Aircastle's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Aircastle Limited (AYR)

Aircastle Limited (NYSE:AYR)

Q4 2011 Earnings Call

February 29, 2012 10:00 a.m. ET

Executives

Frank Constantinople – SVP, IR

Michael Inglese – CFO

Ron Wainshal – CEO

Analysts

Gary Liebowitz – Wells Fargo Securities

Andrew Light – Citigroup

Isaac Husseini - Barclays Capital

Scott Valentin – FBR Capital

Jamie Baker - JPMorgan Chase & Co.

Gregory Lewis – Credit Suisse

Josh Pinkerton – Goldman Sachs

Bill Greene – Morgan Stanley

Glenn Engel – Bank of America

Operator

Good day everyone and welcome to the Q4 2011 Aircastle Limited earnings conference call. This call is being recorded. At this time, it is my pleasure to turn the call over to Mr. Frank Constantinople, senior vice president of investor relations. Please go ahead sir.

Frank Constantinople

Thank you, Carla. And good morning everyone and welcome to Aircastle Limited’s fourth quarter 2011 earnings call. With me are Ron Wainshal, Aircastle’s chief executive officer, and Mike Inglese, our CFO. We will begin the presentation shortly but I would like to mention that the call is being recorded and the replay number is 888-203-1112 from within the United States and Canada, and from outside of the U.S. and Canada the number is 719-457-0820. The replay passcode is 2558049. This call will also be available via webcast on 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 factors 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 I’ll now turn the call over to Ron.

Ron Wainshal

Thanks Frank and thanks to all of you on the call for joining us today. I’d like to start by reviewing our accomplishments for the fourth quarter as well as the full year of 2011. I will then discuss the current market environment, including supply and demand factors for aircraft and their effect on our levels, capital market conditions and our competitive positioning. Finally, I will discuss our plan going forward before turning the call over to Mike for a review of our financials. After Mike’s remarks, we will open the call for questions.

2011 was a successful year for Aircastle capped off by a strong fourth quarter. Throughout the year our focus on disciplined accretive growth and effective portfolio management enabled us to drive our earnings higher. In addition, by selectively selling assets, repurchasing shares and executing on our Airbus new order program, we increased earnings per share and return on equity substantially.

As we begin 2012, Aircastle remains well positioned to take advantage of what we believe is an attractive investment environment for aircraft. We began the year with almost $296 million of unrestricted cash and have no other meaningful investment commitments following the completion of our Airbus program in April. We also continue to benefit from our ability to access the capital markets as we completed an unsecured bond issue at the end of last year.

Given the significant decline in bank financing capacity and the long term structural changes that are taking place in the banking sector, our ability to access the bond market provides us with an important strategic advantage over competitors. And it also represents an important differentiator with our customers. Looking ahead, we are quite optimistic for our prospects.

I’d now like to review some of our specific accomplishments for the fourth quarter and for the full year of 2011. For Q4, our net income was $35.6 million or $0.49 per diluted share. For the full year, Aircastle’s net income increased 89% to $124 million or $0.64 per diluted share.

Full year lease revenue was $580 million, rising 9% primarily due to new investments. In 2011, we invested about $1 billion in aircraft acquisitions, including new 330s from our Airbus program. Of this amount, approximately $400 million closed in the fourth quarter, including our first 777-300ER which is leased to Cathay Pacific.

We also acquired seven narrow-bodies and in December completed the purchase and leaseback of two MD-11 freighters with EVA Airways of Taiwan. We also took advantage of attractive asset prices and monetized some of our investments through opportunistic sales. We sold 13 aircraft for a total of $0.5 billion in 2011 generating $39 million of gains. Of these, five aircraft were sold in the fourth quarter for total gains of $10 million.

Our fourth quarter sales consisted of one new A330 leased to South African Airways as well as several middle-aged aircraft demonstrating that there is money to be made in both new and used aircraft. In fact, since our formation we’ve sold 30 aircraft generating gross proceeds of more than $800 million and an aggregate unlevered return in excess of 14%.

During the course of last year, we also broadened our funding base and enhanced our capital structure. We were able to source attractive secured bank financing for deals with high quality customers such Cathay and EVA. At year end, we also traded $150 million worth of secured debt which provides us with capital to pursue new acquisitions both credibly and confidently. This capital will help us continue building our unencumbered asset base which comprised 27 aircraft with a year-end book value of almost $700 million. Combining these aircraft with our unrestricted cash balance, we had nearly $1 billion in unencumbered assets on December 31.

We also continued to effectively manage our portfolio. For the fourth quarter and the full year 2011, Aircastle maintained a utilization level of approximately 99% and a rental yield of around 14%. These are very strong results and they reflect our ability to manage effectively through several early lease terminations arising from the Arab Spring.

Our accounts receivable more than 30 days late is currently about $1 million, which is a very small percentage of our quarterly rental roll roughly $150 million. Finally, we continue to return value to shareholders. During the year, we executed a $90 million stock buyback program. We also increased our quarterly dividend by 50% to $0.15 per share to reflect the company’s increased earnings power.

