Good day, ladies and gentlemen. And welcome to the Air Lease Corporation Fourth Quarter and 2016 Earnings Conference Call. At this time all participants to this call are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would like to turn the conference over to Ryan McKenna, Head of Strategic Planning. You may begin.

Thank you. Good afternoon, everyone, and welcome to Air Lease Corporation's fourth quarter and year end 2016 earnings call. This is Ryan McKenna; I am joined this afternoon by John Plueger, our Chief Executive Officer and President , Steve Hazy, our Executive Chairman; Greg Willis, our Executive Vice President and Chief Financial Officer. I'd also like to make new formal introduction of Mary Liz DePalma, who is new Director of Investor Relations and I'll pass the call to over to her to walk you through the introduction to this call.

Thank you, Ryan. Earlier today, we published our fourth quarter and year end 2016 results. A copy of our earnings release is available on the Investor section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, February 23, 2017, 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. This includes, 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 for future results, and speak only as of today, February 23, 2017. 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 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 be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pretax return on equity or non-GAAP measures. A description of our reasons for utilizing these non-GAAP measures, as well as our definition of them in the reconciliation 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 the 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 Plueger.

Well, thank you, Mary Liz and I want to take this opportunity to publicly welcome you to the Air Lease family. Let me also offer special thanks to our Vice President, Ryan McKenna for his leadership on the IR site over these past years and we look forward to even more from Ryan as he expands his role in strategy and business development. Well, I am delighted to report that for the full year 2016, Air Lease recorded total revenues of $1.4 billion versus $1.2 billion in 2015, a 16% increase year-over-year. Diluted EPS was $3.44 for the year, an increase of 47% over 2015. For the fourth quarter ALC recorded revenues of $370 million, an increase of 13.4% over the prior year's fourth quarter and diluted EPS was $0.89 for the quarter, a 20% increase. We continue to achieve industry-leading pretax margins for the fourth quarter and full year of 40.3% and 40.9%, respectively. And in 2016, we saw our highest pretax return on equity of 18%. Our forward lease placements remain very healthy, enabling us to have a 92% placement of new aircraft through 2019, and we continue to see robust demand. A particular note, so far in early 2017, we see the same strong wide-body lease placements that we experienced in 2016. This morning, you saw our release for an additional 787-9 with Air New Zealand. On February 6, we announced the lease of five 787-9 with China Southern. In early January the lease of an A350 to Sichuan Airlines, very soon now, you can expect to see further wide body placements, as well as a number of single aisle placements. In 2016, ALC generated $1.2 billion of gross proceeds resulting in gains on aircraft sales and trading activity of $61.5 million for the full year. We…

Thank you, John and thank you for your best wishes. First of all, let me thank our best in class ALC staff and management team who performed superbly and delivered outstanding results in 20160. We're also grateful to all of our airline customers all over the world and our loyal shareholders who have recognized the value of the ALC franchise. As John indicated, we're very pleased with the results of the fourth quarter and the full year 2016. The current business environment in the aviation industry remains very strong. As always, we focus on overall passenger demand. The International Air Transport Association, IATA, reported that passenger traffic rose at a very healthy 6.3%, while capacity group at 6.2% last year. Along with load factors in excess of 80%., we view this as a very balanced supply demand dynamic for the airline industry. The result in 2016 create a healthy bracket backdrop in 2017 with moderate growth and the continued need for replacement of aging aircraft, we expect to see and continue to see demand for carefully selected and customized order book of the latest versions of new technology aircraft. Going into 2017, we remain focused on indicators of airline health. Fuel prices are still at relatively historically low levels. The industry has plenty of liquidity and while interest rates have remained low for long period of time, we do anticipate that they will rise over time, along with a strengthening global economy. With the current health of the airline industry, we expect that gradual changes over time will be manageable. Air Lease is very well-positioned. Let me remind you that rising interest rates have historically resulted in higher lease rates, approximately 90% of our lease contracts include provision for interest rate adjustment, which help offset increase in rates at the…

Thank you, Steve. Our results was driven by the continued growth of our fleet. In 2016, the net book value of our fleet increased by 11% to $12 billion, ending the year with 237 aircraft. Our portfolio lease rate factor remain constant, along with our core fleet metrics, which include our 3.8 year weighted average age and our weighted average lease term remaining of 6.9 years. During the year, our total committed rentals increased by 14% to $23.8 billion, demonstrating the solid demand for the aircraft that we have ordered. This also continues to provide us with a significant amount of visibility into the future and has been a foundation for our strong credit metrics. Additionally, we view the order book as an asset, which allows us to double in size over the next five years and provides us with a significant - with a steady pipeline of attractively priced aircraft. During the year, we sold 46 aircraft, generating the $61.5 million in gains that John referred to. This includes the sale of 24 ATR turboprop aircraft, and 20 E-Jet. We expect to close the sale of the remaining five E-Jets in the first quarter. These aircraft are all transferred to held for sale on the date that we agreed to sell them. Under held for sale accounting, we continue to record rental revenue, but we stopped depreciation on these aircraft. The result will be the sale the final five E-Jets will generate minimal accounting gains in Q1. However, all were so possibly in the aggregate. Since the inception of the company, we have sold 2.1 billion aircraft to third parties at an 8% premium to carrying value and at a significant premium to appraise value. As a reminder, appraisals typically exclude the value detached lease and return condition contained…

