AirCastle's (AYR) CEO Michael Inglese on Q1 2018 Results - Earnings Call Transcript

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About: Aircastle Limited (AYR)
by: SA Transcripts

AirCastle Limited (NYSE:AYR) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Frank Constantinople - Investor Relations

Michael Inglese - Chief Executive Officer

Michael Kriedberg - Chief Commercial Officer

Aaron Dahlke - Chief Financial Officer

Analysts

Catherine O'Brien - Deutsche Bank

Helane Becker - Cowen and Company

Gary Liebowitz - Wells Fargo Securities

Moshe Orenbuch - Credit Suisse

Vincent Caintic - Stephens Inc.

Jason Arnold - RBC Capital Markets

Scott Valentin - Compass Point Research & Trading LLC

Kristine Liwag - Bank of America Merrill Lynch

Susan Donofrio - Macquarie Capital

Justine Fisher - Goldman Sachs

Operator

Good day, and welcome to the AirCastle Q1, 2018 Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Frank Constantinople, Head of Investor Relations. Please go ahead.

Frank Constantinople

Thank you, John. Good morning, everyone, and welcome to AirCastle Limited's first quarter 2018 earnings call. With me today are Mike Inglese, Chief Executive Officer; Aaron Dahlke, Chief Financial Officer, and Mike Kriedberg, Chief Commercial Officer.

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

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

And we’ll now turn the call over to Mike Inglese.

Michael Inglese

Thanks Frank. And welcome to AirCastle’s first quarter 2018 earnings call. Today I'm going to discuss our results for the quarter, well briefly touch upon current market conditions and our strategy as we had for the balance of the year. Then I’ll turn the call over to Aaron Dahlke to cover the financial results after which we will open it up to Q&A. The aircraft leasing industry continues to benefit from solid fundamentals. Air traffic growth remains very strong and is outpacing global GDP growth and the demand for leased aircraft remains robust.

Let me quickly review our results. After very strong performance in 2017 in which we recorded record adjusted net income per share of $2.15 and grew our book value per share by 4% to $24.21 per share. We are off to a solid start for 2018 with Q1 EPS up 35% and ANI per share up 24% respectively compared to the first quarter of 2017. Our book value per share at March 31 was $24.67 per share and our trailing 12-month cash ROE was almost 16%.

Our strategy continues to center around growing in a profitable manner and while we are focused on growth over the long-term. We continue to profitably self selected assets to take advantage of current market conditions to offer strong demand for aircraft investment. Over the past three or so years there has been and continues to be a strong bid from buyers of mid-age aircraft along with abundant available liquidity.

Accordingly since the beginning of 2015, we sold 102 aircraft for total gains of $158 million. During the first quarter, we acquired four aircraft for $111 million and sold four older aircraft, three A319 and one A320 for approximately $44 million, which produced the sale gain of approximately $5.8 million. For the remainder of 2018, we have committed to acquire an additional 12 aircraft for more than $490 million and we have a solid pipeline of transactions that we are working on.

In the current competitive environment, we are taking advantage of opportunities to profitably sell aircraft, but we also continue to find situations to invest in additional aircraft which play to our competitive advantages of structuring flexibility, speed and execution certainty. We've been focused on mid-age aircraft investments recently. During the first quarter, we committed to acquire our first A320 NEOs. This deal is for eight NEOs, six of which are expected to deliver in the second half of 2018 with two additional aircraft during the first half of 2019.

At the end of the first quarter our total fleet of owned aircraft was 224 units with 192 of those being narrow-bodies including two aircraft held for sale. Current generation narrow-bodies now represent two thirds of the total net book value of our fleet, twice the level of five years ago. Our first quarter utilization rate remains very high at 99.4%. We had two aircraft on the ground at the end of the quarter both of these have returned and transitioned to new lessees this week.

We have no aircraft remaining to place this year and one aircraft coming off lease that we expect to part out. We have a number of narrow-bodies replacement in 2019, but nothing that our team has been handled before, and the market for narrow-body placements remains very strong. Perhaps most significantly our aircraft monitoring list remained at zero at the end of the quarter.

