Aircastle's (AYR) CEO Ron Wainshal on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Aircastle Limited (AYR)

Aircastle Limited (NYSE:AYR)

Q2 2014 Earnings Conference Call

July 31, 2014 10:00 AM ET

Executives

Frank Constantinople - SVP, IR

Ron Wainshal - CEO

Mike Inglese - CFO

Analysts

Richa Talwar - Deutsche Bank Research

Helane Becker - Cowen & Company

Arren Cyganovich - Evercore Partners

Jamie Baker - JPMorgan

Scott Valentin - FBR & Company

Gary Liebowitz - Wells Fargo Securities

Moshe Orenbuch - Credit Suisse

Jason Arnold - RBC Capital Markets

John Godyn - Morgan Stanley

William Matthews - Post Advisory Group

Michael Kass - Blue Mountain Capital

Operator

Good day, and welcome to the Aircastle Limited Second Quarter 2014 Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Frank Constantinople. Please go ahead, sir.

Frank Constantinople

Thank you, Don. Good morning, everyone and welcome to Aircastle Limited’s second quarter 2014 earnings call.

With me today are Ron Wainshal, Aircastle’s Chief Executive Officer; and Mike Inglese, our CFO. We’ll begin the presentation shortly, but I would like to remind everyone that this call is being recorded and the replay will be available through our Web site at www.aircastle.com along with the earnings press release and our PowerPoint presentation.

I’d 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 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 Web site. I’ll direct you to Aircastle Limited’s earnings release for the full forward-looking statement legend, and will now turn the call over to Ron.

Ron Wainshal

Thanks, Frank. Welcome to the call. During our call I’ll Aircastle’s performance during the second quarter, the current business environment and our plans for the future. Mike will address our financial results and then we’ll open it up to Q&A.

Second quarter was an extremely busy and successful period for Aircastle as we capitalize on very good market conditions and continue to drive strong earnings and returns to capital through four different levers; number one, through our investment; number two, asset sales; three, portfolio management; and four, financing.

With regards to investing, following up on a very good 2013 when we acquired nearly $1.5 billion in aircraft we’re off to a very good start this year. During the first half we closed on $916 million in accretive purchases including approximately $200 million during the second quarter. Additionally, we secured nearly $0.5 billion of further acquisition commitments and we’re pursuing additional business aggressively but also at discipline. These new investments have added a layer of strong earnings growth as evidenced by the strong increased in our lease rental revenues.

Our approaches in investors look broadly across the $0.5 trillion commercial jet market for attractive buying opportunities and situations would sooth our competitive strengths. And rather than buying same things the same way always we redirect our efforts as market conditions and value propositions change. To illustrate over the past 10 years we’ve acquired aircraft from almost 70 counterparties while adjusting the mix of assets purchased significantly over time. While our approach is common in many investment classes we stand out amongst the larger aircraft leasing companies and we’re profiting from this distinct strategy.

With regards to asset sales, low interest rates and the search by investors around the world for high yielding assets, had driven aircraft prices up. That’s a great thing for the more than $5.5 billion of aircraft we currently own. We’re also capitalizing on this by exiting older aircraft that have less favorable future earnings power and by using sales as a key exposure management tool. In doing so, we’ve improved our portfolio quality considerably. In addition, we’re always looking for good investment realization opportunities that allow us to redeploy capital more optimally.

During the second quarter, we did all those things very well as we sold our designated for sale nearly 20 aircraft netting a pretax gain of $8 million.

Turning to portfolio management this has been one of Aircastle’s consistent strengths and the second quarter is no exception. We achieved nearly 100% utilization and cap received low. We also made excellent progress investing lease placements not only for this year but also for 2015. This improves the quality of our future revenue base.

In the financing area as Mike will describe we’ve taken advantage of attractive marketing conditions to drive down the cost for our debt and extend our maturity profile. We continue to have a conservative match funded capital structure and maintain efficient access to a variety of different financing sources. Indeed, one of our most important strategic imperatives is for the company to maintain good access to capital throughout the business cycle. We’re doing a good job of driving that.

Our successes across these poor levers have resulted in Aircastle maintaining healthy rental yield and net cash interest margin profiles. To that end, despite the slightly lower gross yields to come with an improved portfolio, our net cash interest margin increased to 9.7% over the past quarter. This is one of the highest levels in our industry. In dollar terms our net cash interest margin grew 23% year-over-year demonstrating the results of our efforts.

Additionally, during the second quarter, we recorded a cash ROE of 11.3%. We’re working to drive profitable growth and increase capital efficiency as we continue to execute our business plan. Aircastle is focused on generating stable cash flow, efficiently allocating capital between investments and returning capital to shareholders at appropriate stages of the market cycle. In this context, we’re pleased to announce that our Board has declared a $0.20 per share dividend for the third quarter.

We’ve provided a regular return of capital to shareholders in the form of dividends now for 33 consecutive quarters including significant dividend growth over the past three years. In fact, if we end share repurchases we’ve returned more than $300 million to shareholders since 2011. As we do each year during the third quarter our Board will be reviewing our dividend level relative to our growing sustainable earnings base. We like our strategic positioning as a nimble and credible value oriented investor. We’ve an exceptional team that provides us with the versatility to pursue different investment opportunities across our market.

