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Aircastle LTD (NYSE:AYR)

Q4 2010 Earnings Call

March 10, 2011 10:00 AM ET

Executives

Ron Wainshal – Chief Executive Officer

Mike Inglese – Chief Financial Officer

Analysts

Scott Valentin – FBR Capital Market

Gary Liebowitz – Wells Fargo Securities

Josh Pinkerton – Goldman Sachs

Paul Strike – Cohen Asset Management

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 Fourth Quarter and Year End Earnings 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)

Mr. Inglese, you may begin your conference.

Mike Inglese

Thank you, Operator, and good morning, everyone. This is Mike Inglese, the CFO of Aircastle and I’d like to welcome all of you to the fourth quarter and year-end 2010 earnings call for Aircastle Limited. Joining me today is Ron Wainshal, our Chief Executive Officer.

Before I turn the call over to Ron, I’d like to mention that this call is being recorded and a replay will be available. Details for the replay are contained in today’s earnings release. 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 fact maybe 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 report. I direct you to Aircastle Limited’s earnings release for the full forward-looking statement legend.

Now, I’d like to turn the call over to Ron.

Ron Wainshal

Thanks, Mike, and thank you all for joining us. Today we’ll discuss Aircastle’s fourth quarter and full year 2010 performance, as well as our strategy going forward. I’ll also share some thoughts as usual on the broader trends in our industry. In particular, I’ll elaborate on supply and demand picture for aircraft. This continues to improve aircraft expense as a multiple global GDP growth as it has historically. Mike will then speak about our financials results, after Mike’s results – remarks we welcome your questions.

I’d like to start the call with a discussion of the micro-catalyst for our business. 2010 was a pivotal year for our industry during which demand for aircraft grows above pre-recession levels, in both the passenger and air freight segments.

The latest report from the International Air Transport Association, IATA, again demonstrated encouraging year-over-year trends across key industry metrics, including traffic levels and load factors.

Parked aircraft levels were also quite low. Fueling this growth is a global economic recovery driven by significant emerging economies such as China, India, Brazil and Turkey. Global passenger traffic decreased by 8.2% in 2010, nearly double the corresponding increase in capacity. Freight demand recovered sharply as well as freight ton kilometers increased by 20.6%, compared to capacity expansion of just 8.9%.

Load factors which measure how full aircraft are reached all time highs in 2010. The average passenger load factor for the year improved by 2.7% to 78.4%, while load factor for air freight, which is a much more one directional market rose 5.2% to 53.8%, although increment weather, this winter slowed the recovery somewhat, the passenger and freight segments are above pre-recession levels by 4% and 1%, respectively. With this increasing demand number of our latest generation aircraft remains extremely low between 1% and 2% for most models.

The full year IATA statistics were flat steady incremental improvements we saw throughout the year. The unmistakable signs of industries resurgence led increase to increasingly optimistic demand forecast for the next few years. Recently, IATA forecasted by 2014 the number of air travels – air travelers will increase to 3.3 billion that’s up 800 million passengers from 2009, an increase of more than 30%.

Demand of air cargo flow in 2014 is forecast to increase by 12.5 million tons from 25.5 million tons in 2009. This is an even faster growth rate than for passenger travel. In the IATA statistics, we still see regional differences that continue to shape our approach to market.

During 2010, Intra-Asia travel eclipse into North American travel for the first time to become the world largest aviation market. Of the 800 billion new travelers expected by 2014, 45% are expected to come from air travel in Asia-Pacific.

Airlines industries have traditionally relied heavily on operating leasing and we expect that lessors will play an integral role facilitating new growth. By contrast, European and North American economies recovering more quickly as is the air traffic grow.

Overall, aircraft lessors to be enjoying favorable supply and demand trend, while Boeing and Airbus have announced plans for gradual production increases much as this new supplier won’t come online for a few years. More over continue delays in new platform such as 787, 747-8 and A350 XWB amplify the scarcity effects particularly for wide bodies. This is good news for lessors.

With raising demand we believe that so far rentals have recovered about half away from the trough levels we saw in early 2009. The recovery for new-generation narrow-body start earlier but this continued in a moderate phase compared to wide-body and long-haul freighter aircraft where improvements in rentals started later but it progressing rapidly.