Turning to the overall business environment, we believe the long term outlook for aircraft leasing remains very good. Growth in air traffic is historically averaged between 1.5 and 2 times increases in global GDP. We see this trend continuing especially given the expanding role of emerging markets where economic growth and operating lease market share are both at relatively high levels. Growth in air traffic which I view as a good proxy for increases in aircraft lease demand have been consistently positive, and it’s in contrast to the airline profitability. In fact, there have been only three years since 1970 where passenger traffic levels contracted. This is a much more stable time series than it is generally understood.

Over the near term, we see the global economy slowing and this in turn will dampen air traffic demand growth somewhat. Worldwide GDP growth for 2012 is now expected to be a little over 2% this year. In the middle of last year, this forecast was for an increase of 3.5%. Significantly for our business, emerging market economies are still forecast to grow almost 5% in contrast to GDP expansion of only around 1% in developed economies.

Turning to overall industry traffic statistics, we believe 2011 data was actually quite good, especially given the general economic tone around the world. Passenger traffic was up 5.9% for the year while the more economically sensitive air cargo sector contracted a little over 1% during 2011. However, industry data was more positive earlier in the year and then got a little bit worse during the second half as the effects of the Eurozone crisis and other economic challenges again weighed more on business confidence.

Nonetheless, the expansion in air passenger traffic throughout the year paints a positive picture for demand. On the other hand, high fuel costs have reduced airline profitability and their ability to pass along these costs through high fares has become more difficult. Over the past several weeks, we’ve seen a few carriers go out of business or begin restructuring processes.

To put it into context, at the moment the airline credit environment doesn’t feel as bad to us as what we went through in 2008-2009. But there is an increased weakness versus the year ago.

Now to talk about aircraft supply. One of the important developments affecting our market is the level of new narrow-body aircraft production. Compared to 2009, A320 family production is scheduled to increase by 25% by next year. Additional increases are also being discussed. This is also an issue at Boeing but to a lesser degree. In our view, these are significant increases in supply which we don’t believe the market will absorb well without affecting rental levels.

And while the manufacturer order books appear to be sold out for some time, major reason for this is the continued high level of export credit agency financing support. More on that shortly. In any case, for the reasons mentioned here our investment focus for narrow bodies remains on mid-aged current generation models where the investment recovery period is much faster. I should point out that in contrast, the supply picture for wide bodies remains strong. The 787 production has really yet to take off after several years of delays and the Airbus A350 XWB program is also behind schedule. Additionally, the shift in engineering priority towards re-engining narrow-body programs means current state of the aircraft like the Boeing 777 should enjoy a longer production run.

So what does this mean for rents? In absolute terms, we see aircraft rents being down generally a little bit versus last year, although historically low interest rates can soften this effect for investors. As usual, market performance varies considerably across aircraft. Airbus narrow bodies have been harder hit with absolute rental levels down 10% to 20% compared to early last year. Demand for the smaller A319s remains particularly weak and you may recall that during the third quarter last year, we decided to shorten our economic useful life assumptions for these aircraft. In contrast, rentals for Boeing 737 NGs and in-demand wide bodies like A330s and 777s are more or less flat versus the year ago.

Now a few thoughts on the financing environment. Overall we expect the financing markets to remain challenging this year. Adding to that, we estimate the dollar amount of new aircraft deliveries will be around 25% higher in 2012 versus 2011 rising to roughly $100 billion. This increase is due to higher production of existing aircraft types and the ramp up in 787 deliveries.

We think this growth in financing demand coupled with credit market limitations will present an excellent opportunity for Aircastle. As I mentioned earlier, the bank market is shrinking. This is not just a near term issue but a structural one in our view. There are simply fewer banks with aviation finance expertise that are still in business and those remaining have challenges. This is not a new development. It began with the global financial crisis a few years ago and it continued to last year when several of the larger French banks, who long have been key players in our industry, largely dropped out during the fall. Their return looks uncertainty at the moment.

As a result of the contraction in the traditional bank market capacity and due to the increase in new delivery volumes, we believe export credit agencies will account for growing share of new aircraft financing. Historically, ECAs have traditionally provided roughly 15% of new aircraft financing during stable market conditions. However, since the global financial crisis, the ECA’s market share has nearly doubled to approximately 30%, and we expect the ECA market share to exceed this level in 2012. There remains to be seen how long the ECAs can maintain elevated market shares, and in any case, the ECA pricing is scheduled to increase materially next year.

We see the trend in our business towards U.S. capital markets financing, which is credit ratings driven. It’s important to underscore the importance of the U.S. capital markets given the decline in traditional pure asset based lending capacity. At the moment, bond market conditions for both secured and unsecured debt issuances are quite favorable. We are one of only three aircraft leasing companies to have issued long term rated unsecured debt and we believe this is a strategic edge for us.

