Fly Leasing Limited
Q2 2018 Earnings Call Transcript

Published: 23 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fly Leasing Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Matt Dallas with Investor Relations. Sir, you may begin.

[Matt Dallas:]

Thank you, [Joelle] [ph]. Good afternoon everyone. I am Matt Dallas, the Investor Relations Manager of Fly Leasing, and I'd like to welcome everyone to our Second Quarter 2018 Earnings Conference Call. Fly Leasing, which we will refer to as FLY or the Company, issued its second quarter earnings results press release, which is posted on the Company's Web-site at flyleasing.com. We have a slide presentation that accompanies today's call, which is available to participants on the Webcast. If you are not accessing the Webcast, you can find a copy of today's presentation in the Investor Relations section of our Web-site on the Events & Presentations page. If you are listening to both the live call and the Webcast, you may want to mute your computer as there will be a slight delay in the Webcast's audio. Representing the Company today on this call will be Colm Barrington, our Chief Executive Officer; Julie Ruehl, our Chief Financial Officer; and Steve Zissis, the President and CEO of BBAM, the company that manages and services FLY's fleet. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding the outlook for the Company's future business and financial performance. Forward-looking statements are based on current expectation and assumptions of FLY's management, which are subject to uncertainties, risks, and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and are described more fully in the Company's filings with the SEC. Please refer to these sources for additional information. An archived Webcast of this call will be available for one year on the Company's Web-site. And with that, I would now like to hand the call over to Steve Zissis, the President and CEO of BBAM. Steve?

[Steven Zissis:]

Thanks, Matt. Good morning and welcome to our second quarter earnings call. I'm pleased to report that FLY had an excellent quarter and I think the results we have released today, which Colm and Julie will go over in more detail on this call, demonstrate that the strategic path we embarked on in 2015 was the right one and is bearing fruit in the form of improved earnings per share, higher ROE, and a growing book value per share. Before getting into more details about FLY's activities, I'd like to discuss industry conditions. Passenger traffic numbers continue to grow and drive airlines' demand for more aircraft. While it's not unexpected to see strong growth in developing regions of the world, like China, India, and Southeast Asia, even the developed regions of the world including Europe and North America are reporting above-average passenger demand. For example, IATA recently reported June traffic numbers were up 7.8% worldwide over last year, with Europe growing at 5.8% and North America at 5.5%. For the full year, IATA is forecasting worldwide growth of 7%. They are also forecasting near-record airline profits in 2018 of approximately $34 billion. As a result, airlines globally continue to grow and renew their fleets, driving stronger demand for FLY's aircraft and resulting in higher lease rates. While oil prices have risen in 2018, we haven't seen deterioration in demand for our aircraft and most airlines are still reporting strong profits on higher revenue. In February, we announced our AirAsia transaction. I continue to believe this is a transformative deal and an excellent example of our commitment to be patient with FLY's capital and to transact only when we have an inherent buying advantage and see outsized risk-adjusted returns. It's also a rare example of building a multiyear pipeline of new Neo aircraft without having to pay upfront deposits or speculate on future market conditions. Lastly, it's a terrific illustration of the advantage of FLY's management structure whereby it is able to leverage the buying power, the global marketing resources, the banking relationships, and the structured capabilities of BBAM's platform. There's no doubt that FLY would not have been in a position to bid, let alone complete the AirAsia deal, without access to BBAM's management platform. While Colm will go into more detail on the status of the AirAsia deal, I will note that the transaction is progressing as planned. Our financing for the first 34 aircraft is fully committed and all parties are approved to complete the transaction. In fact, and as Colm will describe in further detail, 13 aircrafts have already closed. As I said in the last call, this deal is a game-changer for FLY and I'm very excited about all aspects of it. Turning to FLY remarketing front, we have completed all but one of our remarketing requirements for aircraft planes expiring in 2018. On average, our re-lease rentals and disposition proceeds have exceeded our initial budgets, providing further evidence that demand for our aircraft remains strong and we're able to trade our aircraft profitably. We expect the one remaining 737-800, which comes off lease at the end of the year, to be committed shortly. Looking out into 2019, we have already completed more than half of the remarketing requirements and only have a dozen aircraft which need to be remarketed. We're seeing strong interest in these aircraft and we'll continue to update you on our progress placing these aircraft. As you are aware, the fleet renewal program we announced in 2015 has significantly de-risked and improved FLY's portfolio metrics. Over the past three years, we sold 75 aircraft for total proceeds in excess of $1.8 billion, which resulted in gains on sale of over $62 million. As part of the AirAsia transaction, we will continue to call our fleet, and as I mentioned on the last call, we anticipate a new sales program targeting a minimum of 150 million of aircraft to manage concentration risk and lower our leverage ratio. While it's still too early to provide definitive feedback on the sales program, I can say that we are generally seeing very strong interest from a wide array of buyers in the secondary market. Expect to have more information to report on next earnings call. Before handing the call over to Colm, I want to remind everybody that in connection with the AirAsia transaction, last month BBAM's management team and one of BBAM's institutional owners completed the purchase of 1.33 million FLY shares at $15 per share. This latest investment in FLY marks the fourth time since FLY's IPO that BBAM's management team has made a significant investment in FLY's shares. After this latest transaction, the BBAM shareholders will own approximately 17% of FLY's stock on a pro forma basis. This is by far the largest insider ownership of any publicly listed aircraft lessor and a further demonstration of our commitment to FLY, and more importantly, our confidence in FLY is on the right track to grow earnings and book value per share. Now I'd like to turn the call over to Colm Barrington, FLY's CEO.

