Aircastle's (AYR) CEO Mike Inglese On Q4 2016 Results - Earnings Call Transcript

| About: Aircastle Limited (AYR)

Aircastle Limited. (NYSE:AYR)

Q4 2016 Earnings Conference Call

February 14, 2017, 10:00 AM ET

Executives

Frank Constantinople - Senior Vice President-Investor Relations

Mike Inglese - Acting Chief Executive Officer

Mike Kriedberg - Chief Commercial Officer

Analysts

Helane Becker - Cowen & Company

Arren Cyganovich - DA Davidson

Gary Liebowitz - Wells Fargo Securities

Christopher Nolan - FBR & Company

Catherine O'Brien - Deutsche Bank

Rajeev Lalwani - Morgan Stanley

Scott Valentin - Compass Point

Stephen Carlson - Waddell & Reed

Nish Mani - JPMorgan

Mark Streeter - JPMorgan

Justine Fisher - Goldman Sachs

Reno Bianchi - Cantor Fitzgerald

Operator

Good day and welcome to the Aircastle Limited Fourth Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Frank Constantinople. Please go ahead, sir.

Frank Constantinople

Thank you, Janice. Good morning, everyone, and welcome to our fourth quarter 2016 earnings conference call. With me today are Mike Inglese, acting Chief Executive Officer and Mike Kriedberg, Aircastle’s Chief Commercial Officer.

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

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

Mike Inglese

Thanks, Frank. Good morning everyone, and welcome to the call. Before discussing our fourth quarter and full year results, let me begin with a quick update on Ron Wainshal’s medical leave of absence. As mentioned in last week’s press release we are all looking forward to Ron’s recovery and to his expected return sometime during the second quarter of this year.

Our senior management team is deep and the team’s steadfast focus remains on serving the best interest of our customers and investors. With a firm support of Aircastle forward we’ll continue to operate business as usual as we execute our business plan in 2017.

Let me turn now to our performance. 2016 was a very successful year for Aircastle as we closed the year with a particularly strong fourth quarter, marked by $635 million of new investments. Our fleet owned and managed now totals 206 aircrafts. Over the course of the year we purchased 60 aircrafts, almost exclusively narrow bodies and sold 30 aircrafts for a total gain on sale of $39 million.

We ended the year with very strong liquidity positions thanks to almost $470 million cash flow of the operating business, $1.3 billion of incremental financing rates in the capital markets and more than $450 million of proceeds from aircraft sales.

I’ll speak more about our financial performance in a moment, but we are very pleased with the fourth quarter and full year results. Net income per share increased 37% to $0.86 per share in the fourth quarter up from $0.63 a year earlier. For the full year of 2016 net income per share rose 28% to $1.92 from $1.50 in 2015 and ANI per share for the full year rose 22% to $2.14 from $1.75.

Cash ROE was a solid 12.3%. Here capital strategy is based on a disciplined value oriented approach towards investing in commercial aircraft. Over the course of 2016, we found many attractive opportunities, of our 60 aircrafts investments 57 were narrow bodies with an average age of 7.4 years and an average remaining lease term of 5.4 years. The three wide bodies we purchased were equally attractive with strong credits and that were priced to part out.

We also took advantage of continued investor demand for aircraft and profitably sold a number of older, less attractive aircraft. In total, we sold 30 aircrafts versus over $750 million in proceeds with a gain on sale of $39 million.

During the fourth quarter alone we sold 11 aircraft for nearly $270 million and $24 million of gains. 2016 sales included 7 wide bodies and three freighters. This has increased our liquidity and earnings while also upgrading the overall quality of our portfolio.

At year-end, Aircastle owned and managed a fleet of 206 aircraft was up from 167 at the end of 2015. Over the past five years, the net book value of our owned and managed fleet has grown to the compound rate of almost 10% per year and is now approaching $7.2 billion.

We believe this growth is consistent with our strategic goal of reaching investment grades. And investment grade rating will significantly expand our borrower base and further reduce our funding cost.

Our portfolio continues to perform well. Fourth quarter and full year utilization was around 99%. On the third quarter call, you will recall that we had four A-330s and one 747 production freighter in place in 2017. As of today we have addressed all but two of these aircraft.

Also during the first quarter of 2017 so far we have confirmed LOI [ph] for the two Ex-TransAsia A321 [ph] that would return to us in the fourth quarter and were aircraft on ground at year end.

