an increase of just 0.1% year-to-date through June. This reflects the low rate of growth in World Trade since 2011. The long-haul freight sector upon which we are focused continues to suffer from weak European demand as a result of the continuing economic issues in the region. We remain convinced there is a fundamental demand that transport high-value time-sensitive good buyer. So, we are more bullish over the long-term. However, even though we are heading into the annual seasonal second half peak for air cargo traffic, we currently don’t see any major sustainable catalysts.

Now let’s turn this supply, using available sea kilometers as a measure passenger supply had increased 3.9% through June this year. This increase was outpaced by strong demand growth as evidenced by the high 79% load factor. Robust demand growth has so far enabled the market to absorb increased levels of passenger aircraft production. To this end, the supply and demand story has been stronger for modern wide-bodies with the slow ramp up of the 787 continues to be a big factor and with the retirement of older fuel inefficient aircrafts such as 747-400s and A-340s gains momentum. The same can’t be set for the air freight market overly high production levels probably attributable to new models are causing supply glut.

In our view, in the near term this growth in supply is the bigger threat to this sector in the sluggish demand growth. And a growing pool of parked aircrafts can inhabit recovering lease trends. However, many of the aircrafts are going into storage and it could end up staying there permanently or getting partied out.

Rental levels are steady for current generation passenger aircraft. In general we aren’t seeing too much in the area of rental increases over the past several months, but in many cases there has been more and better quality competition for our available aircraft. Customer demand for wide-bodies has been stronger given the more favorable supply and demand balance. Regarding narrow bodies 737-800s continue to enjoy steady demand. For A-320s market interest in earlier vintage aircraft remains weak, so there has been some firming for new units.

In general, larger variances in each model line are doing better. It’s worth nothing there is strong demand for spare engines as parts for current technology aircraft. We believe this underlies the recent success we’ve had in several product sales including for mid-age current technology A-320 family aircraft. It also validates our investment approach would certainly emphasize this early to the middle part of the production run, we believe there is a better chance of maximizing exit value.

There has been a bit of turbulence in the capital markets over the past quarter in the wake of concerns regarding the federal reserves direction among other factors. While overall, our interest rate levels are higher than historical lows is achieved during the spring, they are still very low. The bond markets have recovered over the past few weeks and we have seen some airline dealers price recently including Unite Airlines deal last week. Bank market conditions are also good as the number of participants for commercial aircraft deals has increased. There are several factors in play here including more ECA/XN business going into the capital markets rather than the banks, and a larger number of participating Asia-Pacific financial institutions. Thanks for continuing to focus on newer aircraft and our deals involving longer leases and counterparts of better credits.

As a general matter we see prices for aircrafts for particularly for current technology passenger aircrafts going up reflecting strong capital inflows into this space both from new and existing players. The bulk of the inflows continues to be towards new narrow-body aircraft which we view is being used every bought. In our opinion wide-body still offer good investment value particularly given the available credits and long lease terms. Well still low by historical standards transactions volume from mid age aircrafts seems to have picked up this year. However, we are witnessing in increase in level of competition in aircraft despite limited opportunities for livering this aircraft as some participants are simply targeting lower leverage and lower returns on equities results?

With regards to the air line credit environment we believe it mostly positive. Industry profitabilities improved in aggregate as airlines have generally been able to keep hold line on revenues while jet fuel prices have stabilized towards lower end of the trading range we have seen over the past two years. It’s still summer time in northern hemisphere so cash balances are relatively healthier this time. However, there is a considerable amount of retail variation and we are keeping our eyes open particularly with respect to Europe.

Let me now address our second quarter results. They are very good with net income coming in at $32.9 million or $0.48 per diluted share. Adjusted net income was $46 million or $0.67 per diluted share. These results benefit from gains on sale offset by costs relating to the great financing for the sold aircraft. Cash Roe dealing the past 12 months was 12.2%. Portfolio utilization during the second quarter was 98% as we sold or put back on lease all these aircrafts come off lease during the first quarter and this is consistent with the pattern we have developed turned – we in over the business cycle. We had no off lease aircrafts at the end of the quarter and none are off leases we speak.

