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Aircastle Limited (NYSE:AYR)

Q2 2012 Earnings Call

August 2, 2012 10:00 am ET

Executives

Frank Constantinople - SVP, IR

Ron Wainshal - CEO

Mike Inglese - CFO

Analysts

Isaac Husseini - Barclays

Arren Cyganovich - Evercore

Anthony Segoya - Credit Suisse

John Godyn - Morgan Stanley

Scott Valentin - FBR Capital Markets

Andrew Light - Citi

Gary Liebowitz - Wells Fargo Securities

Glenn Engel - Bank of America

Operator

Good day and welcome to the Q2 2012 Aircastle Limited Earnings Conference Call. Today’s conference is being recorded.

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

Frank Constantinople

Thank you, Melanie, and good morning everyone. I’m Frank Constantinople, Senior Vice President of Investor Relations, and I’d like to welcome all of you to Aircastle Limited’s second quarter 2012 earnings call.

With me today 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, from outside of the U.S. and Canada the number is 719-457-0820. The replay passcode for this call is 5002334. This call will also be available via webcast on our website at www.aircastle.com along with the earnings press release and an accompanying 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 these 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 filing 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. I’ll start by reviewing our recent accomplishments, then I'll discuss the current overall market environment, touch on our results for Q2 2012 and provide an update on our plans. Mike will follow with a more detailed review of our financial results and capital structure. After that, we’ll open up the call for questions.

Let's start with some second quarter highlights. We invested $400 million in Q2 building on approximately $1 billion of aircraft acquisitions completed over the previous 12 months. Our investments are focused on modern high utility aircraft in market segments in situations where we believe we have a competitive advantage. We expect these accretive and attractively priced investments will generate strong returns and enhance the company's financial performance.

Secondly, we completed an $800 million unsecured bond offering in April. In addition to providing flexible growth capital we used part of the proceeds of this offering to repay a secured bank deal and to further increase of our unencumbered asset base to $2 billion from $700 million at the end of the first quarter. Our demonstrated capital markets access lets us capitalize on the opportunities arising from the ongoing contraction in bank financing for aircraft.

Thirdly, we continue to manage our portfolio effectively once again achieving a 98% fleet utilization rate during the quarter.

In short, we're continuing to execute on our business plan in a disciplined way. In doing so, we are extremely mindful to putting our capital to work in the most effective way possible from a long-term shareholders' perspective. In this regard, we'll continue to consider the best mix of aircraft investments, repurchasing our securities and returning capital to shareholders through a dividend payout that reflects the company's growing earnings base.

Now, let's turn to the discussion of the business environment. Passenger traffic levels have been surprisingly resilient this year. Year-to-date through June the International Air Transport Association said passenger air traffic is up 6.5% versus last year. However, as we've anticipated we're now starting to see a slowdown in growth rates.

Travel during the month of June was just 0.3% higher than in May. We believe that weakened business and consumer confidence is causing this slowdown. Additionally, while there are always regional variations in performance, we anticipate these differences will narrow as GDP growth begins moderating in some of the large emerging market economies. Nonetheless, I must say that passenger traffic levels have been quite good considering the global macroeconomic circumstances.

For airfreight, the data continues to support our view that the market hit bottom during the fourth quarter of last year but has improved only modestly since. In June, trade volume was just 0.8% better than the same period last year and it's about 2.5% higher on a seasonally adjusted basis in the low point during the fourth quarter of last year. Airfreight traffic is still at a week level. Here again, we believe the current lack of business confidence is to blame. However, as business confidence improves we would expect this to result in higher inventory levels and in turn a pickup in air cargo activity.

Now, I will discuss aircraft supply. On one hand, there are very few apart current technology aircraft that are already committed customers. That's good news. However, we continue to be concerned about increasing production levels particularly for narrow body aircraft. While it's true that there are large order backlogs, we believe that these will be very difficult to sustain without the persistently high levels of export credit agency financing support we have seen over the past fiver years.

Aircraft leasing demand continues to be weak as operators are reluctant to make new long-term commitments. As a result, rental rates remain generally steady but at low levels. We see this now across aircraft types in vintages and view this to be a reflection of the broader economic sentiment. In this softer demand environment, we have been most successful in executing shorter-term lease extensions, as airlines defer long-term decisions. In the same vein, with less orders across the world we're having a harder time placing aircraft with new operators and good terms.

Concerning the aircraft financing markets, long-term structural change is continuing apace. Bank capacity continues to shrink and we do not expect it to return anytime soon. We expect ECAs to support roughly one third in the aircraft deliveries this year, largely replacing bank financing. However, more than doubling an ECA guarantee fees scheduled for January next year will create an interesting market dynamic that we believe will shift more demand for financing towards leasing companies that are able to access the capital markets effectively.