Our capital structure is flexible, low-cost, and allows us to act decisively on investment opportunities as they arise. We have got great long-term minded shareholder partners with Marubeni and Ontario Teachers and we’re privileged to have a terrific Board of Directors that provides great insights. All in all we are well-positioned and excited about opportunities.

I would now like to make a few comments about the business environment. Overall it’s quite good. Demand for passenger air travel continues to grow. According to International Air Transport Association, revenue passenger kilometers which we think of as a good measure of demand, grew 6.2% during the first five months of 2014 compared to last year. The average load factor during this period was 79% which is exceptionally high and it indicates that aircrafts are being very well utilized.

Passenger aircraft rentals are at these and stable levels benefiting from robust traffic growth in limited modern of craft availability. We are seeking to capture this market strength by locking in new lease placements and extensions as far out as we reasonably can. In that regard when we consider signed letters of intent, we have very few aircraft left to place all the way through the middle of next year.

In contrast to the passenger market air cargo remains weak. We have seen modest improvements in demand over the past few quarters, but oversupply remains a big issue and it will take a long time and a lot of demand growth to take up the slack. For older units, particularly large converted freighters, we’re taking actions to reduce our exposure. During the second quarter we’ve made a decision to exit two 747-400 freighters that we expect to sell by year-end. In addition, in July be sold a third unit at roughly breakeven level.

Beyond the current supply and demand picture, the Boeing and Airbus order backlogs continue to grow considerably. This rise in orders at least in part related to the many new models coming online over the next few years. However we note that a large portion of the new orders announced earlier this month at the Farnborough Air Show were from leasing companies rather than operators. At this point, for the new generation of aircraft, there is a waiting list which goes out to the end of the decade and I see quite a bit beyond that too.

We are attracted to the efficiency gains that these models will provide and I am convinced we'll be large investors in these aircraft. However, we prefer not to tie up capital for long periods of time, alongside with many other lessors, particularly when we consider the significant ebbs and flows of investment opportunities in our business over time as well as what’s available here now.

Indeed over the past decades we have seen to exceptionally good entry points for aircraft investors, firstly during the financial crisis and secondly 9 or 10 years ago when we started Aircastle. We are certainly growth minded though we intend to remain disciplined investors to take a longer view in how we develop the company. As we look ahead, we are certainly looking to build on our terrific start in 2014.

With regards to new investments we believe the introduction to new aircraft models across every size category, should provide us with substantial financing and re-fleeting opportunities. In fact, these should play well to our skills in investing, managing and financing both new and used aircrafts. We also see great deal of opportunities in purchasing aircraft from some of the larger leasing companies as they work to manage their portfolios.

We had great success over the past several years investing in new wide-body aircrafts with long lease terms and strong customers. In fact more than 70% of our aircraft acquisitions by value have been with new wide-body. However, competition in this space has become quite strong and we now see better value in mid-age, current technology aircraft. We see the market where 5 to 15 year old airplanes is not more than $200 billion investment opportunity set. Yet, the scenario in which the larger players are virtually absent, given their focus on fleet age.

In any case we are actively pursuing investment opportunities with a focus on situations that are less competitive and more custom-tailored and value-additive in nature. We’re disciplined and taking unique approach to continue to focus on opportunities where we can differentiate ourselves, utilize the company’s distinct capabilities, and make use of our broad deal sourcing network.

Regarding asset sales, we will continue improving the portfolio and seizing on good opportunities to generate gains. Through our efforts to date, we have nearly completed our exit from classic technology aircraft and we continue to use a cash flow driven approach to determining whether to reinvest and re-lease aircraft or sell them. Given our strong growth to date, and our positive view of our new investment pipeline I see Aircastle continuing to be a net buyer this year.

While we have also taken advantage of the lower hanging fruit as it relates to refinancing, we intend to continue exploring other opportunities to improve our capital structure and making it even more useful competitor tool. We are managing the company for long-term and remain focused on accretive growth, stable cash flow generation, and allocating capital wisely over the business cycle.

And I will turn it over to Mike.

Mike Inglese

Thanks. As Ron just mentioned our results were broadly in line with the guidance we provided last quarter and with 1.4 billion of close in committed acquisition, our strong growth momentum continued in the first half of this year. Our fleet growth and value oriented investment approach is generating healthy cash returns and high operating cash flow.

Operating lease and finance lease revenues for the quarter was $187.1 million, up 15% or $25 million year-over-year, due primarily to the net impact of aircraft investments and sales. We acquired 25 aircrafts in 2013 and an additional 11 in the first half of 2014, to a total cost of about $2.4 billion. Over the same period, we sold or disposed 45 aircraft and other equipment for approximately $800 million.