Fuel prices have increased slightly in response tensions in the Middle East, prompting IATA to reduce its near-term forecast for airline profitability. It’s too soon to tell whether the increase in fuel prices will be steep or unstained. So far airlines have been able to pass through most of the fuel price increases in the form our ticket price as surcharges. At this stage, we don’t believe the current fuel price levels will have a discernible effect on overall demand for aircraft and we haven’t yet seen customers modifying fleet plans.

However, we’re watching this closely. We do expect higher fuel prices will drive many airlines to replace less fuel efficient, old technology aircraft more rapidly. Of course, a sustained increase in fuel prices could dampen the economic recovery which we’ve been seeing and in turn that will slow the growth in demand for aircraft, we just don’t see that right now.

On the financing side, the climate for industry has improved measurably during 2010, along with that as a broader market. The institutional debt market has been – has basically recovered from this financial crisis. Historically, this market has been the primary financing source for the major U.S. airlines and also for handful of large lessors with the cash.

Financing from banks, the traditional source of leverage for small to mid size lessors and smaller airlines has also been limited to mostly new aircraft. Hence for credit agency back financing has hold the financing gap for new aircraft during the past two to three years.

But even in 2011, we expect we will account as much as the third new aircraft deliveries, that’s twice the pre-financial crisis levels, while we enjoy banking and ECA market access for new aircraft purchases, having new investment great credit rating and traded volume sets Aircastle apart from our competitors and allows us to source attractive investments across the aircraft market more flexibly.

Now let’s shift to Aircastle’s performance and outlook. The significant improvements in demand for aircraft and availability to attract the financing, allowed us to made – to make very good progress in leasing, selling, buying and financing aircraft last year.

Our 2010 financial results were strong, do not yet fully reflect the impact of our recent investments and the overall strengthening of the industry. But overall the progress we made last year puts the company in a traffic position to capitalize under assumption of the industries healthy growth patterns through new investment opportunities and through margin expansion.

We’re starting to benefit more from our Airbus new order program, which provides us with approximately $700 million of attractive book and growth over the next year or so and we further expanded our asset base last year with approximately $0.5 billion of new investments.

We ended 2010 with $240 million unrestricted cash, an increase of nearly $100 million from the year end – year earlier period. We also had more than $190 million unrestricted cash at year-end 2010.

Today we’re forced to pursue new investment opportunities to deliver superior risk adjusted returns. Needless to say, along with the broad base search and optimism in leasing and aviation we’re mindful that [theatrical] microeconomic risk that could impede industries return to normal growth rates.

Now let’s focus on our portfolio performance. Not only did we deliver close to 100% utilization during Q4 and full year of 2010, we also produced a rental yield of around 14%. At the end of December, our fleet count stood at 136 aircraft with latest generation models now accounting for 90% of our portfolio as measured by net book value.

The weighted average remaining lease term for our portfolio was 4.7 years and we had a customer base consisting of 64 airlines based in 36 countries around the world. Our lease receivables are very good levels. As of this morning, accounts receivable more than 38 outstanding, totaled only about $200,000.

Through the end of December 2011, including sign letters of intent, we only have two scheduled lease expirations requiring placement. We’re also engaged in lease placement or extension discussions relating to about half of our 2012 lease roll off. These aren’t done deals yet but the fact we’re having these conversations a year or more prior to lease expirations a good barometer in strengthening market.

Additionally, I’m proud to announce we signed a long-term lease with Virgin Blue of Australia for our last remaining A330 order, which is scheduled to deliver in the spring of 2012. Our entire A330 order book is now subject to execute these leases.

In addition to our scheduled lease expirations, we recently early-terminated leases on five A320 aircraft, basically family aircraft, I should say, four are A320’s, one is 319. These have been on lease with two customers based in the Middle East.

In the months preceding the political turmoil in -- put turmoil in the Middle East, we agree to an early termination of leases on two of these aircraft with customers in Egypt and Jordan due to difficult local market conditions.

Over the past few weeks, our Egyptian customer ceased operations, we are marketing all type of aircraft actively and are optimistic about signing new lease commitments within the next two months of the busier spring and summer season that are fast approaching.