With respect to the Embraer E2, the manufacturer delivered its first aircraft on time to Widerøe in April and we've made some good additional progress in our placement efforts for the aircraft that are currently scheduled to deliver beginning in late 2019. We have a signed LOI for three additional units that we expect to confirm in the coming months, which will put us at about 25% of the order being placed.

We have more active airlines discussions ongoing than we had earlier this year and expect to make solid progress as we move forward over the balance of the year. We continue to have a very strong liquidity position in minimal forward commitments. To-date, our 2018 capital allocation includes approximately $600 million of narrow-body aircraft that we have acquired or committed to acquire, paying a quarterly dividend on our common shares that currently yielding more than 5%, and we repurchased about $12.5 million of our common shares at an average price of about $19.56 in the first part of this year.

The average share repurchases price represents about 79% of the first quarter book value per share of $24.67. Using multiple tools in our capital allocation approach, AirCastle has consistently generated strong historical cash returns for our investors and we remain focused on creating long-term value by growing the business in a conservative and profitable manner. We are very optimistic about the future and have strong conviction that our strategy and conservative approach will result in long-term profitable growth and value creation.

Given our philosophy of providing a regular return of capital to shareholders, our Board approved our 40-ish consecutive quarterly dividend of $0.28 a share payable on June 15. Since 2011 we've increased the dividend eight times from $0.10 a share per quarter to $0.28 per share.

Let me now spend a few minutes on the current business environment. The global GDP growth forecasted the solid 3.5% and the most recent IATA air traffic results indicate since the beginning of the year show very strong travel growth. IATA expects another year of above trend line growth with revenue passenger kilometers forecast to increase between 6% and 6.5%.

This morning's report through March showed global passenger kilometers rose 9.5% for March and it’s up 7.2% year-over-year compared to the first quarter of 2018. In addition, load factors continue to be very high averaging over 80% in the first quarter. Storage rates remain low and the supply of available narrow-body aircraft is limited. Airlines around the world continue to perform well as global fleet expansion remains below traffic growth.

Asia is benefiting from robust economic growth with demand stimulus effects in the low-cost carriers in this part of the world, while Europe, North America, and Latin America continue to support good growth and high load factors.

IATA expects global airline profits to reach $38 billion in 2018, if this occurs it will represent the fourth time in the industry having exceeded $30 billion. While these forecasts are certainly upbeat, the rising cost of fuel could have an impact on profits and margins in 2018.

However, it's important to remember that while fuel prices have increased about 38% from the end of 2016, they're still down approximately 47% from the peak in 2008 and 37% below the levels we saw in 2012.

As we've indicated previously, this generally positive for our fleet of mid-age current technology aircraft and the gains that we've been able to generate from aircraft sold along with the strong lease placement environment from narrow-body aircraft in particular are good examples of the positive impact of this associated fuel levels.

Mid-age narrow-body rentals remain strong, narrow-body aircraft values continue to rise due to traffic growth, financing availability, and low interest rates. And as I said earlier, we continue to sell into the spring.

Strong traffic growth, limited aircraft availability and modest oil prices have increased the useful economic life of current generation aircraft, while financing availability low interest rates have improved the affordability and attractiveness of investing in aircraft in general. These favorable conditions have also made it easy to extend our transition leases associated with current generation technology aircraft.

As we look ahead there are strong fundamentals driving the demand for air travel and aircraft, we expect air traffic to continue to grow at a faster rate in global GDP, and we expect demand for aircraft to grow as well.

For this fundamental reason, attractive investment opportunities will always be available, but specific opportunities will of course vary over time. We'll remain focused on investing in aircraft that we expect will deliver solid results in excess of our capital costs and create incremental shareholder value.

We will also sell aircraft when appropriate to reduce residual value risk and recognize gains. We have and we will continue to take advantage of the strong demand from mid-age current technology and have now identified selective investments in new technology aircraft as well.

In closing, our experienced management team will continue to grow the company in a disciplined fashion, manage risk concentrations, sell aircraft free of capital and generate gains and maximize the value of aircraft investments. We’re well positioned for profitable growth in 2018 and our high quality platform and conservative capital structure will enable us to increase value this year and beyond.

I will now turn the call over to Aaron to briefly review our results for the first quarter along with our guidance for the second.

