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Aircastle Limited (NYSE:AYR)

Q3 2011 Earnings Conference Call

November 8, 2011 11:00 AM EST

Executives

Michael Inglese – CFO

Ron Wainshal – CEO

Analysts

Gary Liebowitz – Wells Fargo Securities

Andrew Light – Citi

Gary Chase – Barclays Capital

Josh Pinkerton – Goldman Sachs

Greg Lewis – Credit Suisse

Scott Valentin – FBR Capital

Bill Mastoris – Gleacher and Company

Jon Evans – Edmunds White Partners

Operator

Good morning. My name is Ashley, and I will be your call conference operator today.

At this time, I would like to welcome everyone to the Aircastle Q3 2011 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).

Thank you. I would now like to turn today’s conference over to Michael Inglese, Chief Financial Officer. Sir, you may begin your conference.

Michael Inglese

Thank you. Good morning, everyone. I’d like to welcome all of you to the third quarter 2011 earnings call for Aircastle Limited.

Ron Wainshal, our Chief Executive Officer, will start the presentation shortly. But first, I would like to mention that this call is being recorded and the replay number is 855-859-2056 from within the US, or 404-537-3406 from outside the US, with the replay pass code of 20331845. This call will also be available via webcast on our website, www.aircastle.com, in addition to the earnings release and an accompanying PowerPoint presentation.

I would also like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain factors that could cause actual results to differ materially from Aircastle Limited’s expectations are detailed in our SEC 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 for joining us today. I’ll start by touching on Aircastle’s third quarter 2011 results, then I’ll discuss what we’re seeing in the market. Finally, I’ll cover our strategy. Mike will discuss our financial results in more detail. Then, we’ll open up call to your questions.

Let’s start with a few highlights. Q3 was another strong quarter for Aircastle. We continued to manage our portfolio effectively and to benefit from the earnings power of more than $1 billion of investments made since the beginning of 2010. These acquisitions have been very profitability and it reflected value-added orientation of our investment approach. They’ve enabled the company to post higher year-over-year result to Q3 and consistently throughout this year.

We’ve continued to source attractive new investments. So far during the second half of 2011, we’ve invested about $470 million in acquisitions, including more than $250 million since the end of the third quarter. Among the 12 aircrafts we’ve acquired since September 30th, is our first Boeing 777-300ER which is on a long-term lease with Cathay Pacific.

During the third quarter, we also continued to unlock value from our portfolio through asset sales. We generated approximately $9 million in gains, before certain noncash charges in the sale of two aircraft. One of these aircrafts was a 747 freighter we had purchased off lease last year, put through maintenance and then placed on a long-term lease with a leading Asian airline. Once again, this illustrates the value we bring to the table.

During the quarter, we completed our previously authorized share repurchase program, buying in additional 2.6 million shares at a cost of $30 million. In total, we purchased 7.6 million shares or approximately 9.5% of the company’s common shares at a total cost of $90 million. Today, we announced – our Board approved a 20% increase in our fourth quarter dividend. This will be the 22nd consecutive quarter we’ll pay a dividend. The quarterly dividend is now 50% higher than the level at the beginning of the year. These actions demonstrate the Board’s and management’s confidence in Aircastle’s ability to generate strong cash flows as well as our commitment to creating shareholder value.

Now, a few words on our financial performance. In the third quarter, we generated nearly a $146 million in lease rental revenue, representing a 9% year-over-year growth. This is attributable primarily to an increase of $19 million in rentals from aircraft acquisitions net of dispositions. Net income increased a 164% to $22.7 million or $0.31 per diluted common share. Our liquidity position remained strong with unrestricted cash of $265 million as of September 30th.

Now, let’s take a look at some specific operational measures. Our third quarter utilization rate was 99% and our rental yield came in at 14%. Based on our operations so far in Q4, we anticipate we’ll continue to generate strong and comparable utilization rental yields throughout the remainder of the year. In terms of lease receivables, we have only $500,000 in payments more than 30 days outstanding.

Our aircraft placements are in good shape. We have two aircrafts left to place for 2011, both of which are A320 family aircraft, and we’ve made significant progress regarding our 2012 lease roll-offs.

Looking at the scheduled lease expirees for 2012, to date we’ve secured lease placements or extensions for more of than half of these aircraft by net book value, leaving us to place only 6% of our overall portfolio net book value for next year. Weighted average remaining lease of our portfolio is five years, providing the company with strong contracted revenue stream.

Turning to our view of the overall market, I’ll start by noting that air travel is basically a GDP driven activity, and we’ve been seeing mixed signals as global economic growth have slowed over the past several months. Passenger demand has remained surprisingly robust. According to IATA, the International Air Transport Association, through September, year-over-year traffic is up 6.3%, which is higher than long-term average growth rate of around 5%, even if September results is reasonably good with the year-over-year increase of 5.6%.

On the other hand, air cargo demand has been weak. September was the fifth straight month where freight traffic dropped year-over-year. While there is some trade market specific forces at work in these statistics, the air cargo market has historically been a leading indicator for the passenger market. Looking ahead, we expect passenger air traffic growth rates to moderate.

With respect to supply, the number of part modern technology aircraft remains very low. But due to a combination of increasing production levels particularly for narrow body aircraft, and diminished business confidence, we don’t expect to see a continuation of the cyclical recovery in rentals that we’ve been enjoying during the first half of this year. More specifically, rentals for Airbus narrow bodies are weaker than for a comparable Boeing models as evidenced by growing rental premium for 737-800s versus similar A320s. Additionally, smaller variance such as the A319 and the 737-700 are in less demand, reflecting what we think of is the fundamental shift in demand for short-haul aircraft towards larger models.

In contrast, the outlook for wide bodies is brighter, both because demand for long-haul premium travels held in and due to low levels of new supply, mostly due to delay in the 787 deliveries.

