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Aircastle Limited (NYSE:AYR)

Q4 2013 Earnings Conference Call

February 25, 2014 10:00 AM ET

Executives

Frank Constantinople – SVP, IR

Ron Wainshal – CEO

Michael Inglese – Chief Commercial Officer

Analysts

Gary Liebowitz – Wells Fargo Securities

Richa Talwar – Deutsche Bank

Scott Valentin – FBR Capital Markets

Helane Becker – Cowen & Company

Andrew Light – Citigroup

Justine Fisher- Goldman Sachs

Arren Cyganovich – Evercore Partners

Operator

Good day and welcome to the Aircastle Limited Fourth Quarter 2013 Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Frank Constantinople, Senior Vice President, Investor Relations. Please go ahead.

Frank Constantinople

Thank you, Devona. Good morning, everyone and welcome to Aircastle Limited’s fourth 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 remind everyone that this call is being recorded and a replay will be available through our website at www.aircastle.com along with our 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

Thanks, Frank. Hello and welcome to our fourth quarter and full year 2013 earnings call.

During this call I’ll discuss the current business environment, Aircastle’s performance during the fourth quarter as well as some recent developments and our accomplishments during 2013 along with our plans for the future. Our CFO, Mike Inglese, will then address our financial results and then we’ll open up the call to questions.

2013 was a successful year for Aircastle. We generated strong operating results, took important steps to manage our cargo exposure and reposition and enhance the portfolio, the capital structure and the company. We are pleased with the progress we made during the year and in achieving total shareholder returns of nearly 60% for 2013. We were once again successful in sourcing new investments. We closed on nearly $1.5 billion of aircraft investments during the year while maintaining our disciplined value oriented investment approach and focusing on situations that play to our strengths.

Regarding 2014 we are off to a very good start with $200 million from the first quarter investments plus a large 777 deal we announced this morning with LATAM which I will discuss shortly.

Our 2013 operating results and portfolio performance were very good as utilization levels and rental yields remain high. At the same time aircraft sales played a big role in transforming and strengthening the portfolio both with respect to exiting older aircraft and managing portfolio concentrations.

Over the course of the year we further strengthen our capital structure providing the company with increased flexibility to act on our investment strategy. For example, we issued $400 million of unsecured notes in early December and enlarged our unsecured revolving line of credit to $335 million while expanding the bank group. We are also taking advantage of attractive bank market conditions having completed more than $300 million in attractively priced secured financing during the first quarter.

During 2013, we also enhanced the company’s competitiveness and capitalized on value of our platform. Marubeni’s $200 million equity investment in our company improved our shareholders base and I believe will make us a better company. The joint venture we just put into effect with Ontario Teachers’ Pension Plan also a major shareholder complements our growth strategy and enables us to pursue larger transactions and match portfolio purchases.

The company continues to generate strong cash flow. Cash earnings increased 11.3% during the year and we believe our new investments will contribute to the company’s earnings power. To this end I am pleased to announced our Board declared a $0.20 per share dividend for the quarter, our 31st consecutive quarterly dividend. Our policy continues to be sharing growth and the company’s sustainable earnings for shareholders.

Turning to business environment, according to International Monetary Fund global GDP growth was 2.9% in 2013 and is expected to improve to 3.7% this year and then rise to 3.9% in 2015. This improved forecast growth is largely on account of recovery in advanced economies. Many emerging markets and developing countries should experience stronger external demand from advanced economies but domestic weakness and currency volatility are a concern.

Demand for air travel remains good. For the International Air Transport Association revenue passenger kilometers, a good measure of air travel demand rose 5.3% in 2013. The IATA statistics show strength around the world including in developed markets such as Europe and North America which soft pick in demand growth rates later in 2013. The average load factor for 2013 was more than 79%, which is exceptionally high and indicates the aircraft are flying full. IATA expects these favorable economic conditions to drive airline earnings higher in 2014 although profit margins are still low in absolute terms. To put this in perspective, the airline industry’s profit margin is projected to be less than 3% of revenues this year.

Air cargo market on the other hand remains weak. We have seen modest improvement in demand during the past year, but oversupply remains the biggest issue and we think it will take a while to work through supply of available aircraft.

