Good day, and thank you for standing by. Welcome to the Air Lease Q3 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jason Arnold, AVP, Finance. Please go ahead.

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

Thanks, Jason. Good afternoon, everyone, and thank you for joining us. We're going to slightly alter our format today because Steve has been negotiating too many deals and has lost most of his voice. So he's doing great and is on our call with us today, but I'm going to combine our sections of prepared remarks into one section so that he can save his voice for the Q&A. We are happy to report that during the third quarter of 2021, ALC generated $525 million in total revenue, up 6% relative to the third quarter of last year. Moreover, as a component of total revenue, our third quarter rental revenue is a record high for us. We also recorded diluted EPS of $0.87, which is the highest level in 2021. The industry is clearly improving and we -- which we see in our results, forward aircraft demand and lease rates. During the quarter, we took delivery of approximately $800 million in new aircraft, which was $200 million less than we originally anticipated, but these aircraft did contribute favorably to our performance this quarter. It is important to note that while fleet growth has been meaningfully constrained by OEM issues, it is still up 13% from this time last year. Additionally, our blended average funding costs continued to decline. And in fact, we are at an all-time low, helped by our favorable bond issuances this year at the lowest rates we've ever achieved. Greg will comment on that further in his remarks. Despite the Delta variant impacting trends somewhat, we remain encouraged by traffic recovery in North and South America, Europe, Russia and the Middle East. We're encouraged by the easing of many international travel restrictions such as by the U.S.A. for inbound traffic from Europe, Canada and Mexico as well…

Thanks, John, and good afternoon, everyone. I'd like to expand on the details underlying our financial results for the third quarter, and I'd like to offer some additional color on our recent financing activity. As John mentioned earlier in his remarks, we had a very strong quarter driven by the continued growth of our fleet as well as an increase in our cash collections. Improvements in our cash collections were observed across our fleet, but notably on our lessees on cash accounting and specifically Vietnam Airlines. These payments allowed us to recognize an incremental $5 million in revenue this quarter above the regular rental schedule due from our cash basis lessees. This quarter is a great example of what best-in-class relationships like the ones we have with Vietnam, combined with the strength of a large unencumbered balance sheet it can bring. I think it is important to underscore that the large cash payments we received this quarter represent a positive sign for the recovery of the industry, but I do want to make it clear that there's still more work to be done. And until we are able to transition our remaining cash basis lessees, which represent approximately 10% of our fleet, back to accrual, there will likely be a certain level of volatility in our earnings in the coming quarters. Turning to lease restructurings. We have continued to see improvements on this front, and requests for accommodations have continued to decline. Today, we have reached agreements with approximately 64% of our lessees to provide some form of accommodations. During the third quarter, our lease restructurings reduced total revenues by approximately $27 million to the lowest level we have seen this year. Additionally, I wanted to highlight that our appetite to grant additional accommodations continues to diminish as the recovery…

Thank you, Greg. This concludes management's commentary and remarks. [Operator Instructions]. Now I'd like to hand the call over to the operator to open up the line for Q&A. Katherine?

[Operator Instructions]. And speakers, we have our first question from Catherine O'Brien of Goldman Sachs.

So as we think about the impact of ongoing delays at both Boeing and Airbus, should we assume you get caught up at some point, whereby you could see maybe like 2022 or 2023 CapEx significantly higher than the plans laid out in the 2019 10-K, for instance? Or are you expecting the delivery catch-up to be more gradual? Or are we just kind of see CapEx continue to get rolled forward maybe with a less lumpy annual impact? Steven Házy: Well, the big question is the 787 situation. This year, we took Bolivia 2 787-9s in the second quarter, which we leased on long-term contracts with China Southern. But since then, we have not taken any 787s, not because we don't want to. It's that Boeing has been unable to deliver us the aircraft with certificates of airworthiness. So if there is a recovery in the 787 deliveries next year, we could be looking at as many as 12 to 15 787s in 2022, which represents somewhere in the order of $2 billion of CapEx. So there could be a catch-up probably, I would guess, in the second and third quarters of next year. Now Airbus is pretty much on schedule. They recovered from their crisis situation in 2018 and '19. And we're seeing the A321 line now humming a little better. We still have some small delays anywhere from 4 to 7 weeks. And on the wide-body front, on A350 and A330neos, they're very, very close to being on schedule. So the big question mark is the 787. Our MAX deliveries are now running fairly smoothly, and we anticipate that will continue into 2022. So the 8-7 is where we see the lumps and the uncertainty.

