Aircastle's (AYR) CEO Ron Wainshal on Q4 2015 Results - Earnings Call Transcript

| About: Aircastle Limited (AYR)

Aircastle Limited (NYSE:AYR)

Q4 2015 Earnings Conference Call

February 11, 2016 10:00 AM ET

Executives

Frank Constantinople - Senior Vice President of Investor Relations

Ron Wainshal - Chief Executive Officer

Mike Inglese - Chief Financial Officer

Analysts

Gary Liebowitz - Wells Fargo Securities

Helane Becker - Cowen and Company

Richa Talwar - Deutsche Bank

Jamie Baker - JPMorgan

Justine Fisher - Goldman Sachs

Jason Arnold - Royal Bank of Canada Capital Markets

Arren Cyganovich - D.A. Davidson

Vincent Caintic - Macquarie

Christopher Nolan - FBR and Company

Michael Kass - BlueMountain Capital

Operator

Good day, everyone, and welcome to the Aircastle Limited Q4 Earnings Conference Call. Today's call is being recorded.

At this time, I’d like to turn the conference over to Frank Constantinople. Please go ahead.

Frank Constantinople

Thank you, Kim. Good morning, everyone and welcome to Aircastle Limited's fourth quarter 2015 earnings call. With me today are Ron Wainshal, Aircastle’s Chief Executive Officer and Mike Inglese, our CFO.

We'll begin the presentation shortly, but I’d like to remind everyone that this call is being recorded and the replay will be available through our website at www.aircastle.com, along with the earnings press release and our PowerPoint presentation.

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

And we’ll now turn the call over to Ron.

Ron Wainshal

Thanks Frank and welcome to the call. We closed a very successful 2015 with a surge of activity in mission involving market. During this call, I’ll cover; number one, Aircastle’s achievements during the year; two, our views on the business environment and its impact on our company; and three, our plans going forward. Mike will address Aircastle’s financial results. And then we’ll open it up to Q&A.

Over the past year, we’d experienced major shifts in the business climate. These changes which include dramatically lower fuel prices and slowing economic growth in many parts of the worlds are real and we’re taking seriously. Moreover, recently there’s been a sharp increase in financial markets volatility.

With this is a backdrop, I’d like to start by articulating three basic investment propositions which comprised the core of point of view in our approach. First, air travel demand is slightly to remain strong over the long term. Secondly, therefore it’s well for a healthy demand for modern aircraft and for leasing. And thirdly, because economic conditions vary with time and region, prime investment opportunities tend to rise during times of doubter volatility. These propositions underlie the unique nature of Aircastle’s business strategy.

Our approach defers from the other large leasing companies in our space. We disciplined construing investors that create value out of complexity particular when market conditions are not entirely conventional straightforward. We don’t always buy the same thing the same ways everybody else, no matter what else is going on around us. We enjoy limited long term capital commitments by design.

We maintain a conservative capital structure that afford significant investment flexibility. We can also relay on two long term minded strategic shareholders with whom we are working together closely to make Aircastle a better company. We methodically upgraded our portfolio and raised our business. Specifically, we’ve address nearly all of our aircraft placement needs over the next year and push the average remaining lease term out to nearly six years in this strategy designed to provide us with a good steady flow of revenue and operational stability.

We proactively prudent out suboptimal exposures and assets throughout the year. We’ve been incredibly busy as an asset manager and an asset optimizer. Over the past three years, we sold more than 100 aircraft and leased out a similar number. To put those numbers in context, one needs to consider these activity levels in light of our total fleet of around 160 aircraft. I believe these results be wise about our capabilities to general value in both the disposition and placement of aircraft. Furthermore, I believe these actions solidify our foundation and position us well with regards to our goal of achieving investment grade credit rating overtime.

Our liquidity position cash flows are strong. In fact operation cash flow during 2015 was a record coming in at $526 million. Our liquidity was burned by more than $560 million in asset sales last year plus another $300 million which we expect to close during the first quarter of this year. We improved our liquidity profile by enhancing our unsecured revolver which we increased to $600 million and whose churn we extended to spring of 2019. Also our unencumbered asset base was around $4 billion providing us with financial flexibility.

We’ve remained committed to deploying capital efficiently and intelligently and doing right by our shareholder in up and in down markets. This includes drawing our business consistent with our philosophy in our strategic plan and it also includes sharing a portion of our sustainable earnings with the shareholders as we have for 39 straight quarters.

On those occasions when we believe the market has an appropriately target our equity, we’ve demonstrated our commitment to do that equity as we recently did to the acquisition 2.6 million shares.

In light with the current market circumstances, we see our shares trading at a big discount to book value our board reauthorized a $100 million share repurchase program.

We stake that a strategically unique and vital position in the market. Aircastle is the only large primarily capitalized value investor in the aircraft leasing space. We believe this is a necessary, profitable and pivotal role in our category, right dealing position to take advantage of this unique position and to define the inherent opportunities on our terms.

Turning to our results for 2015, Aircastle had a highly productive Q4 to cap solid full year results. We improved our profitability despite taking right down to dress up optimal assets and redeploying equipment out of more difficult jurisdictions like Russia. Our results reflect our consistently excellent operational performance and we’re reported more than 99% fleet utilization throughout the year and nearly 100% in Q4.