Despite the situation, during the first quarter of 2011, we still expect to record fleet utilization of at least 98% and estimate that generally all across our portfolio will be about 14%. Our remaining exposure to the Middle East airlines now consists of five aircraft, which represent about 7.5% of our portfolio’s net book value. Two relatively new 747-400 Freighters a long-term lease with Emirates one of the world’s most profitable airlines accounts to nearly all those exposure, the balances for two other customers.

During 2010, we acquired 11 aircraft of approximately $0.5 billion, including four 737-800’s, two 747-400 production freighters, three A330-200’s and two new A330 Freighter’s, which came from our order stream.

In February, we took delivery of our first of six A330 aircraft lease to South African Airways. We expect the second aircraft to deliver later this month and the remaining four aircraft over the course of 2011.

During 2010, aircraft will secure new financing commitments totaling approximately $1.1 billion from a variety of sources. This includes $700 million for Airbus A330 program through a combination of ECA back financings and pre-delivery payment financings. We also raised about $300 million for our first offering of senior unsecured note. Also in September, we entered into a $50 million senior unsecured revolving credit facility, which has three-year term.

In February, we entered into a $73 million 12-year loan with Sumitomo Mitsui Banking Corporation for our South African delivery. This loan is supported by guarantee from COFACE, the French export credit agency. The financing bears interest at a fixed rate of around 3.97% per annum. We also expect the March South African delivery to be financed with COFACE back debt.

During 2010, the disposition of four aircraft resulted in net gain of approximately $7.1 million. In January this year we completed the sale of four other aircraft, 737-400 aircraft that we did convert into freighters in placed on long-term leases with an arm on the Chinese Post Office.

This transaction showcased our ability to capitalize on value-added deals, which I’ll talk about. In fact, since Aircastle’s formation, we sold 21 aircraft to 12 different buyers for more than $400 million and the aggregate unlevered return we estimate is approximately 15%.

Despite the industry-wide challenges we faced coming into last year, especially during the first half of the year, our financial performance start to reflect the growth to our portfolio. Our lease rental revenues of around $140 million during the fourth quarter and about 530 million for the full year both represent meaningful increases over prior year results and as Mike will describe further, we also strengthened our liquidity position and our balance sheet in 2010.

Our bottom line performance reflects the impacts of impairments reported in the third quarter and the higher interest expense from our bond deal, proceeds of which we did not deploy immediately.

We just – we generated adjusted net income of $14.2 million for the fourth quarter and $67.9 million for the full year. Our adjusted net income plus depreciation and amortization, which we think is a good measure of cash flow performance was $76.6 million during the fourth quarter and over $308 million for the full year.

As the industry momentum continues to build and as our new investments come on line we expect commercial gains with our profitability. With our strong cash position, our projected cash flows, we continually assess the best way to deploy our capital.

In addition to the accretive investments that we’re seeing and our dividend, our Board approved a $60 million share repurchase program. We see this as an excellent investment given our growth prospects and our current valuation.

As most of you know, the competitive landscape for aircraft lessors involved during 2010. A number of new participants entered the market and some of the larger established competitors started investing again. We welcome these changes.

We believe the competitive dynamics generally favor us as they serve to accentuate our distinctions. We have a conservative leverage in resilient capital structure, proven transaction expertise and access to diverse sources of funding.

What I would like to emphasize in this context is that we’re pursuing a differentiated growth strategy, we’re focusing on investments and high-utility aircraft and our situations where we have an edge, particularly where we can add value. We generally stay away from the highly competitive auctions in which the winner is selected mainly on the basis of lowest cost of capital rather than our transaction capabilities.

Our focus on unique investment opportunities combined with a rigorous valuation discipline positions us to have -- positions us to generate superior risk adjusted returns. We see attractive opportunities to purchase new generation aero bodies particularly for the first half of the production run as well as high quality light body aircraft.

Additionally, given the extremely tight supply of modern law of freighters, we now believe there is attractive -- this attractive opportunities to invest in passenger to freighter conversions. This is [narrow] we played in the four flight successfully.

Overall, we’re seeing good deal flow from airlines all over the world and a growing opportunities start from leasing counties. Competitors eyeing the part of the market that we’re targeting typically face higher barriers entry compared to new aircraft deals where returns have been bit down to almost pre-crisis levels.

