AerCap Holdings N.V.

Good day and welcome to the AIRCAP second quarter 2019 financial results call. Today's conference is being recorded and a transcript will be available following the call on the company's website. At this time, I would like to turn the conference over to Joseph McGinley, Head of Investor Relations at AIRCAP. Please go ahead, sir.

Thank you, operator, and hello, everyone. Welcome to our second quarter 2019 conference call. With me today is our Chief Executive Officer, Ingus Kelly, and our Chief Financial Officer, Pete Juhasz. 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 results or events 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 AIRCAP's earnings release dated July 30th, 2019. A copy of the earnings release and conference call presentation are available on our website at aircap.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. Thank you, Joe.

Good morning, everyone, and thank you for joining us for our second quarter 2019 earnings call. I'm extremely pleased to report to you, our shareholders, an all-time record quarter with earnings per share of $2.42. This outstanding result is a product of our unrivaled platform capabilities and our disciplined approach to capital allocation. A focus on acquiring only the most in-demand new technology aircraft type rather than end-of-line current technology aircraft and selling large numbers of older aircraft at a considerable premium has produced an excellent portfolio. This strategy has also enabled us to repurchase over 40% of our outstanding shares at a discounted book value, while reducing our leverage and maintaining the highest liquidity levels in our industry. In the last 12 months, we have taken delivery of 77 aircraft and increased our average lease assets by $2.7 billion. Today, our portfolio is 53% new technology aircraft, This is the highest percentage of any major aircraft lessor in the world. And just as importantly, for the last eight years, Aircap has avoided ordering any end-of-line current technology aircraft. This barbell approach means we only acquire certain variants of new technology aircraft, such as A320neos and 787-9s, not end-of-line current technology aircraft. As in our view, This is the best way to maximize long-term returns for our shareholders. This is actually a contrarian view, as many investors and some rating agencies look purely at the average age of a fleet rather than the components behind it to measure fleet quality. We believe that this approach does not fully capture the risks and the rewards of an aircraft leasing business. Today, AirCap has an order book of 331 of the most in-demand variants of new technology aircraft that will deliver between now and 2023. We are well placed out into the future, including 90% placed on all of our new deliveries through the end of 2021. Relative to our balance sheet size of $43 billion, our remaining forward order cash commitments of $16.3 billion over the next five years are very manageable, particularly when this is tied to our industry-leading liquidity position. This quarter is another example of the consistency of the earnings power of AirCap, which is driven primarily by the capabilities of the platform. The average lease expiry date of our fleet today is the end of 2026. This is almost seven and a half years from now, and this despite having an older average age of our fleet than several of our competitors. Like our industry-leading EPS of $2.42, this is a tangible example of the superior capabilities of the AirCap platform. The longevity of our contracted revenue gives us significant visibility into our future cash flows and profits. The consistency and reliability of our performance is one of the key hallmarks of AirCap's business model. AirCap also has the world's leading platform for the sale of used aircraft. For the last five years, we have accounted for a significant portion of all the sales of mid-life and older aircraft in the global market. In an opaque market, that volume of activity gives us tremendous informational advantages and knowledge about aircraft values, which we use to make intelligent decisions that create value for our shareholders. There continues to be very strong demand from buyers for older and midlife assets. In the second quarter, we continue to sell assets into a strong secondary market, with sales of 22 owned aircraft in Q2 for just over $500 million. We have sold 81 owned midlife and older aircraft in the last 12 months. These sales have reduced our exposure to certain aircraft types, airline credits, and recycled capital into more accretive opportunities. As we look at our capital deployment options between aircraft purchases, de-levering, M&A, and capital returns to shareholders, it is clear that the discount of book value that currently exists provides us with the greatest opportunity to create value for our shareholders. Given this, we announced a further 200 million repurchase authorization in June, so we have the ability to continue to take advantage of this opportunity throughout the year. On the topic of the MACs, Boeing continues to work with the civil aviation authorities to ensure the aircraft's return to service. And they now assume they will obtain regulatory approval in the fourth quarter of this year. To date, we have taken delivery of five MAX aircraft. We had originally expected to receive 17 this year. The number that we actually receive will ultimately depend on the timing of the fix and when Boeing can deliver the aircraft to our airline customers. Turning to the demand side, IATA reported an increase in RPK growth of 4.5% in May, which is above the 3.1% posted in March, but below the 20-year average of 5.5%. That growth in May was broad-based, but led by Latin America at 6.5%. Load factors, however, reached a new record for May at 81.5%, which we believe underpins the demand for aircraft. As we said before, the best indicator for air cap of whether or not there is support for growth at these levels is is what is actually happening with our aircraft placement activity every day in the market. And we continue to see solid demand. In closing, our record results this quarter demonstrate once again the competitive advantages and consistency of Aircap's business. We will continue to run the business to optimize shareholder value and generate sustainable and consistent returns for our shareholders. With that, I will hand the call over to Pete.