Now to cover how we are doing on aircraft placements. Our average remaining lease term is 4.9 years. So we have a relatively strong and long lasting contractual revenue base. We started this year with 17 aircraft to place in 2012 and now have 12 remaining, representing only about 6% of our total net book value of flight equipment. This is a relatively modest level and reflects significant placement activity that we completed last year. However, we have two more aircraft to address due to the bankruptcy of World Airways which filed for Chapter 11 protection this month.

World filed the motion to reject leases for about half their fleet, including our two Boeing 747-400 converted freighters which account for about 2.5% of our total fleet’s net book value. We are in discussions with several parties, including World, about leasing these aircraft mostly likely on a short to medium term basis. This way, we will be able to benefit from what we anticipate will be improving cargo market conditions next year or two.

We expect to have both aircraft in revenue service by Q3, if not earlier. We’ve proven our ability to mesh through these situations consistently over the years and expect this will be the case as well. I also expect that for the first quarter of 2012, our utilization rates will be at least 98% and our rental yield will be around 14%.

Finally, few comments about our strategy. We are well positioned to take advantage of an investment environment that remains me a lot of 2009 and 2010. Our liquidity position and our cash flow are strong and our corporate leverage is low. We have no debt maturities until 2015 and have minimal contractual investment commitments remaining. In other words, we have a lot of firepower to work – to put to work in a good investment environment. Our goal is to increase earnings per share and return on equity by capitalizing on the strengths on our world class team and access to multiple funding sources, including the bond market.

As always, our investment strategy will be to focus on where the risk return proposition is best and where we have a competitive advantage. In general, we’re focused more on customized value-added transactions which capitalize on our team’s capabilities. In contrast, we generally stay from super competitive auctions for purchase and leasebacks where the winner is simply awarded for offering the lowest cost of capital.

From an asset standpoint, we currently see high quality wide bodies, mid-aged narrow bodies and cargo market aircraft is offering particularly good value as much as we have been seeing over the last 9 to 12 months. For the near term, our goal is to invest at least $300 million of capital during the first half of the year, including our last new order A330 which is delivering to Virgin Australia in April. For the full year, I think investing $600 million is a reasonable target. As always, this will depend on finding investments that we think make sense.

I will now turn the call over to Mike.

Michael Inglese

Thanks Ron. The fourth quarter was another strong quarter and we’re well positioned for 2012 due to the contribution from the nearly $1 billion of aircraft investments we added during 2012 along with the investing opportunities we expect to come online during the current year.

Lease rental revenue for the fourth quarter 2011 was $149.8 million, up $10.5 million or 8% from the prior year, due primarily to the impact of aircraft acquisitions net of aircraft sales. Our portfolio yield for the quarter came in at about 14% and revenue utilization was 99% for the quarter and full year.

I think it’s important to emphasize that as you look in our P&L, we believe lease rental revenues represent the best measure of basic portfolio revenue performance. Total revenues for Q4 2011 were $156.9 million, an increase of $22.2 million from the prior year and reflect the $10.5 million of higher lease rental revenues along with higher scheduled maintenance revenue of $10.9 million for the fourth quarter of 2011 versus the prior year.

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

EBITDA for the quarter was $160.1 million, up $25.8 million from the fourth quarter of 2010, due primarily to the higher total revenues of $22.2 million, lower SG&A of $2.1 million and higher other income of $1.5 million, which is driven primarily by higher gains from sale of five aircraft during the fourth quarter compared to the prior year.

Adjusted net income for the fourth quarter was $31.2 million or $0.43 per diluted share compared to $14.2 million or $0.18 per diluted share in the fourth quarter of 2010. The year over year increase of $16.9 million reflects higher lease rental revenues of $10.5 million, higher maintenance revenues of $10.9 million, lower SG&A of $2.1 million, partially offset by higher depreciation of $7.6 million compared to the prior year.

Interest net for the fourth quarter was $53.8 million, an increase of $4.1 million over the prior year, primarily due to an increase in non-cash hedge ineffectiveness of $3.1 million related to the pay down of debt associated with aircraft sales during the quarter and a higher average debt outstanding.

Total SG&A for the fourth quarter 2011 was $9.6 million, down about $2.1 million from the fourth quarter of 2010 resulting from lower cash SG&A of $0.9 million over the prior year mainly related to personnel expenses and lower non-cash share based compensation expense of about $1.2 million in the fourth quarter.

Depreciation expense for the fourth quarter 2011 was $63.8 million, which was $7.6 million higher than the prior year primarily due to aircraft acquisitions to the portfolio on a year over year basis. The monthly depreciation run rate at year end was about $21.3 million. Gain on sale of flight equipment in the fourth quarter was $10.1 million generated by the sale of five different aircraft during the quarter.

Our income tax provision for Q4 represented an effective rate of about 4.8% which brought our annual rate to roughly 5.9%. This reflects the revenue and income sourcing mix from the portfolio during the year. For 2012, we expect our effective tax rate to be in the 6% to 7% range overall.

As Ron mentioned, our acquisition activities during the fourth quarter, we added a mix of 11 aircraft for approximately $400 million during Q4. At year-end 2011, our annualized lease rental run rate from the portfolio was approximately $610 million of which $110 million was being generated from 27 aircraft that we owned outright without any financing related encumbrances.

