Good day, ladies and gentlemen, and welcome to the Air Lease Corp. Third Quarter 2017 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 may be recorded. I would now like to turn the conference over to Mary Liz DePalma, Head of Investor Relations. You may begin.

Thank you. Good afternoon, everyone, and welcome to Air Lease Corporation's earnings call for the third quarter of 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 third 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, November 9, 2017, and the webcast will be billable for replay on our website. [Operator Instructions] 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 competition expense. These statements and earnings possessions our company's future performance represent management's estimate for future results and speak only as of today, November 9, 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 the 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 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-Q we issued today. This release can be found in both investors and the press section of our website at www.airleasecorp.com. Unauthorized recording of this conference is not permitted. I would now like to turn the call over to our CEO and President, Mr. John Plueger.

Thanks, Mary Liz. Good afternoon to all of your thank you for joining us today. I'm pleased to report that for the third quarter of 2017, Air Lease recorded total revenues of $377 million versus $355 million in 2016, an increase of 6.1%. Our income before taxes increased 6.6% year-over-year to $154 million from $145 million in the third quarter of 2016. This resulted in diluted EPS of $0.90 per share for the third quarter of '17, a 4.7% increase year-over-year. ALC continues to deliver consistent solid pretax profit margins and pretax return on equity, which, as of this quarter, was 40.9% and 17.1%, respectively. As expected, deliveries in the third quarter were light, with three aircraft delivery from July through September. ALC's fleet at quarter end included 236 owner aircrafts, with a net book value of $12.7 billion, up from $12 billion at year-end 2016. During the quarter, we profitably sold a total of 7 aircraft, including 3 sold to another aircraft lessor, 1 sold as a seat aircrafts to Blackbird II and 3 aircrafts sold to complete the aircraft sales to Thunderbolt. ALC now services a total of 51 aircraft and our management business is performing well. Just as a reminder, Blackbird Capital is designed to help us expand our footprint in the marketplace using opportunistic capital, while Thunderbolt allows us to strategically sell aircraft but continue our customer touch points in the midlife space. Overall, our business remains strong as does the aircraft demand. Despite recent airline bankruptcies in Air Berlin in Monarch, we've seen an uptick in single demand, both new and used, such that the Monarch and Air Berlin aircraft across more lessors have been a pretty paced, including our product single or aircraft and total that were on lease to those 2 carriers. As…

John, thank you very much, and thank you to all of you for joining our call today. ALC continues to deliver outstanding financial and operating performance as the third quarter results once again indicate and validate. Our priority since ALC's inception has been to award our shareholders, in line with our achievements. With this in mind, I'm very pleased to report that our Board of Directors has authorized a 33% increase in our annual common stock cash dividend from $0.30 per share per year to $0.40 per share, payable $0.10 per quarter, beginning in January of 2018. Air Lease's existing high-quality portfolio of the most in-demand aircraft types on long-term leases, together with our skilled management team, has enabled ALC to generate superior financial results. We are very confident in our business going forward. Looking at the longer-term horizon, I do want to emphasize that forecasted future of the growth of our industry will lead to be funded by hundreds of billions of dollars of capital. Added capital is needed in our industry. Competition has, of course, increased in the marketplace because investors recognize that aircraft are desirable, long-term assets which demonstrate good consistent returns and strong cash flows. There has been much discussion and news reports regarding capital inflows into the space and speculation on the impact on the industry. I want to make it clear, ALC does not take part in the highly competitive sale lease back market, which is primarily price-driven. Instead, Air Lease and its main competitors remain rational and our order book continues to provide with key competitive advantages. As of today, ALC has almost 90% of our projected rental revenues through 2021 under long-term lease contracts, providing us excellent visibility for many years to come. As John indicated, we also remain optimistic about the…