Thanks, Gus. Good morning, everyone. Aircraft produced a very strong performance in the second quarter. We had record earnings per share of $2.42, a 42% increase from last year. Our book value per share is now $67.08, an increase of 13% over the last 12 months. We've continued to grow by taking delivery of new technology aircraft, and our average lease assets increased by $2.7 billion year over year. We completed 82 aircraft transactions in the second quarter, including 17 for Y-Bodies, This included purchases of 11 new technology aircraft during the quarter and sales of 22 of our older and midlife aircraft. Our utilization rate remained very high at 99.4% for the quarter. Our average remaining lease term is now 7.4 years, one of the longest of any major lessor. We continue to carry very strong levels of liquidity and we're now two times covered for all of our cash needs over the next 12 months. And we continued with our share repurchases and announced a new $200 million program in June. In the second quarter, we repurchased 3.5 million shares for $169 million. And so far this year, we've repurchased 7.2 million shares for a total of $337 million, which is an average discounted book of 29%. So altogether, it was a very strong quarter that reflects our consistent operating performance, the power of the AirCap platform, and our disciplined approach to managing our assets and allocating our capital. Our net income increased by 30% compared to the second quarter of 2018, and our EPS increased by 42% year over year to a record 242 for the quarter. This increase is a direct result of our capital allocation strategy in three key respects. First, our net income increased as we grew our average lease assets by $2.7 billion. as we've taken delivery of 77 new tech aircraft over the past 12 months. Second, we sold 22 aircraft in the second quarter for $502 million, and we've sold 81 aircraft over the past 12 months for approximately $1.5 billion. These are older and midlife aircraft from our portfolio that we're selling as part of our strategy to transition our fleet away from these aircraft types and towards a new technology fleet. This strategy has consistently produced gains on sale, including $78 million worth of gains in the second quarter. But more importantly, it's given us proceeds and capital that we can redeploy into other, more attractive opportunities. Third, as we've discussed before, we continue to believe that aircraft stock is a compelling investment opportunity. By selling older aircraft at a gain and reinvesting the proceeds in a better portfolio at a significant discount to book, we can create significant value for our shareholders over the long term. And this quarter, you can see the impact of that redeployment of capital. While our net income went up by 30% year over year, our EPS was up by 42% due to the repurchase of almost 15 million shares since April of last year. And that's basically 10% of our total outstanding shares that we've bought back over the past year. Now, we could have held on to those plans or done economically unattractive sale, leasebacks, and studs, but ultimately we're focused on getting the best economic result for our shareholders. So that's where you can see our capital allocation strategy at work in this quarter's results. On slide six, our total revenues for the quarter were up by 7% year over year, driven primarily by the increase in our average lease assets in the second quarter. Our basic lease rents increased to $1,077,000,000. Maintenance revenues were about flat year over year, and other income was higher in the second quarter of 2019, primarily due to higher interest income. Turning to slide seven, our net interest margin was $755 million for the second quarter, and the increase over last year was due to growth in our basic lease rents driven by the higher average lease assets. Our average cost of debt for the second quarter was 3.95% before debt issuance costs and fees of about 34 basis points. Including those costs, it was around 4.3% for the second quarter. with the increase from 2018 driven primarily by the roll-off of fair value of debt related to purchase accounting. Our net spread less depreciation was 3.4% for the second quarter, up from 3.2% last year. That was primarily driven by our lower depreciation rate as we reduced the age of our fleet, as well as to lower maintenance rights expense as our maintenance rights offset continues to roll off. The average age of our fleet decreased from 6.6 years to 6.2 years at the end of June. We achieved this through a combination of purchases of all new technology aircraft and sales of older