Our cash earnings, operating cash flow and cash returns, have remained strong along with the net growth in the portfolio. Total revenues for the quarter were $226.1 million, up 33% compared to a $170.4 million in the second quarter of 2013. Higher operating lease and finance lease revenues of 25 million and higher maintenance revenues of 23 million were the primary drivers. Lease expansion drove the higher lease revenues and our sales activity in the quarter was the primary driver for the increased maintenance revenue.

Adjusted EBITDA for the second quarter of 2014 was 211.7 million versus 183.4 million last year. Higher operating lease and financed lease revenues, higher maintenance revenues, were partially offset by lower gains from asset sales of 20.4 million. In the second quarter of 2013, I will remind you we realized 23.6 million of gains from sale of three freighters that we sold to Hainan.

As Ron mentioned, we’re very active in the quarter with respect to improving the overall quality of the aircraft portfolio, the average age of aircraft sold in the quarter was over 18 years and we generated sales proceeds of approximately 218 million. Across these sales activities we recognized 35.6 million of maintenance and other revenue and modest gain on sale which was partially offset by 28.3 million of impairment charges related to the 747 freighters that we expect to part out in the second half of this year. All this activity produced the net pre-tax income impact of 8.2 million or about $0.10 a share in the quarter.

Adjusted net income for the quarter was 47.7 million, up 1.6 million year-over-year and reflects higher total revenues of 55.8 million lower maintenance expenses of 3.5 million partially offsetting these improvements were 20.4 million of lower gain on sale, higher impairment charges, higher depreciation of 3.7 million and higher cash provision of 2.8 million. Interest expense for the quarter was 60.5 million a decrease of 6.2 million over the prior year. While our outstanding debt increased to 3.8 billion at the end of the second quarter, up from 3.4 billion a year earlier. Our cash interest expense decreased by 2.7 million due to a lower weighted average cost of funding versus the prior year.

SG&A for the quarter was 14.1 million, up about 900,000 in the prior year. Depreciation was up 3.7 million to approximately 76 million for the quarter reflecting the growth in the aircraft portfolio. Our second quarter tax provision was 6.6 million and excluding the impact of our debt extinguishment expense in the quarter that was in effective tax rate of around 14%.

At the end of the second quarter, we owned 148 aircraft with the net book value of $5.7 billion. We had 91 unencumbered aircraft with the net book value of approximately 3.2 billion up from 80 aircraft and 2.7 billion at year end 2013. For the second quarter of ’14, our portfolio lease rental yield was approximately 13.1% and our net cash interest margin was 9.7% again demonstrating the consistency and the strength of the business. Cash earnings were 181 million and cash ROE for the last 12 months was approximately $11.3 million. Cash flow from operations for the quarter 214 million.

Turning to our capital structure, we’ve made great strides over the past several years to strengthen and increase the flexibility of the capital structure, improve our overall funding cost and position ourselves to be able to capture opportunities as they arise. At the end of Q2, total borrowings were 3.8 billion. During the quarter we repaid 450 million of our nine and three quarter percent notes due in 2018 and from the issuance from $500 million of 5% and an 8% notes maturing in 2021. This refinancing will produce approximately $21 million a year in cash interest savings on an annual basis going forward.

The one-time loss on extinguishment of debt charge was 36.6 million in the quarter or approximately $0.45 per share. Our ratio of unsecured debt to total debt was 59% versus 58% at year end 2013 and up from 49% at the end of 2012. Our net debt to equity ratio was approximately 2.2 times and we’re compliance with all applicable covenants in all of our debt facilities.

We’ve included certain guidance elements for the third quarter in our earnings PowerPoint that was posted to our Web site this morning.

So to wrap up the prepared remarks we ended the second quarter on a strong note. Our business is performing well, operating cash flow is increasing and we continue to successfully execute our value oriented investment strategy and our proactive portfolio of management and sales activities, which continue to improve the overall quality of our fleet.

And with that operator we’re happy to open up the call for Q&A.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll take our first question from Michael Linenberg with Deutsche Bank.

Richa Talwar - Deutsche Bank Research

It's actually Richa Talwar here. I had a couple of questions. So first, about sales, we appreciate that you've been very forthcoming on the opportunities in the market to offload some of your portfolio. So, I was just wondering if we could get more color on what aircraft in portfolio you're finding to be the most easy to market, which aircraft is turning out to be a little bit more difficult? And as another leg to the question, if you could give us a reasonable number, range of aircraft sales we should expect for the back half of the year.

Ron Wainshal

I would direct you to the PowerPoint presentation on our Web site it’s on page six and what it will show you there is what we’ve sold this year so far. There have been seven freighters including three 747s there is a lot of classic aircraft. I would say that those two categories our they kind of part of the portfolio that I would view as a fleet exit. A lot of airplanes very low dollar value. And then I would say that the demand for those aircraft and aircraft in general across the board has been much more robust. And what’s dramatically different now versus even in the beginning of the year is the depth of this interest, both for new aircraft and older aircraft, and I think going forward there is a reasonable prospect of even selling freighters. So it’s a broad-based item. I think the second part of your question in regards to future expectations, we have only a handful of aircraft that I would call fleet exits, that we have got plan, I think it’s three or four aircraft including the two fighters that we have designated has held for sale. Beyond that it is opportunistic, and I don’t think we’re in a position to comment on that yet.