Our portfolio is performing well and we have a minimal level of overdue receivables. Our results in portfolio are both surge by our success of selling assets. We seized on strong investor demand and affected a record $58 million in gains on asset sales encompassing 31 aircraft with an average age of more than 15 years. These sales not only helped improved our portfolio but they drove our cash ROE at 15.6% its highest level ever.

Our investment activity during 2015 was very good, particularly when considering the strong competition we faced. We completed $1.4 billion in aircraft acquisitions. While this is lower than 2014’s exceptional $1.8 billion result, it shows to retrain our discipline. Of the 46 aircraft we acquired, 42 were narrow-bodies. This change in our assets is part of a broader fleet transformation as we’ve nearly doubled the number of current generation narrow-body aircraft in our portfolio since 2010.

We finished the year well closing more than $380 million in acquisitions during the fourth quarter, due to surge in activity with leasing companies as they placed increased value in the certain execution certainly we provide.

During the year, we also agreed to buy 25 new EJet E2 aircraft from Embraer. These aircraft deliver in 2018 to 2021 and represent a promising partnership with Embraer as it looks to build on its existing customer base of more than 70 operators around the world. Unlike its competitors, Embraer continuing to having new sales and we believe the E2s are very competitively positioned.

The net book value of our aircraft increased around $400 million during 2015. This is probably a little less than we anticipated at the start of the year, but it reflects a much better than anticipated climate for sales activity. As a consequence, our financing requirements were also lower that we did raise $800 million of new debt capital during the year, not only that we return to the unsecured bond market, we also expanded our base of banking relationships further into Japan by leveraging our strong relationship with Marubeni.

I’d like to now comment on our business environment. It’s actually still pretty good. 2015 was an excellent year for air travel. Passenger traffic was up 6.5% which is well above the long term average and nearly twice the rate of global GDP growth. Load factors were also record highs. Airline industry earnings were expected to reach highs of nearly $30 billion across the world. These are all very health statistics and early projections for 2016 point to another strong year.

Fuel prices continue to have an important and multi fascinate impact on our business. Jet fuel prices were again sharply lower this past year and they stand around one third the prices they were 30 months ago. Cheap fuels are major key to the airlines industries profitability and in many cases it effectively counteracts the impact of local currency weakness against the U.S. dollar.

The International Air Transport Associating, IATA, excited lower ticket prices is being responsible for half the traffic growth during 2015. These statistics indicate a 5% drop in the average air fares during the year which is undoubtedly inevitable by low fuel prices. However that still lies at the big profit for the year.

Of course low fuel prices also have very different effect on the economies around the world. Fuel importing countries like India have benefited greatly and their GDP growth rate is now over taking China’s. Big exporting countries like Russia and Brazil on the other hand they’re seeing economies weaken significantly. We’re careful not to paint all of the immerging market countries with the same brush.

Finally, the drop in fuel prices favors current generation aircraft versus more expensive but more efficient new technology models. Our conversations with airlines and our conversations with airlines are hearing more management teams take the view the fuel prices will remain lower for longer term.

Overall demand is general still strong and rents for current generation aircraft are stable. While their distinct pockets of weakness such as Russia and Brazil although not China, we believe overall demand is healthy. To illustrate, last week we purchased the first of three brand new Boeing 737-800, the originally meant to enter [indiscernible] in Brazil. These aircraft were access to the airlines' needs, so we agreed to purchase them off lease and remarket them.

We completed the first purchase just two weeks after being awarded, so we didn’t have a lot time to remarket the aircraft. However, we are extremely pleased with the strong and deep customer demand coming from North America the Middle East, Europe, China and other parts of Asia. The economic terms were seeing our, at or in excess of our expectations and the quality in depth for the potential customer bases is proven to be very good. We expect to have these aircraft places by early March.

In general the wide body market remains soft so there are significant differences as across aircraft type, refining adequate customer and investor demand to address our needs. During 2015, we sold six wide bodies profitably including two during the fourth quarter. We also expect to complete more wide body sales this year. We are also able to place wide body aircraft coming off leased in 2016 specifically A330s where there is a large operator base.

We have several wide body aircraft coming off lease in 2017 that which time most will be eight to ten years old which is relative new. We are engaging in constructed commercial discussions with several airlines and I am quite optimistic we’ll find good homes for all these aircraft in the normal course.

Despite the recent financial markets turmoil, we believe the debt market remains open Aircastle. The bank market remains strong and we benefit here from a number of long standing relationships with top global banks and aviation finance market leaders.

The bond market is naturally more immediately affected by the broader market turbulence. However, over the years, we’ve developed a strong quarter of institutional investor, who appreciate our strong credit metrics and our business approach. We continue to expect having access to unsecured financing market might be slightly higher cost.

With respect to the competitive environment for new investments, we believe that at least for the moment, aircraft pricing remain strong, to continues to be strong interest in U.S. assets with good yield. However, transaction execution risk is rising and we see seller increasingly valuing the liability when it’s using counterparties. We expected benefit from this.

We began to see where the health backlog for sales transactions which we are targeting closely this quarter. This includes the sale to our joint venture with Ontario Teacher’s Pension Plan although portfolio six aircraft leased to major customers who we have larger exposures. Once completed, the transactional will grow our joint venture to around $700 million in assets. We use JV to be a great success and an excellent example of how we’ve been able to work together with the strategic shareholder who clearly understands and appreciates our unique approach to this category.

