Air Lease Corporation

Good day and thank you for standing by. Welcome to the AIR Lease Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jason Arnold, AVP Finance. Please go ahead.

Thank you, operator, and good afternoon, everyone, and welcome to Air Lease Corporation's earnings call for the third quarter of 2021. This is Jason Arnold, and I'm joined this afternoon by Steve Haase, our executive chairman. John Pluger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our results for the third quarter of 2021. A copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, November 4th, 2021, and the webcast will be available for replay on our websites. At this time, all participants on this call are in listen-only mode. Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense, and other income and expense items. These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today, November 4th, 2021. These estimates involve risks and uncertainties that could cause actual results to differ materially from these expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we may be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity, are non-GAAP measures. A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10Q we issued today. This release can be found in both the investors and press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chief Executive Officer and President, John Pluger.

Thanks, Jason. Good afternoon, everyone, and thank you for joining us. We're going to slightly alter our format today because Steve has been negotiating too many deals and has lost most of his voice. So he's doing great and is on our call with us today, but I'm going to combine our sections of prepared remarks into one section so that he can save his voice for the Q&A. We're happy to report that during the third quarter of 2021, ALC generated $525 million in total revenue, up 6% relative to the third quarter of last year. Moreover, as a component of total revenue, our third quarter rental revenue is a record high for us. We also recorded diluted EPS of 87 cents, which is the highest level in 2021. The industry is clearly improving, which we see in our results, forward aircraft demand, and lease rates. During the quarter, we took delivery of approximately 800 million in new aircraft, which was 200 million less than we originally anticipated, but these aircraft did contribute favorably to our performance this quarter. It is important to note that while fleet growth has been meaningfully constrained by OEM issues, it is still up 13% from this time last year. Additionally, our blended average funding costs continue to decline, and in fact, we're at an all-time low, helped by our favorable bond issuances this year at the lowest rates we've ever achieved. Greg will comment on that further in his remarks. Despite the Delta variant impacting trends somewhat, we remain encouraged by traffic recovery in North and South America, Europe, Russia, and the Middle East. We're encouraged by the easing of many international travel restrictions, such as by the USA for inbound traffic from Europe, Canada, and Mexico, as well as similar actions in opening international travel in Australia, New Zealand, Singapore, and India. We believe more countries in Asia will soon start following these positive steps. As a result, many of our airline customers are seeing improvement in operating performance as traffic volumes strengthen, while others are still facing continued pandemic challenges. As we've indicated to you many times in the past, the recovery is unlikely to be a straight line upward to pre-pandemic levels. It's going to have some bumps along the way, but importantly, it is clearly continuing to head in a positive direction on a global basis. Now, this positive trend is further evidenced in our collection rate, which improved in the third quarter to 94%. as compared to 87% in the second quarter and 84% in the first quarter. Our lease utilization rate remains strong at 99.7%. Our net deferrals balance edged up slightly during the past quarter to $118 million as of today, from $115 million as of early August, but 54% of deferrals granted to date have been repaid, and we anticipate that repayment percentage to continue to rise in the months ahead based on our repayment schedule. with 77% of those to be repaid through 2022. Our operating cash flow, meanwhile, remains very strong, up 30% year-to-date through the third quarter of 21, as compared to the same period of 2020, benefiting from fleet growth and rising cash collections. On the revenue side for this quarter, the combined impact of cash basis revenue recognition and lease restructuring was meaningfully lower as compared to the last couple quarters. In fact, cash basis lessees actually provided a positive contribution of $5 million in incremental revenue this quarter as compared to a drag of $42 million in the prior quarter. Most of the improvement relative to the second quarter was driven by significant cash payments made to us by Vietnam Airlines, which as you'll recall in order of magnitude represented approximately two-thirds of the total cash accounting impact in the prior quarter. We have reached resolution with Vietnam and will be monitoring their performance carefully, although it's too soon to say whether or not they will remain on a cash basis next quarter. Restructuring impact was also lower this quarter, which Greg will comment on shortly. While additional customer requests for accommodation will depend on the ongoing impact of the pandemic on a region-by-region and airline-by-airline basis, We do want to note that similar to last quarter, requests for assistance remain meaningfully below those witnessed earlier this year and in 2020. Moving to aircraft sales activity, as we previously telegraphed, we scaled back sales for the remainder of this year, largely because of delivery delays resulting in lower aircraft investments than planned. Having said that, we will likely have a few aircraft sales in Q4. But as our deliveries become more consistent relative to contractual expectations, we look forward to ramping our sales activity back up. We're encouraged by what we are seeing in the secondary market for aircraft in our fleet that would be candidates for sale. So let's spend some time now talking about aircraft demand. Today and looking forward, we see narrow body demand at or above pre-pandemic levels for many aircraft types with lease rates on the rise. In fact, during Q3, we executed a record quarterly high of 64 aircraft placements from our order book, including a 31 aircraft transaction announced with ITA in Italy, which is the single largest single placement by number of aircraft in our company's history. We placed 15 A220s, two