current tech aircraft. The average age of our new tech aircraft, which represent 53% of our fleet today, is only two years, while the average age of our current tech fleet is around 11 years. And we believe this barbell approach is the correct way to manage our portfolio. As I mentioned before, our average main lease term has increased to 7.4 years, one of the longest in the industry, and this gives us strong visibility into our future lease revenues and cash flows. So effectively, in the second quarter of 2019, we're generating higher returns on a better positioned portfolio with a lower average age, a higher proportion of new tech assets, and a longer average main lease term. Turning to slide eight, our net gain on sales was $78 million for the second quarter. During the quarter, we sold 22 of our owned aircraft with an average age of 16 years. That resulted in sales of $502 million for the quarter. Our unlevered gain on sale margin was higher than usual at 18% for the quarter. We've continued to see strong demand from buyers for our midlife and older aircraft. We said in April that we expected to sell about $1.5 billion of aircraft for the full year. Given our sales to date at this point, I think we'll be closer to $2 billion of sales for the full year. Turning to aircraft purchases, in the second quarter, we took delivery of 11 aircraft for capex of around $900 million. That was lower than we'd expected because of the max delays. As you can see from our supplemental materials, we're now assuming that we'll take delivery of only three MAXs this year. Ultimately, of course, the number will depend on when the MAX receives certification and when Boeing recommences deliveries, but that's our best estimate at the moment. So for the full year 2019, we now expect our CapEx to be around $4.5 billion. Slide 9, our SG&A expenses were around $65 million for the quarter, a decrease of 24% from $85 million last year. That $65 million equates to about 5% of our revenues, which shows the efficiency of our platform. The decrease from last year is mainly due to lower compensation-related expenses. As in previous quarters, all the asset impairments in the second quarter related to lease terminations and aircraft sales, the maintenance revenue recognized on the impaired aircraft more than offset the amount of the impairment. Our maintenance rights expense was $16 million for the second quarter, down from $35 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 under $1 billion. But the maintenance rights expense was particularly low in the second quarter based on the timing of maintenance events. Our other leasing expenses were around $49 million for the second quarter, a decrease from about $68 million last year. And this decrease was due to lower expenses related to lease terminations compared to the prior year period. Slide 10, we continue to maintain a very strong liquidity position. As of June 30th, we had available liquidity of $8.6 billion. 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 $11.8 billion, which is two times our cash needs over the next 12 months, and that amounts to excess cash coverage around $6 billion. This is our highest coverage ratio ever and shows our commitment to maintaining a high level of liquidity at all times. Now, this quarter, the number is somewhat elevated because we have very little debt maturing over the next 12 months, But as you can see from the chart, we've exceeded our target level every single quarter. Finally, on slide 12, our book value at the end of June was just over $9 billion, and our book value per share was $67.08 compared to $59.25 last June. That's a 13% increase over the past 12 months, and over the past five years, we've grown our book value per share at a CAGR of around 15%. Through our operating performance and capital allocation strategy, we can continue to generate strong growth in book value per share year after year. So to wrap up then, we had a record second quarter. Our utilization rate was high. Our fleet continues to grow with the addition of new tech aircraft. We're placed far out into the future, and we continue to sell used aircraft at attractive prices. We ended the quarter with a record level of liquidity. And through our capital allocation strategy, we continue to generate strong double-digit growth in our book value per share. As we look out now at the full year 2019, we currently expect to have core EPS, that is EPS excluding gains on sale, of between 660 and 680 for the full year. And with that, now we'll turn it over for Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Jamie Baker of JP Morgan. Please go ahead.

