Aircastle Management Discusses Q3 2010 Results – Earnings Call Transcript

Nov. 4.10 | About: Aircastle Limited (AYR)

Aircastle Ltd. (NYSE:AYR)

Q3 2010 Earnings Call

November 4, 2010; 10:00 am ET

Executives

Ron Wainshal - Chief Executive Officer

Mike Inglese - Chief Financial Officer

Julia Hallisey - Head of Investor Relations

Analysts

Jamie Baker - JPMorgan

Gary Liebowitz - Wells Fargo Securities

Andrew Light - Citi

Bill Mastoris - Gleacher & Company

Ray Neidl - Maxim

Scott Valentin - FBR Capital Markets

Josh Pinkerton - Goldman Sachs

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Aircastle Third Quarter 2010 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 session. (Operator instructions) Thank you.

I would now like to turn today’s conference over to Julia Hallisey, Head of Investor Relations. Ms. Hallisey, you may begin your conference.

Julia Hallisey

Thank you, Ashley, and good morning, everyone. I would like to welcome all of you to the third quarter 2010 earnings call for Aircastle Limited. Joining us today are Ron Wainshal, our Chief Executive Officer, and Mike Inglese, our Chief Financial Officer.

Before I turn the call over to Ron, I would like to mention that this call is being recorded and the replay number is 800-642-1687 from within the U.S. or 706-645-9291 from outside of the U.S., with the replay pass code of 18283666. This call will also be available via webcast on our website, www.aircastle.com in addition to the earnings release and an accompanying PowerPoint presentation.

I would also like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain factors that could cause actual results to differ materially from Aircastle Limited’s expectations are detailed in our SEC reports. I direct you to Aircastle Limited’s earning release for the full forward-looking statement legend.

Now, I would like to turn the call over to Ron.

Ron Wainshal

Thanks, Julia, and thank you all for joining us. I will start our discussion today by reviewing our performance during the third quarter, highlighting a number of important achievements. I will then touch on the continuing recovery in demand for leased aircraft and talk about where we are heading including our strategic priorities. Mike Inglese will present our financial results and then we will welcome your questions.

Q3 2010 was an eventful quarter for Aircastle with lot of activity in all fronts. Our operational performance was strong once again with fleet utilization coming in nearly 100%. We’ve seized on a number of attractive buying opportunities where our strategy has been to focus on transactions where we add value and differentiate ourselves. And since June we’ve made new investments and commitments totaling about $300 million.

As Mike will described further, these investments together with our A330 program and the capital structure enhancements we’ve put in place recently will enhance our future earnings and cash flow base meaningfully. With $310 million of unrestricted cash as of September 30, was financing commitments for most of our remaining new aircraft purchases, our capital structure and our liquidity position are in great shape. All in all I’m happy with the current performance and believe we’re in an excellent position to prosper from a continuing industry recovery.

Let’s focus on the performance of our fleet first. Not only did we deliver close to 100% utilization during Q3, our portfolio also produced rental yield of more than 14% demonstrating both strong demand for aircraft and good industry dynamics. At the end of September, our fleet cap stood at 132 with latest generation models now accounting for 89% of our portfolio as measured by book value.

The weighted average remaining lease terms of our portfolio is 4.6 years and we had a customer base consisting of 63 airlines based in 36 countries around the world. We’re staying at top of receivables. As of this morning our cash receivables more than 30 days outstanding totaled only about $340,000. We’ve been proactive in keeping our fleet on lease. Through the end of September 2011, with including signed letters of intent we only have five scheduled lease expirations requiring placement, which is very natural task for a fleet with our – team of our capabilities.

Also counting signed letters of intent since the end of June we secured lease placements or extensions for a mix of different aircraft including two 737-800s, two 737-400s one 767-300ER and a 777-200ER. I’m also pleased to announce we also signed a letter of intent to lease the last remaining unplaced A330 from our new order string. It’s scheduled to deliver in spring of 2012.

We also took several portfolio management steps with financial effects will fall unevenly over the next few quarters. More specifically during the third quarter, we took non cash impairments on 2737 Classic aircraft, which we expect to dispose over the next few months. One aircraft is the last of our 737-500s and the other is a 737-300 we took back for [Inaudible] failure of a customer in Saudi Arabia.

We also complete the sale of the 757 aircraft during Q3 breakeven level. On the other hand we also execute sales agreements to sell four 737-400 freighter and we expect to realize insurance proceeds on the 737-700 that suffered an event of loss during the third quarter.

We expect these transactions will combine to contribute pre tax profits in excess of $13 million during the fourth quarter of 2010. Our financial performance during Q3 is beginning to reflect the growth in our portfolio. Lease rental revenue of $133.5 million is up more than $5 million versus the preceding quarter, with the increase coming primarily from aircrafts acquisitions.

I’ll discuss these in greater detail shortly. However, our bottom line performance this quarter reflects the impact in both the impairments I mentioned earlier and higher interest expense from our bond deal, which didn’t have an immediate deployment of these proceeds.

As our new investments come online this quarter, the benefits arising for the bond deal will be reflected in our subsequent financial results. All in all during Q3 2010 we generated adjusted net income of $4.6 million or $0.16 per diluted common share and adjusted net income plus depreciation amortization of $73.5 million or $0.91 per diluted common share.

During the third quarter, we expanded our fleet and completed several important transactions. Specifically, we acquired four aircrafts in Q3 with a total cost of approximately $210 million. One is the first new A330 freighter aircraft from our order stream. This aircraft is delivered early September to Hong Kong Airlines and is subject to a 12 year lease.

We debt financed this aircraft with an ECA-backed loan during an annual interest rate of just 2.645% for the next 12 years. During the quarter, we also acquired three A330-200 in the sale of leaseback transaction with SriLankan Airlines, a long standing customer. At the end of the quarter we also had commitments in place to acquire five additional aircrafts for an aggregate price of around $175 million we closed on three of these aircrafts all of which are 737-800s during the month of October.