Aaron Dahlke

Thanks Mike. AirCastle had a very profitable quarter and our core earnings continued to be strong. For the quarter, lease rental and finance lease revenues were a $186.9 million down 4% versus Q1 2017, were up 4.3% when compared to Q4 2017, which primarily related to aircraft added during the fourth quarter.

We reported maintenance revenue of $12 million associated with the return of one production freighter, which we had contracted for sell, which we placed on lease – on a long-term lease for the solid credit. We reported a gain on sale of $5.8 million as we sold four narrow-body aircraft with a weighted-average age of 15.8 years or $44 million.

Total revenues were $202.7 million, down 1% versus Q1 2017, mostly due to aircraft sold over to past 12 months. You'll notice that we're now reporting gains on sale from flight equipment in total revenues in order to conform with our other aircraft lessors. This change in our presentation has no impact on bottom line financial results, cash flow or any of our non-GAAP metrics. Total expenses declined by 6.7% versus Q1 2017 due to lower depreciation and lower interest expense.

Net income was $57.5 million or $0.73 per diluted share, an increased of 35% versus Q1 2017. Adjusted EBITDA was $191.1 million, a slight decrease of 1.2% versus Q1 2017. Overall, we had a solid quarter.

Turning to our capital structure, our net debt to equity ratio is 2.1 times. Total borrowings were $4.3 billion of which 80% of our debt is unsecured. Our weighted average debt age was 3.4 years with our weighted average coupon of 5%. We ended the quarter with $211 million of unrestricted cash and $710 million of unused revolver capacity. On May 1, our Board approved $0.28 per common share dividend payable on June 15, to shareholders of record on May 31.

Through May, we have repurchased $12.5 million of our common shares at a weighted averaged cost of $19.56 per share, which is 79% of our book value per share at the end of the first quarter. We have $83 million remaining under our current share repurchase authorization.

We provided our usual guidance elements for the second quarter of 2018 and I want to highlight two items. We have little to know maintenance revenue in the second quarter as we have no aircraft that are scheduled to transition and gains on sale has a wide range to account for potential slippage into the following quarter.

To summarize, aircraft will had a profitable first quarter and we developed good momentum for profitable and accretive growth in 2018. Our pipeline is solid and our balance sheet is strong and we remain committed to allocating capital intelligently for the benefit of our investors.

With that operator, we can now open the call up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Catherine O'Brien with Deutsche Bank.

Catherine O'Brien

Good morning, everyone.

Michael Inglese

Good morning, Catherine.

Catherine O'Brien

Hey, guys. So because when your competitors are higher interest rates are already finding their way into higher lease rates for lease aircraft, especially on the A320 and 737 that you have a good number for remarketing in 2019? So are you also seeing that therefore expecting less of the drag on revenue from remarketing events next year then maybe you were six months to eight months ago?

Michael Inglese

Yes, I’d say by and large we agree with that conceptually that it compared to what I might have thought 12 months or 18 months ago when I think about next year renewals, I would expect to see stronger lease rates in the context of the narrow-body aircraft that we are remarketing.

Catherine O'Brien

I agree. And then are you seeing any improvements in the sale lease back market already, just given this – the rising rates you already talking about. At this point, are you still more focused on other lessors source of aircraft acquisitions that time being?

Michael Inglese

So far this year, we've purchased adverse from other lessors, as I indicated in my prepared remarks, we found our first opportunity to invest in A320 NEOs had returns that we think are commensurate with our return requirements. And going forward, we will continue to look both on the airline side and the lessor side in the context of securing additional assets, but at the moment, I would probably guess it's still going to be more lessor skewed in 2018, but that still remains to be same.

Catherine O'Brien

Great. Thank you so much.

Operator

And we’ll take our next question from Helane Becker with Cowen and Company.

Helane Becker

Thanks operator. Hi, gentlemen, thanks for the time here. I just have a couple of questions. One on Slide 9 I think, you have – the weighted average fleet age has increased a little bit in the last say two years. And I'm just kind of wondering how you're thinking about that? And should we expect it to continue to trend higher? What's your like on sweet spot, where do you want that to be?