Aircastle has a broadly diversified fleet with risks spread across 71 less fleets [ph] operating in 36 countries. We’ve added 27 new customers during 2016. We actively monitor and manage credit and political risk which enables us to quickly and efficiently move access around the globe. The bottom line is our assets are portable.

Finally, our conservative capital structure remains a key competitive advantage. It provides us with significant investment flexibility and gives us the ability to move quickly to see some profitable opportunities across the market.

During 2016,we took advantage of low interest rates and strong financial markets to raise a total of almost $1.3 billion in new financings. We had $5.1 billion of unencumbered assets at year end which included $456 million of unrestricted cash.

Let me now turn to the business environment. We are cautiously optimistic and are approaching new business opportunities with prudence, discipline and a focus on value. This strategy has served us well enabling us to respond quickly to changing market conditions.

The long term fundamentals for aircraft leasing business remains solid and were positioned to continue our profitable growth. Air travel demand is projected to grow at 1.5 to 2 times faster than Global GDP which generates solid demand for modern aircraft and for aircraft leasing.

More recent I added [ph] aircraft results for the month of December and showed demand growth that was well above trend. Traffic growth for the full year was 6.3% with passenger load factors posting a record high of 80.5%.

The airline industry generated record profits in 2016 estimated globally at $36 billion. For 2017, Global GDP growth forecast ranged from 2.5% to 3.5%, and I added estimating overall airline profits in 2017 of approximately $30 billion.

While these forecasts remain positive by the recent events show, the world can change rapidly and in unexpected ways which plays to our strength.

Aircastle is the largest value investor in the industry and this differentiates us from some of our competitors. With disciplined investors who create value when market conditions are not entirely conventional and straight forward. Based on our strengths of reliable deal execution and ability to act decisively in fluid situations supported by a flexible capital structure, we’ve staked out a strategically unique position in the market.

There are three crucial investment themes underpinning our strategy. Number one, retaining our discipline as investors and keeping a realistic view of the environment, number two, continuing to be prudent and skilled managers of our business and our assets and number three, driving improvements to the bottom line.

Our strategic approach is straightforward. We put our capital to work in situations where we can earn strong returns for an appropriate balance of risk and reward. We avoid tying up our capital and our team on situations that will only pay out in the distant future. This is a different path that many of our competitors have chosen but we believe it’s more conducive to lower risk and higher returns in the context of our business.

Looking ahead, we anticipate that 2017 will be another dynamic year with potential volatility and dislocations continuing to produce opportunities for us to profitably upgrade and expand our fleet. We are also taking advantage of a high demand to sell older and self optimal assets.

We remain extremely disciplined and selective in our aircraft purchases. Our cash ROE for 2016 was 12.3% while our GAAP ROE was 8.5%. Rental rates in Q4 were generally flat versus the prior quarter and we continue to see the best value opportunities in the net age current generation narrow body aircraft as this currently a less competitive part of the market.

Thus far in the first quarter of 2017 the narrow-body market continues to perform well, especially for current generation CEOs and NGs. Continued low fuel plus lower rentals and capital costs has enhanced the longevity and value of current generation aircraft. We expect this to remain the case throughout 2017 and narrow bodies will likely remain our focus in terms of acquisitions.

While wide body demand remains weak, we are seeing more airlines recognizing the value of lower priced current technology wide body aircraft. To summarize, we’ve staked out our unique position in the market. Aircastle is the only large publicly capitalized value investor in the aircraft leasing space. We believe this is a profitable and pivotal role in our category and we are ideally situated to take advantage of this position and to find the inherent opportunities on our terms.

Now let me provide a short update on our financial performance. Aircastle had a strong fourth quarter and a very successful year. Our net income for the year was $151 million, an increase of 24% over 2015 as gains from sales reached approximately $39 million. Our operating cash flows came in a very strong $468 million for the year driven by a virtually 99% utilization.

For the fourth quarter, lease rental revenues were $192 million, up 3% year-over-year due primarily to the net impact of aircraft investments and sales. Total revenues for the quarter were $205 million, down 1.7% year-over-year driven by lower maintenance revenue and higher lease incentive amortization of approximately $7 million.

The year-on-year change in maintenance and amortization was mostly due to a sizeable on schedule lease termination with a Russian airline during the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter was $220 million versus $211 for the prior year. Higher gains in the sale of light equipment of $9 million and higher lease rental and finance revenues of $6 million were partly offset by lower maintenance revenue and end of lease termination fees of approximately $5 million.