Richa Talwar - Deutsche Bank Research

And then just one on the competitive landscape, so, not too long ago we read about Norwegian working to set up an aircraft leasing arm. And if they do end up going through with that plan, can you talk about whether you see them as a viable threat? Or if you see the potential for maybe more airlines globally to pursue similar business plans and not putting pressure on your business?

Ron Wainshal

I don’t think Norwegian is unique in this approach and it is not limited to this particular point in time in the aircraft leasing world. It’s happened many times that I would say that, I think the only example where it had some success was when Singapore Aircraft Leasing, now known as Bank of China Aviation was formed. Although they had some tough moments in the early years, I don’t think airlines are set up to be very good aircraft lessors. And I think the competitive advantages that we have in terms of having a global reach being an unaffiliated party that doesn’t have any sort of competitive threat and probably having a more competitive financing cost structure puts us in a better place.

Operator

We will take our next question from Helane Becker with Cowen & Company

Helane Becker - Cowen & Company

My first question, as I was looking at one of the pages of your slide deck and you've got a couple aircraft in Russia, are they subject to sanctions, any concerns, any issues there?

Ron Wainshal

We are monitoring that very closely. The answer is no, in terms of sanctions. Our exposure in Russia is largely in value terms, in two carriers, one of which is AirBridge which is actually a very profitable cargo carrier, sort of a rare combination of things. And the other is a wholly-owned subsidiary of Aeroflot. So, we're keeping a close tab on it, but everybody is performing pretty well so far.

Helane Becker - Cowen & Company

And then my other question is, the government of China is starting to encourage their aircraft leasing companies or their banks; however you want to describe it, to go market kind of worldwide and not to just focus internally on the airlines in China. So, there are many. Do you think that helps you? Does it hurt you? What do you think about that?

Ron Wainshal

The Chinese leasing companies have been very much focused on just China historically. And I don’t think you can be a successful lessor in this space unless you have a global footprint because when the aircraft come off lease, you should be looking broadly. So, it's inevitable that this was going to happen. The Chinese leasing companies also had been focusing on new planes, and on situations that tend to be, we’ll say more auction oriented. We avoid those. I don’t view them as a competitor or as a threat.

Helane Becker - Cowen & Company

And their money, as an opportunity, do you think?

Ron Wainshal

Again largely, as I said they've been largely focused on new narrow-bodies and we haven’t had the opportunity to sell very much to them. It hasn’t been much of an event in either way.

Helane Becker - Cowen & Company

Can I just ask just one question about, I'm sorry this is probably going to sound dopey, but, on the maintenance revenue, the aircraft associated with the maintenance revenue; are they remarketed? I don't quite get that, maybe I missed the comments about why they were $36 million.

Ron Wainshal

As I said, in selling aircraft, and when you’re selling aircraft particularly at the end of life, you innocents are taking in maintenance revenue, at the expiration of that lease. And so when we are doing this exit sales and getting out of this older aircraft that we mentioned, that maintenance revenue is part of the overall math of how your account for the sales of those exit activities.

Helane Becker - Cowen & Company

Okay. So, that includes aircraft that have both been remarketed and aircraft that are still waiting to be remarketed?

Ron Wainshal

Now, it only occurs at lease end. So, it's either a transition from one lessee to another, but in the case of this quarter, the vast majority of the maintenance revenue was driven by our sales activity.

Operator

We will take the next question from Arren Cyganovich with Evercore

Arren Cyganovich - Evercore Partners

I think there has been some recent mixed messages just overall in the airline marketplace looking at potential overcapacity in North Atlantic route so a little bit more weakness I guess from your customer base relative to very strong orders coming in at Farnborough, et cetera. So, I was just curious as to what your feeling is about the strength of your customer base? And are you seeing any new watch list folks popping up among your customers?

Ron Wainshal

Good morning and good question, there have been some headlines about too much capacity over the North Atlantic or too much capacity over the Pacific this is inventible thing that happens as airlines grow and readjust based on differential growth patterns. So I don’t view that as an alarming thing per se. The credit quality of our portfolio and the receivables for that matter are actually quite good. In fact I would go and say that because of all the portfolio management steps we’ve taken over the past year or two that the credit quality has never been better.

I think having said that looking around the world there is a few hotspots where we have to keep close steps. But I don’t think these short term comments about too much capacity in one market to the other are problematic and actually the good thing about this space is that you can move aircraft from one place to the other.

Arren Cyganovich - Evercore Partners

That's helpful, thanks. The A330 NEO, obviously you've talked a lot about last-off the line risk on narrow-bodies over the past few years and you've added some newer A330s over the past couple years as well. Are you concerned at all about kind of a last off the line risk on the A330 NEO coming up?

Ron Wainshal

I think the A330 NEO is an interesting development and actually a bit of an inevitability because of the competitive threat that he 787s posed but it’s a fact of our business that new aircraft get introduced and getting in at the right price and in the right situation is key. I don’t believe there will be much in a way of NEO for quite a number of years. So I don’t think of it is an immediate awful last off line kind of the thing.

