AerCap Holdings N.V.

Welcome to our first quarter 2019 conference call. With me today is our Chief Executive Officer, Angus Kelly, and our Chief Financial Officer, Pete Uhass. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual events or results to differ materially from those expressed or implied in such statements. ERCAP undertakes no obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in ERCAP's earnings release dated May 1, 2019. A copy of the earnings release and conference call presentation are available on our website at ercap.com. This call is open to the public and is being webcast simultaneously at aircap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Ingus Kelly.

Thanks, Joe. Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings call. I'm pleased to report another quarter of strong profitability generating earnings per share of $1.68. This result is driven once again by a robust performance of the underlying business and our disciplined capital allocation strategy. AirCap is the largest aircraft lessor in the world. This scale provides us with tremendous amounts of data. For example, in the last five years alone, we have bought, sold, or leased over 2,000 aircraft. This is approximately 10% of the in-service large commercial aircraft fleet. In an opaque market, this gives us a unique knowledge advantage, and this is a key differentiator in the aircraft leasing business. Allied to this knowledge advantage, the real foundation of AirCap's success is our longstanding, deeply ingrained culture of action and discipline. You can see that culture at work in our proactive forward order placement, which are 90% placed through December 2021, in our globally diversified funding sources, which we have spent years cultivating, and in the speed and forcefulness of our execution around airline defaults. These scale and knowledge advantages, coupled with our culture of action and discipline, have enabled AirCap to produce superior economic results quarter after quarter, year after year after year. Over the past five years alone, we have generated over $15 billion of operating cash flow, over $5 billion of net income, $30 of earnings per share, and we have increased our book value per share by 200% during that period. So that's the past. Now what I want to talk about is how AirCap is positioned for the future. As of today, AirCap is over $40 billion of contracted revenue, That's more than five times our market capitalization. 51% of our portfolio is comprised of the most in-demand variants of new technology aircraft. No other lessor in the world is close to this. Our average lease expiry date is mid-2026. We have a long-term debt structure in place and $10 billion of liquidity. And as our track record has demonstrated, we have a platform that is unrivaled in its capabilities. So as we look to the next five years, we are very confident that the business will continue to generate strong profitability. Very few businesses in any industry can show this level of top-line predictability on a consistent and sustained basis, and critically, also have the track record to match. Turning to demand side of the business, IATA reported a 5.3% increase in global RPKs in February. Growth was driven by Europe at 7.3%. and Asia Pacific at 6.3%, offset by an expected reduction in the Middle East of 1%. Load factors remain strong at 80.6%, and this is a key indicator of whether or not there is support for this level of growth in the industry. The actual indicator for air cap of whether or not there is support for growth at these levels is what is actually happening with our aircraft placement activity every day in the market. and there we continue to see solid demand. So overall, we see a generally healthy environment for airlines, notwithstanding some recent smaller airline failures. For context, there have been over 200 airline defaults in the past five years, and AirCap itself has dealt with over 60 in its time as a public company. Yet our default costs have averaged approximately 1% of lease revenue in that time. So whilst airline defaults are certainly a significant driver of news headlines, These results show that airline credit has not been a material driver of profitability when the risks are managed correctly. As a truly globally diversified lessor with 200 airline customers in 80 countries, we are better placed than anyone to deal with airline credit issues. Jet Airways is an excellent and tangible example of our culture of action. Aircap had its aircraft repossessed and critically deregistered out of India before anyone else in the industry. That is the norm, and we see it time and again, be it with Air Berlin or Primera or Monarch, etc., etc. This is one of the many areas where the capability and knowledge of the AirCap platform produces superior economic returns for our shareholders. Frankly, when it comes to managing customer defaults, having no security deposits, but a platform that has the willingness and the capability to act is far superior to having three months of security deposits and no willingness to act, or six months, or worse, no capability to act. On the topic of the MAX aircraft, we currently have five aircraft that have delivered to a carrier in Asia. We are still awaiting further information on its potential return to service, but we would clearly expect to see some impact on our 2019 deliveries. At the moment, it is too early to say when there will be a return to service on a global basis. On capital allocation, We continue to see considerable value in our stock, given the discount of book value. In contrast to the volatility in the financial markets and our stock price, our business continues to add value on a consistent basis, growing book value per share to $64.92. And we will continue to take advantage of that disconnect. So to close, we operate a long-term stable business model. We have one of the longest average remaining lease terms in the industry, even though some of our competitors have a younger fleet. This is another clear and tangible example of the competitive advantages AirCap has and how these competitive advantages bring superior economic returns for our shareholders. As I mentioned, our average lease expires in the middle of 2026, which provides a very durable and earnings cash flow profile. In closing, our first quarter results are another demonstration of the power of the AirCap platform. We will continue to run our business according to our core principles, because we know that by doing so, we will generate significant value for our shareholders. With that, I will hand the call over to Pete.

