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Edited Transcript of AYR earnings conference call or presentation 12-Feb-19 3:00pm GMT

Q4 2018 Aircastle Ltd Earnings Call

Stamford Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Aircastle Ltd earnings conference call or presentation Tuesday, February 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron Dahlke

Aircastle Limited - CFO

* Frank C. Constantinople

Aircastle Limited - SVP, IR

* Michael Kriedberg

Aircastle Limited - Chief Commercial Officer

* Michael J. Inglese

Aircastle Limited - CEO & Director

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Conference Call Participants

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* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jamie Nathaniel Baker

JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst

* Kevin William Crissey

Citigroup Inc, Research Division - Director and Senior Analyst

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Michael John Linenberg

Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst

* Reno Bianchi

* Russell Filipski

* Susan Marie Donofrio

Macquarie Research - Senior Analyst

* Vincent Albert Caintic

Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Aircastle Q4 2018 Earnings Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Frank Constantinople, SVP, Investor Relations.

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Frank C. Constantinople, Aircastle Limited - SVP, IR [2]

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Thank you, Espe. Good morning, everyone, and welcome to Aircastle Limited's Fourth Quarter and Full Year 2018 Earnings Call. With me today are Mike Inglese, Chief Executive Officer; Aaron Dahlke, Chief Financial Officer; and Mike Kriedberg, Chief Commercial Officer.

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

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

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

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Michael J. Inglese, Aircastle Limited - CEO & Director [3]

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Thanks, Frank. Good morning, everyone. Today, I'm going to discuss our results for the year, our view on current market conditions, and our strategy for the coming years. I'll then turn the call over to Aaron Dahlke to cover our financial results for the fourth quarter and the year, after which we'll open it up to Q&A.

Let me start by summarizing Aircastle's investment thesis. Our industry has solid fundamentals, growth in air traffic remains very strong and while growth slowed a bit in 2018, it continues to significantly outpace global GDP growth.

Globally, aircraft leasing demand also remains very strong, particularly for modern narrow-body aircraft that make up the majority of our fleet. Aircastle's balanced approach towards capital allocation is focused on long-term value creation for shareholders and includes the solid dividend, opportunistic share repurchases and profitable cash flow and fleet growth.

We're disciplined investors and able to find attractive opportunities throughout the cycle, with a conservative balance sheet and ample liquidity to enable us to act opportunistically as market conditions change.

Being an adept asset manager is a critical element to executing on our investment thesis. We have a team of seasoned industry veterans that can effectively move assets around the globe. We believe this differentiates us from many other platforms.

2018 was a very strong year. We closed with a very active fourth quarter, and we achieved significant milestones during the year. We were awarded investment-grade credit ratings by S&P, Fitch and Moody's. We've returned over $1.1 billion of capital to shareholders since our formation, crossing over the $1 billion milestone in the fourth quarter. This is more than half of the current shareholders' equity, which is a little over $2 billion for the first time at year-end.

In our history, we've acquired 470 aircraft for over $15 billion and sold 220 aircraft for approximately $5 billion, generating gains of over $320 million. And in the fourth quarter, we invested in our first new technology aircraft with the closing of 10 A320neos. During the year, we earned $248 million or $3.17 per diluted share with adjusted net income of $257 million or $3.29 per share.

We acquired 39 aircraft for $1.4 billion during the year and extended the leases on 14 aircraft in the fleet and transitioned 5 others. We also sold 14 aircraft during the year, including 2 wide-bodies for net proceeds of about $340 million, all indications of our strength and skilled asset managers with professional leasing platform.

And as responsible stewards of capital, we returned a total of $158 million to shareholders during the year, including $89 million of dividends and about $70 million in share repurchases.

Our GAAP ROE for the year was a solid 12.7% with cash ROE a little above 14%. During the fourth quarter, we acquired 18 aircraft for $760 million and sold 3 older aircraft for $63 million of net proceeds and a gain of $8 million. The weighted average age of the 18 aircraft acquired during the quarter was 3.5 years with a weighted average remaining lease term of 5.6 years.

Our fleet transformation continued during the year, as we continued to invest in mid-aged narrow-body aircraft. Our fleet of owned aircraft reached 248 at the end of the year and 72% of those aircraft are narrow-bodies by net book value, twice the percentage of 5 years ago. Wide-bodies represented 24% of total book value, 2/3 of which are A330s, and this compares to the peak of 50% at the end of 2014. As of today, our 2019 placement task is very manageable and represents a small percentage of the net book value of our fleet.