[Colm Barrington:]

Thank you, Steve, and thank you everyone for joining our second quarter earnings call. FLY is reporting a very strong second quarter based on several positive factors, including a substantial increase in operating lease rental revenue and robust net economic gains from the sale of aircraft. FLY's operating lease rental revenue in the second quarter grew by 10% as compared to the same period in 2017. Our adjusted net income of $25.2 million is a direct result of this increased rental revenue and the positive fleet activity that we have implemented over previous quarters and that Steve just mentioned. Our fleet utilization for the quarter was just under 100% and all of our aircraft are currently on lease. FLY's earnings per share grew even more strongly. Our adjusted EPS of $0.90 is a substantial increase from the same quarter last year, reflecting an improvement in our business and the share repurchases completed at significant discount to book value over the last two years. These factors also contributed positively to our adjusted ROE of 17.6%. We sold two aircraft in the quarter for an economic gain of $15.6 million, once again demonstrating the inherent value in FLY's fleet. Meanwhile, FLY's net book value per share grew by more than $1 to $21.02 as compared to the first quarter of 2018. These outcomes are the direct benefits of the aircraft investments, lease improvement, share repurchases and cost-saving initiatives that FLY has undertaken since 2015. We are truly delighted that these initiatives are bearing fruit. As we move to the second half of the year and into 2019, we expect to see further significant increases in EPS and ROE as compared to previous periods. As we approach the end of our third quarter, I'm happy to confirm and be able to reaffirm our full year pre-tax income guidance of between $75 million and $80 million. Despite these improvements and the positive outlook for the year, FLY's share price continues to trade below $14, which is less than two-thirds of net book value per share. We remain focused on continuing to unlock shareholder value through accretive acquisitions and proactive fleet and financial management in order to close this gap. Now let's have a look at Slide 5 for an update of our recent major portfolio acquisition. FLY's acquisition of 55 A320 family aircraft, seven spare CFM56 engines, and options of 20 A320 family neo aircraft is progressing as expected, now that all the required approvals have been received. So far, 30 A320 aircraft are being transferred to FLY with 21 more A320s and seven spare engines to be transferred by the end of September. There are two additional stages to the transaction. The second stage involves 21 new A320neo family aircraft, each equipped with CFM LEAP engine, which are being acquired through purchase and leaseback transactions with airlines of [indiscernible] AirAsia Group. The first four of these aircraft are placed to be delivered to FLY starting in the second half of 2019 with deliveries continuing through 2021. These brand-new A320neo family aircraft will continue FLY's transition to the latest generation of narrow-body aircraft. The third stage of the transaction is the option for FLY to acquire 20 A320neo family aircraft, which options are exercised beginning in 2019. These aircraft may be leased to airlines of AirAsia Group or to third-party airlines. FLY will evaluate each option as it falls due based on the demand from the airlines for leased aircraft and the availability of attractive financing at the time. At this point in time, these options are certainly attractive and we would expect to exercise them. In summary, the transaction with AirAsia allows FLY to acquire a total of 75 additional aircraft, nearly doubling the size and value of our fleet. 