Good afternoon, ladies and gentlemen and welcome to the Q1 2016 Air Lease Corporation 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 is being recorded. I would now like to turn the conference over to your host Mr. Ryan McKenna, Vice President and Head of Strategic Planning.

Good afternoon, everyone and welcome to Air Lease Corporation’s first quarter 2016 earnings call. This is Ryan McKenna, and I’m joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Financial Officer. Earlier today, we published our first quarter 2016 results. 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, May 5, 2016 and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. 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 including without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense and stock-based compensation expense. These statements and any projections as to the Company’s future performance represent management’s estimates of future results and speak only as of today, May 5, 2016. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of the 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 will use during the call, such as adjusted net income, adjusted diluted earnings per share, and adjusted margin 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 10-K 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 Chairman and Chief Executive, Steve Hazy.

Thanks Ryan. Good afternoon and thank you for joining us today. I am very pleased to report that in the first quarter of 2016, Air Lease Corporation recorded total revenues of $343 million versus $278 million in 2015, an increase of 23.4% from the prior year. We also achieved record quarterly adjusted net income of $151.1 million in Q1 versus $113 million in 2015 representing a 34% growth year-over-year. This resulted in record adjusted diluted EPS of $1.38 per share versus $1.03 per share, an increase of 34%. These consistent and record financial returns represent another quarter of growth and our market-leading results that reflect the strength of our aircraft leasing platform. Let me begin by stating that the current overall business environment in the aviation industry remains very strong and airlines are performing well. In fact, in 2015, airlines recorded the best year in history in terms of financial performance. Financial markets have come down since the turbulent start of the year and as we told you during our last call, we perceived this year that we are shaping headlines to be way overblown. The Chinese economy continues to be in the news, but the aviation industry in China is a key for their long-term growth ambitions and we see a very strong commitment from the government of China in this space relative to other industrial sectors in China. Currency concerns in emerging markets challenges have not dissipated, but it’s important to understand the resilience of the airline customers in this business environment, which are remaining healthy despite these stresses. South America and Russia remains soft and ALC has strategically kept our exposure minimal in these two regions. This has served us quite well as our fleet continues to perform at 100% utilization with a very small watch list…

Thanks, Steve. During the first quarter, we took delivery of ten aircrafts from our order book and acquired one incremental unit. We completed the sale of 12 ATR aircrafts in our previously announced transaction and will complete the sale of the remaining units in the second quarter, as well as the sale of the undelivered aircraft over the next two quarters. We are 85% placed through 2018, which is exactly the balance we want to strike with certainty of placements, as well as keeping a few units available as part of lease campaigns and progress. The lease yield on our overall portfolio and on our forward placements remains steady. As has always been the case, there remains more yield variability on twin-aisle aircraft, versus single-aisle aircrafts as twin-aisle aircraft encompass a greater percentage of large blue chip airline customers in our portfolio who obtain the most favorable rates. I indicated on the earnings call last quarter that we believe there were market opportunities in South America as a result of the economic challenges currently facing the region. We are now in fact, completing transactions to acquire aircrafts through South American – various South American airlines and we market them to carriers outside of the region. Besides our best-in-class order book, we are always optimistic and opportunistic in deploying capital to generate strong returns for our shareholders. Above and beyond the sale of our ATR aircraft portfolio, which remains on pace and on target for the sale of remaining units, we continue to see good demand from aircraft buyers across a spectrum of age, single and twin-aisle aircrafts. Looking back at all the aircraft we sold in inception, it’s very clear that our aircraft sales have covered the complete spectrum of age, types, categories, manufacturers, delivering consistent strong gains and the disposition of used assets and demonstrating continued liquidity of our aircraft fleet. Like for Capital One is now well over half way to the target of filling up the $2 billion fund. The pace of committed transactions have sped up as opportunities have now developed in the market. We believe this should continue into the second half of the year. As we look forward to the second quarter, we will acquire 14 aircrafts on a net basis totaling approximately $725 million in capital commitments and 10 of these deliveries are from our order book and four are incremental units that have been acquired from airlines. Now all these aircrafts are reflected in our commitment table and by the way, the vast majority of the aircraft will deliver in the back half of the quarter. So at this time, we now turn this over to Greg Willis, our CFO who will walk you through our financial results that we believe further differentiates ALC. Greg?