Regarding acquisitions, so far this year we bought or made commitments to purchase ten new narrow-body aircraft for around $380 million. Impart because of the increased in the marketplace volatility, we believe there will be a better buying environment this year, this still remains to be seen. We intend to be patient and maintain our discipline. And this regard as before, we are aiming from economic returns on equity to lease 15%. That means that if our debt costs are higher, we’ll be looking for even higher asset returns.

As I mentioned, we believe the debt markets will continue to be open for Aircastle and there are several such avenues available to us. We’ll be nimble in developing and capturing these opportunities.

No doubt, there are many find this to be disclaiming time. For our part, we view time such as these to be engines of opportunity for Aircastle. The goal transaction I mentioned earlier is a good example. If it turns out that the aircraft investing opportunities are not sufficiently attractively, we simply won’t pursue them. I should add, we view our stock repurchase program to be another example of where we believe we can deploy our capital accretively. Our recent share purchases are the latest in the series of such moves we’ve made over the years.

I’d like to leave you a two key points about our past year and about Aircastle going forward. Number one, we are not burdened by large and flexible long term capital commitments, so we are strategically and tactically in a position to seize on prime opportunities as they present themselves. Number two, we improved our portfolio and de-risked our business so as that have a strong foundation and an expanded capability to act on the opportunities at hand.

Our company is always been responsive to the ebbs and flows of the business environment. Increases in volatility are bound to happen every few years. We expect this will always be the case. That is precisely why providing for such changing circumstances it’s such a fundamental part of our business model. Such event notwithstanding, we believe there is likely to be a strong, steady and continuing trend in the growth for air travel and in turning the demand for aircraft and for aircraft leasing. This is a trend that provides the underlying support for our sector.

Our differentiated strategic approach is actually quite basic and prudent. It’s to put our capital to work in moments where we can hear in strong returns. It’s not tying up our capital or a team. While maybe harder for analysts to model this dynamic approach, we believe it is intrinsically more conducive to lower risk and higher returns which after all is ultimately whatever investor is seeking. We really like repositioning Aircastle.

I’ll now turn it over to Mike.

Mike Inglese

Thanks Ron. Aircastle had a strong solid fourth quarter the cap and active in successful year. Our net income from the year rose 21% to 121.7 million as gained some aircraft and equipment sales reached a record $58 million.

Our operating cash flows have reached a record 526 million for the year, up almost 15%, thanks to excellent utilization statistics. And our cash ROE was 15.6% another record for the company.

In addition to improving our financial results, we continue to de-risk our business and improve the quality of the fleet during 2015.

We acquired over 1.4 billion of newer aircraft and sold more than $560 million of older assets during the year.

To our acquisition sales and asset management efforts, we’ve start grow the earnings base of the business while sharply inducing our exposure to freighters and add of production aircraft, while it is inevitably addressing our exposures in more difficult markets.

Turing to our results, for the four quarter, lease, rental and finance lease revenues were 185.7 million, up 3% year-over-year, due primarily to the net impact of aircraft investments and sales. Total revenues for the quarter were 208.3 million, down 30 million year-over-year, primarily driven by lower maintenance revenue up 37.1 million. The decrease maintenance revenue was driven by early terminations of narrow-body leases with airlines in Russia and the Ukraine and lease restructuring with the U.K. based airline that occurred during the fourth quarter of 2014.

Adjusted EBITDA for the fourth quarter of ‘15 was 211 million versus 233.2 million for the prior year. Lower maintenance revenue up 37.1 million was partially offset by higher lease and finance revenues of 6 million and higher gains from the sale of flight equipment of a little over 5 million.

During the four quarter of 2015, we’ve reprocessed the 19 year old A330 aircraft from a small charter operator in Russia that have been focused on doing business in Turkey.

As a result, we took into income 15.4 million of maintenance and other revenues offset by a non-cash impairment charge of 16.9 million. This asset is now held for sale and we expect to dispose with later in Q1.

Adjusted net income for the fourth quarter of ‘15 was 54.3 million, down 25.9 million year-over-year and reflex total loader revenues of 30 million, a $7.1 million increase in depreciation, partially offset by lower impairment charges of 9.5 million and higher gains on sales of 5.2 million.

Interest expense for the quarter was 59.5 million, an increase of 2.7 million over the prior year, due primarily to higher weighted average debt outstanding of 4 billion versus 3.6 billion for the prior period.

SG&A for the quarter was down slightly from the prior year reflecting lower personal costs. Depreciation for the quarter was up 7.1 million to 81.2 million and including an additional 3.1 million of accelerated depreciation related to our last MD11 freighter which we sold in December.

Our fourth quarter tax revision was a true up to bring our full year provision to 10% and was a $0.7 million provision.

At the end of the year, we owned 162 aircraft with a net book value of 6.1 billion including a 118 unencumbered aircraft with a net book value of almost $4 billion. We manage another five aircraft today through our joint venture Ontario Teachers that is a net book value of 500 million at year end.

For the fourth quarter of 2015, our portfolio lease rental yield was 12.6% and our net cash interest margin was 9.1%, again demonstrating the consistency and strength of the fundamental business. Cash ROE was at a record of 15.6%.

Turning to our capital structure at year end, we had a 156 million of unrestricted cash and 375 million of unused revolver capacity. Total borrowings were approximately 4 billion including 2.9 billion of unsecured debt. The weighted average coupon on our debt at year end was 4.95% and the weighted average maturity of our debt portfolio was approximately four years. Our net debt to equity ratio was approximately 2.2 times.

