Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Air Lease Corp 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mary Liz DePalma, Director of Investor Relations. Please go ahead, ma'am.

Good afternoon, everyone, and welcome to Air Lease Corporation's earnings call for the second quarter 2017. This is Mary Liz DePalma, and I'm joined this afternoon by Steve Hazy, our Executive Chairman; John Plueger, our Chief Executive Officer and President; and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our second quarter 2017 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, August 3, and the webcast will be available for replay on our website. At this time, all participants in 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 expenses and stock-based compensation expense. These statements and any projection as for the company's future performance represent management's estimate for future results and speak only as if today, August 3, 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 of 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, are non-GAAP measure. A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and their reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q we issued today. This release can be found in both in the Investor 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.

Thanks, Mary Liz. Good afternoon to everyone listening in and thank you for joining us today. I'm pleased to report that for the second quarter of 2017 Air Lease recorded total revenues of $381 million versus $350 million in 2016, an increase of 8.8%. Our income before taxes increased 9.6% year over year to $156 million from a $142 million in the second quarter of 2016. This resulted in diluted EPS of $0.92 per share for the second quarter of 2017, a 9.5% increase year-over-year. ALC continues to deliver strong pretax profit margins and pretax return on equity, which this quarter was 40.9% and 17.3%, respectively. Greg will provide you with further details on our financial performance a bit later in the call. Our business remains very solid and there continues to be a healthy operating environment for our airline customers, broadly. Strong traffic growth trends remain with [indiscernible] latest release from just this morning, which you probably saw, and Steve will further comment on this in his remarks. As a result of this growth and the need for replacement aircraft, we see continued demand for both narrow-body and wide-body aircraft within ALC's order book, along with the used aircraft we've been able to source opportunistically. This quarter specifically, we took delivery of 14 aircraft, eight from our order book and six used aircrafts. We now have 240 aircraft in our owned fleet with a net book value of $12.7 billion, and the lease rate factors of our existing fleet and overall portfolio metric remained stable. We've made excellent progress in our placements. We're 90% placed through 2019 and 73% placed through 2020. And as I said on our Investor Day, we're farther forward place than we ever thought we would be a year or two ago. One of our…

Thanks, John. As our second quarter results indicate, Air Lease Corporation is delivering outstanding financial and operating performance. We continue to build the best-in-class fleet on long-term leases to our global customer base. ALC’s diverse group of 88 airline customers in 54 different countries are performing well. As you know we always focus on passenger demand data, as passenger traffic is one of the strongest indicators of air line performance. Just this morning, IADA reported that global passenger traffic grew by 7.9% year-on-year in the first half of 2017. And that industry-wide load factors were at an all time high for the first six months of the year at 80.7%. As further evidence of a strong global economy, IADA reported yesterday that air cargo in the first half of 2017 experiences the strongest first half performance since 2010 or in seven years when rebonded from the global financial crisis. So right now we are in extremely healthy operating environment for strong air line results. In addition to the traffic growth supporting demand for new aircraft, there is ongoing need generally by the replacement cycle. Many of Air Lease’s new aircraft placements are geared toward the replacement of older planes built in the 1980s and 1990s. The wide-body aircraft in ALC’s order book are particularly a large focus right now as our airline customers look to replace their Aging twin-aisle aircraft that accommodated a larger amount of passenger volume in the midst of ongoing airport slot restrictions at more and more congested airports. This quarter, we continued to experience strong placements of both narrow and wide-body aircraft for both growth and replacement. To give you examples of what we are seeing in the market, on the wide-body side, we just announced a placement with TAP Portugal on Monday that includes four…