Thank you, Greg. This concludes our management remarks. For the question-and-answer session each participant will be allowed to ask one question and follow up. Now, I'd like to hand the call over the operator to begin the Q&A session.

Thank you. [Operator Instructions] Our first question comes from the line of Mark Streeter at JPMorgan. Your line is now open.

Good afternoon, everyone and Steve happy birthday, Ryan congrats on the new responsibilities, as well. Couple of question, first off, Blackbird, can you give us an update, sort of big picture on Blackbird, how big can it get, obviously you have the success with ABS deal and so forth. But as we think about round two of Blackbird and how you envision the rollout of the platform going forward, relative to the size of the core balance sheet how should we think about it?

Well, thanks a lot Mark. So as I indicated with a really success – successful ABS, we all decided to sort of cap Blackbird, the original Blackbird where it was. We are now looking at new alternative ventures. It’s really hard for us to sit here and predict the ultimate size, because we've actually also learned good deal amount of this venture and why it was successful for us and now we're looking to tailor make what we've learned you know, into the maximum potential forward - going forward. But it's really hard. We don't have a dollar level of forward order – forward business thinking in terms of where it’s contributing our bottom line. It’s a good point for us to pause because this started in 2014. It’s a good point for us to pause and say how can we now optimize this for ALCs growth and additional capital platform. So I don't have and we don't have for you today you know, a number of how big this could be, just know that it was valuable and that value you know - and that concept going forward is something we're very much look on expanding.

Great. Thanks. And just a quick follow-up, just on - to Steve's comments on the cycle for John, for you or Steve, how do we – how should we think about how you're going to risk manage the portfolio going forward in terms of some of your current generation or what's about to be sort of prior generation technology, I mean, you only have one 767, you've got one 777, 200 ER. But as your portfolio starts to age and so forth, you've obviously sold off the regional jets and so forth. But how do we think about whether it's your A330 book that you have right now or some of these one-off aircraft, how aggressive are you going to be with the strength and asset values of may be rotating out of some of these older aircraft in your fleet?

Well, if you look at our portfolio, the percentage of older aircraft in our fleet is actually the minimal amount compared to the other lessors. As you said earlier, we only have one 777 200 ER with KLM. We're in the process of extending that lease. We have extended a lot of our Boeing 737-800, A320, A321 leases. In terms of the A330s, most of those aircraft required in the 2011 to 2013 period and virtually all of them are - almost all of them are in 12 year leases. So we have very little in the way of lease expirations. We've also worked very hard on placing future orders in advance on long-term leases and as we indicated before approximate 90% of our fleet is already pre-leased of in terms of deliveries are coming in '17, '18 and '19. So the company is very well-positioned. We're seeing a lot of demand. We've already placed a large number of aircraft out in 2020 and even '21 on long-term leases, some of these leases are even as long as 14 years of age, 14 years old. So we're seeing very strong demand. We continue to sell our older planes. That’s an ongoing process. As Greg has mentioned before, a few minutes ago, we have already sold more than 2.1 billion of used aircraft to third parties. So we see a robust demand for midlife aircraft. We continue to seek opportunities to sell those older units at a profit. We continue to extend the current generation 737-800s, A320s, A321s, 777s and A330s and we have a significant number of new deliveries in the MAXs, Neos, A350s, A330 Neos and 787 where we're very well-positioned compared to the other lessors.

Mark, I would also add, as the comment on our – the age of our – overall age of our fleet, remember, we just finished a year where we sold virtually our whole ATR and Embraer fleet. All of those airplanes were very young. They are all two years older less. So selling a lot of those units at that age, mathematically does result in the overall remaining fleet to be a little bit older. But to Steve's point, we remain committed to our philosophy of selling airplane, generally speaking when they are about a third of their lives or have been realized and as our fleet grows, I guess to be a slightly bigger number, but I just really want to point out that the slight increase you see in the overall portfolio is really a result of selling some many ATRs in Egypt this year.

Perfect, understood. Thanks, John. Thanks, Steve.

Thank you. Our next question comes from the line of Jason Arnold of RBC Capital Markets. Your line is now open.

Hey, guys. Happy birthday, Steve, good to be 45, I imagine?

No, its 44.