Turning to demand for leased aircrafts, rentals for passenger airplanes were generally a little stronger than they were a year ago. This trend ranges across current generation aircraft types. The biggest pick up has probably been in Airbus A-320 family aircraft where the gap with Boeing new generation 737s has been narrowing. A key development here is that the overhang of available new aircraft delivery positions being offered by lessors appears to have shrunk considerably. More generally, there is a used passenger aircraft availability and this is a very good thing when it comes to commanding better lease terms.

Moving to the OEMs, it’s an interesting time. Given the number of new models coming online or having been recently announced investing is a little bit more complicated now. For example, in our view investor should be pricing in faster economic depreciation for the end of the line current technology aircraft. In addition, as I will discuss later, we believe getting a better picture of new aircraft availability can create new deal opportunities.

We are taking a close look at the new models and expect that they will eventually work their way into our fleet. However there is a long wait ay for new orders and for those few aircrafts that have become available via airline sale and leasebacks there’s been fierce competition among lessors. So as always we’ll be patient and move for the right opportunities.

Competition for aircraft investments heated up further, putting upward pressure on aircraft prices. Very low interest rates and strong capital markets conditions are carrying over into this market. We are looking to capitalize on higher aircraft prices by increasing our asset sales efforts and remaining disciplined buyers.

Turning to our performance in the fourth quarter of 2013 we recorded net income of $48 million or $0.60 per share. Adjusted net income was nearly $55 million or $0.80 per share. Operating and finance lease rental revenue increased 7% in the fourth quarter and 5% for full year thanks primarily to the new investments we’ve added.

Cash earnings, defined as cash flow from operations plus collection on finance leases plus gains from sales less depreciation increased 11.3% during the year and cash ROE during 2013 was 12.1%. Operationally results were excellent with 99.5% utilization in the fourth quarter almost 99% for the full year. Rental yields were 13.6% for the fourth quarter and for the full year.

Finally our cash receivable balances are in excellent shape, as of this morning we have less than $300,000 in amounts due more than 30 days. That’s an exceptional low amount particularly given that we are in this slow winter season when receivables tend to run a little higher.

Turning to new investments as I mentioned earlier 2013 was a big year for Aircastle. We purchased 25 aircrafts during the year including eight aircraft during the fourth quarter for $472 million. We are particularly successful in sourcing modern wide-body aircraft and long term leases with good operators.

We also continue to find higher yielding mid-life investments including 12 current generation narrow bodies. We are off to a good start in 2014 with $200 million in acquisitions that are completed or expected to close during the first quarter and the big and recent development for us is the large sale with South American’s largest airline LATAM.

This morning we announced a $900 million purchase and lease back deal with LATAM for eight 777 300 ER aircraft. This is the largest airline sourced deal we have done and it’s one we think is priced attractively. The LATAM deal has two parts, the first entails four 2012 modular aircraft. We expect these will close early in the second quarter. Second part involves four 777’s built in 2008. This part of the deal will close once LATAM sorts through the repayment of its existing financing, so the time table for this is difficult to project at this stage.

All aircraft will be coming off lease beginning in late 2017 and through 2019. The time frame we think will be very attractive for re-leasing given the expected lack of availability of new generation aircraft in that time frame. This transaction plays to our strengths as an expert asset manager with a strong lease placement team and a flexible capital structure.

Aircraft sales and part out dispositions played an important role in 2013 and help reshape our portfolio. We sold 22 aircraft for nearly $550 million during 2013. Three of these were relatively new A330 freighters that we sold to our lessee; two others were new A330’s leased to Garuda, a large and important customer for Aircastle. These two aircrafts are transferred to our partnership with Ontario teachers and we will continue to manage these assets.

The other 17 aircraft we sold were relatively old having weighted average age of 18 years and included many end of life dispositions. In total aircraft sales generated $37 million of gains during 2013. This strong result indicates our ability to capture value in the market and in managing the disposition of the older aircraft.

They also demonstrate the important role asset sales have had in terms of portfolio management. At the end of Q4 freighter aircraft account for 19% of the netbook value of our flight equipment down from 31% at the end of 2011. Our joint ventures with Ontario Teachers provides flexibility and enables us to continue doing business in situations we’ve already have concentrations. Having said that we remain focused on originating investments for Aircastle’s accounts.