Hey, good afternoon, everybody. Starting off with a Max-related question, now that Boeing has established its reimbursement pool, how should we think about compensation and how it courses through the earnings model? I realize remuneration hasn't been negotiated yet. I'm just wondering about the mechanics of how you expect to be reimbursed and how we should model for that. Any thoughts?

Jamie, it's too early to discuss that. There are various ways that Boeing have to provide compensation, but at this early stage, it's too early to discuss that.

Okay, fair enough. Second, on the aircraft sales over the last 12 months, could you add any color as to how pricing in the recent six-month period compared to the first six months of that period on a like-for-like basis, particularly on the on the narrow body side, just looking for how pricing might have evolved over the last 12 months.

Sure. I'm very happy to, Jamie. Twelve months ago, the market was extremely strong, no question about it. Then as we came into the very end of this year in December, the very end of 2018, with the market, all financial markets under pressure, coming into the Dublin Air Finance Conference in January, we were We were concerned, would there be as many buyers of airplanes? There were. But I think it's fair to say that at that time, people were more cautious and patient. But certainly over the last four months, we've seen a full return to where we were in terms of prices 12 months ago. So really, I think any temporary aberration was driven by that December sell-off. But I can firmly say it recovered very quickly as evidenced by our results.

Excellent. Thanks, Chris. Appreciate the call. Take care.

No problem.

Our next question comes from Ross Harvey of Davey. Please go ahead.

Good afternoon, guys. Two from me with just one clarification. Firstly, can you provide any guidance on the expected gain on sale margin in H2? Was there a particularly strong figure in Q2 relative to what we should expect for the second half? And secondly, one maybe for Pete, the quarter end cash at hand level, just under a billion. Does this sort of indicate what you'd establish as a new norm or should it revert back up in the coming quarters? And just on a clarification side, just to double check, the core EPS that you outlined for 2019 was 660 to 680, excluding gains on sale. Is that correct? Yes.

Yeah, Ross, thank you. So I'll take them first with the last question. Yes, core EPS excluding games on sale for the year, $6.60 to $6.80. So to confirm that, which is an increase, obviously, from our previous guidance of $6 to $6.20 for the full year. Second, in terms of games on sale, we don't project those margins, although if you look historically, they've generally been between 5% and 10% on an unlevered basis. So, obviously, this quarter was higher at 18%. It was significantly higher. And that's really just due to the mix of what was sold. That will bounce around in any particular quarter, and we've shown that before. Last quarter, we had a chart there that showed that. So, you know, you can see that move around. But I think, in general, 5% to 10% is a reasonable estimate. But, again, it will move around quarter to quarter. And, sorry, what was your – did you have a third question? Yeah, it's in relation to the cash in hand, yeah. Yeah, so the cash in hand around $800 million. I mean, we have been running that at around $1 billion, and we decided that we can probably bring that down a little bit, so we ended the quarter at $800 million. Again, you can see that in particular we have a fair amount of CapEx coming up over the next several quarters, but pretty low debt maturities. I think this is a reasonable level for us to run it at, so I think we could keep it at, you know, at $800 million. And then you see on the liquidity side, generally speaking, you know, we're at two times coverage over the next 12 months, which is a very high level. That's great. Thanks for the call, Eric. Sure.

If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Our next question comes from Christine of Bank of America. Please go ahead.

Good morning, guys. For the 95737 MAX you have on order, how much in pre-delivery payments have you made? And with the aircraft still grounded, what are your obligations for pre-delivery payments for the rest of 19 for the three aircraft you have said you may receive for the full year and then also for 2020?

Christine, we don't break out the PDPs by individual aircraft types of competitively sensitive information, as we have a number of different types on order. We are in terms of our contract, of course, whatever obligations we have in our contract, we will comply with them.

Whatever rights under our contract we have, we will enforce.

Thanks. For maybe switching gears, for the Embraer E190, 195 E2s, has the Boeing and Embraer deal on this aircraft changed the demand? And also what percent of your 35 E2 aircraft through 2021 is already placed?

Well, we, as of almost 12 months ago, we had placed 47 out of the 50 we have on order. So we're to all intents and purposes done on that, and we were done some time ago. which again shows you the difference between the capabilities of AirCap and anyone else who's ordered that airplane, or most airplanes for that matter. Since the tie-up with Boeing, of course, there has been more interest in the aircraft. One of the issues that subscale OEMs struggle with is a global logistics chain to support an airplane around the globe on a 24-hour basis. And that is where Bombardier and Embraer are at a distinct competitive disadvantage to the giants of Airbus and Boeing who have that. And so now that Embraer has that, or it is coming once the deal closes, we can already see the level of interest in the aircraft picking up considerably.