Thank you, Steve. As mentioned earlier, we recorded another great quarter, generating diluted earnings per share of $0.90. Our results were driven by growth and average assets as well as lower interest and SG&A expenses. And we're further supported by our portfolio lease risk factors, age, lease term remaining, which are all constant on a weighted-average basis. As we look forward, we have over $23 billion of committed minimum rentals, providing us with significant visibility into the future. In the third quarter, we generated total revenues of $377 million, including $359 million of rental revenues and $17 million from aircraft sales, trading and other activities. Our fleet activity included a purchase of 3 new aircraft, representing $245 million in CapEx and the sale of 7 aircraft generating net proceeds of $185 million. Included in aircraft sales, trading and other activities, were $7 million in gains from the sale of aircraft and $3 million from management fees. As it relates expenses in the quarter, I want to highlight 2 items. First, SG&A reached its lowest point in the year at $19 million and was $4.5 million lower as compared to the second quarter, largely due to fewer transactional expenses. We continue to expect that our revenue growth will outpace our SG&A growth, leading to increased operating efficiencies. Second, we continue to benefit from a reduction in our composite cost of funds. Our interest expense this quarter declined as compared to the prior year, despite having a higher debt balance, resulting - this resulted from our lower composite cost of funds. Our aircraft activity, together with these expense savings, drove our results, allowing us to achieve an 18.5% adjusted pretax return on equity on a trailing 12 month basis. Transitioning to tax reform. The current tax proposals containing multitude of changes, including…

Thanks, Greg. This concludes management remarks. [Operator Instructions] Now, I would like to hand the call over to the operator to open the line for the Q&A.

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

Great. So thanks for all the detail. Could you maybe just talk a little bit about the thoughts you would have as your ability to kind of supplement your current order book from existing transactions in the market, given the likelihood of there being some ongoing, as you; said, shifting to the right of deliveries in 2018?

Yes. Look, we - sure, Moshe. We have pretty significant CapEx, even with these delays for 2018. Next quarter is also going to be pretty good as well. So roughly, circa, I think about $4 billion or so for 2018. So that total, we don't think, is going to change that much. We do think, again, it's going to be back end weighted. Having said that, just like we said this earlier this year, with the Pegasus 737-800s, we are on the look for opportunistic used aircraft purchases, geared towards more the first half of the year. And we're always on the lookout for the right airplanes to buy at the right time. So as and when those happen and develop, we will certainly advise you. But our strategy and our playbook, because of these delays, remains the same.

I just want to add one more item. Conversely to what's happening in Airbus, we are working very closely with Boeing to accelerate some deliveries in 2018 into an earlier month because of the backend weighting of our Airbus deliveries, we're doing everything in our power to push more aircraft into the first half of the year and as early as possible in 2018 to begin generating lease income associated with those aircraft. And we're having some success already with Boeing and we continue to work with Boeing to do as much as we can to accelerate deliveries.

Got it. Thanks. And just as a follow-up, Greg, I see you've got probably $1.5 billion of debt maturities in '18. Just talk a little bit about the cost there and what it's going to look like as you replace this?

I think most of the cost savings that we look to benefit as we're refinancing some of our initial unrated debt is going to come in '19 and '20. We don't see a material change in our composite cost of funds, as we layer in new debt that's at our current rating levels, our current pricing levels.

Thanks so much.

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

Hey. Good afternoon, guys. This in Nish Mani on for Jamie. I want to ask you guys about the potential sale of a very large aircraft leasing platform and whether or not you guys would consider buying either a part of a portfolio or even an entire platform to bolster you guys? I know you can't comment on M&A and speculation, so I don't need you to answer that question specifically, but rather, how do you guys think about bolstering your platform? And is scale something you guys are looking to build in the near term, given that there are new support balances of potential platform sale?

Yes. Thanks very much. So we do have that scale. If you just at our forward order book, it's circa $28 billion against our balance sheet today roughly, $15 billion. So over the next 6 or 7 years, our own organic growth provides the level that we're happy with, going forward. So having said that, we always have and always will look at any fleet purchase opportunities or any other opportunities on the M&A side or otherwise, moving forward, but as always, we are very conscious of terms, conditions, pricing. And it really is very opportunistic. So our playbook is not changing. Whether or not any platforms, large or small, become available forward, just know that we always have taken a look where we thought it made sense and we'll continue to do so going forward.