We also signed contracts to acquire two six year old 747-400 production freighter, they are coming out of Japan Airlines' fleet as a restructure this operations. We found outstanding demand for these aircraft and secured long-term lease commitments from two leading cargo carriers.

We except to complete the acquisition of both freighters later in Q4 also I am pleased to tell you that yesterday we took delivery of our second A330 freighter, which is also on the long-term lease with Hong Kong Airlines. Debt financing for this aircraft was also provided by an ECA-backed deal with a fixed interest rate of 2.685%. We are also looking forward to seven new A330 deliveries next year.

Beyond our existing order stream, we believe we’ve got excellent investment value in our new acquisitions that capitalize our team’s broad origination capabilities, placement strengths air cargo market know how and last but not least, a differentiated access of debt beyond what the conventional bank market is currently going to offer. In short, we believe we have a competitive advantage and all those translates into annual unlevered returns on the new investments in the 14% to 15% range. And that should exercise with meaningful sales upside over time.

In addition to the transactions I just covered, we took several steps to strengthen our balance sheet. Using part of the proceeds from our 8 year, $300 million unsecured bond deal we repaid $128 million in secured bank term facilities, pushing out our earliest debt expiration date to 2015. We are paying this secured bank debt free up almost $300 million in net book value of collateral, which together with some of the new acquisitions we’ve been making, will provide us with a large and growing pool of unencumbered asset.

Significantly, this will provide the company with a strong set of cash flows and add some portfolio management flexibility. Mike will elaborate on this point, this is an important development in terms of gauging the firms cash flow generation capabilities going forward.

Gaining access to a deep and thriving institutional debt market is a competitive differentiator for us. We believe this market has recovered from the financial crisis at a much faster rate than the traditional airspace bank market. And as this market is historically been the fact of financing source from many of our source in Airlines. The bond market continues to rally and that’s a positive signal to reduce taxes that market again.

We also complemented our unsecured bond deal with a $50 million, three year unsecured revolving credit facility, which provides us with initial flexible in pursuing the business. These financings provide Aircastle with a competitive edge in sourcing investments and maximizing deal economics. I’d like to illustrate how this work in the context of our 747 freighter acquisitions.

Following Japan Airlines bankruptcy and its decision to exit the dedicated cargo business investors were shown these aircraft, conducted an auction to sell those freighters, which were coming off lease. We found the toughest competition came from airlines rather from our source. The flexibility provided by our financing structure along with our expertise in re-deploying aircraft, allowed us to pursue the purchase of this aircraft without financing contingencies and then conducts our own [Inaudible] bidding process to get the best terms in the market, rather than by teaming up with the specific airline and making our offer to buy.

I am convinced this approach had a significant positive effect on the economic outcome, we have lease rentals and better deal terms and it’s something we simply couldn’t have done with conventional financing. Turning to industry conditions, during the third quarter we saw strong signs of continued improvement in key metrics including traffic levels, the load factors, airline profitability in part aircraft trends. Demand for leased aircraft is increasing and the airline is in the midst, the industry is in the midst of a definite recovery.

With the latest report from the International Air Transport Association, IATA, based on the December data again demonstrated encouraging trends. On a year-to-date basis, passenger traffic is up 8.3% through September as measured in revenue passenger kilometers. That means absolute travel levels are above the previous peak experienced in early 2008 and that the industry is working its way back to its historic growth trajectory.

Significantly, load factors are at all-time high with September results coming in at 80% worldwide. In short, planes are full and that’s a very good thing for lease demand.

The fuel price is also remaining at reasonably low levels. The airline profit outlook is decidedly brighter now too. IATA recently updated its outlook for global industry profitability in 2010, increasing its forecast profit to $8.9 billion versus just $2.5 billion that it estimated just a few months earlier.

IATA traffic statistics also showed growth flowing a little bit in the freight sector with the year-over-year growth increases in the month of September increasing only 14.8%. Year-to-date, the increase in freights on kilometers has been over 25%. Now we are standing at somewhat slower growth rate, here too traffic levels are above those experienced during the pre recession peak and load factors are also close to all-time highs.

The number of part latest generation aircraft continues to remain at extremely low levels between 0.5% and 2% for most models, for example the 737NG family where there is more than 3000 aircraft flying they are less than 20 part. There was a slight blip upwards recently during the Mexicana’s associative operations. But we expect the number of stored aircraft remained very low given strong passenger traffic levels and load factors.

And this means that airlines have limited ability to increase to accommodate growth without taking on additional capacity. Rental levels are continuing to increase broadly in the same pattern as we discussed during our last earnings call. Leased freights for new generation narrow-body aircrafts are increasing gradually, but still haven’t reached pre recession levels.

Demand is basically stronger for Boeing 737NGs and the Airbus A320 family, but the bigger story here is the strength of the larger variance such as the 737-800 versus the smaller variance like the 700. For short-haul aircraft, we see a strong focus on per-trip cost rather than per-seat costs. We’ve seen this show up and solid demand for the 737-800 we have coming off lease next year.

Rents are up sharply for modern wide-body such as the A330 and 777s along with 747-400 freighters. We were surprised pleasantly by the level of competition around our spring 2012 A330 delivery position and by the terrific reception we’ve got for the JAL freighters only went to market with them. I believe rents on the A330s are now 15% higher today than they were at the beginning of the year.

On the other hand, while there have been a few glimmers of hope for 737-400s, there continues to be a software market for older technology aircraft and this underlies our decision to exit the 2737 Classics I mentioned earlier, rather than we invest in them at the end of their leases. Wrapping it up, we believe this is an excellent time to invest in aircraft and we have the capital structure and platform to pursue a wide rage of opportunities to generate attractive risk adjusted return.