And since you've already placed the majority of the existing orders you have, what else do you have to see to... get you to place more orders for the E-2. And then also tied to that, right, you already mentioned with the tie-up with Bombardier on the C-Series, what's now called the A-220, with that airplane success, with its partnership with Airbus, does that make that asset more attractive to you as well?

I think, look, it's just demonstrably true that any airplane that becomes part of the Airbus and Boeing stables just becomes more attractive automatically than it was before. In terms of the E-2, you know, we've placed an awful lot of them. I think we want to see now how the merger goes between Boeing and Embraer. I think they have a tremendous opportunity to go on the offense with this airplane, provided the integration of the two companies works. is successfully done and done quickly for that matter.

And the A320?

And the A320, I mean, we continue to look at them on the Airbus side. It's fair to say that the A320neo family airplane has been a tremendous success. We've placed all our Neos out until 2022. We've placed more than anyone else in the world. And so that airplane has done very well, and we'll continue to look at the A220 as well to see how its commonality evolves with the rest of the highly successful 320 family.

Thank you. Thank you.

In the interest of all the analysts, I'd just like to remind you, please limit yourself to one question and one follow-up, please. Our next question comes from Catherine O'Brien of Goldman Sachs. Please go ahead.

Hey, everyone. Thanks for the time. So maybe just a question on the update to your core EPS guidance. You know, pretty impressive given that CapEx has had to come in a bit because of delivery delays. Could you just maybe walk us through what on the cost side of the house has improved versus your prior expectations? Or maybe it's just the lease rentals you're getting on that lower CapEx base. Any puts and takes would be helpful. Thank you.

Sure. So I'd say the main drivers, Catherine, we are seeing some more revenue on the maintenance side. So the maintenance contribution has been higher than what we expected it to be. So that's one driver. Some of the costs have been lower than we expected. So SG&A, as I mentioned, was $65 million. That's a little lower than we expected it to be. On the leasing expense side, those have been a little lower than we had expected. So there are a number of items that contribute to that estimate, but I'd say those are the main ones.

Great. Thanks. And then maybe, Gus, a number of your peers have noted that while there haven't been any notable exits, the pace of growth at some of the new entrants less north of Asia has slowed over the past year. I guess, first, are you seeing that? And then, second, of the more global base of new entrants focused on the sale-leaseback market, have you seen any of those players place orders or material orders with the OEMs, or are they primarily sticking to the sale-leaseback market still? Thank you. Appreciate it.

Sure. Well, I think, actually, I understand that China Ming Sheng – has sold most, if not all, of its portfolio. So they'd be the first to turn tail. ICBC also was reported to have sold a significant portion of its portfolio. So, you know, look, I wouldn't say that there are many of the new entrants that have significantly reduced their interest in the sector, but I do think Some of the new entrants that came over the last four or five years are beginning to become more rational and more thoughtful in how they deploy their capital. And I think we do see signs of that in the sale-leaseback market. It's still 2013 since AirCap executed its last sale-leaseback transaction. It hasn't stopped us growing faster than anyone in the industry has ever grown before them. So there's plenty of opportunities in this business. if you're patient and disciplined. But then, by the same token, when the opportunity is right, you do have to be aggressive. But I would say overall that there's still an extremely strong bid in the sale-leaseback market for new airplanes, but probably some of the participants are a bit more thoughtful than they may have been in prior years.

Okay, that's great. And then have you seen any of those sale-leaseback players branch out into placing orders with OEMs?

Not many, really. I mean, it's a very small group of people who have an order book of more than 10 or 15 wide bodies and 30 or 40 narrow bodies. You're into a very small number of operators of maybe you might see a few of them play some, a few small narrow body orders, but I don't see anything dramatic changing there at the top table.

Great, thank you so much for that caller.

No problem.

Our next question comes from Rajiv Lavani of Morgan Stanley. Please go ahead.

Hi gentlemen, it's actually Jonathan on for Rajiv. I wanted your thoughts on the pending wide body replacement cycle. Boeing's obviously been out talking about how that's something they see maybe early next decade. I just wondered your thoughts on whether that's something you're beginning to see as you start to place aircraft out in the 2020s and how are you positioned for it?