Thanks, Gus. Good morning, everyone. Our net income for the first quarter was $234 million, and our diluted earnings per share was $1.68. We completed 81 aircraft transactions in the quarter, including 16 wide-body transactions. This included purchases of 17 new technology aircraft during the quarter for capex of $1.2 billion, and the sale of 19 midlife and older current technology aircraft. Our utilization rate remained high at 99.2% for the quarter. Our basic lease rents increased in the first quarter as our average lease assets grew by over $2.3 billion year over year. Our net income was lower in the first quarter of 2019 than in the prior year period, primarily due to lower gain on sales compared to the first quarter of 2018. In the first quarter of 2018, we sold a much higher volume of aircraft and also had a record amount of gains on sale. Our earnings per share was slightly lower in the first quarter, as our purchases of 17 million shares since January of 2018 basically offset the impact of the lower gain on sale this quarter. And that's a result of our disciplined and consistent capital allocation strategy. The average age of our fleet continued to decrease, and we're now operating in the low sixes. The average age was 6.2 years at the end of March. We've reduced the age of our fleet in the right way by buying new technology aircraft that will be in demand for the next 25 years. The average age of our new technology fleet was only 1.9 years at the end of March, while the average age of our current technology fleet was 10.8 years, and we believe this barbell approach is the correct way to manage the portfolio. Our average remaining lease term for our existing fleet is now 7.4 years, taking us out to the third quarter of 2026. We continued to maintain very strong liquidity of over $11 billion, and our leverage ratio was 2.8 to 1 at the end of the quarter, which is in line with the revised target we set earlier this year. We continued with our share repurchase program and bought back 3.1 million shares for $137 million during the quarter. We currently have around $150 million remaining in our existing authorization. Our basic lease rents for the quarter were $1.75 billion. continuing the growth we saw in the third and fourth quarters as we took delivery of new technology aircraft and grew our aircraft assets. Our maintenance revenues for the first quarter were $87 million, which was in line with last year. Our net gain on sales was approximately $22 million for the first quarter, which, as I mentioned, was significantly lower than the $89 million last year, which was a record number. This was really due to the lower volume of sales this quarter, as well as the composition of those sales. Our other income in the first quarter was higher than last year, primarily due to insurance proceeds that we recognized in the quarter, as well as higher interest expense resulting from our higher cash balance during the quarter and our higher interest rate that we earned on that cash. Turning to slide seven, our net interest margin was $757 million for the first quarter, and the increase over last year was due to growth in our basic lease rents driven by higher average lease assets. Our average cost of debt was 4.2% for the first quarter, with the increase from 2018 driven primarily by the roll-off of fair value of debt related to purchase accounting. The average cost of debt of 4.2% includes all fees, including debt issuance costs, upfront fees, commitment fees, and original issue discounts. It also includes the impact of finance leases. And if you add all of those up, they come to about 40 basis points that's included in that 4.2%. Our net spread was 8.1% for the first quarter, slightly below the 8.2% we reported last quarter, and the decrease from the first quarter of 2018 was due to the lower average age and longer average remaining lease term of our fleet. The average age of our fleet decreased from 6.8 years to 6.2 years at the end of March, and this was achieved through a combination of purchases of new technology aircraft and sales of older current technology aircraft. Our average main lease term, as I mentioned, has now moved out to 7.4 years, which is one of the longest in the industry and longer than any of our publicly listed U.S. peers. That's due to the fact that we're placing almost all of our new aircraft on 12-year leases, and we're also placing and extending many of our used aircraft on longer lease terms. Our net spread last depreciation was 3.3% for the first quarter, an increase from 3% in 2018. This was primarily due to lower maintenance rights amortization, as well as a lower depreciation rate on our assets generally. And as the average age of our fleet has fallen, our depreciation rate has also decreased. So effectively, in the first quarter of 2019, we continued to generate strong returns on a better positioned portfolio with a lower average age, a higher proportion of new technology assets, and a longer lease term. Turning to slide eight, Our net gain on sales was $21.5 million for the first quarter. As I mentioned, we sold 19 aircraft with an average age of 15 years. That resulted in sales proceeds of $340 million for the quarter. Our gain on sales margin was around 7% for the first quarter. And as you can see from the chart on the right, sales volumes and margins tend to move around from quarter to quarter, but the margins have remained consistently high, generally in the 7% to 10% range, but sometimes above that. We've only shown you the last eight quarters here, but the story is really the same as you go further back. We've consistently generated gains on sale for the last 14 years. And it's also worth noting that these are unlevered gains measured as the sales proceeds over the cost of goods sold to the assets. Because we're levered at 2.8 to 1, an asset margin of 7% is equal to an equity margin of around 27%. We've continued to see strong demand from buyers for our midlife and older aircraft. We said in February that we expected to sell about a billion dollars of assets in 2019. And given the fact that we've sold $340 million in the first quarter and currently have a held for sale balance of $633 million at the end of March, at this point, we expect to do at least a billion and a half dollars of sales for the full year. In turning to aircraft purchases in the first quarter, we took delivery of 17 new technology aircraft, for CapEx of the $1.2 billion, which was about what we had expected to do. Turning to the next slide, our SG&A expenses were around $67 million for the quarter, which was a decrease of 22% from $86 million last year. That's mainly due to lower stock compensation expense, which was higher than normal during the first half of last year. But it's also due to a reduction in some other compensation-related expenses. Our maintenance rights expense was about $21 million for the first quarter, down from $54 million in 2018, and this was primarily driven by the lower maintenance rights asset balance, which has come down substantially since 2014 and is now just over $1 billion. Our other leasing expenses were around $70 million for the first quarter, a slight decrease from about $79 million last year, and that's still a little higher than normal due to some aircraft transitions that we had during the quarter. We continue to maintain a very strong liquidity position. As of March 31st, we had available liquidity of $11.1 billion, and that includes our cash, our revolvers, our other undrawn facilities, and our contracted sales. Together with our operating cash flows, that gives us total cash sources of $14.3 billion, which is 1.4 times our cash needs over the next 12 months. This amounts to excess cash coverage of around $4.3 billion. As you can see, we've exceeded our target level every quarter for the past two years. In fact, we've always exceeded this target ever since we first put it in place five years ago. We raised around $2 billion of financing during the first quarter, including public unsecured bonds, unsecured loans, and secured loans. Maintaining this diversity of funding sources is an important aspect of our strategy and we'll continue to seek out new sources of liquidity. We currently borrow from over 120 banks and other financial institutions around the world at as well as from the public capital markets. But it's not just our liquidity and funding that remains strong. AirCap's credit metrics have improved considerably across the board since we were upgraded to investment grade ratings in 2016. As Gus mentioned, new technology aircraft now make up more than half our fleet, and of course that number will continue to climb as we take new deliveries. Our order book commitments are very manageable and represent 39% of our total assets, compared to 56% in 2016. We brought our debt to equity target down to 2.8 to 1, and we're currently at that target level. And we reduced our secured debt to total assets from 28% in 2016 to 25% today, which is a reduction of around $1.2 billion of secured debt. As I mentioned before, our average age is now in the low sixes. Our fleet is now more than a year younger, and our average remaining lease term is now a year longer. And we've accomplished all of that in the right way by selling older, less liquid assets and taking delivery of the most in-demand new technology aircraft. And finally, our book value per share of $64.92 today is up by 32% since the end of 2016. And while this isn't a credit metric, it does show that we've been able to create significant economic value for our shareholders while at the same time improving the credit profile of the company and positioning it for long term success. And in fact, On the next slide, if we look at the last five years since the ILFC acquisition, you can see that on average, we've grown our book value per share at an annual rate of about 14%. That's a very high level of consistent economic value creation year after year. To wrap up, first quarter was another strong one for AirCap. We continue to make good progress in placing our new aircraft. We're now 90% placed through the end of 2021. Around 95% of our lease rents for the next three years are already contracted. We continue to sell older and midlife current technology aircraft at attractive prices, and the market for those assets remains robust. Our portfolio is now over 50% new technology aircraft. We ended the quarter in a very strong liquidity and capital position, and we've significantly improved our credit metrics across the board. So with that, now we'll turn it over for Q&A.