With respect to capital allocation, we’ve remained committed to allocating capital efficiently between value enhancing investments and returning capital to shareholders.

On February 9th, our Board approved the $0.24 common dividend paying on March 15th. We now paid out more than $608 million in dividends since going public in 2006 and we’ve increased the dividend six times since 2011.

Since November of 2015, we’ve repurchased 2.6 million shares at an average price of little over $19. Since 2011, we’ve repurchased a $190 million worth of our shares at an average cost of 13.21.

As Ron mentioned, the Board reinstated a $100 million share repurchase authorization which we expect to use opportunistically.

As usually, in our guidance elements for the first quarter of 2016 has been included in the earnings press release and PowerPoint both of which were posted to the website today.

Let me provide a bit of commentary on the guidance to help a better, facilitate a better understanding of the current quarter. First, I’d like to point out that our maintenance revenue is expected to be down materially in the first quarter of 2016, due to lower scheduled lease transitions. This is a reflection of our success in addressing our fleet placement needs for 2016 earlier on.

As a reminder, maintenance revenue flows through our income statement as leases expire and when the number of expires found, maintenance revenue will naturally be down.

By way of comparison in the first quarter of 2015, we had maintenance revenue related to lease transitions of $18.1 million.

Our maintenance revenue guidance for the first quarter of 2016 is 0 to $2 million. We are also guiding to combine lease rental and finance lease revenue between $180 million to $185 million. This is down slightly on a sequential basis versus the fourth quarter due to plan sales of aircraft that will generate gross proceeds of around $300 million during Q1. These aircraft will be sold to our joint venture with Teachers and to third parties.

So to summarize, 2015 was a great year. We de-risk the portfolio, we further strengthen the franchise and we opportunistically acquired attractive assets and profitably sold older equipment. Our success during the year enabled us to achieve record cash ROE and cash flow from operations and we ended the year with significantly improved fleet profile in a longer portfolio lease terms.

We also return significant capital to shareholders increasing our dividend by 9% during the year and repurchasing approximately 2.6 million shares.

Our cash flows remained strong and our future capital commitments are modest. Our lower leverage capital structure is flexible and conservative and I believe we’ll continue to maintain good access to additional financing.

All of this positions us well to seize on market opportunities in a disciplined fashion as a leading value investor in the commercial aircraft leasing market.

And with that operator, we are happy to open up the call to Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today is from Gary Liebowitz from Wells Fargo Securities.

Gary Liebowitz

Thank you, operator. Good morning, gentlemen.

Ron Wainshal

Hi Gary.

Gary Liebowitz

Ron, you mentioned a high utilization in the quarter and that you are almost fully placed for 2016, I was wondering if you can give us more comments on your internal watch list, you’ve got a number of customers in countries where the currency is weakening, I noticed your accounts receivable balanced to small number but it’s still nearly triple from September. And just give some qualitative comments about the outlook for your customer’s ability to pay?

Ron Wainshal

So a couple of comments to start about with, one is our customer base is excellent shape and at this moment, our accounts receivable in more than 30 days is zero. I think the actions that we’ve taken consistently over the past year and then some, we did out some of the bigger problems most notably in Russia. You know in terms of Brazil that comes up a lot of times from investors. I’ll say few things. One is the economy there is definitely take it on the chin and we don’t expect to get any better in time soon. Number two, we have two larger customers there LATAM and Avianca Brazil. I’ll comment a little bit about each of those, they are both doing very well. As a general matter, the Brazilian market is behaving rationally, capacity is being reduced and the prices were actually - ticket prices were actually increasing.

LATAM is the airline in Latin America, they doing all the right things, they are professionally run and they have the network to actually move things around and redeploy capacity in efficient manner.

With respect to Avianca Brazil, they are very efficient targeted airline which focuses on trunk roots. And the airline actually even out a profit in the fourth quarter which is remarkable considering the circumstances. So we’re in close touch with our customers and we feel pretty good about where we stand.

Gary Liebowitz

Okay, great. And then my other question will be on the impairment charge, it doesn’t look like that was related to the airplanes that you sold, maybe some color on that? And also Mike if you have the numbers at year end for the number of aircraft that you do more susceptible to failing the recoverability test and what the book value of those aircraft might be.

Ron Wainshal

I’ll comment first on the aircraft that was impaired during the fourth quarter. It was just Mike mentioned in his prepared remarks, nearly 20 year old A330 been on lease to a small Russian charter carrier, focusing on doing business with Turkey. As you can follow the relationship between Russia and Turkey soured and so did the travel market, we reprocessed the aircraft in the fourth quarter and our plan is to dispose that airplane, I feel probably be a part out type of a sale and that’s - we expect that to done by the end of the first quarter. So we took our lumps on that one was in a very big charge net, you can do the math afterwards.

In regards to the monitoring list, monitoring list is primarily comprised of the six older converted freighters that we had written down during the third quarter. Those are aircraft that will be coming off lease over the next two years or so and our plan is to scrap those. Other than that there are two or three different aircraft, we had three to begin with, one is removed because we plan to sell it. I’ll note that that is the 777 that we had taken back from Malaysia. Our plan is to sell the airframe there and to lease or sell the engines and we expect to breakeven on that.