Okay. Is there - I mean you guys mentioned, obviously, is that potentially with OEM deliveries being pushed back next year. You'd want to fill in the gap of, perhaps, in the near term either this year or early 2018. Would a partial portfolio sale help you with that component? In other words, if you larger platform was broken up into pieces, would that be something interesting, so that you can bolster some of the sale in the near term while realizing the value up on the tailwind?

The answer is, what you're talking about there is actually totally independent of the timing, which is a short-term thing on the delays. Our decision will strictly be focused on whether in the interest of our shareholders, and timing is irrelevant when you're talking about things like that.

And just to be absolutely clear for the record, when you use the word OEMs, there are no delays from Boeing, the only delays we're experiencing this juncture are from Airbus. And our Boeing deliveries are on-time. And as I just mentioned a few minutes ago, we're working with Boeing to accelerate some deliveries into earlier months than what we have in our contracts.

That's right. [indiscernible] Boeing in any way. Okay. That's it. Very helpful, guys. Thank you so much for the color. I appreciate it.

You're welcome.

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

Good afternoon, gentlemen. This is actually Catherine O'Brien filling in for Mike. So today, one of your peers noted earlier that the used aircraft market was extremely strong right now, strong since his 30-year, actually, he said. Would you agree with this? And has that influenced the amount of aircraft looking to sell in the coming quarters at all?

Well, I think we've said that we've seen an overall uptick in single aisle demand, both new and used. So yes, I think the aircraft - the single aircraft marketplace is very, very strong, current generation, 737-800s, very, very strong. We should have 10 more of them today. I could place them all, we could place them all. Also, the A320s and 21, current generation, also pretty strong. So is it the strongest we've ever seen, I don't know, I don't know that. But I think it is very strong. And as always, we - life is a balance for us. We balance when is the right time to buy and when is the right we sell. That tends to be aircraft specific driven. We are mindful of our growth in the big picture of our CapEx picture, et cetera. But the thing that drives us, most of all, is aircraft value. So that might make a little bit more difficult for us to well-priced opportunities. But I would say the market was fairly strong last year when we found these Pegasus airplanes as well. So I would just say it maybe makes it a little harder for us to find the kind of value that we're looking for. But we're pretty resourceful in this regard. So we continue to look. I do think the market is very strong. But listen, leave it to us, we have a lot of experience here and if we can source things that we think make sense, we absolutely will do so.

And in the third quarter, we did sell more aircraft than we took delivery of.

Understood. And if could ask one follow-up. Can you describe the process you guys go through on deciding whether to sell aircraft into Thunderbolt or one of the Blackbird funds versus the third-party? And then, are there any parameters on aircraft that are acceptable to Thunderbolt and Blackbird shareholders, purchase price or risk profile, any color would be really helpful? Thank you.

Well, I think, as we've stated before, you have to look at those difference in those two vehicles. As I commented earlier, Blackboard is more opportunistic capital and is really not primarily looking for inward growth from our fleet. We look at that as opportunistic capital to go out and source or to address further needs from airlines where we might have - be reaching a concentration limit on exposure and that's very useful for that. So it's not so much coming from our fleet, for Blackbird. For Thunderbird, however, as you know, these were - these tend to be aircraft which are a little bit more in the mid-life space. We sold a lot of in the Thunderbolt already. So therefore we have much less of them left to sell at this point in time. But what the great part about it is it extends our reach into the midlife section and keeps our customer contact point with all those leases. So that's really, really important. So I would just say, the simple answer is, Thunderbolt tends to be more focused on our strategy, on our primary business model, keeping our aircraft young and this allows us to programmatic way as aircraft age to sell into that platform, which is a great platform, and the investors I think are quite happy there. We keep management and Blackbird is for opportunities, and that's as simple as I can answer it.