Thank you, Steve. As John mentioned earlier, our EPS grew by 9.5% to $0.92 per diluted share. The growth in EPS is primarily due to the growth in our average manned aircraft assets. During the quarter, we purchased eight new and six used aircrafts, representing $637 million in CapEx and we sold 17 aircrafts generating net proceeds of approximately $334 million. Despite this activity, our portfolio lease rate factor age and lease term remaining all held constant on the weighted average basis. Aircraft’s sales, trading and other activities totaled $23 million in the second quarter. This was primarily driven by the sale of 17 new aircraft to Thunderbolt and Blackbird Capital I generating 17.6 million in gains. The timing of these closings exceeded our expectations. As such, as we look forward to Q3, we expect a light quarter in terms of aircraft sales. We anticipate selling four aircraft in the third quarter, representing approximately 85 million in aircraft sales. The third quarter is historically a light quarter in terms of capital expenditures, and this year is no different. We anticipate delivering three aircraft in the third quarter, representing approximately 215 million in capital expenditures, which are weighted towards the second half of the quarter. There are a few items I'd like to highlight specifically of this quarter: first, impacting the results with the repining of our 1.1 billion unrated senior notes that carried an interest rate of 5 5/8%... this helps us to lower our composite cost of funds by 40 basis points to 3.08%, and as compared to the first 317. Further we recorded as compared to the first quarter 2017. Further we recorded lower interest expenses compared to the prior year despite carrying 900 million in additional debt. Second as I mentioned previously, depreciation expense in the prior…

Thanks, Greg. This concludes management's remarks. For the question-and-answer, session each participant will be allowed to ask and one and question. I would like to hand the call over to the operator to open the line for Q&A.

Thank you. [Operator Instructions] Our first question is from Moshe Orenbuch of Credit Suisse. Your line is open.

John, you talked a little bit about the placements, the forward placements being kind of longer than you had historically. Could you talk a little bit about what kind of leads you to want to do that and maybe little bit about your customers also and their thoughts with respect to it?

Sure. Well, these placements are because of the strong demand, and each one individually is done -- most of them are multiple units on campaigns. So it’s really nothing more than balancing our desires to place with those active campaigns on terms of we mutual beneficial with our customers. We have always also had a philosophy that we actually under-order. For many, many years, we’d like to say that looking out two to three years, we only have one order about half what we think we can place, half from a balance sheet perspective from our capacity in a marketplace to place, et cetera. So we can take that conservative posture and then we top-up the orders, as you saw in Paris, as needed. So there is really nothing more to the being along in the forward place and then being that we’ve been happy that we have been able to lease successful number of campaigns, knowing that we do want to have some available aircraft, which we’ve now toped on up with. It’s just a balance. There is no right answer for how much do you save for the future and how much you have now. It also depends upon the current campaign that you are operating. And frankly building a long term business wanting to meet our customers' needs. If I have a customer it’s only – and once the team more units, our tendency as always to trying satisfied that customer.

And maybe just as an actual follow up I mean, you mentioned kind of 50% level. As we think about how much you could be topping up in the future with respect to those orders either through of purchases of aircraft or additional orders. I mean, is that the right amount or is there another way to think about it?

Well, I mean I think it’s a right amount. We are comfortable with that amount. I’ve said in my comments that we did not make large orders. We now have some 373 aircraft orders through 2023, that is sufficient, we are very happy, with that level. I don’t think we are going to change any of our philosophies our outlooks and how much we should have in order, comfortably we have got a great order base. We got great contracts. There is no need to go out and order 2 300 airplanes, a 100 more airplanes today. We are just very happy with being conservative and feeling very good about our ability to place the order book that we do have, which is conservative under good economic terms.

I head, just to comment on what John said, we are one of the largest players in the overall single-isle market, which is heart and essence of the operating lease business with the A320, A321 neo family, with the 737 MAX family, we have 276 aircrafts yet to deliver, those particular very popular aircraft families. And then we have very strong wide body franchise, as I indicated in my commets we continue to place wide body aircraft both airbus and Boeing improving quantities to airlines that are leaders in their particular areas.

Our next question is from Jason Arnold of RBC Capital Markets. Your line is open.

I was just curious if you could add any extra color on the wide-bodies replacing narrow-bodies slots trend. Does this feel like something that’s accelerating and then maybe you can comment on that the regions where you are seeing that occur?