Gary Liebowitz

Thanks very much. I’ll get back in the queue.

Ron Wainshal

Sure.

Operator

Moving on, we’ll take a question from Helane Becker from Cowen and Company.

Helane Becker

Good morning, thank you very much, operator. Hi guys, thank you for the time. So Ron, in your prepared remarks, you said that you are seeing strong demand from you know places around the world, you said a bunch of countries not, Russia or anything like that. But you said you are seeing lease rates at or better than your expectations, had you reset your expectations lever or can you just talk about the trends you are seeing in lease rates compared to where we were say a year ago or two years ago and where we are today?

Ron Wainshal

I think the lease rates are stable and my expectations were not reset going into that exercise with the former goal aircraft.

Helane Becker

Okay. And then just with respect to demand for new aircraft, are you seeing your customers come to you with you know financial request to help finance their aircraft deliveries?

Ron Wainshal

The financing market has been - the request for sale lease back financing has been a steadily increasing force for many years now and I think it will only continue if not accelerate, nothing new there.

Helane Becker

Okay, great, just taking your temperature. Thank you.

Ron Wainshal

Sure.

Operator

Next question is from Richa Talwar from Deutsche Bank.

Richa Talwar

Hey, good morning, gentlemen.

Ron Wainshal

Good morning.

Richa Talwar

So first, I know it’s early, but you did touch on this in your prepared remarks Ron, and I was hoping you could elaborate. In your September quarter 10-Q, you reported that Aircastle has 20 leases scheduled for X version in 2017, I believe those represent 12% of its net book value, can you tell us if those are still the most current figures, if you’ve already started remarketing those aircraft and what type of aircraft in that pool and that would be helpful.

Ron Wainshal

You’ll see the 10-K come out with the specific statistics later today I believe and the number is similar. We are remarketing all of these aircraft. I will say that the vast majority of the book value is comprised of five of the six light-bodies. These are three - sorry - four relatively new A330 is currently on lease to Singapore Airlines and one 777 lease to Cathay Pacific. Those are excellent carriers with excellent providence and I don’t expect we’ll have difficult time finding new customers for those airplanes.

The rest of the aircrafts are actually quite low value and I would say probably four to eight of those aircraft are likely to be sold for scrap.

Richa Talwar

Okay, thanks. And then a balance sheet question; you currently have some relatively high coupon unsecured debt, and you also have a grown unencumbered asset based. Are you considering taking out some of your unsecured debt and refinancing with lower cost secured financing, that would obviously generate some interest expense savings, but I wanted to hear you discussed potential drawback for moves like that?

Mike Inglese

When we look at the capital structure and what we need to do, we don’t - our first maturity in terms of high yield debt is in April 2017, it’s relatively high coupon, so we’ll continue to look at that as we move through the year and the best way to refinance that. In the context of raising capital for new investments, we will look at that and marry that up with a type of assets we are buying whether it’s secured or unsecured in the context of what we think the returns are from those asset.

But fundamentally our unsecured bond structure, a bullet maturity they have make all provisions and so you have to look at where treasuries are trading, where you can do those kinds of trades and do them where they can make sense.

Richa Talwar

Okay, thanks Mike. And then just one more, can you update us on your thoughts around consolidation and you talked a lot about the value the market seems to be adding on execution and given, Aircastle saw a track record in that regard, do you think that’s improving your opportunities that as it relates to pursuing acquisitions of some other larger aircraft portfolios that maybe in the market?

Ron Wainshal

Look, I think the reality is that when the stock market drops are taking in consideration I think it cools off the consolidation. The market opportunity doesn’t mean that that’s how it’s going to remain forever but we have to be realistic about it. When we had this discussion following our Q3 results, it was on the heels of the Avalon deal getting done and I think the feeling at that time is something was my view with that might have precipitated more activity. I think that’s probably cooled off for the moment.

Richa Talwar

Alright, thanks for that color.

Ron Wainshal

Sure.

Operator

And we’ll go next to Jamie Baker from JPMorgan.

Jamie Baker

Hey, good morning, gentlemen. Ron, you guys have obviously done an enroll job at de-risking the portfolio over the last couple of years. I am just wondering whether in light of you know what you’ve identified low fuel of lower China, everything else going on in the world, you know is the plan to sit on the current book and ride out the storm or you’re thinking further modifications to the construct of the portfolio. I mean I know you spoke about being opportunistic, I get that. I am just trying to assess where you think those incremental opportunities might be or is it just more of the same but coming at better pricing?

Ron Wainshal

My short answer to that Jamie is that it really depends on how the price environment plays out. We have been very successful in finding value in narrow-body, current generation narrow-body aircraft. And I that regard, I would add, I don’t see good value in the new technology aircraft today. When you have fuel prices that are one third the level that they were 30 months ago, the value proposition for an operator - for an investor is different. I believe those aircrafts lease based on the pricing indications we’ve heard before don’t make sense, if you were to place those aircraft today in the market.

So for the moment that the focus is on the current generation and more on the narrow-body side, this can change. And the great thing about our model is that we have capital is not locked up and we’re very open minded about what the opportunities look like.

Jamie Baker

Excellent. Second question, just year-on-year, any change in terms of airline customers that are on your I don’t know what you would call it internally, but you know any sort of watch list for lack of better term?