I am sorry. So I guess just first one with the first 787-10 rolling up the line here, can you remind us of your positioning on the dash 10 versus the dash 0 and kind of update us on your views on the type and the variance there?

We're launch customer on the dash 10.

Yes, we're very focused on the 787-9 and 787-10. Just in the last couple of weeks we announced several transactions involving 787-9 to China Southern, and this morning to Air New Zealand. So 787 activity continues to be quite active. We have a number of deliveries this year and that continues into next year. On the 787-10, we are the launch of leasing customer. We ordered a total of 30 aircraft, those deliveries to begin in 2019. All of our 2019-10 deliveries are leased to two different airlines, large international airlines. We've already placed 10 of the 30 787-10s and we're very bullish about that airplane because it offers probably the lowest absolute seat mark cost of any wide-body aircraft that we are familiar with, on flights up to about 6500 nautical miles. And we continue to have a number of campaigns with global network airlines on leasing more 787-9s and 10s. So it's a very vigorous part of our program going forward. Yesterday we took delivery of our last of order 777, 300 yards which went to KLM or Dutch Airlines. And so our Boeing wide-body future is very much connected to the success of the 787-9 and dash 10.

Jason, just in terms of numbers to your question, our lunch order for the 797-10, we have 25 of those units coming and as Steve indicated, we already replaced a number of them. We were close to the same number on the 787-9s, just a little under 25, about 22 airplanes sitting here today. So it's a very balanced mix between the 9s and the 10s, the 9 is here now, the 10 has just rolled out. So we're experiencing very good forward placement on the 10th. So that's the quantity as we – our launch order is 25 787-10.

Excellent. Good color. And certainly a greater point to, well position there. I guess, quick follow color and you certainly a great airplane's location where I guess just a quick follow-up, you mentioned you'd be looking to some incremental aircraft types to add for 1Q 7 and just curious if have any preliminary thoughts on what you're kind of looking at or regionally where there might be some opportunities?

Yes, sure. And actually, I just wanted to – have one favorable follow on comment, we've actually converted a few more of the dash 9s to the 10. So we're probably going to have about five more, about 30 total 787-10. So just to make sure the numbers are right. So look, the use marketplace continues to be pretty robust and we continue the strategy that we have last year and as we are looking at areas that might be either a little long on aircraft or might want to reduce you know, their lease. So that includes South Americans, it includes parts of Europe like Turkey, for example. So we are exploring avenues, which we believe it’s in the airline's best interest to possibly remove some equipment from their fleet, reduce their overall capacity. So we're making I think good progress, but it's the same thing we've done last year, we're looking at opportunities to relieve airlines, perhaps some excess capacity in their specific regions that are undergoing a little bit of pressure and I think you'll see from us in the next quarter or two some good result from that.

Excellent. Thanks a lot for the color guys.

You're welcome.

Thank you. Our next question comes from Michael Linenberg of Deutsche Bank. Your line is now open.

Hi, Mike.

Oh, great. Hey, Steve what better opportunity or time to celebrate your birthday with an almost 20% ROE. So happy birthday.

Thank you. And since I am 44 today, it would be nice for a top result of 44. That would be the best birthday present.

Don’t worry, you'll get there when you are 45…

Thank you. Exactly…

Couple of questions here. Just your cost of financing, that went down from last year. And unlike, what we've seen across the board, most people cost of financing has gone up. And I am just curious how much of that was a function of just refinancing older more expensive debt or how much of it was just a function of you becoming investment grade and basically you know, catering to a completely different investor base?

Well, a lot of it was Mike, we have been paying off a lot of our secured loans that we took on specific aircraft, in other words, aircraft financing that was tied to an airplane in 2010, 2011 and many of those transactions had interest rates that were north of 4%, some were even above 5%. So we've been paying off a lot of that secured debt. And so our averages come down because we're basically eliminating the highest cost of debt. We've also prepaid some loans that we felt were higher in our weighted average. Now coming April 1 of this year we have a $1.1 billion five-year bond that we sold as an unrated company in 2012, and that carries an interest rate north of 5.5%. So we anticipate that once we pay that off starting the first day of the second quarter' our overall composite interest rates will come down significantly because we'll probably replace that with a matrix of various maturities at a significantly lower rate than we pay on this bond.

That’s great.

Greg?

Thanks for the color on that, that's helpful. Steve, just one other question, you mentioned when you were talking about rising rates and having protection and you mentioned that I think it was 90% of your leases had that protection from the higher rate, they have the escalators. I was just curious that other 10% you know is it just a different structure are those some of the one-off that you inherited in some of the various transactions over the years, what's the…

Yes, Mike, its John, those 10% are ones that are very close in, in terms of deliveries of this year, next year. So effectively it’s inconsequential. They are very, very close…

Okay…

And I will only also add that as a matter of your prudence, if we did a future placement that did not have an interest rate adjusters, the lease rate – the base lease rate going in for us would have factor that in and it would be much higher. So the short answer is that 10% is I guess short end of the curve, the vast majority is 90.