Turning to our capital structure, we ended 2011 with approximately $296 million of unrestricted operating cash, $247 million of restricted cash and $50 million of availability under our unsecured revolving credit facility. We had approximately $3 billion of secured and unsecured borrowings with net debt outstanding of about $2.7 billion, which represents about 61% of the net book value of our flight equipment.

Our net debt to equity ratio, excluding the mark-to-market of our interest rate derivatives was approximately 1.7 to 1 at the end of the year. And we were in compliance with all applicable covenants in our debt financing. As you have noted in the past, our goal is to maintain a relatively conservative capital structure of about 2 to 1 with a mix of secured and unsecured debt. We believe this capital structure lends itself to flexible portfolio management and opportunistic investing while providing for a balanced maturity profile.

To that end, during the quarter we raised $275 million of secured and unsecured capital. First, we completed two secured financings of $90 million loan facility from NordLB to purchase the 777 on lease to Cathay Pacific and $36 million of secured loans from DVB and Chinatrust Commercial Bank for the purchase and leaseback transaction with EVA of the two MD-11 freighters.

Blended rate on these facilities is approximately 4.3% fixed. We also issued an additional $150 million of unsecured notes and an add-on to our 2018 deal. The notes were issued at a premium to par at approximately 102.8% of fixed with an annual yield towards 9%.

Also as we discussed during our third quarter call, during 2011 we executed a forward starting interest rate swap that would reduce the cash pay interest rates by approximately 400 basis points on our second securitization beginning in the middle of this year. We expect that to result in approximately a $30 million reduction in interest expense on this facility during the first 12 months after the new swap’s commencement in June.

With a strong balance sheet, steady cash flows and access to capital, we are in a good position to support our growth strategy by taking advantage of the attractive investment opportunities when they are available in the marketplace. We intend to remain shareholder focused having increased our common dividend twice during 2011 and successfully completed the repurchase of 7.6 million of common shares for $90 million during last year.

Finally, with respect to some Q1 2012 guidance, we expect lease rental revenues to come in at around $150 million to $152 million. Maintenance revenue is expected to be between $9 million and $11 million. Amortization of net lease discounts and lease incentives is expected to be in the range of $5 million to $6 million. And total SG&A is expected to be around $12 million, and I will remind everyone, in our sort of historical quarterly pattern, SG&A is typically higher in the first quarter of the year due to the timing of cash bonus payments and the implications for payroll tax payments as well as some stock compensation acceleration expect here in the first quarter of 2012 related to our recent CIO departure.

This estimate assumed the early return of one out of the two World 747 freight aircraft during the first quarter of this year. As Ron mentioned earlier, the 747 freight aircraft at World represented about 2.5% of the net book value of our flight equipment and approximately 3% of our year-end lease rental run rate. Based on today’s market conditions, we expect the net leases on these aircraft would be at lower rates which would translate into an expected reduction in the overall lease rental run rate of about 1% to 1.5% on an annual basis compared to the year-end 2011 number.

In conclusion, the fundamental business continues to perform very well. We remain focused on near term lease placement activities and sourcing new investment opportunities in those sectors of the market where we see the most attractive risk adjusted returns. Our strong cash position, revolver availability and expected access to the unsecured markets as well as selected bank financing, we expect to see strong earnings and cash flow performance again in 2012.

Finally, before we open up the call to Q&A, I just have one other item. We mentioned over the next few days, we will be sending out invitations for our annual investor launch and which will take place in New York City on April 12 this year. Details will follow soon.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz – Wells Fargo Securities

Ron, you said just in general that there are a lot more appealing opportunities on the buy-side and there are on the sell-day, in that it’s highly unlikely you will sell another $0.5 billion worth of assets this year?

Ron Wainshal

Yes. It’s a cyclical market, Gary. And there are sometimes where it makes more sense to focus on buying, sometimes it makes more sense to focus on selling. Sometimes it’s good to do a little bit of both. I think 2011 was in that last category. Because of the capital markets pressure, I think the buy-side is going to be more interesting this year. That isn’t to say we don’t expect to selling the aircraft but it’s just going to be our lower emphasis for us.

Gary Liebowitz – Wells Fargo Securities

And based on your earlier discussions for the two ex-world 747s, when you release those, on how far below sort of the 14% average portfolio yield do you expect those planes to go out at?

Ron Wainshal

I think Mike gave you a little color in terms of kind of where the overall rentals would be. Let me just give you some color on the cargo market first of all. Cargo market is definitely weaker than it typically is due to the slowdown in the sector. We don’t think this is a long term phenomenon. In fact, there are some early signs of a recovery. Our strategy with these aircraft is not to lock in very long lease terms. I am thinking one, two, maybe three years maximum. And these will be kind of tied into heavy maintenance work. So we will probably see a decline in the lease rental of probably in the 40% level.