Now let me spend a few minutes on the situation in Brazil. In our press release last week, we tried to underscore the importance of the Cape Town Convention to Brazil as well as having a predictable judicial system. Although the bankruptcy judge extended the stay on repossession until mid-April, in contravention of Cape Town, in our view, he did require the aircraft to be properly maintained and that the lessors must be paid for everything falling due after February 1.

We've appealed this stay and believe we're on the right side of the law and the fact. This gives us cautious optimism. We remain confident that we have aircraft on lease with other operators within a reasonably quick period of time after we get them back. Until then, we'll be closely monitoring our assets and expect that we'll be receiving ongoing rent and maintenance payments.

With respect to our E2 order, we continue to have asset campaigns with a variety of potential SCs, and we're working very proactively with Embraer to develop the market for these new-generation aircraft. Our first deliveries now are not scheduled until the second half of 2020. We believe we will be able to put these aircraft into the market in the coming year and as the Embraer and -- in conjunction with their new partnership with Boeing, helps develop market for this next generation of regional assets.

Now turning to the current business environment. Market fundamentals remain strong as evidenced by the most recent IATA air traffic results for the full year. Global air traffic growth 6.5%, in line with the full year estimates. The continued high level of air traffic compares favorably with the IMF's estimate of global GDP growth of 3.7% for 2018. It represents a multiple of GDP of approximately 1.8x. Full year traffic growth was, again, above capacity growth as estimated by IATA at 6.1% for the year, resulting in passenger load factors reaching a record of almost 82%. While 2018 traffic was healthy, it was off a bit from the prior 2 years of above trend-line growth.

According to IATA, global airline profits exceeded $32 billion for the year. This represented the fourth consecutive year that the industry's profits exceeded $30 billion. IATA is forecasting 2019 profits to rise 10% to about $35.5 billion. According to IATA, almost 80% of the airline industry's cumulative net income since 2004 has occurred over the past 4 years. Low fuel prices have benefited airline profitability, while the cost of fuel can be volatile, prices remain low by historic standards.

At the end of '18, fuel was 33% below the October 2018 peak and 62% below the 2008 peak, a year when the airline industry reported a loss of $26 billion. In the latest IMF January forecast, average oil prices are projected to be just below $60 a barrel for '19 and '20, well below the peak level seen back a decade ago.

Switching to the leasing market. Demand for current generation narrow-bodies remains strong and rental rates remain stable. As we've been pointing out over the past 2 years, the second lease demand for wide-bodies remains soft, due to their narrow operator-based and relatively higher transition costs as well as the current supply-demand situation in the marketplace. With respect to aircraft values, prices have been supported by traffic growth, financing availability and low interest rates.

Strong traffic growth and low oil prices have supported continued demand for NGs and CEOs with ample financing availability and low interest rates enhancing the affordability and attractiveness of investing in aircraft. Although interest rates increased during 2018 like fuel, they remain low on a historic basis. 7-year treasury at 259 at year-end, this was up from 233 at the end of 2017, but still well below the 4.4% average between 2000 and 2008.

Towards the end of last year, financial conditions tightened, credit spread widened a bit, but central banks have been more accommodative since year-end. The U.S. Fed has taken a pause on its prior rate hike path and the ECB recently signaled monetary policy would remain accommodative.

Looking ahead, we remain optimistic about the near-term prospects, while being ever mindful of trends and current events. We expect to be able to continue to be selective in our new investments, while growing in a disciplined, profitable and conservative manner.

In a highly competitive market, we achieved strong results in 2018 by finding situations that play to our competitive strength.

Our team is deep and experienced, we have a conservative capital structure with investment-grade credit rating. Aircastle is the largest permanently capitalized investor in the mid-aged aircraft space, and we have the flexibility to react quickly to market conditions, plus we are not tied down by large investment commitments. Combination of discipline and financial flexibility, that allows us to take advantage of these opportunities, is a cornerstone aspect of our strategy, and our patient long-term approach towards building value.

Consistent with our philosophy of providing a regular return of capital to our shareholders, Aircastle's board approved our 51st consecutive quarterly dividend, $0.30 per share payable on March 15. The dividend yield on our shares is currently about 5.7%. Since 2011, we've increased the dividend 9x, tripling it from $0.10 per share per quarter to $0.30 per share.