Turning to lease placements, during 2013 we continued to successfully address aircraft coming off lease, it was one of our biggest years in that respect. We renewed, delivered on lease or sold 39 aircraft during 2013. This momentum has carried over into this year; we are having good success in addressing our placement requirements thanks to good market condition and our proactive approach.

Our biggest challenge as we’ve discussed previously is an addressing six older 747 400 converted freighters including four scheduled to come off lease this year and two returned us late in last year. In that regards I am pleased to say we signed a three aircraft deal with Air Atlanta of Icelandic extending leases of two aircraft and placing one of the aircraft that was returned us in May 2013. That leaves us with three 747 400 freighters to take care of this year. I expect we’ll be selling one and possibly two of these aircraft as part of our part out program which we expect to be roughly breakeven overall.

We’ve made a lot of progress with our freighters. At this point we have 16 remaining 2014 expirations to address representing a little over 5% of total net book value. 10 of these aircraft are likely end of life sales, representing about 2% of net book value, and we are seeing generally strong demand for these aircraft in the part-out market.

These aircraft include 757s, 737 classics and a few late 1990 vintage 737-700s. We’ve only got six aircraft left to place this year mostly in the second half, four of them passengers two of them freighter and this is a very manageable task for us. Capital markets conditions have been very strong and we took advantage of this throughout the year. Among our recent successes were $400 million five year unsecured note issuance in early December.

We believe bond holders appreciate the growth in our unencumbered asset-base, including unrestricted cash that grew to $3.3 billion at year end. During 2013 we also enlarged our unsecured revolver to $335 million. The secured financing markets has also been strong and we completed more than $300 million in attractively price secured financing from the bank market in the first quarter.

Also during the first quarter in February we repaid our first securitization. Looking ahead we are off to a good start in 2014 as we progress through the year we intend to remain a disciplined investor and continue to target economic returns on equity of at least 15%. With $200 million in Q1 under way and $500 million slated for Q2 there is definitely upside possible to our $1 billion investment target for the year which I had touched on previously early on the call. However we are finding that the margins are going to be competitive particularly for new aircraft.

We continue pursuing opportunities in our sweet spot including mid-life current generation aircraft and asset sales should once again play an important role into this year as we are seeking to benefit from stronger investment demand for aircraft.

Off-course as I mentioned previously we are devoting significant attention to affectively managing our exits from our end-of-life aircraft. Financial market conditions are very strong and we intent to access capital additionally from a wide variety of available sources. We are looking very closely at ways for reducing our capital cost including refinancing.

As we thank to the opportunities provided in the market we’ll certainly seek to maintain the flexibility provided by our capital structure so this is an important competitive events that we look at buy aircraft. Complementing our growth strategy we intend to continue to exploring ways to utilize our partnership with Ontario teachers. In addition one of our priorities for the year is continue to working on developing our strategic partnership with Marubeni.

In this regard we are working on leveraging their airline and financial market relationships and their vast global network. Finally we remained focused on growing cash returns and adjusted earnings as well as returning capital in form or dividends.

I’ll now hand it over to Mike.

Michael Inglese

Thanks Ron. We had a very active fourth quarter on the acquisition, sales and financing fronts. We required eight aircraft for $472 million sold seven aircraft for $264 of proceeds and recorded gains on sale of $11.6 million. We also raised $400 million issuing senior note for the five year tender at 4.625 our lowest coupon yet.

Turning to our results for the fourth quarter of 2013 lease rental and finance lease revenue were a $173.3 million, up $11.3 million or 7% year-over-year due primarily to the net impact to our aircraft acquisitions.

Total revenues for the quarter were $192 million, an increase of $15.4 million or 9% from prior year reflecting a higher lease revenue of $11.3 million, higher maintenance revenue of $9.2 million offset by a decline in other revenue of $4.6 million. Accounting from much of this decline was that during the fourth quarter 2012 we earned interest income from a secured bank loan which is repaid in early 2013.

Adjusted EBITDA for the fourth quarter was $196 million, up $24 million or 14% and reflects higher operating finance lease rental revenue along with higher maintenance and other revenues totaling $15.8 million. An $8.9 million year-over-year increase in gains from the sale of aircraft also contributed to the improvement.

During the quarter we recorded $5 million of transactional impairment charges related to the part-out of two 767 300 ERs, both over 22 years old that came off lease during the quarter. These charges were more than offset by end of lease maintenance revenue related to these two aircraft totaling $7.1 million.