And I think that the other thing that’s worth noting is cargo aircraft in comparison to passenger aircraft are a lot easier to redeploy. You don’t have to worry about seats and galleys and inflight entertainment systems and things of that nature. So the cost of redeployment, and I am not ruling out at least one of the aircraft at World, but the costs of redeployment are likely to be quite low. Aircraft as we understand are reasonably in good shape.

Gary Liebowitz – Wells Fargo Securities

Okay. And then just one last one. I noticed you still have $90 million of PDPs on the balance sheet. Aside from the new A330, what else is in there?

Michael Inglese

Conversion payments for the freighters that were being converted at year end that one came out of the factory in January of this year and delivered to Southern. The second is scheduled to come out in the second quarter of this year.

Ron Wainshal

When that last aircraft comes back to us delivered from Airbus in April, that will be the last of the pre-delivery payment.

Operator

And we’ll go to Andrew Light with Citi.

Andrew Light – Citigroup

The lease rentals on those two aircraft to be down 40%. What impact do you think current market conditions are having on just generally the value of the freighters? And with rents down that much, what do you think you will have to make impairment charges on not only those two planes, but maybe others in the fleet?

Ron Wainshal

The short answer is no. The freight market is little bit volatile inherently than the passenger market. I’d just point out these are the only aircraft we expect to come off lease this year in the freighter sector. So I don’t think the rental effect on our portfolio is anything more than what we’re talking about right here.

In terms of aircraft valuations, it’s more of a volatile times series than passenger aircraft, but that’s also where you can make some money. The key to us in terms of portfolio management is not to lock in long term rentals because I think things would be better in the year two and the values of these aircraft will recover quite nicely.

Michael Inglese

I think Andrew, it’s just important to point out on these two particular aircraft, these leases were executed in late 2007 and they came out of the freighter conversion process in early 2008. So it was a very different market environment at that time.

Andrew Light – Citigroup

Okay. And in terms of seizing opportunities in your target (indiscernible) freighter slightly older aircraft market, are you seeing an increase or decrease in one, inquiry levels, and two, competition?

Ron Wainshal

Couple things. One is, I’ll just clarify that in terms of what we are focusing on is not only mid-aged aircraft. I think there’s good value on some of the newer higher quality wide bodies like 777s we bought with Cathay. But having said that, what happened in the fourth quarter, and actually probably also in January was that the market kind of struggled to digest the impact of financing costs. The deal flow was slow at first but it seems to have picked up a lot in the last few weeks. And so I think the opportunities of that will be pretty good.

You never know until the deals come over to finish line but I am pretty optimistic about it. And I think the return levels that we are targeting will do a little bit – even a little bit better than what we anticipated back in the end of last year. How does that play out over the rest of the year, that’s hard to say but I don’t think that the capital markets forces that we are seeing here are short term phenomena.

Andrew Light – Citigroup

And the level of competition, I mean very large, getting a more attractive space (ph)…

Ron Wainshal

The level of competition, firstly for the wide bodies is a mixed story. We are seeing more focus from some of the more active players away from some of the new narrow bodies particularly Airbuses. And so some of that’s going to shift over into the wide body side. And I think people are coming around our perspective in terms of production levels and rental outlook and residual value outlook in regards to those airplanes. That’s a bad thing.

On the other side, because of the constraints in the bank market, it’s going to be harder and harder for those players to source financing effectively and reliably. We actually do benefit even in the bank market by having a credit rating because we can, if we choose to, do a recourse financing, perhaps take a bigger balloon exposure if we choose to, it’s a bigger – it’s a better credit package for bank to take to a more fickle investment committee. I think the competition there is going to be on average what it might have been say two, three months ago. Competition for mid-aged aircraft is even lower than it was at the end of last year. So that’s a very positive thing from my perspective.

Operator

And now we’ll go to Isaac Husseini with Barclays Capital.

Isaac Husseini - Barclays Capital

A quick question on the SG&A and maybe that was –

Ron Wainshal

Isaac, could you speak up a little bit? We’re having a hard time hearing to you.

Isaac Husseini - Barclays Capital

On the SG&A and I apologize that might be in the prepared remarks that you gave, and I may have missed it. But SG&A expense came in a bit light for 4Q, and it doesn’t seem like it was at that level in absolute terms since ’07. So is there anything that’s going on there, is there something that we can expect going forward as a run rate?

Michael Inglese

I think what I said, Isaac, is the fourth quarter was a bit lower than the prior year due to the level of compensation expense recorded in the quarter as well as a decline in the stock compensation expense. In the first quarter of this year, we expect the total number to be back up of $12 million, and part of that is driven by the stock comp expense we expect in the quarter related to our CIO departure and acceleration of some of those stock assets. And then also in the first quarter we play our cash bonuses and there is a large payroll tax that gets paid and recorded during the quarter, in the first quarter of each year. And if you look at our history, Q1 is typically our highest SG&A quarter throughout the calendar.

Isaac Husseini - Barclays Capital

And then I guess my second question is in light of your share buyback program and the recent increase in the dividend, just wanted to get an update on your thoughts and your view on growing the platform in terms of adding assets to the book versus returning capital to the shareholders. Has that thought process progressive at changing, but what’s the update on that please?

