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Aircastle Limited (NYSE:AYR)

Q2 2008 Earnings Call

August 8, 2008 12:00 pm ET

Executives

Julia Hallisey - Investor Relations

Ron Wainshal - Chief Executive Officer

Michael J. Inglese - Chief Financial Officer

Analysts

Analyst for Jamie Baker - J.P. Morgan

Andrew Light - Citigroup

Richard Shane - Jefferies & Company

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Jim Altsho - Aviation Advisory

Finn McAlbach - Analyst

Robert Wray - Analyst

Jerry Lupton - Stifel Nicolaus

Operator

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Aircastle second quarter 2008 earnings conference call. (Operator Instructions) Ms. Hallisey, you may begin your conference.

Julia Hallisey

Thank you, Ashley and good afternoon, everyone. I would like to welcome all of you to the second quarter 2008 earnings call for Aircastle Limited. Joining us today are Ron Wainshal, our Chief Executive Officer; and Mike Inglese, our Chief Financial Officer. Before I turn the call over to Ron, I would like to mention that this call is being recorded and the replay number is 800-642-1687 from within the U.S., or 706-645-9291 from outside of the U.S., with the replay pass code of 57141497. This call will also be available via webcast on our website, www.aircastle.com. Presentation slides for today’s call have been posted to the investors section of the Aircastle Limited website.

I would also like to point out that statements today which are not historical fact 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 reports. I direct you to Aircastle Limited’s earnings release for the full forward-looking statement legend.

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

Ron Wainshal

Thanks, Julia, and thanks to everybody for joining us. Q2 2008 was another very successful quarter for Aircastle, particularly against a backdrop of a tough global economy. Today I am going to cover three areas -- first, our Q2 2008 performance; second, our current activities and what we think about the market today; and finally, our plans moving forward. Mike Inglese will then take you through our financial highlights before we open up to Q&A.

I will start with a discussion of Q2. By many measures, the second quarter was our best to date. Q2 revenues continue to build as expected and reached $145 million for the quarter, up 75% versus last year. This reflects the growth of our portfolio and a solid performance.

Adjusted net income was $34.3 million in Q2 versus $26.2 million in Q2 2007, an increase of 31%. The percentage of days on lease for our fleet, which is a good portfolio of performance measure, was more than 99% for the quarter.

Regarding financial performance, I would like to emphasize cash flow generation. For the second quarter, adjusted net income plus depreciation was approximately $86 million. This $86 million comes out to about $4.40 per share annualized, which is significant given number one, our stock is trading at approximately $13 per share, around three times this measure; secondly, that we anticipate cash flow will remain strong; and thirdly, we intend to invest our capital to grow earnings.

On the investment side, we sold three Boeing 737 classic aircraft during the quarter, generating a $5 million profit, and we are working on a few other aircraft sales, which I will discuss later.

Financing continues to be available on attractive terms for Aircastle. During the quarter, we completed $786 million term financing for 28 aircraft. This financing was provided by a group of leading international aerospace banks who are more selective but remain open for business with well-regarded counterparties such as ourselves. The market reception for this deal was strong and the deal was over-subscribed.

Now for a few comments about the current status. As I mentioned up-front, the macro environment in which we are all doing business is difficult and high fuel prices and slowing economic growth are certainly having an effect on airlines. The Aircastle team is full of industry veterans with a track record of working through cycles. We remain very focused on every aspect of our business.

To that end, since late last year, we have concentrated our efforts on lease placements and portfolio management, as well as increasing liquidity rather than new acquisitions. Thanks to these moves, we believe the company is well-positioned to take advantage of new opportunities.

Notwithstanding the newspaper headlines, we are finding that the market segment we are in remains measured and constant, despite the run-up in fuel prices. And while we’ve seen signs of a slow-down recently, particularly in the U.S., air travel globally increased more than 5% through June year-to-date versus last year. In other words, there are more people around the world flying today than a year ago.

Consequently, demand for the right aircraft -- that means modern and operationally fuel efficient jets we have in our fleet -- is holding up well.

At the end of June, the remaining weighted average lease term of our portfolio is 5.5 years. Our portfolio encompasses 58 customers in 30 countries. We also have 27% of our fleet in freighters, where the weighted average lease term is nine years and our customers include excellent credit, such as Air France, KLM, and [Emirates].

Moreover, 91% of our fleet is leased to operators outside the U.S. This profile provides the company with a diverse and long-lasting contractual lease revenue stream and it has a monthly run-rate of more than $45 million.