Perfect. Okay, great. Well, thank you. Thanks for answering the questions gentlemen.

Thank you. Our next question comes from the line of Rajeev Lalwani of Morgan Stanley. Your line is now open.

Thanks for the time. John, on the additional placements you’ve made through '19 and some of the extensions that you talk about, can you just talk about some of the economics yields, duration of lease, any other color you can provide?

Yes, the duration of leases have held up pretty well. You know due to the strength of our position order book, it used to be that single aisle leases were sort of 7 to 8 years and twin aisle 12 years. More of our lease is now on single aisle are 10 to 12 years, as well, as the twin aisle. So the duration is long. And in terms of the overall economics on those placements, as you’ve been actually seeing order and order and order from us in the past, we believe a similar overall economic return to ALC and we project that forward and look out. So there's no material difference in terms of the bottom line impact to Air Lease Corporation. We are benefiting as you’ve heard from a little bit lower interest rates, that’s helped us a little bit. There has been a little lease - lease rate compression. But as you’ve seen and continue to see in our results, we continue to have outsized returns and we think that’s going to continue for all these placements we've done to date through 2019 and '20.

Thanks. And Greg a question for you. I appreciate your comments on tax reform and not wanting to speculate, but generally speaking, if we saw a reduction in rates how is that going impact your tax liability and your stated book value if at all?

Right. So very simply speaking, a change in effective tax rate, we go through and revalue are deferred tax liabilities through the income statement and ultimately increases equity. Right now that was way too soon to say, to start calculating or looking at different circa arm, things are on the table until we have more information. But that’s simply how the accounting works.

Very helpful. Thank you, gentlemen and happy 44th birthday Steve.

Thank you.

Thank you. Our next question comes from the line of Helane Becker with Cowen & Company. Your line is now open.

Thanks, operator, and yes, happy birthday, Steve.

Thanks.

Let's say, my first question is, have you – are there any concerns about the 737 MAX and the delivery schedule or is it just that the Neos?

No, its actually other way around to the MAX, it looks like Boeing will beat the certification target date and the first delivery is likely to occur a little bit ahead of the original schedule. We have accelerated a number of 737 MAXs. For example, we had some deliveries in '18. That will actually occur now at the end of this year. We've had some other MAXs that were in '19 and will now be in '18. So right now from everything we can tell, from the flight test program and the certification and the production, everything seems to be on track. We're not aware of any engine delays on the leap engine from CFM. So all the reports we have from Boeing senior management are positive thus far and we have not been notified of any delivery delays on any 737s, either the 800s or the MAXs.

Okay. Okay. And then my other question is with respect to a comment, thank you for that answer, by the way, is with a request to a comment I think, John, you made about focusing more on mainline aircraft. And I kind of think when Air Lease started out, you had the opportunity to go into those Embraers and the ATRs, which I guess are good aircraft, especially in Europe. But as you think about like the mainline program going forward, would you not look at any other regional jet type aircraft? Should we just expect you to ignore that business altogether?

No, I mean look, we continue to be - we continue to evaluate all opportunities. We have – you're right, when we first started Air Lease it was a great opportunity for us to get new aircraft quickly from ATR and Embraer. They were available much earlier than Boeing Airbuses time they've been profitable for us and they are great airplanes, and we sold airplanes really we think to the world's best lessor who knows that space the best, that's NAC. It is a specialized space and we did well with it, but our space is the mainline space and it will remain so. So we never say never, you know the C-Series is always still out there as well. But clearly our mindset here, unless proven otherwise, or unless we can see a very compelling case for going outside that mainline is to stick more with the Airbus and Boeing profile. But we always look at any and all different airplanes that come up, wherever they come up and look we are airplane people, we like airplane. So it’s just in our nature to look, but so far we've not found any compelling reason to go beyond that. In fact, you can stick by our assistance we decided to focus even more on the mainline product. But we're always looking Helene at the - at all the derivatives and all the new generation concepts, designs that Boeing Airbus we're working on. We continue to evaluate the C-Series. We looked at the E2 for Embraer. So at any one time we're always looking at the full spectrum of jet transport aircraft and evaluating what makes sense for Air Lease.

What makes sense for you or what makes sense for your customers and their fleet planning?

Both actually

Yes, it’s a combination – it only makes sense for us if it fits in with the planning of our customers and our airline lessees can make money and operate those aircraft profitably and reliably.