Aircastle is in a great position today to create shareholder value to profitable growth. We’ll continue to focus on opportunities to play at our strong points, that is, making investments with value-added elements. We’ll generally stay away from the highly competitive auctions, auction situations where one is simply amongst 10, 15 or 20 competitors selected on the basis whose money is cheapest.

I’m excited about the new investments we’ve added over the past few months and believe there continues to be a great opportunity set for us. These investments will complement around $700 million of built-in growth from our A330 program and I expect these will generate very strong earnings and cash flows going forward.

Overall, we’re capitalizing on our distinct competitive advantages and our differentiated strategy to benefit, one from the recovery in an industry we saw long-term demand catalyst. And two, from the opportunities arising from lingering effects of a significant capital market dislocations we’ve looked through over the past few years. We’ve got a great platform to capture the value available in the market today.

And I’ll turn it over to Mike.

Mike Inglese

Thanks, Ron. I’ll spend a few minutes reviewing the business results for the quarter and provide an update on our liquidity and capital structure. Our operating results for the third quarter were generally consistent with our expectations and continued to show strong fundamental underlying performance in the business.

Lease rental revenue for the quarter was $133.5 million, up $5.2 million or 4.1% from the previous year due primarily to the aircraft acquisitions net of dispositions over last year. For the third quarter, annualized portfolio yield, annualized lease rental revenue compared to the weighted average aircraft assets held for lease was 14.1%, up 43 basis points in the second quarter of 2010 and 56 basis points from Q3 ‘09 but Q3 revenue utilization at nearly 100%.

I think it’s important to emphasize that as you look at our P&L we believe that lease rental revenues represent a truce measure of basic portfolio revenue performance. Third quarter total revenues were $132.2 million, down $33.5 million from third quarter 2009, reflecting lower year-over-year maintenance revenue of $28.8 million resulting from fewer lease transitions during the third quarter 2010, both scheduled and non-scheduled compared to the third quarter of 2009.

And lease termination revenue of $9.4million in 2009, for which there was no comparable revenue in Q3 2010. As we’ve discussed previously, we recognize maintenance revenue at the end of any particularly leased, whether scheduled or not, the amount we recognized in any reporting period is inherently volatile period specific rather than recurring and it depended upon a number of factors, including the timing of lease expiries, the timing and cost of maintenance events and utilizations of the aircraft by the lessors.

During the third quarter of last year, due to both scheduled and unplanned lease expirations, we had an unusually higher level of maintenance revenue and other end of lease termination payments as well as an impairment charge relating to four aircrafts. For Q3 2010, although we had no scheduled expiries, we did have one Classic 733 returned early from the Saudi lessor that ceased operations and we also signed a forward sale agreement for the remaining 735 Classic in our portfolio.

These transactions resulted in a net pre-tax charge of $4.5 million or $0.06 per diluted common share in the quarter. The early return of the 733 aircraft resulted in a net pre-tax charge of $1.7 million, which reflects a net impact of an impairment charge of $4.5 million partially offset by $2.8 million of end of lease, maintenance lease, incentive and other revenue.

On the 735 aircraft, we executed an agreement to sell the asset in the spring of 2011, when the current lease expires and the execution of the sale agreement during the quarter resulted in a non-cash impairment charge of $2.8 million. I will note that in the first quarter of 2010, we recorded $4.4 million of end of lease maintenance revenue associated with return of this 735 aircraft from the prior lessor.

Finally, during the quarter, we completed our annual impairment test for the entire fleet and recorded no other impairments beyond the two Classic aircrafts I just discussed. As we always do, we continue to monitor this topic closely throughout the year. Finally, during the quarter, we completed the sale of another 757-200 at breakeven with net proceeds after debt repayment of approximately $9 million.

EBITDA for Q3 was $116.1 million, down $19 million from Q3 ‘09 due primarily to $38.2 million less in maintenance and lease termination revenue, which was offset by lower impairment charges of $10.9 million, higher lease rental revenue of $5.2 million and lower maintenance cost of $3.6 million.

Adjusted net income was $12.6 million or $0.16 per diluted share on revenue of $132 million for the quarter, compared to 35.7 or $0.45 per diluted share on revenue of $165.7 in the third quarter of 2009. The change in adjusted net income reflects the total lower revenues from maintenance and others, higher adjusted interest net of $2.5 million offset by lower impairment charges of $10.9 million and other costs of $3.6.

Adjusted net income plus depreciation for Q3 2010 was $72.5 million or $0.91 per diluted share. The decreased year-over-year was driven primarily by lower maintenance and lease termination revenue, higher adjusted interest, lower impairment charges, higher lease rental revenues and lower maintenance and other costs.

Reported interest net, which includes hedge-related charges was $47.5 million for Q3 2010 and is net of $200,000 of interest earned on cash balances in the quarter and $1.3 million of capitalized interest during the third quarter. We used a portion of the proceeds from our $300 million senior notes offering in Q3 to repay certain term facilities, our term loan number two and Citibank three locker facility for the acquisition of our first aircraft on sale leaseback. As a result of these pre-payments, we wrote off $2.5 million of deferred financing fees related to these facilities, which is included in our reported cash interest net for the quarter.

Cash interest expense, which excludes all non-cash interest charges and hedge items was $40.1 million for Q3, up $3.4 million from Q3 2009 and includes the parts of quarters interest from our late July senior notes offering. For Q3 2010, total SG&A was $11.3 million, up modestly from $11.1 million in the third quarter of 2009 and includes non-cash year based compensation expenses of $1.5 million in Q3 2010 and $1.7 million in Q3 2009.