Recent lease activity is also quite good. Since the end of the first quarter, we’ve turned up new leases and extensions for 16 aircraft, some of which were scheduled to expire well beyond next year. These new leases and extensions are in line with our expectations and here are a few examples of some recent deals.

We signed 10-year leases with an affiliate of the Chinese Post Office on four Boeing 737 400s that are coming off existing leases next year and we are going to then convert these aircraft into freighters.

Another example is we entered into a binding long-term lease commitment with a Chinese airline for three of our Airbus A330 freighters, which are delivering during the second half of 2010. These are the first placements from our Airbus deal.

And finally, we extended the lease of a 767-300 YAR with a Europe flag carrier from late 2009 to 2015, with the lease rate increasing more than 15%.

From a placement perspective, 2008 placements have been completed. We are releasing three aircraft that we took back since May after defaults, one 757 and two 737 classics. Just to put it in perspective, these aircraft account for less than 1% of our net book value.

We’ve signed lease letters of intent on all aircraft and expect to deliver them during the third quarter, demonstrating our proactive approach and our team’s agility.

Now for a look ahead at the future -- for 2009, our placements are 80% complete. Only four of the 20 aircraft meet placement next year; more specifically, two 737-800 next generation aircraft, one Airbus A319, and one 737-400. All of these have lease expirations during the second half of the year. We expect to place these aircraft over the next several months, and overall we still anticipate that the rental rates for these 2009 new leases will be up between 5% and 10% versus the old leases, and that the average lease term will be about five years. That would be a tremendous result.

In addition, we’ve made great progress on our 2010 lease roll-off.

We took advantage of market conditions last quarter to sell three 737 classics, capturing the value we added in purchasing them off lease, reconditioning them, and then placing them on lease with a carrier in Russia. We will continue to look for opportunities to harvest assets at full valuations when it makes sense from a portfolio perspective, and while it’s too early to be specific here, our sales pipeline does include a 757 we sold last month. We also signed agreements to sell a 747-400 and another 757 profitably later this year once they come off lease.

In addition to leasing and portfolio management, liquidity has been a major focus of ours since the beginning of the year, especially given the volatile credit environment.

Through the large deal we completed in May, which Mike will describe more, another transaction that’s well underway, we expect to have our entire current fleet financed on a long-term basis by the end of the third quarter. That means we will have put in place $1 billion in term financing this year while bringing the warehouse balance to zero.

At the same time, at the end of last year we had $13 million in unrestricted cash. By the end of the second quarter, this cash balance grew to $77 million. Our revolver is undrawn and we have no plans to draw on it. I expect our cash balances will also be substantially higher by the end of the year and consummating the asset sales we have in progress would be a plus on top of that.

Clearly in this environment, cash is king and our building liquidity puts us in a great position. It gives us the ability to be flexible and to acquire under-valued investments, or to purchase our own securities.

For the years 2010 and beyond, our Airbus A330 order provides built-in growth. This is a well-priced deal with significant value. In that regard, we amended our order to give us more flexibility recently, reducing the order from 15 to 12 aircraft and converting some of the delivery positions to passenger aircraft to take advantage of strong demand from several high-quality airlines.

We remain bullish on the freighters and we are very pleased with the long-term deal we just signed for three early deliveries.

In sum, I feel good about where we are, notwithstanding the current economic challenges, and we have a strong cash position, good financial markets access, and growth built into our business plan. I am confident we are managing the risks in a thorough and measured manner, and that we have the flexibility now to move quickly and take advantage of opportunities present in today’s market.

I’ll now turn it over to Mike.

Michael J. Inglese

Thanks, Ron. I would like to spend a few minutes updating you on our financing activities, as well as covering our business results for the quarter. As Ron mentioned, we ended Q2 with $77 million of unrestricted operating cash, up from $17 million at the end of the first quarter, and we expect to continue to build liquidity over the balance of 2008.

During the quarter, we completed the $786 million term deal, covering 28 aircraft with a syndicate of international aviation banks in May and all the aircraft transferred into the new facility during June.

Our focus now is on two separate financings -- refinancing the remaining aircraft on the warehouse facility and arranging pre-delivery financing for the Airbus program.

First on the warehouse; we’re in active negotiations with a major European aviation bank to underwrite a new five-year term facility for approximately $215 million for 10 of the aircraft that we expect to close during the third quarter. And we have an executed sale contract to sell the 11th aircraft to a third party operator that we expect to close in Q4.