In closing, we had a very successful 2018, notwithstanding developments in Brazil. We remain first and foremost, responsible stewards of capital, and we'll continue to allocate capital to create long-term value. We've improved profitability and returns over the past few years, while earning an investment-grade credit rating. We've substantially improved the quality of the fleet with a conscious shift towards more liquid in-demand narrow-body aircraft. And as an investment-grade issue with conservative leverage and significant liquidity, and a team of seasoned professionals, we believe we can continue to attract -- source attractive opportunities and proactively manage our portfolio.

Now I'll turn the call over to Aaron, who'll review the results for the quarter and the year.

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Aaron Dahlke, Aircastle Limited - CFO [4]

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Thanks, Mike. As Mike stated earlier, we had another strong year of operational and financial performance. For the full year, we earned $248 million or $3.17 per diluted share, and adjusted net income of $257 million or $3.29 per diluted share. We acquired 39 narrow-body aircraft in 2018 for $1.4 billion and sold $339 million of assets at a healthy profit. This resulted in net fleet growth of 10%. We further increased our sustainable earnings base in 2018 and continue to reduce our remaining-in exposure to what we felt are higher-risk assets. Let me review the financial results.

For the fourth quarter, lease, rental and finance lease revenues were $193 million, up 7% or $13 million year-over-year, due to the impact of the 10% net fleet growth. We owned 248 aircraft at the end of 2018, up from 224 aircraft a year earlier.

We recorded a gain on sale of flight equipment of $8 million in the fourth quarter and $37 million year-to-date.

Total net proceeds from our aircraft sales in 2018 were $339 million. This translates into a rough sales margin of 11% for the full year, which is well above our historical margin of approximately 7%.

Total revenues for the quarter were $239 million, an increase of $96 million or 49% from previous year. This is primarily driven by higher maintenance revenue of $93 million and higher lease rental and finance lease revenues of $13 million. The increase in maintenance revenue was largely due to the early termination of 11 aircraft leases with Avianca Brazil.

For the full year, total revenues increased $39 million or 5% due to higher maintenance revenue of $50 million and higher lease rental and finance lease revenue of $11 million. Depreciation was $10 million higher for the quarter and $12 million higher for the year. The increase in depreciation was primarily driven by net fleet growth.

Over the past 2 years, we've acquired 107 aircraft and have sold 51, for a net increase of 57 -- 56 aircraft and grew net book value from $6.7 billion to $7.4 billion.

For the fourth quarter, interest expense was $7 million higher than the previous year due to a larger average debt balance. We issued $650 million of unsecured notes in September and repaid $400 million of maturing notes in December. Interest expense for the quarter was $53 million and $235 million for the full year. Full year interest expense declined by $7 million due to loan termination fees that were included in 2017 interest expense.

We reported a net loss of $8 million on our unconsolidated equity investment associated with our joint ventures as compared to $7 million earnings in the prior year. In 2018, Lancaster, controlling partner, decided to exit its investment in a JV and is pursuing the disposition of the JV assets as a portfolio. For accounting purposes, we recognized a $9 million loss on our share of the undistributed losses related to the disposition of the portfolio. It is important to highlight that despite the fourth quarter accounting impact, we expect to earn nearly 15% IRR on our investment in this JV since inception.

For the quarter, net income was $104 million, adjusted net income was $110 million, up $49 million and $53 million, respectively, year-over-year. The change for both mainly reflects higher total revenues of $96 million, partially offset by $10 million increase in depreciation, $7 million higher of interest expense and $16 million decrease in earnings from our Lancaster JV investment and $5 million of higher taxes. For the full year, net income was $240 million and adjusted net income was $257 million. Net income in 2018 was $100 million higher than in 2017, while adjusted net income was $88 million higher. We had no impairments in 2018 versus $80 million of impairments in the second quarter of 2017.

Adjusted EBITDA for the fourth quarter of 2018 was $277 million versus $185 million last year due to higher maintenance revenues of $93 million. For the full year, adjusted EBITDA rose 5% to 100 -- to $840 million from $802 million. Maintenance revenues were $50 million higher and lease rental and finance lease revenues were $11 million higher. These increases were partially offset by $18 million of lower gains in sale of flight equipment.

At the end of the fourth quarter, we own 248 aircraft with a net book value of $7.4 billion, including 217 unencumbered aircraft with a net book value of $6.1 billion. We manage 13 aircraft with a net book value of $602 million through our joint ventures.

For the fourth quarter of 2018, our portfolio lease rental yield was 11.2%, and our net cash interest margin was 7.8% versus 8.6%.