The US capital markets continue to be robust. And not surprisingly, we're seeing in the growing number of airlines and leasing companies seeking to raise capital here. However, we believe consistent market access particularly for unsecured debt will be limited to those with strong capital structures and compelling business models.

Aircastle's use of the capital markets is not completely unique among aircraft leasing companies. However, our percentage of unencumbered assets more than 40% as of June 30, and the growing role of unsecured debt in capital structure sets us apart. We believe this will lead us to a strong standing with capital market debt investors.

I will now touch on our second quarter performance. Lease rental revenue, which we believe is the most consistent measure of revenue for our business, increased to $153.6 million in Q2 from a $143.4 million in Q2 of last year reflecting the growth in our investing activity and good fleet utilization levels.

Adjusted net income during the quarter was $25.8 million or $0.36 per diluted common share. Income was lower this quarter versus last year primarily due to a reduced gain on sale and in aircraft specific impairment. We expect gains on sale this year to be a quite smaller role than last year, given the weak pricing environment, which we're capitalizing on as buyers. Mike will discuss the details.

Looking ahead, the new swap for 2007 securitization financing began in June and is expected to reduce our interest expense by around $30 million over the next 12 months. Mike will also provide interest expense guidance in his prepared remarks.

Turning to our liquidity position, business remained strong, as evidenced by an unsecured and unrestricted cash position that stood at $291 million at June 30. We have no significant debt maturities until 2017, nor do we have any outstanding aircraft order commitment at this point.

Portfolio performance, once again, was solid with fleet utilization at 98% and a rental yield around 14%. We continue to anticipate high utilization rental yields for the second half of 2012, and it's through the worst revenue base, with an average remaining lease term of 4.9 years.

We made good progress with aircraft placements both in regard to the scheduled lease expirations and in also addressing customer issues. We began this year with 17 aircrafts replaced in 2012 and have worked down this to three remaining scheduled lease expirations for this year. We expect three additional aircraft will return to us in the fourth quarter, two are former Cimber Sterling aircrafts on short-term leases, and one is an agreed early return.

The six aircrafts we're currently marketing for 2012 represent about 3% of our total fleet net book value. We've also been making good progress on 2013 placements and have already placed or extended five of our expiries next year, including Boeing narrow-bodies, 767, and an MD-11 freighter aircraft. The net book size remaining placements we have for 2013 is now 9% of the total.

Following the end of the second quarter, we began to a part out disposition of the 747-400 passenger aircraft, originally was to Singapore Airlines, and that was originally targeted for future freighter conversion. Challenging air cargo market conditions and a significant cost of converting the aircraft on one hand, along with a strong demand for spare engines on the other led us to this approach.

To-date, we've disposed of the airframe and it's over swapped out three of the four engines, and we're pretty close on a deal on the fourth engine. While this wasn't our original plan, we estimate this investment will result in a very respectable and leveraged return to more than 13%. Our approach to this aircraft highlights both our asset management skills and our thoughtful methodical approach towards getting the most out of our investments.

Now, a few word on our investments and the sales activity. As I mentioned before, we completed about $400 million of new investments during the second quarter consisting of 12 aircraft acquisitions. This included the last of our A330 order stream deliveries. In addition, we also signed commitments to acquire more than $200 million in aircrafts during the second half of this year.

Here's more color on our recent aircraft acquisitions. All these aircrafts have medium to long-term remaining lease terms. Approximately half of this new investment volume is made up if newer light body aircraft and majority is leased to Asia- Pacific carriers reflecting growth in this part of the world.

In general, we are focusing on aircraft we think will either obtain stronger residual value performance due to better supply and demand characteristics or where we have very good visibility in regards to residual value of the aircraft.

Turning to aircraft sales, activities here has been primarily oriented towards disposing of older aircrafts what we determined is better to sell rather than to reinvest and release. Since the end of the second quarter, we've completed a breakeven sale of the oldest aircraft in our portfolio, a 1985 Boeing 737-300 that had been on lease to South West Airlines. We're pursuing a number of other sales in the classic generation aircraft.

As we look ahead we believe the investment environment will remain attractive although we believe macro issues will persist. As such, we will remain focused on our modern high utility asset strategy with a keen eye for excellent value.

Our ability to raise flexible debt capital in the bottom market provides for a great opportunity. To this end, we're making investments that we expect incremental cash ROEs in excess of 15%.

We are bullish about the investment opportunity set and the potential positive impact on our EPS and return on equity over time. We intend to remain disciplined and we'll continue seeking the best employment of our capital for a shareholders perspective, meet new investments, repurchasing securities, or making dividend distributions. To this end, we have $15 million in share repurchase capacity available.