I think the two regions that we are seeing that in significant ways is in Asia, particularly intra-Asia, we are seeing single-isle capacity being replaced by these smaller 250 to 300-seat widebody aircraft. There's a large migration in that direction and part of that is the traffic density on a lot of these city payers is reaching a point where airlines run out of frequencies with their single-aisle operation. And secondly airport slaugt. Elda, constrained. As a lot of the major airports, whether it's Hong Kong, Tokyo, Osaka, Singapore, and on and on. So that's one part of the world where we're seeing a tremendous surge in need of wide body aircraft to fly traditional single-aisle one is routes. The other one is on the North Atlantic. We do see more single-aisle aircraft operating secondary markets on the North Atlantic, but we're also seeing wide-body aircraft replacing, for example, 757 flying, where load factors have reached 90-plus level So once again, the 787 the A330 are extremely valuable assets to operate on the North Atlantic in markets that are not necessarily the highest density markets, but city – direct service bypassing congested hubs. I would offer a third component, Jason, and that is we do believe, as we look longer in the future, that we're going to see an expansion of the long-haul, low-cost carriers. You see Norwegian doing a lot of this now with the 787s, but that's just one example. So joy, level, all these folks in Europe. So I think that this represents a third leg, if you will, in the wide-body equation that is going to grow over time. So big picture, looking out over a good period of time and not just month-to-month, quarter to quarter, although there remains some concern about the wide-body space, we do see this applications we talked about in Asia shifting more to wide-body plus, as I just mentioned an anticipated growth in the long-haul, low-cost segment of the marketplace.

I mean, some of the Asian carriers that are getting into the long-haul, low cost business are AirAsia X, JetStar Australia and Scoot, which is now the merged Tiger Air and Scoot Subsidiary of Singapore Airlines. So we're seeing more and more shift on the long-haul, LTC market where airlines are utilizing the 787 and high density configurations like John mentioned Norwegian, as well as the A330 200s, 300 and A330-900, those are all excellent platforms for long haul LTC operations.

Excellent. Thanks for the color there. That's great. And then just another one that I wanted to follow up on in terms of I guess potentially near term tempering some of your sales of aircraft, any context you can wrap around that statement like selling a couple or several less than previously expected and you know maybe near term being over a couple of quarters, your near term, any other color there would be helpful.

Look, we're still actually looking at this, Jason. It's hard for me to give some color. I mean, literally we're waiting for updates from, for example, Airbus, week to week. I would say that we'll maybe have -- probably have a little more, we'll definitely have more color for you next quarter, but I think by the end of the summer we'll decided whether or not we're going to -- how much we're going to troll back if at all on the sales. I mean, obviously we'll have delays in CapEx going into '18, timing delays I would say initially, and that meters it, But it’s a little tough to say definitely a or b, when we don't know exactly, Airbus is working pulling out old sock to doing whatever they can, but frankly I mean it just keeps changing. So I will just check it out little more as to quantity, etc, but the truth is we're just not there yet.

Even some of our CFM powered A321s we've seen some small delays. So the DTF is not alone. It's obviously the largest single problem in terms of delays, and then next June we've the Rolls-Royce situation with the A330-900neo, which is already late beginning their flight test program.

Suffice to say, I'm confident -- I'm pretty confident that we'll be delaying some sales, I just don't know how much.

Thank you. Our next question is from Jamie Becker of JPMorgan. Your line is open.

John, just getting back to the placement question before, you mentioned being further placed currently than you ever dreamed of a year, I don't remember the exact term you used, and I'm just kind of wondering what changed. I'm not saying there's anything wrong with the outcome. I'm impressed with the 90%. I'm impressed with the 73%. But clearly there were drivers behind the variation to the original plan, and I know you mentioned topping up in Paris, but what else changed or were you just being too conservative in the first place?