Adjusted income for the fourth quarter was $70 million, up $60 million year-over-year primarily due to lower impairment charges. Interest expense for the quarter was $67 million, an increase of 13% or $7.6 million over the prior year, due to higher average debt balances during the fourth quarter of 2016 along with $3.5 million of loan termination fees associated with one aircraft sold during the quarter.

Depreciation rose by $3.9 million compared to the fourth quarter of 2015, primarily as a result of buying narrow-body aircraft during the past year.

At the end of the year, we owned 193 aircraft with a netbook value of $6.5 billion, including 156 billion unencumbered aircrafts with a net book value of $4.6 billion. In addition, at the end of the year, we managed another 13 aircraft through our two joint ventures with Ontario Teachers' and IBJ leasing that had a net book value of approximately $690 million.

For the fourth quarter of 2016, our annualized portfolio leads rental yield was 12.4% and our net cash interest margin was 8.7% which was sequentially flat with the second and third quarters of 2016.

Turning to our liquidity and capital structure, at yearend we had $456 million of unrestricted cash and $810 million of unused revolver capacity. Total borrowings were approximately $4.5 billion, including $3.3 billion of unsecured debt.

The weighted average coupon on our debt at year-end was 5.01% and weighted average maturity of our debt portfolio at approximately 3.7 years. Our net debt to equity ratio remained at 2.2 times and unsecured debt represents approximately 73% of total debt.

With respect to capital allocation, we remain committed to deploying capital efficiently and intelligently in both up and down markets. This includes growing our business consistent with our philosophy; it also includes sharing a portion of our sustainable earnings with our shareholders.

For the first quarter of 2017, our board approved the $0.26 common dividend payable on March 15. This is our 43rd consecutive dividend, its’ going public in 2006. We paid out a total of $685 million in dividend and increased the dividend seven times since 2011 for a total increase of 260%.

Finally, our guidance elements for the first quarter of 2017 and that’s included in the earnings press release and PowerPoint, both of which were posted to our website earlier today. As a reminder, maintenance revenue closed-door income statement as the leases expire or when aircraft are sold, the wide range of guidance for both maintenance revenue and for expected gains from the sale of aircraft reflect potential timing issues between the first and second quarters of 2017.

In conclusion, 2016 was a very strong year. We achieved robust earnings and fleet growth while improving our portfolio and expanding the franchise by opportunistically acquiring attractive assets and profitably selling older equipment.

Our success during 2016 drilled outstanding financial results and we ended the year with an improved fleet profile and strong lease returns. We currently have significant liquidity, our operating cash flow is very strong, and our future annual capital commitments are modest.

Finally, Aircastle’s conservative capital structure is flexible and affords strong access to additional financing. The leading value investor in the commercial aircraft leasing were well positioned to continue to drive shareholder value and return by executing our disciplined and flexible approach in an ever changing market environment. We are confident that Aircastle’s fleet management team’s strong board and professional team of employees around the globe are well-positioned to execute the company strategy.

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

Question-And-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Helane Becker with Cowen & Company.

Helane Becker

Thanks, operator. Hi, team, thanks for taking the time. Morning. So I just have two questions. One is with respect to aircraft acquisitions for 2017. How should we think about that you have a goal in mind?

Mike Inglese

I wouldn’t say we have a specific goal in mind Helane, but when I look at where we are in the current environment and what we’ve done over the last three to five years on an annual basis in the context of acquisition and sales and netting normal depreciation. Over the last five years we’ve grown the fleet at about 10% a year. You know we’re sitting where we are today, I would guess that we are probably a little bit inside that in the mid to high single digits of potential growth in the fleet across the year.

Helane Becker

Okay. And then my other question is, I don’t know if that affects you guys this much, but I know we’re still getting a lot of questions about border adjustment tax and if you know that will wind up affecting you.

Mike Inglese

And I think that practically speaking Helane it’s too early to tell what any of these tax proposals that are floating around will mean to many people. In a practical sense for Aircastle, we are a Bermuda based company. We own most of our assets either in Bermuda or in Ireland, as many of our peers do. So it’s not obvious there’ll be any immediate impact on Aircastle from any of the proposed border adjustment taxes or other changes of the U.S. tax code, but it -- frankly there a little early in the formation and a lot of details to be figured out along the way. So it’s something we are keeping an eye on, but it’s not something that we think will have a big impact on Aircastle.

Helane Becker

Okay. All right, well those are my questions. Thanks.

Mike Inglese

Thank you.

Operator

We’ll hear next from Arren Cyganovich with DA Davidson.