In regards to dividend our board just cleared a 25th consecutive quarterly dividend and our 4th consecutive payment of $0.15 per share. We last raised a dividend in the fourth quarter of 2011. Based on our growing earnings base, larger contractual revenue stream and strong cash flows, we believe Aircastle is well positioned to maintain and grow our dividend over time.

In evaluating future dividend levels the board will continue to maintain a balance approach creating shareholder value through accretive investments, dividends and share repurchases. The board intends to review our dividend level next quarter in conjunction with our annual business planning process.

I'll now turn the call over to Mike.

Mike Inglese

Thanks Ron. During the second quarter we continued to execute on our plan to add accretive assets and to strengthen the capital structure of our business, continue to successfully source new investments, maintain a strong asset yield and utilization rate and have a solid contracted revenue stream.

In addition, as we discussed in our last earning’s call, during the second quarter we continued the transformation of our capital structure with an $800 million unsecured bond issue in early April. This transaction continued our migration towards the larger mix of unsecured debt, increased on unencumbered aircraft asset base by approximately $1.3 billion to $2 billion overall, extended our earliest debt maturity from 2015 to 2017, provided us with additional operating flexibility and growth capital, and in addition we no longer have any financings with LTV tests associated with them.

Turning to the second quarter results, our lease rental revenue was $153.6 million which is an increase of 7% primarily due to the net impact of aircraft acquisitions made over the last 12 months. Total revenues were $172.2 million, an increase of $23.3 million or 16% primarily driven by higher lease rental revenues, lower amortization of lease incentives and higher maintenance revenue in the quarter.

You'll recall from our last earnings call that we early terminated leases on two 737-700 aircraft that we are associated with the bankruptcy of Cimber Sterling on May 3. One other 737-700 lease at Cimber also terminated as scheduled during the second quarter. As a result, we recorded higher maintenance revenue of $5.4 million primarily associated with Cimber and two other scheduled lease terminations. Also, we had lower amortization of lease incentives of about $5.1 million compared to the prior year quarter primarily due to the reverse of accrued incentive payments specifically related to Cimber. All four of the Cimber aircraft that came off lease in the first half of 2012 have been released and are now back in service with other carriers today.

Other revenues for the quarter were $3 million which includes interest income from financial lease treatment associated with the sales leaseback transaction we did with Thomas Cook’s German subsidiary Condor for six 767-300 ERs which closed in early June. This transaction is accounted for as a financial lease since the 8-year lease has run through what we think of it as the end of the aircraft’s useful life and is not captured on the other revenue line of our income statement as opposed into lease rental revenue. The gross cash lease rental yields for this transaction are approximately 18% per annum.

Our growing portfolio also contributed to improvements in EBITDA. The second quarter EBITDA was $146.8 million, 3% increase over the prior year. The increase is driven by higher total lease revenues at $10.3 million, higher maintenance revenue of $5.4 million and higher other revenue of $2.6 million. These increases were offset partially by higher maintenance and other expenses of $1.9 million due to the Cimber early returns, lower gain on sale of aircraft of $7.4 million year-over-year and a higher aircraft impairment charge of $4.9 million.

During the second quarter we point on the recoverability assessment on the 757 and a 767-300 ER and we recorded impairment charges of $10.1 million related to these two aircrafts. Impairment charges are driven by changes associated with an aircraft economic useful life, residual value or estimated future lease stream and net maintenance cash flows.

In the case of the 757, the impairment was driven by a decision to sell the aircraft at slightly below book value to the current operator based on the specific attributes and maintenance condition of this particular aircraft. In the case of the 767, which came back on a scheduled lease expiration in the second quarter, the impairment was driven by unanticipated engine work that will be required for this particular aircraft in the next lease reducing the expected future maintenance cash flows.

It is also important to note that we recorded about $2.5 million of maintenance revenue associated with the end of the lease on that 767.

Also during the second quarter, we settled an insurance claim on the lot 767 aircraft, which resulted in the net gain of $2.9 million. This compares with the $10.3 million gain from the sale of an A330-200 aircraft during last year's second quarter producing the year-over-year reduction in gain on sale approximately $7.4 million.

Adjusted net income for the second quarter was $25.8 million or $0.36 per diluted share compared to $32 million or $0.42 per diluted share for Q2 '11. Net net, the year-over-year decrease is largely attributable to a lower gain on sale associated with aircraft sales activity compared to 2011 along with the impairment charge taken in the quarter.