The biggest change in our industry over the past several months has been in the financial market. During this time, we’ve seen a further contraction in the traditional aerospace bank market with several leading trench banks cutting back on new business or even worse, closing up longstanding aircraft finance departments. We believe this is part of a longer-term structural issue leading to a diminished role for banks in respect to the overall aviation finance market. And while bank capacity remains available to finance new aircraft for stronger counterparties, we believe it will be more difficult for small and weaker aircraft fliers to get financing from banks.

Financing for mid-age aircraft remained limited. We expect banks will account for a smaller share of the new aircraft financing market, and once again, export credit agency backed financing will pickup the slack. In fact, we expect the ECAs to grow beyond the roughly 30% of the new aircraft financing that they’ve held for each of the past three years. We believe this elevated level of ECA support for such a long period of time suggested aircraft production they’ll be at levels that are not commercially sustainable.

Pricing in the US capital markets also got more expensive over the summer. But it has shown recent signs of recovery. Fundamentally, we believe that this is a bigger and deeper pool of capital in the bank market, but it’s one where credit ratings matter a lot more. In our view, Aircastle’s access to this market is a strategic differentiator, particularly given the difficulty involving getting a strong credit rating.

Our capital costs plus a somewhat weaker outlook for rentals means prices are unlikely to continue to increase. In fact, for many aircraft types, we believe aircraft prices will moderate, and therefore we think this is a good time to buy, provided reasonably the private financing is available.

As we look ahead in our growth plans, we’re pleased for A320 program. All the aircrafts are placed and have financing ECA commitment to place. During the third quarter, we took delivery of three new A320s, two passenger model fleets to South African Airways and a cargo aircraft leased to an affiliated high-end group in China. We’ve financed two of these aircraft with attractive long-term debt providing us with strong returns on equity. We also sold one of the South African aircraft upon delivery. And we have the contract in place to sell the six and final SAA unit which is delivering in December. The last A320 from an order stream is scheduled to be delivered in the spring of 2012 to Virgin Australia.

Apart from this built-in growth, we’ve made significant investments in the open market through a variety of channels based on where we’ve seen the best opportunities. We’ve invested approximately $210 million during the third quarter, acquiring four aircrafts including two 747-400s, which we’re converting the freighter configuration. We’ve executed long-term leases for both aircraft to Southern Air and expect them to be in service during the first quarter of 2012. Our value-added investment strategy is once again highlighted by the acquisition conversion to long-term lease placement of these aircrafts.

As I mentioned earlier, we purchased our first 777-300ER aircraft in October. This is an aircraft type which we believe has a strong residual value outlook. We’ve financed this investment with a $90 million term loan provided by a German bank. To my point earlier, this acquisition highlights that even in a challenging environment, bank financing is available for quality transactions.

Going forward, we expect new high-quality wide body deals such as this will play an important part of our investment program along those for yield year mid-age current technology aircraft which we expect to finance via the unsecured bond markets. We think that these deals is offering returns on equity in the mid-to-high teens if not more. All-in-all, I think we’ve positioned Aircastle very well relative to our peers in regards to accessing capital. This is important given what we believe will be a more attractive opportunity set for aircraft purchases.

Aircraft sales continued to be a core function for Aircastle though. Our level of activity is going to be driven by the strengths of the market. In addition to allowing us to manage our portfolio exposures, asset sales also allowed to demonstrate the value added of aspects of our strategy. Since Aircastle’s founding, we’ve sold or committed to sell 25 aircrafts, generating net proceeds in excess of $650 million, with an aggregate unleveraged return of nearly 15%. Importantly, by utilizing a selective disposition strategy, we’ve been able to maintain a diversified and in-demand portfolio, while increasing our return on equity.

To sum up, we see great opportunities for Aircastle. We’re continuing to manage our portfolio effectively, de-risking our revenue streams through early and continuing focus on our 2012 placements. We have no debt maturities until 2015, and one of the lowest debt-to-total capital structures in the industry. Very importantly, we believe we’re well positioned to access capital for new investments.

We are a strategic long-term investors with a focus on achieving superior risk adjusted returns on our investments and creating value in the market through the disposition of aircraft. Our competitive advantage is service well, as our disciplined approach and expertise enables us to identify opportunities in market that generate accretive growth. We’re confident about our outlook and the strengths of our cash flows, which has led to increase our dividend once again. We’re committed to returning value to our shareholders through our dividend program and increasing our earnings per share, and our overall return on equity.

I’ll now turn it over to Mike.

Michael Inglese

Thanks. As Ron mentioned earlier, the $1 billion plus in new investments completed since the start of 2010 have driven significant improvement in our financial results. Lease rental revenue for the third quarter was a $145.9 million, up 9% over the third quarter of 2010, due primarily to the net impact of aircraft acquisitions and dispositions of $19.2 million. This increase is partially offset by lower lease rentals due to lease terminations, transition and extensions of $6.8 million.

Strong performance from the portfolio contributed to the company’s results with respect to fleet utilization, which came in at 99%, with a portfolio yield of approximately 14%. We expect to come in at these utilization and yield levels during the fourth quarter of 2011 as well. Total revenues for the third quarter of 2011 were $141.5 million, up 7% from the third quarter of 2010, and reflect higher lease rental revenue of $12.4 million, approximately offset by $2.5 million decrease in maintenance revenue. As expected and discussed in our last call, no maintenance revenue was recorded during the third quarter of 2011 since we had no lease terminations during the quarter.

Portfolio growth also drove improved EBITDA. For the third quarter, EBITDA was a $137.6 million, up $21.5 million from the third quarter of 2010, reflecting higher lease rental revenue of $12.4 million, gains totaling $9 million from the sale of aircraft and a reduction in impairment charges compared to the prior year of $6.1 million. The impact of these items was partially offset by the $2.5 million decrease in maintenance revenue and higher maintenance and other cost of $2.9 million compared to the prior period.