Michael Inglese

We don't run our business with the sweet spot for weighted average age of our portfolio which we’ve been saying I think consistently for a long time. Practically speaking, we have been finding good incremental investments in the 8-year to 10-year old narrow-body aircraft segment over the last few years. We've been derisking our business by selling down newer wide-bodies, which has contributed to that age growth, and over the last quarter the fleet age grew by quarter of a year. So we're conscious of age, we’re more conscious of not getting too much of sort of last of the line current generation technology. We think there's a very strong demand for what we owned and we expect and produced return consistent with our underwriting thesis.

Helane Becker

Okay. Thank you. And then I just have one follow-up question that's a little unrelated. I think Mike you said that you have no airline customers on your current watchlist. And I'm just kind of wondering as you're thinking about the business holistically. Are there any regions of the world about which you're concerned or we in that sort of area right now where everything is kind of moving up into the right let say?

Michael Inglese

Look I think – we think the overall global economy is looking very solid, the airline credit portfolio is performing well, and obviously you've got to continue to monitor that, things can change quickly in certain places and with certain weaker carriers, but as we sit here today, I think we feel pretty good about the mix we have and the status of our customers.

Helane Becker

Okay. Thank you.

Operator

We’ll take our next question from Gary Liebowitz with Wells Fargo.

Gary Liebowitz

Thank you, operator. Good morning, guys.

Michael Inglese

Good morning, Gary.

Aaron Dahlke

Good morning.

Gary Liebowitz

Mike is the round $1.5 billion still reasonable number for growth CapEx this year, so this looks like it will be perhaps second half of the year weighted.

Michael Inglese

Look I wouldn't say the possibility where we sit today and stuff we have that is reasonably closed into things, we think we can close were probably a little over $1 billion, so that’s – as I said before we have 600 done and committed, we probably have another 500 give or take that we think we have a pretty good shot of concluding transactions on, beyond that kind of remains to be seen as we march through the year. On the sale side, conversely we're probably looking at a level that's in the 400 to 500 range-ish of stuff we expect to do at the moment, but as we move through the year that can change through and we'll talk about that as you move along.

Gary Liebowitz

Okay. Thanks. And I think you might have alluded to this already, but the eight A320 NEOs that you – did you say you're requiring those from another lessor?

Michael Inglese

No, it’s a sale leaseback transaction within airlines.

Gary Liebowitz

With a single airline?

Michael Inglese

Yes.

Gary Liebowitz

Okay. And just a housekeeping question, Aaron, so you're moving gains up into revenues, is it just a simple move in the P&L, I think we go back and restate our quarterly financials or is there anything more to it?

Aaron Dahlke

Gary, you are right. And of course as we reported, we do that automatically. So the prior year is already been reclassified.

Gary Liebowitz

Okay. Thank you.

Operator

We’ll take our next question from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch

Great. Thanks. So maybe if you could talk a little bit about – you had mentioned a little bit about the impact on lease renewals of rising rates, but maybe if you think about it kind of on both sides just the sorts of things that you would see in terms of lags. Like how would you expect to affect your yield overall versus your cost of funds kind of over the next year?

Michael Inglese

A little tricky to predict at the moment if you think about our cost of funds if you look at some of our bonds and how they've traded. We've seen treasuries go up 50 or 60 basis points in a relatively short period of time across the aircraft leasing companies and there are unsecured sort of capital structure elements, we've seen credit spreads remain pretty consistent.

So any drift up in current yield has all been attributed to the treasury environment. So there is modest incremental debt cost if you will going forward and how and exactly that will layer on top of that, our lease rate increase, I think you will get there, I'm not sure it’s exactly contemporaneous, that maybe a quarter or two lag realistically, but that’s something that frankly is yet to quite play out. So I can’t answer it more specifically.

Moshe Orenbuch

But you think there would be kind of a catch up there which is…

Michael Inglese

I think there will be some modest lag, but I think in general you'll see that that spread should normalize.

Moshe Orenbuch

Great. And maybe just talk a little bit about the repurchase, I mean it sounded like your actual CapEx was going to be a little more backend weighted and maybe just how you thought about the share repurchase and potential for others are – how you think about that in general?