Okay, great. Thank you so much.

Thank you. Our next question comes from the line of Mark DeVries of Barclays. Your line is now open.

Yeah, thanks. Just wanted to explore a little more the decision around increasing the dividend. I mean, I guess that there is a recognition of strong performance and growing cash flows. But when we look at the potential embedded growth in your forward order books, it seems like that could consume all the capital you'll be generating, and then some. So I was just hoping you could help me think through the plus and minuses of distributing more of that earnings, rather than retaining it and investing it in your fleet. And also, does this have any implications in terms of potential accelerated sales in the Thunderbolt is the way to kind of manage capital?

No, the connection between used aircraft sales and the dividend are non-existent. First of all, let me emphasize, we started this company out as a public platform in 2011. We had very modest dividends in the first several years. Our current dividend this year is only $0.30 per share, which represents a little over $30 million in dividends. We felt that with the performance of the company, as we know today and going into 2018, an increase to $0.40 per share, represents about $10 million increase in the aggregate cost of dividends. And as much as our company shares are trading at significantly above our book value, we felt that a dividend increase was a more appropriate way of rewarding our shareholders than buying back our stock, when, in fact, we can deploy that capital more profitably buying airplanes.

I would just add, life is a balance, and as our fleet grows and gets bigger, we will have more aircraft to sell. So that's part of our normal business strategy. So I'm not sure, I think you're looking at more of the math side. But the math side would also dictate that we would be selling more. But that's a normal part of our fleet, as it gets bigger, it's a normal part of our business model. So it all ties in, I think, quite nicely hand-in-hand.

But we're not selling used aircraft to fund a dividend.

Right.

I just want to make that clear.

No, that's what I was implying. I was more thinking that if we think about how big your book could be growing over the next couple of years when we look at the potential deliveries, it looks like it could consume a fair amount of capital. And so, my point was, do you sell some so that you can continue to add to your managed fleet but not consume quite as much capital?

We are going our managed fleet and we're growing our own embedded fleet at the same time.

It's Greg. Our internal plan shows that we're able to take delivery of our orders and maintain a 2.5 debt - 2.5:1 debt-to-equity ratio without raising equity, as Steve points out, and also maintain our dividend.

Okay. Fair enough. Thanks.

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

Thanks, operator. Hi, guys in Marilyn [ph] Thank you for the time. Most of the questions I had, actually been asked and answered. But I just had a question about the composition in the fleet. You have some aircraft where you only have one of such aircraft, like 1 777 or 1 767. With those big candidates for sale, would you prefer to have bigger fleets of more of one type of aircraft and fewer of these ones or does it not really matter or are you agnostic out...

I can answer, a good question. It does look odd to the reader when they see that we have 1 Embraer 190. But the reason for that is that we have a very close relationship with David Neeleman and Azul in Brazil. And as you recall, we sold our whole Embraer fleet to Nordic Aviation Capital. But consciously, we decided to hold back 1 aircraft for our own portfolio to continue that relationship with Azul in Brazil. We had already disposed of our aircraft at Gol in Tam and we made a tactical decision to keep, at least, 1 aircraft in Brazil during that downturn period. On A319s, we have 1 aircraft at South African Airways and the reason we did not sell that to Thunderbolt or anyone else is because we were in the process of extending the lease, and during a lease extension negotiation process, it was unclear how long that lease extension would be. So we retained that aircraft. And our new comment about 777s it's not totally correct. We have large fleet of 777-300 ERs, but we have 1 777-200 ER at KLM and we're also in the process of extending that lease.

Got you. Okay. Sorry, I missed those 300s.

Yes, you missed.

I guess I did, I missed the 24, 300s, I just saw the one 200.

The 24 300s represent well over $3 billion in value. So once we accomplish our objectives with these extensions, then those aircraft become eligible for other activities weather its sale or combining into a portfolio aircraft that are sold.