Mike Inglese

No, I think I kind of addressed that before in the sense that I’d addressed - we took here the Russian exposure, our Russian customers are - the exposure there is down significantly, in fact for Russian passenger airlines, we are down at two aircrafts for the book value of less than $30 million. So it’s actually quite small. We are keeping a close eye and the economies that are filing the pressure but at the moment I feel very good about the exposure there.

Jamie Baker

Okay, Mike and I appreciate it. Thank you very much.

Mike Inglese

Thank you, gentlemen.

Operator

And Justine Fisher from Goldman Sachs has our next question.

Justine Fisher

Good morning.

Mike Inglese

Hey.

Justine Fisher

So, you guys were talking to Richa about the coupon then you are done, I guess when we talk relatively high coupons, the 2017 by its relatively high versus where your pressure most recent deal, but it’s actually right on top of where your 22s are currently trading and so given the aircrafts trading in the high 6%, 7% range, when you guys look at refinancing that 17 bond, Mike, do you guys - would you accept financing unsecured at a higher rate or do you go back to the banks for the refinancing? I am not talking about taking out your other bonds early, but as we manage the capital structure going forward, would you go the banks just for the lower coupon or just you say, you know look we’ve got to take a higher coupon on new refinancing deal but we rather stand unsecured?

Mike Inglese

Look, it’s a mix, we’re going to look at both and we’re going to make choices when we need to make those choices. So I am - frankly, I am hopeful, I’ll better than what I am looking at today and then not do just in future, but I could be wrong. So we’re going to evaluated that in the context of what are we doing with our capital and we’ve got 14 months out from that day and we look at the best time that we think is to take that out.

Justine Fisher

Okay. And then just another question on cash, so I know an argument that you guys have made in the past that I think makes a lot of sense is that your operating cash flows on annual basis are pretty much able to cover your unsecured bond maturities, so no worse, worse case situation where the markets completely closed and let’s say you can’t even do secure which I don’t think will the case, so let’s just say you couldn’t, then you could still use your operating cash flow to take care of your unsecured bond maturities. Does the company look at difficulties in the bond market and say okay, yeah, our stock is really attracted by that because it’s trading of books, but we need to retain more cash to make sure that we can deal with those maturities in the worst case scenarios, is that on the radar at all?

Ron Wainshal

Sure. You know we have to be mindful of what we do with our cash. In addition to our strong operating cash flow is a business, we have a very large unsecured revolving credit facility some of which was utilized at year end but we have lots of asset sales on tap here in the first quarter. So we view that as an additional source of liquidity in those kind of thinking about if things go really bad, how do I deal with those windows where there are high yield market might not be open. So that’s - of course that on our radar screen and it’s part of the capital allocation discipline what we employ here.

Justine Fisher

Okay. And then just on the IG rating, because that to us is a biggest risk that we’ve heard from investor that no one things that the business model is in real trouble but people are saying well maybe less - said Aircastle may not go IG. And so my question, in your discussions with the rating agencies and based on what you are seeing in the business, is there anything besides sentiment that would be well Aircastle moving towards an IG rating?

Ron Wainshal

No, in fact I would say that the actions that we’ve taken over the last year are totally consistent with investment grade to de-risking the portfolio, the improvement of the profile of customers and lease maturities and the revolver, those revolver really, really important kind of bed rock things that really stand, it’s in great shape whenever you have a little bit more of a bottle environment. I also think that the fact that we have such a low level of capital commitments is probably one of those misunderstood and not sufficiently valued things.

I think the company should be an investment grade right this very moment, but I don’t control that decision. And we will grow the company, that’s the one variable that seems to be falling short from rating agency standpoint, but we’re going to grow the company as we see from a long term perspective and we are managing the company for shareholders.

Justine Fisher

Okay, thanks. And then just one last question, as far as what we should be assuming ballpark for acquisitions and sales this year. I mean is the billion to billion range of acquisitions, I know that you can have the pipeline, yeah, but I mean is that around about accurate number that we should assume?

Ron Wainshal

I think particularly in this environment all bets are off. We had talked about a billion dollar number in the third quarter earnings call and we’ve got call it little shy of $400 million to date. But we’re going to be very selective about what we do. And the great thing is we have the luxury of picking their spots. We made to a whole lot more than that or made to whole lot less and really just depends on whether we see the right risk opportunities in the market, that’s what makes it different.

Justine Fisher

Alright, thanks very much. Thanks Ron.

Ron Wainshal

Sure.

Operator

[Operator Instructions] We’ll move on to Jason Arnold from Royal Bank of Canada Capital Markets.

Jason Arnold

Hi guys. Just a follow-up on the last one on the 2016 acquisition so far, can you talk a little bit more in detail about the types at aircraft acquired?

Ron Wainshal

Ten airplanes, all new narrow-bodies.

Jason Arnold

And split between Airbus and Boeing?

Ron Wainshal

Yeah, I mean I think the way we see the market for those airplanes is pretty bounced.

Jason Arnold

Okay. And then I just one other follow-up here on the MAS recovery on the 777, any progress to report there on getting some of your funds back or any updates?

Ron Wainshal

As I mentioned before, our plan there is to sell that the airframe for that airplane very shortly. And the market for the airframe is actually quite strong. The market for the engines is not. But we’re going to basically chop our basis in half and by the way we are not selling it to delta. And we are expecting to breakeven in that proposition at the end of the day.