Additionally, our debt costs have declined dramatically over the past several months, placing us in even stronger competitive position. In addition to new investments, we’ll also consider more asset sales particularly for the aircraft situated in the part of the market that’s already recovered significantly that is the part for which bank financing is more readily available.

Our new deal pipeline has been building very nicely and in addition to our built-in growth, I believe $0.5 billion to a $1 billion in incremental investments during 2011 is a reasonable target as assuming current market conditions continue. Driving this process for us is our new Chief Investment Officer, Bob Peart.

Bob joined us in December from Guggenheim Partners. He is leading our investment, lease placement and asset sales efforts. Having served as an investment manager, airline CFO, lender, engine leasing and trading manager, Bob brings to Aircastle an intimate knowledge of the metal side of our business as well as capital markets know-how.

In closing, based on the industry trends I’ve reviewed in our performance in 2010, we’re very optimistic about our growth prospects in 2011 and beyond. We expect to benefit from our significant built-in growth, recent new investments and the continuing emergence of investment opportunities in line with our strengths.

We have the capital structure, the financial markets access and the platform to respond to a wide range of opportunities and discipline matter as you would like to clear the investment criteria. I’ll now turn it over to Mike.

Mike Inglese

Thanks, Ron. The fourth quarter was another strong quarter and we’re well positioned for a much stronger financial performance in 2011 as our Airbus A330 delivered throughout the year and we see the contribution from the incremental aircraft assets we added to the fleet during the second half of 2010.

Lease rental revenue for the fourth quarter of 2010 was $139.3 million, up $11.6 million or 9% from the previous year due primarily to the net impact of aircraft acquisitions and disposals. Our portfolio yield for the quarter came in at 14%, up 40 basis points from Q4 ‘09 and revenue utilization was about 99% for the quarter and full year 2010.

I think it’s important to emphasize that as you look at our P&L, we believe lease rental revenues represent truest measure of basic portfolio revenue performance. Total revenues for Q4 2010 were $134.7 million down a modest $1.1 million for the prior year reflecting the $11.6 million of higher lease rental revenues offset by lower maintenance revenue of $10 million due to fewer scheduled and unscheduled leased transitions in the fourth quarter of 2010 and higher amortization of net lease discounts and leasing incentives of $2.8 million.

As we discussed previously, we recognized maintenance revenue at the end of any particular lease whether scheduled or not, the amount we recognized in any reporting period is inherently volatile, period specific rather than recurring and is dependent upon a number of factors including the timing of lease expertise or terminations, the timing and cost of maintenance, events and the utilization of the aircraft by the lessee.

EBITDA for the quarter was $134.8 million, up $10.3 million from the fourth quarter 2009 due primarily to higher lease rental revenue, lower SG&A and maintenance and other costs and higher other income of $6 million, which is driven primarily by higher gains from asset sales in Q4 compared to Q4 2009.

These increases were partially offset by the lower maintenance revenue in Q4 2010 of $10 million compared to Q4 2009. Adjusted net income for the fourth quarter was $14.2 million or $0.18 per diluted share on revenue of $134.7 million for the fourth quarter compared to $21.1 or $0.27 per diluted share on revenue of $135.8 million in the fourth quarter of 2009.

The year-over-year decrease of roughly $6.9 million reflects lower total revenues of 1.1, higher depreciation of 3.1 and higher adjusted interest expense of 5.9 partially offset by lower SG&A and maintenance and other costs of $2.5 million. Adjusted net income plus depreciation and amortization was $76.6 million for the fourth quarter or $0.96 per diluted common share, down about 1 million year-over-year due primarily to lower maintenance revenue of $10 million and higher adjusted interest expense partially offset by higher lease rental revenue of 11.6 and lower SG&A and maintenance and other costs of $2.5 million.

Total SG&A for Q4 2010 was $11.7 million, down about $1 million from the fourth quarter of 2009 resulting from lower cash SG&A of $1.5 million over the prior year mainly related to personnel expenses and professional fees partially offset by higher non-cash share based compensation expense of $0.5 million in the fourth quarter of 2010.

Depreciation expense for the fourth quarter was $56.2 million and at the end of the quarter, our monthly run rate depreciation excluding the 737 converted freighter sold in January 2011 was approximately $19.3 million. As detailed in our recent 8-K filing, during the fourth quarter 2010, we reported a gain of $8.4 million in connection with the disposal of one 737-700 that was declared a total loss and we incurred non-cash hedge and effectiveness charges related to the sale of aircraft of $2.5 million, which is recorded in interest net in the income statement.