Our investment activity during the quarter was strong with more than $450 million in acquisitions completed during the period. Due to date we have secured more than $960 million in committed and closed aircrafts investments of which $554 million has been completed today. We are bullish about the pipeline and now we believe we can achieve $1.2 billion in new investments in 2013. With respect to our portfolio aircraft sales are replaying a bigger role for our company this year, although there are two different situations that play here. Firstly, we sold three relatively new A330 freighter aircraft, an affiliate of HNA Group of China in response to an inquiry from them. The sale was responsible for most of the gains on sale realized during the quarter. After completing the sale, freighter aircraft now account for 23% of the net book value of our flight equipment. Secondly, since the beginning of the year, we sold 8 older aircrafts with an average age of 21 years, 6 of these were sold during the second quarter.

In several cases, we sold the airframe and rotated the engines with greed time or remaining life to other aircraft in our fleet to optimize our maintenance spend. These dispositions highlight the asset management strengths of our company. In our view, very few big lessors have the capability to do this work well. Lease market conditions are good. But absent the tick up in global GDP growth, we don’t see rents going much higher over the next year or so. As such to the extent that we see good quality lease placement opportunities, we are securing in that rather than waiting. In each case, we are going through a disciplined process of considering all alternatives when an aircraft comes off lease. That means outright sales and partout plays of one sort or another may come into play more often for mid-age aircraft. In this situation, our team’s asset management’s expertise is extremely valuable.

With regards to lease placements, we have made considerable progress over the past few months. We now have only 5 aircraft to place for 2013, 3 are high-demand 737-800s, of which one is subject to a lease letter of intent. Aside from the 737-800s we have two older aircraft which we expect to sell at approximately breakeven. Thanks to our placement of sales successes. We expect utilization levels to be very high for the balance of the year. We have also been making very good progress on our 2014 placement needs. As things stand presently, we have 34 aircraft to address next year representing approximately 15.5% of the net book value of our flight equipment. I expect we will sell at least 8 of these aircrafts which are older and lower value units. That leaves 26 scheduled lease expirations to take care of next year, many of which we already have were working actively to address. All-in-all, I consider our task for 2014 to be quite manageable, especially considering the 39 aircraft we sold or placed last year.

Our acquisition and asset management efforts have had several important impacts in our portfolio. Firstly, the customer base is continuing to shift towards Asia and away from Europe. The share of our fleet lease to Asia-Pacific Airlines as a percentage of total flight equipment has now increased from 20% to 34% since 2009, and that’s despite the sale of those three Hainan A330s. This reflects the large opportunities at the region. In addition to this geographic shift, there has also been a change in our aircraft mix with modern wide-bodies playing a growing role in our acquisition program. These aircrafts are typically on long-term leases with strong customers and offer attractive ROEs. However, they entail lower cash yields for middle age aircraft. At the same time, we have been exiting from the older types effectively. At this point, we are almost out of 737 Class 6 and have no more A320s with older engines.

Our 757 and 767 fleets make up a much smaller part of our overall fleet, notwithstanding some attractive and opportunistic lease to part out value additions to the portfolio that we completed in the last two years. We continue to critically evaluate aircraft investment opportunities and keep our eyes and ears open to attractively price deals. Our liquidity position at the end of the third quarter – the second quarter was $430 million in unrestricted cash. Together with the cash provided from the Marubeni investment, our newly enlarged $335 million unsecured revolving line of credit and attractive opportunities to leverage some of our new wide-body acquisitions were terrific say to execute our acquisitions program.

Looking ahead, we remain sensitive to what’s going on around us. Over the past few months, there has been a great deal of regional noise in some cases in countries that were considered relatively stable like Brazil. Additional several high growth economies are showing signs of slowing down a bit. Our approach is both to remain vigilant from a defensive standpoint, but also to seek out new opportunities that might arise in these situations.