41 of these 75 aircraft are brand-new A320 and A321neos. I can frankly state and support what Steve said earlier that this transaction is uniquely favorable one to FLY. It will allow us to acquire these latest technology aircraft being delivered new from the manufacturer without having to take on the exposure of committing to on-leased aircraft many years ahead of their delivery date and without the requirement to commit substantial pre-delivery payments. The transaction has come to us due to BBAM's strong airline relationships and its relationships with two other investors who have partnered with FLY in part of the total or in total is an $8 billion deal, certainly a deal that was too big for FLY to contemplate on its own. Indeed, many other companies in our industry would not have been able to contemplate this transaction. As we acquire these aircraft and deploy capital through the third quarter and beyond, we expect to see FLY continuing to report strong shareholder returns in future. For 2018 we expect to achieve the financials out that we have just confirmed. I'd now like to briefly discuss our financing and projected leverage. In June, FLY closed a $574.5 million term loan facility to finance the acquisition of most of the initial portfolio that we are acquiring in 2018. The terms of the facility are very attractive with blended pricing of LIBOR plus 1.725%. The facility was oversubscribed with a multiple syndicate of 18 banks. This is a robust signal of the attractiveness of the portfolio acquisition as well as the strength of the financing market and the high regard that FLY has held in it. To complete this transformational acquisition, FLY will temporarily increase its leverage. As you can see from the slide, we expect our leverage to reduce to between 3x and 4x relatively quickly. In the second quarter, we sold two aircraft with an average age of 10.3 years and an average remaining lease term of 3.7 years. The age of the aircraft was substantially above FLY's fleet average and the remaining lease term was substantially below the rest of our fleet. These two sales produced a total economic gain of $15.6 million, which was a 16% premium to the net book value. Our aircraft sales record continues to underscore the inherent value in our fleet and suggest that our $21 net book value per share and particularly our current share price do not reflect FLY's full market value. So far in the third quarter we have sold one aircraft. It is more than 17 years old and has been sold at an economic gain of $5.6 million. FLY's model is to dispose off aircraft as they age and invest the proceeds into younger new generation aircraft. Generally we have disposed of our aircraft at gains to net book value. As Steve mentioned, over the next 12 months we plan on selling a minimum of 150 million worth of the initial 34 A320 CEO aircraft that we will be acquiring in order to produce both our leverage and manage our geographic and lessee concentration. With little exposure to AirAsia Group airlines within the global leasing community, we have seen strong demand from bidders for these aircraft. We anticipate mandating these sales by the end of the year with closing stretching into 2019. With that, I'll hand you over to our CFO, Julie Ruehl, for our Q2 financial review.

[Julie Ruehl:]