These two transactions will take care of our refinancing needs for all of our owned aircraft and will leave us with no outstanding borrowings on our warehouse facility.

In addition, we currently have no outstanding borrowings on our revolving credit facility and we have no other aircraft purchase commitments at this time outside of the Airbus program.

With respect to the Airbus A330 program, we have reduced the overall size of the program and the financing requirements for it and we are in discussions with numerous banks to arrange pre-delivery financing for the program and expect to have the facility in place later this year.

PDP payments required for the program total approximately $17 million for the balance of 2008 and $153 million in 2009. As we have discussed with you previously, we expect to fund around 50% of the PDP amounts with this new facility.

Financing for new aircraft continues to be available and we have very attractively priced aircraft in this program that we are confident will attract significant interest from the aviation finance community. We expect to finance the equity requirements from cash flow from operations over the coming years.

Finally, with respect to our existing warehouse facility and corporate revolver, which expire in December, we don’t believe that we need to renew those facilities. When we decide to acquire aircraft in the future, we will look to finance those acquisitions opportunistically at that time.

Regarding our financial results, we earned adjusted net income of $34.3 million, up 31% or $0.44 per diluted share, up 13%, on revenues of $145.4 million for the second quarter 2008, compared to $26.2 million or $0.39 per diluted share on revenues of $85 million in the second quarter of ’07.

The Q208 figure excludes a $5.1 million gain on the sale of the aircraft Ron mentioned and $4.1 million charges related to hedged expenses and write-off of deferred financing fees during the quarter.

Similarly, the Q207 figure excludes a $10.2 million gain on sale of aircraft, which is previously reported as discontinued operations last year, and $1.6 million of income related to a terminated interest rate swap.

Adjusted net income plus depreciation was $85.9 million, or $1.10 per diluted share, up 59% and 36% respectively over the second quarter of ’07. We use this measure to assess our cash operating performance after taking into account the interest expense on our outstanding indebtedness.

At June 30, 2008, we owned 135 aircraft. For the owned aircraft at quarter end, we had contractual aircraft lease rentals on a monthly run-rate basis of approximately $45.5 million, or $546 million on an annualized basis, up 44% from Q207, producing a gross yield on the aircraft portfolio of approximately 13.4% on the book value of those assets.

For Q208, total SG&A was $11.4 million, up from $10.5 million in Q207, including non-cash share-based compensation expenses of $1.6 million in Q208 and $2.8 million in Q207. The increase in cash SG&A period over period reflects higher expenses related to professional service fees and higher personnel costs, reflecting the year-over-year growth of the business.

Our current expectation for full-year 2008 cash SG&A is approximately $40 million.

Reported interest expense for Q208 was $51.3 million, including hedge termination and ineffectiveness charges of $4 million, an $800,000 write-off of deferred financing fees mentioned previously. This figure is also net of $2.8 million of interest earned on cash balances and $800,000 of capitalized interest in the quarter.

Gross interest expense excluding the hedge items noted on debt facilities for the quarter was $48.3 million, on weighted average debt outstanding of approximately $2.97 billion for the quarter, giving a weighted average cost of debt of approximately 6.53%. At quarter end, we had $2.67 billion of debt outstanding and a debt-to-equity ratio of 2.0 times.

Depreciation expense for Q2 was $51.6 million compared to $27.8 million for Q207, reflecting the growth in the aircraft portfolio year over year, and at the end of the second quarter, our run-rate depreciation on a monthly basis was around $17 million.

For the second quarter of ’08, we recorded a tax provision of $1.6 million, with an effective tax rate of 4.4%, reflecting the revenue and income sourcing mix from the portfolio during the first half of the year. Cash paid for taxes during Q2 was approximately $700,000.

And finally, a hedging update -- in connection with our recent financing and the termination of about $700 million of notional value of hedges, we’ve put new hedge agreements in place. The new agreements do not require any cash collateral posting going forward. Our remaining hedges that require collateral posting have a current mark-to-market of $21 million and we have approximately $4 million of collateral posted.

And with that, Operator, we’re ready to proceed to the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jamie Baker with J.P. Morgan.

Analyst for Jamie Baker - J.P. Morgan

It’s Scott here for Jamie. Good afternoon. You mentioned the sale of aircraft, the Boeing 737-500s and 200 for about $5.1 million or so, and you consider this as part of continuing operations. Do you see this as one-time in nature or do you see this as ongoing as part of your business? And if so, should we expect anymore aircraft sales in the third or fourth quarter? Thanks.