Our expectations for full-year cash SG&A remain in the $39 million to $40 million range. Depreciation expense for the third quarter was $55.7 million, and at the end of the third quarter our run rate depreciation on a monthly basis was about $18.8 million. For the full year, we continue to expect the effective tax rate to be in the 7.8% range. During the third quarter, our tax provision was at an effective rate of approximately 1.75%, reflecting the revenue income sourcing mix on the portfolio as well as the tracking towards the full year effective tax rate of 7 to 8.

During Q4, we expect to complete the sale of four 737 converted freighters and we also are receiving insurance proceeds from one 737-700 that was declared a total loss. The expected sale and insurance proceeds are anticipated to add more than $13 million in pre-tax income during the fourth quarter. These items are expected to produce net cash proceeds after debt payoffs lead to the aircraft of approximately $40 million during the fourth quarter.

The sale of the 734 converted freighters is a fine example of our value added and proactive portfolio management approach. We bought these aircrafts in 2007, converted them to freighters when the original leases expired, placed them on long-term leases and we’ll sell them at a good profit.

With respect to our current aircraft portfolio, assuming we fly no additional aircraft during the fourth quarter other than the last A330, which we took delivery of yesterday and the two 747 freighters from the JAL situation, we expect our year-end 2010 exit lease rental run rate to be about $560 million in total on an annualized basis. In that regard, I point out that about $92 million plus of this lease rental run rate is expected to come from 18 aircrafts, which we own route right without any financing-related [Inaudible].

A few housekeeping items, looking at the fourth quarter, we have two scheduled lease expirations and transitions based on the information we have today and the timing of those, we expect maintenance revenue related to these to be somewhere between $2 million and $5 million for the fourth quarter and with respect to amortization of net lease discount and lease incentives, we expect that net amount to be around $5 million in Q4.

We ended the third quarter with $311 million of unrestricted operating cash, $190 million of restricted cash and $50 million of availability under our new senior unsecured revolving facility. As we discussed previously, in the third quarter we issued $300 million of senior secured notes and used the proceeds to pay off $128 million of secured indebtness related to term loan number two and a $25 million facility we had used for the first three locker purchase leaseback transaction.

In addition, during the third quarter, we secured nearly $700 million of new financing commitments for our Airbus A330 program, which will benefit from ECA guarantees provided by Coface. These delivery financing commitments along with our PDP facility takes care of all the remaining funding needed for the Airbus program during 2011 and ‘12.

The first of these aircraft was delivered to us in September, $69 million loan was funded on a 12-year term at a fixed interest rate of 2.65%, the second delivery took place yesterday and similar $69 million loan is funded for a 12-year term at a fixed interest rate of 2.685%.

At the end of the third quarter, we had $2.7 billion of secured and unsecured borrowings with net debt outstanding of approximately $2.4 billion, which is around 61% of the net book value of our flight equipment. Our net debt to equity ratio excluding the mark-to-market on our interest rate derivatives was approximately 1.6 to 1 at quarter end. We believe this low level of leverage along with the debt structure that doesn’t have any maturities until 2015 is one of the things that sets us apart among the independent aircraft lessors.

To wrap up, setting aside the financial reporting volatility and timing of maintenance revenue recognition impairment charges, which occurred from time-to-time, the fundamental business continues to perform very well. We ended the quarter with over $310 million of unrestricted cash, $190 million in restricted cash and $50 million of unsecured revolver availability.

To continue strong performance on the existing portfolio of secured and unencumbered aircraft is expected to produce strong operating cash flow going forward. We have committed funding for the delivery of our seven new A330 aircraft during 2011 into 2012 and all this puts us in an excellent position for solid operating results in the coming year.

With that, operator, we have to go open up the call to question and answer.

Question-and-Answer Session

Operator

(Operators Instructions) Our first question comes from Jamie Baker with JPMorgan.

Jamie Baker – JPMorgan

Hey, good morning everybody.

Ron Wainshal

Hi Jamie.

Mike Inglese

Hi Jamie.

Jamie Baker – JPMorgan

Ron, I probably know the answer given from your comments on 737 Classics, but I’m wondering if you’re seeing any evidence that the new money that’s coming into the space might be moving down market or is the focus just stilled absolutely on newest aircraft?

Ron Wainshal

Money is coming in two different places in the market, the most media worthy I think has been the new coast that have been focused on the brand-new airplanes, but there has been actually a lot of money at the lower end of the market, in the tear down market, if you will. There has been almost nothing in the middle and the reason for it is because you can’t get effective debt financing for those middle-age aircraft. Even it’s a latest generation aircraft, the bank market simply doesn’t exist for it.

The place which is open to that is the institutional market, the bond market, the issue there is you need have a credit rating, you need to have a track record, you need to have critical mass. So there is a barrier to entry. In time, all these things will adjust, but I think for the moment, because of the continuing bank market challenges, particularly in Europe. I think that market will be very slow to fall out.

Jamie Baker – JPMorgan

Okay, that’s helpful. And Mike, just a follow-up on that aircraft that was lost, my mind is still in a blank, what was the incident that resulted in the whole loss?

Mike Inglese

Yes, we had a 737 aircraft that had, what they call, a runway excursion during the third quarter. There were few minor injuries, but the aircraft wound up in a bad condition and the insurance declared it a total loss early here in the fourth quarter and so we except to receive all the insurance proceeds and I have received quite we are prone to have served them already to-date. And the insurance proceeds compared to the net book value of the asset will generate part of that $13 million pre-tax gain we except to as well as the sale of the converted freighters.

Jamie Baker – JPMorgan

Sure, okay, thanks. I was just racking my brain trying to remember this specific incident. Thanks a lot.

Mike Inglese

Sure.

Operator

Our next question comes from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Thank you. Good morning guys.

Ron Wainshal

Good morning.

Gary Liebowitz – Wells Fargo Securities

Ron, can you talk about the financial plan for the JAL freighters and it sounds like you have pretty good interest in those aircraft, are those going to be 15% of higher yields right out of the gate?

