Ladies and gentlemen, welcome to the Air Lease First Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason Arnold, Head of Investor Relations. Sir, please go ahead.

Good afternoon, everyone, and welcome to Air Lease Corporation's First Quarter 2022 Earnings Call. This is Jason Arnold, 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 first quarter 2022 results, a copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, May 5, 2022, and the webcast will be available 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 the state of the airline industry, including the impact of sanctions imposed on Russia, 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, May 5, 2022. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we may be using during the call such as adjusted net income before 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 definitions of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and the 10-Q we issued today. This release can be found in both the Investors and the Press section of our website at airleasecorp.com. As a reminder, unauthorized recording of this conference is not permitted. I would like to turn the call now over to our Chief Executive Officer and President, John Plueger. John?

Thanks, Jason. Good afternoon, everyone, and thank you for joining us today. I'd like to begin by expressing our sorrow on the war in Ukraine. The devastation and loss of life is a humanitarian disaster of horrific proportions, and our thoughts and prayers are with all of those affected. To this end, just as we did with COVID relief for India, Air Lease Corporation, working and partnering with ISTAT, provided the leading $100,000 donation for the Ukraine Relief Fund, which supports AirLink and other nongovernmental organizations who provide humanitarian aid to the country. We hope that helps. Moving on to our first quarter financial results, ALC generated $597 million in total revenue during the quarter, up 26% relative to the first quarter of last year, and achieved record quarterly rental revenue of $567 million. Our adjusted diluted EPS for the first quarter of $1.76 per share rose 71% year-over-year. First quarter performance on an adjusted basis benefited from the growth of our fleet. A significant reduction in cash accounting and lease restructurings, as well as end-of-lease revenue from the termination of our leasing activity in Russia. We purchased 8 new aircraft and one used aircraft in the secondary market during the first quarter of '22 for a total of 9 aircraft, adding approximately $490 million of flight equipment during the quarter. Our operating cash flow was up roughly 9% relative to the first quarter of last year. I'm very happy to say that the impact of cash accounting and customer accommodations was minimal this quarter as compared to prior periods. We ended the first quarter with a lease utilization rate of 99.5%. So in summary, excluding the Russian write-off, our key operating metrics continue to trend favorably. We had no aircraft sales in the quarter. And as we commented to…

John, thank you very much. I'm proud to say that this month, we celebrate ALC's 12th anniversary having purchased our first new jet aircraft on May 19, 2010. Let me begin by just adding to John's opening comments on Russia and Ukraine that while a tragedy for all humanities. These events are particularly painful for me and my family to watch as an individual whose family was forced to fleet from our home, country of Hungary back in the late 1950s, under very similar circumstances. We extend our prayers to all those people affected by this tragedy. I do want to additionally expand upon the relatively modest impact of Russia shutting itself off from most of the world. Based on IATA estimates in recent months, Russia domestic and international traffic combined represents just a few percent of total global traffic. That percentage of global traffic will continue to fall as seized aircraft become non-airworthy due to unavailability of parts and heavy maintenance capabilities, both within and outside of Russia. The broader European traffic recovery, meanwhile, has continued largely unfazed by the ongoing war, and March and April, again, were the best performing markets in Europe among all the international traffic areas compared to the prior year. Looking at more recent indicators versus IATA and Europe volume increasing nicely, even closure of the Russian air space to most of the airlines around the globe has not been terribly burdensome. Certain legs from Northern Europe to Northeastern Asian countries, are, in some cases, more significantly extended, while routes between Southern Asia for Europe, while longer than before, aren't as dramatically impacted. In either case, this is nothing out of the ordinary for airlines to circumnavigate an airspace closure, whether it's due to volcanic activity, seasonal weather patterns, and we can't forget that…