I think we're always conservative, to begin with. I would say, more than we dreamed of a little shy just think of more than what we thought what we have scheduled. But it's a good thing because, again, this is been driven by what our customers want. We've had several occasions where an initial placement of three to four aircraft turned into five to six, and a few campaigns popped up that we didn't think of or we – so we're going to be there originally, we felt that was important for us to meet those campaign needs. So it's just really timing and circumstance, and I think, your last point, we're always a little conservative and maybe a little over conservative, but I'd rather be in that space than the other where we're behind the power curve. We feel very comfortable with where we sit right now.

Jamie, some of these placements are multiyear placements, where we might have one or two aircrafts delivered in '18 and another two or three in '19 and other couple in 2020. So many of these transactions involve phasing out all the aircrafts and then replacing them one for one with new ALC aircraft. So a lot of these transactions that we've done deliver to the airline over a multiyear period.

And while I have team, it’s kind of a strange question, but what are you -- why do think investors in Boeing feel like this cycle is so strong at this point, whereas we just don't see that level of conviction in the cycle from leasing investors? Or put differently, I mean there's so much concern about residual value risk for you guys and it did feel to me like Steve just started another want, [indiscernible] OEM last quarter, but over the Boeing their owners just seem to keep kind of waving through potential production cuts down the road. It’s a topic that markets are rappelling with internally Boeing up 50%, you guys up 15% or 16% year-to-date. I mean I don’t like to asking management about share price generation, just kind of my job, but I am wondering if you have given this topic any thought. There seems to be a real disconnect here.

Well, we are happy for the enthusiasm over Boeing and their investors and their stock. I mean, they are doing a lot under Dennis and Kevin's leadership now to streamline their operations, improve their efficiency. Obviously, they are looking to increased production rates. I mean to have to say soon here today we don’t have the production delayed problems bonds with Boeing. If we would, Airbus. That’s pretty obvious. Now, I think that’s a factor. It just seems like Boeing has their programs under control. I really can't speculate as to why the difference. I mean I think -- I'm anticipating what you’re going to hear from almost virtually all the public lessors is that the operating environment remains pretty strong. And why investors remain concerned? I don’t know. Steve just gave you a lot of detail, for example, on our specific placements on wide bodies. There is a lot of undue concern about wide-bodies. Yes, we know the Middle Eastern guys are deferring. Americans deferred A350s, but I think we have given you some color on really use and pathways for wide-bodies over the next three to five to seven years, so we just don’t share that level of concern. And maybe we don’t good enough job. We as aircraft lessors publicly held space and communicating all this, but I just think that frankly it’s much to do about nothing and our business continues to move forward. I wish some of that Boeing enthusiasm could still over to our space, and I think we will just continue to produce results that indicate that that enthusiasm was actually warranted.

Our next question is from Rajeev Lalwani of Morgan Stanley. Your line is open.

I wanted to come back to you, John, your comments on the wide-body side. It seems like you are pointing to maybe an inflection there as it relates to the data points in cargo and some other placements. But is the other side of it is the Middle Eastern carriers? Maybe your peers noted the potential for deferral, et cetera? What are you guys seeing there and how important is something like that to you? Is that helpful to wide-body market?

First of all, we have no aircraft scheduled to deliver in the future to any of the large three Middle Eastern carriers, and we expect that there will be some wide bodies, so some deferrals there. I think that will enable us to probably – hopefully, fingers crossed, accelerate some aircraft and wide-bodies and some active campaigns that we’re working on now that should help us in '19 and '20 and '21. So there is no -- I would say there is no real change in inflection point. I would only offer up a slightly different perspective in that. I just think that there is too much concern about it, and we are just not as fast about it.

Yes, I think the wide-body market, there is a tendency on the Wallstreet to sort of put everything in one category, and from our advantage point the wide body market really has two very, very clear segments: one is the very top in that wide-body market, which is represented by the A380, 747-8 Intercontinental, the future 777-9X. Those aircraft have a different demand profile and different customer base than a lot of the 787, AC30, AC50 transactions that we're doing. So in the middle segment, which is as I said the 250 to 350-seat aircraft, we're seeing a lot of demand, a wide breadth of airline customers that are both buying and leasing those aircraft, which is totally different than the environment at the top end of the wide-body market, which is the 400-seat-plus aircraft, where we're seeing sluggish demand, we're seeing a lot of deferral possibilities, and so we're staying away from that segment of the market consciously.