Arren Cyganovich - Evercore Partners

And then lastly, Mike, maybe if you could go in a little bit more detail about the 8.2 million net contribution, what specifically, what line items were those impacting to get to that 8.2 million benefit from the aircraft sales?

Mike Inglese

Yes, as I said in my remarks, Arren, basically you had about 35.6 million of maintenance and other revenue you had and the impairment charge of 28.3 and a modest gain on sale and net of those three numbers is about 8.2 million pretax in the quarter. And we file our Q at the end of the day as we typically do they’ll be more data in there for everybody to digest.

Arren Cyganovich - Evercore Partners

Okay, thank you.

Operator

We’ll take our next question from Jamie Baker with JPMorgan.

Jamie Baker - JPMorgan

I've got Mark Streeter here with me as well. Obviously a lot of speculation as to EXIM Bank financing and the accompanying ramifications there, both for airlines and lessors, just curious, Ron, what your current thoughts are at the moment?

Ron Wainshal

A couple of things, one is EXIM Bank and for that matter the European ECAs have played a declining role in what’s going on from a financing perspective. They played a role during the time of the market where the markets were most disturbed in terms of financing capabilities. But in terms of their profile right now it’s not that huge a number of the customers that are benefiting from that are actually fine on their own in terms of accessing capital through different ways. Probably the most problematic part of this is in aircraft types that are most difficult to finance on their own. In the case of Boeing aircraft probably the 747-8s but as a bigger picture thing I don’t think it’s still into the market maybe for some individual source of for Boeing. But for us it’s a non-event.

Jamie Baker - JPMorgan

Appreciate that. As a follow up, should we be more focused on traffic growth or profit trends? Because obviously, and this gets back to questions that have already been asked, as analysts and investors, particularly those of us that follow the airlines as well, the focus tends to be on the latter, on profitability. But from a leasing perspective, I'm wondering if the former is actually the more selling metric, at least up to a point?

Ron Wainshal

We tend to focus on traffic growth. Unfortunately airlines come and go and the providers of the service change and their cost structures if they’re competitive get competed away by other people that take over the LCC phenomena is a big deal and obviously is tend forth away low cost, short haul low cost travel is done. So we’re not completely in different to whether somebody is around or not but I think it’s the overall demand that makes a difference and I don’t see any reversal of the ticket pricing trends that have been going on for many, many years.

Jamie Baker - JPMorgan

And just to squeeze in a third one on the topic of portfolio sales, are you looking at the AIRES portfolio?

Ron Wainshal

We don’t comment on any particular situation we tried to save as involved in opportunities as we can.

Jamie Baker - JPMorgan

Okay, well then it doesn't count as a third question. That's fine. I'll move on. Thanks a lot.

Operator

We’ll take our next question from Scott Valentin from FBR & Company.

Scott Valentin - FBR & Company

Ron, with your comments two questions on kind of maybe the future direction of the fleet. You mentioned one, that it seems like after maybe you're moving to a younger fleet, it's declined in age, it sounds like your comments now are saying that mid-life is now more attractive. Should we see the fleet age start to creep back up again?

Ron Wainshal

The short answer is, I don’t know. We don’t manage the fleet age, we managed through lease terms. The fact that the fleet age decreases the function of two things, one is we’ve got a lot of very high quality newer wide-bodies on long lease terms with good customers. Those are all very good. And then we did that as long as we could in terms of being able to make a reasonable return on capital. That’s gone very competitive, I mean you never know there may be other opportunities that pop-up in that regard, but what I was saying is that the media age aircraft are -- mid-age current technology aircraft, that’s the important part, are attractive. And because of all the new models coming down the line, there should be interesting growth opportunities where we should be able to make some good money. The other part of it is sales. And we have been exiting the old technology aircraft very successfully, making money on it. There’ll be some further evolution in our portfolio as we discussed. I don’t know if the short answer. I would think that it wouldn’t move that much, but it’s not a metric that we managed to.

Scott Valentin - FBR & Company

I also noticed in your comments, kind of a shift. You actually favored wide-body for a while now you're saying probably better opportunity in narrow-body. What do you think has caused the increased demand for wide-body? Is it just the function of the way traffic is flowing?

Ron Wainshal

I think the wide-body space has been underappreciated for awhile and I think investors are waking up to that. And part of that was also driven by the fact that there was yield fatigue on the narrow-body side. When you have everybody in the business, kind of focusing on the same thing, it drives down returns. Almost all of the big players are focused predominantly on new narrow-body and I think we lose sight of every now and then as an industry it’s that this is an investing business. It’s not an asset collection business. And just because it’s new or it’s because it’s all narrow-body or whatever it is, you got to make an adequate return on that. And so I think it’s just the natural evolution of the market where capital is finding its way to the next highest and the most interesting application.