Arren Cyganovich

Thanks. Mike with respect to potentially having a reduction in aircraft purchases from the recent strong purchase activity over the past couple of years. What would you use the excess capital for? Would you look to do more buybacks and I guess conversely, would you also kind of reign in some of aircraft sales, so that you don’t shrink the portfolio too much?

Mike Inglese

Yes I think in my response to Helane’s question when I am thinking about growth, I am thinking about the net effect of acquisitions in sales. And so they are not always necessarily perfectly correlated of what drives either one, but we’ll certainly be keeping the balance of those two activities in our minds in the context of trying to continually and profitably grow the business overtime.

Arren Cyganovich

Okay. Thanks and then from just an accounting perspective, it looks like other revenues and other income were both slightly elevated this quarter. Was there any kind of one time or nonrecurring items going on in those lines?

Mike Inglese

I think there is a couple million dollars in the fourth quarter related to the Trans Asia return. I can’t think of anything else in specifics that was running to that line.

Arren Cyganovich

Okay, thank you.

Operator

Our next question comes from Gary Liebowitz with Wells Fargo Securities.

Gary Liebowitz

Thanks, operator and good morning guys. Mike you mentioned that you had placed three of the Singapore A330s I guess that was one left. How many down times you expect those aircraft to have and do we see a dip in second quarter revenues as those planes transition to a new customer?

Mike Inglese

Yes, I think there will be a little bit of downtime associated with the transition of those aircraft during the second quarter. And also in the second quarter, you’ll see the effect of some asset sales, some of which we expect to close during the first quarter and some of which will likely lead into the second quarter as well. So those two dynamics will have some impact on to do, but it’s generally consistent with our expectations in our own plan for execution for the full year this year.

Gary Liebowitz

Okay. And you said you had about $137 million of CapEx in line for the first quarter, are those new narrow-bodies?

Mike Inglese

What we have in terms of actual commitments at this point in the year is about 137. Those are three new narrow-bodies that we will be delivering most likely during the third quarter of this year. In terms of activity, currently, we probably have another 200 and 300 million in play at the moment, bulk of which could close during the second quarter and it’s from a mix of both airline opportunities as well as looking at potential less ordeals as well.

Gary Liebowitz

Okay, any update on the Embraer placement?

Mike Kriedberg

Hey Gary, its Mike Kriedberg. I would say its still timing hasn’t really changed. We placed the three. We are still pretty encouraged what we are seeing. We expect Embraer to have some bigger opportunities this year. But generally we like what we are seeing. I think it’s lagging a little bit just given we are seeing that with only technology aircraft given the fuel environment. But in general we expect some bigger opportunities later this year.

Gary Liebowitz

Thanks. And just lastly, I guess Ron’s probably listening. So Ron, best wishes for a speedy recovery and hope to see you soon. Thanks guys.

Mike Kriedberg

Well thank you Gary.

Operator

Our next question comes from Christopher Nolan with FBR & Company.

Christopher Nolan

Mike, Kried or Mike. What sort of trend are you seeing in emerging market airlines given stronger dollar, rising fuel costs and so forth?

Mike Inglese

Good, so far I think we are still seeing pretty solid performance from most of our lessees and the rising dollar has in different part of the world has been mitigated by certain local currencies actually doing much better in the recent quarters, and people appears certainly to be exercising more capacity discipline in the context of running their airlines around the world.

Christopher Nolan

Great. And then, you mentioned like $3 million I believe an early lease termination fee related to the higher interest expense. Did I hear you correctly or..?

Mike Inglese

So, we sold an aircraft during the fourth quarter, which generated gain on sale in connection with that sale we had to break some fixed rate loan and that charge was about $3.5 million in total that ran through the interest expense lines during the quarter.

Christopher Nolan

And then finally, for the investment grade rating, I known in the past you guys have said that scale or size of your business is a factor in achieving that. Is that still an issue for you guys achieving investment grade?

Mike Inglese

Look, its not entirely clear or black and white that has certainly been one of the issues that we have been working through and in the context of growing our business, but its not necessarily a static line up per se because the industry is growing as the overall aircraft and airlines around the world grow as well. So, look we think we’re on a reasonable track. We think we continue to deliver strong credit metric. We’re encouraged frankly by the Moody’s in the past six to 12 months has taken a much more constructive view of the industry overall.

There you’ve seen S&P and Fitch upgrade aircraft in the context of what they've done over time. Moody’s has put them on a positive outlook. About this time last year we got a one notch upgrade from Moody’s from Ba2 to Ba1. So, we continue to do what we think make sense for the business overall with the view on that topic and in our normal course of our conversations with the agencies we’ll be visiting with them over the course of the next month or so, and continuing to make our case and we’ll obviously keep everybody updated on our progress.