Thank you, Steve, and good afternoon, everyone. In the first quarter of 2022, ALC generated revenues of $597 million, up 26% as compared to the first quarter of 2021. This was comprised of $567 million of rental revenues and $30 million of other activities. Approximately $60 million of revenue this quarter was a product of end-of-lease revenue and forfeiture of security deposit income resulting from the termination of our leasing activities in Russia, which approximately covers the lease rentals that would have been due from our Russian fleet for the remainder of the year. The increase in our revenues was primarily driven by the growth of our fleet, a reduced impact from COVID and the end-of-lease revenues I just discussed. Broadly speaking, we continue to witness a firming operating environment for our lessees. COVID-related factors such as cash accounting, base restructuring and deferrals are now minimal as compared to last year. And our outstanding deferred balance continues to be repaid as expected. Now on to expenses. I want to add some additional detail on the Russia fleet write-off. As John mentioned, we wrote off $802 million in connection with our owned and managed fleets in Russia. This is comprised of $791 million related to our own fleet located in Russia and $11 million related to our interest in our managed vehicles with Russian exposure. As it became clear that the Russian government was not going to permit the return of these aircraft in accordance with our lease agreements, we were forced down an accounting path that led to the write-off that we previously announced. And based upon these facts, we feel strongly about the validity of our insurance claims and we'll pursue them vigorously. Importantly, I do want to point out that any cash recoveries we do receive on the…

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

[Operator Instructions]. And your first question comes from the line of Catherine O'Brien from Goldman Sachs.

So John, I think you mentioned in your prepared remarks that higher interest rates may lead to the exit of some of that excess capital currently transacting the sale leaseback market. Is that something you've already started to see signs of? Or is that just based on the cost of capital for some of the non-IT players in that market?

Well, I think it is our expectation. I can't say yet that we actually see this in the sale leaseback market. Again, our primary business is not sale leasebacks, so it's not as if we're out there pursuing a lot. However, reality is reality and rates are rising. And so I would just say that's largely our expectation. I would be surprised that, that expectation was not seen in the next 3 to 4 to 5 months.

That's really interesting. Maybe just like a related one on just the relative cost of capital between -- totally understand sale leaseback is a very strong part of the business. But -- so just maybe an incremental opportunity going forward, potentially if we do see that excess capital come out given the delivery delays at the OEMs, back at the conference we hosted here at Goldman in December, I had a rating agency panel, and they basically spend an hour talking about how COVID was a great stress test and the industry overall, particularly someone like yourself, probably deserve a ratings upgrade. Are those conversations that you're having now with the rating agencies?

Yes, we continue to have conversations with the rating agencies, and they appreciate the trend line that we're on. And with the robust growth in our revenues, the firming up of lease rates, the global demand for the type of aircraft that we have, those conversations will intensify in the coming quarters.

Got it. If I can sneak one quick modeling one in for Greg. I just wanted to confirm something from the prepared remarks, Greg. I think you said that the $60 million or so of end-of-lease revenue associated with Russia offset lost rental revenue for the year. So I just wanted to confirm that we should be thinking about that lost Russia revenue being about $60 million per annum, is that right?

I would say in the Q, we actually have more detail. I think we say that it's about $18 million a quarter.

Keep in mind that we had some of those aircraft due to return at the end of their leases in the next 24 months.

And the next question comes from the line of Jamie Baker from JPMorgan.

It's Jamie, and Mark will take my follow-up if that's okay. Steve, looking forward to seeing you tomorrow. Question for John, so one byproduct of COVID has been a significantly heightened awareness amongst investors about deferrals. And unfortunately, one question that we're getting is whether Air Lease is poised to receive Myriad deferral requests in light of what's happening with Jet kerosene prices, notwithstanding my own views on this topic. Could you just comment, pre-COVID, what was your experience with deferral requests over the course of your career, not just limited to Air Lease. Under what sort of economic conditions did they typically occur? Just a little color on that to assuage some of the questions that we're taking on the topic.