As expected and as we discussed in our last call, interest expense net for the quarter was $64.1 million, an increase of $8.2 million over last year. This included two impacts on the repayment of our term loan number one with the proceeds from our April bond deal. The $2.9 million write off of deferred financing fees and a $4.4 million charge of related deferred hedge amortization on the hedge termination related to that repayment.

These adjustments are included in our calculation of adjusted net income. During the quarter, our average debt outstanding was approximately $400 million higher year over year.

SG&A was essentially flat with last year while depreciation expense for the second quarter was $67.1 million versus $58.6 million in 2011. The increase related to the growth of the fleet on a year-over-year basis.

Our Q2 tax provision was $1.3 million right around 8% and we expect the effective tax rate for the full year to remain in the 7% to 8% range.

At the end of the quarter, we owned 155 aircraft versus 144 at year end. At the end of Q2, the annualized lease rental run rate on the portfolio approximated $646 million of which $294 million is associated with 67 unencumbered aircraft including the total lease rental payments from our finance leases.

These aircrafts had a net book value of about $2 billion or roughly 42% of the net book value of our aircraft portfolio. Including our unrestricted cash balance total unencumbered assets approximate $2.3 billion.

As stated earlier, the gain on sale of flight equipment was $2.9 million, a bit lower than last year. As Ron mentioned, we sold 13 aircraft and generated $39 million of gain on sale in 2011. We continue to believe that 2012 is proving to be a better year to acquire as opposed to selling aircraft and accordingly we are not anticipating material gains from the sale of aircraft in the second half of the year.

Turning to our capital structure at the end of the quarter our unrestricted cash balance totaled $291 million with restricted cash at $138 million. We also had $50 million of availability under our unsecured revolving credit facility, with secured and unsecured borrowings totaling approximately $3.2 billion. Net debt outstanding was $2.9 billion which is approximately 61% of the net book value of our flight equipment.

The ratio of secured debt to total debt at quarter-end was 60% down from about 85% at year-end. Our net debt to equity ratio excluding the mark-to-market on our interest rate derivatives was approximately 1.9 times. And, finally as a remainder, we have no asset coverage test in our unsecured bond indentures, no LTV tests in any of our secured financings and we are in compliance of all applicable covenants in all of our debt facilities.

As we previously discussed in early April, the $800 million of unsecured debt was issued at a blended rate of about 7.08%. We have paid down $583 million of term financing number one debt and refinancing. We released approximately $70 million of restricted cash and unencumbered 27 aircraft with a net book value of $1 billion. The refinancing also resulted in a hedge breakage cost of approximately $51 million which is funded partially with a portion of the restricted cash that was released.

Also the new interest rate swap that we executed in 2011 for our second securitization became effective in June and will reduce our cash pay interest expense on this securitization by about 400 basis points which we estimate will save about $30 million in interest expense over the next 12 months.

Finally, turning to Q3 guidance on selected elements, we expect lease rental revenues of $157 million to $159 million. Maintenance revenues associated with one scheduled exploration in the quarter are estimated to be $1 million to $3 million. We expect amortization of net lease discount premiums and lease incentives of $6 million to $8 million. Our SGNA level is expected to be between 11 and 13 consistent with current run rate, depreciation expectations are $67 million to $69 million, an interest net of $52 million to $54 million, including about $4.5 million of amortization of the hedge losses on the repayment of term loan number one.

To conclude, we continue to successfully execute on our business plan and we are well-positioned on a perspective of portfolio strength, operating performance, capital structure and capital markets access as we enter the second half of the year. We expect our proven access to capital and strong cash position will enable us to take advantage of investment opportunities that are consistent with our return-oriented investment focus.

And with that, operator, will now open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We'll go first to Isaac Husseini with Barclays.

Isaac Husseini - Barclays

Ron, maybe a question for you. Going back to your scripted remarks, I guess, the language that was used to describe leasing demand as weak feels a bit different than slightly more optimistic language that was used in the past couple of quarters. Is that a fair assessment or are we reading too much into the remarks that you made there?

Ron Wainshal

I think it is pretty consistent with the way we see it. What hasn't happened is any kind of economic recovery and that is basically the bigger problem across the industry. As I said during my remarks, business confidence, consumer confidence isn't very strong and the airline planners are reluctant to make new commitment. I do not think it is a big change from the last quarter; we are just not seeing any kind or recovery.

Isaac Husseini - Barclays

Okay. Got it. And then, another question on asset values. We heard that from some that some asset values have come down to level that make selling them and booking losses unattractive for owners. Have you seen any resistance when you are trying to purchase aircraft in the second day market from owners that are not willing to sell because of those values?