Christopher Nolan

Great. Thanks for taking my questions, and Ron speedy recovery.

Mike Inglese

Thanks, Chris.

Operator

We’ll hear next from Catherine O'Brien with Deutsche Bank.

Catherine O'Brien

Good morning, everyone.

Mike Inglese

Good morning, Catherine.

Catherine O'Brien

Good morning. So regarding the three A330s you placed in Singapore. Can you speak about how those lease rates or you know the lease agreement in general compared to other agreements you’ve reached over the past 12 to eight months, just given the amount of A330s develop on the market right now. And just any updates or even discussions currently about that last A330 you have to place this year?

Mike Kriedberg

Hi. It’s Michael Kriedberg. I guess the quick answer, we’ve been pretty consistent on this in the wide-body market, the lease rates have been difficult, they’ve been lower, but we are starting to see them sort of bottoming out, stabilize a little bit. I would say, relative to your question on the Singapore 330s, its lower than we originally expected but it’s been stable, it’s not much different than over the last but I’d say six to 12 months. It’s more or less stable right now. The four 330 we’re having discussions with several potential lessees right now. I think you’ll see something come together there, shortly.

Catherine O'Brien

Okay, great. And then $130 million in gains booked in 2016, can you disclose how much of that was related to aircraft sold in to your JV?

Mike Kriedberg

Pretty modest proposition of that was any aircraft sold to joint ventures.

Catherine O'Brien

Okay. Just could you give the number of aircrafts you sold this year in to your JV?

Mike Kriedberg

I honesty don’t have that number in front of me, Catherine, maybe Frank can follow-up with you later on that.

Frank Constantinople

I’ll get back to you.

Catherine O'Brien

All right. Thanks.

Operator

Our next question comes from Rajeev Lalwani with Morgan Stanley.

Rajeev Lalwani

Good morning. Thanks for your time.

Mike Inglese

Good morning.

Rajeev Lalwani

On your net cash interest margin that you showed in your release, it seems like it’s down one to two points since 2014. How do you get that to reverse? Should we just assume that it compresses as we look forward and then you offset it by growing the fleet as you mentioned earlier?

Mike Inglese

Look, I think practically speaking where we are today is kind of the condition of the current marketplace. What we buy obviously affects and what we sell affects what the rental yield number will be, but we think today as we look at the construct of the portfolio, we have longer lease term supporting the current portfolio than we’ve had in a while. We think the overall quality of the portfolio particularly the increase in the narrow-body exposure is quite strong. And frankly I think we’re going to be in that sort of high eight place probably for a while given the context of the attraction and the new capital that’s flowed into the aircraft investing space over the last few years.

Rajeev Lalwani

That’s helpful. And then in terms of the cash ROE target that you’ve laid out before, I think its 15% or so, have you been able to hit that with some of the opportunities you highlighted for the next couple of quarters?

Mike Kriedberg

Look, I think practically speaking when we set investment targets and we make underwriting decisions you're looking at a current lease, and your expectation of how the lease market and residual values evolve over time. So that’s a sort of forward-looking underwriting standards in the context of making those decisions and we’re trying to remain discipline around what we think that economic ROE would be over time.

Rajeev Lalwani

Is that 15% still a good number to use or is it just case-by-case kind of a thing?

Mike Kriedberg

It’s very case by case, but that still overall sort of metric we shoot for in the context of thinking about new business.

Rajeev Lalwani

Thank you, sir.

Operator

Our next question comes from Scott Valentin with Compass Point.

Scott Valentin

Good morning. Thanks for taking my question.

Mike Inglese

Good morning, Scott.

Scott Valentin

Just with regard to the cash balance, it’s still kind of elevated. Just wondering when we could see that come down maybe positive effects it could have on the margins?

Mike Inglese

It’s going to depend on sourcing acquisitions and putting that capital to work, so we continue to focus on that. We continue to make sure we have strong liquidity available in the business so that we can react opportunistically when those acquisition opportunities arise. But yes, over the last year its probably been a higher operating cash balance and we had over time, but frankly we’re okay with that and we’re going try to remain discipline in deploying that cash in the context of running the business.

Scott Valentin

Okay. And just going back to earlier question, I might have missed the answer, but with the pace of acquisition slowing down and going from a 10% growth rates to say mid single-digit, that should free-up some capital unless the goal is to deliver, but would some of that be allocated to a buyback potentially, understanding you want to keep a sustainable dividend but the buyback is allow some more capital return flexibility.