This is actually a good problem. We only have one of this and one of that, that's a pretty good.

We're very happy that we have one 777 yard [ph] and only 1 UM90 and 1 A319. Those are not problems. Those are actually recognition of the excellent fleet planning looking ahead that we've accomplished over the last 3 years.

Got you. And then on the 767, just as other question I have. So I know you talk to Boeing all the time, Steve, and I know that - well I don't know this part, but have I talked to you about the idea of reopening that production line to accommodate more passenger aircraft?

You have to call, area code (206) 1637-37. This is another case where the media doesn't know what it's talking about. Fake news. The 767 line is open. The 767 production line has never been shut down. It's fully open. They're billing aircraft for people like FedEx and UPS and others. This is a discussion about whether to create a bridge production line or the passenger 767, which is on a same line as the freighter 767s. And that's being discussed with a number of airlines. And I think Boeing is looking at the economics in the marketplace for 767-300 ERs. It is a work horse. And I think Boeing is looking at various alternatives.

Got you. Okay. Well, thanks very much for answering the questions.

Thank you.

You're welcome.

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

Good afternoon, everyone. Thanks for taking my question. Just wanted to compare maybe the possibility of sale lease back versus a new delivery. I know you guys talked about supplementing, may be with sale lease back. Just wondering how should I think about the profitability of one versus the other?

Scott, I don't quite know, I don't know where you got the impression we were looking to shut some of the sale leasebacks. In fact, we, specifically, in Steve's comments, say we really don't do them. All we said is we're looking for opportunistic used aircraft sales transactions, just like we did earlier this year, buying 11 737-800s from Pegasus in Turkey. So we don't have any plans to invest in sale leaseback transactions. Only the two avenues that we're looking at are some incremental used aircraft and then as Steve commented on, accelerating some Boeing deliveries forward by a couple of months.

Okay. Thanks for that clarification. And just I guess, then moving to used aircraft versus new aircraft. Are the returns pretty similar? I know you guys are very selective in how you acquire aircraft. Just wondering if the returns are, somewhat, similar?

Well, I mean, generally speaking, I think, it's known that as aircraft age, the initial lease returns are a little bit higher on the lease rate factor. But you do have an older aircraft and you're taking residual value exposure. So just generally picking, I think the best and to do is look at our consistent returns and our financial statements and as the balance of primarily new aircraft with used aircraft that we have that drives our overall result. So suffice to say on the used aircraft side, we are really focused more on the acquisition price as a really key element, because if you get really good price as you move that aircraft around, and then ultimately, as you go to sell that aircraft, that's probably the bigger factor that we look at. We're looking to get good deals and I think it's pretty simple.

One final question. Just big picture, as Steve mentioned, Europe is undergoing a low-cost carrier model, that's putting pressure on some legacy carriers in Europe. We're at the front end of a wave of bankruptcies in some of the higher cost carriers, and I guess, dovetailing on that, has your watch list changed at all as a result of the change in dynamics in Europe?

No, no. Our watch list remains remarkably low and pretty stable. It's a very - very, very small component, and anything that's on there is well covered by cash secure deposits and reserves. I wouldn't say we're in a wave at all. I just think this is a normal average revolutionary process, some airlines are able to adapt and others are not. The low-cost and ULCC continue to place pressure globally worldwide on higher cost airlines and that's just the way it is. And some of the large legacy carriers are differentiating by product, retaining a premium economy, a business-class, their frequent flyer program and they're distinguishing higher level of service and that sort of thing. So I don't think we're on the crest of a wave by any means. We rather - this is an evolutionary process over, so I don't see any acceleration, deceleration, it's just a normal adaptation environment.

All right. Thank you very much for the color.

Certainly.

Thank you. And our next question comes from the line of Christine Lewark [ph] of Bank of America. Your line is now open.