Ron Wainshal

We look at this stuff – we look at these questions regularly and it’s based on prevailing market conditions. I think the platform has significant scalability. I said this before but I will repeat it. I think we could effectively double the size of our portfolio without increasing our overheads very much. So there is a lot of bandwidth potential over there. And we will do that provided that there are good investment opportunities, I think we will see that this year.

I think the question about whether you buy back stock or invest is always a good – what’s better in relative terms. Back when we did our stock buyback program, our stock price was lower and investment returns were also lower. So it made more sense in that context than it does right now. It doesn’t mean we rule it out but where we sit here today, I am a lot more focused on investing in aircraft than I am in buying stock back.

Operator

And now we’ll hear from Scott Valentin with FBR Capital Markets.

Scott Valentin – FBR Capital

Just earlier you referred to, I think you have roughly $1 million in past-due lease receivables. I am just curious what happened to the watchlist – if the number of airlines or aircraft on the watchlist have increased at all?

Ron Wainshal

Couple of things. One is, it’s highly tougher overall environment than it was a year ago today. I don’t think it’s dramatically different but the effect of higher fuel prices and kind of slowing economic growth rates there. It’s probably more of a – the epicenter is more in Europe than anywhere else, although it’s exclusive. Our receivable levels are quite low in absolute terms. There is probably more noise than not.

We also have every season at this time of the year a slowdown. Winter is always the hardest time for airlines because that’s when cash flow is lowest. It’s a more challenging credit environment than it was year ago, as I said. But I also want to remind just from a perspective of the cycle, we actually went through a bit of rough patch in the first quarter last year with all the Arab Spring issues. So I wouldn’t put, what we are going through is anything that’s kind of alarming in anyway.

Scott Valentin – FBR Capital

And then just with the aircraft, just curious as to maturing leases in 2012, you mentioned, I think you have 12 aircraft left to place in 2012 and the ’17 that you had mentioned earlier. I am just curious are there scheduled lease expirations or maturities?

Ron Wainshal

Let me comment a couple things. What’s left over, actually reflects an awful lot of work that we did last year and I think in general we locked in rates that were better than what we see right now. So I am happy about that. What we have left over is a very small part of our overall fleet. Typically if you think about five years remaining average lease term, you’d expect 20% rollover in any given year. We don’t have that much left right now. And if you look ahead to 2013, we have only 10% of the fleet value coming off lease that’s scheduled. For 2014 it’s 14% and the year after that it’s only 7%. So our revenue exposure is actually quite low in the near term, which means our contracted revenue base is a pretty big percentage of our overall picture.

Scott Valentin – FBR Capital

And then just a final question. In terms of the higher fuel prices, obviously the classics have been under pressure for a long time. Do you envision maybe the pricing moving up to more of the kind of mid-aged asset class?

Ron Wainshal

I think the fuel prices affect the overall market, number one. They are absolutely killing the classics. I think bigger effect – it’s not a nice thing for us but the bigger effect that we seeing recently is production levels. And so they are affecting the current generation aircraft, more Airbus than Boeing. And that’s a problem that I worry about over the longer term. I think if you – it’s very hard for an OEM to dial back production. These are long industrial lead time processes. It’s also kind of hard to lay off people. So I am concerned about that. And that’s one of the reasons we’re avoiding the new narrow bodies because aircraft have to last a long time to justify the economic propositions we see before us.

And if you are worried about the next lease, the lease after that, and one after that, that’s a challenge. For the aircraft that we are focusing on, and I’ll give you an example. We just purchased a 15-year old A320 for $15 million. It’s got the remaining lease term that’s going to – remaining lease with a decent carrier that’s going to pay us between $7 million and $8 million. I think the balance for our investment which will – is going to be covered by part of the value. So at the age of 18, we’re covered. I think that’s a pretty safe investment, and there’s an awful lot of upside if we get another lease or two to go. However, if I contrast that with a brand new airplane, I think there’s an awful lot of risk there.

Operator

And now we’ll go to Jamie Baker with JPMorgan Chase & Co.

Jamie Baker - JPMorgan Chase & Co.

Ron, it seems clear that the weakness right now is primarily on second-gen for aircraft, particularly on the A320s. That seems to be what everybody is complaining about right now, you said as much in your prepared remarks and it’s consistent with what we are probably all hearing – the 73 market does seem to be holding up better. I am wondering if that’s your observation as well, and whether there is any opportunity here that might be specific to Aircastle other than just hoping the market firms up in the coming year too?

Ron Wainshal

Yeah, I think the NGs are holding up better. If I were to look at call it 10-year old 737-800 and its rental rate today versus a year ago, it’s about the same. I think that’s probably in the low to mid $200,000 a month kind of territory. So it definitely help up. It’s probably a little bit higher during the first – kind of middle of the year and softens just a little bit but largely it’s held in pretty well. The Airbus aircraft definitely weakened, and it’s not just the overall level of – the number of choices we have in terms of placing the aircraft. We’ve been thinking more and more is there a play for us even on a part outside. It’s not a capability that is something that we have resident with our company but it’s something we’re kind of exploring as a business concept.