Jason Arnold

Okay, and then you know I guess I was just curious specifically on you know I know there was some obligation that MAS had to you there above and beyond kind of whole value recovery, is there any sense of legal ramifications of why not they could somehow call back some of that loss value?

Ron Wainshal

We’re going to pursue all our options and as with any of these types of processes they are never fast and the outcome is never certain.

Jason Arnold

Yeah, okay, thanks for the color.

Ron Wainshal

Sure.

Operator

And next we’ll hear from Arren Cyganovich from D.A. Davidson.

Arren Cyganovich

Thanks. Ron, you mentioned some softness in the wide body but you also mentioned that you had some gains relative to a couple that you sold in the fourth quarter. Can you talk about you now the magnitude of the softness you are seeing in the wide body market by model type or age?

Ron Wainshal

It’s all over the place and it’s kind of hard to generalize because there are big differences, for example the 777-200 ER market that’s the airplane, the one airplane we had in Malaysian. There are more than three dozen airplanes parked right now and that going to grow. And that market is in really bad share. The market for new A330 is reasonable and that barriers as you go down spectrum on the engine type size and what the pedigree of the aircraft is. I think the fact that the manufacturers have elected to cutback the production is a plus. And so that’s something that boards well in the coming placement efforts.

Arren Cyganovich

Thanks. And then from a clarification purposes, you announced the reauthorization of the share buyback, is that a new 100 million that’s been reauthorized?

Mike Inglese

The 100 million is what’s available from this point forward, that’s correct.

Arren Cyganovich

Great, thank you.

Operator

Moving on, we’ll hear from Vincent Caintic from Macquarie.

Vincent Caintic

Hi good morning, guys. I think the stocks, I think well this morning under the back of your buyback announcement and the aircraft sales, so my two questions will touch on those points. First, in terms of your view on the aircraft trading market in 2016, how do you see your sales going, I think for 2015, you’ve had about a 10% on sales margin, do you expect kind of similar lines for your first quarter plan sales going forward?

Ron Wainshal

No, it’s a little bit complicated and I’ll just elaborate it a little bit. A chunk of the asset sales are going into the joint venture with Teachers and we generally move those assets of book value, okay. So that’s a different proposition in our efforts into the third party sales market. The assets that we’re selling apart from that are probably at or better than that lever. But what we are looking at in terms of asset sales going forward had several different motivations, it’s not just games on sales, portfolio improvements, on some cases, we will be very happy to breakeven, just to remove the exposure and redeploy the capital in more efficient way. So I think going forward beyond the first quarter, I think it’s going to harder to generalize.

Vincent Caintic

Got it, that makes sense. And then the second point on the buybacks, first, if you could remind us what your disability of your free cash flow, I think sometimes people forget that. And then secondly, I think you touched on a little bit, but when you see your stock trading at the level, it’s trading at now when you see your bonds with coupons of 6% to 7% versus buying aircraft, how does that squeeze overtime and could we expect more buybacks opt in the future?

Mike Inglese

Yeah, when we see your stock trading at 70% on book, we think it’s pretty attractive investment, so we bought stock 50 million worth in the fourth and so far to the first quarter if things stay where they are and we don’t see better investment opportunities in the aircraft market, it’s reasonable to think we’ll use some of that stock authorization and so more buybacks.

Vincent Caintic

Got it, thanks so much.

Mike Inglese

Sure.

Operator

Christopher Nolan from FBR and Company has our next question.

Christopher Nolan

Hi. You mentioned 15% target ROE, is that a cash ROE or GAAP ROE and if it’s a GAAP ROE, how do intend to achieve that?

Mike Inglese

It’s not a GAAP ROE. We don’t buy aircraft based on GAAP earnings, they based on economics. So this is cash over the expected horizon holding the aircraft.

Christopher Nolan

Okay, so it’s basically flat with your current cash ROE right?

Mike Inglese

That’s one we look at it.

Christopher Nolan

Okay. And then, am I correct that in terms of the investment grade rating for the issue is industry sales, is that still an issue?

Ron Wainshal

Yeah, I don’t agree with it, it’s just these - the framework it’s a rating agencies have established and we got to work with it. I think the rational varies a little bit from one rating agencies to the next but I think they generally view sizes of proxy for franchise value. And the part that I have the difficulty with is that we have incredibly good access to airlines and financing and you name it. That the part or maybe that fall short and it happens, start other people from doing it, to play for large orders with the OEM and that’s not our business model. So I find it sort of a hard thing to just to post together but that’s what it is.

Christopher Nolan

Okay, thanks for taking my question.

Operator

And moving on, we’ll hear from Moshe Orenbuch from Credit Suisse.

Unidentified Analyst

Good morning, guys. This is actually Jim Wicklund [ph] for Moshe. Thanks for taking the question. You talked about the remarketing efforts in your light body book and the 777 in general. Can you go into greater detail and your outlook for young and midlife A330s over the next 12 to 18 months specifically with respect to any influence of 777 could have on the A330 market?

Ron Wainshal

I think they are totally markets. I am not sure what more I can add to what we’ve already spoken about. I think the aircraft that we have specifically on the A330 side of mass set of airplanes coming out of Singapore which is as good as again. There are Rolls powered which is the most popular asset - sorry engine type in that class. And I don’t expect to have that difficultly from getting those places in a good location.

Unidentified Analyst

And then maybe some thoughts on just the greater A330 market amongst aircraft less orders in general beyond just Aircastle?