Ron Wainshal

The financing plan is we have the cash on hand, thanks for the bond deal to finance those from cash proceeds. We’ve been approached by a numbers of banks saying when you get the lessees lined up, we’ll be happy to talk to you.

And I think the lessees, we are not positioning out them just yet, but those will both be the bank or the we haven’t made a decision about whether we’ll do anything different with those aircrafts, we are quite happy to financing as they are and yes in aggregate those are in the same kind of return targets we talked about 15% and I think we thought some important and I kind of made comment about that in the prepared remarks.

If there is a lot of upside here too, we’re buying these aircrafts well and once we add value to them, again if you take the aircraft out of the bankruptcy, you deal with all the paperwork and the technical issues put a lease on, I think there is a lot of profit to be made and that’s kind of what we are focused on as a general business matter.

Gary Liebowitz – Wells Fargo Securities

Okay, also can you talk about the decision to sell those 737 freighters? I am guessing those in the China coastal aircraft. Are you actively marketing those? Or were you just made an offer, you kind of refused?

Ron Wainshal

We’re go out to market from – first of all they are China coastal aircraft and we go out from time to time and to kind of get market dealers and we were pleasantly surprised by things that have a Chinese lessee attached to it. And I don’t think we are the first leasing companies discovered that, but there was a good appetite for that.

The opportunity was very attractive one in our view and here again was another example of aircraft that we added value to and we are able to capitalize on the freighter conversion to a long lease term with a good customer have that phenomenon and that’s part of what I would call a broader end of life strategy for some of the aircrafts in our portfolio.

As I mentioned during the prepared remarks, we have a little bit of more bearish outlook as far as 737 Classics go, that’s not to say that they are in fact we were able to get two 737-400s on lease with the regional arm of a large Southeast Asian carrier. So for the 400s I think there is a little bit of life left, but for the 300s and the 500s we’re obviously little bit less excited about the future and maybe I should put that in the context.

We have in our portfolio as we entered third quarter, 132 aircrafts, there is one 735 and we are going to sell that and in our four 737-300s. Together they are less small percent of the portfolio. That’s probably the part of the portfolio that economically and I feel is the most vulnerable.

Although we’ve done quite well with those things from a cash and cash type of return, each aircraft we can’t have a strategy for managing end of life. And in the case of the aircraft we got back from the Saudi Arabian airline airbus. The condition of the aircraft and the engine and system makes sense for reinvesting.

In a couple of cases, last year, we decided to keep the aircraft back on lease because the condition of the engines the aircraft were good enough so we are getting good cash flow form. So it’s kind of case-by-case.

Gary Liebowitz – Wells Fargo Securities

I see. And one for Mike. Mike, can you just clarify the $560 million run rate, are you implying that fourth quarter will be something a little bit less than 140 in terms of lease rental because you don’t have that until the full quarter, some of the new additions and that 2011 will actually be somewhat higher than the 560 because you are not including the seven or so A330s that you planned to take delivery of?

Mike Inglese

Yeah, in terms of the 560, it does not, it’s calculated at year-end. We are taking new aircraft on, we took three on in October, we are expecting the two JAL freighters to come to us and be on lease by year-end. So those are included in that year-end numbers. So your assumptions about Q4 are not unreasonable. And then going forward, that does not include the delivery of the seven Airbus, aircrafts that we expect in 2011.

Ron Wainshal

Or anything else we might do.

Gary Liebowitz – Wells Fargo Securities

Well it’s okay. Thanks, I will get back in the queue.

Mike Inglese

Okay, thanks.

Operator

Our next question comes from Andrew Light with Citi.

Andrew Light – Citi

Hi there.

Mike Inglese

Hi Andrew.

Ron Wainshal

Hi Andrew.

Andrew Light – Citi

And previously quoted, I think, on your leasing activity, you used to indicate what the percentage outlet or down less still - down in lease rates on aircrafts being placed. Could you give us an idea of those ten aircrafts that are expiring or being placed, next year what kind of rents you’re getting from or are there other thoughts?

Mike Inglese

I think - have we published this, I think the results for 2010 will show a drop of something like, 25% to 30%, versus the preceding leases, and I’ll just put that in context. Normally as an aircraft age, their rents go down. And I think, the typical lease term tends to be on average around five years or so.

So depreciation of the aircraft and the rentals kind of follow more or less inline. So if you are assuming 5% depreciation, you should expect that the next lease would be 25% down, it’s also the question what you’re starting with. So many of the leases that we had coming off in 2010 reflected a better market environment in the ones in the preceding years. So it’s kind of, within their life or expectations.

Andrew Light – Citi

Right. Now turn to your ‘11 plans, because you would be at any placed about six or seven just in this quarter alone?

Mike Inglese

Yeah, I don’t think we are in a position yet to kind of put those numbers out. I think that will be down versus on a same-store basis, but I think we will be in a position next quarter we do the year end analysis to talk about that. It will be probably a lower level of decrease on a same-store basis so.

Andrew Light – Citi

Okay. Question on the securitization of the – you got the securitization itself has pay down, heavily I think, July next year. What are your thoughts on refinancing that the other stage or not be financing, just that’s pay down?

Mike Inglese

Yeah, we have looked at a number of possibilities with respect to 2016 which does start to pay higher debt amortization in the middle of 2011. We haven’t found an economic trade at this point that we think makes sense for us. So our current expectation would be that it would go into debt amortization mode in the middle of next year.

But as you know we talked about earlier, we have large approval of unencumbered assets that we have in our portfolio and expect to hit in the fourth quarter. The Airbus program generates good equity cash flow on each plane and we are adding seven more of those next year. So we, our current expectation is, it goes in to that cash mode, but we’ll continue to look at the possibilities for refinancing and look at the economics and if there is a trade that makes sense we’ll pursue it.