Ron Wainshal

Asset sales are a part of -- a basic part of portfolio management, the way we see this. And we are always on the look for opportunities. I mean, we’ve done this as a methodical process on every aircraft as it approaches milestones, like a year or so before lease expiration. And we also look at it across the portfolio, so I don’t think this is a one-time thing. We are not in the asset trading business but we do manage our portfolio.

As I mentioned during the prepared remarks, we do have one 757 we sold in July and we’ve got two other aircraft that we have signed sales agreements, and that’s going to happen later in the year.

Beyond that, I don’t have anything more specific to tell you but it’s something we are on the lookout for from time to time.

Analyst for Jamie Baker - J.P. Morgan

And Ron, you mentioned about the market with increased demand for aircraft and more people flying -- given that now you’ve reduced your dividends and increased some cash flows, and given the fact that you have done a great job in obtaining financing via the recent term loans, do you have an idea on when you would be more interested in acquiring more aircraft? Should we think about acquisitions more towards first quarter, second quarter of ’09?

Ron Wainshal

We take an ongoing look at that. Right now, I don’t see deals priced at a level that I would want to do them, but this changes from time to time.

You have to remember, it takes about three to four months to germinate a deal, so it’s really not likely you will see much of new investment volume this year. If conditions improve, and I think they will, then I think 2009 is a different story. But it’s kind of a jerky market and I don’t know I can predict much more beyond that.

Analyst for Jamie Baker - J.P. Morgan

Okay. Thanks, Ron.

Operator

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

Andrew Light - Citigroup

A couple of questions -- first of all, in the press release you mention a $4.1 million revenue related to maintenance on lease expirations. To what extent was that a one-off item, or is that likely to be a recurring element?

Michael J. Inglese

For us as a company, it was the first time where we had lease transitions during the period, where in fact the money we collected during the lease was not owed back to the lessee, and so recognizing it as revenue in the period where those leases expired is the appropriate recognition. It’s hard to predict going forward but we would expect to see that line item appear in the future as we deal with similar lease expirations and transitions from one customer to another.

Ron Wainshal

Andrew, the short answer is it is likely to be kind of lumpy.

Andrew Light - Citigroup

Right -- [inaudible] most of your maintenance related revenues [and costs] goes just through the cash flow statement.

Ron Wainshal

I’m sorry, I didn’t understand your question.

Andrew Light - Citigroup

The vast majority of your leases are on a net [debt] basis, so that most of the maintenance related items really just flow through the cash flow statement rather than the income statement.

Ron Wainshal

That’s correct.

Andrew Light - Citigroup

I’ve got a question on the deal with Airbus; was it at their request to go from 15 to 12 so they could [inaudible] slots for other customers? And if so, is that in your favor in terms of future compensation, or was it the other way around?

Ron Wainshal

Well, I don’t want to get into the back and forth of the negotiation. There is very good demand for the passenger aircraft. They don’t have enough capacity available and I think I probably ought to leave it at that. I think the deal is a win-win for both of us, so --

Andrew Light - Citigroup

Just a final question -- on the sales of those planes, despite [inaudible] the depressed market, you still made $5 million on [what effectively seem to be] three classic aircraft. Were those planes particularly impaired or particularly lowly valued in the books because you bought them really cheaply ages ago? What was the story there?

Ron Wainshal

Well, there’s a couple of different things. One is the aircraft, much of our classic portfolio was bought early on at very, very attractive prices. We bought most of our classics -- in fact, these specific aircraft literally out of the desert. We put a lot of value into them. We reconditioned them and we placed them on lease in Russia. In this particular case, the lease addition into Russia is a big plus because there is a big import tax, which effectively serves as a barrier to entry for new aircraft going in to Russia, and we are merely harvesting value there.

Andrew Light - Citigroup

All right. Thank you very much.

Operator

Our next question comes from the line of Richard Shane with Jefferies & Company.

Richard Shane - Jefferies & Company

Thanks for taking my question. How many 737 classic do you still have and what is the maturity in terms of the leases on those planes in ’08 and ’09?