Adjusted net income for the quarter was $54.9 million up 51% or $18.5 million year-over-year and reflects higher revenues of $15.4 million, higher gains on the sale of aircraft of $8.9 million and lower aircraft impairment charges of $2.7 million. Higher adjusted interest expense of $5.2 million higher depreciation of $2.6 million and higher other expenses net of $1.2 million partially offset those improvements.

Interest expense net for the quarter was $60.1 million, an increase of $4.5 million over the prior year. This increase included $2.6 million related to higher average debt balance and $3 million increase related to higher funding cost on an overall basis.

Weighted average debt balance for the fourth quarter was $3.4 billion versus $3.2 billion for the previous year. SG&A for the fourth quarter was $14.1 million approximately $2.4 million higher compared to the prior year primarily due to an increase in number of employees and higher non-cash stock compensation expense versus 2012.

Depreciation expense for the quarter was $72.5 million, up 2.6 million from the prior year reflecting growth in our aircraft portfolio. Our fourth quarter tax provision and effective tax rate was $2.5 million or 4.9% respectively. For the full year our 2013 effective tax rate was approximately 8.2% when you exclude on a tax adjusted basis the fleet impairment charges associated with our third quarter review.

For the full year 2013 cash earnings were $186 million, up 11.3% compared to $167 million in 2012. We use cash earning as a metric because of the best way to understand our business to follow the cash. We defined cash earnings as net cash from operations plus collections on finance leases plus or minus gains in sale from flight equipment minus depreciation. This simple metric starts with cash flow from operations which filters out the non-cash elements of maintenance and lease incentive terminated hedge amortization, stock compensation and other non-cash charges.

Our cash ROE the ratio of cash earnings to average shareholders’ equity increased to 12.1% in 2013, up from 11.8% in 2012. Our aircraft portfolio at year-end consisted of 162 aircraft with an annualized lease rental run-rate including finance leases of approximately $701 million of which $349 million is associated with our 80 unencumbered aircrafts which had a net book value at year-end of $2.7 billion.

During the fourth quarter we completed the sale of seven aircraft and recorded a net gain of $11.6 million. For the full year we sold about 22 aircraft for roughly $550 million in sales proceeds and a net gain of $37.2 million. Included in the fourth quarter and full-year 2013 results were two A-330 aircrafts that we sold to our joint venture with Ontario Teachers in late December for approximately $215 million.

Since the Aircastle’s formation we’ve sold the total of 60 aircrafts for gross proceeds approximating $1.5 billion which generated an unlevered IRR of 11.2% excluding taxes, financing and hedging costs. We continue to manage the portfolio with a focus on to cash flow based economics of each investment and reinvestment decision while we expect to grow the portfolio as Ron mentioned our growth will not be linear and we expect to take advantage of profitable asset sales where appropriate.

2013 was another successful year for us in the capital markets as we raised almost $1 billion from diverse capital sources. In addition to the $400 million of senior notes in the fourth quarter we raised $177 million in bank and ECA debt financing. We increased our revolving unsecured credit facility to $335 million from $150 million and we raised $209 million of common equity from Marubeni Investment.

Turning to our liquidity and capital structure at year-end we had unrestricted cash of $655 million, restricted cash of $123 million and our $335 million revolving facility was undrawn. Total borrowings at year-end were $3.7 billion and our net debt outstand was approximately $3.1 billion which represents 59% of the net book value of our flight equipment.

In addition our unencumbered aircraft totaled $2.7 billion or 51% of the net book value at our flight equipment up from 15% at the end of 2011. We continue to transform the capital structure towards the balance mix of unsecured and secured debt and at year-end the ratio of unsecured debt to total debt was 58% up from 15% at the end of 2011.

Our net debt-to-equity ratio was a conservative 1.9 times at year-end. Before turning to our 2014 guidance let me spend a minute discussing the impact of certain lease and maintenance payments that we expect over the course of this year. During 2014 we have six mid-aged 737-800 coming back off long-term leases.

Under the terms of the expiring leases Aircastle will make end of lease maintenance payments reflecting the much better maintenance condition of the aircraft on the redelivery date compared to the condition of the aircraft when it was delivered. In particular all the engines on these aircraft will be fresh for major engine shop visits.