Adjusted net income plus depreciation and amortization was $80.2 million or $1.09 a share for the quarter, a year-over-year increase of $7.7 million. This was primarily due to the increase in lease rental revenue, the reduction in impairment charges, and the corresponding decrease in maintenance revenue. Adjusted interest expense, up $3.4 million and maintenance and other costs higher of $2.9 million on a period-over-period basis.

Adjusted net income for the quarter was $15.4 million, up $2.8 million year-over-year, reflecting the increase of $9.3 million in total revenue, reduction in impairment charges of $6.1 million, partially offset by increases of $4.4 million in depreciation, $3.4 million in adjusted interest expense, and maintenance and other costs up $2.9 million. Depreciation expense for the third quarter was $60.1 million. And at the end of the quarter, our monthly run rate depreciation was approximately $20.7 million.

During the third quarter, we recorded an impairment charge of $1.2 million related to one Boeing 737-400 aircraft which we plan to sell. The lease on this aircraft was early terminated in the second quarter, at which time, we recorded a $5.2 million impairment charge, as well as maintenance and other revenue totaling $3.1 million.

Reported interest net for the quarter was $48.9 million, higher by $1.5 million from the previous year. This reflects higher interest of $1.9 million, driven by higher average debt outstanding and higher amortization of deferred losses of $3.4 million, including an accelerated amortization charge of $1.7 million relating to the sale of our South African A330 in the third quarter. The impact of these increases partially offsets by lower deferred financing fee amortization, $900,000 decrease due to measured hedging effectiveness, and an increase in capitalized interest in period-over-period of approximately $400,000.

In Q3 2011, our tax provision indicated an effective rate of about 5.2% reflecting the revenue and income mix during the full year-to-date results. And for our full-year 2011, we expect the effective rate to be in the 6% to 7% range overall.

At quarter-end, our annualized lease rental run rate of the portfolio was about $579 million, of which, about $94 million is being generated from aircraft we own outright with any financing related encumbrances. And as I’ll discuss later, our recent purchases will increase the size of the encumbered asset pool as well as its earnings power.

In the quarter, we performed our annual recoverability assessment. This assessment was prepared in the context of broader aircraft specific portfolio review, which we assess each aircraft relative to our expectations of current and projected market conditions and trends. Other than the 737 classic that we impaired in the quarter, we recorded no other impairments during the year as a result of this assessment.

As a result of this recent assessment, we did make changes to the economical life or residual value assumptions for certain aircraft types to reflect changes in market conditions. More specifically for our Airbus A319 aircraft, we shorten the economic useful life assumptions to be 22.5 years from the prior 25 years, resulting from what we believe to a long-term reduction in demand for this lower capacity variance of the A320 family.

For classic and less fuel efficient narrow body aircraft consisting of the Boeing 737 classics to 300 and 400 variance, as well as the Airbus A320-200 aircrafts with previous generation’s engines, we reduced our end of life residual value assumptions to reflect weaker market demand and lease rate conditions for these aircrafts. As a consequence of these changes to our estimates, we expect future annual depreciation for these aircraft will be approximately $3.5 million higher than our previous annualized depreciation expense for these class of aircraft.

As part of the recoverability assessment, we identified assets that are more susceptible to failing what is essentially a test of future projecting cash flow and residual values. At the end of the third quarter, we identified a total of 26 aircrafts with a net book value approximating 9.2% of the total book value of our flight equipment as being more sensitivity to changes in those contractual cash flows and future cash flow estimates and aircraft residual and scrap values. These aircrafts comprised of the A319s which we discussed, the classic narrow body aircraft, as well as the number of Boeing 767-300ER aircrafts. While the rental rates on the Boeing model of 767-300ER have remained firmed over the past year, we see continued demand for this aircraft for many years. We also anticipate a greater probability that lease rates will soften in time. That’s the result of a continuing success of the A330 program and as the production of the 787 eventually ramps up.

Consistent with our balanced approach of providing shareholder value to investment and return of capital, our Board authorized a 15% share dividends for the fourth quarter or 60% annualized, a 20% increase over our previous 50% annualized rate. This increase reflects our continued confidence in the expected cash flow generation capabilities from our existing portfolio, as well as committed aircraft acquisitions. Further as noted in today’s earnings release, we’re adjusting the timing of the declaration in payment to the dividend going forward to correspond more closely with our earnings announcements. Therefore, during 2012, we expect to pay dividends in March, June, September and December.

With respect to our previously announced share repurchase program as Ron mentioned earlier, we completed the program during the third quarter by purchasing an additional 2.6 million common shares with the remaining $30 million authorization, bringing the total purchases during 2011 to 7.6 million for $90 million or approximately 9.5% of the common shares outstanding at the beginning of the year.

Turning to our liquidity position, Aircastle ended the third quarter in excellent shape. At September 30, we had $266 million of unrestricted operating cash, $195 million of restricted cash, and $50 million of availability under our unsecured revolver. At the end of the quarter, we had $2.8 billion of secured and unsecured borrowings, with net debt outstanding of approximately $2.5 billion, which is 60% of the net book value of our flight equipment. Our net debt-to-equity ratio, excluding the market-to-market on our interest rate derivatives was approximately 1.6 to 1 at quarter-end. We are compliance with all debt covenants and tests.

During the third quarter, we entered into a new five-year forward starting interest rate swap agreement for securitization number two with an average fixed rate of 1.27%, which is approximately 400 basis points lower than the existing fixed rate swap for that deal. The new arrangement begins at the exploration of the existing hedge in June 2012 and has structured the hedge approximately 75% of the expected debt balance going forward. This reduction in rate apply to the average expected debt balance during its first year from June ‘12 to June 2013, would equal approximately $32 million in annual interest savings.