In addition, we completed the sale of four 737 freighter aircraft in January 2011, which is previously expected to close during the fourth quarter. And during Q1, we recorded a gain on sale of approximately $9.5 million on that transaction.

Fourth quarter 2010 tax provision with an effective rate of 11.4% bringing our annual rate to roughly 9.1% and reflects the revenue on income sourcing mix from the portfolio during the year. For 2011, we expect the effective tax rate to be back in the 7% to 8% range overall.

Looking at our acquisition activities during the fourth quarter, we completed the acquisition of six aircraft, three 737-800s, two 747 production freighters, all of which were funded from cash on hand and one A330-200 freighter which is funded with the ECA’s afforded loan that Ron mentioned earlier.

At year end 2010, our annualized lease rental run rate from the portfolio, excluding the 737 freighter sold in January was approximately $560 million, of which 93 million was being generated from 18 aircrafts that we owned out right without any financing related encumbrances.

With respect to our Q1 2011 expectations, we see annualized leads rental run rate at the end of Q1 to be around $570 million reflecting the net addition of two A330s during the quarter offset by the disposal of the four freighters we sold in January and assuming our five current AOG aircraft remain off lease at quarter end, with $93 million of that run rate expected to come from our 18 unencumbered aircraft.

We expect that once we place all five AOG aircraft back on lease, that these aircraft will provide an incremental $10 million to $12 million of additional annual run rate. Maintenance revenue for the first quarter is expected to be between $13 million and $16 million reflecting the shift into the first quarter of ‘11 of previously expected Q4 2010 transitions and the impact of the early termination of the five aircraft from lessees in the Middle East.

Our amortization of net lease discount and lease incentives is expected to be in a range of $3 million to $5 million for the first quarter. We ended 2010 with $240 million of unrestricted operating cash, $190 million of restricted cash and $50 million of availability under our unsecured revolver.

With a strong balance sheet, steady cash flow is an access to capital, we’re in a position to support our growth strategy, continue our current dividend policy and take advantage of the attractive investment opportunities such as the stock buy-back announced today.

At the end of the year, we had $2.7 billion of secured and unsecured borrowings with net debt outstanding of approximately $2.5 billion, which is about 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 recently completed the annual appraisal for our term loan one facility and are in compliance with our 75% loan to value test as defined in that deal reflecting both the general recovery and asset values as well as the maintenance condition of the aircraft in this portfolio.

To conclude, the fundamental business continues to perform very well and benefits from the built-in growth we’re now beginning to see realized. With a strong cash position, revolver availability and access to external capital, we expect to see organic growth in earnings from our -- in our portfolio during 2011.

And with that, operator, we’re happy to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Scott Valentin with FBR Capital Market.

Scott Valentin – FBR Capital Market

Good morning. Thanks for taking my question. Just with regard to the five aircraft, do you actually have possession of the aircraft yet or are you in the process of gaining possession?

Ron Wainshal

Hi. It’s Ron. We have possession of two aircraft. They are out of the Middle East and the other three aircraft are still in Cairo and they’re being looked after by a top notch MRO facility.

Scott Valentin – FBR Capital Market

Okay. And then overall the stated condition of the aircraft, generally, what you would expect or are there any unforeseen issues with the aircraft?

Ron Wainshal

At this point, we don’t see anything -- until you expect the aircraft in more detail and you put them through shock, it’s impossible to know but we don’t know of any right now.

Scott Valentin – FBR Capital Market

Okay. And then just with the remaining exposure, I think you went through it very quickly to understand it properly. I think, there is about 10% of the portfolio is Middle East and Africa and I guess the Emirates is probably the vast majority of that exposure?

Ron Wainshal

Yeah. A little under 10% and Emirates is about two thirds of that. Obviously, the stuff that we took out is worth over 2% and the remainder is quite small.

Scott Valentin – FBR Capital Market

Okay. All right. And then just another question, with regard to the NEO we’ve seen a couple of big orders come out for the NEO. I’m just wondering, you mentioned the strategy of acquiring narrowbody aircraft from the first half of production or first runs of production. Any thoughts on the impact of NEO on those values, does that change your thinking at all?