With regards to portfolio growth, we will continue our disciplined value-oriented approach towards investing. We are emphasizing a thoughtful and targeted approach to the transaction origination focusing on situations to play to our strength. We continue to target economic ROEs of at least 15% and the level of deal flow in that regard remains good. Based on market conditions today, we expect the large continuing role for wide-body aircraft in our portfolio. These aircrafts have played an important part in the evolution of our asset base.

During the past several months, we have gotten a lot more clarity as to the timing and nature of the next generation of wide-body aircraft, and we remain very comfortable with the residual value outlook for our investments. We are also continuing to pursue higher yielding mid-age but current generation aircraft purchase opportunities. While the level of deal flow is higher than last years, it’s still low by historical standards. And as we said for sometime, we are concerned about narrow-body production levels, but we think the returns here are still good given the risk are low, particularly when you consider the short payback to part-out value metrics. We are encouraged by the investment environment we are seeing. We will also continue to look opportunistically at potential sales both with regards to end-of-life plays as well as newer aircraft.

We are very excited about the moves we have taken to improve our capital base. Marubeni’s investment in our company is an exciting step and we are very glad to have them on board. We believe we can deploy the capital they provided. So, it will be EPS accretive by next year. We have also begun discussions on how to work together. And fundamentally, we believe we could be a better company with them. Moreover, we believe the internationalization of our shareholder base is a positive development that reflects nature of our business. We are also very happy about the funding flexibility we have built for ourselves, particularly with our newly enlarged and enhanced unsecured revolving line of credit facility. We intend to continue focusing on maintaining strong credit metrics like a conservative debt-to-equity ratio and on building our unencumbered asset base. We consider the bond market to be very important strategically and continue to monitor conditions closely for opportunities.

While interest rates modestly increased over the past two months from historic low levels, we believe they are still at attractive levels. The biggest impact on us relates to potential refinancing activity though in that regard, I would note that the increase in rates offsets to some degree the potential hedge break exposure for refinancing existing and secured debt. We will continue to monitor opportunities, particularly with respect to our 2006 securitization.

Finally, a few words on dividends, our Board’s approach has been through reevaluate the dividend level on an annual basis and to announce this together with our third quarter results. This is the current plan. I’d also add that our philosophy is to share sustained increases in the company’s earnings base with shareholders, and in general, to achieve the balanced approach of deploying capital for the benefit of our shareholders. I will now turn the call over to Mike.

Mike Inglese - Chief Financial Officer

Thanks Ron. We had a very active first half and continued to successfully execute on our value-oriented investment approach. We invested more than $2.3 billion over the past 2.5 years and our earnings power and cash returns continue to increase. Specifically, our cash ROE increased to 12.2% compared to 11.8% for 2012 and 11.4% in 2011. As Ron noted earlier, our Board declared our 29th consecutive dividend since our IPO in August of 2006, and including this dividend, we have returned over $590 million to shareholders in the form of dividends and stock buyback since going public.

For the quarter, lease rental and finance lease revenues were $162 million, up $7.5 million or 5% year-over-year primarily due to the net impact of aircraft acquisitions. Total revenue for the quarter was $170.4 million, a decrease of $1.8 million or 1% from the previous year, primarily reflecting higher operating lease rental revenue of $4.3 million, higher revenue from finance leases of $3.2 million offset by higher amortization of lease premiums incentives and discounts of $10.8 million.

To note in the second quarter of 2012, we had lease incentive amortization reversals that drove the year-over-year comparison to be an odd-looking phenomenon. Adjusted EBITDA for the second quarter was $183.4 million, up $26.3 million or 17% reflecting higher lease rental revenue, finance lease and other revenues totaling $10.6 million and gains from the sale of flight equipment of $18.5 million. Adjusted net income for the quarter was $46 million, up $20.3 million year-over-year and reflects higher gains on the sale of flight equipment of $18.5 million, lower aircraft impairment charges of $10.1 million, and lower adjusted interest expense of $1.1 million. These improvements were primarily offset by higher depreciation of $5 million, higher tax provision of $2.4 million, and slightly higher SG&A and other expenses of $1.5 million.