Based on the additions for the fleet so far in the fourth quarter and the expected sales activity, we expect to end the year with an annualized lease rental revenue run rate of between $595 million to $605 million. Of which, a $110 million would be generated from aircraft we own outright with any financing related encumbrances. Further, when factoring in the two 747 converted freighter that’s going on lease to Southern early next year, that annualized encumbered lease rate would grow to about a $127 million.

Looking ahead to fourth quarter 2011 expectations for certain other elements based on the timing of Q3 and Q4 acquisitions and sales activity, and expected lease transitions, we expect fourth quarter lease rental revenue to range from a $146 million to a $149 million. Based on lease transitions, we expect maintenance revenue to range between $6 million and $8 million during the quarter. We expect amortization of net lease discounts and lease incentives to range from $5 million to $6 million. And in connection with the contracted sale of our South African delivery in December, we would expect to record a $5 million to $6 million charge as part of our interest expense related to the termination of the hedge associated with that aircraft.

To conclude, with the strong liquidity position and proven access to capital markets, combined with the expected solid cash flow performance from the existing portfolio, we expect continuing organic growth in earnings and the portfolio for the remainder of the year and continuing into 2012.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Thank you and good morning, gentlemen.

Ron Wainshal

Hi Gary.

Michael Inglese

Hi Gary.

Gary Liebowitz – Wells Fargo Securities

Ron, you made a comment that there are some freighter market specific forces that work here, which speak to the negative view to your comps. I wonder if you could elaborate on that comment and if you see those forces easing anytime soon.

Ron Wainshal

Yes. One of the forces was, last year, we had a tremendous restocking of inventories as this economy recovered. So the year-over-year comps for this year were made that much more difficult, because you can’t restock twice. The biggest issue that’s affecting the freight market is business confidence. And when you chart what happens in the business confidence to revenue passenger kilometers time series, that’s passenger travel, you’ll see there is a pretty strong correlation there too. So we’re concerned about that.

As the mix of freight travel was also very different, we’re focused on long-haul trade that the passenger market is much more distributed across the world. The weakness in the freight market by the way has been very much focused on traffic out of Asia into North America and Europe. Freight flows in those direction are getting a little bit better and freight flows to the Middle East and South America are actually quite good. Currency is I’m sure playing a factor there too.

Gary Liebowitz – Wells Fargo Securities

Okay, thanks. If I can ask a follow-up, can you – do you have an update on the status of the LOT Polish 767 to the extent of which the damage was incurred on that plane.

Ron Wainshal

Yes. That – first of all, I would like to say, we’re amazed by the skill of the pilot and very, very relieved that nobody was hurt. That aircraft has been toed off the runway and there is an insurance adjustment process is underway. We expect it’s going to take several weeks before we know anything more.

Gary Liebowitz – Wells Fargo Securities

But this could be like you had earlier this year or last year, there could be a gain if it’s deemed in total loss and it could be material.

Ron Wainshal

Yes, but first we have to go through a process involving the insurance adjustments. So it’s premature to say anything about where this is going to end up.

Michael Inglese

Yes, Gary, I think – this is Mike. Just to make the main points on that topic. The aircraft is fully insured. When we know the outcome, we’ll know what it might mean from a cash end or accounting standpoint. And lessee is responsible for continuing to pay lease payments while this investigation is underway. So we’re covered, if you will, with respect to this incident, and we’ll report out what it means when we know.

Gary Liebowitz – Wells Fargo Securities

Okay. And Mike, can you just clarify? You gave a monthly depreciation run rate. Does that include the accelerated depreciation on the classic and A319s?

Michael Inglese

Yes, it does.

Gary Liebowitz – Wells Fargo Securities

Okay, thank you.

Operator

Our next question comes from the line of Andrew Light with Citi.

Andrew Light – Citi

Hi, good morning.

Ron Wainshal

Hi Andrew.

Michael Inglese

Hi Andrew.

Andrew Light – Citi

I have got a question on – how do you see the supply of freights, both new ones and converted ones, let’s say, the next 12 months? And do you think that’s going to have any reputations [ph] for lease rates values?

Ron Wainshal

I think the supply is a very small part of the story there. There is a couple of main sources of supply here. One of which is the 747-8, and that’s been slow to come on stream. But each one of those aircrafts is in fact very large. It’s a 130 ton aircraft versus the normal 747-400 workforce aircraft which is more like a little over a 100 tons. So say 25% bigger. 777 was the other big inflow. And there is a lot of demand for 777s just across the board. But I think the bulk of that supply is going into the passenger market. So a very few actual 777s is going into the mainline trade markets. FedEx is taking a lot of their – the ferry supply by the way, and that’s sort of a different market.

In terms for conversion freighters, I don’t see more than half a dozen airplanes getting freighter converted over the next year. And I see that the freighter supply will reduce quite a lot by the continuing retirement of lesser – less efficient models. Net-net, I’d say that the supply by strength, I’d say roughly level depending on the overall economic demand.

Andrew Light – Citi

So you’re comfortable with the aircraft – with the [inaudible] sort of the freighter values and lease rates in the end of price of the declining freight market?

Ron Wainshal

Yes, we don’t have any freighters coming off lease next year. We have one aircraft that we have slated for freighter conversion. That should come out at the end of next year perhaps. That’s the extent of our freighter replacement exposure. And we’ve done historically extremely well in terms of downturn in terms of payment performance. In fact, we went through the last downturn without any defaults whatsoever. So there is no guarantee of future success. But I don’t think we’re going to feel too much of an effect from what we’re seeing right now.