Thank you, John. We completed the first quarter of 2016 with all-time record revenues and profits in ALC’s history. Our results were driven by the continued growth of our fleet through the acquisition of ten aircrafts from our order book and one incremental aircraft. Our portfolio lease yields has remained constant along with the core fleet metrics, which include our 3.6 year weighted average age, and our average lease term remaining at 7.2 years. Rental revenues for the quarter were $343 million and our overhaul revenues represented a conservative 0.5% of this amount. Overhaul revenues were lower than previous quarters as there were no end of lease events during the quarter, which typically result in incremental overhaul revenue in the period under our accounting policy which is based on virtual certainty. Additionally, we sold 12 aircrafts during the period generating $21 million in gains, further demonstrating the liquidity of our fleet of young aircrafts. We continue to benefit from operating leverage as we grow our fleet. This is reflected in our ratio of SG&A to revenue which has declined 5.7% from 6.9% in the prior year. We ended the quarter with a composite cost of funds of 3.34% which has continued to decrease as we have started to refinance some of our first unrated bonds with investment grade bonds. All of this activity resulted in record adjusted margins of 44.4% and contributed to the continued expansion of our adjusted returns on equity, which adds 18.5% on a trailing 12 months basis. The financial markets were volatile at the start of our year. One of the key reasons that we operate with a low leverage balance sheet and hold excess liquidity is to be able to wait up periods like this until the markets recover. We did just as during the start of the year and executed a five year $600 million senior unsecured issuance in April at 3.375%. This bond is 225 basis points less expensive than our five year bond maturing in April 2017, which bears interest at 5.575%. This illustrates just how far we have come in reducing our cost of funds since the founding of ALC. This also demonstrates the benefits of our investment grade capital structure and best-in-class credit metrics. This concludes my review of the results and financing activities of the company and I’ll now turn it back to Ryan.

Thanks Greg. That concludes management’s remarks and for the question-and-answer session, each participant will be allowed one question and one follow-up. Now I’d like to hand the call over to the operator. Operator?

[Operator Instructions] Your first question is from Mark Streeter from JPMorgan. Your line is now open.

Good afternoon, gentlemen. You got Jamie, Nish, John and me here the whole JPMorgan team. First question, Ascend seems to indicate that you have one 737 800 2006 vintage to go that’s in storage, but I know you are 100% utilized. So I just want to clear that up, is that information in Ascend?

We do not have any aircraft at GOAL. We haven’t had any aircraft at GOAL for a number of years and we have no aircraft in storage. We don’t subscribe to Ascend data because we frequently find significant errors in that information.

That’s why I wanted to clarify that. Thanks, Steve. That’s perfect.

I repeat again. We do not have any aircraft on the ground. We do not have any aircraft with GOAL and we don’t have a 737 800 that’s not operational.

Perfect and I am glad we clarify that because a lot of people pull up Ascend and they get bad data. So, thanks for sending us straight.

If you want good data, just call us.

Exactly, right. So, speaking of data, the GOAL situation announced this week, there is sort of formal attempt that an out-of-court restructuring. We’ve been getting a lot of phone calls and I guess, the word is, they want to potentially get out of 20 aircrafts or about a seventh of their fleets as part of this restructuring, obviously everything is leased there and so forth. Just wondering if you can comment on – and I know you don’t have any exposure to GOAL, but the impact to Air Lease, if GOAL does return 20 aircrafts to lessors, do you think the market can handle that? What do you think the impact is in terms of your strategy or just in terms of lease rates for your single-aisle efforts?

Yes, look first of all, just an overall comment. GOAL has a big commitment there as a shareholder, but, look, I do think that the market will be able to absorb a number of aircrafts that could be able to come out of GOAL. GOAL and others also to the extent they want to offload any aircraft that they own as opposed to returning back to lessors would probably do so at pricing that would reflect the economic realities there. So, again, in my comments, I said, we’ve been looking at South America for opportunities. GOAL could be one of them. But the truth of the matter is, even for example on the new aircraft production side as holds, or as available is my pop up, the positions have been taken and so far the strength of the 737 800 market is sufficient enough to where if we had 15 to 20 over coming – coming over the next year, year-and-a-half, it might present a little bit of temporary excess supply, but we do think that depth of the market is there sufficient to absorb it.

Great. Thanks John, appreciate it.

Your next question comes from Moshe Orenbuch from Credit Suisse. Your line is open.

Great, thanks. John, it sounded like you said that, you did one additional aircraft purchase in the first quarter and expecting four more in the second quarter coming from some of that disruption in – among South American airlines. Is that the extent of the opportunity or is it something that will extend into the second half, any thoughts on that?

No, yes. First of all, the incremental unit actually was not from South America. It was from Europe. We have included, we haven’t announced yet, but we’ve included, concluded a transaction with a South American carrier. But those are actually going to be on some new aircraft units that are going to put outside of that region. So, I think, just to make sure you don’t understand, the results are not reflected yet of those purchases in our core. They are just in process now.

Right, should they be in the second quarter?

Correct, correct.

Okay. And just a follow-up for Greg. The – it sounds like the execution on the debt in April was pretty strong. Just talk about other opportunities in the balance of the year.