Interest expense net for the quarter was $66.7 million, an increase of $2.5 million over the prior year and includes $5.8 million of non-cash charges related to the write-off of deferred hedge loses and financing fees and $3 million in loan termination fees connected with the sale of our three A330 freighters.

SG&A for the quarter was $13.2 million, up $1.7 million versus the prior year, primarily reflecting higher personnel costs. Depreciation expense for the quarter was $72.1 million, up $5 million from the prior year reflecting the growth in our aircraft portfolio. Our second quarter tax provision and effective tax rate was $3.7 million and 10.2% respectively. Our tax rate for the second quarter of 2013 increased from 7.6% from the prior year as a result of the shift of the mix of our business in higher tax jurisdictions. We expect our tax rate to range between 10% or 11% in the third quarter and for full year 2013.

At the end of the second quarter we owned 158 aircrafts with an annualized least rental run rate including finance leases of $659 million of which approximately $321 million is associated with 76 unencumbered aircraft with a net book value of $2.3 billion. Including our unrestricted cash balance at quarter end, total unencumbered assets totaled approximately $2.8 billion.

During the quarter we sold nine aircrafts including the opportunistic sale of three A-330 freighter aircraft for net proceeds of over $230 million and recognized $21.3 million of net gains. Since Aircastle’s formation we have sold the total of 49 aircrafts for gross proceeds of approximately $1.2 billion generating an un-levered internal rate of return of approximately 12.3%. As we continue to manage the portfolio going forward, we’ll maintain our focus on cash flow based economics of each investments and reinvestment decision.

Turning to our capital structure on August 2nd we increased our revolving credit facility from $150 million to $335 million and expanded the bank group from four to seven institutions, adding three international lenders to our already top tier lending group. This increase in our revolver further enhances our strong liquidity profile and will give us added flexibility around the timing of future capital raising activities. At the end of the second quarter our unrestricted cash balance is $430 million and our expanded revolving credit facility was un-drawn.

Operating cash flow was $103 million in the second quarter and $435 million over the past 12 months that’s an 11% increase over the prior 12 months period. Our unencumbered aircraft totaled $2.3 billion or 49% of the net book value of our flight equipment this was up from 44% at the end of 2012 and up from $677 million or 15% of the net book value of flight equipment at year end 2011. As our encumbered assets continued to increase our liquidity and overall solid credit profile also improves. Total borrowings at quarter end were $3.4 billion, down from $3.6 billion at year end and our net debt outstanding was $3 billion which is approximately 62% of the net book value of our flight equipment.

The ratio of unsecured debt to total debt at quarter end was 52%, up from 49% at year end 2012 and up from 15% at the end of 2011. During the first half of 2013 our secured debt went down by $209 million. In June in connection with the sale of aircrafts we sold we repaid this outstanding principal balances on two of our related ECA financings totaling $112 million. In May, we assume bank financings totaling $92 million in connection with the acquisition of four narrow-body aircrafts. In addition, the outstanding principal balance of our two securitization transactions declined by approximately $150 million during the first half of the year. 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 applicable covenants in all debt facilities.

Finally, turning to Q3 2013 guidance, we expect lease rental revenues of $160 million to $162 million and finance leased income of approximately $4 million, maintenance revenues given the modest level of lease transition activity in the quarter are expected to be $2 million to $3 million, amortization of net lease premiums and lease incentives of approximately $10 million to $11 million. SG&A is expected to be between $12 million and $13 million consistent with our current run rate. Depreciation, we expect to be $70 million to $72 million reflecting the asset sales activity and acquisitions in the second quarter. And interest net, we are expecting $57 million to $59 million including approximately $5 million of hedged lots amortization.