Got it. Thanks so much for all that detail. Steven Házy: You're very welcome.

Appreciate, Steve. So this one is probably for Greg. Just 2 modeling ones. You noted you saw an incremental $5.4 million in revenue from airlines on cash accounting. Does that mean we should expect to see that the 50 -- excuse me, $42 million impact in cash accounting from last quarter, is that going to start to show up potentially at some discount rate over the next couple of quarters? Like from here on out, cash accounting should only be a positive? And then on the lease restructuring impact, you noted that the year-over-year impact in the third quarter was $26.6 million. Is that comparable to the cumulative $45 million figure you gave last quarter? Mean the impact of lease restructurings actually declined from last quarter? And if that's right, how did that happen? Had you granted some temporary relief that is starting to roll off? I know that was like a 3 for 1. So let me know if you want me to repeat anything.

Let me start with the cash basis stuff first. I mean I think as we've said all along, we've intended to collect a lot of the past due balances from our customers that have gone on cash basis. So this is our first quarter where we've actually collected more than what was due and, in fact, recapturing past receivables. I can't -- we went short of saying, yes, that should continue to be the effect next quarter. But I think right now, we want to see or expecting continued volatility until we're a little further along in the recovery, right? Because there could be hiccups along the way with different individual airlines, which could push it back into the negative. But overall, I think you're seeing a very positive trend in the fact that we're recapturing our receivables. In that way, it's actually contributing positively more than what it had been in the past. To your question on restructuring, yes, it was lower this quarter as compared to what it was last quarter in Q2. You're just seeing the effects of fewer restructurings being put on, and I think that's another positive sign. So if you like additional clarity, just let me know beyond that.

And speakers, we have our next question from Helane Becker of Cowen.

Just two questions here. As we think about the delivery schedule for this quarter, is it mid-quarter, front-loaded, December? How should we think about that?

Well, the way I think a lot of it's pushed towards the second half right now. And hopefully, we're able to take as much of it into the quarter as possible. So it sets ourselves up really well for Q1.

Okay. And then the other question I have probably for you, Greg, is on funding. So you guys -- you mentioned went through the whole laundry list of funding that you've done, and you've done a really great job raising capital. So -- as you -- and I can't believe I'm asking this question. As you think about rising interest rates and borrowing at higher rates potentially going forward, whether -- even if it's above your record low rates, how should we think about your appetite for raising capital, I don't know, 2023, let's say, or 2022 second half?

Well, I mean, first of all, I think it's important to note, I think we benefit from a rising rate environment, right? Because I think given our investment-grade profile and the strength of our balance sheet, I think we're going to be able to borrow significantly cheaper than what our airline customers borrow it. So I think it's not terrible that rates are rising. But from my seat, clearly, I'd like to see it low financing cost as possible. I do think that we benefit from 2 maturities coming due in January and February of next year at $700 million at 3.5% and then $600 million at 3.75%. We're borrowing significantly inside of those levels today. I think we're going to remain in an opportunistic lender. With the record levels of liquidity we have on the balance sheet allows us to time our issuance to be able to really take advantage of those low-funding windows when they present themselves. So I think you'll see us be conscious. And I also think as we continue to recover, I think we're going to continue -- we'll probably take down the level of liquidity that we have on our balance sheet as well.

Helane, it's also really important to understand that we have interest rate escalators and adjustors in our leases in all of our forward placements. And these are one-way adjustors up. So as interest rates do increase, we have a mechanism right before delivery to adjust the final lease rate in all our 4 deliveries, and that's been a very -- that's something we've been doing but is particularly relevant given your question.

Yes. That's a good point because I think investors sometimes tend to forget that you do that. And so I think that's very helpful. Okay.

Thanks.

And speaker, our next question from Jamie Baker of JPMorgan.

So on this week's DAE call, you know the topic of order books came up. And perhaps you saw a few weeks ago in Edinburgh, Donald was talking about how he wished he had never ordered -- he would never make speculative wide-body orders ever again, only narrow-body. So Mark and I have been wondering, over the past, I don't know, 18 months, as you think about the competitive shifts that are taking place, have you rethought the order book strategy at all? How far out you're willing to commit, the constitution of the book, stuff like that? I sort of thought that might have been the direction that John was heading in some of his prepared remarks. Steven Házy: Well, we continually fine-tune our ratio of single-aisle and wide-body orders. I mean that's an ongoing process. And I think going forward, we'll probably have somewhat higher ratio of single aisles to wide bodies. We still have a pretty good wide-body backlog on 787s, A330s and A350s. Now most of these have been placed. We actually have very, very few unplaced wide-bodies there in our backlog. But I think we're going to put more emphasis going forward on the most popular and desirable single-aisle aircraft where we're also seeing the strongest improvements in lease rates and lease rate factors, at least for the next 2 or 3 years.