Yes, the execution went really well. We are over three times oversubscribed and we subsequently upsized the transaction from the start and we are also able to tighten pricing. As we look forward to the rest of the year, it just helped bolster our liquidity to allow us to continue to be opportunistic when we tap the market in the future. There is also been a lot of demand out of the bank markets. They have been – lots of banks have been approaching us looking to upsize their commitments to us as well as the new banks that have just recently joined our bank group. So I think, all in all, the financing markets have been quite strong for us.

Moshe, I also want to add something, we have a positive outlook for Standard & Poor’s which I think is really key to the credit story as we continue to book orders, which should have ripple-through effects of our financing opportunities as we hope to get that upgrade additionally and reduced cost of our unsecured corporate warehouse of revolver, which pricing actually goes down with a rating upgrade. So there actually are a couple of different opportunities that we foresee as that credit story continues to evolve.

Thanks.

Your next question comes from Kristine Liwag from Bank of America. Your line is open.

Hey guys, good afternoon. My question, my first one is for Steve and John. It sounds like the C series maybe pressing the pricing for the 737-700 market and we’ve heard that deals are being done in the low 20s. Since you already have a $20 billion order book, how much flexibility do you have in benefiting from this favorable pricing environment for aircraft buyers today?

Yes, first of all, we have no 737-700s on order. We have a very, very small number of 737-700s in our fleet. Most of those leases have been extended. So our total exposure to the 737-700s is less than 1% in terms of financial impact in our balance sheet and those are performing well. We are obviously watching very closely the competitive environment between Embraer upcoming on the E2 version of the 175, 190, 195 versus the C series 100 and 300 and Boeing. We believe that the United transaction will serve an outlier and part of that is because Boeing’s production of the 737 NG is virtually sold out now in their bridge to the Max. So there really aren’t many classic – I shouldn’t call classic, the NG 700 market is – there is not any supply left from Boeing other than 1VQZs where we do see more of a competitive environment is between Embraer and Bombardier. But we have not seen any effect on the Air Canada or Delta deal on 737-800 or A-320 lease rates.

Great. And maybe if I could switch gears for my second question. It looks like in the first three months of 2016, you guys repurchased 7.8 million shares and as of early April, you have about 11.8 million shares remaining in your authorization. How should we think about the cadence of share repurchase through the year or is this something…

Yes, Kristine, I am not sure we don’t – we haven’t done any share repurchases nor have we had any authorized. Where do you get that information because we are not aware? The only new shares that were issued were a small number of RSUs pursuant to our published and authorized program. There has been no…

Executive comp program, but we haven’t authorized, announced or done any share repurchases and if you look at…

That was my mistake. Actually, I was looking at a different on filing. My apologies.

Yes, that sounds like some of …

That’s the other guy Kristine.

It was the other guy, I am sorry.

That’s another leasing…

I was trying to do my homework while I was doing the call with you guys. But maybe if I could squeeze one last one and this is a legitimate question for Air Lease.

That’s another leasing company through the margins and profitability, are significantly inferior today…

Okay, so if I could squeeze one in for Greg. Greg…

Greg is sitting here smiling.

He is always smiling. Greg, I think, you guys have some – for with – the question I h ad in terms of like this, the flexibility for your financing for the rest of the year, I guess, my question has to do with, when, if you are not able to access the debt markets today, how much flexibility do you have in the balance sheet without having - in order to meet your financial commitments with your order book and when would that date be and when is the debt maturation that you have to meet?

In the 10-Q we state that we can go 12 months and that’s standard disclosure that we make. But we have a substantial amount of liquidity to allow us the flexibility to stay at the markets and to allow us to opportunistically cite when we do cap those markets.

And Greg is that – so that’s included in $600 million?

Yes, the contracted rents as well as the sales proceeds from the aircrafts that are subject – that the remaining ATR fleet.

The cash flow there is so strong, Kristine, that it really gives us a huge lever to finance the deliveries along with the liquidity that Greg just mentioned with that issuance. We are sitting in well over 12 months of capital. So we really get to pick and choose and we go to the market.

Yes, plus we have an ongoing used aircraft sales program beyond just the ATR aircrafts. So, last year, it was, what over $700 million? Roughly 700 million of used aircraft that we sold on a cash basis and when we sell these aircrafts, we don’t take back any financing from the buyers. So, that’s an additional source of liquidity over and above the cash flows from leasing operations.

Great, thank you very much.

Thanks, Kristine.

Your next question comes from Helane Baker from Cowen and Company. Your line is open.

Thanks, operator. Hi, gentlemen, thank you for the time. Steve, in your prepared remarks you made a comment about having no issues with respect to any customers except a few who are slightly late in making payments and I was kind of hoping you could or wishing you could flush that out a little bit for us. When you say they are late in making payments, are they so late that you would consider getting your aircraft back and because, in the prior life you used to be very aggressive with customers who are late?