Including the Marubeni transaction, we expect to have weighted average diluted shares outstanding of $78.5 million for this quarter. To conclude our business is performing well and we continued to success we execute on our strategy. Going forward on our active portfolio management focus, increased cash flow from operations and conservative balance sheet has the company well positioned to generate healthy returns for our stockholders.

And with that operator, we are happy to open our call to Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will take your first question and that will come from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Thank you, operator, and good morning gentlemen.

Ron Wainshal

Hi, Gary.

Gary Liebowitz - Wells Fargo Securities

Ron, you mentioned the Marubeni cargo market with no apparent catalyst, how are you thinking of investing in that space going forward? Is that all or have prices not come down to the point to sufficiently compensate you for the risk of buying those types of planes?

Ron Wainshal

It’s a good question, Gary. There is a couple of different scenarios in the freight market. One is for the newer, what I’ll call it, kind of next generation airplanes, which I think of basically its 777 freighter. And then there is everything else, the 777 freighters I think, have a terrific future and they will replace basically most of what’s flying around today. As far as anything else, I think the same approach that we take in regards to older narrow-body aircraft, which is kind of a lease to part out value metric is the way to go. We haven’t seen too many deals that make sense for us. We haven’t shut the door on the freight market, but we are looking for high returns there.

Gary Liebowitz - Wells Fargo Securities

Okay. And just a follow up on that, can you give us an update on the two 747 freighters that were at Air Cargo Germany, are they still there, are they still current?

Ron Wainshal

Our lease was with Martinair. And as far as I know, Air Cargo Germany is no longer leasing those aircraft, but the lease of Martinair remains in place and they are performing.

Gary Liebowitz - Wells Fargo Securities

They are performing. And just one housekeeping for Mike. Mike, what were the total sort of non-recurring type expenses that flow through interest expense in the quarter was about $9 million?

Mike Inglese

It is just shy of $9 million Gary, 5.8 related to hedge lots write-offs for the A330 sales and about 3 million of loan breakage fees also related to those assets.

Gary Liebowitz - Wells Fargo Securities

Great, thank you very much.

Mike Inglese

Sure.

Operator

We’ll move next to Isaac Hussani from Barclays.

Isaac Hussani - Barclays

Thanks. Good morning everyone. Ron, I know just you remarked about the increased competition in the mid-age aircraft market, and I also noticed your remark in the press release about how majority of your new investments have been in the new wide-body aircraft. As a result of these competitive changes, should be expect to increase the margin to shift away from the strategy of investing in mid-age aircraft?

Ron Wainshal

Well, I think that’s already happened. It’s, first of all, let me say a couple of general things. First, we still like mid-age aircraft at the right price. Secondly, we fundamentally view ourselves as value investors, so as market shifts totally, but having said that, there are number of situations in the freight – sorry, in the mid-age aircraft where we think we have terrific competitive advantages including just the ability to buy without a financing contingency. So, we still see opportunities there. In more competitive situations, we find ourselves losing more often. That’s it.

Isaac Hussani - Barclays

Yes, that’s helpful. Okay. And then I guess I wanted to ask a question on ROEs, so you are effectively hedged against the rising interest rates on the short-term the impact of rising rates should be minimal, but can you just help us understand the puts and takes on a longer term basis that could result from an increase in interest rates and perhaps give us a sense of what the current 15% ROE target could look like?

Mike Inglese

Yes. Isaac, as you said, our existing portfolio and our existing debt structure is completely hedged. So, we don’t have any real direct exposure to any interest rate changes. As we see the interest rate environment increasing, I think we would expect with some modest lag time that we would see lease rates and asset values increase as well. And so in the context of how that environment changes and how we think about deploying capital will adjust our ROE expectations on a risk adjusted basis accordingly.

Ron Wainshal

Yes, just to add to that, Isaac, as we make incremental investments, we look at the incremental ROE effect. And so if interest rates are higher we are going to price that in, and if we can make it work, we want to put the money to work.