Ron Wainshal

I think the total is 25 and I think -- we went through a bit of a breakdown and you can see it on our website, and it has specifics by airplane. It doesn’t reflect some of the recent moves we made on lease extensions, so maybe it’s a little bit out of date. But half of the classics, 13, to be precise, are 737-400s, which are the bigger versions of the airplane. Those aircraft, despite all the headlines, are actually in really good demand. There’s a push right now among customers for the bigger variance of airplanes, so those are doing quite well and they are also excellent freighters, and I think a good example of that is the deal we just struck with the Chinese Post Office affiliate for a 10-year lease post freighter conversion. So those leases will expire in 2019.

The 737-300s, we have 11 of those, four of which are freighters and those are likely to be flying for quite a while longer. Those don’t expire until the middle of the next decade. And then we have seven 300s and one 500.

The average net book value under those, just as a point of reference, is roughly $6 million net of reserves. We are getting cash rentals on those of about $1.5 million a year and when you think about scrap values, call it $4 million, those are actually super investments for us.

And by the way, the lease extensions, the details on those are posted on our website.

Richard Shane - Jefferies & Company

Great. Thank you, that’s very helpful, guys.

Operator

Our next question comes from the line of John Stilmar with FBR Capital Markets.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Good afternoon, gentlemen. Thank you for letting me ask my question. Specifically with the -- first starting with types of aircraft, the 747-400, some of those, United, I think there was one on the ground and there’s a little bit -- and I see that you are taking the last 747 after the freighter conversion. Can you talk a little bit about that type of aircraft and what you are seeing as the value for it? Because I think there is a replacement for that type of aircraft coming up and I’ve just heard conflicting stories as to the real sort of demand for that aircraft in the market.

Ron Wainshal

Firstly, it’s a smaller market in terms of number of airplanes floating around. The fleet we have, some September/October will be all freighters. Let me talk about the freighter market first, because that is where the bulk of our assets are, in 747-400 freighters. That’s the latest iteration today. There is actually quite a number of older generation aircraft, 747-200s and 300s and 100s. I think [Gcast] posted a result recently where they cited a fuel efficiency difference of about $1 million a month between the 400 and the 200. That’s more than a rental. And so what we are seeing happening more directly in the world is that the 200s are getting parked and the 400s are doing just fine.

That’s one of the misleading things out there, is that it is certainly the case that freight has slowed down. Demand for 400s is still hanging in very firm because it is so much more fuel efficient than the rest. Now, as it relates to the new generation aircraft, there are two models that are kind of out there. One of them is the 747 Dash 8. That’s 30% bigger. It’s a huge aircraft and it works on certain routes but not on routes where you can’t fill the plane.

The other type of aircraft, the 777 freighter, which is compared to the bulk of our freighters in the fleet, probably twice as expensive from a capital cost perspective, so it’s a fabulous aircraft but it’s really kind of a customer specific decision.

As I mentioned during the call, the freighter customers we have are generally really good credits and we have nine-year lease term remaining on average, so that part of the fleet I’m really very -- that’s probably the best part of our fleet, from a certainty of cash flow perspective.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

That’s extremely helpful. And then, with regard to just two housekeeping items -- the first is the $48.3 million of interest expense that was for this quarter, is that -- barring anything else, is that sort of the 6.53 that we should start expecting for next quarter, barring any sort of term, the execution of a term transaction?

Michael J. Inglese

I think if you think about excluding the hedge effects, it’s not a bad proxy.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Okay, and are -- okay. And then lastly, can you take me through a bit -- I know you’ve sold some of the aircraft -- the average age of the total fleet, as well as the breakdown between the cargo and passenger, if you have those statistics with you?

Ron Wainshal

I think the average age of the total fleet is 10 years. And I don’t recall the statistics off the top of my head in terms of freighters. I think it is a little younger but let me say a couple of things here.

Firstly, the more relevant statistic than age is the technology of the aircraft and 86% of our aircraft are the latest generation. That’s what matters today when you have a fuel environment as extreme as it is, and actually demand for those aircraft is just fine.

I think the average age -- the freighter fleet is even a newer technology and we are actually kind of handicapping ourselves because when you look at the 737 classic freighters, there’s actually nothing newer in that size class that is flying around today, so arguably the entire freighter fleet is the latest generation.

The main thing from my perspective though, besides the operational efficiency, is how are we doing from a financial perspective on each asset. It’s not just a portfolio statistic. As I alluded to during the 737 classic comment, our 737-300s are certainly on the older side statistically but the cash yields on those are awesome and the floor on those through [part-up] value is actually not far from where we are at.