Yes, we are aggressive and we don’t tolerate tardiness. We have a very small number of airlines who are - obviously, issues with currency and in terms of just the economic environment in the areas where they operate and sometimes on their overhaul reserve payments or rent payments, there is small delays, but all our airlines are performing and we have not had any credit write-downs or credit losses as a result of these issues. When you have a $12 billion, $13 billion fleet, there will always be a small outlying number of airlines that are not performing as well as the majority of our customers and we work with them to make sure that they are healthy and able to meet all of their obligations. Obviously, lease payments, paying for fuel, paying for labor, those are among the highest priority payments that an airline has to deal with, so.

Helane, I would also just add that, as a matter of fact, the total balance has actually gone down from last quarter and from two quarters ago. The total amount we are talking about is so small. In fact, that the security deposits well cover by a huge order of magnitude, the payments. And so, frankly, it’s a really, really small component, which is why we don’t talk about as the material and we have no issues in terms of none of these people that we are talking about now. We have any repossession actions on.

Okay, well, Steve talked about, so – in his prepared remarks, so.

No, there has been no repossession activity.

Okay.

I think we put it in Steve’s comments, only because people ask about it all the time and we never mentioned, because it’s just so small. So we just thought we would have Steve mention it.

Okay, okay. Fair enough and then, my other question is, can you say how many aircrafts went into Blackbird this quarter if any?

Zero, in the quarter we were actually committed to capital, Helane because a lot of the aircrafts are actually for future deliveries. So it was a very, very active quarter. We’ve delivered some already in this quarter to Blackbird in April. But there is a series, there was a lot of activity in the past few months as opportunities start to develop exactly as we’ve sort of hoped where that strategic capital could be deployed alongside of Air Lease with sourcing new customers and being helpful in campaigns and it’s great to see it really playing out, so.

With the several aircrafts going in there, this quarter, two have already delivered, and as we mentioned in our statement, we are working very hard to get to the $2 billion mark by sometime in the first half of 2017.

Last quarter I mentioned that the first quarter would be slow for Blackbird and that they would accelerate for the remainder of the year and that’s in fact, what we see happening. We are focused on the big picture getting the $2 billion funded out. So, we can have a commitment, we look at total commitments less than when those aircrafts actually enter the Blackbird fleet.

Perfect, okay. Thanks very much. I appreciate your help.

Okay, thanks for your questions.

Your next question comes from Arren Cyganovich from D.A. Davidson. Your line is open.

Thanks. Just looking at the, kind of resurgence price of oil recently, has that changed at all the demand for some of the Neos or Max in your order book or conversely changed the demand at all for the order left to fuel-efficient aircraft out there?

No, I mean, we really haven’t seen any material change in demand on the new aircraft side. There is a very strong demand for the Maxs and Neos and the wide-body new programs and products. I think you are going to see a lot more traction for example, on the A-320 neo later this year. The same token, I haven’t really seen a material change in the used aircraft market either and the mid-life aircraft. We still, I would say, have a higher pace of request for extension than we did say, a year, year-and-a-half ago on the aircrafts that are coming off their first lease terms. But I don’t think you could say there was early any material change based upon fuel in the last 30 days or 40 days, et cetera as it’s been pretty consistent.

Yes, also a lot of our new aircraft placements for the A-320, 20 neo family and the 737 Max family are for deliveries out in 2019, 2020 and 2021. So, those fleet planning decisions by those airlines are less affected by short-term price volatility of oil. But they are more based on network planning and total suite planning strategy rather than just short-term spot market fluctuations of energy prices.

Thanks. That makes sense. And then just, a small modeling question, the overhaul revenue for the quarter was relatively low, as I think $1.6 million. Was that just due to a small amount of transitioning of aircrafts? I was just curious because it was lower than past recent quarters?

As I mentioned in my remarks earlier, there was no end of lease spend. Typically, our aircraft leases are quite long. So, 10 to 12 years. So there is very – under that concept or the principle of a virtual certainty, there is a small percentage of revenue that is able to be recognized on a go-forward basis until the end of the lease.

Got it. Thanks.

Your next question comes from Mike Linenberg from Deutsche Bank. Your line is open.

Hi, good afternoon gentlemen.

Good afternoon, Mike.

Two questions here. Hey, just looking at the percentage of your debt, at fixed versus variable, I mean, I think historically you’ve been in sort of that mid to high 70s maybe even over 80%. It does seem like, just in the last quarter, a decent drop there and I mean, that maybe helping your composite interest rate. I am just curious, if there is a benchmark that you want to get to fixed versus variable or is this just a function of the fact that, we’ve seen rates around the world go into a bit of a free fall as central banks some going as far as to take interest rates into negative territory. I mean, does it – who you to be more variable than fixed now. I mean what’s driving that? Maybe your philosophy, because that is a pretty sizable move.