Well, I think that goes back to how we set up the portfolio and the consistent strategy we've had for many years in that we do believe that for the next decade, or the best part of it, the 330 and the 777, will be the backbone of long-haul travel. Having said that, as we get to the end of the 2020s, you're going to see those aircraft replaced by the 787 and by the A350 predominantly. And that is something in our position we see. And that's why we were very keen to stress that looking at the average age of a portfolio does not capture the risks and rewards within a portfolio. So based on what I said, you'd much prefer to own a 12-year-old 777 than a 3-year-old one. Because a 12-year-old one, you'll have no economic exposure to when the residual value, when the economic cycle or the replacement cycle, as you say, starts to really kick in at the end of this coming decade. Whereas if you've won that has 10 or 12 years left to consume, you're in a very different position. And so we would agree that there is a replacement cycle out there. But you need to be positioning yourself for it many, many years in advance. And I don't believe anyone has done the work that AirCap has done to position its portfolio with that barbell approach that we just spoke about.

Thanks. If I could, just one more. Obviously, you guys talked about a higher or elevated sales this year. Is that going to impact your fleet age targets for the year? I know I think you guys talked about expecting that to be in the low sixes this year. Does that change at all, or does it get pushed out?

No, no, as of June 30th, we are at 6.2 years, and so I think we'll continue to be just over six years in the low sixes at the end of the year as well, which is pretty consistent with what we had said before.

Got it. Thank you.

Sure.

Our next question comes from Scott Boundin of Compass Point Research. Please go ahead.

Good afternoon. Thanks for taking my question. Peter, you mentioned earlier the contributors to the higher core EPS guidance. I'm just wondering if there's any upside to that margin. You know, rates have kind of maybe, the trajectory of rates have changed a little bit. At least mid and long-term rates have come down. I'm just wondering if there's maybe upside to the 8% margin you guys have talked about.

The 8% spread. Yeah. So I still expect the spread to be 8% this year. I mean, what we've seen on the debt side and the interest rate side, so you saw our cost of debt this quarter was 4.3%, including all those fees and costs, which is about 35 basis points. I think for the full year, it will probably be around 4.2%. But, you know, given what we've seen in the market where we've seen rates going down and pulling back, right, we've seen a compression of spreads. Today, our funding costs are, you know, well below 4%. So if we were to do a 10-year today, for instance, we could do that, a 10-year unsecured bond, we could do that under 4%. We could do a five-year at just over 3%. So if we see this environment continue, we would see that cost of debt come down, and we would see a benefit to the spread.

Thank you for that. And then just a housekeeping question on the buyback capacity. How much is still authorized? Of the 200 million that was announced in June?

About 190 million still authorized. Thanks very much. Thanks. Sure.

Our next question comes from Helene Becker of Cowan. Please go ahead.

Thanks, Operator. Hi, everybody. Thank you for the time. I think, Peter, you might have said this. What would CapEx have been had you gotten your full complement of aircraft this year versus what you forecast it will be now?

Helene, thanks. So we had originally expected it to be just under $6 billion for the year, and now we're expecting about $4.5 billion.

Okay. And then the other question I had was with respect to LIBOR. I noticed you still use LIBOR Plus for some of your debt, and, you know, it's going away in another year and a half or so. And I'm just kind of wondering, are there provisions to replace LIBOR with another benchmark?

Well, there are a couple of different benchmarks that are being considered, including SOPR. So I think that we will see a transitioning to that over time.

Okay, thanks. I think those were really my questions. So Gus, you're off the hook today from me. Thank you, Elaine. Thank you.

Our next question comes from James Ulan of Credit Suisse. Please go ahead.

Hi, thank you. So we've chatted with a handful of fleet managers who are saying that they're expecting NEO and MAX lease rates to go up and we haven't really chatted with enough to form a big sample size, but I was wondering if you could share some feedback that you're getting from your customers about how the MAX is impacting lease rates on, I guess, the NEO and also current generation narrowbodies.

The MAX has just been

It's been grounded for a relatively short period of time. So the impact that it is having is difficult to say also because there's no clarity around when the slots that you had will actually deliver. So you're not in a position to actually really offer them to customers at the moment. So with that lack of clarity, it's not easy to offer aircraft into the market at the moment. As I said earlier on, really, since its launch, the NEO has been fairly strong and has maintained its strength in the market over the course of the last three, four years. We've moved over 200 of them. So, you know, we still see solid demand for the airplane. The fact is, you know, you're placed out already many years in advance. So there isn't necessarily an impact on a NEO placement in any near term because of any issues with the MAX. And as I said then, on used airplanes, we saw very strong markets last year, and it was more – any fall-off in that happened in December, well before the MAX grounding, and that was due to really the sell-off in the financial markets, which then obviously we saw – a strong bounce back in those values more recently.