Ron Wainshal

No. We’re looking at the NEO like any investor in the market is and studying what this is. It’s still kind of an emerging picture but I think it is important to remember a couple of things. Firstly, the stated goal of that program is to come online in 2016. So five years from now.

In the meantime, we have got an installed base of 6,000 current-generation narrow bodies and that is going to grow along with the demand base. This isn’t the first [re-engineer for 20] by the way. The first iteration happened in the mid-to-late 90s and the first generation engine is actually quite well.

I think the strategy of buying from the first part of a production run, as we have adopted is a very sensible one. And we kind of quantify it, if we hook at a new A320 that you buy today, you’re probably buying it for somewhere in the low to mid 40s in terms of price. In six years when the production is supposed to begin coming online, you’re looking at a residual value depending on your depreciation assumptions in the low 30s, you’ve got to recover that over some period of time, say, 20 years, in the face of something that’s new.

If you buy a 10-year-old aircraft today in the mid 20s and you look at the depreciation, the value that you have outstanding say in six years, same time, it’s half as much. So the amount of recovery that you need in the face of a new and emerging technology is much less. It’s always about the transaction, Scott, but we see there being really good values in the middle of the market and fuel efficiency and operating efficiency differences aren’t that big. Even with fuel prices now there’s almost no part A320s or 737 MGs of any in it.

Scott Valentin – FBR Capital Market

Okay. Thanks very much.

Operator

And our next question comes from the line of Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Good morning, Ron and Mike.

Ron Wainshal

Good morning.

Mike Inglese

Good morning, Gary.

Gary Liebowitz – Wells Fargo Securities

Ron, can you clarify your comment about a $0.5 billion to $1 billion of investment opportunities you’re targeting, because by my math you have well over $0.5 billion in, you know, scheduled for delivery from Airbus this year. So, is that $1 billion number inclusive of what’s in the pipeline now?

Ron Wainshal

The $0.5 billion to $1 billion is above and beyond the Airbus order. And the Airbus order, by the way, just from a funding perspective, we expect as by did with the first aircraft in February and with aircraft delivery this month to fund most, if not all, of those aircraft to ECA (inaudible) and is in aircraft orders we have made, what we call, pre- delivery payments, progress payments against the price of the aircraft as the aircraft is built.

Together with our pre-delivery financing schedule we basically put the equity we need for those aircraft down already. That’s been sitting on our books, so to speak, for the last year plus. So, that is, I think of that as a self-funding program by and large.

Gary Liebowitz – Wells Fargo Securities

I see. Also, with respect to the Egypt planes, Mike, can you just go through the first quarter accounting considerations? I suspect it would be some end of lease related revenues, whether it’s security deposits or maintenance that you would book or correct me if I am wrong there?

Mike Inglese

No. That’s correct, Gary. As I mentioned in my remarks, we expect maintenance revenue to be between 13 and 16 for the quarter and a good chunk of that will be related to those four aircrafts that were terminated here in the first quarter of this year.

And in terms of security deposits and when the lease is expired, we expect that we’re covered through the first quarter, but that we -- given where we are in March 10, we’d expect to see some downtime from those assets probably in the second quarter.

Ron Wainshal

And just to add a little bit to that, in terms of where we see these aircraft going from a lease rental perspective, as we did with the Sterling situation, we have to balance lease term and redeployment costs. Some people want different seating configurations, for example. That will factor into what we booked for rentals.

But putting all those five together, we expect the monthly rentals on those will be somewhere in the $800,000 to a million territory in aggregate. And the specifics, we don’t know yet. It will tie into those factors. But we’re in a much better position now heading into spring and summer than we were with the Sterling situation and these are commodity aircrafts that enjoy a broad demand base. So we’re optimistic.

Gary Liebowitz – Wells Fargo Securities

Okay. And the two aircrafts that you’ve contracted to sell later in 2011, are those going be at gains or losses or can you quantify that?

Mike Inglese

The short answer is no. The quantification is no gain or loss. We’ve already taken that into consideration. One of the aircraft is a 737-500 upon which we took an impairment back in the fourth quarter, the actual price that we sell the aircraft to will -- as always, depend on the specific pre-delivery conditions. So there’s always a chance for some variation against our estimate of what this will result in, but I don’t expect there will be much of a change.