So those strike me as quite good investments for Aircastle.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Great, and then my last question has to do with some of the lessees that you’ve been talking to, how are they thinking about the relative differential in terms of fuel costs? Obviously one could make the argument that at $140 a barrel, there is a value savings between the most modern fuel efficient aircraft and maybe one that’s less modern, less fuel efficient. But as the oil itself has come down and been volatile, maybe that differential is narrowing. How are the people who you are leasing aircraft to or potential buyers are selling to, how are they thinking about the input of implied volatility of the commodity price in ascribing value to the aircraft? I’m just curious about the buying community or leasing community and their thoughts about that.

Ron Wainshal

Well, let’s start with the airlines. You know, airlines have a pretty predictable demand for fuel, and fuel volatility is at an all-time high, there’s no doubt about that. But it’s not a commodity where prices stay stable.

The fact that most of these guys have not hedged is surprising but also reflects maybe the financial realities of what their conditions are and that’s -- these guys are keenly aware of the volatility of the price and I think at this point, having been through the wringer over the last several months are probably just kind of assuming the worst. At least I hope so. The behavior certainly reflects that. You are seeing very aggressive moves by -- well, we’ll start with the U.S. guys -- American, Delta, United, et cetera, grounding some aircraft that should have been grounded a long time ago. And I think that’s all a healthy and very necessary thing for the market. It kind of right-sizes capacity to the world today and the current macro environment and actually when I think about it from an Aircastle perspective, those are actually good things as well. Those aircraft aren’t going to fly again, by and large, and they are not going to compete with us.

I think the fuel environment though is pushing everybody towards newer generation aircraft and for that reason, we are seeing demand stay steady. We are actually working with some of our customers to do some enhancements like adding winglets to aircraft. Winglets on a 737 new generation aircraft add about 4% or 5% fuel efficiency, which could be $1 million a year in saved fuel costs. So there is -- it’s a very big deal.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Great. Thank you guys very much; really helpful information.

Operator

Our next question comes from the line of Jim [Altsho] with Aviation Advisory.

Jim Altsho - Aviation Advisory

Good morning. Thanks for taking my call. A couple of questions for you, please. First of all, are all your lessees current on their lease payments? Is anybody behind? Are there any airlines that are having some financial problems or have indicated to you that they might want to restructure any of the leases?

Ron Wainshal

We have nobody who is more than 30 days late and it’s -- let me put it this way; we’re worried about everybody today, given the fuel price environment and we are taking a very serious look at everything.

We have airlines asking for things in good times and bad times, so I’m not sure that I want to characterize things as dire in that respect, but there’s no doubt that the fuel environment and the economic environment are putting pressures on these guys and we are working with some of the airlines. The winglets example is a good example of what we can do to be helpful. In some cases, we’ve taken back aircraft earlier. We’re working with an operator of a 767, taking back that aircraft, doesn’t work in the network and finding another home for it. That’s all consensual and they are not behind on their payments but it’s the reality of our market.

I am worried about the credit environment but we have good assets that are portable and a great team, and I think the example that I gave of the two 737 classics and the 757 are a good illustration, so the issue is not will they pay -- it matters, it’s certainly important, but what do you have there and can you move it quickly?

Michael J. Inglese

Let me just follow-up and be clear -- today are receivables are about $1 million, which is well below one days sales outstanding.

Jim Altsho - Aviation Advisory

Next question -- you have discussed the situation with the 737 classics but looking through the fleet list in the 10-K, you also have a number of 757 among your classic fleet, which were built anywhere from ’88 to ’95, I think, maybe one was a little later, and the 767s are classified as current or latest technology aircraft, they were also delivered from ’88 -- I guess the newest one was delivered in ’97. What are you seeing -- I know you execute a couple of transactions for 757s and 76s, the 76 recently, but are you seeing any softening in either asset values or lease rates in the market in general for those aircraft types?

Ron Wainshal

I think they are hanging in there. I think the 757 -- a comment that applies to both types and it applies to the whole investment philosophy we have is we buy aircraft that have big operator bases, number one. They certainly fall in that category.

Number two, we have a focus on the freighter market as something we planned right now and as a potential down the road. 757s and 767s are excellent freighter candidates and in fact, I think we have 13 757s left; another four of those are subject to sales agreements eventually when their leases end. I am quite certain those are going to be made into freighters. We’ve looked into that ourselves. The only thing holding us back was that the passenger market was strong enough.