What about for lease rates of the current generation technology? Again, you know, look, you've got to look at we're at 99.6% utilization.

So it's not that we have a bunch of airplanes on the deck that we can just put up in the air because of the shortage of maxes. we don't immediately generate a gain from that per se. Gotcha.

Okay. Thank you. Thanks.

Our next question comes from Reno Bianchi of Cancer Fitzgerald. Please go ahead.

Yes. Good afternoon and thank you for taking my question. I have a question related to HNA failure exposure. My understanding is that you had three narrow body and 15 wide body. I just want to If you can give me a little bit of color, so what is happening there, how late they are with the payment.

Sure.

Well, you can see our receivable position at the end of the quarter in totality was $60 million, which is below the averages. We are working with members of the H&A group. be it the different airlines. We do believe that the airlines themselves are viable businesses. The issue they struggle with, of course, is to some extent what happened at the parent level where liquidity had been taken from the airlines. It was encouraging to see the first steps in the closure of the Hong Kong Express sale to Cathay Pacific occur. There's also been another Other airline AOCs in China, I believe there's also some interest in those. In China, an airline AOC is a very difficult thing to get on, like in Europe or the US, where anyone can set up shop tomorrow. There, there's only been a handful of them granted in the last several years. So it's quite a valuable asset to have. So there is value in those H&A airlines, and we are working with them and have worked with them, to be fair, over the course of the last year. But as I said earlier, you can look at our overall receivable position to see where we stand.

Okay. My second question, I want to try to dig a little bit deeper on the gain that you book in the quarter, the $78 million on the sales of 22 aircraft. It comes down to $3.6 million per aircraft. And when I look at the recent history, the only quarter that you exceed that number was for quarter 2018 when you book about $4.3 million per aircraft. But that particular quarter, you sold aircraft that on average were 12 years old versus 16 this quarter. So the bottom line, it seems like the $3.6 million per aircraft is quite in excess of the average $1.5 million, and I think it broke for most of the last three or four years. I am wondering, were there any particular to the composition of the 22 aircraft that you sold this quarter or Is that more a reflection of the market coming back? What makes for that seemingly very high gain per aircraft?

So you're right, Reno. It was definitely above the average gain that we've sold at over time. They were older aircraft here, but not that different, really, when you look at it over the last couple of years, what the average has been. It's been in and around that. you know, 14 to 16-year-old average age. I do think, you know, in some cases on some of these older aircraft, we're able to extract a lot of value for them. You know that we have a conservative depreciation policy as well, right, for older aircraft, and that's part of it. But I think the – so I think that, you know, we're looking at this relative to our book value, and I think what you can see from this is that it's – you know, we are able to realize – more than realize the book value in our older assets. In fact, typically, you know, you see this 18% gain. That's a big margin. And as I mentioned before, that's on an unlevered basis. That shows you how solid that book value is. And so while, you know, I wouldn't take that necessarily as an indicator to say that next quarter across the board, across the industry, you're going to see higher values for aircraft. I wouldn't say that. But I would say that this is what gives us confidence that our book value is fully real. It's fully realizable and more.

And Reno, I mean, as Pete says, it does bounce around. It averages around 8% on a growth basis, which on a levered basis, which is what we are, of course, that's closer to 1.3 times our book equity. And I think you can look back over the last 12, 13 years since we've been a public company and every single year we've generated a gain on sale selling assets.

And my final question, if I may, at the end of last quarter, you had 398 aircraft that were pledged to different credit facilities. How many aircraft were pledged at the end of the second quarter?

It's 359 incumbent aircraft at the end of the second quarter. How many, I'm sorry?

359. 359.

Thank you very much for your time. Thank you.

Our next question comes from Kevin Crissy of Citi. Please go ahead.