Ron Wainshal

All the time. It goes in ways, I mean, I think you generally have that going on. And then, you have periods of time where people kind of come to a realization that if they do want to sell they will have to just deal with the levels that are out there. And that's kind of accounted for little bit of lumpiness in deal flow on our side. But as I said, looking beyond the quarter-to-quarter kind of variations, I think the outlook is very good for new investments. And we are seeing them from all quarters, whether it is existing aircraft leasing company owners or airlines.

Isaac Husseini - Barclays

And so I guess, because of that you are not, is it fair to say that you are not seeing anything different now than you were in the beginning of the year? You will still be net buyers, you still think you will hit that target of $600 million to $700 million of asset acquisitions going into fourth that has not changed, right?

Ron Wainshal

No, it has not changed at all. In fact, if you look at the acquisitions that we announced this for the second quarter plus the new commitments we have made we have hit the investment target for the year at this point.

Isaac Husseini - Barclays

Okay, great, thank you so much.

Ron Wainshal

And we are continuing to look.

Operator

We'll go next to Arren Cyganovich with Evercore.

Arren Cyganovich - Evercore

Maybe you could talk about the $400 million that you purchased this quarter and I apologize if I missed any specifics but maybe get into details of what type of aircraft do you purchase?

Ron Wainshal

Hi, Arren, it's Ron. If you go to the PowerPoint that’s on our website there is a little bit more detail, I'll just kind of read it off for convenience. For that $400 million there are two relatively new A330s including the last aircraft from our order stream which is on lease to Virgin Australia. There are five current generation new narrow bodies that are mid age, there are six 7-300ERs on finance leases to Condor, as Mike mentioned during this remarks, and there is one 747-400 freighter. In addition, during the first quarter we also acquired a 777-300ER secured loan.

Arren Cyganovich - Evercore

Great sorry, I missed that in the presentation. The, is the impairment on aircraft, I know these popup once in a while but I guess just since you do have some additional 767s and 757s in your portfolio these are I am assuming you are going to say that these are aircraft specific and you don’t need to run test on the existing portfolio?

Ron Wainshal

No, Arren, when we look at any particular impairment that occurs, it does cause us to look at the type of aircraft broadly across our fleet to do a more detailed look at that each quarter. The 767s have been on our watch list as we reported in our 10-K and 10-Q over the last few years. And so this assessment that concluded this quarter with this plane that was returned resulted in impairment as we detailed today but did not result in impairment for any of the other 767s in our fleet at this time.

Mike Inglese

Yeah, the other thing I noted in regard to 757 that was in our watch list that was the only 757 on our watch list and there was some aircraft specific issues with regards to return condition relative to maintenance condition of the aircraft, and so that one was not a surprise. And as I mentioned to you in terms of under what circumstances we sell aircraft, it’s in situations where we believe it is just better to sell rather than reinvest and release and that was certainly the case with 757. The other 757s in our fleet we feel pretty good about.

Arren Cyganovich - Evercore

Okay, thanks. And then lastly the share count, did you make any share repurchases during the quarter with new authorization?

Mike Inglese

No, we still have $50 million under our existing authorization.

Operator

We'll go next to Gregory Lewis of Credit Suisse.

Anthony Segoya - Credit Suisse

This is actually Anthony Segoya for Greg this morning. Good morning everyone. I just have a quick question. I noticed in the presentation there was a slide kind of showing a shift in exposure from Europe to Asia, and I was wondering if there were any kind of benefits that you guys are seeing in Asia when you guys are putting the planes on leases whether its longer lease terms or better maintenance terms anything like that was kind of structurally different as you guys move planes there?

Ron Wainshal

Hi, Anthony, it's Ron. The move to Asia is coming from two different forces. The first force and the bigger one is the new investments that we are making. And as I said in my remarks, more than half of the new acquisitions we talked about are going to Asia Pacific airlines and those are aircraft with quite long lease terms. So, and the lease terms are quite strong. Where the lease terms are weaker and it's not a geographically specific issue it's just on placements that have come up in the last year. And that’s the different market conditions.

I don’t think there is really a material difference between the lease terms that we get in Asia versus anywhere else. We make an aircraft placement decision we try to get the best deal possible looking for around the world as we can.

Anthony Segoya - Credit Suisse

And then, I guess, I was just wondering if you kind of provide a little bit more guidance on the amortization of the net lease discounts. Obviously in the guidance for Q3 like pretty high historically, and I was just wondering if that will kind of continue or if that’s just related to like planes coming off of lease and transitioning more so in that quarter?

Ron Wainshal

Yeah, I think it’s a combination. I think it’s more instructive about a current run rate going forward. Obviously, the second quarter was distorted by the reversal associated with the Cimber aircraft, but as we have recorded more maintenance revenue we will be in most circumstances recording more lease incentive amortization against the next lease going forward. So, I think what we have put out today is probably a reasonable look for what we think the second half of the year will look like.