757 is an extremely versatile aircraft. It flies about 750, 800 nautical miles farther than it’s Airbus competitor. You can’t fly a new generation Boeing 737 across the Atlantic. You can fly a 757. So that’s a versatile aircraft. I think it will remain robust for quite a number of years.

On the 767 side, I’ll make a broader comment about anything that is sort of 200 to 300 seats with longer range, very, very strong demand for those. The Airbus order we amended actually reflects that too. 767s took it on the chin in a very bad way during the last downturn and it came roaring back and we are still seeing that hanging in there pretty well.

Jim Altsho - Aviation Advisory

Great, and just one more, if I may; in the note five for the 10-K makes reference to a loan secured by a commercial jet that Aircastle acquired last year. This note further states that the borrower elected not to repay the loan and maturity and that you expect to take ownership of this airplane in the first quarter. I didn’t see any reference to this loan in the first quarter 10-Q. Did you take ownership of this airplane and what was the disposition?

Ron Wainshal

Yeah, we did. That was part of a structured finance lease originally. We bought the loan knowing that the -- well, on the one hand, if there was the off chance that the loan would be paid off, we’d make a fabulous cash return but we didn’t expect that. We actually expected to get the aircraft and we treated it sort of like an operating lease acquisition, which is what it became. And we put that aircraft on lease -- acquired it and put it on lease.

Jim Altsho - Aviation Advisory

What was your last sentence?

Robert A. Willett

We subsequently acquired the aircraft and then we put it on lease.

Jim Altsho - Aviation Advisory

Okay. Thank you very much.

Operator

Our next question comes from the line of Finn [McAlbach] with [inaudible] Capital.

Finn McAlbach - Analyst

Last conference call, you guys said that you believe your aircraft portfolio is worth more than you paid for it. Is that still true?

Ron Wainshal

Yes.

Finn McAlbach - Analyst

Okay. And as far as -- I guess 80% of the ’09 leases have been placed. How are the rates comparing versus ’08?

Ron Wainshal

I think for the whole year, on average it will be up 5% to 10%, versus the previous leases. And as I think I mentioned this during the prepared remarks, I think the average lease term for that whole blob will be about five years or so, maybe a little bit more.

Finn McAlbach - Analyst

Okay. And I guess what priority would buying back shares take with the free cash flow if you essentially could buy airplanes at 20% to 30% discount by buying your own stock?

Ron Wainshal

You know, we’re looking at this and we’ve having a lot of discussions with our board about that. It’s definitely on our list of things to consider. I alluded to that during the call as well. We certainly take note of where the stock price is. It’s a balancing act and I don’t know where we’ll come out but it’s something we are discussing actively.

Finn McAlbach - Analyst

Okay. Thanks a lot.

Operator

Our next question is a follow-up question from the line of John Stilmar with FBR Capital Markets.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

On the A330s that have been converted to passengers, I may have missed it but do you already have letters of intent or sort of preliminary contracts signed for those aircraft that are going to be delivered?

Ron Wainshal

Not yet. We have a number of discussions underway with some pretty high profile, very well-regard airlines. I’m hoping next call or two we’ll have some very good news to report but I think the big highlight is we got the first three done as freighters and we are very happy with those. Those are 12-year leases.

John W. Stilmar - Friedman, Billings, Ramsey & Co.

Perfect. Thanks, guys.

Operator

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

Andrew Light - Citigroup

On the last call, Mike, you indicated SG&A I think would be $36 million for the year, not it’s 40. Can you just explain the difference, please?

Michael J. Inglese

I think frankly, I was a little optimistic on my last view of where we would be, particularly with respect to professional services. I don’t see any changes in headcount for the balance of the year, but with the new financings, new audit requirements, frankly I think it’s just going to cost a little bit more operationally to run the business than I previously thought. But net net, I think our tax rate is trending down below where we thought, so we are still a pretty efficient business on a net income basis.

Andrew Light - Citigroup

Are these items like travel and professional fees, that kind of thing?

Michael J. Inglese

Yeah, it’s a lot of little things and I don’t see it as a fundamental change to the business, and compared to our public competitors, anyway, I think we still have the most efficient SG&A rate out there.

Andrew Light - Citigroup

And just a final question -- how satisfied are your technical guys with the -- your lessees, particularly in the U.S., keeping up to date with the maintenance requirements? Because when I read stories about airlines taking out video screens to save a few dollars, surely they must get worried about that.