A320neos, nine A321neos, and five A33900neos on long-term leases with ITA. We're particularly proud that Steve helped orchestrate this meaningful step forward in the modernization of Italy's state-owned flag carrier, and we have high expectations for our partnership. We also announced the placement of 10 new Airbus A321neo aircraft and five new A320-200neo aircraft with Spirit Airlines, where we placed the A321neos from our order book and leveraged our capital partners and our managed business to provide funding for the remaining five A320s in a highly customized fleet planning solution for the airline. In late July, we placed 10 used A320-200s with Allegiant Airlines as part of our transaction with Alaska Airlines. And speaking of Alaska, we delivered the first of 13 new Boeing 737-9 aircraft to the airline in September, a sizable placement designed to help the airline pivot to an all-Boeing fleet. We also delivered one A321neo to Sky Airlines in Chile, the first of its type to be delivered to that country. And we delivered the first new Boeing 737-9 in the country of Kazakhstan to SCAT Airlines. Our lease placements are clearly accelerating, such that our available delivery positions in 2024 have reduced by about one-third since our last earnings call, and we are 96% placed through 2023. As a whole, our order book is now 67% placed, with our current orders running through 2026. Rising fuel prices are certainly playing into the demand equation as well, as fuel efficiency increasingly makes new aircraft decisions even more attractive to airlines, with fuel efficiency improvements of 20% to 30% versus prior generations. We'd like to point out that narrow body demand is strong across both Airbus and Boeing products, but particularly the Airbus A320-21neo family, including the LR and XLR versions of the A321neo. Importantly, the Boeing 737 MAX is also recovering well in the marketplace, with lease rates climbing steadily from the lows of 9 to 12 months ago and recent strong momentum on the Dash 9 MAX. And the A220 has also accelerated, gaining good placement momentum. The bottom line is that these lease rates are rising on all of these new aircraft types. Now, that being said, we also have seen an uptick in demand and lease rates on the new twin aisles. For example, the 31 aircraft transaction with ITA included five new twin aisle A330neos, and we have several yet unannounced placements for 787s and A350s. Our main concern on the Twin Ella front is the ongoing Boeing 787 delivery freeze. We told you last quarter that under our Boeing contracts, we were scheduled to receive 10 new 787s by the end of the year. At this juncture, we are uncertain that we will be able to receive any of our 787s by the end of the year. In some cases, these aircraft are or will be more than 12 months late, and as such, we have canceled three 787s. Further, as we advised last quarter, we're seeing some minor delivery delays on a few Airbus single aisles, which they attribute to COVID or supply chain constraints. As such, looking ahead to the fourth quarter, we have trimmed our expectations for deliveries. Although we are contractually scheduled to take delivery of 25 aircraft in the fourth quarter of this year, we only expect to take 15 aircraft, representing approximately 1.2 billion of aircraft investments. Beyond that, we are closely watching supply chain constraints, especially as the OEMs ramp up production rates. It is no coincidence that both Boeing and Airbus increased commentary on supply chain constraints in each of their third quarter earnings calls. So now at the simplest and highest level, we're at a point where more than 60% of commercial aircraft deliveries by Airbus and Boeing combined this year are being taken by lessors or financed by a sale-leaseback transaction which as compared to the 40% to 45% share of the industry of the recent past, clearly demonstrates this shift to leasing for an airline industry that is still reeling from staggering financial losses and capital constraints. We see this continuing for the next several years as airlines look to recover their balance sheets and lessors remain a bastion of capital and aircraft, vital to the recovery and vital to the OEMs. Since the inception of ALC, we have focused our business on the most fuel-efficient, advanced technology, environmentally friendly, and highest demand aircraft in the world. That business model has served us well and positions us for even greater strength during this critical recovery phase. In light of the overall improving environment, including acceleration and demand and order book placements, strengthening lease rates, and the continued expansion of e-commerce pushing freighter demand and rates to new levels, we are reviewing our capital allocation plans going forward. We have always been disciplined and rigorous in this process to determine the best and highest return use of capital in our business. Historically, this has meant investment in new aircraft on long-term leases, and we do not believe that has changed. Despite the pandemic impact, ALC has enjoyed industry-leading margins. We also previously announced our board's reauthorization of a modest stock buyback program. We continue to intensively evaluate all capital allocation alternatives. With our continued successful navigation through the pandemic storm and reflecting continued confidence in our outlook and our business, our board of directors has declared a fourth quarter dividend of 18.5 cents per share, up approximately 16% from the prior period. This dividend represents our 36th consecutive distribution since our first in February of 2013, and our ninth dividend increase over that time. Wrapping up Steve and my comments, we want to reiterate a simple premise we've shared with you throughout the pandemic, and that is air travel demand is highly durable. The pandemic temporarily suppressed it, and travel restrictions have constrained it, But at the end of the day, people want and need to take trips, do business, and connect with each other in person. Whenever we see travel restrictions lifted globally, there is an immediate surge in passenger bookings. While the pace of the recovery has had its ups and downs, we are confident in the long-term direction remaining very positive. And we're equally confident in our business model, which was purposely designed to be highly durable as well. Our focus on fleet, replacement over growth, focused on new technology, young aircraft, fleet diversification, and low financial leverage are key components that have helped us weather the downturn successfully and will serve us well in the future. And with that, I'll turn the call over to Greg to provide more detail on our financial results. Greg?