Sure. Well, the short answer, Jamie, is no. We've not received any recent deferral requests due to the higher costs associated with fuel. And I would also add, since you focused pre-COVID, and I will also add our prior 30-plus years at our former company, keep in mind that we have always been leasing the most fuel-efficient aircraft that are out there and the youngest. So the truth is, is that I can recall little to no deferral requests that I can attribute primarily because airlines were paying higher fuel rates -- fuel costs. Again, the more common outgrowth is instead a request of an accelerated replacement of their older fleet with aircraft that we may have on order or in our fleet. And frankly, it was more common for us to either be frustrated. We didn't have the -- or they were asking too late or we didn't have the aircraft to provide. So while there may be an isolated exception, I'm hard pressed to think about it from my memory. We've not seen any evidence of that today. Generally speaking, of course, if airlines become under -- come under a lot of financial duress generally due to fuel prices or other aspects, it's not beyond the expectation that they come back to lessors and ask for help. But I can tell you that given what we've gone through COVID and all the restructurings that have been done, I would venture -- I can tell you that from Air Lease's corporate perspective, and I would venture to guess from many others as well, we've already kind of gave it the office. I mean we have done a lot for our customers. And I don't believe we're going to be overly anxious to cooperate with such things. Airlines are sophisticated organizations. They have a good forward view. And the best thing they can do is to operate the most efficient aircraft that we offer.

Thanks for that, John. That was the one I expected, but obviously, more coming from you than me. A follow-up for Mark.

John and Steve, we spent a lot of time at our conference discussing with you the difference in your Russia portfolio and how your exposure was basically exclusively to the private Russian airlines. It looks like it did not make a difference in your impairment charge. But I'm wondering as you pursue insurance claims, could it make a difference? Is it more likely that for your portfolio, for example, you could be reunited with aircraft down the road if sanctions are relaxed or something like that? Or should we just assume that you're simply going to get a full payout of whatever you get with the insurance companies. Wondering if you can add some color on that.

I think it's too early, Mark, to comment on the recoveries and the timing of recoveries. As we said before, we have a very strong case on our policies, and we'll vigorously pursue those. Bear in mind that some of these airlines -- private airlines in Russia, we've had long-term relationships with, some spanning more than 20 years. So as circumstances may change in Russia, there could be avenues where some of these aircraft could be reinstated subject to sanctions and other government regulations and become normalized again. So I think it's just too early as we sit here in May of 2022 to make predictions. But I can tell you that our relations with these airlines were very cooperative, and these airlines were all looking forward to additional business with us in the future.

I would also add, Mark, that I still submit that there will -- that there is a difference between privately owned versus state-owned carriers in Russia. I can only tell you that, as Steve said, those carriers are so anxious to be able to get behind this and to move forward as quickly as possible. I'm not 100% certain that it would be as quick with Russian state-owned airlines. I'm speculating, but I'm not 100% convinced that it's going to be as quick.

And Mark, on that same topic, the one thing that we didn't really get into very much in our formal presentation, the aircraft that we had destined to go to Russia in the future. And we had a number of new aircraft, particularly A321neos, that were scheduled to go to the Russian airlines on contracts that were signed back in 2020 for delivery this year and next year, we have now placed all, I repeat, placed all of those aircraft with airlines in the Americas and Europe. So all of the aircraft that were destined for Russian customers have now been placed on long-term leases.

And Steve, was that the same or higher lease rates?

Pretty much equivalent lease rates, some a little higher, yes. I can think of 2 A321neos where the lease rates were about 14% higher than what they would have been had they gone to the original lessee in Russia. We also placed 4 A220s that were going to go to a Russian airline this year, to a major flag carrier in Europe. We placed several A321neos for delivery to a carrier in the Americas. So I think that demonstrates what John was talking about earlier about the resilience and strength of the single-aisle market. We had a number of different airlines lined up competing for these assets.

And the next question comes from the line of Moshe Orenbuch from Credit Suisse.

John, I think you alluded to the idea of perhaps a greater propensity towards lease extensions for your existing aircraft. Could you just kind of talk that out a little bit more? And what -- how you -- how much of that you're likely to do and how you think about that for Air Lease?

Well, I think it's actually pretty simple. We are seeing requests for lease extensions earlier than in the past. When I say earlier, normally, you talk about lease extensions of the lease during the year -- during the 8 months to 1 year that are before the lease expiry. Now airlines are coming to us 1 to 1.5, in some cases, 2 years ahead of time, expressing an interest in extending leases. An aircraft that, for example, a year ago, some wide-body aircraft that I thought would certainly be returned based on our thoughts at the time, we're now in the process of extending, one of them with a large carrier in North America. It just is another example. So I would say that the cargo markets have went particular strength to extensions of wide-body aircraft because of the higher cargo and freight rates. Those aircraft have largely been able to earn their own keep just by the freight revenue and excluding most of the passenger revenue. So we see this trend continuing. And I expect it will continue for the next 15 to 18 months. And we recently got 2 RFPs, for example, from, again, a major carrier in North America that due to their own aircraft deliveries from OEM delays, they were looking for bridging aircraft, both on the single aisle and the twin aisle side for different periods of time. So all of the things I tried to capture in my opening remarks are happening, and these are just several small examples and circumstances that we're seeing and we expect to continue to see.