Mike, our target, fixed floating ratio is 80% fixed, 20% floating. The blip this quarter is mainly due to the timing of when we issued our last unsecured bond which took place in April as opposed to within the quarter. So we expect that ratio to tick right back up as we move into Q2.

So, had we did – if we did the $600 million bond at the end of March, that $600 million would have come in as fixed rate debt and it would have reduced our floating rate debt, Mike by $600 million. So I think we’ve got the funding on April 11, my understanding. So, April 11, the $600 million came in from the issuance of the bond that matures in June of 2021 and obviously, it created a dynamic where the fixed rate portion again increased.

And in January there was also a meaningful pay down of a unrated bond that had…

$500 million

I’d say, 4.5, right, which is meaningfully above our composite rate, so when you take that out, that also drives the composite rate down.

So bottom-line, Mike, effectively no change.

Yes, so in the middle of January, we paid off the $500 million 4.5% bond. We did not issue a replacement for that in effect until the first week or so of April. So, a lot of this mathematics, Mike, is just a timing between probably two weeks. Does that make sense?

That makes a ton of sense. Very helpful. And then just, 85% of your leases delivering in 2018 are placed, I mean, that’s a great number. I think you are up by 26 percentage points from the prior quarter. Just curious about 2019 and what that translates into from – call it, a committed fleet rental perspective? I think, last quarter you had a cool little chart in there that had your current fleet contracted rentals and then your committed and just to kind of keep track of that, I don’t know if you have that data in front of you, that was very helpful.

Mike, this is Greg. We are going to keep that as an annual disclosure. So, every year, when we put that in the footnotes you’ll see us updating it, but as we add – as we continue to lease out our airplanes that goes out, that $21 billion or $20.9 billion contracted rental number.

Yes, yes.

So, I wouldn’t expect there to be too big of a change from the end of the year until this quarter.

But we will be announcing lease transactions with deliveries out in 19, 20, 21, 22 and as we announce those, we’ll make references to the aircraft type, who the lessee is, and the anticipated delivery date. So you can do your own modeling as the forward placements continue to build out.

Yes, I think, Mike, we tend to really look at this percentage as sort of two years out, but 2019 is getting a lot of activity. For example, 2019 is when we start getting our A-321 LR Neos. I think you are going to see some acceleration in that program especially in the second half of the year. So we are making quite good progress on 2019 and 2020, frankly, one of the more challenge – difficult challenges we as a management team face is, how much to keep available versus how much to place now. The marketplace is dynamic. It’s really important for us to remain on the strategic front of the theater of aircraft campaigns. If we’ve gotten nothing to offer, that’s not necessarily good either. So, it’s the classic decision and a good problem to have is, if we really wanted to, we could probably conclude our placements in 19 and 20 and probably to have a 21 in the next few months. But you need to have some products available for really key customers and campaigns and to be able to move things around in fleet. So, for us, it’s more of a – it’s kind of at our election and our option and we just simply try and achieve the balance that we’ve – that I indicated in my remarks that, sort of 85% through the next two years or more. But, we are in a market price luxury that we can kind of pick and choose how far forward to book that. It is more of a strategic question for us and tactical question, and ability to place question.

Yes now it’s a nice…

By way of example, if you look at 2018, 2019, 2020, I think we’ve placed already 20 787 9s and 10s during that period. But as John says, we are holding back a few positions for ongoing campaigns. Same thing on the A-350. We have now placed all of our A-350s in 2017, 2018 and some already in 2019. So, it’s really important for us to be competitive and to have at least a small number of positions to start off the delivery sequence to some of these airlines.

These have been placed….

But I think as the…. I am sorry, go ahead.

I was just going to say, these have been placed, but they have yet to be announced, is that right?

Some have been announced, some have not been announced.

Okay, okay. Now, it’s a nice high quality problem to have.

Yes.

Thank you.

And the same thing is true on the 737-8 Max and the A-320, 21 neos we have a number of transactions that have not yet been announced because the airline itself frequently has a direct order in negotiation with Airbus and Boeing, so they don’t want us to announce a lease placement until they finalize their own direct deal. So, we have a number of transactions that the airline customer have asked us not to announce until they tie up their own direct deals and usually those deliveries come after our deliveries. So usually are the kick-off introduction delivery of these new types.

Very good. Thanks guys.

Sure, thanks, Mike.

Your next question comes from Mark Streeter from JPMorgan. Your line is open.