GAAP ROE was -- for 2018 was 12.7% and cash ROE was 14.2%. The lower net cash interest margin was primarily due to lower lease revenue, mostly driven by the termination of 11 leased aircraft with Avianca Brazil. Given the expected transition time on the aircraft coming out of Avianca, we expect the first half of 2019 net cash interest margin will be down a bit, but we anticipate it to recover in the second half of the year to around 8% by year-end.

Our liquidity position remains very strong. At year-end, we had $153 million of unrestricted cash and more than $625 million of unused revolver capacity. Total borrowings were $4.8 billion, including $4 billion of unsecured debt or 83% of total debt. The weighted average coupon on our debt at year-end was 4.99%. Our weighted average debt maturity was 3.3 years, and our net debt-to-equity ratio was 2.3x. Cash flow from operations was $523 million, year-over-year 6% increase. With significant liquidity, low financial leverage, investment-grade credit rating and minimal forward commitments, we are well positioned to take advantage of any potential market dislocation, which could lead to attractive buying opportunities.

Our capital allocation approach remains balanced. During the year, we acquired $1.4 billion of aircraft and returned $158 million to our shareholders in the form of dividends and share repurchases. We remain committed to allocating capital efficiently between accretive investments and return of capital to shareholders.

On February 8, the board approved a $0.30 per share common dividend payable on March 15. We've now paid out $1.1 billion to our shareholders, including $857 million in dividend since going public in 2006 and $89 million in 2018 alone. We've increased the common dividend 9x since 2011, tripling the payout from $0.10 to $0.30 per share for quarter.

Since 2011, we have also repurchased approximately 270 million of our shares at an average cost of $14.57 per share, and we currently have a share repurchase program authorization, which we can use opportunistically with the remaining balance totaling $76 million.

You can find guidance elements for the first quarter of 2019 in our earnings press release and earnings presentation, both of which were posted to the website this morning. I'd like to provide some background and context on that guidance. Thus far, in 2019, we have closed or have committed -- have commitments to close 10 narrow-body aircraft for $378 million. For the first quarter, we are guiding to a combined lease, rental and findings -- finance lease revenue between $187 million and $194 million, which would compare to $187 million in the first quarter of 2018. This reflects the net impact of our acquisition volume and sales activities over the past year, along with the transition of aircraft that are presently not generating revenue, including the 11 Avianca aircraft. Our maintenance revenue for the first quarter is expected to be roughly flat year-to-year, based on scheduled transitions in Q1 '19, but down materially on a sequential basis. As explained, the fourth quarter of 2018 includes sizable maintenance revenue associated with the termination of leases with Avianca Brazil.

In conclusion, 2018 was exceptionally strong year of financial performance and results. We further strengthened our franchise by acquiring 39 narrow-bodies, including 10 A320neos and profitably selling 14 aircraft to produce solid gains and reduce residual value risk. We achieved a strong ROE and returned significant capital to shareholders. We have a strong liquidity position, our future capital commitments remain modest, and our capital structure is flexible and conservative, and with the investment-grade credit ratings, we have robust and steady access to financing.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Helane Becker with Cowen and Company.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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Just a couple of clarification questions. On the differences between the lease rent and the finance lease, do we have to think about any accounting changes associated with that?

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Michael J. Inglese, Aircastle Limited - CEO & Director [3]

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You're talking as a result of the new leasing standard?

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [4]

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Exactly.

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Michael J. Inglese, Aircastle Limited - CEO & Director [5]

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No, we don't expect that to have any material impact on our business reporting.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then my other question is, with respect to the joint ventures that, I guess, you were talking about Lancaster leaving the partnership. Are they giving -- you said that they were I think selling assets associated with that. Are you considering acquiring those assets? Or is that not something that you would want to do? Can you just maybe discuss that in a little more detail?

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Michael J. Inglese, Aircastle Limited - CEO & Director [7]

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Sure, Helane. It is something we considered, but in the context of the stewardship and the management of those assets, the third-party market, we believe, will offer them more value than we probably would have. And so it's likely that, that sale will occur to a third party.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [8]

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Okay. And then my last question, just in terms of what you're seeing. I think you said, Mike, that you were seeing really strong demand, and I'm just kind of wondering if there is a geographic bent to that? Is there one region that might be stronger than a different region that you could maybe talk a little bit about?

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Michael Kriedberg, Aircastle Limited - Chief Commercial Officer [9]

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It's Mike Kriedberg. No, I wouldn't say -- it's across the board. I mean, you're seeing it in Europe, you're seeing it in Asia. It's pretty much across the board on purchase leasebacks. We're finding a number of those and still a lot of lessor selling. So we haven't found any shortage of finding decent opportunity. So I think, it's pretty across the board. Yes, I wouldn't pick a specific region.