Well, that's actually -- thanks, Steve. And that's actually a good segue into my second question because given the trends that you identified, given what we're seeing around the world, particularly in terms of shorter haul demand trends and how quickly they're ramping. If we look out 2 to 3 years, how concerned should we be about a potential narrow-body shortage if Boeing and Airbus don't ramp up production fast enough? Steven Házy: Well, demand already is greater than supply, I mean, as we look out over the next 24 months. We ourselves have more requests coming in than we can handle. So we need to be more selective, more disciplined, more strategically-oriented. But a lessor, having both wide-body and single-aisle capability with major airlines, is a huge competitive advantage. So I don't agree with Mr. Slattery on his comment that he wishes he never ordered any wide-bodies. That's just not -- it's an oversimplification, and it demonstrates a lack of understanding of the marketplace.

Jamie, let me just add to your question on how far out. Well, our current orders that do go out through 2026. I mentioned in our prepared remarks that we are looking forward at capital allocation. And so because they're -- particularly on the 320, 21neo, basically, Airbus is out of positions through 2025. So should we decide to place any new orders, you can expect -- with either Boeing or Airbus, you should expect us to be able to probably go out a few more years beyond 2026, so that would be normal for us. And let me just remind everybody, we have now placed 67% of our total order book. So these are things in consideration, but we -- I don't think -- I don't ever see us dropping wide-body orders. As Steve pointed out, we're probably going to emphasize single aisles more. But in the long term, which is how we've always run this business, wide bodies will always have a role. And there's a lot of airline CEOs that feel that once these international markets open up, you're going to see just exactly the level of surge in demand that we're seeing today. You're seeing U.S. airlines cancel flights all over the place because of this demand. They're not being prepared for it. That demand has to be fueled by aircraft, including wide-body aircraft.

And speakers, our next question from Moshe Orenbuch of Credit Suisse.

Great. I was just hoping you could talk a little bit, John, about the comments that you made about rethinking capital allocation and what sorts of things that could entail.

Sure. Well, as I said in my prepared remarks, historically, Air Lease Corporation has always determined that the best use of our capital -- our shareholders' capital is to invest in new aircraft on long-term leases, with the most modern technology. And I also commented that we don't think that, that's changed. But this year, our Board also authorized -- did a modest share buyback authorization, and we look at that as well. So broadly, those 2 categories, further aircraft investments, combined with our potential stock buyback and our authorized stock buyback program as well as increasing the dividends. So those are the 3 broad categories that we focus in on looking at capital allocation. Having said that, we continue to watch the landscape very, very closely for any opportunistic capabilities to buy new aircraft, possibly even a merger here or there, although historically, ALC has not found any compelling opportunities there. So all avenues remain open, and we continue to focus on those intensely. So I would say there's really nothing new in this regard than what we've already been doing.

Got it. Okay. And maybe just to kind of follow up on that theme a little bit, you did mention also that you would potentially be starting to sell aircraft in the fourth quarter. Could you talk a little bit about how that -- what you see as the effects there? What types of planes are you selling? Is that a way to kind of accelerate some of the restructuring post COVID? Can you just talk to that a little bit?

Yes. Well, certainly, we have a young fleet. We're known as to having a young fleet. But as those aircraft age, new aircraft come in, and so we typically look to sell aircraft that are sort of in the -- they start being candidates for sale at sort of 5 years, 6 years, and they still have several lease term remaining. What's good now about even compared to 3 or 4 years ago is in the last several years, we've actually been lengthening out most of our lease terms also on the single aisles. One of the ways that a lessee gets the lowest lease rates from us or almost all lessors is to lengthen out the lease term. So to get that, we've been writing somewhat longer leases out to 12 years on the single aisle. And that really helps quite a bit the attractiveness when it comes to selling aircraft that are 5, 6, 7 years of age, you got a lot more lease term remaining. So I think across the board, we have actually turned down. We have a lot more -- as Steve commented, we have more lease demand than supply. I would also say it's been our conscious choice as we have not been able to spend as much capital as we wanted to because of the manufacturing issues. We are the ones that are throttled back. But as we see this going forward, Steve mentioned Airbus is pretty much on time. We're pretty much on time with the MAXs. We're behind on the 787s for the production freeze levels. I see us assuming a more normal profile of sales going forward wherein we may do an additional management platform like another Thunderbolt. We may form some new relationships and new management platforms. But pretty much across the board, including some wide-body sales, that's how we'll be looking to normalize. We're going to blend the most optimal sales to us as these aircraft age with a few wide bodies. We'll also look for new sales platform. So nothing particularly new. I think it's just a resumption of the sales program. And the philosophy that we've always had is just that we've held off on purpose for now due to our lower CapEx.