Ron Wainshal

The bond markets probably the lot lately but it’s really hard to be an interest rate that’s effectively in the mid five still

Andrew Light – Citi

Okay, any comment on that so you can cover the dividends just with the other aircrafts in the portfolio?

Mike Inglese

Yes as we think about the future of the business and the portfolio that we have, we feel very comfortable with the cash flow profile of the business in the context of our current dividend level and meeting all other obligations and having excess cash in the system over the next three years to deploy.

Ron Wainshal

Yes, I think, the point that Mike made during his prepared remarks about the unencumbered pool of aircrafts we have created in effect, those throw off an awful lot of cash flow, Mike talked about a run rate of over $90 million a year just from those 18 planes.

Andrew Light – Citi

Alright, okay, sorry, probably you had mentioned the down market interest rate is now about 5% today, did I hear you right?

Mike Inglese

No, no, that was the interest rate - the effective interest rate on taking into consideration a hedge on our 2006 deals.

Andrew Light – Citi

Okay.

Ron Wainshal

Which is pretty similar to the interest rate on 2007 and 2008 deals too. When we have a great interest rate structure, kind of interest rate cost structure on the existing pool financings.

Andrew Light – Citi

Right and just one more question. Your account on a 10% on that latest bond offering, where do you think bonds are now?

Ron Wainshal

We’ve gotten, I mean it’s hard to make too many extrapolations. So we market reads from some of the various banks and traded stats and the latest indications we have on that is it in the 109%, 110% of face value territory versus the issue price in the mid 98s. I think the yield on that works out to be below 8% whether we could do a new deal to those levels I don’t know, but it certainly rallied quite a lot and a lot it just the strength of the bond market.

Andrew Light – Citi

Okay, excellent. Thanks very much for that.

Ron Wainshal

Sure.

Mike Inglese

Thank you.

Operator

Our next question comes from the Bill Mastoris with Gleacher & Company

Bill Mastoris – Gleacher & Company

Thank you. You indicated that with the bond market and I think you prepared this on several different occasions on that with the rally that you can access end-market at very, very low rates. I am just wondering under what circumstances would you consider doing that? Would you see, would you do that if you saw additional opportunities out there to purchase attractive aircraft? Or would it be to address the 2006 securitization? Maybe if you could add some additional color, that would be greatly appreciated.

Mike Inglese

I think we would consider doing it for both of those situations if we think that the investment logic works. With respect to the deal we did this year, a 10% and we’re looking at investments that we believe will yield 14% to 15%. So we think that’s a good trade. In the context of refinancing debt was up 5.5% interest rate. Going forward, we’ll continue to look at it on an economic basis and what we think it means to, the equity cash was in the business.

Ron Wainshal

Just one other thing to add on that, the unsecured market is one option. Several of our competitors have accessed secured market financing as well. And that’s something we look at as well and those – on the margin secured deals are always going to be cheaper than the unsecured deals although it’s more kind of things attached to it. We look at that as well. But our conclusion at the moment and this is something we review it from time-to-time is that what we’ve gotten places pretty good and then what would you do otherwise.

Bill Mastoris – Gleacher & Company

Okay and are you seeing – lessees wanting to rollover and extend for longer terms than they have been in the past given the overall perception at least rates are going to do nothing but go up or have you seen kind of a bifurcation where maybe some of the mid-aged aircraft where they might either hold the line or maybe even want to sign up for maybe short releases, where on the newer generation they might want to extend them a little bit further? And again any additional color would be greatly appreciated.

Mike Inglese

Let me give you few examples. We, I mentioned a 777-200 yard during the remarks. That was an extension. That aircraft along with A330s have suddenly become completely unavailable. So, anybody who wants to grow and seems like a lot of people do, and there is no new capacity available. They are focused completely on extending.

So we’ve seen a lot of interest there and people have approached us a lot earlier about things, assets of that type, just to make sure that they maintain the capacity. I was very pleasantly surprised by the kind of spiking interest for the last remaining A330 aircraft. We had interest from all over the world.

What I will tell you is this, it was one of these scenarios where the market changed so quickly that a lot of airlines has had sticker shock. Nonetheless they kept coming back after kind of trusting discussed and this is a - it’s kind of a funny anecdote one airline says in touch, well certain appraisal firms has to rental on this aircraft is only – is 10% lower than what you’re asking for.

And of course we said, we’ll go rent that, go lease that aircraft in that appraisal firm. We did quite well. We had a very robust competition in that aircraft. On the 737 Classic side, I think there is a few people who are kind of trading office fuel for bigger sized aircrafts within the same family. And I think this is a longer-term trend. In the short-haul world, the premium section is not going to be as important as it used to be. People just aren’t on the same work for two or three hour flights or less.

So we are seeing much better demand for 400s versus 300s in the 737 Classic side. Certainly, that’s in the case for the 800s versus the 700s and a same holds true for the Airbus family. So, on the 800 side, there is a lot of people who are taking new delivery of aircraft, in our particular case, we’ve had more of a changeover on the 800s than we’ve had in the past. And I think it’s just in the aircraft an airline-specific dynamic, but we’re finding very good demand from places around the world. I think there is a general trend you will see a lot more people keeping airplanes because of the sellout conditions.

Bill Mastoris – Gleacher & Company

Hey, you had mentioned that you’re seeing lease rentals up 16% on the A330s that would assume it would be of a similar magnitude obviously for the competitive Boeing product the 777s would that be a fair statement?

Mike Inglese

Yeah, I think that sounds right, but I don’t have as much direct - a visibility on the 777s because we don’t have new 777s on order, but it feels like the right magnitude though.

Bill Mastoris – Gleacher & Company

Okay, and how about some of the narrow bodies. If I missed it I apologize, but on maybe some of the newer generation maybe on A320s or A320 family as well as newer generation Boeing Narrowbody 737-700s and 800s, any magnitude of lease rental increases or any ranges?