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Operator [10]

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And we'll take our next question from Susan Donofrio with Macquarie Capital.

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Susan Marie Donofrio, Macquarie Research - Senior Analyst [11]

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Just a couple of questions. One is, can you talk a little bit about emerging markets and the rising interest rates? And if there is anything to flag, obviously, India is, I guess, coming to mind, in general. Is there something that we should be watching for? And then I just have some follow-ups on Avianca.

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Michael J. Inglese, Aircastle Limited - CEO & Director [12]

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Yes, first, I would say, it's not clear that we're in a rising interest rate environment anymore. So we're, obviously, keeping an eye on that. We did see effects in the middle of last year from both the strengthening dollar, rising rates and oil. Some of that has sort of -- the amplitude modulation of that has come down a bit from what we were seeing in the middle of last year in respect to those 3 phenomenon. And I would say, with respect to India, it's clearly a very competitive market, and it's a very strong growth market for the airline industry. We have enhanced our relationship and our investment with IndiGo during the second half of last year with our first investments in A320neos through sale leasebacks with them, which is in addition to a handful of other A320ceos we have on lease with them. We also have exposure there to SpiceJet, to GoAir and to Jet Airways as well. So we think it's a -- going to be a strong growth market. It won't be a perfectly smooth path to accommodate all of that growth, but we continue to monitor the situation. With respect to Jet Airways, it appears that they have in the works a recapitalization plan, which will allow them to move forward. It's not done yet and so no one's ready to declare victory, but it appears on the right path, and we expect that we might see some news related to that and more definitive details over the course of the coming months.

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Susan Marie Donofrio, Macquarie Research - Senior Analyst [13]

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Great. And then just on Avianca. So the next step would be a higher court would listen -- is that -- I'm just trying to think, I guess, about the timing of when you can get your aircraft back in order to replace them.

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Michael J. Inglese, Aircastle Limited - CEO & Director [14]

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So under the bankruptcy judge's stay, he has given them a stay until mid-April when their -- the creditors meeting being scheduled. We have appealed that decision with the appeals court. That process will probably take some time, and I don't think we would expect to have any clarity or an answer from that process until probably the first half or mid-March at this point in time.

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Operator [15]

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And we'll take our next question from Jamie Baker with JPMorgan.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [16]

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So Mark and I are trying to understand why you had so many aircraft with Avianca Brazil in the first place? Should we assume there was something maybe about the reserves, the leases maybe were nicely above market? Or was it a case that your underwriting simply failed you? I know you're not alone in this regard, but others that have exposure there, and I'm thinking about GE and ACG that -- it seems that they're avoiding the situation that you're currently in. So any color on how this whole morass came to be?

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Michael J. Inglese, Aircastle Limited - CEO & Director [17]

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So yes, let me sort of dismiss the whole premise of your question. We don't cover any underwriting. We had appropriately priced lease rates. We had appropriately scaled maintenance reserves. And the idea that GECAS and ACG are somehow in better shape than we is basically preposterous. So these are relatively young A320s. I expect to get them back, and I'm expecting to have them on lease quickly, on new long-term leases with a very strong credit.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [18]

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Is there a risk that you may need to write them down? And if so, when? And also just given what seems to be a pretty blatant disregard for Cape Town, is this like a one-off situation? Or are you possibly rethinking about how you place aircraft with weaker operators in jurisdictions where Cape Town might have previously held up?

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Michael J. Inglese, Aircastle Limited - CEO & Director [19]

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So look, certainly, everyone -- the world is watching what happens in Brazil, and how Cape Town plays out. So certainly, we are watching that with keen interest and depending upon how this goes, it will certainly influence how we think about the convention and how we think about pricing that risk into future business.

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Operator [20]

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And we'll take our next question from Vincent Caintic with Stephens.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [21]

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Just a couple of kind of detailed follow-up questions. So first on the $14 million loss in the earnings of equity method investment. So I understand first off, the $9 million from Lancaster. I'm wondering what's driving the other $5 million to get it to the $14 million? And then in terms of the $9 million, is that just a mark-to-market of the assets in the JV portfolio? If so, is there potential upside to that as you go work through that portfolio? And then, any reason that there'll be a loss on that venture versus the gains that you're seeing on the existing portfolio? And if there's any implications on your other joint ventures?