Okay.

Sure. Steven Házy: And adding to John's comments, I want to emphasize that we've significantly expanded our management business for third parties of managing aircraft assets. And in the coming years that will keep going up. We have, I believe, more than 100 aircraft now that we manage to third parties. We have new aircraft and used aircraft that some of these managed vehicles have acquired and will acquire on sale-leasebacks and through other transactions that we have structured. So that's going to be an incremental source of revenue and income to supplement our core leasing business, and we'll generate cash that we can then redeploy in either buying back our stock, buying back more airplanes and increasing our dividend. So our management business is growing and is extremely profitable.

And speakers, we have our next question from Vincent Caintic of Stephens.

First question is actually kind of more of a follow-up. So really good rental revenues, $520 million. And so that's up $6 million to $8 million quarter-over-quarter. I guess maybe just trying to bridge the delta. So you've got, I guess, about $45 million of cash accounting that has come back. I was wondering if that $45 million, is that kind of an accumulation of prior amounts that were owed, so we shouldn't be expecting that $45 million going forward? Or if the $520 million is the right number to be -- when we're thinking about rental income growth going forward?

Greg?

Yes. So the number includes about $5 million incremental above the regular schedule. So that's the recapture of prior receivables, which I think is a really positive thing. And then looking forward, as I mentioned earlier, it's a little tough to say as to how much of that incremental will be there next year or if it goes back the other way. A lot of it depends on how the recovery plays out. So clearly, as the recovery gets better, we expect to see more and more positive recapture, but we're going to have to sit here and wait because it's too soon to say how it's going to shape out next quarter.

Okay. Very helpful. And so second question, just kind of a broad question on the environment for aircraft demand. And maybe trying to put it kind of maybe compared to pre-pandemic levels. I know maybe demand might be not as strong as pre-pandemic levels. But given the level of -- it seems like there's not enough supply and that you were getting more demand relative to the amount of supply you can provide for the next 2 years. Is this environment may be relatively stronger for leasing platforms such as yourself, just kind of maybe trying to put a frame of reference around it.

Well, I think we tried to cover that Vincent in our remarks. I think specifically what I said was that for narrow-body aircraft, we are at or, in some cases, above pre-pandemic level for some aircraft types. And again, I pointed out a particular strength in the 320 and 21neo, but with that also recovery in the MAX and the A220. So I think the bottom line is, yes, we are -- we have more demand sitting here today on the single aisle and narrow-body side than we have supply. And people -- because of that, people are all -- airlines are looking to place further and further out. And I guess it's a good thing. But not surprising, the supply and demand rules kick in. And that's one of the reasons why lease rates are going up. So certainly, over the next couple of years, we're basically out in terms of the new aircraft side. And if we can get some more here or there, fine. But as far as our order book, in the next 24 months, we're placed. We're done. And now we're just focusing on the out-years, primarily end of '23, '24 -- I'm sorry, '24, '25. We're even having some discussions about '26. So I think it shows you how far forward the airlines are looking to meet what they fervently believe is going to be a very high demand period.

Okay. And so maybe just to sum it up, would you say that from a demand perspective and from a, I guess, like a lease rate perspective that we might kind of be back to pre-pandemic levels?

I don't think the MAX is quite yet to the pre-pandemic level, but it's climbing nicely, and I expect it to be back that way very, very soon. And I think on the -- certainly on the 320, 21neo, yes, I think that's the case. I think we're probably above pre-pandemic levels in lease rates as we sit here today.

And our next question from Hillary Cacanando of Deutsche Bank.

I wanted to ask about Vietnam. When you said you reached a resolution with Vietnam Airlines and -- but you're not -- you're still not sure if there'll still be on a cash basis accounting next quarter, does that mean lease restructuring is off the table and that they'll likely to go back to accrual? If you could just provide a little more color there?

Greg, do you want to cover that?