Thanks for all the color and then just another quick one. As it relates to some of these vehicles that you have, like Blackbird and Thunderbolt, would you consider being more aggressive with maybe selling assets into those vehicles simply because it seems like they may get better valuations than what the market showing? Just to help with your valuation I guess.

Well, as a matter of fact we did with Thunderbolt One, that's exactly what we did. Thunderbolt 1 was a sale of 19 aircraft into that entity. We have told you that we think that's a replicable platform. So to the extent that we ever do T-bolt 2 or 3, I see no reason to change a successful formula on that regard. And with respect to Blackbird Capital 2, that's more of a sidecar equity platform for us and we look at that in terms of partnering with someone being able to provide us additional balance sheet that’s not consolidated with us to meet campaign needs, placements. If I am reaching an exposure limit or a risk limit within a specific customer, because we're very mindful of these things with our investment-grade ratings, that's what Blackbird Capital is there to help us so we don’t have to let that business go to other leasing companies. We can a. satisfy the customer, b. make the Blackbird Capital investors happy, and c. not give that business elsewhere. So I think that's the kind of color I would put on it. If there was, we commented on the call, I commented that we do have a plan to seal initially Blackbird Capital 2 aircraft from our portfolio, but that's not the main intent of the growth of Blackbird Capital 2. It's an adjunct to our ongoing placement and opportunity needs.

Understood. Thanks for the time.

Thank you. Our next question is from Mike Linenberg of Deutsche Bank. Your line is open.

Couple of questions. John, just back on your point, you were talking -- I mean following up on Steve about some of the opportunities and demand for wide-body and you talked about the long-haul, low-cost model, and there's obviously -- there's a pretty hardy debate about kind of the long-term viability of that model. And I know that when you look at a level and it's Scoot in June, I mean they complement a parent company that has a full service product offering, and I guess like an AirAsia-X would be a good example of a long-haul, low-cost operator. As a standalone, that seems to be holding its own. What are your thoughts or like what should we be looking at? Is it just the immaturity of that model? Like where do you come out on that? And I realize that it is really early in their development.

Yes, I mean you're point is well taken, Mike. I mean we don't have any aircrafts scheduled to replace or forward lease into any of those carriers, the long-haul, low-cost model carrier, and we do think we agree it is a bit of a debate. However, we do think long term there will be growth in that segment. We think that the carriers you just identified and mentioned will add aircraft. So in the overall global market for wide-body aircraft, we're simply pointing that we think that this is a -- I think the term that I used was kind of a third leg to support the overall wide body marketplace. How extensively we get into that in terms of our forward placements? It's hard for me to speculate. But for sure you make a good point. It’s something that we're watching, but we do feel pretty confident that it will be a least expanding over the next three to five years.

And then just second question. It does look like that some of the carriers out there that has their own captive aircraft leasing companies, it does seem like that those businesses are now upon the block, and I was curious if those types of portfolios would interest you. I think from what I've heard one of the sort of rubs is that those fleets aren’t all that diversifies because I think in many cases, because they're captives, they may have only one or two customers. And so thoughts on that?

We looked at the AirAsia portfolio, which is all A320s, it's as you mentioned, it's all aircrafts scattered within the AirAsia Group. There’s very little -- outside of they're little bit in India, but generally as you mentioned, it's captive customers. Similar situation with Lion Air, and their operation -- they had some aircraft in China, but again most of the aircrafts are leased to their own sister or daughter companies. And then Norwegian has this Arctic Aviation Capital, which has done a little bit of work outside of Europe. But again most of the assets are with the mothership. So we're really not looking at buying entire portfolios from those players, because of the concentration issue, but we would certainly entertain opportunistic situations where we could acquire a cluster of assets at attractive rates.

And this is something also where Blackbird Capital II could be helpful.