Isaac Hussani – Barclays

Okay, but you are not ready to give some sense as to what the 15 could look like in a higher interest rate environment just yet?

Ron Wainshal

Yes.

Isaac Hussani – Barclays

Okay, thank you.

Operator

We’ll move next Richa Talwar from Deutsche Bank.

Richa Talwar - Deutsche Bank

Hello gentlemen. My first question is just on – we heard from many of us was you included that there is solid buying opportunities in the market rate right now, but I want to hear more about aircraft sales, you recognized a solid gain this quarter. And I know I believe Ron you said you expect to sell two aircrafts for breakeven for the remainder of the year, but I was wondering if there was some upside risk to seeing some aircraft sale gain for the rest of the year maybe looking out?

Ron Wainshal

Well, I will say this, when I mentioned there is more competition sometimes we would like to provide our competitors with product. I can’t be more specific in that, but the amount of capital in our business is much higher than it was a year or two years ago. It’s not evenly distributed as I said during my prepared remarks, most of the money has been focused on new narrow bodies and for that reason we haven’t made any sense of the economics in that space. To the extent that there is more and more competition in places where we own assets, we will look at monetizing them, using the following as a guidepost. If we can take money that’s currently deployed and deploy it better through a sale, then we will do that.

Richa Talwar - Deutsche Bank

Okay, and then my second question is just on your 747 fleet. There was some news recently that Boeing was buying up all those 747 technology aircrafts from airlines to incentivize them basically purchased newer generation 747-8s. And I was wondering if you could just are they offering similar deals to (indiscernible) or if you could just comment on whether that phenomenon is having any impact on the value of the older generation aircraft and then just share maybe your general thoughts and the value of the 747s in your fleet? Thanks.

Ron Wainshal

Right, it’s an interesting phenomenon what you point out. In a fact what Boeing seems to be doing is trading in older aircrafts to facilitate the sale of new ones. We haven’t shown a tremendous amount of interest for the 747-8. As I said earlier I am much more bullish about 777s as freighters. And so I can’t say we have had very much in the way of discussions of trade-ins. The big question from a market perspective is what happens to those trade-ins. Do they comeback and reenter service and that would be the bad scenario or do they just sit or get parted out and that would be the good scenario, don’t know yet. I think the issue with the 747 values is one of fundamentally of how fast will demand pick up hopefully will relative to supply. On the supply side, we have seen two kinds of different forces as you pointed out there is the new production aircraft and there is the retirement of the old one. On the demand side, I think the key thing to look for is trade flows into and out of Europe, both from Europe to North America, but even more so Europe and Asia.

Richa Talwar - Deutsche Bank

Okay and then just one final one. From a debt to equity perspective, what are your targets, I think 1.9 is where you currently stay in that debt to equity, what are you willing to push back up to?

Mike Inglese

Depending upon what we see in the investment environment I think we have communicated consistently over time that we would be comfortable being at a slightly higher debt to equity ratio I think sort of two and a half times would probably be sort of the outside in context of how we see the world today. So, we have a fair bit of room in the construct of where we are sitting with debt today the new equity we have just raised and looking at opportunities to deploy additional capital.

Richa Talwar - Deutsche Bank

Okay, thanks.

Operator

Operator Instructions. We will move next to John Godyn from Morgan Stanley.

Unidentified Analyst

Hi. This is (indiscernible) on behalf of John. I know that you are going well dealing in size of manufacturers for some time but any appetite to place more orders directly with manufacturers and how do you compare that to opportunities we are seeing in the secondary market?

Ron Wainshal

We are always in discussion with our friends at Boeing and Airbus and for that matter also at the Embraer. I think the way we look at wide-bodies is perhaps a little bit more risk averse than some of our peers. We are much more focused on the opportunity cost involved with first of all the pre-delivery payments. And secondly, when you order a new aircraft you have a risk on who the less you will be, what the rental profile will be, and also what the financing environment will be at the time you take delivery. Having said that if we can achieve a sufficient premium to what we can achieve today where a lot of those variables are known and we will look at it. It is all kind of a price question and I don’t have anything to tell you, but we have discussions all the time with manufacturers. I think we are just a tougher sell for them than most of our peers.