I'll take a first step and feel free to add on, well, Steve and John. I mean, to me, we reached agreement, which is a great thing. They've been paying. They've been honoring their agreement, but things are still very tough for them right now. So we're keeping a very close eye to see how things shake out. And until we have more information, we're not -- said differently, we're not ready to make the decision to pull them off a cash basis just yet. But we'll have more information for you on our next call in February.

Okay. So I guess it's reasonable to still assume that they'll be on cash basis accounting for the next -- at least for the next quarter or two? Steven Házy: That's maybe going a little too far assumptions. Look, we're watching it week to week, and things can turn very rapidly in terms of traffic recovery, which will then generate sufficient earnings for them that they don't need government funding or government support from Vietnam. And that point, we ought to be on a much more clear pathway going forward. So I think 2 quarters might be a little bit too far out. I think we should normalize based on everything we see in the early months of 2022.

Okay. Got it. Got it. And then just as a follow-up, you did a sale-leaseback transaction with Spirit Airlines during the quarter. I was just wondering why we haven't seen more SLB transactions, maybe -- particularly maybe in Asia where the airlines, they can definitely benefit by getting some needed liquidity through SLB transactions. Is it just not a competitive market? Steven Házy: Well, factual correction, we did not do a sale-leaseback of our own aircraft with Spirit. The transaction we did with Spirit, and I was critically involved in putting that deal together, is we lease them 10 brand new A321neos from ALC's order book, and we arranged one of our partners in our managed business to acquire with their own funding 5 A320neos, which I believe 2 are supposed to deliver between now and the end of the year. And so we acted as a manager, facilitator of those 5 aircraft, but we had no capital invested in those aircraft. We simply get fees for putting the transaction together and then fees on an ongoing basis from the lease rentals. But the aircraft that came from our order book were all just direct long-term leases from our pipeline.

And as far as Asia goes to your question, look, Asia remains the last broad geographic region to really meaningfully recover. I cited reopenings now in Singapore, in India and in Australasia, down in Australia and New Zealand, but we still have to have a reopening of orders in Korea and Taiwan and Vietnam particularly. And across the region, it's a single largest region in the world. So until that happens, I don't think we're going to see a whole lot of sale-leaseback activity there as they pretty much shut things down. Until they start opening up and have the sense of better progress in their traffic flows, I think it's actually quite natural. We haven't seen a whole lot of sale-leaseback transactions out of Asia.

And speakers, we have our follow-up question from Catherine O'Brien of Goldman Sachs.

So I realize the airlines are still dealing with COVID and fleet plans are 25-year decisions, even if maybe the decision to lease an individual aircraft may have a shorter time pricing. But like, generally speaking, when you see fuel prices increase quickly, does that positively impact your inbound call volume? It sounded like from the prepared remarks, the answer is probably yes. And maybe then on a related topic, can you just help frame how much more ESG is part of fleet planning conversations today versus 2, 3 years ago, if it is, in fact, a bigger piece? Steven Házy: Yes. Yes. The ESG situation, particularly in Europe and North America and the increase in oil prices and the rate of increase in jet fuel cost since the beginning of the year, has really refocused a lot of airlines to accelerate their fleet planning process and to take a much more proactive look at modernizing their fleet quicker than they were planning to do back, say, in 2019. So all of that kind of comes together in what we've been saying in the last 45 minutes is that demand is now up, way up beyond our expectations. And so therefore, the most desirable, fuel-efficient, environmentally friendly aircraft are the ones that are going to achieve the highest returns. And Air Lease will be a beneficiary of that for many years to come.

Got it. And so you are seeing airlines actively perhaps look to maybe refresh fleets at a faster rate than they may have historically to meet... Steven Házy: Yes. The replacement cycle has accelerated by the higher cost of fuel and also by the ESG issues. For example, in Europe, if you fly a 737-800 into Heathrow, the landing fees and charges are x, to fly a MAX 737, they're significantly lower. So airlines have a cost benefit, not just from fuel consumption, but also from lower landing fees and handling charges at airports. So when you put the 2 together, that's a lot of cash savings and direct operating costs.

Maybe a simple way to look at it is that if fuel prices hadn't gone -- been going up, if they remained low, already, yes, we were seeing fleet replacements for ESG purposes. But now you add on top of that escalating fuel prices and any airlines that might have been a little on the fence in this regard have just accelerated, and that's just provided an additional accelerant.

And there are no further questions at this time. I will now turn the call over back to Jason Arnold, AVP, Finance, for closing comments.

Thank you, Katherine, and thank you, everyone, for your time participating in our third quarter call today. We look forward to speaking with you again when we report fourth quarter results. Operator, thank you, and please disconnect the line.

Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.