Andrew Light – Citi

All right. And just a follow-up question on the 250 million odd purchases since the quarter ended. I mean is that what you’ve done for the year? Would you expect more purchases? I think you originally had a target of 500 to 1 billion?

Ron Wainshal

There is going to be a little bit more activity. During the – we’re not – whether we achieve – I don’t think we’re going to achieve the target that we’ve set up before. When the financial markets started slowing down, we also put the breaks on our investment activity, because at the end of the day, we’re trying to do is to make a reasonable return on equity on whatever we’re putting to work. The movement in the financial markets is a lot faster than that in the aircraft prices.

As I mentioned during the prepared remarks, we saw a real contraction bank market capacity. The freight market – sorry, the high-yield market also got a lot more expensive. But in the last two weeks, it’s coming quite a lot. So for us, it’s a matter of being disciplined and not getting ahead of ourselves. So I think there is a little bit more coming for this year, but I think there could be a lot more coming in the early part of next year.

Andrew Light – Citi

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Gary Chase with Barclays Capital.

Gary Chase – Barclays Capital

Good morning, guys. How are you?

Ron Wainshal

Good. How are you, Gary?

Gary Chase – Barclays Capital

A couple of questions. I guess on, just sort of thinking about the some of the commentary you made again on this freight issue. I’m wondering if you’ve got customer commentary that’s suggesting people are expecting this to last. Just because – it’s sounds like you’re saying, “Well, you think the cargo market is a leading indicator, you expect passenger demand to follow,” as you’re out sort of talking to less cease in general, are they indicating that they expect this weakness to persist?

Ron Wainshal

It’s a mix story that depends on what part of the world you’re dealing with. But I think it’s important to go, take a step back and look at what’s driving all this, this is basically a GDP driven activity. And if you will look at most GDP forecasts, there has been a progression of decreasing expectations. A lot of this flows out of the concerns coming out of the European debt crisis. I think it’s a broader business confidence issue. And we’re seeing that reflected into demand for goods coming out of North America and Europe. Having said that, I mean if there is some sort of solutions put together, that could be a positive catalyst. But our view is that it’s going to take a while for all those things to sort themselves out.

Gary Chase – Barclays Capital

Okay. But sounds like nothing specific, Ron. Is that fair?

Ron Wainshal

Yes.

Gary Chase – Barclays Capital

Okay.

Ron Wainshal

And again it’s a geographically distinct phenomenon. If you speak to our goods customers in Korea, they’re very focused on the semiconductor and kind of high-end electronics market, and that’s very much of a consumer demand driven phenomenon. Other markets are driven by other sorts of shipments.

Gary Chase – Barclays Capital

And then, and I guess this kind of segues a little bit into my next question which is, should we take your dividend increases in anyway as a read on what your view of the potential is to deploy your cash in asset acquisitions. In other words, if you say cargo is the leading indicator and you think passenger market may follow. Is the dividend hike – I realized it’s not huge – but is the reflection of you that maybe returning cash to shareholders is going to be more rewarding than some of the things you might do in the asset markets?

Ron Wainshal

No, I think it’s a balance, Gary. The broader economic outlook is looking a little bit more challenging than it was, say a few months ago. But historically, this is the best time to buy. It’s also – but our dividend policy is also a reflection of what we think of is the earning power of the company. We’ve just put on line a lot of very attractive investments in the last year or two. And broadly speaking, the philosophy is to kind of reward shareholders is the earnings base growth.

Gary Chase – Barclays Capital

Okay. And then last kind of related – you mentioned the public markets and I recognize that you still have access to the bank market, should we be thinking that you maybe want to operate with less leverage sort of on a sustained basis going forward like closer to where you are now versus say maybe 2.5 times to 3 times lever?

Ron Wainshal

Our strategy has been to be very conservatively capitalized. Roughly 2-to-1 debt-to-equity type of ratio, or for another way 70% debt-to-total capital. We’re looking below that right now, but these numbers kind of fluctuate quarter-to-quarter. We think that’s the most prudent way to play in this market. And we look at this from an overall kind of corporate perspective. Some deals – some of our portfolio securitizations for example be delevering. And if we were to do an incremental high-yield deal that would be more leveraged, but we’re going to stay within that range.

Gary Chase – Barclays Capital

Okay guys. Thanks very much.

Ron Wainshal

Sure, thank you.

Operator

Your next question comes from the line of Josh Pinkerton with Goldman Sachs.

Josh Pinkerton – Goldman Sachs

Hi, good morning, guys.

Ron Wainshal

Good morning, Josh.

Michael Inglese

Good morning, Josh.

Josh Pinkerton – Goldman Sachs

Just a first question, just wondering if you guys could give a little bit more color around the decision to lock in that lower interest rate on securitization number two. And what’s the implications of that for potentially refinancing that? Is it fair to say that you maybe looking, keeping that outstanding when that turbo day hits?

Ron Wainshal

Yes, Josh. I think as we looked at the overall environment and looked at what our basically historic low rates and the cash trough [ph] date that is in June 2012. We thought it would be prudent to lock in a hedge at these rates, which gives us a lot of flexibility around when is the right time to think about refinancing that transaction. So we’re perfectly comfortable with this going into cash trough in June of next year. It will delever faster with this lower interest rate.

But over time, obviously we’ll look at the economic trade-off and the access of capital from that set of aircraft versus where we can access capital elsewhere to think about the right time in construct for doing something like that. So it takes a deadline away from doing something or not doing something. And if we keep it in place, we’re required to have a hedge. So given where rates were and are fundamentally today, we think it made a lot of sense to just put that away and give us the flexibility of the right timing to deal with that particular financing.