Okay, thanks, back over to me. So, John, I have a question for you on all the noise out there regarding the new engines, whether it’s the lead or the GTS there have been articles about teething paints with these engine platforms. We are getting some questions from investors. You’ve obviously have studied those and are very close to the engine manufacturers. Any concerns or is typical at this point in your view for where these programs are in their evolution?

No, it’s actually typical. We don’t really have any major concerns about half to three quarters of the things we read about are just simply not true or exaggerations or paranoise. Bottom-line is, we – rest assured, we are technically on top of exactly where each of the manufacturers are. And don’t forget the manufacturers – the airframe manufacturers, Airbus and Boeing actually have to audit that data, because in fact, they are the ones that actually issue the overall product guarantees and fuel burn and that sort of thing and that process is very robust. So, I think, gear triple fan, there is two categories of issues, one was the board router issue, which is probably in a lot of different airplanes, it’s just a question of how long it takes to start the airplane. But also, these blue messages, these annoyance messages, those have been now under correction with software development changes, new software issuance releases. So, I think at the end of the day, we are satisfied and we are not overly concerned on either product type. Both companies have sufficient wherewithal. I think the other thing that happens in the marketplace is, you read about something or whether a natural process, as the engine guys go through their development, they will often say, oh, you know what, by this results or this test that we are getting, we could actually improve this a bit further. It doesn’t mean that the current – that the final product is going to be put in the airplane that day, does not meet the guarantees it does, but you always find opportunities to improve based upon the testing development certification in the first year. That’s a very normal thing. So I think people have to be very careful to characterize something as a flaw, which in fact is really nothing more than a normal opportunity for further product enhancements based upon the development of the engine.

Great. Thanks, that’s helpful. And then, question on, how should we think about the economics to Air Lease? Just from a modeling perspective, or in terms of your profitability, when you are able to step into these delivery positions with these Latin American carriers and so forth, where they don’t want to take delivery kind of the stress in the market, you step in, you don’t have to pay the PDPs. So you don’t have that PDP drag that you have in your sort of regular way order book. What is that due to your IRR or internal, whatever for the return calculation you use as a benchmark? How incrementally profitable are these deals versus your regular placements out of your order book?

The way we approach it is, if there is an incremental pop up opportunity because of a distressed airline that has ordered either Boeing or Airbus aircraft, but they really don’t want to take deliveries. We look at the transaction on its own merits and it has to be better in terms of economics for ALC then the weighted average portfolio of the same types of aircraft. So for example, let’s say if there is an A-321 where there is an opportunity to acquire one, we look at our portfolio of A-321s and this transaction has to deliver a much better overall return on the investment. The pricing has to be obviously extremely competitive and attractive and the overall lease return has to be as good or better than what we have in our current portfolio of A-321s, just by way of example.

I think the other tag line of that Mark is that, you can’t make a whole business out of that. I mean, our order book remains, our key and common engine for growth and return. These things are exceptions are not the rule. If we couldn’t just stop ordering airplanes and stop taking deliveries of new aircrafts and only look at these opportunities, I mean, in the world of how we need to grow, it’s just not enough of them. So, we see these as enhancers but certainly no replacement in any meaningful way. The other factor that currently we have to deal with is, both the export import bank of the US and the European ECAs in the UK, France, Germany, Italy are basically shutdown right now for any transaction over $10 million. So, we have seen a number of airlines that previously we are going to purchase aircrafts and use ECA guaranteed financing with commercial banks. We are now looking at the leasing alternative. So if anything we see more opportunities in the next 12 to 18 months.

Great, and then, Steve, just one more from me. You’ve obviously spoken to the technical viability of the C series, but the concern was always been that the Bombardier team had to sell, sell, sell. Well, they at least sold a large chunk obviously, and somewhat legitimized the program with Delta. You are obviously not going to tell us if you are going to order the plane, but is this enough? Do they still need to – in order for Air Lease to consider purchasing the C series, and to be when the leasing customers of the program, how much more selling does Bombardier need to do until you are comfortable?

Well, as of today, we have three, what I would call, high profile global airlines that have ordered the airplane. Air Canada, Swiss, which is really a subsidiary of Lufthansa and Delta. We need to see more activity in Europe. We need to see more activity in North America. And we certainly need to see more activity in Asia, South Pacific regions, because we can’t just have two blue chip airlines in North America and one unique situation in Switzerland where its replacing the Avro four engine aircraft. We need to have a bigger customer base. Now Bombardier and ALC are in discussions. We are entertaining possibilities to look at all aircraft types at all times. But the key to our involvement in the future is an expanding customer base of airlines, not just lessors. We need to see more airlines that sign up for these airplanes. And the same is true for the E2, the Embraer, E-Jets E2. So we continue to have dialogue with all the manufacturers, all the OEMs, the engine guys, the air framers. We are keeping up to date. We continue evaluate their flight test results. But obviously, the key as John has said many times on other calls, we need to see a solid customer base building. And once that momentum picks up, we will certainly evaluate opportunities in that sphere.