Operator

We will go next to John Godyn with Morgan Stanley.

John Godyn - Morgan Stanley

Hi, everyone. Thanks a lot for taking my questions. Ron, I just wanted to follow up on some of your demand comments just so that I understand a little bit better. When we think about the idea that reiterates sort of stabilized here and maybe there is some reasons to be optimistic going forward, is that really a bet on global demand, kind of improving from here or is there something about where lease rates or aircraft value has stabilized that creates sort of unique downside support, where even if demand got worse we wouldn't see another step down because some aircraft types are at part-out value or something like that? I'm really just trying to explore the downside risk, if demand actually keeps getting weaker.

Ron Wainshal

John, it's a good question and I think the answer is aircraft type specific. The investment that we made on the 767s that are treated as finance leases were done with a very, very kind of return condition specific deal residual value. So we've a really, really good idea, provide the lease run that's as opposed to what we're going to get at the very end. And we've a pretty good visibility particularly now in Pratt 4000 engines, which is what's going on with these aircrafts. That's one thing.

Where I am the most concerned about from a downside perspective and where I'm avoiding making new investments is in the "last off the line" new narrow-bodies. Anybody who buys an aircraft is going to have a take a view whether they hold it or not that it's going to last a long time. And because of the production levels and because of the eventual introduction and new technology I think that's a tougher proposition with "last off the line" narrow-bodies. I think that's where this whole downside is.

John Godyn - Morgan Stanley

Okay. And if I could just follow-up on your comments on air cargo, it sounds like you're sort of maintaining this view that cargo has turned a corner. Can you just talk about to what extent that's -- that's kind of reading the data that that's out there that we all see versus what you're hearing actually from customers on the margin as you try to kind of, as you just operate in the air cargo leasing market?

Ron Wainshal

Turning to corner is probably true but I wish it was more than where we're at right now. The recovery this year has been very modest. And there are a bunch of very kind of specific to regions and market issues going on. But you've a bunch of different kinds of operators. I think the cargo market in general is suffering from business confidence issues. We're also seeing for certain operators a decline in the U.S. military spending, which was very important for some of them. That's one of the reasons that lead to the World Airlines bankruptcy.

In talking to customers, this is the critical time of the year, for airfreight, long haul airfreight it's basically July, August through January, which is a busy season, and it's a mixed story. We're getting some folks that are a little bit more optimistic and some people gotten a little less optimistic. It's really kind of mixed.

John Godyn - Morgan Stanley

Okay, it's really helpful and just last one Ron or maybe Mike, I don't remember who, somebody made the comment that cash ROE is a target of 15%. Can you just kind of give us a sense of how the idea of buyback kind of relates to that? It seems like the cash, ROE on buybacks in certain scenarios here, could be 15% or higher. I don’t know how buybacks sort of fit into that underwriting standard.

Mike Inglese

John, this is Mike. We look at buying new assets. We look at buybacks in sort of the same vein on what we think can do to shareholder value over time. As we've I think elaborated, through the first half of the year we've been very focused on what we think are very accretive asset acquisitions. We have put a new authorization in place and we'll continue to look those two elements as well as the concept Ron talked about around the dividend and the regular return of capital to shareholders in the context of a higher underwriting standards to drive the overall ROE of the business higher as we move forward.

Ron Wainshal

Yes, definitely the stock buybacks are in our toolbox and its something we monitor along with the other alternatives.

Operator

We'll go next is Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets

Just with regard to, I know your strategy in the past are, currently is kind of focused on middle aged aircraft where it's probably a little less competition from buyers. But just wondering, you mentioned over production by the OEMs. Is there a chance if you see opportunity to switch to maybe newer aircraft and then couple of that maybe the change in ECA financing that presents more sale leaseback opportunities?

Ron Wainshal

Scott, it’s a good question, but let me make a couple of comments. First, the new acquisition we've made this year, about half of them are newer light bodies. So it's not entirely a one dimensional strategy. And our strategy is to function of what's available in the market, both in terms of raw returns and also in terms of how one can finance them. So we'll look at anything, but we also have to be realistic about what the options are. Where we see value right now is based on our advantages, having unsecured debt market access, the team's capabilities, our expertise in the freight market, etc. But we're open top things and we look at different ideas from time to time.