Thank you, sir. Ladies and gentlemen, if you'd like to ask a question today, please press star 1 on your telephone keypad now. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Again, that is star 1 to ask a question. And our first question today comes from Moshe Orenbuke from Credit Suisse. Please go ahead.

Great, thanks. Peter, you had mentioned that your CapEx in the first quarter was roughly in line with your expectations. I guess as you look out the balance of the year, given some of the delays that are out there from both of your major suppliers, is that likely to continue? And if not, what are your plans in terms of the use of that capital?

Thanks, Moshe. So you'll see in the supplemental materials that we didn't change our delivery projections for the remainder of the year. That being said, as Gus mentioned, we do expect to see some deliveries on the MACs. But it remains to be seen how long those will be. So we'll have to see how that is. You know, we had projected just under $6 billion of CapEx for the year. And we'll have to see, you know, how pronounced those delivery delays are.

Okay. And on a separate topic, you talked about the increase in the cost of debt driven by the roll off, you know, of the fair value. given that interest rates have now sort of stabilized and that some maturity has fallen, can you talk a little bit about the progress and how that's going to look over the balance of 2019?

The progress in terms of our average debt, you mean?

Well, I mean, yeah, your average cost of debt. Like how will that kind of move over the course of 2019?

Yeah, so I think the average cost of debt will probably be 4.1%, 4.2% for the year. You know, it takes a long time for any of these effects for that to change. And so I think it will still be somewhere in that ballpark.