Michael Inglese

Sure. We've been a modest repurchaser from time to time and our stock is below 20 over the past few years. It’s kind of a view we've had, as we said we – that represents something around 79% of book, which we think is well below where the business should be trading. So I think we'll continue to look at that in the context of how we think about allocating capital as we move through the year, but absent something else happening. I'm not sure we are expecting to do any significant repurchases in the context of what we see today.

Moshe Orenbuch

Great. Thanks so much.

Operator

And we will take our next question from Vincent Caintic from Stephens.

Vincent Caintic

Hi, thanks. Good morning, guys. First one just wanted to focus on the timing a little bit, so the CapEx mostly in the back half of the year, if that's correct. And then secondly in terms of sales, how you're thinking about that timing?

Michael Inglese

Look as we're sitting here today, I'd say it's likely to be CapEx is more second half weighted than first half given where we are. Sales at the moment are probably more spread through the first three quarters of the number I was talking about.

Vincent Caintic

Okay. Got it. And then secondly, quickly, investment grade rating, how you're thinking about that evolving over time, if you could update us on that?

Michael Inglese

Sure. I wish I had an update for you, but frankly I don't expect to get some feedback in the not too distant future from S&P and their views on that topic and when we hear we'll let everybody know.

Vincent Caintic

Okay. Got it. And then just last one for me, so you had nice maintenance revenue beat this quarter, I think it was $0.13 and last quarter you had guided to it being $0 million to $1 million. This quarter you're also guiding for it to be $0 million to $1 million for second quarter. I'm just wondering what changed versus your guidance and maybe it might be upside as we think about the second quarter or beyond? Thanks.

Michael Inglese

Look, as we think about the first quarter just to be clear, when we reported we expect it be selling that production freighter that we subsequently took back and put on the lease with the different customer. The counterparty for that sale could not meet their obligations and therefore it required us to take the point back, find a new lessee and put it back out on a new long-term lease.

And so – because of that change of lessee, the accounting for the return compensation payment was maintenance revenue in Q1. If the aircraft had been sold, it would have all been flushed through the sales transaction math, so that's frankly what produced the Q1 maintenance revenue that we weren't planning on. I would not plan on that for Q2.

Vincent Caintic

Okay. Got it. Thanks very much.

Operator

We'll take our next question from Jason Arnold with RBC Capital Markets.

Jason Arnold

Hey guys. Good morning. Just a follow-up on that last one, any thoughts for like the second half of the year on maintenance revenue, I guess just based on kind of plans or what you're seeing right now? I know it's a little bit further up.

Michael Inglese

I think it’s still going to be pretty modest for the balance of year because you really have no transition activities schedules with what we had – when we started 2018 and where we are now respectively all 2018 activity has been taking care of – might be some modest, but we're not expecting a lot in the second half of the year.

Jason Arnold

Okay, and then again I know it's very early, but 2019 would that maybe be a year or maybe more normalized kind of maintenance revenue I guess if there's a reasonable assumption around normalcy there?

Michael Inglese

Yes, with your caveat of reasonable assumption about normalcy for this business. Yes, say that always think about.

Jason Arnold

All right, thanks a bunch. And then I guess the last one was just on your pipeline, any aircraft types airlines regions kind of trend, why is that that you're finding particularly appealing or seeing good opportunities and in particular?

Michael Kriedberg

Hey. Hi, it’s Mike. I would say from – on the pipeline it's all narrow-body, no wide-bodies generally pretty big mix. You find a chunk in Asia, chunk in Europe. That's most of it. But all kind of some of the new aircraft, Mike mentioned to maybe kind of 9-year and 10-year old, generally all current about half current technology is probably have with the – which would be NEOs.

Michael Inglese

Okay, I think as we're looking at the investment environment one of the things we've been trying to do in the last 12 months to 24 months frankly is broaden lessee customer base along with these new investments to give us additional opportunities to kind of grow with customers over time.

Jason Arnold

Okay. Makes sense, super. Thanks for the color.

Operator

We’ll take our next question from Scott Valentin with Compass Point.

Scott Valentin

Thanks for taking my question. Just kind of a housekeeping question to start, tax rate guidance going forward is down from where it was, what drove that change of the U.S. tax law change?