Hey. Good afternoon. Steve and John, how do you think of partnership of Air Lease and Bombardier changed, how you view the C-Series? Do you think that this new ownership substructure could take the C-Series from a niche aircraft to a mainstream aircraft? And a follow on to that would be, aside from significant pricing discount, what would you have to see in the market to order the C-Series?

Well, first of all, it's still an engagement, not a marriage between Airbus and Bombardier. So once the regulatory issues and any sort of rebuttals or attempts to de-row that transaction are settled, then we'll see where we go. But the success of the C-Series, I think, goes beyond Airbus' participation. They need to offer the aircraft at a competitive price and they need to enlarge the customer base of airlines. They need to have key anchor customers in North America, Europe, Asia and elsewhere. And up till now, the number of airlines that have committed to the airplane is very, very low and do not meet our criteria. However, as that expands and if Airbus becomes the partner in the program, that could all change very quickly, particularly, if the A319-neo is sort of terminated from being a production airplane.

Yes, I mean, look, I think, it's widely known that both Airbus and Boeing are sort hard-pressed to really generate profits as the sales of its smallest units, whether it's A319 or 19-neo from Airbus or the 737 7-max, on the Boeing side. I mean, smaller is harder to cost out. And this does allow Airbus, perhaps, to emphasize what would be a lower cost airplane. So as Steve indicated and also as I said in my remarks, its price and market share. And to the extent that Airbus can drive, better price and better market share, we react to the needs and forecast and demand for our customers. And we will act accordingly. But it's just - it's just a bit premature right now, we don't really know how it's going to - Airbus has probably stated that until this transaction concludes, they are still going to complete the A319, and et cetera, et cetera. So it's hard to know. But what is also certain is that also indicated in my remarks the, 100 to 150 seat segment is not a huge segment. There's a lot of OEMs in that segment. So Airbus has made a stake and is trying to lay the claim on that part. Whether or not Boeing reacts in any manner remains to be seen. It's just premature for us to comment. The other point Christine, is that, Embraer has a very large customer base for their family of E170, 175, 190, 195s. I think they have right around 100 customers that operate their plane types. So that's also a headwind for the C-Series, as we know today.

That's very helpful. So maybe switching gears. For the 3 A321-neo aircraft that you have in your portfolio, can you provide us an update on how the aircraft is performing with regards to fuel burn and also the customer feedback?

It's better. The fuel burn is better and it gets better on the longer sectors, above 2 hours. And the customer experience, so far, is very positive. The aircraft are quieter, both externally and within the cabin. The range performance of the aircraft is good. The airport performance is excellent. And our A320-neos and A321-neos, we've had really good customer feedback from the airlines.

Great. And maybe if I could squeeze the last question. Since the end of last year, we've seen your exposure to Asia, including China takedown as a percent of your net book value. Is this an active strategic shift of your exposure or does this have to do with timing of deliveries?

There's no - there's no real strategic shift. It's more of the timing of deliveries. You know, we did some large scale transaction in China several years ago for aircraft delivering now and a bit last year and next year, et cetera. So this is a more of an evolutionary past. We still think majority of our growth will reside in Asia. So this is much more a timing and a delivery aspect. And you will see further, I'm sure, later on, and as we go into '18, you'll see further transactional announcements for us in Asia. So that's all that is.

I mean, for example, starting in 2018, we have 19 787s going to 3 different Asian airlines, starting in 2018, '19, '20. We have a large number of A350s that began delivering this month that are going to Asia. So there will be a significant number of deliveries, both widebody and single-haul aircraft going to Asia and China. But at the same time, we have a lot of airplanes going to Europe and elsewhere.

Thank you very much.

You're welcome.

Thank you. And that's all the questions we had for today. I'd like to hand the call back to Mary Liz DePalma for any closing remarks.

Thank you all for your participation today. This concludes the call for today and we look forward to speaking with you again next year. Operator, if you can please disconnect the line?

Yes, thank you. Thank you. Ladies and gentlemen, this does conclude the program. You may all disconnect. Everyone, have a great day.