Scott Valentin - FBR & Company

And then one final question, obviously you guys are looking for acquisition opportunities and it sounds like more mid-life. Just trying to get a sense, competition, you mentioned prices and lease rates, these prices for aircraft are going up due to demand. Are you seeing the same level of competition still on a sale lease-back opportunity or any other type of opportunity acquiring aircraft? Are you seeing increased competition?

Ron Wainshal

There is increased competition. But we’re very careful about which situations we step into, so generalizing is only worth so much. Well we try to focus on these places where we are not in an auction. We lose every time where it is basically the guy with the lowest cost or capital on the line. And so situations where there is a value-add element helping somebody transition out of four fleet, dealing with aircraft for shorter lease terms as we did with some very attractive and newer Latam 777s, or with mid-age aircraft, suits us and there’s situations where there is fewer people bumping up against us. The mid-age market, though having said that, and as I said in my remarks is the place where we don’t see are big competitors playing by and large and so the folks that we compete against, and then there is always competition. I don’t feel if anybody tells you there is competition. There are folks that have lesser resources, whether it is capital or people. And so I think we’ve a pretty good, we are seeing a pretty good chance of winning these deals.

Operator

Our next question will come from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Ron, it's been a little bit over a year since Marubeni became a major shareholder. And at the time you talked about some of the potential strategic benefits of bringing that kind of partner on. Can you tell us where that stands and where you expect to take the relationship?

Ron Wainshal

The relationship has been a very good one. And we have had a number of benefits. I’ll give you an example. Some of them are more tangible and some of them are less, and some of them are on to come. But I think that, in fact we have a nice stable shareholder, probably put us in a very different position with rating agencies, and as you know that’s an important part of our capital access story. And I, in fact, I think Moody's might have taken us off their watch list back last year when Marubeni came on-board. We have extended our revolving line of credit that includes a bank that is an affiliate of a Japanese bank. I can tell you that there is a direct line from the Marubeni shareholder to that, but it probably didn’t hurt. We have a number of ongoing opportunities being pursued whether it’s buying from Japanese lessors that are looking to exit or talking to more Japanese banks. We’re dealing with some of the large Asian airlines through the Marubeni relationships are at play. Stay tuned.

Gary Liebowitz - Wells Fargo Securities

Also, maybe a couple for Mike, Mike, do you still disclose what your annualized current lease run rate is? You used to give that number quarterly.

Mike Inglese

You know Gary, we haven’t put it out because we have been much more active in selling things in China handicap sales, frankly I thought it was too hard, and I did want to put out the number that was potentially sort of misleading to people.

Gary Liebowitz - Wells Fargo Securities

Also, you mentioned you've already sold one freighter. You expect to sell two more. Is there any unusual accounting that goes on with those other two freighters? Will there be an impairment charge or do you see these being sold at basically book value?

Ron Wainshal

No, I expect to get out of the second half of this year, those two freighters that have been written down had around where their new carrying value is.

Gary Liebowitz - Wells Fargo Securities

Okay. And assuming those are sold by year-end, what percentage of your fleet by book value would be freighter?

Ron Wainshal

It depends on what we buy Gary and what we sell there is a lot of other stuff going on. I would say it’s a general trend you’ll see the freighters decreasing as a percent of our portfolio but to put a number on it is a little bit secular.

Gary Liebowitz - Wells Fargo Securities

Great, thank you very much.

Operator

Next we’ll go to Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch - Credit Suisse

You've talked about kind of the returns. Is there any way you could kind of just give us a sense for the levels, how you see the IRRs on new deals compared to let's say over the last couple of quarters? I’ve kind of got a follow-up.

Ron Wainshal

We’re still trying to -- we're still targeting from a cash IRR perspective this is not a GAAP measure and it’s not something that we’re talking about burdening with overhead but just share yield math similar levels we’re still at the 15% and north territory. What’s helpful is when your cost of debt is lower but we’ll remain disciplined in that regard.

Moshe Orenbuch - Credit Suisse

But when you look out, I guess, is it a question of just not seeing as many opportunities at that level or how do you kind of think about what's out there?

Ron Wainshal

I think we’ve got out to maybe our best start ever with over $900 million in the first half. We’re not trying to go after the retail market in terms of transactions so hard to say exactly where we’ll end up the year and what that year after that brings on because market conditions change a lot but I am optimistic about the pipeline and the growth prospects.

Moshe Orenbuch - Credit Suisse

And then, I'm not sure if this is part of the vagaries of just the math inherent in the calculation, but your cash ROE is kind of down roughly 0.5% from where it kind of had run roughly. And I know it's a volatile measure, but is there any kind of reason for that and can you talk about that?

Mike Inglese

I think you see in the current LPM basis we basically lost a big contribution from sales in the second quarter of ’13 and we’re also in the current year as I mentioned in our Investor Day discussion having some downward pressure from contra-maintenance revenue in 2014. So I expect this year to be in this level and I expect it to expand next year as we watch our way through some of that.

Moshe Orenbuch - Credit Suisse

Got it, thanks so much.

Operator

Next we’ll go to Jason Arnold with RBC Capital Markets.