Consistent with our original expectations when we purchased the aircraft and placed them on existing leases we anticipate reimbursing approximately $30 million across these aircrafts during 2014. These end-of-lease maintenance payments will be accounted for as the opposite of maintenance revenue or contract maintenance revenue at each lease expiry during this calendar year.

Based on the redelivery schedule we expect about two-third of this amount to be reported in the first half of 2014 with the balance occurring during the second half of the year. This type of transaction and accounting treatment is a bit unusual for us and is based on the particular circumstances related to our original underwriting economics and expected cash flow timing of lease rental and maintenance events i.e. we paid a very low purchase price upfront and deferred major maintenance outlays for six plus years.

The 737 are high quality in-demand aircraft and the first five have been placed on long-term leases with a good customer in Turkey and the last one is being marketed for lease or sale. As a contrast during 2013 our end-of-lease maintenance payments aggregated $1.4 million for the full year. Similarly as we look at our existing lease portfolio expiries over the next few years we do not expect any significant payments like this.

Finally turning to selected first quarter and first half guidance elements to help provide a bit more clarity into the year ahead. We will provide selected elements for the first half and first quarter as well as our usual guidance. These elements represent our current estimates of how the first quarter and first half will look based on what we have in the acquisition pipeline. However because of inter quarter results could differ from a timing perspective we are providing guidance for the first half of the year as well.

So turning to our expectations for the first half of 2014 we expect lease rental revenues to range between $347 million and $352 million. We expect finance lease revenue to be approximately $8 million we expect maintenance revenue excluding our expectations for this year’s part out activities to approximate $11 million to $14 million.

We expect the contra maintenance revenue associated with these 737 returns to be between negative $18 million to negative $21 million in the first half. Amortization of net lease discounts and lease incentive of $15 million to $17 million during first half. SG&A at $27 million to $29 million, depreciation $147 million to $151 million and interest net $127 million to $129 million. And we expect our effective tax rate to range between 9% and 11% for the first half of the year.

In conclusion during 2013 we continue to successfully execute our business strategy and further position the company to generate strong cash flow and operating results in the coming years. We’ve returned capital to shareholders in the form of higher dividends and we entered 2014 well positioned with significant liquidity and proven access to capital to pursue our value driven investment strategy.

And with that operator we’re happy to open up the call for questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll go to Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Thank you, operator. Good morning gentlemen.

Ron Wainshal

Hey Gary.

Gary Liebowitz – Wells Fargo Securities

Ron with the LATAM deal you will be going through I think about dozen 777s in your portfolio what has your opinion or the investment committee’s opinion of that particular aircraft been a lot more bullish in the last six months or so and if so why is that?

Ron Wainshal

We’ve been bullish on the 777 for really long time Gary. It’s a great aircraft and it’s one that we’ve been pursuing for an awfully long time. One of the things that changed this past year was that debt financing that was available for banks improved our competitiveness. This is a unique situation though and as I mentioned during the call the lease terms here are a little bit under shorter side. The first back to aircraft will be five years in lease term and the other ones will be coming out in ‘17 and ‘18.

Those are aircrafts coming at a very opportune time in our view, the 777 ex the replacement from Boeing will not be out until at least the beginning of the next decade. And there will be very few A350 stretch aircraft. So I think we’ll have a great time re-marketing them and we’ll be in to them for a good price. So I think it’s just a success it’s a bit of capital market help on our side too.

Gary Liebowitz – Wells Fargo Securities

So you referenced the financing on the $300 million that you did in the first quarter on the secured side. Can you talk about the terms of the secured financing how those have improved and with respect to either interest rate or tenure or LTVs?

Michael Inglese

Yeah Gary I mean in terms of access to the secured debt market we did three separate transactions in the first quarter. Two of them were levering two 777s on lease to Thai. Those leases have floating rate leases in them and then the debt we’ve put on those are sort of relatively conservative leverage levels also have floating interest payments.

So in today’s environment they are very low interest rates enterprise. The third is a fixed rate amount associated with another aircraft that we purchased during 2013. And the return in the bank market has brought in spreads and has opened up what you can do in the construct of not only forward defense right from day one but also the size of the balloon at the end of the lease term and the loan.

Gary Liebowitz – Wells Fargo Securities

Okay. Thanks, Mike. Just one more, there was a $10 million cash outflow for a pre-delivery payment, what does that relate to?