We react to our customer demand and actually you raised that. Its suffice to say if we were getting a lot of requests for the E2, a lot of requests for the C-Series, you know, we would be - we would be acting upon them if they were consistent across the board and very strong. Now to be fair, we I think in the industry are not known as a player in E2 space and we certainly not in the C-Series space. So the fact that we are not getting a lot of those requests and we are not, you know, I want to temper the fact that we're not known for being in that space. But nevertheless, if we were to be asked, if our customers think we really not wanted to this program, would you like to do with you, and here's what makes sense. Of course, we're going to take a look at it.

The other point I want to make is that, we're watching very carefully other lessors who jumped into the E2 program, jumped into the C-Series program and we're watching very carefully their placement activity. But until today we've only seen a very small handful. In fact, I got more fingers the number of those types of aircrafts that been placed by lessors that order the C-Series or the E2. So we're observing the marketplace. We're talking to over hundred airlines at any one time and once we see sufficient demand and the product has proven itself then obviously we have an obligation to our clientele, to our shareholders to look at all those opportunities.

Okay, great. And then I just have one last follow-up question. I don't want to be responsible from keeping you from that cake, but you said that…

And…

Oh, got it, that's even worse. I don't want to keep you, I don't want to be responsible for that. But on the delays on the eight aircraft you mentioned, I just want to make sure I understand the numbers. So there's 34 total deliveries this year, including the eight or excluding the eight?

It’s including the eight.

But 34 is the number of new aircraft deliveries that does…

Right.

Not include any young used aircraft or any of not…

Anything incremental that we would do…

We've have not yet published or announced.

Okay. Okay. And does it include pulling forward some of the 737s you just mentioned?

Yes.

Yes, we pulled forward two 737 MAXs into the fourth quarter.

I think we mentioned last quarter you know, we sort of have averaged delays with over few months on these aircraft, but the good news is we're going to still get them all in 2017. The current schedule from Airbus is that we're still going to get delivery of all of them in 2017

Yes, and let me explain one other item to the analysts on the call. If we have a two-month delay on a delivery of an aircraft, it does not change or alter the length of the lease. So if we have a 12 year lease that was supposed to start in April, but only starts in June, its still going to be a 12 year lease. So the total amount of cash flow, rental revenue stream is totally unchanged.

Okay, great. Thanks very much. Enjoy.

Thank you.

Thank you. Our next question comes from the line of Arren Cyganovich of D.A. Davidson. Your line is now open.

Thanks. In terms of the incremental aircraft that you discussed, is this stepping in for potential orders? Is it portfolios? What are you looking at when you are talking to these airlines?

No, I mean, it's consistent again with what we did last year. We were always optimistic and as is said, were going to regions of the world. We think we can pick up some good young used aircraft, or even a few new aircraft. So they are not committed yet, I think is the first item, but what I am telescoping view is that, I think we're making good progress and for all these reasons that we discussed you know, the Pratt & Whitney delays, the sale last year, you know, we're focused on that and I think we're going t be successful just like we were last year.

That's helpful. Thank you. And then in terms of the Blackbird, capping off the purchases there with the first vehicle, what was the total amount that you ended up funding in that vehicle?

It’s about a $1 billion.

Okay. All right, thank you.

Thank you. Our next question comes from the line of Christopher Nolan of FBR & Company. Your line is now open.

Happy birthday, Steve. Congratulations, Ryan.

Thank you.

Steve, can you provide some sort of detail in terms of the demand that you are seeing for aircraft with leases in the secondary market? Is it -- hearing from other lessors, it sounds like you're seeing more interest in this market from financial buyers. Is that something you are experiencing as well?

Yes, it is. We have a good problem, we have a lot of people – we have more people who want to buy airplanes and we really you know, should probably sell because again for about the fifth time, we sold a lot of airplanes last year, that we didn’t think we're going to sell. So we have to be mindful of our base of earnings going forward. But yeah, the answer is we're still seeing a good approach from financial buyers and other buyers and everybody to buy in these good earning assets. And this asset class is really gotten to be very strong the last several years, why, because it's consistently performed. So it's a good problem to have, the answer is yes.

And John, as a follow-up to that, how does that affect your fleet planning? Is it more profitable to opportunistically buy young aircraft, attach a lease to it, and then sell it in the secondary market? Or how does that affect your strategy going forward?

It kind of depends upon the opportunity, but just to level set, our main strategy is and remains the purchase of new aircraft on large-scale orders for the placement globally and that's what we are going to continue to do. These incremental purchases are A, opportunistic, B, additive and we don't necessarily buy them to flip, we are looking this year more to buy them, to keep them in our in our portfolio for while to make sure that our earnings base going forward is solid. So you know, I would not characterize this as a as a quick flipper, most of the use units that we buy, we buy for a holding period and when that holding period is over, we look to sell. So that’s just not to say that if we didn’t you know, if we bought an airplane and somebody offered us x-more and x is a big number two months latter we wouldn’t do it. But generally speaking, we're not flippers in the marketplace. We buy to support our earnings base.