But I think it's very important, as Pete noted in his prepared comments, that when we give you our cost of debt, it's the all-in cost of debt. Borrowing money requires you to pay fees. It requires you to have on-drawing lines. And as we said, our all-in cost includes 40 basis points. of fees associated with our debt balance. Others, when they disclose, disclose at excluding fees. So just to make sure you compare like with like.

Got it. All right. Thanks very much.

Thank you. Our next question today comes from Ross Harvey. Please go ahead. Your line is now open.

Hi. Thanks for taking my question. Two from me. Firstly, given all you've said around portfolio management and liquidity and credit metrics have improved and with the stock still trading at a discount, I'm just interested in what you think are the main risks to the business and how do you counteract them? And secondly, there's a quite noticeable step down in terms of depreciation expense at the percentage of lease assets in the quarter. Just wondering, Pete, how you expect that to trend from here?

I'll take the first part of it, Ross. Thanks for that. You're right. Look, the three risks that come up when we talk to investors are airline credit risk, the funding risk, and residual value risk of the portfolio. Starting with airline credit, for a company of our capabilities, credit risk has never had a material impact on our results. That's because of the capability of the platform, a very consistent aircraft portfolio strategy, but as we mentioned above all, a culture of action. And so what we've seen there, as I mentioned, is that for the last 14 odd years, credit costs have been 1% of lease revenue. So they're not the material cost in reality. Second risk is funding, though, as you mentioned. No one in the world has our experience of raising funding or the scale of having done it. We have the most diversified funding base in the world and the largest pool of standalone liquidity out there. No other leasing company in the world carries 10 billion plus of liquidity. From that regard, that risk is covered. The third one you touched on is the residual value risk. The residual value risk materializes when you can't consume the carrying value of your assets. Today, air cap is 51% of its portfolio in the most in-demand variants of new technology aircraft. No other leasing company in the world is anywhere close to this, despite having younger fleets. And that's why average age of a portfolio is not significant. a good indicator of fleet quality or residual value risk. The truth is far more nuanced. What is critical is will your fleet consume its remaining carrying value? And crucially, on current technology assets, our average age is 11 years. So I have every confidence that for the next decade, 320s, 330s, 777s, 737s, they will be the backbone of the global fleet. But after that, the sun will start to set on that customer base or the customer base for those aeroplanes. So you don't want to have economic exposure to those aircraft types at that time. And over the last five years, we've been very consistent and deliberate in creating a barbell in our portfolio regarding age. So the average age of the current technology is far, far older than the average age of the new technology. And look, as you've seen, we backtest the carrying values of our assets all the time. We sold 450 airplanes off our own bucket again. And so over the last five years, look, it has been extremely enticing to purchase new 777s to boost near-term growth in earnings and to reduce the average age of your fleet. But this is where the real residual value risk lies, because they will have declining user bases. But if you look at the way we've positioned ourselves, for example, on 777s, our fleet is an average age of 13 years. And we can clearly see that demand is there for the remaining useful life of our 777 fleet, So when we look forward, we're very confident in our carrying values. And again, if you look at the past, the track record for 14 years, you'll see we consistently sold it again. And because of that, we're very confident that we have the most attractive fleet in the industry from a residual value risk perspective. And further evidence of that is the last time we placed an order for current technology airplanes was 2011. So that's where those three risks are covered. in our business and why we have so much confidence in the future and why we're continuing to buy our own stock when it's there at a discount in the market.

Ross, on the depreciation question, you're right. It came down pretty substantially from the first quarter of last year. There are really two components of depreciation. There's what I would say is the regular depreciation on the fleet, and then there's the maintenance rights amortization. And most of that reduction that you see year over year was really due to lower maintenance rights amortization. That's because the balance of that asset has come down. So if you look at it and say without the maintenance rights amortization, depreciation was about 4.6% over lease assets for the quarter. And I think it will probably continue to be about that during the course of the year. Maintenance rights amortization, it was a little lower than normal just in terms of dollar numbers this quarter than it would typically be in a quarter, but not that much lower. So that's come down pretty substantially. So I think it will be relatively flat during the course of the rest of this year.

That's very, very interesting. Thank you both. Sure.

To ask a question, please press star 1. And our next question today comes from Scott Valentin from Compass Point. Please go ahead.

Thanks very much for taking my question. Just with regard to the sale guidance, you guys mentioned you increased probably to $1.5 billion now, your target for sales. Is that reflective of the environment? You just see the opportunity right now to get where the stock is, combination of where the secondary market is. It's just ideal to be selling aircraft right now?