So at some point or another, all these old 319s will be difficult to justify reinvesting in to keep them leased. And I think there is an opportunity for us to buy those and actually manage those. But that’s a comment, it’s not something we’ve kind of decided to do for sure, it’s something we kind of look at.

Jamie Baker - JPMorgan Chase & Co.

And actually Ron, you gave NG comparison, flat year on year $200,000. Can you give a comparison again on the A320? I missed that if you gave it earlier.

Ron Wainshal

I think to talk about specific rental levels, but I would say that the same vintage A320 was probably going for about call it $200,000 a month in rent last year. And right now we are looking at $160,000 to $180,000.

Operator

And we will open the floor up to Gregory Lewis with Credit Suisse.

Gregory Lewis – Credit Suisse

Ron, can we assume that the 12 remaining aircraft to be leased are on narrow bodies this year?

Ron Wainshal

No, there is mix. There is a couple of – there is one A330, there is four 767s and the rest in narrow bodies.

Gregory Lewis – Credit Suisse

Okay, great. And then my last question is just going to be on the maintenance revenue. Is there any way to provide some detail on how much of that revenue was related to early redeliveries that were on plan?

Michael Inglese

Actually in the fourth quarter, it was all scheduled lease expiries. And the reason we came in a little bit higher than our guidance was the return compensation on one of those leases turned out to be a bit higher than we originally forecasted.

Ron Wainshal

And just to add to that, in regard to the first quarter much of what we got in there relates to our assumption of one of the World aircraft coming back to us.

Operator

And now we’ll hear from Josh Pinkerton with Goldman Sachs.

Josh Pinkerton – Goldman Sachs

So first question is on the new wide body market that you talked a little bit. It seems like you are not necessarily interested in placing a new order with the manufacturers or doing some of these competitive sale leaseback transactions. Where do you see is the best place to kind of get involved or to put on, or to find new wide bodies for your fleet, how do you think about that?

Ron Wainshal

Couple of things. One is we will look under every rock and every opportunity. We have a regular dialogue with the manufacturers. But having said that timing is everything, and versus a here and now investment where we know what – the sale leaseback for example, or purchasing an aircraft from other leasing company, we would know how we are going to pay for an aircraft, we’d know what rental’s going to be, and we’d also not have to deal with pre-delivery payments. And so I would want an investment return premium for taking all those incremental risks for a new order.

Now it could be that there is an opportunity that pops up and you never know. I don’t think that’s kind of the highest likelihood. I think you will see it’s much more likely for us to find new investment opportunities by buying aircraft leased from airlines or from other leasing companies.

Josh Pinkerton – Goldman Sachs

The next, it was just on some of the customer weakness, or not necessarily yours, but the kind of broader market weaknesses, is that concentrated in kind of the geographies that people would think of them? I mean, is this mostly the European problem, a global issue and what’s going on there?

Ron Wainshal

There is more of a European centricity to this, if you will, particularly on the peripheries. And most of the airlines involved here tend to be relatively small. We saw a few bigger ones like Malev and Spain Air really this year. But I think most of what else is left – the way it looks like to me is smaller, and therefore less impactful from a lease market perspective.

Having said that, the Indian market, even though it’s growing like crazy, it seems to be pretty dysfunctional. And that seems to be an area of weakness. In that context, I will say our grand total exposure in India consists of two 737-700 is coming off lease from Jet next year. So we are really, really underweighted over there. But that’s kind of one we are watching. And there is a couple of pockets here and there but I think the epicenter like I said is probably in Europe.

Josh Pinkerton – Goldman Sachs

And then just a last question, it seems like there is a bit of a step-up in your restricted cash line this quarter. Do you expect that to go that down and what’s going on there?

Michael Inglese

Yeah, the step-up across year end, Josh, related to some of the fourth quarter asset sales because the waterfall dates in a particular financings don’t correspond with calendar. And some of the asset sale proceeds were actually in restricted cash and then subsequently in early January that cash was taken out and paid off the associated debt with those aircraft with those financings.

Operator

And now we’ll hear from John Gordon with Morgan Stanley.

Bill Greene – Morgan Stanley

Hey it’s actually Bill Greene. Thanks for taking the question. Hey Ron, I was hoping you can add a little bit of color to normalized ROE. You talked about some potential secular challenges more on the financing side. So what does that do for normalized ROE if you think about in overall a cycle?

Ron Wainshal

Well, let me tell you where I see investment returns today. I mean, there is what we own today, and then there is what we see incrementally. Okay, and I will divide that into two generic categories, the first of which will be these kind of higher quality wide bodies. Those aircraft, just to begin with, are probably unlevered returns of or ROAs and this is an accounting number, it’s economics, of 8%, 9%,10%. Okay. And in those contexts we might choose, and I guarantee that we may choose to also finance some of those with secured debt. Secured debt based on the bank market profile probably gets us to an ROE of something in the mid to high teens. But perhaps a little bit higher. So that’s one category, one flavor of investment.