Jason Arnold - RBC Capital Markets

Just back to the mid-age aircraft that you're finding kind of particularly attractive at present, can you talk about the sourcing and value identification process that you and the team go through in ferreting out good deals in this segment of the market, kind of in contrast with some of the newer stuff? And I think you mentioned opportunities getting aircraft from both lessors as well as airlines here and maybe kind of talk about the differences.

Ron Wainshal

I think it’s fair to say that for mid-age aircraft we cast an even broader net because there is a broader range of owners. So it’s both airlines and lessors on the lessors side first a number of lessors do manage to a fleet age and we’re open to different aircraft type as long as it’s good investment proposition so that’s a source of business for us. There are a number of smaller leasing companies that we bought from that were using our transaction as a way of exiting the market over the last two years. So it’s not just big guys.

On the air line side, it’s all over the world it could be somebody who just needs to refinance a balloon dead balloon coming up or somebody who is trying to hit residual risk to somebody is better able to deal with it like us in anticipation of new technology aircraft coming.

Jason Arnold - RBC Capital Markets

Okay, thanks. And then just another follow up, clearly very nice benefits on the debt refinance side and Ron, I think you mentioned keeping an eye out for other capital efficiency opportunities. Anything else specific you guys have in mind, more refinancing other types or composition of borrowings as an opportunity for the business perhaps?

Ron Wainshal

I think we don’t have any specific ideas to discuss today but I would say in terms of looking at our debt maturity and our unsecured complex and how those maturities roll out and how those bonds have been trading. We obviously keep our eye on opportunities to refinance some of that and push that maturity wall to the right as we move forward in what continues to be a very strong and saturate environment.

Jason Arnold - RBC Capital Markets

Thank you very much.

Operator

Our next question will comes from John Godyn with Morgan Stanley.

John Godyn - Morgan Stanley

Thank you for taking my question. Ron, one of the other lessors that reported today, this morning, said that they think that we're in the fifth year of a seven year cycle. Not that anybody really knows. Not that this is guidance, but I'm just curious, do you agree with that general view of the cycle or what's your view of the cycle?

Ron Wainshal

Well, I don’t think we’re that good. We don’t have a crystal ball that’s got all those sort of lines ingredients on it. It feels to me a more complicated world than just that. There is a couple of different things that plays here, one is the capital cycle and other if you order cycle then there is the economy. And there is different upsides and downsides depending on which part that you’re measuring and you sort of have to look at how all these things come together when you look at anyone particular angle on our business.

I think economically there is a lot more upside. The European economies are still in a very slow growth mode. If they get it together, there is upside there. China has remained remarkably resilient. The U.S. has picked up. The last GDP number was actually pretty good. So, there's upside there. The financial market is an interesting place because of the low interest rate environment and the search for yield that I have talked about and that’s obviously crept into our space and a lot of others. That has cost asset price inflation which always worries us. We are very-very price focused. So, the question though then is how does that relate to the financing opportunities? The short answer is, I am not calling a peak to the cycle, I don’t think we can do that. And it’s a little bit more complicated than that.

John Godyn - Morgan Stanley

And just, you mentioned the order cycle as well. And I think this relates to some of your other commentary. Just going back to this idea that there are some concerns out there about soft patches, I think the concern is also in part that manufacturers are over-delivering and therefore the supply-demand balance will continue to get worse from here. Of course, that's just a concern among investors, may or may not be true. I'm curious what your perspective there is?

Ron Wainshal

In the immediate timeframe, whatever aircraft are being served up are being doubled up. There is really no idle capacity of any magnitude for modern aircraft whether it is small or big. What would happen in the future is a function of a couple of things. One is the economic growth rate, the growth in demand; and then, retirement rates. I think the Aircastle’s approach has always been a little bit more risk. At first, in regards to putting those commitments weigh the heck out there. And that is because of the order right now -- and I will come back to that in a second. But it’s just because when you look back over the last 5 or 10 years, there been extremely good and extremely bad opportunities in terms of investing. And when you look at the order streams as they are right now and how long you have to wait. There’s a good chance that you’re going to be missing out on something good and so we balance how good of an opportunity is this order. I just order Boeing, you know in Airbus I'm not giving out massive discounts because why you need to. And how good is that opportunity, 5 to 10 years versus the year now, or what might come. In our book it’s better to keep your options open, invest now and we’ll let other people do that.

John Godyn - Morgan Stanley

And you made your view on economic growth clear, but the view on retirement rates, do you agree with the idea that they're going to be higher for longer here?

Ron Wainshal

I think as lessors become an increasing part of the ownership type, as they have, a different financial discipline, I will say a greater financial discipline will enter into the retirement versus continuing to operate decision. We have been pretty aggressive about exiting out earlier and finding good profitable points. And I would imagine if that our peers would be similarly inclined from an analytic perspective. But I think the one big overriding factor here, John, which factors into the competitiveness of any aircraft is what fuel prices are. And so if you prices remain where they are, it’s one thing, but if they drop, it changes the equations fundamentally. And one of the reasons your timing rates have been as high as they’ve been is because fuel has kind of hung around, it’s $3 a gallon territory, and it is pretty high.