Michael Inglese

No, those were just purchase deposits Gary on aircraft that we expect to close in the first quarter of this year that are on the balance sheet at year-end.

Gary Liebowitz – Wells Fargo Securities

Okay, perfect. Thank you.

Ron Wainshal

Thank you.

Operator

And we will go next to Richa Talwar with Deutsche Bank.

Richa Talwar – Deutsche Bank

Hey everyone. Thanks for taking my questions, just a couple here. So first I am sorry if I missed it but can you give us an update on the monitoring list of aircraft’s subject impairment charges? I believe on the last call you said it was roughly 4% of your fleet’s net book value, so I wanted to see what that is now?

Michael Inglese

It hasn’t changed Richa.

Richa Talwar – Deutsche Bank

Okay. But just qualitatively as you think about the trend that you are seeing now versus a couple of months ago, do you feel better, worse or the same about impairment risk, I guess I am that implies to [same rate]?

Michael Inglese

We feel about same about it.

Richa Talwar – Deutsche Bank

Okay. And then just if you could, Ron talk a little bit more about cargo trends. We have mostly been seeing negative trends, a sluggish trend I should say in the cargo market but we have seen some bright spots recently for instance Lufthansa’s cargo subsidiary recently disclosed that they are going to [confer] options five additional 777s and increase cargo capacity by 4% to 5% and then Korean Air which is a really largo cargo player recently said they see an uptick in cargo trends as well.

So given your experience in this space do you think you will be willing to get back into investing if you see the right prices or do you think the structural challenges are sort of over shadowing those bright spots? Thanks.

Ron Wainshal

Well let me first address the supply and demand picture. There has been a pick-up in demand; it was up very, very modestly for the full year of 2013. The problem was supply increased even faster. So I think there is an overhang there that’s going to persist for a while.

And as far as investments are concerned same as what we discussed in the previous earnings call. I sort of view the market as having two parts to it. First is the 777 market and it’s a terrific aircraft type and you can see people like Lufthansa getting into those. Problem with those from our perspective is that they are very expensive aircraft. They are probably $10 million to $15 million more expensive than 777-300 ERs although they are probably $10 million to $15 million cheaper to build. And so that’s a dynamic that will reverse itself overtime and we haven’t been able to make the math work on those.

As far as the other aircraft types because of the glut of supply the way we price things doesn’t lead to many opportunities to actually get deals done. So bottom line is I don’t see the freighter investments increasing very much.

Richa Talwar – Deutsche Bank

Okay. Got it. And then if I could just squeeze in one more. Did you repurchase any shares in the December quarter and if you could give us an update on the share repurchase authorization you have left in that program? Thanks.

Michael Inglese

Yeah we did not repurchase any shares during the fourth quarter and we still have $30 million authorization left in the existing program.

Richa Talwar – Deutsche Bank

Okay. Perfect. Thank you.

Michael Inglese

Sure.

Operator

And we will go next to Scott Valentin with FBR Capital.

Scott Valentin – FBR Capital Markets

Good morning gentleman. Thanks for taking my question. On the LATAM transaction, was that a negotiated transaction or was that a bid situation?

Ron Wainshal

It’s a little bit of both, Scott. This was the transaction that began as a deal for the older aircraft, the 2008 aircraft. There was a bid that was – tend to a small number of lessors as we understand it. That transaction evolved overtime given some issues with the existing financing. And in the end what we were able to do is come up with a complete seat answer for LATAM. And that was a desirable output for them because there kind of plans for the future and introduce smaller A-350s to replace these as the LAN and TAM companies merge. So it’s a bit of both.

Scott Valentin – FBR Capital Markets

Okay. And then I think you made a passing remark about the emerging markets and some volatility there. Have you guys taken – have you seen any need for any action yet on your part with regard to lessors in those markets or anticipate any type of actions?

Ron Wainshal

No. I mean we are in a very short-term Scott, our receivables position is in excellent shape as I mentioned but we are worried about it. And it affects different airlines in different ways. And just to touch on that there is obviously different dynamics going on as you look around the world. Some of these dynamics will affect the domestically oriented or regionally oriented carriers more.