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Aaron Dahlke, Aircastle Limited - CFO [22]

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It's Aaron. So on the joint venture, when you think about the change or the gross change is $14 million, so that's a loss. And it's a portfolio value, so there will be gains on that in 2019, just the way the math has to work for accounting purposes.

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Michael J. Inglese, Aircastle Limited - CEO & Director [23]

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But I think if you think about -- sorry, if you think about it holistically, our controlling shareholder in that joint venture used to own Aircastle's stock and established this joint venture with us. When they look at the totality of their investment in this space, they have made a very nice return on both sides of that equation, and this is a decision by them to exit these assets in the context of reallocating their own capital into different sectors, and the people who established this aircraft-leasing venture with us have since retired there. So with the change of personnel and the change of sort of vertical mandates, this is a logical progression for them, and we don't think it necessarily has any implications in the context of how we're seeing values or what we expect to see in our own portfolio over time.

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Aaron Dahlke, Aircastle Limited - CFO [24]

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And just to remind you, like today, return -- I'd like to say return on it is going to be in excess of 15% for us since inception, and you're going to see gains coming in, in 2019 on this.

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Vincent Albert Caintic, Stephens Inc., Research Division - MD and Senior Specialty Finance Analyst [25]

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Got it. That's really helpful. Next, on the situation with Avianca Brazil. So one thing I want to clarify, our -- the guidance for first quarter '19, does that assume -- are you actually receiving monthly lease payments from them since the court ordered that for February 1? And then just kind of thinking long term from your prior experience in these types of events, what -- how does it typically play out? And then, how long -- once you repossess the aircraft, how long does it take to turn it around?

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Michael J. Inglese, Aircastle Limited - CEO & Director [26]

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So in the context of the bankruptcy judge's new order, we have in fact received payments since stipulated resumption date of February 1 on our leases, both rent and maintenance reserves. In the context of how this plays out, it remains to be seen where we will be in a month with the appeals process or where -- and if there will be, in fact, a recovery plan that the creditors and others find acceptable when you get to the middle of April. So my personal expectation is, sometime after mid-April, I will be getting my aircraft back and after a relatively short period of time, I'm guessing a few months, we should be able to get them back out on lease on what I expect to be relatively long-term leases with a stronger credit.

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Operator [27]

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And we'll take our next question from Mike Linenberg with Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [28]

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Mike, not to beat a dead horse here, but back to Avianca. I just -- so I want to be clear. So you said you did receive rent and maintenance reserves recently from Avianca Brazil, now are you whole -- so have they -- everything that was in arrears going back, I don't even know how many months. But are you, one -- are they current? Number one. Number two, if they continue to make those payments, and they perform, can they continue to keep those airplanes? Do they have a say there? Can you actually take them out? I'm just curious about that dynamic. Then I have a few others.

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Michael J. Inglese, Aircastle Limited - CEO & Director [29]

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That's okay. So no, they are not current. The judge did not order them to get current. He ordered them to pay for the usage of the assets with all the lessors as it began on February 1. So there is still significant arrears across all the lessors in the Avianca Brazil family and. As it relates to the going-forward situation, we don't believe the judge has the authority to cram down leases on us and tell us that we need to keep them there, but it's a developing situation, and we will see how it progresses over the course of the next month on our appeal process as well as the next few months in the context of the recuperation plan.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [30]

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Okay. And then just as a follow-up. It looks like in the press release, you talked about repossessing the 10 Airbus narrow-bodies, and then you've -- apparently, I believe, you've already found homes for them. What about the A330? So does that mean the A330 is that still flying with Avianca Brazil? Or were you able to actually get that out, repossess and that's gone on to greener pastures?

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Michael J. Inglese, Aircastle Limited - CEO & Director [31]

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So yes, and not exactly. So we did in fact repossess the A330 before the bankruptcy -- the original bankruptcy stay was put in place. The aircraft is in our possession, and we are in the process of remarketing it. So the greener pasture hasn't quite yet been identified, but we're confident we'll find a home for that. It's basically a 2015 A330, and we will find a home for it, we have not yet.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [32]

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Okay. And then just kind of the last and this is maybe a little bit of a follow-up to Jamie's question is that we know that BOC Aviation, they did get their airplanes out, now, it was only 2, and so you had 11, and I realize every situation is different, sometimes planes don't have your engines, trying to track them down. So what worked with BOC? Did they move first and so, therefore, they had first-mover advantage? Or because they had a less-complex situation than what you had with Avianca Brazil? They were able to move and get the assets out and on to another carrier?