Yes, we don't really believe in the philosophy of an airline owning a large leasing company. We just haven't seen that work out successfully. And so what you're seeing now is these entities looking for either unloading those assets or finding strategic partners to help them shed the liability level.

Thank you. Our next question is from Kristine Liwag of Bank of America Merrill Lynch. Your line is open.

When I look at -- maybe a bigger-picture question, because to your owned fleet, it's limited by your investment-grade requirements, but for your managed fleet it seems like the growth is really only limited by investor appetite. And when you look now, your managed fleet is about 20% of size of your owned fleet and presumably after Blackbird II, there could be a Blackbird III and so on, and even perhaps a follow on to Thunderbolt eventually. So assuming that investor appetite for these structures remain strong, how do you think about balanced long-term growth of your managed fleet? And is there an overall fleet size that you are targeting?

We don’t have a target for the fleet size, but to your point, we like that business and its added incrementally to our own. We will never get to the point where our management fees get anywhere really close to what we earn in our core portfolio. But for all the reasons we’ve talked about, it’s a great adjunct and a great compliment. So to the extent we can grow that business we will, but I would only say that when we manage aircraft we take it very seriously and our first obligation to do a great job for the investors. That’s the only way that we are going to be able to continue to grow that business. So our first focus is to make sure that we can handle, that we have to bandwidth to successfully managed portfolios of aircraft on behalf of investors, and at the same time, without diluting in any way, in fact equally strengthening and continuing to the placements and management of our own fleet. So we are very mindful here, first and foremost doing a great job for these investors. And that’s what’s going to bring more and more equity investors. And so we are going to temper that growth. We like the business. We’ll continue to grow it. Well, that will be tempered by how well we think we can continue to execute.

And when you think about your existing cost structure today and your manpower, what size fleet do you think did reasonably grew without tretching your capabilities?

We gave actually some color on that. We’ve given in overtime. Generally speaking, it’s a very big sort of generalization. We can support five to six aircraft per employee, as if you wanted just to make a generalization, and so with our current staffing somewhere around 80, 85 people, you multiply that by six, and that’s kind of where we think we can support fleet size. So that’s just about 500 aircraft or so. But to continuously manage and evolve fleets for other people, we will have to ramp up a bit more our accounting, technical, legal staff, but we should still ought to be able to stay within that five to six aircraft per employee range.

Our next question is from Helane Becker of Cowen & Company. Your line is open.

May I ask Greg a question? Greg, with new accounting rules that are coming into effect, will there be any changes in the way you recognize revenue?

We said in our 10-Q that we’re still evaluating the new revenue recognition standard, but we don’t at this point see that there’ll a meaningful change the way we recognize revenue. That goes in fact I believe next year and then the following year is the lease accounting standard which is -- there is no real standard changes for aircraft lessors.

I know that part. I was just wondering about the first part. Thank you. And then do you guys -- maybe for John or Steve, do you have any customers on your watch list that you're concerned about at all?

No, in fact we just had a board meeting yesterday and we have virtually no issues in that area, and so we're really in good shape on the credit side of the equation. We haven't had any write-downs or delinquencies that would cause any concern.

Okay, that's perfect. And then, Steve, when you talk about -- this is sort of follow-on to Jamie's earlier question. When you talk about your comments about the supply situation for the manufacturers and for them not to get over -- too far over their skis, why do you think they're not paying attention to you? You know what I mean? Like, you're well regarded in the industry. People know your long history, your experience and so on, but yet the manufacturers don't seem to pay attention to that one comment, and just kind of wondering why you think they're just trying to continue to grow their business and maybe getting too far ahead of themselves.

Yes, I think they're more interested in their stock price than the realities of the global environment that we’re dealing in. So I would have to say it's driving up the perception of shareholder value, and the people who are leading these companies have not been in the business as long as I have.

That's a good point. Okay, thank you, guys. Thanks very much.

Thank you. And that concludes our Q&A session for today. I'd like to turn the call back over to management for any further remarks.

Okay, that concludes our call for today. We appreciate you all participating. We look forward to speaking to you on the conference call following the third quarter. Thank you.

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