I think people view aircraft as a very investable industry, particularly when we talk about equity outside of the public markets. They feel that this is a very stable investment to make. And so there's been consistent and stable demand on the buy side from lots of types of buyers all over the world. In some instances, there are funds that could be private equity funds. It could be sovereign wealth funds. It could be airlines, banks, et cetera. There's a very broad array of buyers and there's very solid demand for aircraft. And of course, as you rightly point out, look, given where the stock is trading, capital allocation is not only about how you spend your available resources, but it's very much about thinking how you create those resources. And obviously, aircraft sales are a part of that.

Thanks. And just on the 737 MAX, assuming if there's a six-month delay, let's say, in deliveries, how fast do you think Boeing can catch up to deliveries, or will it be a perpetual six-month delay?

It's premature at this stage to say the extent of the delays. Of course, the 2019 airplanes, we do expect some delays to occur, but we'll have to see when, on a global basis, all the regulators put the airplane back in the sky and If one regulator goes before the other, that won't impact global deliveries. It'll impact deliveries only for one market. So we've got to see how long it takes all the main regulators in the world to put the airplane back in the sky before we could accurately answer that. Okay.

All right. Thanks very much.

Our next question today comes from Helene Becker from Cowan. Please go ahead. Your line is open.

Excuse me. Thanks very much, Operator. Hi, team. Thank you for the time. Angus, thank you very much for all your opening remarks because they answered most of my questions. I just have one question on the asset impairment and the aircraft sales. As we think about your aircraft sales against prior asset impairments, are the gains you're reporting, you know, I guess they're net of those numbers, right? So we don't really have a sense on how well you're selling aircraft?

Well, Helene, when you sell a portfolio, if you've got most of the assets that we're selling, we're selling for a gain. But you could have a couple of aircraft in there that are a loss. Overall, we look at it and say, what are we getting for this portfolio and what's the margin on that? And so if you've got an aircraft that you know you're going to make a loss on, you have to recognize that loss in the quarter that you sign the SPA, not the quarter that it actually gets transferred. Whereas the gains, you recognize those when the aircraft actually gets transferred. So what tends to happen is, you sign an SPA purchase agreement for a portfolio of aircraft, and then it takes a few months for those aircraft to be novated and to transfer. And if you've got them held for sale at the end of the quarter, you may have to recognize an impairment if there's a forthcoming loss. As you can see, the numbers tend to be pretty small. It was $5 million.

But you've got to look at the overall picture. That's why Pete gave for the last eight quarters, but you could go back 10 years and we've never had a losing quarter selling airplanes. So that's the best evidence we can give you. As we say, we backtest our carrying values quarter in, quarter out. For the last 60-odd quarters, this company makes money doing that. Any impairments are completely immaterial to the scale of the gains.

Gotcha. Okay. Well, thank you. That's very helpful. And then my other question is, I think you talked about having such a substantial liquidity balance greater than, you know, anybody else out there. So as you think about capital allocation and buying back your stock, should we think about you using more cash for aircraft acquisition? Or do you think, you know, the debt markets make more sense? How should we think about that too? And those are all my questions. Thank you.

Elaine, I mean, when we look at capital allocation, of course, we want to make sure that the balance sheet target debt equity ratio that we have is satisfied. That's the number one priority. And then as we generate capital above and beyond that, of course, we look at what's the best way to spend that capital. And as you've seen from our behavior, currently, we strongly believe it's buying our own stock.

Okay, thank you. That's very helpful. Thanks very much.

Thank you. Our next question comes from Catherine O'Brien from Goldman Sachs. Please go ahead, ma'am. Your line is open.

Hello, gentlemen. Thank you so much for the time. So I was wondering, is there anything unique to the March quarter that drove your net spread, less DNA, above your full year 3% target for 2019? Or should we expect to see 2019 come in above target just as 2018 did? Thanks.

Yeah, thanks, Catherine. It came in a little above what we would expect because the maintenance rate standardization was lower than expected, so a little lower than normal, and that's what boosted it. Long term, I'd say 3% is a good number to use, and that's still kind of what we would expect. So the year may be a little bit above that because the first quarter was higher, but long term, it still would go at 3%.

Okay, understood. Thanks, Pete. And then when I speak to the U.S. airlines about the grounding of the MAX, it seems they feel it's too early for them to make decisions on potentially extending leases or going out to the market to source additional aircraft to backfill those MAX plots. But have you seen any increased or initial indications of interest from airlines elsewhere globally to maybe extend leases or looking to buy some of your current technology aircraft that might be coming off lease this year or in 2020?

Yeah, we certainly are. We know no question about it, that some airlines are acting, not every airline, but some certainly are, Catherine, and looking to extend leases or acquire airplanes.

Thank you both so much for the time.

Sure.

Again, ladies and gentlemen, if you'd like to ask a question, please press star one. And our next question today comes from Vincent Caintick from Stevens Inc. Please go ahead.

Vincent?

I'm afraid his line has dropped. Let's move on to the next questioner, who is Susan Donofrio from Macquarie Capital. Thank you.

Yes, hello, everyone.