John Godyn - Morgan Stanley

That's super helpful. And just one last clarification, you had mentioned that it's good to expect freighter, the right models, to expect freighter exposure to fall. Is that just the simple math around the freighter sales that you've already announced? Or is that a point for after those transactions occur, we should expect freighter exposure on balance to fall further?

Ron Wainshal

I think is the function of growth, firstly. That will actually have a bigger effect than the sales that we thought about because those are relatively small dollar values. If we have a nice elegant point to exit freight, whether it’s -- for that matter any aircraft where we think the piece of earning power is not as good, we’ll do it. I think this market offers more opportunities to do that.

Operator

Next we will go to William Matthews with Post Advisory

William Matthews - Post Advisory Group

Could you give us a sense of how important investment grade ratings are to you and what kind of a time frame is that you think you could achieve that?

Ron Wainshal

I'll weigh in with the first part and Mike can talk about the second. Investment grade is an aspiration of ours, and I will explain why. It fits in strategically. It’s not so easy to say how it all comes about. But I think the benefit from investments grade is more reliable access to capital throughout the business cycle. And as I spoke to in my remarks, I think the best opportunities are when the market is little bit out of joint and that’s where the investment-grade access is a big deal. But even today, when we did our last Boeing deal there was another lessor with a Boeing deal right around the same time, around the same size, around the same tender, and was 1.5% less. If you apply that to your capital structure over time, it’s very powerful. But that’s during a good market. During a bad market it’s a lot more valuable. So I think it’s a key thing to aspire to. With S&P I think it is size driven.

William Matthews - Post Advisory Group

Any kind of timing commentary?

Ron Wainshal

I think the timing is all function of our growth. And we’re mindful of the step change benefit. It’s not a bright line as to when you crossover into this magical world that the rating agencies might say is acceptable. But we’re mindful of that and it really is a function of the opportunities we see.

William Matthews - Post Advisory Group

Great, thank you.

Operator

We’ll go next to Michael Kass with Blue Mountain Capital.

Michael Kass - Blue Mountain Capital

Just had a few housekeeping questions. I was wondering, going to your page on aircraft sales, I was just trying to back out what occurred in Q1. And I was just wondering if you could kind of just get us through what the Q2 activity has been. And also, where the freighter sales tend to be on kind of the age spectrum of your current freighter fleet?

Ron Wainshal

I’ll answer the second question first I think the freighters that we sold are early 90s vintage I don’t the exact dates right off the at the top of my head, but say 20 plus years in age. And in regards to the first quarter I know that the four 737 classic freighters were a large part of that mix and I think there are one or two others that factor into as well.

Michael Kass - Blue Mountain Capital

Because I'm showing, I think you sold six in the first quarter and it says you sold 17 in the second quarter and I'm just trying to add that up.

Ron Wainshal

Right, so let me just help you little bit with the math that some items there that go beyond the second quarter firstly the four aircraft are from the first quarter that’s the first item there. The three 747 freighters that are also to come and then the last aircraft on the list is a 777 that we’re selling into our joint venture that’s a third quarter deal.

Michael Kass - Blue Mountain Capital

On the 777, on the joint venture with Ontario Teachers', are there any parameters for what aircraft can be acceptable? Do they need to be new? Do they need to be wide-bodies? Do they need to be 777s I mean I’m just…

Ron Wainshal

No, they look at the world very similar the way we do.

Michael Kass - Blue Mountain Capital

And then lastly, I just noticed on your income statement that the amortization of lease premiums or lease incentives switched to a positive in the quarter. And I was just wondering if you might be able to just fill us in on why that was the case.

Mike Inglese

Yes, in our sales activities one of the assets that we sold resulted in a reversal of lease incentives in the quarter. And so it’s not reflective of what the overall sort of run rate of that activity will be going forward. It’s part of the 35.5 million of maintenance and other revenue that I talked about in the context of the asset sales impact on Q2.

Michael Kass - Blue Mountain Capital

And going forward, and I don't mean like next quarter, I mean just in general, should we expect that line item or that contra-revenue to increase over time given the growth in maintenance revenues? Like is there a relationship between the two? Or is most of the maintenance revenue that's now being booked a function of sales and dispositions of aircraft?

Mike Inglese

There is no clear correlation over time of how those things are going to flow. I would not say lease incentives are going to grow as a general matter, it’s going to depend upon what we buy what we own and what we do at each lease turn with the aircraft.

Ron Wainshal

The contra-maintenance revenue are related to a specific batch of aircraft it was sort of an oddball situation. And once those play out that’s going to begin the story as far as we can tell.

Michael Kass - Blue Mountain Capital

Got you, thank you.

Ron Wainshal

Thank you.

Operator

That concludes today’s question-and-answer session. Mr. Constantinople, at this time I would like to turn the conference back to you for any additional remarks.

Frank Constantinople

Thank you for your time today. We hope you found it helpful. If you have any follow up questions feel free to call me at 203-504-1063. Thank you, again have a good day.

Operator

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

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