The other one is kind of the middle-aged aircraft, turning the market opportunities. These are aircraft that we are likely to fund through the unsecured debt. And the way I think about those is they will probably have unlevered returns of 12%,13%, 14%. That varies by type. If I issue debt, for example, at 9% which is what we did back in December, and I assume that two-thirds of my capital structure is debt, I can opt for an ROE and that comes out to be in the high teens or higher. Right now, if my debt cost is not 9% but 7%, or 7.5%, the ROE is a lot higher obviously.

Bill Greene – Morgan Stanley

Sure. Now how important when you look at it as in total, not just segments of the fleet but in total, how important are gains on sale to getting the ROEs at a firm level to this mid-teens target?

Ron Wainshal

Those economic numbers assume a hold – a long term hold. Now as it relates to our GAAP results from time to time, they will be very different. Last year, the sales had a big effect on our returns, on our ROE and our earnings per share, and this year I am not expecting they will be very high at all.

Just to say, in this regard, our goal is not to just kind of pop a gain every year and to kind of maintain that every year, because I think leads to a kind of skimming of the cream off the crop during a bad time of the market. Our general rule of thumb is can you take the money that you generate from an asset sale and redeploy it more profitably? If the answer is yes, then we will do it. If not, we won’t.

Bill Greene – Morgan Stanley

And when you think about the challenges in the financing market, how do you think about the marginal cost of debt?

Ron Wainshal

I think the marginal cost of debt has to be considered against the marginal investment opportunity. It is one of the most misunderstood things about approach to the debt markets. So if I am going to buy this hypothetical, high quality new narrow body – new wide body aircraft, I can fund the debt cost as we did with the Cathay deal call it 4% -- 4.5%. The unlevered returns on those aircraft will be lower to begin with but the ROE that gets cranked out at the end of the day is going to be something in the mid high teens. Having that if I am going to buy a 10-year 737-800 I am not going to be able to – even if I wanted to, I am not going to be able to go get bank debt financing for it. So my only choice there is to get that higher cost debt but the returns on that – the higher cost on secured debt but the returns on that are so much better and the resulting ROE is even better. You kind of have to match these things up a little bit.

Bill Greene – Morgan Stanley

And the last question, can you offer any color on the RBS transaction, what’s sort of the read across from your perspective to Aircastle? Thanks for the time.

Ron Wainshal

Sure. I am looking at this a bit from outsider’s perspective. What I read suggests that RBS got a very good price. We know the RBS team people, they’re super team, they are very competent. And two guys (ph) got a group to join them. But as I look at it and I am looking at this more from a metal perspective, I’d be paying a big price.

Now the big question for kind of the general buyer is what is the platform worth? And this gets into valuation for companies like ourselves. You can look at our value as some of the metal minus the debt. I think what this RBS deal demonstrated and if not unique at the time, is that people do value a platform, right? And this happened previously with Pegasus, it happened with AWAS, it happened with Boullion, it happened with Singapore Aircraft Leasing (indiscernible) Bank of China. So that’s just something that doesn’t seem to factor into this, from my vintage point and how people look at aircraft lessor valuations all the way around.

Operator

And now we will go to Glenn Engel with Bank of America.

Glenn Engel – Bank of America

I have two questions. One, it sounds like you expect the market gets tougher before it gets better. And so one, why wouldn’t the middle-aged aircraft be vulnerable in that environment? And two, when does waiting make sense for even better deals in pulling the trigger earlier?

Ron Wainshal

The middle aged aircraft, they are absolutely exposed just the new ones are. I think my comment is not that the rental levels on the middle aged aircraft won’t go down. It’s just that we don’t expect that they’re going to be exposed to that pressure for as long a period of time. They’re going to be eventually to a residual value level off sooner. So that’s one comment.

It’s very hard to play timing games with either investments or placements. With the placement side, first of all, you do get a little bit of lead time notice. And what we do as a systematic manner is we begin remarketing aircraft well over a year in advance, because even putting market timing aside, it’s an orderly transition of an aircraft from operator to the next is by far the best way to go because you will save a lot more in terms of transition costs. You will find the best match in terms of the customer. (indiscernible) you know what you’re going to get and transition costs are often even bigger deal than the rental differential. So we don’t play too many games with that.

In terms of market timing, that’s on the investment side, there is a couple of different equations which go into it, which are a little bit tricky for an investor. Number one is, what you will earn and it takes a few months to get deals closed generally. And then how will you finance that and what will those rates be? And the approach we have taken so far as a business model is we are going to generally raise the capital first and then deploy. So we have a bit of a negative carry. But what matters us in the long term is reputational – our ability to actually execute. Because we actually win a lot of deals, I am confident that we are not necessarily the high price, but when you go to another counterparty and they know that you can deliver that counts an awful lot.

Operator

And there appear to be no further questions.

Ron Wainshal

Thanks everyone. Look forward to talking to you in the near future.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation.

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