So if you are an airline and you are in say Turkey or Brazil or in Indonesia and your revenue base is in local currency, you are going to be feeling the rise of the dollar relatively speaking because so many of the expenses like fuel and aircraft are denominated in dollars. Other airlines that are particularly ones that are more internationally oriented have dollar-euro revenue don’t feel it quite as badly. For us we are taking a little bit extra closer look and monitoring those more vulnerable airlines.

The other side of this story though is that it also creates deal opportunities. Since aircraft trade in dollars an airline that might be owning aircraft in a weak currency environment might find it more desirable to sell aircraft right now.

Scott Valentin – FBR Capital Markets

Okay. And then one final question, actually there was a pretty recently large M&A transaction and there has been talk that might support consolidation among lessors. Just wondering one, if you believe that I think there is an interest now to consolidate the industry. And two do you think you guys can be participate maybe looking at other lessors portfolios?

Ron Wainshal

I think you are obviously referring to the AerCap-ILFC transaction, it’s an interesting deal and I think the key there is I think it will create one very large publicly traded company. And we are hoping that it will attract a lot of investor interest into our space and we will be a beneficiary of that.

Whether there is further consolidation time will tell. I think there is certainly the pot has been stirred and we hope to be part of that discussion. As far as lessor portfolios that’s something that we pursue all the time. And in fact as we said in previous calls the fact that you have a concentrated larger group of lessors that are increasingly subject to financial regulatory pressures it means that there is more pressure on them to sell aircraft to match their portfolio exposures. That’s been a big source of business for us historically, including last year and it’s something that we are hoping to focus on this year as well.

Scott Valentin – FBR Capital Markets

Okay. I appreciate the comments. Thank you.

Operator

And we will go next to Helane Becker with Cowen.

Helane Becker – Cowen & Company

Thank you very much, operator. Hi, guys, thanks for the time. I was looking at page 13 of your slide which is the update of the investments that are changing the portfolio and of your slide deck. And I see that you snuck in some regional jets, I mean you obviously don’t sneak them in, but is that a focus or is that an opportunistic buy?

Ron Wainshal

Helane, they are a part of the portfolio that we feel good about and we began buying the E-Jets at the end of last year. And in the last season we focused only the mainline aircraft the Boeing and the Airbus airplanes Embraer’s developed a nice little niche there. There is really no great competitor to them and they have developed an operator base that’s really, one it lends itself to both operating and leasing, it’s got a global span and we are also interested in seeing what happens next in terms of E2s. But it’s not a new thing, it’s a small part of our portfolio but it’s one where we will be opportunistic.

Helane Becker – Cowen & Company

Okay. And any interest in C series.

Ron Wainshal

I think they need to develop the customer base first.

Helane Becker – Cowen & Company

Okay. That’s fair. Thanks for your time. Those were all my questions.

Ron Wainshal

Thank you.

Operator

And we will go next to Andrew Light with Citi.

Andrew Light – Citigroup

Good morning. Ron do have a view – if you look out to the backlog on the Neo and the Max and the 787 and the A-350 and so forth, do have a view as to what proportion is likely to be purchased in a sale or lease back opportunities and when do you think that will start ramping up in terms of airlines going out?

Ron Wainshal

We’ve already seeing the beginning of it Andrew. I think it’s going to be a very popular set of aircraft and we are certainly interested in it too. We are still a few years off from those in entering operation so that’s sort of a practical consideration, but operating lessors including ourselves like having very fungible aircraft and these will certainly fit that category. The bias that we have is in investors always been towards the early to middle part of production life of an asset and so we are going to be looking at those aircraft as well.

Having said that there is the current time a lot of completion we’ll just have to find our way to the opportunities but I think it will be very popular aircraft and I wouldn’t be surprised to see the market share of those aircraft in terms of lessor ownership to be more than half similar to what they are right now for the 320s and 738 MGs.

Andrew Light – Citigroup

I mean do you think most airlines just play the field like six months in advance of delivery would you then now look further out on that?

Ron Wainshal

It’s an airline by airline, I think it’s near line by airline question Andrew. I mean some of that is a question for them of balancing the debt opportunities which are attractive today versus leasing. Lessors will typically commit further out than a lender and so it’s a question of when do they want to de-risk in terms of committing capital getting capital committed rather.

Andrew Light – Citigroup

Okay, great, thanks very much for that.