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Michael J. Inglese, Aircastle Limited - CEO & Director [33]

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I would describe it as, I don't believe they moved first or sooner. We were moving at the same time. It was just much easier to tie up 2 airplanes than it was to try to tie up 11 before the bankruptcy judge issued this initial stay.

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Operator [34]

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And we'll take our next question from Kevin Crissey with Citi.

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Kevin William Crissey, Citigroup Inc, Research Division - Director and Senior Analyst [35]

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Do you currently have any other clients that may be delinquent or in that you have particular eyes on maybe outside of that region?

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Michael J. Inglese, Aircastle Limited - CEO & Director [36]

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No, as I alluded to before, Kevin, so everyone who is involved with Jet Airways is certainly keeping an eye on the situation there, and how the recapitalization plan comes together. Outside of that, I don't think we have any material concerns with any of our top 15 or 20 customers.

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Kevin William Crissey, Citigroup Inc, Research Division - Director and Senior Analyst [37]

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Terrific. And then, do you, as in general, take positions on joint venture agreement applications, American, with LATAM, or any of the other? I don't know if you weigh in on the prospects for those JVs.

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Michael J. Inglese, Aircastle Limited - CEO & Director [38]

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Not really. I don't think it's my place to comment on commercial tie-ups between those folks and what they may be talking about or thinking about.

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Operator [39]

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And we'll take our next question from Russ Filipski with Post Advisory.

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Russell Filipski, [40]

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My questions on Avianca were answered with earlier questions, so I'm not going to belabor the point.

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Operator [41]

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And we'll take our next question from Kristine Liwag with Bank of America.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [42]

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Guys, with the aircraft in Brazil presumably -- presuming that you've been in discussions with potential lessees, when -- if you were able to get that aircraft out, how are the lease rates looking for a fairly new narrow-body? Were you expecting to get a higher lease rental on the aircraft, if you were to sign it with a new lease -- lessor today and -- versus what you've had with Avianca Brazil?

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Michael J. Inglese, Aircastle Limited - CEO & Director [43]

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In a word, no. We never expect to sign leases for a higher lease rate than some place -- than a plane that's been in place for 4 or 5 years in an existing operator. It's just how the industry works in general. Occasionally, you get lucky and that happens, that's not the norm. And so we would expect there will be a lower rental rate with the new operator, but sort of mitigating that effect is we also expect the next lease to be longer than the original end date of the Avianca leases and so we think by the sort of heavy check in the year 12 will be not far off of original underwriting economics from where we would have expected to be.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [44]

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And after your experience with the local courts in Brazil, and presuming that you also look at your portfolio after and reevaluated credit risk, is there anything that you would highlight that you've changed how you looked at? Before, were you only looking at Cape Town agreement as a risk mitigator or were you also looking at other factors? And how has that changed after your experience with Brazil? And what are the main changes you think you would implement going forward?

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Michael J. Inglese, Aircastle Limited - CEO & Director [45]

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So let's be clear with this. There is no after Brazil, we're in the middle of Brazil. So we are, obviously, looking at how Cape Town gets dealt with and how, ultimately, the situation gets resolved. It's not the only mitigant that we rely on in underwriting in any jurisdiction. It's precedent and other factors that go into thinking about that. And no one, I would say, realistically believe that in the context of repossessing a plane that you're going to get it back the day you terminated your leases. That's not how the real world works. So we're disappointed with how the process is being implemented and playing out in Brazil. The actual time frame involved in making all this come together is not exactly a surprise to anyone who's been in this business for a while.

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Operator [46]

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And we'll take our final question from Reno Bianchi with Cantor Fitzgerald.

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Reno Bianchi, [47]

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A couple of questions and unfortunately, the first one is again on Avianca Brazil. But I think the only information that hasn't been disclosed is, how much rent has been accrued on the book to date? And related question, when you will receive the rent? If you receive the rent, how would you recognize in the P&L?

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Michael J. Inglese, Aircastle Limited - CEO & Director [48]

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So to be clear, as it related to the past due amounts, once someone goes beyond our security package, we do not recognize revenue unless we collect cash. And so in the context of the new judge's stay and the prospects for collecting rents, we will only recognize that to the extent cash comes in the door.

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Reno Bianchi, [49]

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And you're not willing to disclose the amount of cash that might come in through the door?

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Michael J. Inglese, Aircastle Limited - CEO & Director [50]

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No, I'm not going to get into the specifics of the...

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Reno Bianchi, [51]

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But let me ask you this. Maybe you can answer this one. Is it full quarter fourth quarter of '18 of lease rental that has not been collected? Is it full 90 days?