Hey, good afternoon. Just one question from me. Big picture, long, long term. Can you talk about the opportunities and risks maybe from electric aircraft and or other technology changes that might be out there that, you know, on a long-term basis may adjust the market?

Well, Kevin, you may have seen that last Monday, Monday of last week, we delivered a brand new 787-9 that conducted the longest ever biofuel flight of 12 and a half hours. So the challenge of biofuel, of course, is can it be made efficiently at scale? And the answer to date is no. That may be, that is a substance that can be used today. And the question is around cost. Electric engines are not that advanced yet or other types. I think you do have to look at the extraordinary investment that is required to develop an aircraft and an engine, and the risks associated with that development are extraordinary as well as recent events have shown us. So I think it will be some time before we see the replacement of the current technology engines that we have by an alternative fuel source given the huge risks involved in doing it. I think it could be quite some time. Terrific. Thanks for your time. No problem.

Our next question comes from Kirsten of Deutsche Bank. Please go ahead.

Hi, guys. How do you think the introduction of the A321XLR might impact the widebody replacement cycle, and more specifically valuations and demand for some of the smaller variants of widebody aircraft, such as the A330-200 or 767s or even the 787-8? I know you have a number of A321neo on order as well. Would you consider converting some of these to the XLRs?

The XLR is a very interesting aircraft.

It's a very powerful airplane. But what you have to remember is the heart of the A321 market is flying less than three hours. That's where the vast majority of the market is because the further an airline goes from home, the greater the risk it carries. The further you go from home, no one knows who you are. And how do you pick up freight and passengers on the far side? That's always a challenge when you fly long haul. So I do think It will definitely take some of that meat of the market. Aircraft, there's no doubt about it. I think, again, that you will see it, of course, over time. Will it take up some of the routes that are currently flown by wide-body assets that aren't built for those routes? And could it be a better airplane on those routes? Sure, it could, yeah. But it's not going to come into service in scale yet. until 2025, 2026, before we see it in scale. It may be even later, to be quite frank. And that's a ways off. And the way we wanted to set up the air cap portfolio is that, as you mentioned, our A330 fleet, et cetera, at that point in time, because we do believe that there is a replacement cycle coming and we've been getting ready for it for the last five years because we could see it coming, given our knowledge that we see and the information we have in the market. that we have limited to minimal exposure to that aircraft type in that timeframe. And if we see that the market is more than a niche market for the XLR, we'll certainly convert some of those airplanes that we have as A321s into that aircraft type. But at the moment, the heart of the A321 market is still in the... say less than four-hour missions, many are less than three hours. So an airline will ask itself, if all I'm going to do with that airplane is fly from New York to Miami, do I want to carry all that extra weight that could enable the airplane to fly from New York to Santiago? You know, you're not going to get paid for carrying that extra weight around. So that's the question that airlines will be asking themselves. Is it... is it an aircraft that's applicable to more than a niche component of my fleet?

Great, thanks, Lucas. Great, thanks.

As a reminder, if you wish to ask a question, please press star 1. We'll take our next question from Susan D'Onofrio of Macquarie Capital. Please go ahead.

Yeah, just a question on your customer watch list. Would you say it is better, the same, or worse relative to a year ago? Feels better, but I just want to kind of circle around.

I'd say overall it's similar.

You're right, fuel is better. You know, Brent, which really is the key index for the global market, has been in the low 60s. That's a big driver. But overall, look, we'll always have a few customers. That's just the nature of the business that have their issues and we work with them. But again, I would stress that as you've seen over the course of the last 13 years of the public company, defaults haven't been a material driver of AirCap's performance over that period of time. So what I expect when the winter comes, one or two guys, not to make it sure, is that something out of the ordinary. No, it's not. We don't see anything much different to where we were last year, in fairness. And this time last year, I think we were looking at the Air Berlin and Monarch situations.

Great. My other questions have been answered. Thank you.

You're very welcome.

That concludes today's question and answer session. At this time, I would like to turn back over to the host for any additional or closing remarks.

Thank you. Thank you, everyone, for joining us today. Look to sum up. We delivered another very strong quarter, our best ever, with $2.42 of EPS. We've increased the outlook for the full year, and we'll continue to run this business in a way that's focused on the future and generates the maximum value for our shareholders. We look forward to speaking to you again in three months' time.

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