Great, thank you for taking my questions.

Thank you. Our next question comes from the line of Scott Valentin of Compass Point. Your line is now open.

Thanks and good afternoon. Steve, happy birthday, and Ryan and Mary Liz, congratulations.

Thank you.

Just a follow-up on the secondary market. Just wondering when we compare profitably of secondary market versus OEM purchase, is there a big difference in the two? I know it sounds like you guys prefer OEM, but just wondering about the profitability differences.

Well, look both are long-term in terms of - when you say profitability, we have to look at the earnings power of the asset over time and we think again the mainline business model we have of buying new aircraft is still the right model. However, when we buy something and we see it on the secondary market opportunistically that means, what? It means we're getting a really low price, a price that we think really adds value to begin with. And then also the lease rate factor is probably outsized. So we see that as a complement to our strategy and it's been a very successful complement to our strategy.

The balance by the way Scott on the secondary market, the pricing remains very competitive because there is a lot of competitors out there. And so I want I want to emphasize that we see the sort of balance of how much of our deliveries come from our order book, relative to secondary acquisitions. And so yes, we are very, very much committed to that order book strategy where we can control pricing, we can control forward placement in lease contract that go with it and then when there are opportunities, we go act upon them. But the market dynamics have not shifted in favor of trying to go you know, into the sale of leaseback category in a really major way relative to the economics of the order book.

Okay, thanks. That color helps. And then just on SG&A, I think Greg mentioned you guys were at 5.8% of revenues. I know that's come down over time. Just wondering how much more room there is to grind that down even further, if there is room.

We think – we see revenues going faster than our cost base. So we still continue to expect that SGA will continue to grind down as we continue to grow our book, but we're not going to give guidance as to what it as ultimately stops at.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Justine Fisher of Goldman Sachs. Your line is now open.

Good afternoon. Happy birthday.

Thanks.

My question is on ratings. So, given that one of your competitors recently got I think the first investment grade rating for an independent lessor from Moody's, would you guys consider getting a Moody's rating?

Right now we have three excellent ratings, from credible rating agencies and speaking to our bond investors, we haven't seen a compelling reason at this point to engage a fourth of rating agency. At such time that we feel that’s a value added or it could be a way of bringing down further spreads on our bonds we'll certainly look at it, but as of – as we sit here in 2017, we just don't see that as a pressing requirement.

Okay, thanks. And then I had a follow-up on, John, one of the comments you made earlier about how you guys are helping airlines to manage their capacity down by them taking some of your new aircraft. And I was wondering if you could drill down for us on whether this is happening on the narrowbody side or the widebody side or both? Because what we are hearing from airlines is up-gauging, at least on the narrowbody side. So are you finding that it's more than maybe retiring a 747 and putting in a smaller aircraft to replace that and narrowbody is still up-gauging? Or can you talk to us about whether the dynamics are different on the narrowbody or the widebody side as you lease?

No, its – Justine it’s mostly the narrowbody side, that’s the biggest single market in terms of unit and customer depth and focus. So I would say our – these opportunistic looks that we're doing in the used aircraft are pretty well focused on the narrowbody side. We found that - if we found a great opportunity, you know, an appropriate widebody we wouldn’t hesitate, but by the same token, it's a quicker trade and a larger base to explore these opportunities. So on the narrowbody, so it’s more focused on a narrowbody.

Can you help us not just with -- not the specific airline, but just an example of it? Like, you come to an airline with aircraft type X and they are, like, I've had aircraft type Y. Can you just give us an example of how that works so we can figure out exactly how they are thinking about it?

Yes, actually I can give you a live example. We did a transaction with a Latin American carrier that had a substantial number of A320s and A321s in order, at the same time we were dealing with an airline in Europe that had A320s in this Latin American carrier came to the conclusion with our input that they have too many A321s coming in 2016. So we basically had them cancel their order. We stepped into their positions with Airbus on literally a few weeks notice and we placed those aircraft with the European airline that wanted to up gauge as you mentioned from A320 180 seat aircraft to 220 seat aircraft. So it was a win-win solution. It relieved the Latin American airline of over 150 million of CapEx. It enabled them to optimize their fleet and then also helped the European airline to obtain the equipment on short notice without getting in line to order new planes that would have taken three or four years to deliver.

That’s…

ALC was the – so we're the catalyst to make that happen. Those aircraft are in our portfolio now and doing very well. We have a similar situation now on Boeing aircraft and we're obviously as John said looking at situations when airline needs our help to sort of optimize your fleet size and fleet composition and then use those aircraft at other customers of Air Lease who need that additional capacity.

That is really interesting, thanks.

You're welcome.

Thank you. Our next question comes from the line of Kristine Liwag of Bank of America. Your line is now open.