Thank you, Colm. FLY is reporting net income of $24.3 million or $0.87 per share for the second quarter of 2018, a significant increase from net income of $2.9 million or $0.09 per share in the year ago quarter. Overall we are very pleased with our improved financial results. Q2 adjusted net income of $25.2 million is nearly 5x more than Q2 2017, and adjusted ROE of 17.6% also represents a five-fold increase from Q2 2017. On a per share basis, adjusted net income was $0.90 in Q2 2018 as compared to Q2 2017 adjusted EPS of $0.16 on a revised basis. The transfer of additional aircraft from the AirAsia transaction over the remainder of Q3 will enhance FLY's already positive growth trend. As a reminder, we have revised our definition of adjusted net income beginning in 2018.to simplify the presentation and align more closely with the metrics reported by our peers. Please refer to the appendices at the back of the presentation for a reconciliation of our adjusted net income. Turning back to FLY's operating results for the quarter, our operating lease rental revenues in Q2 increased 10% to $89 million due to the growth of the fleet and higher lease rate factors. This is the second consecutive quarter of double-digit growth. Since quarter end, we have sold one aircraft and added 12 to the fleet, bringing our portfolio to 96 aircraft today, an increase of 13% since the beginning of the year. In Q2, FLY recognized $12.6 million of end-of-lease income and a $2.9 million gain on sale related to the sale of two aircraft, which taken together represent a significant premium to the net book values of these aircraft. FLY's economic gain was maximized by making the smart decision to accept cash compensation and retained maintenance reserves at the end of the lease rather than requiring a lessee to perform maintenance work which would not have resulted in a dollar for dollar increase in the sales proceeds for out parted-out aircraft. This is why a significant portion of economic gain is classified as EOL income versus gain on sale. In comparing expenses to the prior year quarter, depreciation and interest expense are both up due to the growth of FLY's aircraft portfolio. SG&A expenses for the quarter include nearly $900,000 of unrealized foreign exchange gains as compared to unrealized foreign currency losses of $1.3 million in the prior year quarter. In Q2, FLY incurred $900,000 of debt extinguishment costs related to the two aircraft sales previously discussed, consisting almost entirely of non-cash write-off of debt costs. Now I would like to cover our guidance for Q3. As we have noted previously, the AirAsia aircraft acquisitions are occurring over time. Our guidance assumes that the transfer of the initial portfolio of 34 aircraft will be completed by the end of Q3. For the third quarter of 2018, we are expecting operating lease rental revenue of $97 million to $98 million. We expect amortization of lease incentives of $2 million to $3 million. Gain on sale of aircraft is expected to be approximately $2 million. Note that the one aircraft sale forecast for Q3 has already been completed. We expect end-of-lease income of approximately $3 million. Depreciation expense will be approximately $36 million to $37 million. We expect interest expense of $36 million to $37 million. We expect debt extinguishment costs of under $1 million. Maintenance and other costs are expected to be less than $1 million. We expect SG&A expense of $8 million to $9 million without consideration of any foreign exchange gains or losses that may occur. We provided high level full-year estimates for fiscal 2018 on last quarter's call. As we noted then, we typically do not provide forecast beyond the next quarter and do not intend to do so on a recurring basis. However, given the significance of the AirAsia transaction, we thought that it would be helpful to provide more color about the impact of the transaction to FLY. As a reminder, consistent with our Q3 guidance, the full-year estimates assume the initial portfolio transfers are complete by the end of Q3. As Colm mentioned earlier, we continue to expect full-year 2018 pre-tax income of $75 million to $80 million. Our full-year pre-tax income estimate does not include any gains from aircraft sales from the acquired portfolio as we do not have visibility into the timing and magnitude of such sales at this time. As we gain more clarity on potential aircraft sales, we expect to further refine our full-year estimates by the time of our Q3 earnings call. Now I will turn it back to Colm for his closing remarks.

[Colm Barrington:]

Thank you, Julie. So, we have reported great quarterly results for FLY resulting from the leasing fleet management, financing, and share repurchase initiatives we have taken at FLY over the last two years. We expect that these initiatives will continue to be reflected in improved financials over coming quarters, although each quarter is different somewhat because of the quarterly changes, gains on aircraft sales and end of lease income. Our major transaction to acquire up to 75 aircraft, including up to 41 A320 family neos, is proceeding as planned, with 13 aircraft already delivered to FLY and 20 more due by the end of September. We will see the results of this major fleet addition reflected in our quarterly income starting in Q3 2018. We intend to dispose off some of these aircraft [indiscernible] leverage and hopefully to make some small sales gains. Meanwhile, our net book value has increased to over $21 per share, which reflects our young and attractive fleet which has an average age of 6.8 years and an average lease term of 6.2 years. Our continuing sale of aircraft at economic gains to net book value demonstrate the underlying value of our fleet and the positive views expressed by some analysts that FLY is undervalued. We hope that these realities will be reflected by increasing demand for FLY's shares and the consequent drive in share price. With that, we are ready for your questions.

[Operator:]

[Operator Instructions] Our first question comes from Gary Liebowitz with Wells Fargo Securities. Your line is now open.

[Gary Liebowitz:]

First, a clarification, so Onex and BBAM acquired their shares, when does AirAsia acquire theirs?

[Colm Barrington:]

AirAsia would be acquiring the shares this month. The share purchases were related to the transfer of assets from AirAsia Group airlines to FLY and I believe that the share purchase will happen by August 30.