Josh Pinkerton – Goldman Sachs

That’s great. Thanks. And then, kind of related to that in some of your earlier comments about the bank market and potentially the capital becoming less available there, do you see it so far? Is it really an issue of access and that the lower quality credits are going to potentially be shut out, or even the higher quality credits? And you guys are you seeing higher rates now, or – for the people who do have access are is that money staying relatively affordable?

Ron Wainshal

It’s going to take a little while to kind of manifest itself, because the most responsible airline will not wait until the last minute to arrange financing. So what commitments were made I think are being honored, that’s kind of what we’re hearing in the market. But if you were to show up with an incrementally new deal and go to the bank market – if you’re something like Cathy Pacific, you’ll get a good reaction. You’ll probably pay a little bit more in the way of margin, because particularly from European banks, they’re going to be passing through their higher borrowing costs. But nothing earth shattering.

But if you’re a more marginal borrower and – or you’re dealing with something that isn’t brand new, you’re going to see a lot less availability. And we saw this by the level of aircraft trading during the first part of this fourth quarter. There was a real pickup during the summer in terms of aircraft trading activity and we’ve been benefiting for that from some of our asset sales activity. But from what we here the reactions to new request for proposal on aircraft sales has been lot less enthusiastic and I think that’s how it shows up.

Josh Pinkerton – Goldman Sachs

Great. And then if I could just one more. I don’t know if you had a chance to see this morning, but one of your larger competitors, they actually took down the useful lives on some of their cargo aircraft and they – down to 25 years. And I believe you guys are still at – yours is 30 to 35 years depending on whether it’s brand new or converted. I wonder if you had any thoughts about that and if that’s something that you considered as well.

Ron Wainshal

We’ve considered cargo aircraft – every aircraft in our portfolio is part of our fleet review. And that fleet review involved, first of all, kind of coming up with a business plan for each aircraft. And all that’s sort of fed into our impairment analysis. We’re very comfortable with where we’re at on the freighter market. In fact, I think we consider that to be one of our core strengths and one of the things that we do better than most leasing companies. We’re comfortable with where we’re at.

Josh Pinkerton – Goldman Sachs

Great. Thanks guys.

Operator

The next question comes from the line of Greg Lewis with Credit Suisse.

Greg Lewis – Credit Suisse

Yes, thank you, and good morning.

Ron Wainshal

Good morning. How are you doing, Greg?

Greg Lewis – Credit Suisse

Hi. Ron, you touched on earlier in the call, I guess roughly 6% of the remaining book value is going to be sort of released in 2012. Could you talk a little bit about the asset mix of that – those remaining aircraft and sort of what your outlook is on lease rates for that 6%?

Ron Wainshal

Yes. We’ve got about a dozen aircraft left. I’m speaking from memory. But as I recall, about five of them are new-generation air body aircraft, mostly Boeing aircraft. Those will do well, because the Boeing aircraft demand has been quite good. And to – I’ll address each of these things in terms of aircraft types. In regards to 737-800s, we’re seeing lease rates even for next year placements being a little bit higher than what they were say a year earlier. That’s a lot of say $5000, $10000 a month, maybe a little bit more. And probably the same is true for the 700s as well.

Freight 320s, I see rental being down year-over-year. Not a lot, but probably about $20,000 a month per aircraft. The other important part of what’s coming off leases, we have a few wide bodies, 767-300ERs and an A330. The 767 market has kind of hung in there. And that’s because, number one, the long-haul markets is reasonably good. And I think the 787 delays just keep on contributing. And I think those aircrafts will probably come in little bit higher in terms of rentals versus where they would have been last year.

Greg Lewis – Credit Suisse

Okay, great. And then just shifting gears a little bit, you touched on some of the banking issues. When we think about some of the French banks that provide a lot of financing and have some big portfolios, have you started to hear any rumblings about the potential for maybe some of the larger French banks looking to start to unload some of their portfolios?

Ron Wainshal

What we’ve heard in the market and this is more anecdote as opposed to any direct conversations we’ve had has been that the difficulties they face has been primarily in sourcing long-term US dollar debt and they’re trying to reduce that exposures as much as possible. The easiest stuff for them to sell is the stuff that’s the highest quality. So we’ve heard that a number of French banks, a number of other European banks have been shopping their XM [ph] backed or ECA backed loans, and that’s as far as I know.

Greg Lewis – Credit Suisse

Okay.

Ron Wainshal

Easiest things to sell as opposed to regular kind of commercial debt financings.

Greg Lewis – Credit Suisse

Sure. And just given the fact that aircraft values have held in there and they just seems like it might makes sense for that that something that could happen over the next year or two. I mean – and just thinking about that, I mean I’m assuming that if assets do come to market, it does sounds like Aircastle is in a pretty good position to maybe take down some of those aircraft.

Ron Wainshal

Yes. I think look – I think when you look at the market, our investment strategy has never kind of set its tone, but where we’ve seen things last month, still kind of makes sense as we look forward. The high-quality wide bodies make a lot of sense to us, because number one, the residual value outlook looks terrific for 777 versus say a new narrow body. The production levels are much more managed, the supply has been a lot more constraint. And now that we know that the resources of following an Airbus are being directed towards their re-engined narrow – new narrow bodies, there is a kind of a longer runway in regards to those airplanes.

There is, for a good counterpart like a Cathy Pacific, there will be good bank market financing, and the ROEs sent from that are very good. We think there is a very low risk and a very high return potential from the mid-aged narrow bodies we’ve talked about even more so now than say the middle year. That all depends though in terms of its traction for us on reasonably priced high-yield bond market financings – unsecured financing. That’s something we can do to lever our peers cannot. And seems like the market conditions are getting better as the last couple of weeks have progressed.

Greg Lewis – Credit Suisse

Okay, perfect. Thank you very much for the time gentlemen.

Ron Wainshal

Thanks Greg.