The other aircraft is a 757 and here again, the price has been set a long time in advance and the only source of variation there is just the delivery conditions. Our best estimate right now is that it’s going to be a breakeven.

Gary Liebowitz – Wells Fargo Securities

Now, these are being sold out of the 2007 securitizations?

Ron Wainshal

The answer is yeah.

Gary Liebowitz – Wells Fargo Securities

So there will be some free cash that flows to the corporation?

Ron Wainshal

Correct.

Gary Liebowitz – Wells Fargo Securities

Okay. Just one last one on the sale of the four freighters, did you disclose how much free cash that generated?

Ron Wainshal

No.

Gary Liebowitz – Wells Fargo Securities

Will you?

Mike Inglese

You’re talking about net proceeds after debt repayment?

Gary Liebowitz – Wells Fargo Securities

Yeah.

Mike Inglese

Yeah. It did generated probably in the neighborhood of $25 million.

Gary Liebowitz – Wells Fargo Securities

Thank you very much.

Operator

(Operator Instructions) Our next question comes from the line of Josh Pinkerton with Goldman Sachs.

Josh Pinkerton – Goldman Sachs

Good morning.

Ron Wainshal

Morning, Josh.

Mike Inglese

Hi, Josh.

Josh Pinkerton – Goldman Sachs

I was just wondering if you guys could expand a little bit more on your comment that you might look to sell some of the aircraft where bank’s financing has come back into the market. I assume that means, kind of, the latest-generation narrow bodies and just maybe your thoughts on what you might look to reduce your exposure to, if anything?

Ron Wainshal

You can think about sales as being driven by two different reasons. One of them as we have in the last year, driven by, kind of portfolio management or exit of the type kind of strategy, the 737-500 is a good example.

In other cases, if you can take the capital from a sale and deploy it more profitably than it is right now, that’s probably a good idea. And I think that opportunity exists with some of the aircraft we have coming from our order stream and some of the aircraft we have bought in the last year or two. The bank market financing has broadened a little it bit, but I think it will still kind of recover slowly. So it is for newer aircraft, but I don’t think it’s limited to narrow bodies, Josh.

Josh Pinkerton – Goldman Sachs

Okay -- I mean, are you seeing lease rates come down on some of those new aircraft, because we’re seeing a lot of new entrants come into the field and I was just wondering how that competitively is playing out versus other source in the market, if that’s having an impact versus maybe wide bodies or some of the older aircraft?

Ron Wainshal

Let me take your comment and kind of break it down. Lease rates are established in two different ways. One is in a sale leaseback transaction, which is sort of a financing and the other is just in the open market. We’re seeing the open market rentals drop and continuing to increase.

In the financing side of it -- sales leaseback side, it’s gotten more competitive. And as I said during my prepared remarks we’re seeing un-levered returns at almost pre-crisis levels. So in that case, the answer is yeah. And that’s been mostly a narrow body phenomenon, but it’s also crept into the wide bodies too. And yeah, the new entrants are -doubly having an effect. There is no doubt about it.

I think the fact that some of the traditional players that are getting back into investment mode is also having a big effect and they, too, are focused almost exclusively on new aircraft. And the other part of the picture is the continuing big role the DCAs play. But, I think the new entrants in the -- it’s almost like a unilateral focus on newer aircraft. That’s what makes us excited about our investment policy.

Josh Pinkerton – Goldman Sachs

And then just one last question, can you just update us on the latest thinking on securitizations and as those start to accelerate later this year?

Ron Wainshal

Yeah -- we at the moment, Josh, we haven’t found any elegant solution for the 2006-1 securitization which would go into that mode in June of this year. We’ll continue to look at the ‘07 deal and market conditions do continue to improve.

We don’t have a trade or deal to talk about specifically today, but we continue to look at the second one which would go into amortization mode in the middle of 2012 and think there is perhaps a more likely transaction we can get done with respect to that one.

But for the first one, I don’t think we see anything today and we are not expecting to see anything in the near-term that makes trading that in economics and structure for something that exists today.