[Gary Liebowitz:]

Okay, thanks for that clarification. Steve, maybe you can talk about what you are seeing on the watchlist? I mean there seems to be some negative news out there about one of your Indian lessees and I'm just wondering how you are preparing perhaps for the need to have to move some assets around?

[Steven Zissis:]

I guess the two areas that we are more concerned with is obviously Turkey with the currency depreciation, and in that jurisdiction we currently have four aircraft on lease to the various airlines. One aircraft is already in transition and coming out and the second aircraft is in remarketing, will come out at the end of the year, which leaves us with two aircraft which is about 1.5% of our revenue. So, it's de minimis kind of concern for us but it's more generally a concern for kind of the general industry. And the fact that Turkey has been an active and great market for lessors over the last 10 years, so we're watching it very closely. We do think there will probably be some opportunities in the Turkish market once things stabilize because it is a dynamic market given its geographical location and its ability to bounce back over the years. So, we've seen this before, Gary. I think there will be some interesting opportunities. The other one is India, right, and India is starting to show some stress again from the stronger dollar and higher fuel prices and we've got three fairly new 800 at Jet Airways, they have talked about some restructuring of those leases but have not really pursued it. And so, we're kind of standing by and trying to just monitor the situation. The other airlines that we lease to, which is Air India, SpiceJet, and IndiGo, the latter two are very solid and no issues there, and with Air India as you know there are recapitalizing the airline and going through congress to get approval to recapitalize it. But again, in that one we are not concerned at all because we do hold a government guarantee on all our obligations on the Air India transaction. So, there are areas that we monitor and are concerned with in view of the general industry but with respect to FLY it's a de minimis issue.

[Gary Liebowitz:]

I see. Just one last quick one, you sold the 787 during the quarter, is there a story behind that, is that a customer concentration, risk management, or what was behind that decision?

[Steven Zissis:]

Look, we were trying to reduce our wide-body exposure and we thought that aircraft was kind of in the sweet spot in terms of its liquidity and we've got a fairly attractive deal on it, so we decided to sell that aircraft and make some room for some other opportunities that we think are going to come up next year.

[Gary Liebowitz:]

Great. Thank you very much.

[Operator:]

Our next question comes from Jason Arnold with RBC Capital Markets. Your line is now open.

[Jason Arnold:]

Any detail you can provide on the targeted AirAsia portfolio sales, I mean maybe specifically on size? I guess, if 150 million is kind of the lower and minimum, maybe what would you say would be the upper end and then where do you see the concentration exposures within AirAsia that you'd like to kind of reduce?

[Steven Zissis:]

So we are currently in the market with the portfolio of aircraft on AirAsia. Our initial target is 150 million in 2018 and another 150 million in 2019. But depending on where the offer is coming, we may upsize that and do a bit more. And Jason, the aircraft that we are offering are only the [COs] [ph]. So, they are the AirAsia family [COs][ph] that's spread between 2006 type of vintage to 2013 vintages. So, we'll just see how the market is and if we get attractive bids on it, we may end up selling more than our targeted amounts here. There is no desire to sell any of the Neos at this point. We want to hold the Neos longer-term and we have got great values on those, so we will be building up the FLY portfolio with the newer technology aircraft as we go along. In terms of concentration, I guess Colm, I'll let you talk about our targets there.

[Colm Barrington:]

I mean, Jason, there is no specific airline that we would be targeting to reduce our concentration to, but just overall the whole AirAsia group will become a significant part of FLY's portfolio. So we just think it's sensible to be reducing exposure there generally over time. And particularly as Steve said if we can sell some of the more midlife aircraft and give us more capacity there to take on the neos as our deliveries start coming up next year.

[Jason Arnold:]

Okay, great. Thanks for the color. That makes sense. And then I guess on a follow-up, you don't have much to speak of in terms of near-term funding maturities, I think just the Nord LB Facility, but maybe you can speak a bit more on your views on the funding markets, I think you touched on a little bit, but maybe just a little more detail? And then also directionally, how should we think about funding costs as you ramp on the AirAsia deliveries? Obviously lower funding costs and on a mix perspective, I would assume that should take the average borrowing cost down, but just maybe some added color there please?