Operator

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

Scott Valentin – FBR Capital

Good morning. Thanks for taking my questions. In the past, I think you guys have talked about the core aircraft kind of, I don’t know, eight to 10-year old aircraft kind of middle life type of aircraft, just wondering now with the change in the market, some weakening of pricing, has that changed your attitude at all or changed the target market?

Ron Wainshal

Well, first of all, everything is a higher rate of returned expectation being a lower price, I think we can achieve it. The placement demand for our aircraft of comparable ages remain good for the Boeing aircraft, it’s a little softer for the Airbuses, and the prices adjust accordingly.

Scott Valentin – FBR Capital

So, I guess, I mean are you willing to incur what looks like additional risk and acquire maybe cheaper aircraft with a thought that you’ll have a rebound eventually or do you try and stay with the stronger aircraft today?

Ron Wainshal

In general, what we’ve been trying to do on the acquisition program is take a very hard look at the market and figure out where we want to play. A year-ago, we were in content and we did very well in terms of buying aircraft with short remaining lease terms. Right now, we’re not looking to take as much placement risk on it.

Scott Valentin – FBR Capital

Okay. And then earlier on, I think you mentioned about $500,000 in nonpayment during the quarter. And I was just curious, watch list overall, has that grown maturely or is that still relatively short watch list, and any new material additions?

Ron Wainshal

Yes, just to clarify what that was. That was accounts receivable more than the 30 days due, that’s not necessarily a nonpayment. And I think it’s important to put that in the context of a – on the quarterly rental role of a $146 million. This is a the really, really low level, and you can – you shouldn’t expect – I mean that’s a terrific level.

Looking ahead at the industry and what we’ve seen in the, let’s say, end of the year, we typically see a pickup in receivables as the year progresses and we head into winter time. That’s when cash flow for northern hemisphere airlines tends to get a little bit thinner. The watch list is about the same as it was a few months ago. We’ll see how the winter goes and that’s the function of how the economy is. In terms of weakness and strong points, the strong points continue to be Turkey and Asia and Latin America. We’re seeing weakness particularly from the smaller European carriers. That’s been the case for a while now. And I don’t see any major changes in that regard.

Scott Valentin – FBR Capital

And on the return on capital front, you guys have done a great job, bouncing buying back stock, increasing dividend, return on capital shareholders. I think you’ve repurchased $90 million worth of stock in 2011. Just wondering how much is left. And what your thought is there if you’re bumping up near the authorization, did you reauthorize additional buybacks.

Ron Wainshal

At this time, Scott, we have exhausted the $90 million of authorizations we had for 2011. At this point, we’ve chosen sort of a balanced marching forward to increase the dividend at this point. But we will obviously continue to evaluate other forms including a share buyback program in the future to the extent we conclude that to make sense. But we’re looking to balance the return to a higher dividend, accretive investment growth for the business, but we’re not taking share buyback out of the equation forever by any means.

Scott Valentin – FBR Capital

Okay. Thanks very much.

Operator

The next question comes from the line of Bill Mastoris with Gleacher and Company.

Bill Mastoris – Gleacher and Company

Thank you. First question I have Mike, has to do with, when you think about a reasonably priced high-yield market, what parameters do you think about? And then, beyond that, you talk about some of the opportunities that may exist out there, and maybe what vehicle to use, and you’ve been pretty nimble particularly with your two securitizations. I’m just wondering how we should think about on – are you going to access the high-yield market well if you have certain rates and maybe a certain rating or you’re going to use a revolving credit facility. And I know that – I recognize that’s a little bit comp alluded. But any additional color that you could shed on that would be very helpful.

Michael Inglese

Sure. I think as we think about accessing capital, it’s really driven by what will you expect to see in the investments that we’re going to make and what we’ll look at in terms of what that unlevered return would be and what kind of a spread it would produce given capital markets conditions. And so when we made our first foray into the unsecured market last year, we paid a high coupon, but we were looking at and concluded investments that we think will be yielding 15% on an unlevered basis.

And so as we continue to look forward and look at our accessing capital and where it makes the most sense for us, we would expect when we can get those yields on the investments to be at a place, where we can go into the high-yield market and justify what the existing price is. We would expect to do that again. In the context of other places, as Ron mentioned, in the fourth quarter, we purchased a few year old 777. And in the context of doing that, we use cash on hand and we access secured bank market, which is readily available for a high-quality asset with the high-quality credit associated with it.

Ron Wainshal

This is Ron. Put another way, at the end of the day, we’re looking for an ROE that’s in the high teens for something that’s going to be purchased through a high yield type of an issue and so the interest rate base percent and that the ROA is got to be at least something in the low teens.

Bill Mastoris – Gleacher and Company

Okay. And then, Mike you ran through I think some of the financing options do you have for forward deliveries very quickly. I wonder if you could – and unfortunately your tone was faster than my pen. I wonder if you could just quickly review that for all of your forward deliveries.

Michael Inglese

We only have – we have one delivery as we mentioned in December for our A330 program. We have a contracted sale in place for that aircraft, so we expect to sell it and delivery as we did in September. The final remaining A330 position is a delivery in the spring of next year, it’s on a long-term lease to Virgin Australia. And we have ECA support for that last delivery. We are in the process of basically pursuing ECA covered debt as well as commercial debt in the context of what the right financing is for that final delivery in the spring of next year.

Ron Wainshal

This is Ron. I’d just add one other thing in that regard. The – I made a comment about limited bank market, that’s certainly the case. But for a new A330s, for a strong carrier like Virgin Australia, they’ll have some good choices. And there are reasonably good sources of supply in that regard out of the Asian markets and the Australian bank markets. So that’s probably one where we’ll have a number of good choices and we’ll have to balance the upfront cost of an ECA deal with a lower run rate versus the lower upfront fee and a higher run rate in terms of their commercial bank market.