Unidentified Analyst

Alright, great. And one other question I think you mentioned that you guys are bullish on the cargo market in longer term and with the sale of several freighter aircraft this quarter, how do you see the mix between passenger to cargo aircraft changing over time?

Ron Wainshal

Well, I think there will be a place in our portfolio for freighter aircraft. We don’t have a target. I don’t see anything in the horizon that will suggest much of a shift from where it stands today. If anything maybe there is a little bit of downward pressure as we execute on the acquisitions that we have which are at this point entirely non-freighter. But we don’t rule that out as just we don’t have a specific target. But as I said before, if we do buy on a new aircraft side it would be probably oriented towards 777s because we take those as the back bone of the freighter fleet in the future. And secondly if there is opportunities they will be more on a priced on a lease to pod out type of a basis.

Unidentified Analyst

Great, thank you.

Ron Wainshal

Sure

Operator

Scott Valentin from FBR Capital, your line is open.

Scott Valentin - FBR Capital

Good morning. Thanks for taking my question. Just with regard to our aircraft type it seems like more of the industry is getting interested in wide-body just wanted if you can comment on the competition you are seeing for those aircrafts if it’s increased?

Ron Wainshal

You are right to point it out and it’s not a brand new phenomenon, I think we saw the wide-body competition level really increased early last year. And what drove it was I would say buyer fatigue at the returns available on narrow-bodies. So, it’s not an entirely new phenomenon. And as we do else – in every aspect of our business we are always looking at deals where we have an angle, where we have the competitive advantage through a relationship or through a financing source or just by being able to move quickly.

It is just an example that in the second quarter we purchase an A-330 from Guardia brand new one and that situation arose when the original bitter was unable to follow through because of our liquidity and because of our relationship with this sale and we are able to step in get the deal done in just a few weeks. So, it’s a business model on our side that’s not conditioned on investing billions of dollars every year. If we find a handful of wide-bodies that’s a big impact in terms of the investment targets we have talked about.

Scott Valentin - FBR Capital

Okay, thanks. And then just on Marubeni I think the investment they made you guys from a leverage perspective or liquidity perspective did really need the capital, just wondering what – was it more strategic opportunity than really a financial opportunity?

Ron Wainshal

I think it’s the combination of things. Firstly I think of them as a strategic partner and it was in the financial transaction ling going after the market if we are in a race. There is something longer term that we are looking for. Secondly, the deal was sold at a large premium to our then trading price and the way we were looking at it we are pursuing the acquisition pipeline growing. And a lot of things just came together in that situation, so we felt we can deploy the capital accretively, we felt that making our shareholder base stronger with something like Marubeni good long-term partner was a good strategic thing to do. And we were able to generate a decent bump in terms of the stock price without giving away effective control.

Scott Valentin - FBR Capital

Okay thanks very much.

Ron Wainshal

Yup.

Operator

Moving on to Moshe Orenbuch from Credit Suisse, please go ahead.

Moshe Orenbuch - Credit Suisse

Great, thanks. Just kind of expanding on that what are the – can you kind of elaborate a little bit on what types of business relationships you might expect to have with Marubeni and over what timeframe do you expect to get of your debt-to-equity ratio kind of back to where you would consider normal?

Ron Wainshal

I will take the first one. I think I’ll divide the opportunities of Marubeni in terms of low hanging fruits in long-term prospects. What low hanging fruits encompass of few different situations, for example aircrafts who has never done leasing business with the Japanese airlines. I think our ability is to do that’s probably much better now that we have Marubeni as a major shareholder. We probably can stand a better chance of raising money from certain Japanese financial institutions now that we have Marubeni as a shareholder. Now one area where we have had some success over time is buying mid-age aircrafts from Japanese investors as those aircrafts come off lease. I think we can do much better accessing those opportunities by having Marubeni on the ground and plugged into that business community that we can do on our own, this is increase rate, for examples. Marubeni has a whole host of other business relationships, for example, their risk sharing partner with Rolls-Royce on the Trent engine. I think we can leverage these things in a lot of different ways. Those could be more longer term oriented things, but there is a terrific amount of synergies I see between the two of us. Some of which will be more, more of the long-term prospects as I said.