[Colm Barrington:]

I think first of all, Jason, we're not seeing any reduction in the availability of financing, particularly in the secured market which is where we specialize. As we have reported, we raised $574.5 million at 1.75% over LIBOR to part-fund the first sort of 34 aircraft. In fact, it was 30 of the 34 aircraft in that transaction. So, we're not seeing any impact of generally rising interest rates on the availability of funding. In terms of interest rate exposure, as you know we are generally hedged so that our funding matches our fixed-rate leases, and we do have some floating-rate leases which we fund with floating-rate debt, so you will see now leasing can go up somewhat because of rising interest rates and our interest costs go up because of rising interest rates, but those two effectively are hedged by the rising lease rates. So, we are not finding any adverse impact of interest rates on our business right now.

[Jason Arnold:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from Helane Becker with Cowen. Your line is now open.

[Helane Becker:]

Just two questions, one is I think you said, Steve, that insiders now own something like 70% of the Company. So does it make sense, do you need to have public equity in order to accomplish your goals or does it make more sense to maybe take the Company private again?

[Steven Zissis:]

It's Steve. I wish we owned 70%, but we own 17%.

[Helane Becker:]

Oh, 17%, okay, thanks. Sorry about that. And then the other question I had was with respect to the, and I guess this is probably more a question for Julie, the $36 million or $37 million in depreciation that you're looking at for the third quarter, does that assume all the aircraft are in place for – the new aircraft are in place for the quarter or is there still more to be added in the fourth quarter?

[Julie Ruehl:]

It does assume that all of the initial 34 are in by the end of the third quarter, some of them toward the end, but all of them are anticipated to be transferred by the end of Q3.

[Helane Becker:]

Okay, all right, great. Thank you very much.

[Operator:]

Our next question comes from Michael Linenberg with Deutsche Bank. Your line is now open.

[Mike Linenberg:]

Just a couple of questions here, if we look at AirAsia and we look at that as a percent from a concentration risk perspective, where is that peak, and you can give it to me either in fleet numbers or in lease revenue, so where does that peak as a percentage of your total lease revenue? And then as we look at over the next couple of years as you divest call it 150 million in 2018 and 2019, where does that go, what's the appropriate rate when you think longer-term?

[Colm Barrington:]

I think it's a bit like saying how long [indiscernible], Michael, because first of all there are five different airlines within the AirAsia Group in five different countries [indiscernible] to the AirAsia franchise, AirAsia Berhad which is the parent company has a minority interest in those airlines. Secondly, we will be selling aircraft from the initial portfolio. Steve said, [indiscernible] 150 million, all goes well, this year and the same next year. So we would be continually reducing our exposure. You could find by the time we get halfway through the new transaction, we may have a very few of the CEOs stay with us. So, really it's impossible to say, give you a precise answer where the exposure will go to. Julie, do you want to – I mean the moment, if we acquired everything and didn't sell anything, it will be 24%, but we don't expect to reach that, we expect to keep it under 20%.

[Mike Linenberg:]

Okay, that's actually the number that I was looking for. That's actually helpful. That gives me a sense of total size, and then as we know, over time that will come down. Second question, obviously recognizing that your leverage is going to move up initially, as I look at some of the charts that you have, there is clearly a move to deleverage over the next couple of years. And look, there was a time where as an independent the view was that you couldn't get an IG rating, the agencies just won't provide it. Over time as the industry has evolved, we have seen over the last few years several independent lessors get to an IG rating. Where is management with respect to that? Do you have an aspiration to get to an IG rating three to five years out or is that not necessary, as I know currently you are BB-/Ba3, is BB then maybe the most suitable rating profile for FLY, just your thoughts on that?

[Colm Barrington:]

I mean we do actually have investment-grade rating from [indiscernible] but we don't from the other two major agencies. Look, it's not one of our top priorities, Michael, to get to investment-grade rating. We have ready access to all the financing we want in the secured markets. As we have said in our prepared remarks, our leverage does go up somewhat with the acquisition of the AirAsia aircraft. But as we sell aircraft and then due to the ongoing amortization in our secured facilities, which give or take those facilities amortize more rapidly than the aircraft depreciate, so our leverage will be going down automatically. And so we expect to be back in the 3x to 4x range within the next three years. Again, that could be quicker if we sell aircraft faster than we anticipate. So, it will be going down and we are very comfortable with that sort of leverage considering that most of our cash is secured and amortizing debt.