Bill Mastoris – Gleacher and Company

Okay, thank you very much.

Operator

Our next question comes from the line of Hermione Decker [ph] with Dahlman Rose.

Hermione Decker – Dahlman Rose

Thanks operator. Hi guys, I think most of my questions have been answered. Just two clarification points. One, Ron, I think you talked about A320s being seeing less value in those maybe lease rates coming down a little bit. Are you making a distinction as to engines or are you just saying all A320s as a group?

Ron Wainshal

I think the engine – the popularity of one engine versus the other kind of obviously changes with the direction of the wind. I think it’s fair to say it’s a generalization.

Hermione Decker – Dahlman Rose

Okay. And then my other question is this, one of the other companies that I follow is an aircraft operator and they’ve been buying used passenger jets and then converting to freighter, and they’re seeing some good opportunity in the 767 equipment type I guess, for lack of a better word. I mean just kind of wondering, are you seeing similar opportunities, or are they seeing it – those opportunities because they’re an operator versus a leasing company?

Ron Wainshal

767 market is one that has – in theory has a good potential and is a converted freighter. But it’s been a very, very narrow operator base. So an operator’s perspective in this context is probably a little bit different than us as a leasing company, because we are really, really focused on making sure that there is several choices in terms of placement, and we don’t want to be held hostage to anyone – a very narrow operator base. So we’ve been sitting on the sidelines as far as the 767 freighter conversion market goes and instead focused our resources on the 74 market which we think of it as a much broader operator base.

Hermione Decker – Dahlman Rose

Right. And what about the 757, would you put that in the same category as the 67?

Ron Wainshal

No, I think it’s a – that’s a different market. Those have a lot more potential, but there is a lot of concentration there. FedEx has been a huge buyer of that aircraft and have continued to be. In fact, we’ve been selling several aircrafts over the years. The 75 market is one where – and probably in contrast to the 76 and the 74 still has some good legs in terms of passenger demand. And so the choices that we have for our fleet and for incremental acquisitions are probably of different nature. We think there is going to be a better set of choices in that regard.

Hermione Decker – Dahlman Rose

Okay. So you would seek more of buying used 757s to take them in passenger service for at least another lease round before converting those to freighters. Is that a good –?

Ron Wainshal

That’s right. We’ll look at how things guard. But I think it’s important to note that when we look at the re-engine narrow bodies, the 73s and the A320s really didn’t – there is really no replacement for the 75 in this new technology. And so that’s why I’m a little more optimistic about 757 [inaudible] passengers, they’ll make excellent freighters, but I think we’ll have a choice.

Hermione Decker – Dahlman Rose

Okay, great. Thanks so much.

Ron Wainshal

Sure.

Operator

Our next question comes from Jon Evans from Edmunds White Partners.

Jon Evans – Edmunds White Partners

Could you just maybe articulate a little bit, you talked about the French banks and the dollar funding issue, et cetera? I guess could you take a one step further and – if they start to get out of the market more, do you believe that has positive ramifications for the spreads in your lease rates than you were actually potentially be able to make more money over time, because there will be less funding out there, or is that a stretch?

Ron Wainshal

No it’s not a stretch at all. I think it’s a very good question. I think you’re hitting on one of the tenants of our strategy which is – this is something that we put in place last year, which was a difficult thing for a standalone leasing companies do if we get a credit rating.

We saw the contraction the bank market is starting a lot earlier than what just happened. It started with the global financial crisis and the contraction in a number of banks, number one. Number two, a lot of the banks became state owned or state supported and began focusing on their home markets as opposed to the global aviation market. And we saw that as something that was going to continue with Basel 3 and with other forces. And the latest episode with the French banks is just a – in some ways an accelerant. That isn’t to say banks ceased to lending into the sector. But if you were to look at the Asian or Australian banks as referenced before, there will be a lot more name brand oriented, a lot more regionally focused, and less inclined to take on used aircraft or aircraft outside the region.

So for us as a leasing company, having that credit rating was something that we thought as the key differentiator. And to do that you have to develop the base of unencumbered assets. Mike talked a lot about the earning power that we’re generating from that and that’s a growing aspect of our company. It’s really hard from most leasing companies to do that, because the standard leasing company will be financed with mortgage debt for single aircraft. And it’s always cheaper on the margin to borrow secured versus unsecured. Having said that, if you actually do develop that critical mass, it is a way of kind of getting on a different track, and I think we’ve done that.

Jon Evans – Edmunds White Partners

Okay. And may I ask you one follow-up, and you may not want to answer this. But one of your competitors and you have seemed to talk – talk down the Airbus 320 a little bit. And I guess I’m curious, are you just trying to send a message to Airbus that they need to limit production a little bit since they’ve continued to ramp it or any thoughts there?

Ron Wainshal

I don’t think Airbus will change its production levels based on what I say on this call. But I’m making a pure observation about what I see in terms of demand for aircraft and what we hear in the market.

And I’ll try to quantify that a little bit more relevant to some of the response I gave earlier. It used to be the case that the premium between a 737-800 and an A320 for same new aircrafts was $50,000 a month. And that makes sense to me, because the 73s has got a capacity for extra seats. That premium right now looks to me more like a $75,000 level. And the same is true on the used aircraft side. And the directions are opposite. As I said during the remarks, we see some strengthening in the 738 market, not a lot, but some. It’s going in the opposite direction for the 320 market. It’s not a political statement, it’s a statement of our view of the market.

Jon Evans – Edmunds White Partners

Got it. Okay. Thank you for your time.

Ron Wainshal

Sure.

Operator

And we have no further questions in the queue at this time. Thank you, ladies and gentlemen, for participating.

Ron Wainshal

Thanks everyone. I look forward to speaking with you soon.

Operator

And this conclude today’s conference call. You may now disconnect.

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