Michael Inglese

No, it's really just a blend of where we ultimately we own the aircraft where we lease them out. We are getting a little bit of benefit, which you notice in Q1 from Singapore which is built into the effective tax rate that we're forecasting.

Scott Valentin

Okay. So it's geographic distribution of income, okay.

Michael Inglese

Yes.

Scott Valentin

And then just on in terms of your outlook with fuel price is moving higher, I think you mentioned kind of a 50/50 split between new and called it 9-year, 10-year old aircraft. How does the rising fuel price is plan to your outlook on aircraft? Are you more interested now coinciding with your first A320 NEOs? Is that any effect there from fuel prices on your thought process?

Michael Inglese

No, I wouldn't say it's part of the equation on anything that we invest in, but I think are looking at and making that first investment in the NEO technology is really just preparing for what's going to happen over time in this industry and finding ways into the new technology that we think will make sense and in time as the new technology gets more prevalent, lessor counterparties will be in a new source of trading in those, but today people are still waiting for the first deliveries of those asset. So it's part of understanding what's going on in the market and trying to position ourselves as we transition from earned generation to the new technology and where that sort of inflection point will occur sometime in the next decade.

Michael Kriedberg

The only thing I’d add is just right now is pure demand. So right now there's huge demand for aircraft and there is backlog of aircraft. So current technology while fuel prices have been low. Their people just need seats. So a lot of people just taking planes and that's one of the reasons you’re seeing rents drive up. It's not specifically because rising interest rates. It's just pure demand.

Scott Valentin

Okay, that's helpful. And then just there's been some speculation or kind of a thought process that has rates move higher, like some of the hot money in the sector that was here is kind of as an investor move out to other asset classes and the sale lease back market would get more attractive in terms of rates. Are you seeing that – do you think it's too early with only 40, 50 basis point move in interest rates?

Michael Inglese

I think that's a reasonable thesis. I'd probably suggest though that it's too early to say that. We've actually seen any of that occurring just yet.

Scott Valentin

Okay, all right. Thanks very much.

Michael Inglese

Thanks, Scott.

Operator

We’ll take our next question from Kristine Liwag with Bank of America Merrill Lynch.

Kristine Liwag

Good morning, guys. For the A320 NEOs that you’ve acquired in the quarter, what’s the seller’s rationale? Consider there seems to be a scarcity of NEOs today because of the engine guys. Did you get a good deal?

Michael Inglese

Look, we think we got a reasonable deal that’s consistent with our return expectations from an airline that has a large growing fleet and how is looking to diversify their funding sources. And we didn't acquire them yet. They will be acquired – as I said, we expect six in the second half of 2018 and a couple in the first half of 2019.

Kristine Liwag

I see. And from your commentary it seems like you have more appetite for a new technology narrow-body like the NEOs. How do you think about placing an order with OEM and then what would you need to see in order to place before an order book?

Michael Inglese

Look we have historically been a big order book player. We never say never. We continue to have dialogue with both of the major manufacturers about what that might be and what that math would be and the risk profile from our perspective and we haven't found the opportunity yet in our mind to go and do that.

Kristine Liwag

I see. And the 16 aircraft that you've slated to acquire for the year, presumably the younger aircraft have a lower lease yield than your existing portfolio. How should we think about net cash interest margin and where should that shake out by the full-year.

Michael Inglese

I think your premise is a reasonable one that newer technology has a lower yield than mid-age technology. For the overall portfolio, it will depend on a number of things, but I would say given the current market environment, given the current rate environment, it's reasonable that our net interest yield will tick down a bit and maybe settle in at around 8%, but that depends on a lot of stuff that I haven’t contracted for or quite figured out yet.

Kristine Liwag

Thank you.

Operator

We’ll take our next question from Susan Donofrio with Macquarie Capital.

Susan Donofrio

Yes, hello. Thanks for taking my question.

Michael Inglese

Good morning.

Susan Donofrio

Just two, one is just a clarification, you mentioned that fuel prices could impact demand, are you seeing it now or you just seeing overall just given the rising fuel prices?