As I mentioned, one of the things we've looked at in the past are the E-Jets, the Embraer E-Jets to be clear. But it's not a---it's not fixed. The one thing about ECA financing is I kind of mentioned in our prepared remarks is that while that is reliably once you get the guarantee it’s pretty using the finance but the guarantee fee more than doubles next year. And you’re looking at depending on the credit rating of the borrower 10, 11+% upfront fee on the debt issued. That’s huge. And so, if you intend to hold that asset forever, fine as you can spread that over say 12 years. But if you ever want to sell it you’re going to have a very expensive financing on your hand. And I think that’s a point that will increasingly become -- will come to the fore with both airlines and lessors because that everybody wants to hold everything forever.

Scott Valentin - FBR Capital Markets

Right. I see you expect maybe a great opportunity for sale lease back transactions once the new financing region takes effect?

Ron Wainshal

Yeah, definitely. I think this is an opportunity but in order to play there you need to find a different way to finance. That’s why the capital markets access is so important.

Scott Valentin - FBR Capital Markets

Okay. And so the last question. There’s been some debate and I guess you kind of referenced that may be on the last of the line aircraft, but do you think there’s been a shift in economic life of aircraft and the gap is 25-year amortization, 15% residual, but it seems like maybe high fuel prices have fueled a shorter life but it seems like there’s a debate now about, is the true life of aircraft 25 years or has it shortened?

Ron Wainshal

I think it’s a fair question. I think it’s a question that we’re going to ask ourselves in the context of our fleet review but I think the really important second level questions get ignored which is, number one, where in the production line are you buying. So, if I look at A320 with the current engines, Airbus started delivering those in the mid-'90s and they’ll continue to deliver those until 2015-2016. I would tell you that 2015-2016 deliveries are really unlikely to last 25 years but the ones first off the line has much better chance, maybe longer. So you can’t ignore the context of the situation. And as investors we have to be extremely mindful of that.

I also think that the family of the aircraft is going to make a big difference too. My view about a 777-300 ER is going to be very different in my view about a 319. So, it’s a fair question to ask but you really do, as an analyst, you need to look at the next layer of detail. And I think my comment about field production is largely driven towards the narrow bodies.

Operator

We’ll go next to Andrew Light of Citi.

Andrew Light - Citi

Are you saying given the 15% ROE you can get in the older planes and indeed I recommend Thomas Cook there was a lot higher than that. Are you seeing more competition for example, I think last year Guggenheim was also to the portion of that Thomas Cook transaction?

Ron Wainshal

The competition for mid-age aircraft is a most credible from people who can access the unsecured debt markets, because there is really no secured debt financing the position for mid-age aircraft, okay. So let's look at the list of the people with credit ratings and access to unsecured debt that claim the mid age aircraft. Maybe it is only [AVOS] everybody else is either not doing it or doesn’t have unsecured debt access, okay.

So, I think there is great opportunities there, to kind of refer to an earlier question there is a reluctance by sellers to accept what they'll deal from a price perspective, but we have a much better batting average in that market. Having said that, I do think that there are opportunities with the white bodies as we demonstrated by through the acquisitions we have made. So it's not purely focused there, and I think the white body opportunities that could expand particularly if the ECA fees increase substantially.

Andrew Light - Citi

Okay. And on the impairments side when would you say the flip side of being in a buyers market is the impairment risk when your own portfolio has gone up particularly with 56 or so aircraft coming off lease in the next two years?

Ron Wainshal

Well, you have to look an impairment analysis is a projection of cash flows against a book value. And so, the cash flows don’t necessarily contemplate a sale of an aircraft. I think what's germane as what your projection both now and for cash flows over time plus the residual at some point about what you can realize. So I don’t think you should confuse the relevance of the sales price for the "current market value" is in what you would reduce your book value, but the first test, the test that gives rise to whether an impairment exist or not is based on the forecast of cash flows.

Andrew Light - Citi

Last question for Mike, I can't remember if you mentioned this in your guidance for Q3on the lease rental revenue of 157 to 159, but that include the finance lease income from any of the Condor planes?

Mike Inglese

No, that’s just reported lease rental revenue.

Andrew Light - Citi

Well, but that just come in as other revenue?

Mike Inglese

That will come to the other revenue line.

Operator

We will get the next question from Gary Liebowitz of Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Ron, a couple of related questions on the large cargo market. It looks like Boeing is really going to ramp up deliveries of the Dash 8 starting the second half year. Is that an asset type that you are interested in seeing any opportunities in those sort of first off the line aircraft? And then the related question is on the 747-400. You have got a lot of those which seem to be a good number those that already parked; you are not converting a 747 like you originally planned. What is your appetite to add that sort of asset to your portfolio?

Ron Wainshal

Let me answer the first question in the following way. When we look at investing in aircraft we like to see a large operator base, and that doesn’t exist today for the 747 Dash 8 freighter. The airplane is I think and the very interesting asset for a small number of operators for a specific set of applications but we're a leasing company and when lease ends we need to have some choices. So until that market materializes, I'm reluctant to -- same story with the 380 by the way in the passenger side. It's a question of having alternatives and redeployment possibilities when a lease is over.