Ron Wainshal

Yeah, let me try to put it in context. First of all, the increases I am talking about on the wide bodies, the 777s, the 330s are against a base have experienced a much sharper drop during the downturn than the narrow bodies did. If you look at the peak level, which was in early 2007, early 2008 or late 2007, I think the maximum drop in the new gen 73s was probably in the 10% to 15% range. I think you are about 5% to 10% off; you are more than halfway back in terms of recovery today. It’s been a – not as steep of a drop and a more gradual recovery.

Bill Mastoris – Gleacher & Company

Okay, that’s very helpful –.

Ron Wainshal

I think it’s a little softer just qualitatively on the Airbus side and on the Boeing side.

Bill Mastoris – Gleacher & Company

Okay, that is again very helpful and I do appreciate it.

Ron Wainshal

Sure

Operator

And our next question comes from Ray Neidl with Maxim.

Ray Neidl - Maxim

Just want to clarify couple of things that you said. First thing on the finance market. I think you’re saying that the bond market has rallied. So you can get financing there. And that could change very rapidly depending on what the federal reserve does I guess. Depending on top of that, you said the bank loan market is still very tight, I was hearing that some of the banks are starting to loosen up; I was just wondering if you can clarify these points?

Mike Inglese

Well, I think we’ve already talked about the bond market. In terms of the bank market, the bank market is actually a bunch of sectors all rolled up into one. What we focus on is not guys that are just regional specialists like the folks in the Middle East or in Singapore or Hong Kong, but the guys who are traditional lenders to lessors and smaller to mid-sized airlines, and almost all those banks are based in Europe. And these banks are doing very well in terms of their aviation lending business. I think they are really taking advantage of the market opportunities.

Issues they have are the broader and higher level within the organizations. The European economy is still suffering, everybody is trying to figure out how to deal with [Inaudible]. There is still a skittishness about stepping away from only the very safest of proceed deals. And I don’t think that that’s going to change very quickly and one of the inhibiting factors here is also there are just fewer banks around.

There are so many banks that got nationalized or went out of business or merged away or what have you. It takes a long time for that to replenish. And nothing is forever and we’ve heard a few banks start to soften, the age criteria that they are willing to consider. But I still think that that’s just a marginal effect as opposed to what we are seeing in the bond market, which is more of a dramatic change.

Ray Neidl - Maxim

Okay, great. That’s interesting. You said also that stored aircraft remained low I assume that you mean new generation type of aircraft. And is this by tending all deals crate sitting in a desert?

Mike Inglese

Yes, absolutely. I am not including things like the 737 Classics. And I’ll put that in context, this is one of the reasons we are not taking the approach we are. In the 737 Classic territory you’re seeing a 300 stored percentages of the fleet in the 20% territory and it’s not - in contrast I talked about the 737NGs are being like 0.5%. And that’s basically had a zero percent structural unemployment rate, the way I see it.

When you look at the A330s, they are basically at 1% rate. Even the 767s, which have got in the line by the appraisal community, they are only at a 5% storage rate, and that seems to be shrinking gradually too in the case of the 767s, there still isn’t a 787 available and each story you read is seemingly pushing thinks out to the right a little bit. So I think that aircraft actually does benefit from a bit of a recovery as well, not like during the last downturn, but I think that still has a lifeline.

Ray Neidl – Maxim

Okay, great, that’s interesting. And the last thing was you’re out of period maintenance, you said that’s something, how big was that and you said that’s something that’s not going to occur too often.

Mike Inglese

I think the point we made, Ray, was in the third quarter 2009, we had an unusually large level of maintenances revenue recognition north of $31 million contract with $2.5 million in this quarter and it has a reporting matter it’s volatile and asset specific effect, it only occurs when leases expire.

Ron Wainshal

You know what I might draw your attention to the PowerPoint that we posted on our website on the fifth page there is something called revenue trends where we laid out for the last 18 months last six quarter in quarter-by-quarter on the revenue section and you can see and when you get to that the extreme fluctuations in this maintenances revenue, it is what it is. This reflects what happens at the end of the lease. When we look at the business and think about how we are doing, we tend to focus on the lease.

Ray Neidl – Maxim

Okay, great. Thank you, gentlemen.

Mike Inglese

Thank you.

Operator

Our next question comes from the line of Scott Valentin with FBR Capital Markets.

Scott Valentin – FBR Capital Markets

Good morning, thanks for taking my question. Just a quick question on the cash at period end was about $310 million unrestricted, just curious based on the current CapEx acquisition profile, what you said running down to?

Mike Inglese

I think our expectations and consistent with our year-end run rate expectation of not closing any deals other than the JAL freighters between now and year-end. We would expect that to be well above 200 at year-end.

Scott Valentin – FBR Capital Markets

Okay, and then in terms…

Ron Wainshal

Unrestricted cash.

Scott Valentin – FBR Capital Markets

Right, unrestricted cash, correct. And then in terms of leverage, you mentioned you got 1.6 right now, what will be the ideal level of leverage?

Mike Inglese

Frankly, I think we feel comfortable where we are and we have historically run a little bit higher than where we are and so that’s a possibility, but I think as we talked in the past, we wouldn’t necessarily see ourselves drifting too far beyond, like a two to one number in any point in time.

Scott Valentin – FBR Capital Markets

Okay, and then just kind of an industry question, obviously load factors are very high for the industry overall, just curious that the industry has made noise about trying to remain disciplined on that front, as time will bear out, whether that happens or not, but do you believe there’s kind of pent-up demand for aircraft right now given what load factors are and given passenger miles keep increasing?

Ron Wainshal

Yes, absolutely. I mean I haven’t seen 80% across the globe ever, that’s a September number and September is still a very busy season, but even when you look at the seasonal adjusted numbers, that’s a really high level, but it’s still going at that level. And so the airlines have two choices, one is they can kind of keep the supply at the same and ratchet up the ticket prices and they are doing that, and the other part is to grow.