Hi, Susan.

So just a question on the rising fuel prices. Have you seen any change with respect to demand for aircraft?

We haven't seen a noticeable change yet. There's still very solid demand day in, day out for airplanes, particularly for the new variants like the 787 and the A320neo family airplanes. We're seeing pretty strong demand. So we haven't seen any noticeable change in demand just yet.

Great. And then can you also just comment on some of the emerging markets and what you're seeing here?

I mean, look, as I said, the real indicator of how the market is absorbing the level of growth that is coming in through deliveries is, one, you've got load factors, which is a macro indicator. If load factors were falling deeply, then clearly there's too much growth coming into the market. Now, you could argue and say, well, maybe they're giving seats away. Maybe they are. But what's a real indicator for us is, are they adding our capacity to that as well? Are we seeing demand for our product every day and yes we are so as I said we're still seeing pretty strong solid demand across the world and there's always going to be one or two markets that have their issues at any given time but on a global basis we see pretty strong demand okay great you answered my other questions thanks so much no problem our next question today comes from Christine Lee wag from Bank of America

Mary Lynch, please go ahead.

Sorry, Christine, we can't hear you there.

Sorry about that. Gus, with the grounding of the 737 MAX, what are airlines doing for alternative lift? Is there opportunity for you in the near term to get higher lease revenue on aircraft coming off lease?

Look, there's certainly increased demand, Christine. That's, I suppose, somewhat self-evident, and we'll just have to see how that plays out.

In terms of your order book, you've got 99 737 MAX aircraft in order, and if the 737 MAX issues persist, even once the aircraft enters into service, which is clearly not what anybody wants, But should it happen and airlines veer away from the 737 MAX in the medium and long term, would you have any flexibility to cancel or renegotiate the price of your order?

We have a very long relationship with Boeing. We're the biggest buyer of Boeing airplanes in the world for the last 25 odd years. So the contractual discussions we'll have with Boeing, we'll keep those in private, Christine.

Great. And if I could squeeze one last one. You've got similar-sized A320neo and 737 MAX deliveries in 2021, and since you're already 90% placed through 2021, can you discuss on a high level the pricing differences between the two families of aircraft? Which one's getting a premium over the other, and how much of a difference is there?

Christine, look, we've had extremely solid demand for the MAX 8 airplane. The A320 book, clearly we've a lot more of them in order. We're 2.5, 2.6 to 1 in favor on the order size on the Airbus side, which reflects the A321. If we look at the three airplanes, the MAX 8, the A320, the A321neo, we're closer to a third, a third, a third. And we see in terms of yields, they're pretty close together on average. You'll always have one or two that are higher or lower than another, but on average, the yields across the three types are broadly similar.

Great, thank you.

You're welcome.

Our next question today comes from Rajiv Lalwani from Morgan Stanley. Please go ahead.

Hi, gentlemen. Thanks for the time. Continuing on the MAX dialogue, Gus, do you have any longer-term concerns as far as residual value, anything along those lines on the aircraft? Maybe just start with that.

Sure. I think, you know, you have to put in context the life cycle of an aircraft. We're looking at a 2025 year life cycle for the aircraft type. We have had incidents before the launch of aircraft types, most recently with the 787, of course, which had very significant issues. It didn't have the terrible tragedies that have been experienced on the MAX program. But looking at purely from a residual value perspective, there were concerns around the 787 family four or five years ago as to its residual value and how it would hold up. And what we believe is that Boeing will produce a quality product and that market demand is there for the airplane. We don't see that in the long run, assuming Boeing deliver a quality product, we wouldn't envisage any type of long-term detrimental impact on the residual values, assuming Boeing build a quality product.

Thanks. And unrelated, or I guess sort of related, there's been a degree of discussion out there as far as narrow bodies, not having a home as far as other lessors. Obviously, you guys are in pretty good shape over the next couple of years. Is that something you're seeing or agree with?

No, well, not for us. We clearly don't see it as you see our contractual data. We're 90% placed through 2021. We have a lot of our equipment leased in 2022, 2023, even 2024. So we certainly don't see that. But look, the reality is no one has the capability of air cap when it comes to placing airplanes. And so you see that in our placement capability. And again, I would caution anyone who talks about Are there open slots out there? This is anecdotal information. There is no access to that data by anyone as to how many open slots in reality there actually are in the skyline. So that's completely anecdotal. And of course, you do hear those things from time to time. Several years ago, people talked about a 777 being worth less than $10 million. Of course, that was completely erroneous. We knew the factual situation, which was that because they managed the airplane for a third party, they'd received $30 million of end-of-lease compensation as part of the transaction, and they were just selling the airframe for scrap. So I think you have to be very cautious about giving too much weight to anecdotal information without any evidence behind it.

Very helpful. Thank you. Next question, operator.