So, I like in terms of the new freighters the 777 is much better, much more versatile. When you talk to customers including guys that have the Dash 8 everybody is very excited about the 777s. I think that would be where I would direct my new freighter investment dollar.

As it relates o the 747-400s, during the first quarter we had to -- we had to deal with the bankruptcy at World, then we redeployed successfully 747-400 with another operator. It's not a great market, but it exists and its certainly (inaudible) when it was say at this point last year. There are a lot of parked aircraft, but part of it is also a question of how good are you at marketing this. So in terms of placements it is not easy but it is doable.

In terms of new investments, it's a deal specific thing. I will note that we did buy one 747 freighter during the second quarter which was on a very long term lease with Asiana. So we continue to find the interesting things in the sector and we continue to look at opportunities in this sector. So I'm not set it all throwing in the towel on that aircraft type.

Operator

We will take our last question from Glenn Engel with Bank of America.

Glenn Engel - Bank of America

Couple of questions, one from a customer basis. When you look at your customers, are they -- is there any change in their ability to pay on time and any metrics you look at showing signs of the distress or no signs of distress yet in your customer base?

Ron Wainshal

I think our accounts receivable it's probably the most direct way of looking at it's been pretty stable throughout the year. Now that's good, but as always as you head into the which is when cash flow turns more negative with airlines that’s when you have to kind of look a little bit more carefully and monitor more carefully.

At this point, we are doing fine. I am actually pleased with where we are at from a collections perspective. The places where I see weakness continue to be on the periphery of Europe on one hand and that was evidenced by the bankruptcy of Cimber Sterling and we have placed all those aircraft; we did that very quickly.

The other place where I see weakness is in the freight market. And the freight market story is it’s been kind of persistently weak. I am hoping it will get better it’s just been really slow. I don’t see anything imminent there but it’s just never good to be an operator in a weak environment that stays with you for a while.

Glenn Engel - Bank of America

On the CapEx side, have you given a full year estimate for 2012 CapEx?

Ron Wainshal

Well, we had and we achieved it. Now, I'm not in a position to tell you how much more we are going to do, we are going to be very patient, very disciplined we talked about in our remarks. We had signaled $700 million and if you add up with what we have done to-date plus the commitments we have that we expect to close in the second quarter at $700 million. And there is a target rich environment for us but we're taking our time and we are being very disciplined.

Glenn Engel - Bank of America

And third, you sort of touched on this, but to finance a plane there is the interest rate and there is also how much money you have to put down on the aircraft to be able to buy it for both the relatively newer planes and your old ones. How is that changing? Are the banks requiring more and more money for you to put down? And is there any sign of that stabilizing?

Ron Wainshal

Are you referring to how much equity on a secured loan?

Glenn Engel - Bank of America

Yes, I'm sorry yes.

Ron Wainshal

Okay. The bank market is shrinking as we talk about a lot. For new aircraft I think it’s fair to say that depending on the situation you are looking at 65% to 80% available in terms of a debt. So, or put the other way, 20% to 35% is a down payment. That’s for the best of the best. When you get more and more down market not only is it the amount of equity you have to upfront but how fast you have to repay the loan. And that has a dramatic impact on what your ROE turns out to be even more than the margin on the debt, I don’t think people get that. That’s where you are seeing the greatest pressure.

So, while to loan values upfront might be shrinking a little bit banks are looking for a much fast repayment and much more belts and suspenders in the way of loan to value test and things of that nature.

Glenn Engel - Bank of America

And that’s for the relatively new pairings. For the older aircraft how much do you have to put down? It’s just not there period, okay.

Ron Wainshal

Yeah, I mean I am speaking in extremes; there is always exceptions. But I think once you get into the 8, 9, 10 year old aircraft range it’s really hard to find anything that makes sense from our financing perspective in the debt market.

Glenn Engel - Bank of America

Thank you very much.

Ron Wainshal

That’s why, these are still relevant aircraft. That’s why the buyer markets are so compelling from our perspective. And by the way anybody who has secured debt they may have got it from a banker from some other source that has a balloon that has to be refinanced, that’s going to be the issue. And I think that’s what brought some of the other new players into the market there, there is just no way to refinance that with that with the traditional bank market unless you find somebody that’s over a barrel and they kind of have to play with you.

Frank Constantinople

Okay, thank you very much for your time today. If you have any follow up questions feel free to call me at 203-504-1063. Have a good day. Thank you, operator.

Operator

That does conclude today’s conference. We thank you for your participation.

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