[Mike Linenberg:]

Okay, great. And then just one last one, since Steve and Colm, you have been through multiple cycles here and right now at least in the U.S. we are heading into the 10th year of expansion, that's certainly not the case around the world, but the fact is people are always looking for call that proverbial canary in a coal mine. Steve, you laid out a bunch of highlights about global aviation, global aircraft demand, some of the trends that we're seeing, and things are quite good right now, there is a few concerns here and there, whether it's Turkey or India, what are some of the things, like when we think about that proverbial canary in a coal mine, is it some spike in interest rates around the world? I mean what are the things that start to tell you that maybe the party is coming to an end, any thoughts or data points or things that you look at that all of a sudden maybe suggest that an inflection point is nigh?

[Steven Zissis:]

No, look, my opinion is always a little of several things is not going to be one thing that will trigger anything. But I think if you look at aviation, we are sort of in a super cycle, if you will, and so there will be times where there will be small events or events that will be cause a correction, but longer-term you ride through those and you've seen what aviation investment has done over the last 20 years, and it's quite amazing, and we don't see anything stopping that. The way we look at it, we are long-term investors and if there is a hiccup in Turkey or India, we think that those are opportunities for us.

[Mike Linenberg:]

Great. Thanks for that. Nice quarter. Thanks everyone.

[Operator:]

Our next question comes from Scott Valentin with Compass Point. Your line is now open.

[Scott Valentin:]

With regard, Colm, you mentioned obviously dissatisfaction with where the stock is trading on a valuation basis, how much flexibility is there going forward to do something in terms of capital management? I know delevering probably is the first focus but is there flexibility to use some of the proceeds maybe from aircraft sales to focus on maybe repurchasing shares, like you have done in the past?

[Colm Barrington:]

I think, Scott, we've done a lot of that over the last few years and probably at the moment we'll be focused more on acquisitions of new aircraft and growing the portfolio with new technology aircraft, and as we've mentioned, deleveraging. Those are our two priorities right now. So I don't think you'll see us buying shares back within the foreseeable future. But look, conditions might change somewhere down the road, we can have a look at that, but as of now we are focused on acquisitions and deleveraging.

[Scott Valentin:]

Okay, fair enough. And then just with regard to the guidance, I know you reiterated guidance of $75 million to $80 million pre-tax for the year. I think through the first half of the year we have done about $40 million in total pre-tax income. That implies about $40 million for the back half. Just thinking with the addition of the portfolio, mostly obviously the positive impact coming in 4Q, you have a full quarter's impact in 4Q, I mean do you think there is room for upside to that above $80 million given you have done $40 million year to date and the benefits of the acquisition are really coming call it in 4Q?

[Colm Barrington:]

I think the $75 million to $80 million, Scott, is based on our projections for the acquisitions that we have contracted. It does not take into account the potential aircraft sales of the portfolio aircraft. So, as some of those are accelerated into 2018, we could potentially beat that figure. But that's not in sort of our core estimate right now, but that's the potential upside.

[Scott Valentin:]

Okay. And of the 150 million that you have initially targeted, I think you mentioned, will most of those close in 2019 is your expectation, the first half of 2019?

[Colm Barrington:]

The expectation is we'll probably do mandates roughly within 2018, we might do some closings in 2018, but some of them are likely to drag on into 2019. It's [indiscernible] typically get closed around year end anyway because everybody is going for holidays, but we're definitely working on trying to get some done this year but we are not relying on that right now.

[Scott Valentin:]

Okay. And just one final question, in terms of aircraft demand, you mentioned you're selling CEOs and retain the neos, has there been a big shift in value call it in the last six months as fuel prices have increased, have you noticed more demand for the new aircraft?

[Colm Barrington:]

We haven't noticed any significant change. I mean fuel prices have gone up a bit, but they have also gone down 10% in the last few weeks too. So the whole thing is up and down. So we haven't really noticed any significant change in the last few months.

[Scott Valentin:]

Okay, thanks very much.

[Operator:]

I'm not showing any further questions at this time. I would now like to turn the call back over to Matt Dallas for any closing remarks.

[Matt Dallas:]

We would like to thank everyone for joining us for our second quarter earnings call. We look forward to updating you again next quarter. You may now disconnect.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day.