Thanks.

It’s interesting to Steve’s earlier comment, here we have the ECAs and EXIM shutdown, but Brazil’s BNDES, and the Canadian equivalent are operating. It’s just going to be very interesting to see the competitive posture between Canada and Brazil going forward.

Thanks for taking our extra questions.

Sure.

But we’ll keep watching the movie as it unfolds.

Your next question comes from Christopher Nolan from FBR & Company. Your line is open.

Hi, thanks for taking my questions. For the customers slightly late on payments, as a follow-up to Helane’s question, are those – or geographically, where those customers are? What region in the world?

I mean, we have, maybe one in Eastern Europe. We have…

One in Brazil.

One in Brazil, we have, they are not really…

One in Asia.

There is really no, they are not concentrated in Russia and South America, that’s what you are asking?

Yes.

But they are immaterial in terms of the totality of the amounts involved and the number of days involved. They really have no impact and usually, the way we write our contracts, they have to pay a penalty interest. So if let’s say an airline owes us $100,000 today, and they pay us next Wednesday, they not only have to pay the $100,000, they have to pay a punitive interest rate on that late payment for the number of days that they are late. So they highly incentivize to get back on track as quickly as possible.

And the key is that they are recovered by deposits and these are novel assets, right, so if there was a problem, like you go in and them and put them in other performing regions in the airlines.

So it extends far too much time on this question, it’s everywhere today. It’s like a pin in a haystack it’s nothing.

All right. As a follow-up, I am looking that Q, the black – the company’s investment in Blackbird is $19 million or so. Given your comments on completing the $2 billion AUM by year end, should we be seeing a lot of activity in Blackbird growing in the second half of the year?

By the way, the deadline is not necessarily the end of the year.

I think it was the first half of 2017, it’s not the end of the year, I mean, that would be an aspirational goal, but we are driven more by the quality and the returns on those assets that are committed to that venture. So, we don’t have the end of the year as a hard cut-off. It can go a bit beyond there.

We have no idea, Chris that we commit to these assets that they can deliver in the future. I mean, it’s not about just having things that are already – some are new airplanes. I mean, so they are not necessarily already delivered. So we will target to get it to get the commitments done towards the end of the year and the flexibility we have, there is no hard deadline with that. So it gives us the flexibility to strike when opportunities exist, just like we do with Air Lease planes.

But the bottom-line is we had nothing in the first quarter, but you’ll see more in second subsequent.

And our equity participation is 9.5% of $500 million. So, when everything is filled up, we’ll be somewhere in the 40 plus million range in terms of equity invested. But then also, commensurate with that, the management fees grow as the portfolio grows.

We will provide more color and update at our Investor Day on all these different topics and as John said on prior calls, we’ll look to do the second one later in the year.

Great, thanks for taking my questions.

Thank you.

Your next question comes from Justine Fisher from Goldman Sachs. Your line is open.

Hi, good afternoon.

Hi.

I have a question for Greg or whoever else want to comment on net interest margin. It’s a metric that we’ve seen some of your peers point out for their fleets and correct me if I am wrong as I calculate it, if use an average book value, you guys are at kind of 11.5% rental yield and it’s 3.375%, I think you said present borrowing rate. So, it looks like some margin is kind of in a low – to low 8% range. Do you guys use this metric as a way to evaluate your fleet and the way your lease placements are going? I mean, and do you think we should look at it and where it went on?

Justine, we don’t calculate that metric. We don’t use it. I think at the end of the day we are an investment grade borrower. So I think maybe the high yield borrowers who go out there and do a sale leaseback and their financing is high on a non-recourse based it’s tied to the actual airline that they are extending a lease to. I think that’s more appropriate, but we fund the company on a portfolio basis. And our financing costs are very disconnected from the underlying – the airlines that we are financing. So, the short answer to your question is, no we don’t look at that metric. We focus on adjusted return on equity and adjusted margins and you’ve seen that we’ve been in a position to continue to expand our returns on equity as we continue to refinance our few remaining legacy unrated bonds. We look to build out our management business and as we benefit from operating leverage as we continue to add more plans to our portfolio without adding to the employee base.

Yes, the other fallacy with that calculation and one of the reasons we don’t use it is that you could have two aircrafts with identical net interest margins, but one aircraft is sold for 70% of its original acquisition cost after ten years and the other plane we sell for 105% of its acquisition cost. So, to have an accurate evaluation of a lessor, you need to understand what happens to the asset when it’s disposed off, because if we have a significant gain above book value and disposition, it can increase on an NTV basis the net interest margin that we really earned.

Right.