Mike Inglese

Look, buyback as we've shown over time is always part of the tactical toolkit we’ll employ in terms of thinking about capital allocation, but it's to depend upon the balance of acquisition opportunities we see in the context of how our stock price is performing.

Scott Valentin

And just a follow-up question. In terms of secondary market, in terms of competition intensity, has that been stable or is it actually increasing? As more capital coming in to the space, and you're seeing more competition for acquiring aircraft in the secondary market?

Mike Kriedberg

Hey, it’s Mike Kriedberg. I think there’s always more capital coming in this space, there is no denying that, but just around the buy opportunities and I know we’re sort of toning it down a little bit to sort of answer your question. We still see good opportunities, and I think what Mike was alluding to partly our capital structure. We’re still one of the largest buyers of mid-life aircraft.

And more importantly, we found our niche and we’re playing a really big role in helping [Indiscernible] airlines but also lessors transition, so transition from current technology to new. We’re seeing a lot of good opportunities. As Mike mentioned, we still have a 200 million plus that’s in LOI, in addition to 135 million that we have contracted for. So we’re a big role in the fleet transition and probably still if not the biggest mid-life player out there.

Scott Valentin

Thanks very much.

Mike Kriedberg

Thanks, Scott.

Operator

Our next question comes from Stephen Carlson with Waddell & Reed.

Stephen Carlson

Hi. Good morning, guys. Congrats on the good results, and I certainly echo the best wishes and speedy recovery for Ron. Just a housekeeping item. I was curious if you could clarify for 2016, what was the guarantor and non-guarantor sales and EBITDA?

Mike Inglese

Steve, we don’t publish that information in the context of our current structure or current indenture [ph] requirement, so I don’t have that kind of information handy.

Stephen Carlson

Is that something you could disclose going forward?

Mike Inglese

Probably only if that was required too.

Stephen Carlson

All right. Thank you.

Operator

We’ll hear next from Jamie Baker with JPMorgan.

Nish Mani

Hey, good morning. This is actually Nish Mani on for Jamie and my colleague Mark Streeter is joining this morning as well. So, I want to ask question, hoping he could chime in follow-up. But I want to dig a little deeper on your value acquisition strategy, its kind of assess from your perspective how much asset values need to fall from here, in terms of narrow-bodies A320 CEOs and 737 NGs, in order to become more attractive that you would swoop in and make meaningful acquisitions. From a timing perspective, is this contingent upon the 737 MAX introduction, and a production rate increase on the NEO program? So just want to get a sense of when this inflection will occur, and by how much assets that is need to fall?

Mike Kriedberg

Well, that’s quite speed in that question. Let me take a step back. So when we think about buying new assets obviously we’re keeping an eye on what's coming online in the context of new technology, but it's not just the simple what’s the plane worth according some appraiser without a lease. We’re buying assets with leases attached and term attached, and we’re looking at the overall picture of at what price can I buy an asset with that lease and expected return conditions and other aspect of that lease that we think makes sense to us over our expected holding period for those investment.

So, I can’t give you a simple answer that I need some appraised value to drop by 10% for me to be a buyer or something like that. As we’ve shown over the last few years even with the strong environment we can find what we think are attractive opportunities to buy in sizeable amount and we can also find opportunities to sell assets in some cases to the newer money that’s in the space, but just in another cases just the people who typically have played in a different part of the lifecycle of these assets and like in any asset in any industry people will have different views of the future evolution of something and that’s why buying and selling occurs.

Nish Mani

Okay. That’s fair.

Mark Streeter

Great. And let me jump in. It’s Mark Streeter here. Mike just to your last point on sort of leased encumbered values. This is something that came up with another lessor, we were talking about, the difference between the book values and current market values that investor see and they used that to sort of justifies some of the parts on your stock and so forth and lease encumbered values.

And you mentioned earlier that obviously you know prices continue to go up for aircraft because people really value the yield associated with them and so forth. Have you seen the appraiser community and so forth that that investors are looking towards sort of start to maybe come to appreciate that the lease encumbered values are actually a lot higher than the current difference that they're showing between the lease encumbered value in the current market value. I don't get too technical here but you know what I think I'm getting at?