Ron Wainshal

I am not sure I understand where you are going with. What would you like me to address specifically?

Unidentified Analyst

Just characterize which you expect at A330 with regards to lease rates, market values and remarking in general?

Ron Wainshal

I think the A330 market is still sort. I think it softer for older aircraft. I think it softer for A330-200s which are just smaller but longer range variant. And on the 300 side which is bigger, you should remember that there is a newer and higher longer range version and then very old one which is not so capable. And most of the part aircraft they fall in that later category and they are totally different aircrafts then what we have to remarket. I think it’s a market that benefits from the fact of fuel prices are sold aren’t cheap and that’s one of the misunderstood things about the aircraft, it’s lined beyond proportion, the 330-300 for most mission is actually is a very economical and efficient airplane versus the newer technology 787.

Unidentified Analyst

Thank you.

Operator

And we’ll hear next from Michael Kass from BlueMountain Capital.

Michael Kass

Hi guys. Congratulations on the results. I was just curious if you had any color on - it looks your tax rates kind of dropped over the course of the year and I guess the - I think it’s the 11% effective rate, and so lower than it was before. What taxing there, if anything or is that am I just mistaken in what it was?

Mike Inglese

No, it is modestly lower than it was the prior year, it’s really just a mix shift of where profits are being generated in the context of the airline Singapore and other countries where we have lease entities going through.

Michael Kass

Is the 11 - should we kind of turn on the 11% going forward, is there particular kind of timing so that, I am just versus kind of your more typical effective tax rate, should we expect that for the foreseeable future or is there certain timing issue with that?

Mike Inglese

You know like everything in the worlds it depends, but I think in our guidance today, we are basically saying we expect this year’s full year effective tax rate to be around 10% or 11%.

Michael Kass

Thanks.

Operator

And it looks like we have a follow-up question from Gary Liebowitz from Wells Fargo Securities.

Gary Liebowitz

Yes, thanks operator, couple of cleanup questions. Mike, the maintenance revenue guidance for first quarter is very low, last two year you’ve averaged about 75 million annually, should we expect that number to be way down next year? I know you don’t like to full year guidance, but it is - has a pretty big impact on the estimates?

Mike Inglese

Yeah, look, given our level of lease expires this year, we expected to be lower than it has been in the last few years.

Gary Liebowitz

But is 0 to 2, that’s not the right quarterly run rate, it’s - you can give us any help on that what the full year looks like?

Mike Inglese

No, I really not going to do full year outreach, Gary on a particular item, I am just trying to convey that we have very few schedule lease expires and that would translate into lower maintenance revenue now we’ve seen in U.S. where we’ve had a larger number of lease expires.

Gary Liebowitz

Okay. And Ron, can you just give us an update on the discussions you are having with potential customers for the E2?

Ron Wainshal

There is a bunch of discussions underway, we had one which we alluded to during the third quarter call, that’s going well still, there is a little bit of a yearend distraction, but that’s the long pace. And as I said during the prepared remarks, I’d like the E2’s competitive positioning. They are continued to generate sales. The customer’s base there is a terrific example of incumbency. And what I would add, just to highlight a couple of things about Embraer is, they don’t have the same production increase issues that we see with the Boeing and Airbus narrow-bodies.

Number two, we don’t have a huge number of aircraft leasing companies that falling all over themselves. The guys involved in this aircraft are disciplined and it’s a small number.

And number three, one of the big changes we’ve seen over the last few months is the proliferation of opportunities for 100 seat aircraft in the U.S. market which is upside from my perspective.

Gary Liebowitz

Thank you very much.

Ron Wainshal

Welcome.

Operator

And we have another follow-up question from Richa Talwar from Deutsche Bank.

Unidentified Analyst

Hey, actually it’s Mike Limburg [ph] here. Hey Ron and team, look, you guys have a bunch of cycles here and you probably have a pretty rich history with you know how things play out and I know you talked about the Idaho forecast for this year and how well traffic was for ‘15. But you know look a forecast is a forecast, and I am just curious beyond you know like looking at accounts receivable or monitoring some of the weaker credit carries, what are some of the macro or micro inputs that you look at you know leading indicators you know is it storage rates, things that you know you see that tick up that tell you wait a minute, you know we need to be prepared because it’s going to get worse very quickly?

Ron Wainshal

Well, if you are asking me to tell you, it’s going to worse very quickly, you can have a long way, because I don’t believe that. Is it worse in some places? Distinctly yes, it’s be awful in Russia, it’s bad in Brazil, it’s great in India, it’s fine in the U.S. It’s the big world, it’s never the same. And when you look at parked aircraft, there are some very, very different stories there, when you look at models. I don’t agree with the proposition that the worlds is going to end and I do believe that it may be a little bit softer next year, but that’s relative to - it’s absolutely terrific year. There is a not of lot of businesses that saw gross demand increase 6.5%. So I am not going to go tell you that the world is coming to an end, it’s actually a healthy industry.

Unidentified Analyst

Fair enough, thanks.

Operator

And that’s all the time we have for Q&A today. Mr. Constantinople, I’ll turn the conference back to you for additional or closing remarks.

Frank Constantinople

Thank you, Kim. And thank you for your time for dialing into the call today. If you have any follow-up questions, feel free to call me at 203-504-1063. Have a good day.

Operator

And that does conclude our conference today. Thank you all for your participation.

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