And if the lessor shows a high net interest margin, but then takes an impairment charge or a write-down, you basically deceived Wall Street and giving you a false impression of how well they are doing. It think the proof of the pudding is, ALC has demonstrated at every aircraft we sold since the inception of the company has been on a significant gain over the then book value. Secondly, we’ve had no impairment charges and thirdly, we’ve never had a credit loss on any of our operations, not a single dollar has been lost because of credit losses. So you got to look at the totality of the business. You can’t just isolate the net interest margin, because that’s reflective of the current situation, but does not take into account the ultimate realization of the asset.

So I’ll pile on, Justine, number one, net interest margin doesn’t account for the underlying credit of the customer that’s flying the plane. Number two, it doesn’t account for the duration of the lease, how long it’s sitting on there. Number three, it doesn’t account for the quality of the aircraft, number four, it doesn’t account for the purchase price of that asset relative to the market and as Steve perfectly hit, it really is not about a point in time, it’s about the ultimate realization of value of that asset over the time that we harvest returns and that we ultimately dispose of that asset or then continue to manage it at some point in the future. To me, this is a very, very simplified unnuanced comparative metric that doesn’t account for quality of fleet, age of fleet, duration that’s there, and really another point, that I think Greg was alluding to an issue that I think we’ve read a numerous times is breakage of debt, slot costs and financing that gives part of that margin, ‘back’ when you don’t have an investment-grade capital structure. So, we really don’t think it’s a very accurate way of describing the quality of the business that we’ve built and so we don’t ever look at it.

Justine, I still have in my archives at home, annual reports of sub-prime lenders back in 2004, 2005, 2006 that had excellent net interest margins and the mortgages blew up the borrowers didn’t pay back the amount. And these lenders took huge multi-billion dollar hit.

Say great NIMs.

Great NIMs, yes.

Yes, I am not saying [Multiple Speakers]

Where we are coming from.

I can do that, I think investors look at it because it’s kind of – in some way, all they have that gone by do agree that a lot of the money in leasing and the skill is in the buying and the selling not necessarily just the leasing out. So you are right, it doesn’t account for that. That’s a good point. And then, the other question that I had to ask was about aircraft coming out of certain regions, we’ve had aircrafts come out of Russia and everybody was really concerned about it and then, there may have been a small blip in terms of lease rates, but the worlds has absorbed those and it seems as the other world is doing the same thing, with Brazil especially given the lessors are able to kind of pick up some of the slacks. So, is there another country, I won’t ask if there is another region, because if we take out Russia, Latin America, there is not much left, but is there another country that you guys could see aircrafts coming out of in this number? And I am not concerned about the world’s ability to absorb it, because it think lessors are proving they are worst, but is there a country that you guys are concerned about?

Not really, I mean…

No, no, we took airplanes out of Russia in a friendly way, both out of Transaero and Nordwind and those airplanes went to an airline in Europe and one in Southeast Asia. And the lease rates were very respectable. We didn’t really suffer in the re-leases. India right now actually do much better than I’ve ever seen before in the last six or seven years. They are looking for both 737s and A-320, 21s. And as you say most lessors have been successful at placing those aircrafts that have come out of Brazil. We just sold six of our ATRs that we had in Brazil to two different lessors. So we do start Brazilian exposure on our ATRs.

I would offer, maybe a slightly different way of looking. Rather than a region, it was really not a region, we also continue to look at those airlines, low cost airlines who awarded vastly higher numbers and quantity of aircrafts and they can take in their operations. So for example, Lion Air in Indonesia is not an Indonesia softness per se, but when you have one carrier with is so many airplanes on order, that is something to watch. You can do the same thing about Norwegian and few others. So, I think, as opposed to a regional focus, we are more – we have one eye focused on those airlines that have these vast quantities of airplanes on order and whether or not they think they can do leasing companies and make them all work is a huge question, but, I suspect that we’ll actually see some availability coming from at least one or more of those order books. So, rather than a region, I would encourage you think more of the way we do, which is looking at those types of airlines that really have so many product on order. Indigo in India is another example of an airline. It just ordered vast numbers of the single-aisle aircrafts.

The other thing I want to point out is that, now there is a viable program to convert 737 NGs in the cargo airplanes. And we have seen a significant number of 737-300s and 400s, the classics convert to cargo. We’ve seen that on 757s and now there is a program that’s being implemented to convert the older 737 NGs to cargo. And I think those are all healthy trends that will reduce the supply of single-aisle aircrafts as they reach a certain age point.

Okay, great. Thanks so much.

Thanks, Justine.

You are welcome.

I am showing no further questions at this time. I would now like to turn the conference back to Ryan McKenna.

Thank you all very much for joining us. We look forward to seeing everybody on May 19th for our Investor Day in New York City and then again on our Q2 Conference Call in August. Have a good day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.