Ron Wainshal

Well, in fact, [inaudible] a passenger either. There’s certainly a lot of well-publicized stories about the U.S. and this was not news, really. When we try to move aircraft -- I mean, some of the classics we talked about earlier on that we sold were ex-United and I’m not going to single out United, it’s a broader issue.

The FFA and the U.S. airlines maintain aircraft to a different standard. There was more in the way of spot-checking. People were allowed to use microfilm to store records. It’s really, really difficult to move aircraft from the U.S. to some other jurisdiction, particularly in the European [YASA] regime, and it’s a very expensive thing.

When you look at what we have in the U.S. though today, the scheme has improved and the maintenance practices for the newer aircraft are much more in sync with what’s happening more broadly speaking. I can tell you from my [Gcast] days when I took a bunch of aircraft out of U.S. Airways, we released them with some German carriers and that worked fine. We had to invest in some things like rafts because they are going to fly over water but it was not a big trauma like it was with the classics.

What we have in the U.S. right now, I think we’ve detailed this in a previous presentation that’s available on our web, is actually pretty modern. We have the bulk of it is with U.S. Airways in the form of four A330s and those are doing just fine. In fact, I understand that they are retrofitting those and improving the cabins, likewise with the 757s we have with them.

The only classic we have in the U.S. is with Southwest. It’s a 1985 aircraft that goes out until 2012 and I’m not really worried about that. I think that one probably goes into part-out when it’s done.

The other aircraft we have in the U.S. are freighters and that’s less of an issue.

Andrew Light - Citigroup

You’re generally happy that maintenance standards are being upheld on your planes across the fleet?

Ron Wainshal

Yes. Actually, we are pretty rigorous about that with not just our U.S. customers but with all of them. We try to make sure we are there for every heavy check, every C check, which happens about 15 months, and we are there on site so we can see not only -- it’s not just sort of a kick the tires and walk around the airplane. We can see the airplane opened up to see if there is a latent issue like corrosion or whatever. And we at the same time look at their records to make sure they are up to date.

Andrew Light - Citigroup

Okay. Thanks very much.

Operator

(Operator Instructions)

Ron Wainshal

Given our last call, we are taking extra precautions here to make sure everybody gets their calls in.

Operator

Our next question comes from the line of Robert [Wray].

Robert Wray - Analyst

I wonder if you can help me understand more the dividend policy you guys are going to have going forward. Obviously if I look at history, it’s been kind of an up-and-down cycle there, and I know you’ve cut back a lot in the first half of this year for the credit problems we were experiencing, but can you give us some help understanding where you are going going forward? Do you have a certain ratio of pay-out that you are targeting or balance sheet ratios that you are targeting? What can you say in terms of how you are going to use that as a tool to return value to the shareholders?

Michael J. Inglese

Well, when we took the action we did in March, we looked at the state of the capital markets and tried to strike an appropriate balance between returning capital to shareholders and retaining cash in the business to fund its needs and provide growth capital and I don’t think we see that very differently today. It’s a decision we visit every quarter and I think we feel comfortable with where we are right now.

Robert Wray - Analyst

Is this something -- I mean, cyclical, like -- I mean, you are obviously seeing growth in earnings. Is that something that can grow with earnings or -- I mean, we can talk about this on a short-term basis or a longer term basis too. Is this something that you see going forward -- you know, as earnings grow, will you be able to grow the dividend too or at this point, are you looking at the high dividends that we saw last year? Are those just an aberration at this point or can you get back to that?

Michael J. Inglese

It’s one of the focuses and views and processes and ways to return capital to shareholders. We don’t -- we’re not prepared today to address the longer term view but it’s in the mix of things we think about and ways to grow the business and grow the value of the company amongst investing in continued assets and potential share buy-backs, as Ron mentioned also.

Robert Wray - Analyst

Whatever it’s worth, here’s one that looks for them, so whatever you can do to grow them and increase them, that definitely has value to the shares for this stockholder. Thanks for that, whatever you can do there.

Operator

Our next question comes from the line of Jerry [Lupton] with Stifel Nicolaus.

Jerry Lupton - Stifel Nicolaus

He just asked my question. I appreciate it. Thank you very much.

Operator

There are no further questions at this time. I will now turn the call back over to Ms. Hallisey.

Julia Hallisey

Thank you for joining us today. This concludes the Aircastle second quarter 2008 earnings call. We look forward to speaking with you next quarter.

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