Michael Inglese

No I think what we're saying is we're conscious of fuel prices and the different views in the world about where those are going and for what reasons, but we're not suggesting that rising fuel prices from where it was to where it is today appears to have affected demand for mid-age aircraft in any way as they perform.

Susan Donofrio

Okay. Great. And then my other question is on wide-bodies, could you just give us an update on what you are seeing on observation wise with respect to demand?

Michael Inglese

Look, we've had good success in getting extensions and next placements on own wide-body aircraft both the 777-300ERs and the A330s, but it's definitely a softer market dynamic than what you see in the narrow-body space, but I think those aircraft are in demand. They will find homes. They may not be I think leased during the second lease rates that everyone who was expecting when they bought those plans, but there is demand and those assets are being utilized.

Susan Donofrio

Okay, great. Thank you. Great quarter.

Michael Inglese

Thank you.

Operator

And we’ll take our next question from Justine Fisher with Goldman Sachs.

Justine Fisher

Good morning.

Michael Inglese

Hey, Justine.

Justine Fisher

I have to ask the question again in another way because one of the only constants that I think I've heard in the sector over the last year or two, is it the sale leaseback market is ridiculously tight, and that there are a lot of traditional players who are just not going there because they say there's no way that you can make the returns makes sense unless you have extremely low borrowing costs because you had a large bank, agent bank at your parent company or something like that.

So your average interest costs are definitely not high, but it's at the higher end of similar source because you're independent. So how could you guys do a sale leaseback for NEOs that made the returns work for you? Is there any more color you can give us?

Michael Inglese

Frankly, it's going to be hard to give you any more color. Other than to say it’s within airline that we have an existing relationship with current technology aircraft. They're looking to diversify our funding sources and we think it's a good investment for us and let’s put it in context of $100 billion of planes getting delivered in the year, this is a few hundred million dollars with one airline. So I wouldn't over generalize that suddenly AirCastle while it’s going to be the winner in the sale leaseback market. That’s not likely to be the outcome.

Justine Fisher

Okay. And so then my next question was going to follow-up on that that if there – if you guys are looking to play more new technology, do you think – it sounds like you don't think they're going to be other deals like this that will come about where you can make the returns necessarily work on a NEO. So how are you guys going to layer in some of that newer technology if this is not an easily repeatable deal?

Michael Inglese

I don’t overstress – either one of the easily repeatable I'm not going to do that. We’ll find opportunities from time-to-time. All I’m saying is I wouldn’t expect me to reinvesting in $1.5 billion of NEOs next year.

Justine Fisher

Okay, and then one other question on the net interest margin, it's interesting that in the chart that you guys give during net interest margin you talk about on a risk adjusted basis that that 8.3% margin is healthy and it's a good margin and I just wondering if – how you guys define risk adjusted?

Is it that there are fewer wide-bodies in here and as you say you've sold higher yielding aircraft that are older and so it's kind of an risk adjusted basis based on the aircraft or is it based on airline credit like what are the factors that go into our valuation there, because there are other lessors who don't want to – you would advise the street not to look at net interest margin because they say that it doesn't include a clear risk component of it. So how do you guys define risk adjusted or talk about or think about it?

Michael Inglese

So we look at it in contest of our fleet composition in terms of aircraft types and we also look at it in the contest of the customer base and spread of those customers. So that’s what we have in mind when we tell you, we think even though the absolute numbers down. We think on a risk adjusted basis it still a very strong performance indicator and very strong margin for this business.

Justine Fisher

And it’s based on the credit quality of the customers too, so in other words probably even over the last couple of years as the credit quality has improved that goes into that risk adjusted definition?

Michael Inglese

Yes, as I said it’s a combination of asset probably more weighted towards asset with the context of customer portfolio as well.

Justine Fisher

Okay, thanks so much for the time.

Michael Inglese

Thank you.

End of Q&A

Operator

And it appears there are no further questions at this time. I'd like to turn the call back over to Frank Constantinople for any or closing remarks.

Frank Constantinople

Hey, thank you, John. Thanks to everybody for dialing in today. I'll be at my desk if you have additional questions. You can reach me at 203-504-1063. Thanks again for your time.

Operator

And that concludes today's call. Thank you for your participation. You may now disconnect.