We have Vincent Kayntick back on the line. Would you please go ahead and ask your question, Vincent? Thank you.

Hi, yes, can you hear me? Hello? Sure. Yes, okay, great. Sorry for the technical issues. First, a question on the lease rental yield. So by my math, I'm calculating that the lease rental yields are up quarter to quarter pretty significantly, which is very impressive. I'm kind of wondering, is there any underlying trends that you're seeing there, and is there something where we can start to see lease rental yields expand going forward?

The primary driver of the lease rental yield, so just lease rents itself, basic lease rents, has been the decreasing age of the fleet. So that's been the primary thing that's driving that. What you'll see now is we've already brought the average age down to 6.2 years. I think it will bottom out at around six years. So you don't see that significant decrease in average age, which was driving that. So I think that's part of what you're seeing there in terms of the yields. The other aspect of it is the maintenance revenues. And as we've talked about before, that can bounce around just depending upon activity levels. So that's the other factor there.

Okay, got it. And a second question. I know we've been talking about the max delays a lot, but just broadly speaking, as a result of those, are you seeing differences in demand for your existing portfolio? So I'm wondering if maybe there are better lease rates there. Are you seeing... more requests for extensions, higher gains on sale, and does that sort of maybe change your thinking about fleet age and how you're thinking about selling going forward? Thanks.

No, it doesn't. It does not change our directional view on how we manage the portfolio. It's still less than 90 days since the fleet has been grounded, so it's fairly premature to see what the long-term impact will be.

Okay, got it. Any early indications from what maybe airlines are wanting to do more extensions or increase demand for current generation aircraft?

Sure. Of course, in the near term, look, there are those that would have airplanes that might otherwise be returned. They want to extend them in the near term, but no one is changing their fleet strategy on the back of this at this early point.

Okay, understood. Thanks very much.

Thank you. Our next question comes from Reno Bianchi from Cantor Fitzgerald. Please go ahead.

Good morning and good afternoon. My first question is, I find a little bit of a discrepancy between your market outlook and your company capability and the relationship between your order book and your existing fleet. Your order book is about 35-36% of the existing fleet when you look at all the major aircraft with soar is around 80, 90%. So my question is, I don't fully understand it, how much this is due to your larger critical mass, how much that is due to your more prudent approach toward future committed aircraft order, and how much may be due because you don't spot as many opportunities as some of your competitors?

I think there are several factors at play there. I think, first of all, of course, you rightly point out just scale. means that for us to be at 80%, 90% of our balance sheet would be $40-odd billion. I do think, though, when we look at allocating our shareholders' capital, we have to ensure that we're very disciplined about it and that we are very focused on maximizing the value of the business for the long term. And from our perspective, we see at the moment the share buybacks provide an awful lot of opportunity for us that really, frankly, isn't matched by opportunity, certainly in the, say, lease bank markets. And with the OEMs, I think you have to be very cautious there and make sure that you buy what you and your customers want, not what the manufacturers are trying to sell you. There's a big difference there. And so I think we very carefully analyze how we deploy each dollar of capital. Should it go to buybacks? Should it go to debt repayment? Should it go to ordering airplanes from the OEMs? Clearly, you know, if you look at the capability of the business, we could, of course, absorb more, but we would only do that if it produced superior returns for our shareholders.

Fair enough. Changing topics. I mean, you made a lot of progress with respect to the balance sheet, and you have dedicated a couple of slides to, you know, your renew policy. financial strength. It seems like we are in a period of time where most of your competitors have enjoyed rating upgrades, some quite significant from high yield to high grade. Your rating, I wouldn't say they're stale, but around a couple of years old. Is there something that's some kind of stumbling block that prevents a rating agency to upgrade your ratings?

Well, Reno, thanks for your question. From our perspective, the reason we tried to lay out that the improvement in the credit metrics is we believe that as it stands today, they warrant an upgrade. So you can see the significant improvement that's been made there. I mean, some of these things take time. Remember, it takes time for the rating agencies to act. We have seen a lot of upgrades of others from below investment grade and into BBB-, And as we look out and compare ourselves with those companies, we do think that there's a significant differentiator between both the power of the ERCAP platform and our metrics relative to those. And so, as I've said in past calls, we would like to see an upgrade, and we think it is warranted.

Well, you're not aware of any particular target, and a ratings agent should tell you that you have to meet in order to move to the next stage of your ratings.

No, I mean, you can see in the reports that they've published some of the targets that they've laid out, you know, for instance, in terms of average age and things like that. And I think, you know, we have reached those levels.

I agree. But anyway, my last question is a little bit of a small question, detailed question, but I'd like to better understand the decrease in SG&A. I think you mentioned something about, you know, share payment under your plan. But, you know, the numbers is pretty large decrease over here. Can you please give me a little bit more context as to the decrease of the SG&A?