The challenge from a growth perspective is where would you get the lift. And that’s where the rental pricing dynamics come up. So there is only a certain amount of airplane that people can add in this, it will be more of a redistribution as opposed to growth.

Scott Valentin – FBR Capital Markets

Okay and then I’m sorry if I missed this before. I think on page eight of the presentation, which is of the fiscal year ‘11 expirations placed, I guess curious as to the timing of the unplaced aircraft, I guess 10 or 13 were placed.

Ron Wainshal

Yes, we have one aircraft that is scheduled to come off lease in about a month and we’re very close to getting that placed, that’s for 2010. For the remaining 2011 aircraft, were on the second half.

Scott Valentin – FBR Capital Markets

Okay, alright. Thanks very much

Ron Wainshal

Yes, just one thing to follow up on your first question, Scott. The one thing that surprised us about the September traffic figures is Europe. Europe has been laggard and I’m still not that optimistic about Europe as a general region. But the statistics for September showed Europe growing at a rate of almost 8.5%, which is a significantly higher rate than we’ve seen in the past.

And some of the airline results that we’ve seen and the outlooks that were projected coming out of Europe had been a little bit more bullish than expected to. To me, the one soft spot broadly speaking in the world and so that’s encouraging.

Operator

And our next question comes from Josh Pinkerton with Goldman Sachs.

Josh Pinkerton – Goldman Sachs

Hey guys, thanks for taking my question. You gave an update earlier on the financing plans for the JAL 747s, but did you give any info on the financing for the 737-800s that you bought during this quarter? And then I was also…

Ron Wainshal

We do and I think those aircrafts are probably going to stay as they are unencumbered. I mean, I think the de facto strategy with the JAL aircraft is probably to keep them unencumbered as well.

Josh Pinkerton – Goldman Sachs

And did you give an age for those 737-800s?

Ron Wainshal

We did and they are little over 10years’ old.

Josh Pinkerton – Goldman Sachs

Thanks. And then one more question. In the past, you’ve talked about trying to vary your lease links little bit depending on what your view is of the market going forward, and I was wondering how you guys are thinking of positioning yourselves with regard to lease links heading into some of the renewals next year?

Ron Wainshal

You’re absolutely right, that this is a basic thing that it’s called cycle match and every responsible aircraft lessor does that. So when the market head south and you always have a little bit of a lag in the passenger market versus the overall economy so you can see it coming, you try to keep the leased terms as long as possible to reflect what will be you know hopefully very good rental levels. And when you hit the recession level, you try to keep the lease term short. So you don’t walk in, lousy lease rentals for a long time and thereby avoid the benefit of recovery. So that’s kind of putting it in context.

I think we are kind of in the middle right now and I don’t think you are going to see us trying to do what we did in ’08, which is to push for six-plus-year lease terms on average, but what actually is the driving factor right now is what is the natural maintenance break for our lease expiration. We like to get aircraft back from the overhaul and so if it’s four years versus five years, that’s okay. But right now, we are trying to – I think we are starting to get into the point, we are kind of at the tipping level starting to push a little bit longer.

Josh Pinkerton – Goldman Sachs

Great, thanks.

Operator

Our next question comes from Gary Liebowitz with Wells Fargo Securities.

Ron Wainshal

Welcome back Gary.

Gary Liebowitz – Wells Fargo Securities

It’s great to be back. Thanks. Ron, the reported lease yield in the quarter was 14.1%, it’s up like 50 basis points from the second quarter, we usually don’t see that sort of fluctuation and I know you are aware of the Sri Lankan planes, which probably brought that up a little bit, but there is something in the math that explains why the annualized yield was so much better this quarter?

Ron Wainshal

Yes, I mean there is a couple of things. In the second quarter, we had an A330 that transitioned from a lessee, basically that ended late in the first quarter and didn’t get back on lease until well into the second quarter. We also had the drag of the two 757s that we sold this year throughout the second quarter, basically had no revenue for a full quarter on those two aircraft and a couple other transitions that put some pressure on Q2 and with virtually 100% utilization in the third quarter, you saw that tick up from that effect. Yes, it’s a combination of the new aircraft and the lack of downtime.

Gary Liebowitz – Wells Fargo Securities

Okay, and also, Ron, it seems like you made a lot of money on these 737s that you converted and now selling. My suspect there is a fair amount of [Inaudible] stock of 737-400s out there, is this something that you might consider doing again or is that sort of a one-time thing?

Ron Wainshal

No, we looked at it. There are a bunch of aircraft specific things that you have to look at. Those aircrafts were newer within the range of the 734 world, and they were young enough to get into China. There are age limits for freighters going into China, and so we got them in just in time. There is probably a broader price demand for 734s in my opinion versus 733s and same as for the passenger aircraft and it’s case by case.

What we do is each of our aircraft is they get a year or two prior to lease expiration we develop a business platform and the freight market went through some pretty tough times during the last few years too, it’s come back. I don’t think the short-haul freight market is as robust as the long haul. But there may be a case or two where that happens. I wouldn’t say it’s going to be the case for the majority of our fleet, but I wouldn’t be surprised if you see over the next year or two a few of those get maintenance freighters as well.

Gary Liebowitz – Wells Fargo Securities

Okay, also any update on the CIO search?

Ron Wainshal

We are getting close.

Gary Liebowitz – Wells Fargo Securities

Okay, thank you.

Ron Wainshal

Sure.

Operator

And there are no further questions in the queue at this time. I will now turn the conference back over to Julia Hallisey for closing remarks.

Julia Hallisey

Thank you all for joining us for the Aircastle third quarter call. We look forward to speaking with you next quarter.

Operator

This does conclude today’s Aircastle third quarter 2010 earnings conference call, you may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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