Mike Inglese

Yeah. And in that regard, I’ll just point out that the swap interest cost -- the fixed interest costs of those deal was in the mid to high fives. So it’s a pretty attractive place to be in the first instance and it’s a high standard for replacing.

Josh Pinkerton – Goldman Sachs

That’s great. Thanks, guys.

Ron Wainshal

Sure.

Mike Inglese

Thank you.

Operator

And our next question comes from the line of Paul [Strike] with Cohen Asset Management.

Paul Strike – Cohen Asset Management

Morning. Just getting back to the securitization issue, if you’re not able to refinance this year then next year’s, have you quantified the impact of EPS or EBITDA of this cash flow diversions?

Mike Inglese

There’s no impact on EBITDA or EPS on the business on a consolidated basis. We are the only equity holder in those securitizations and it’s just a question of redirecting cash to pay down debt and de-lever those facilities.

Ron Wainshal

Paul, I think, if you break it down actually, if you look at earnings and if you pay down your debt faster there’s less interest. The question is what is the opportunity cost relating to that cash? Because you’ve invested that in a higher return and I don’t think either of those is going to be -- in either of those cases is going to be a very big number.

In terms of the cash flow of the business, Mike talked about the growing base of unencumbered assets that we have, the 18 aircrafts that are generating a little under $100 million of cash flow just on their own. And that’s a pretty good cash flow irrespective of what happens to the three portfolios financings we have and this cash flow that comes from our export credit agency backed aircraft and we expect we will be growing our encumbered basis further this year.

Paul Strike – Cohen Asset Management

Okay. Thank you.

Operator

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

Scott Valentin – FBR Capital Markets

Thanks again. Just a quick follow-up. With regard to the proposed changes in some of the ECA financing, the addition of a C, how do you envision that impacting, you know, the space, I guess, both from a airline perspective (inaudible) require aircraft directly with a higher cost, the ECA being advantaged from that source?

Ron Wainshal

I think the first thing is that -- this is in regards to our own order stream, we are covered by the existing rules, meaning that we still have the more favorable financing scheme in place. That basically goes away at the end of 12.

And in regards to deliveries after 2012, it’s a much more expensive proposition and the way we always think about it is that ECA is sort of your backstop in terms of financing. If your backstop just got twice as expensive from a margin perspective and it makes you on the margin that much less inclined to buy aircraft. Now aircraft demand is so solid that I don’t think it is going to result, per se, in any changes in that respect.

It makes me, on the margin, a little bit more reluctant to make a new order. I don’t think this is the time to do it for us in any case. However, I think the opportunity set will be better for anybody who is a commercial financer, whether you’re a lessor or a lender, beginning in late 2012 as people look to find out the sources.

Scott Valentin – FBR Capital Markets

Okay. And then, in terms of -- I guess you expect would lease rates to rise as funding costs, given your (inaudible) increased lease rates, given the alternative is much more expensive for the airlines?

Ron Wainshal

Yeah. A little bit, I think it’s going to be a gradual change, I don’t think it’s an earth shattering thing especially since it’s a couple of years out.

Scott Valentin – FBR Capital Markets

Okay. And one final question, in terms of the mix of aircraft, it’s 70:30 passenger cargo roughly. Is that mix, I mean, given the opportunities that you see in front of you, does that change at all going forward? Do you see more opportunity on the freighter side?

Ron Wainshal

Well, you got to remember that of our contracted orders with Airbus of the seven remaining, actually six remaining aircraft, five of them are passenger and that’s a lot of money. So that’s going to push the percentage a little bit more towards passenger. But the freight -- I think the freight market is going to be an important year for us irrespective. I don’t think a big change is going to happen, but for the first time in three years, I see passenger freighter conversion opportunities.

There’s just no supply of 747-400 freighters in the market today and those are tough deals to do. There’s a probably handful of that source who can pull that off. We are one of them and we see a really good kind of competitive landscape and a great supply. So, you’ll see maybe a little bit more of that happening in the near term, but on doubts, I think it’s going to stay roughly in the same ballpark.

Scott Valentin – FBR Capital Markets

Okay. Thanks very much.

Ron Wainshal

Thank you.

Operator

And there are no further questions at this time. I will now turn the call over to the presenters for closing remarks.

Ron Wainshal

Thank you for joining us today. We look forward to talking to you soon.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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