Ron Wainshal

Sure.

Operator

And we’ll go next to Justine Fisher with Goldman Sachs.

Justine Fisher- Goldman Sachs

Good morning. I just had a question on the JV could you guys talk about how going forward would you might expect to see you make decisions about assets that will go to aircraft versus JV? I know you mentioned that the 330’s that have gone that are on lease to Garuda and so it seems that there may be concentration as you do something that might have let you to put those particular aircraft in the JV. But can you talk to us about how we could expect to see that decision making process going forward?

Ron Wainshal

It’s a good and very meaningful question. The JV is a way for us to manage concentration risk, the first priority is to invest on our account. And I think the Garuda transactions have very good illustration that’s say in aircraft type and the customer that we are keen on but also have building exposures. And so while we want to continue to develop our relationship with Garuda this was a way for us to still have significance skin in the game but to reduce the total exposure and keep managing the aircraft.

So to give you a sense of the math on that Justine the equity split between ourselves and Ontario Teachers is about 30% Aircastle to 70% Ontario Teachers and leverage off-course is a deal specific think. But if you assume roughly 70% leverage and we take what we’ll say a 100% and reduce that to roughly 10% in terms of our on balance sheet exposure.

We still manage it and it has nice ROE profile. We still control the customer relationship but it’s also a way of spreading risk.

Justine Fisher- Goldman Sachs

Okay, and so if I guess you could expect that going forward as you guys are evaluating good deals I guess that they would be a first look for Aircastle and then if for whatever reason be a concentration limit there or other Aircastle decided to pass on it and then it would go to the JV, it wouldn’t work in the other direction.

Ron Wainshal

That’s one way to look at it and I think the other way to look at it Justine is that we can just bid on bigger deals more comfortably.

Justine Fisher- Goldman Sachs

Okay and I don’t know this just came to my mind as you are talking I don’t know if you guys have disclosed that but it seems like I mean the LATAM deal if we look at it as a percentage of your pro forma book value is pretty big. What’s the concentration with Garuda and were there are no concentration issues with LATAM and are you topped out with LATAM now I mean is that kind of the size that we should think about for Aircastle before you might have to start to touch out may be putting one of LATAM aircraft into the JV or something like that?

Ron Wainshal

Garuda was approaching 10% and don’t have a magic number of exposure or something that we think of on many dimensions not just a network value but obviously the JV’s acquiring the 2A 330 that released a Garuda created a little bit headroom as we saw it. With LATAM the transaction has two parts as I mentioned the first part will come very soon within the early part of the second quarter. The second part’s little bit hard to predict in terms of timing, then I think that’s what my [catalyze] is to kind of move on exposure management.

The Ontario teachers’ JV is certainly possibility in this context.

Justine Fisher- Goldman Sachs

All right, excellent, thank you very much.

Ron Wainshal

Sure.

Operator

And we’ll go next to Arren Cyganovich with Evercore Partners.

Arren Cyganovich – Evercore Partners

Hi thanks and your guidance for the first half of $700 million including the four aircraft from LATAM in the second quarter. But the full year guidance is only a $1 billion. Are you being relatively conservative there or what’s the view on the drop off and new investment activity in second half of ‘14?

Ron Wainshal

Well there is a couple of things, one is the LATAM deal has a part to it that I don’t know when it will come online. So it could come this year and may slip into next year. And the second part of it is you have to sort of think about it relative to assets sales. So I mentioned during our discussions that we are seeing pressure upwards on prices and that’s not certainly a bad thing but we have to sort of balance our acquisitions and sales activity. So when you think about the billion dollars yes you also have to think about it in terms of the impact of sales.

Arren Cyganovich – Evercore Partners

So the $1 billion is not a net of sales growth, that’s growth from investments.

Ron Wainshal

So I think there is upside for that, and but I also think you have to consider as you model things out the impact of sales.

Arren Cyganovich – Evercore Partners

Okay, fair enough, thank you.

Ron Wainshal

Sure.

Operator

And it appears no further questions at this time I’d like to turn the conference back over to your host for any additional or closing remarks.

Frank Constantinople

Okay thank you Devona and thanks everyone for dialing today. If you have any follow up questions feel free to call me at 203-504-1063. Have a good day. Thank you.

Operator

Thank you. This does conclude today’s conference we appreciate your participation.

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