Moshe Orenbuch - Credit Suisse

Got you.

Ron Wainshal

And as far as the debt to equity ratio, that’s a function mostly of the pipelines build and we have increased the target this year from what we will achieve last year $850 million give or take to $1.2 billion. That’s not a cap obviously. And I see the pipeline building very nicely, not just for all the way through December, but beyond that. So, I think some of this capital gets deployed in the ROE, as far as the debt to equity ratio builds over the course of the early part of next year as well.

Moshe Orenbuch - Credit Suisse

Okay, thanks very much.

Operator

Up next is Glenn Engel from Bank of America.

Glenn Engel - Bank of America

Good morning. Talked about of the remaining CapEx this year should be evenly split among third quarter and fourth quarter and would you expect 2014 to be similar to 2013 in CapEx?

Ron Wainshal

It’s going to be back-ended Glenn. It’s a bit really to say anything about the full year of 2014, but we are seeing the momentum of ‘13 going into the first quarter of next year.

Glenn Engel - Bank of America

And so the $960 million closed or committed, does that all show up this CapEx in 2013 or does some trickle into 2014?

Ron Wainshal

No, that’s all this year.

Glenn Engel – Bank of America

The maintenance and other revenue was $13.5 million, I think you were looking for $8 million to $10 million at the start of the quarter, why didn’t that being higher?

Mike Inglese

We had an additional transition during the quarter and estimating maintenance revenue is always a bit of veggie for Glenn. So, we try to be conservative when we tell people what we expect.

Glenn Engel - Bank of America

And the maintenance and other costs, should that come down as the maintenance revenues come down as well in the second half?

Ron Wainshal

Yes, I would expect with the fewer lease transitions in the second half compared to what we saw in the first half that we would see in maintenance and other cost trend down as well.

Glenn Engel - Bank of America

Thank you.

Mike Inglese

Sure.

Operator

Moving on to Bill Mastoris from R.W. Baird.

Bill Mastoris - R.W. Baird

Thank you. Ron with now a broader access to the capital markets than you have ever had in your in ever had in your company’s history and better liquidity than you have ever had and growing acquisition pipeline. I am just wondering now would now not be also an opportune time maybe to take a portion of that liquidity along with what is a very attractive high yield market and maybe refinance some of that high cost debt?

Ron Wainshal

We have thought about that. And it’s something we are looking at. I can’t tell you anything more than that right now, but it’s something that we are considering.

Bill Mastoris - R.W. Baird

Okay. And just following up on an earlier question just in terms of expanding maybe that debt to equity ratio up to 2.5, I mean will we be looking at a gradual increase or might we be looking at 2.5 and I recognize that it is a function of investment opportunities out there by sometime next year the end of 2015? Is this going to be something that’s gradual or is something where it’s really going to accelerate very quickly?

Mike Inglese

It’s going to be hard to tell you when it’s going to be there or if it ever gets to 2.5, it’s going to depend upon what we buy and how we think the most efficient rate of finance it is. So, to the extent, pipeline opportunities materialize sooner. We would expect to see leverage drift into the more normal range in the sooner fashion, but that really will depend upon what we see in the investment environment.

Bill Mastoris - R.W. Baird

Okay, thank you.

Ron Wainshal

Yes.

Operator

And at this time, we have no further questions in the queue. I would like to turn the conference back over to Mr. Constantinople for any concluding remarks.

Frank Constantinople - Head, Investor Relations

Okay, 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

And that does conclude today’s teleconference. We thank you all for your participation.

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