John and Steve, can you provide more color on pricing of the A320neo and the 737 MAX families for lease placements in 2018 and 2019? And how does pricing in the market compare to what you had expected when you first placed the aircraft orders?

You are talking about pricing or lease rates?

Lease rate.

Okay. We've already placed all of our MAXs and Neos in the time frame you talk about. So the lease is already done.

And so for the contracts that you signed, how does that compare to what you initially expected when you first placed the aircraft order?

Its pretty consistent, look, we expected it when the first when the Neos and MAXs first came out and we could start offering and doing deals, that it would follow the typical behavior of any new aircraft type or any derivative, which is in the earliest part of the launch they command a slightly higher premium, that premium degrades over time and you know it's still – we're getting good lease rate factors, but based those aircraft to follow that historical curve.

Great. And for the two 737 MAXs that you mentioned you are pulling forward in 2017, is this because of accelerated delivery from the OEM or did you pick up an earlier slot from someone else?

It was an airline that wanted to rearrange their stream of deliveries and when they made that request to Boeing, Boeing called me and said, would we be willing to take the aircraft earlier. We already had an airline customer that was literally begging us to accelerate aircraft from mid '18 into late '17 because they were returning some older aircraft to another lessor competitor of ours. And so everything kind of came together, was perfectly synchronized. Boeing is happy, the airline that placed the original order is happy and our customer got the deliveries they wanted. So it was a win-win situation.

And generally when you switch something like that, are you provided some incentives to take on that earlier delivery slot?

Yes, we're known to be recipients of large incentives, that’s part of our culture.

It is also - don't forget, our customers are also Boeing's to customers or Airbuses customers. And so to make a quick decision which we're known for doing, a quick lease placement, a quick adjustment really is everybody's - in everybody's interest. And so in order to make that quick part happen, the best way to facilitate quick's is with a further discount.

By the way, these two aircraft, 15 were part of a larger placement. So I don't want you think, it was just two airplanes going to one airline. These two aircraft represent two units of a larger lease placement of 737 MAXs to a flag carrier overseas.

Great, that makes sense. And one more if I could follow up. You were the launch customer for the A321neo. Can you provide customer response so far? How are airlines viewing this aircraft? The extra range of this airplane makes it really unique in the product market. Can you give a little bit of color on what you are seeing there?

We are launch customer of the 21 LR Neo, I would say that that program has had outstanding reception and frankly, our biggest problem right now is that we have more people that want them, than we have available. We've already placed a number of initial units. So we are constantly working with Airbus to see if we can get some more LR Neos into the no late '19 early '20 time frame, because we have more demand than we have position. So I would say the 21 – 321 LR Neo has actually exceeded our initial expectations in terms of customer reception.

And the other thing I want to point out is among all of the lessors. We have by far the highest ratio if A321 Neos in their total A320 family Neo order. So we have a relatively manageable small number of A320s and the great majority of our backlog is A321 and that's where we've seen the action, that's where we have excelled. We're the leader of the pack. We placed more A321 Neo and A321 Neo LRs and all other lessors combined.

Would you be able to quantify for us what outstanding means? And maybe can you provide some directional magnitude of premium versus A320 Neo. Is it a magnitude of…

Outstanding means, where we have three airlines for one airplane, in other words, if we have 10 airplanes in a certain period of time, we have 30 prospective placements. So that…

And how does that compare for the A320 Neo?

A320 Neo is great, but we felt that where we could be a unique player and bring advantages for the airlines and to Airbus and to Air Lease, we felt the A321 has great potential, as the 757 replacement and also at airport slot constraints become more prevalent, we felt that upsizing of gauging was the trend at high density airports and the A321 has turned out to be a perfect vehicle for that.

Thank you, Kristine.

Thank you.

Thank you. And our next question comes from the line of Jamie Baker of JPMorgan. Your line is now open.

Hey. Good morning, guys. This is Nish Mani on for Jamie. I'll make this quick so I don't want to be the one blocking you in front of cake. I just wanted to read a little deeper into your comments about the delays on the 320 Pratt & Whitney engines. Does this diminish in your mindset the competitiveness of that program relative to the 737 MAX? In other words, would you view now Airbus and Pratt & Whitney as perhaps needing to value out with more incentives and pricing offerings in order to make the family work as well for you?

No I think that’s totally correct. Look, this is a delay you know, caused by engine production limitations, et cetera, et cetera. So it doesn't necessarily diminish over time. You know, the value or the competitiveness or any else like that were fully committed to the you know, to the Neo into the Geared Turbofan engine. I think what would capture more of our attention is if the production problems either got worse or the he ability for Pratt Whitney to produce sufficient engines to meet this fair engine requirements for current operators of the Neo, as well as, if it got worse you know, then we would probably take a little harder look at it. But we believe that you know, the ship is been righted. So it's caused a delay, but hopefully all will be okay going forward.