Sure. So most of the decrease was due to a reduction in share compensation expense. And that's because if you look back over the last, over 2018, you'll see that that was an elevated number. It was around $31 million for each of the first two quarters of 2018. And that's just the way you have to recognize those expenses. It was some front-loading of it. And so that's one of the principal drivers. That's the main one, really, in terms of the year-over-year comparison. We did have some other lower expenses, you know, both on the compensation side, a little lower office expenses, a little lower professional fees. But going forward, I would say, you know, if you were to look out, a typical quarter should be around 70 to low 70s, say, around 70 million, 73 million or so, and that's inclusive of stock-based comp. So those are really the drivers there. I appreciate it.

Thank you very much for your time. Sure.

Our next question today comes from Kush Patel from Deutsche Bank. Please go ahead. Your line is open.

Hi, guys. You've previously said that net spread was likely to reach a bottom in 2019 in the low 8% range. Given what you're seeing in the market right now as it pertains to lease rates and borrowing costs, is that still a range you're comfortable with at this time, and should we expect one Q or two Q to mark a bottom for you?

Thanks for your question. I think that 8% is about where it should bottom out in that ballpark, and really probably during the course of this year, that's around where we will be for the year. The thing that could take it, if it were to go slightly lower, the thing that would do that would be if we were to sell more aircraft and some more higher-yielding aircraft. But if that happened, I think it would only go slightly below that. I expect it to be relatively flat during the course of the year.

But I think, though, Pete, if we were to sell assets, you'll recoup more than that, we would say, by buying back the stock. So we're not going to sell assets and have the net spread decline if we're not going to redeploy the capital in a more accretive fashion. So you would see that if we did something like that, you have to look at both metrics and you can continue to see EPS move up.

Got it. So then moving from the $1 billion... in targeted asset sales to $1.5 billion shouldn't necessarily impact that 8%. No.

Okay.

And then as a follow-up, I know you mentioned you're 90% leased through 2021, but I just wanted to see if you could give us some insight as to how you're progressing as it pertains to the E-2 order book you have. I know there's a pickup of deliveries as you go into 2021 and 2022.

Sure. We should be clear that when we talk about lease through 2021, that's only our new order book. The average lease expiry date for the ERCAP portfolio is mid-2026, so way out there. In terms of the Embraer product, we have 50 of them in order, and we've already placed 47. That's many multiples of what the competition has done. And again, as I said to you, that is a real tangible change. demonstration of the capability of the air cap platform that generates superior economic returns for our shareholders being brought to bear.

Fantastic. Thanks a lot, guys. Sure.

Our final question today comes from Kevin and Chrissy from Citigroup. Please go ahead.

Thank you for the time. Maybe you could touch on the attractiveness from your perspective of 321s versus 321LRs?

Sure.

The 321 is the heart of the market. That's absolutely the case. And we do have some LRs on order. In fact, just today, we delivered the very first one to the Americas. Again, another first for AirCap leading the way. with the first Delor being delivered to the American hemisphere. So that airplane is an excellent aircraft, but like all aircraft, airlines have to make sure they're going to use its capability. It can fly transatlantic with heavy loads. So if that's your market, then it's a great airplane for it. But the heart of the A321 market is a much shorter-haul market than that because sending airplanes long-haul for many airlines is riskier than just flying two or three hours from your home base And in highly populated parts of the world, like East Coast of the U.S., Western Europe, China, where the heart of the market is, the average stage length is much smaller than that. So we think the A321LR has a great role to play, and it's a very capable airplane for those airlines that are going to need it for that length of mission. But the vast majority of the market is in the regular way A321.

Thank you. And if I may... I got a question from an investor, and I gave my perspective. I wanted to give yours. In a proportional size, fuel price shock versus recession, which is a more challenging environment for air cap and for lessors generally?

I think it's the velocity that always matters. If fuel prices were to go steadily up to $90-plus a barrel, and it was to happen over a year, year and a half, airlines would have time to start adjusting their business model to cope with that. If it was a sudden shock in the morning, then that would be very different. It wouldn't be easy to cope with that. I think on a recession side, again, it depends on the severity of the recession. But what's very important to note is for our business, there is growth every year in traffic. So you could have a recession in the United States, as we've seen in the past, but you can have Growth in Brazil, you can have growth in China, you can have growth in Europe. As we just saw in the last quarter, Europe led the way for growth. So a regional recession isn't something that's going to have a material impact on this business. Sure, there'll be guys who will go bust, but that's the daily cut and thrust of the business, as I've said before. But with a platform of air cap scale and its capability, we'll move those airplanes from underperforming regions to performing regions. as we've shown time and time again, most recently with events at Jet Airways, where, of course, we led the industry again. Terrific. Thank you so much.

Thank you. That concludes today's question and answer session. I'll hand back over to you for any closing remarks.

Thank you, Operator. Thanks very much, everybody, and look forward to talking to you in three months' time.