Mike Kriedberg

Look, I think people are starting to think more in the context of the overall industry about the fact that it's not just the simple metal appraisal that’s the underlying value of these businesses. The metal enables cash flow and that cash flow comes through leases and leases have different terms and they have different duration and sometimes they have different whether you're collecting maintenance reserves along the way or getting the current compensation at then end. I think the appraisers are starting to focus more on that. I think investors are starting to appreciate that differences as well over time, and frankly I think that’s the right way overall to think about the context of this business model as an industry.

Mark Streeter

Great. And then just on the derisking of the portfolio that you cite in the presentation and the release in so forth, where are we? Are we in the eighth-inning now? Are we going to call the end of the ballgame here in 2017 obviously I can see your disclosure in terms of what you have left for freighters and so forth, but just want to get a sense of how close are you to the optimal mix here that you're seeking?

Mike Kriedberg

I’m not sure there is such a thing is an optimal mix to be perfectly honest, Mark. Look, we continue to be opportunistic and we find places where we think we can turn our knowledge into cash and value for the investors. So, we’d improve the mix. We still have freighters in the fleet that will cycle out over time. We still have other exposure that we will expect to reduce overtime. We’re down to our last handful of classic. We have some 757s that we expect to sell and those leases expire to somebody who is interested in doing a freighter conversion for parcel service. So, look, we’ve been focused on in the last year predominantly in where we see value and that value for us in our mind has been in current generation narrow bodies.

Mark Streeter

Great. Thanks.

Operator

We’ll hear next from Justine Fisher with Goldman Sachs.

Justine Fisher

Hey, how you guys doing?

Mike Inglese

Good, Justine.

Justine Fisher

The first question I have is just on the wide-bodies. And Mike, I think you had mentioned that you guys are placing these wide-bodies, and maybe it's at a lower lease rate, but that they’re definitely getting placed. Can you give us any color as to the user base of these wide-bodies? Are we seeing the same airlines extend the leases for the same mission, or are you seeing airlines that may not previously have considered using a wide-body on a particular route, now using a wide-body, because they can get it for a lower lease rate? Like are we expanding the mission for these aircrafts that may result in a broader user base?

Mike Kriedberg

Yes. It’s interesting. It’s Michael Kriedberg. I mean, the quick answer is yes to that. But I think you break it down to different buckets, there’s a whole bunch of different reasons. I mean, first of all, the rent levels, if you will, the cost of capital now is low enough that some people, big European carriers, big Asian carriers are actually keeping current technology longer, extending it or adding in versus taking new technology and that increase cost of capital. So that is definitely happening. But then you see expansion, you’re seeing southeast Asia starting to expand in some of the wide-bodies, you’re seeing, the U.S. start to rationalize certain wide-body types, we’ve even seen certain U.S. carriers start to focus on 777, 300s all of a sudden versus brand new technology.

So its all over the place, but there’s definitely an expansion and I think pat of that’s driven by frankly the rents are low enough on some of the current technology wide-bodies that there are folks sort of saying, hey, I can make money doing this. So, that’s what I’m sort of saying, we feel like market is kind of bottom down, you’re seeing interest, I wouldn’t say the rents great, but its stable now and you can place some wide-bodies.

Justine Fisher

Okay. Thanks. And then another question that I had is one I get from investors a lot. It has to do with the capital from Asia that's been coming in to the sector, and obviously, there's a lot of capital around and there has been, and I think that has buoyed aircraft values. But as you guys look over the next couple of years, is there concern on your part that some of this capital might be retracted and that element that has added some strength to the aircraft market might go away, depending on what China does with capital controls? Are you guys hearing anything like this?

Mike Inglese

I’m not sure, we’re seeing any real current sort of anecdotal evidence that any of the capital is flowing away from this space. I mean, we’ve certainly seen the large number of new investor from around the world discover the yield possibilities of investing in aviation assets and across the capital structures. It’s also a dollar-denominated asset that has been very attractive to foreign investors. That doesn’t mean in time if we get back to what we thought a few decades ago is normal and economic growth and lease rates that some investors might not go back to investing in other thing that they use to invest in, but fundamentally if you look at the delivery stream that the OEM have over the next four or five years we’re talking about $150 billion to $200 billion worth of airplanes delivering every year and this is an industry that requires lots of capital. So, we haven’t seen any current evidence that people are moving away from investing in aircraft.

Justine Fisher

Okay, great. Thanks a lot.

Operator

Our next question comes from Reno Bianchi with Cantor Fitzgerald.

Reno Bianchi

Yes, good morning. Thank you for taking my call. A couple of items. The first one when do you plan to release a 10-K?

Mike Inglese

It should be filed later today.