Okay.

Go ahead.

No, no, sorry, go ahead.

I was going to say the full resources of United Technologies and Pratt are behind that program. They have tremendous experience. They build tens of thousands of jet engines and a lot of times these programs are late or they don't quite measure up in the initial batch. We had the same situation the 787, it was four years late, that does not diminish to fact that it’s a great airplane. The A350 did not meet its original target delivery date. So at the front end of any commercial airplane or engine program there bounds to be issues, and I think we've built that into our planning.

Yes, that makes sense. So is it fair to say then that incentives and perhaps concessionary pricing is not necessarily on the table yet as it relates to the program?

Well, I'll always say that, it’s a general rule, concessionary pricing and further discounts is never off the table at Air Lease Corporation for any reason.

Fair enough. Okay, I'll leave it at that. Happy birthday. Congratulations, Ryan. Thank you so much, guys.

Thanks. Take care.

Thank you. And our next question comes from the line of Christopher Nolan of FBR Company. Your line is now open.

Guys, can you characterize the credit quality of your emerging market clients given the rising cost in jet fuel as well as the stronger dollar?

They are actually quite strong. If you look at our largest placements again, let's look at China, the vast majority of our placements were the largest three airline groups in China, Air China, China Southern and China Eastern, you know Vietnam Airlines, a government owned carrier I'm looking at Europe and Asia. And moving on to Europe, you know all of our placements in Eastern Europe, et cetera,. you know, we announced a large deal with the LOT Polish Airlines et cetera, et cetera. So I would say that the quote un quote emerging markets, our placements, you know are in terms of the credit quality, et cetera, are close to par. I mean, we're were very strong.

I mean, just to give you example, our first A321 long-range Neo is going to a company called Air Arabia, which is publicly listed, very successful, all Airbus operator, profitable, had a great year in 2015, a great year in 2016. It operates to lot of what people would call Third World countries ranging all the way from places like Bangladesh to Jordan, Egypt and so forth. So the airlines in those areas do o perform very well and demand is growing, middle class population is growing and these efficient airplanes provide the tools for these airlines to make money.

Great. Thanks for taking the question.

Sure.

Thank you. And our next question comes from the line of Vincent Caintic of Stephens. Your line is now open.

Hey, thanks, guys. Most of my questions have been answered, so maybe I just want to take a quick step back. So you placed 92% of your orders through 2019. You placed them also in 2020 and 2021, and you've got the lease rates already factored in there, and you've also got escalators for rising rates. And then on the other side you've got your funding cost actually improving. And so I would think you would have visibility for the next 3 to 5 years and to how that spread is. And would it be fair to say that, looking into the next three years, that that spread is increasing where your lease rates are going up while at the same time your funding is improving?

Yes, Vincent, this is Greg. We don’t give forward guidance on profitability, but I can say that we have very strong returns on equity and adjusted returns on equity and that order book that you referenced is 92% placed through 2019, provides us with an unbelievable amount of visibility and will help us to double in size in five years.

Got it. That makes sense. Maybe if asking it another way, are the terms of what you've placed so far in those through 2019 consistent with what you've been placing in the past?

Yes, on an overall basis yes, which is why you know, we are confident in our doubling of size, in our shareholder return. So you know, as I indicated last quarter little bit more variability, but overall we're happy with where they are and that’s basis of our overall comments that we feel pretty confident about the future.

And as I mentioned earlier by paying back the funding that we obtained back in 2010, '11, '12 when the company was not a investment grade rated company, we're able to actually repay those obligations which had a higher interest rate than what we can fund for in the present marketplace. So we have been replacing what we considered expensive, it was not expensive but by today's standards they were, 4%, 5% money were now placing with 2% and 3% money.

And specifically, as we look forward in '19 or '20, you can imagine that are aspirational goal is actually to further improve those investment grade ratings, BBB to BBB plus et cetera, et cetera, that's very much in the calculus that we have going forward as in the calculus of where we expect to have the bottom line earnings in the future. So we see that improvement in interest rates is a key for us, but we are by no means sitting here saying we're BBB, we're great, all is good. We believe that our future performance will demonstrate an increasing credit enhancement that will warrant a further upgrade from all of the agencies and that will result in even further benefits from us for us. So in the in the whole totality of that universe we're confident over the next five years and we think our return are going to be great.

Got it. Makes sense. Yes, I just wanted to put a finer point because it seems like you are benefiting not only demand for your assets but also demand for your bonds, so it makes sense to me. Thanks very much, guys. Enjoy the cake and happy birthday, Steve.

Thanks a lot.

Thank you. I am showing no further questions at this time. I like to hand the call back over to management for any closing remarks.

Thank you. Thank you, all for your participation. This concludes our call for today. And we look forward to speaking with you at the end of the first quarter.

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