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Michael J. Inglese, Aircastle Limited - CEO & Director [52]

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Again, I'm not going to get into the specifics of this particular situation, given that we're not going. So...

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Reno Bianchi, [53]

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Okay. So let's leave Avianca Brazil alone.

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Michael J. Inglese, Aircastle Limited - CEO & Director [54]

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Yes.

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Reno Bianchi, [55]

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I assume then you had the chance, I hope so, to see the outlook that Avalon put out a couple of days ago, which I think, in the aggregate depict a situation, maybe slightly more conservative than the one that you highlighted at the beginning of this call. I mean, my concern or what I would like to hear your opinion is there's been a decent amount of, I would define, a small bankruptcy, but certainly, a little bit of more incremental supply of aircraft than maybe it was originally contemplated. Because of all this bankruptcy, you still believe that the market is easily able to absorb that additional supply that is coming out of bankruptcy?

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Michael J. Inglese, Aircastle Limited - CEO & Director [56]

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Look, we think that the market so far has done a reasonable job of absorbing assets that have come out of recent situations. It doesn't mean that the market has an unlimited appetite and airline bankruptcies continue going forward. My suggestion is, with respect to Avianca Brazil, that given the nature of the assets that are coming out of there, we, in the context of our own assets, are very confident in finding a new home for those assets. But you've also had other recent bankruptcies, like Primera, some smaller carriers -- many of the smaller carrier assets, in my view, are going to find their way to the part outbin. And so I don't think they're necessarily going to be competing for a lease placement opportunity in the context of what you see coming out of Avianca Brazil.

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Michael Kriedberg, Aircastle Limited - Chief Commercial Officer [57]

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And I would just add to that -- really, just add to that comment. This is Mike Kriedberg. We haven't seen a slowdown in demand for, in particular, 320 -- CFM-powered 320s. There is demand for 738. So even with the bankruptcies, there is a number of new aircraft where I have seen actual demand slow a little bit as around the magnitude of new technology, MAXs and Neos. But as far as actual demand, there is really strong for relatively new CFM-powered 320s, 738s and if anything, some of that demand has even focused on buying. We're seeing a lot of the U.S. majors looking to buy 319s, young 320s, young 738s. So we haven't seen a change. Mike's comment's right. At some point, if we've got an -- an added supply of bankruptcy, it's going to take a toll out of it. We're right now on the young midlife, not seeing at all. We have no placement issues whatsoever. And the only thing I'll add on Avianca without getting into too much detail is I can tell you there's 4 or 5 strong interests from players. We will have no problem placing them, and we're waiting to see the outcome before we can actually do something with those aircraft. But I can tell you, we have no shortage of interest.

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Reno Bianchi, [58]

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My final question related to the net cash margin and obviously, the fourth quarter '18, on an annualized basis, is the first time ever that it declined below 8%. But as you explained, there was a lot of noise around that kind of -- mostly Avianca Brazil. But if I go back on time, so remember when you started launching this program of modernizing the fleet, I mean, I think at that time you announced that your expectation was the net cash margin to stabilize around the 8% kind of level. I just want to make sure that given the current trend in the market and everything else, that remain the expectation going forward? Or is there any possibility that margin may go up and down from that approximately 8% level?

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Michael J. Inglese, Aircastle Limited - CEO & Director [59]

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So I would say, look, given where we are with the situation in Brazil, the first half of this year will be lower than even what the fourth quarter was because the situation wasn't reflected in a full quarter of 2018. But I do believe by the end of this year, and when we're talking about the fourth quarter of '19 at this time next year, I would expect it to be back around the 8% level, give or take a little bit.

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Reno Bianchi, [60]

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But you do not expect basically the continuous influx of money into the sector to put further pressure on that statistic?

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Michael J. Inglese, Aircastle Limited - CEO & Director [61]

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I think it remains to be seen, but my view based on what I'm seeing today is I don't see a material difference in 12 months, but obviously, it will depend upon what I invest my money in and what I do in the way of selling assets as well. I don't think it will necessarily just be driven by the liquidity in the marketplace.

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Operator [62]

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(Operator Instructions) And there are no further questions at this time.

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Frank C. Constantinople, Aircastle Limited - SVP, IR [63]

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Okay. Thank you, Espe. Thank you for your time today. Feel free to reach out if you have additional questions. Have a nice day, and thanks for joining us.

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Operator [64]

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And that concludes today's presentation. We thank you for your participation. You may now disconnect.