Reno Bianchi

Okay. Thank you very much. The second question was, the average age of the fleet went up from 7.6 years at the end of the third quarter to 7.9 years at the end of this quarter. I think the main activity in the quarter were kind of placement on aircraft in the United Kingdom and in India. Can you please provide a little bit more color with respect to those specific leases, and whether they were slightly higher than average, or were they consistent with the rest of the fleet?

Mike Kriedberg

No. This was so enough for example, we have announce the easyJet transactions, so those are older 390s [ph] effectively priced to part-out. So, those are example of good value transactions. We’re not going to sit there on the sidelines saying this is to all. But we have a very good credit. You’ve got adequate term, and you could make a pretty good mix win-win. Airline gets to remove some older technology aircraft and we get a nice return on a part-out basis. So that’s a kind of stuff you’re seeing that’s picking up at the end of the year which we’re more and happy to do.

Reno Bianchi

So to a certain extent, the increase in the average age of the fleet to reflect some ad-hoc opportunities than you face in the fourth quarter not necessarily is going to be an established trend trying to focus more on older aircraft. Is that correct?

Mike Inglese

That’s correct, what we do, number one, we don't run our business to an average age. We try to find what we think are the best opportunities, and age settles out where it does.

Reno Bianchi

Fair enough. The other question I had, you guided us with respect to gain from aircraft sales to $5 million to $15 million in the quarter. The number actually came down at $24.2 million. I hope, I didn't miss it during this call, but you know can you provide any colors why the gain was so much higher than what was originally expected?

Mike Inglese

Sure, so when we did our third quarter call in early November we had a transaction that was reasonably was based and we expected some of the aircraft to close during the fourth quarter, and some of them to slip into the first quarter and quite frankly, the buyer was very motivated to close and time is always the enemy for anyone in the world, and so we worked very diligently with them to get all of the aircraft closed in the fourth quarter.

So it’s really this timing in the context of getting things closed beyond what we expect it to do.

Reno Bianchi

And my last question is with regard to the computation [ph] and the data that you include in the net cash margin. I hope, I didn't fall behind the wheel, but it seems to me that beginning in second quarter of 2012, you changed the composition destination of the net book value of the fleet, as well as the definition of rent revenue. And I don't know whether this occurred in last quarter or this quarter, but in general, it seems like the methodology to compute the net cash margin has changed. Can you please address that?

Mike Inglese

Yes simplistically Reno, we’ve had a growing piece of the overall portfolio that’s in the form of finance leases and so we just read, we just included in the definition in both the numerator and the denominator, the effect of those finance leases and the collections onto those specific leases.

Reno Bianchi

And which would make sense because the way that most other companies are reporting the same statistics, right?

Mike Inglese

Right. We believe so.

Reno Bianchi

Thank you very much for taking my call.

Operator

And our next question comes from Gary Liebowitz with Wells Fargo Securities

Gary Liebowitz

Just a couple follow-ups. Mike, on the three new narrow-bodies that you are adding later this year, are those CONG generation planes, or are they Neo or even Max is possible in the third quarter.

Mike Inglese

Yes, current generation they are not Max.

Gary Liebowitz

Okay. Also maybe for Mike Kriedberg, the TransAsia, that seemed to go south pretty fast. You just placed those planes in there a few months earlier. Can -- were you surprised by what happened there? Were there any terms that made the deal more attractive to mitigate some of the risks involved here?

Mike Kriedberg

Yes, what I’d say Gary is certainly we knew there is a risk. We were surprised that definitely went fast as south as fast as it did, but what I would tell you we are not getting into too much detail. We underwrote that deal on the basis of a security package that we were very comfortable with and on the basis of a plane type and a spec that we felt that we needed to play we could. So when we underwrote it and we have not analyzed the value of that, we look at the potential real world scenario what do we look like from a placement. And it will turn out okay for us. So I would like to have stayed longer, but in the end we were looking at it from the worst perspective and we were okay with the underwriting on our faces.

Gary Liebowitz

Thanks.

Operator

And our next question comes from Moshe Orenbuch with Credit Suisse.

Mike Inglese

Hello.

Operator

Just one moment.

Mike Inglese

Did we loose you?

Operator

I apologize. [Operator Instructions]

Mike Inglese

Okay, Janice it looks like there is nobody else in the queue. So I would just say thank you very much for your time today. If you have any follow up questions, feel free to call me at 203-504-1063. Thank you very much for dialing in and have a good day.

Operator

This does conclude today’s conference. We thank you for your participation. You may now disconnect.

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