Got it. And maybe this is a little bit theoretical at this point, but you said that net of cash, you're at 2.6x leverage. So you're not very far above your target. And so as you receive any proceeds and whether it's a week from now or 6 months from now or 2 years from now, any thoughts about how you'll be deploying that capital? Because it's likely to come in obviously, not all at once, but it could be lumpy in terms of that. And any thoughts there?

This is Greg. I think we'll wait and see. I mean I think we have to look at the current environment, how things are going with Boeing and Airbus and their delivery streams, how the sales program is going. But clearly, if you receive a substantial amount of cash, it goes straight to equity through the bottom line. We need to think about capital allocation.

Yes. We do have some opportunities, I think, coming up in the next 12 months. A number of airlines and leasing companies canceled brand-new Boeing aircraft that the Boeing Company could not deliver within 12 months of the contracted delivery date. And that's a normal contractual provision with Airbus and Embraer and Boeing. If the OEM can't deliver the airplane after 1 year, the customer can walk away, get their money back and get all their deposits and so on. So we have a situation now where there are quite a number of aircraft that have been canceled, that have been built and, in many cases, they're not ready for delivery. They've been built but they're not fully completed and certified. So we could have situations in the next 12 to 18 months where the OEMs will come to us and say, "Look, we have this airplane already built for airline X. Can we interest you in acquiring that aircraft at some kind of a discount just to be able to get the cash into the OEM," which is obviously right now a precious commodity. So there could be pop-up opportunities for brand-new aircraft with airlines that we already have a good relationship with.

And your next question comes from the line of Hillary Cacanando from Deutsche Bank.

So one of your competitors in Asia have said that they are seeing horrendous numbers in terms of, I guess, insurance premiums following the sanctions. They said premiums for renewals coming up are very high and that the aviation industry may have to rethink how they do insurance. So I just wanted to see if that what you're seeing in the insurance market as well? And just your thoughts on what you think if there'll be changes to the insurance premium and the way the aviation industry handles premium. So today, do they continue to insure the same amount, less, more. Just your thoughts on that.

Hillary, this is Greg. I think it's too soon to say what's going to happen with the market. And I think a lot of people are in market right now. So maybe we can revisit this later in the year to figure out how this whole industry is going to shake out, because they've never seen this type of an event before. So I mean, clearly, we've seen confiscations, insured losses for individual aircraft that have gone down, but nothing to this magnitude. So I think we'll have to wait and see on how the story flies out before we further comment.

Okay, got it. And then just a follow-up. You obviously talked about the impact of higher oil prices and a rising interest rate environment. I was wondering if you could also discuss your thoughts on rising U.S. dollar, dollar appreciation in the market, is it good or bad? Like how -- just your thoughts on the impact to the leasing industry, given that your customers are very international.

Typically, when expenses go for the airlines, it tends to buys them towards trying to lease aircraft because there's a lower cash effect of leasing aircraft versus going out there and buying and financing itself. So typically a stronger U.S. dollar pushes airlines towards leasing aircraft.

And our final question comes from the line of Helane Becker from Cowen.

This is Tom [indiscernible] on for Helane. I'm just curious if -- since the war in Ukraine, if you guys have reevaluated how you assess country risk and then just how you're thinking about that. It seems like maybe de-globalization is too strong of a word, but there's some type of decoupling more to tailors than it had been 5 years ago. I appreciate your thoughts.

Well, our outlook and our risk assessment really haven't changed materially. I think it would have been anyone as evidenced by many, many hundreds of corporations, large and small, doing business in Russia. It's hard to envision this activity. However, I would comment, for example, that we have pursuant to not this specific Russia-Ukraine action. But again, as part of our normal customer concentration risk reviews, about 4 or 5 years ago our business in China represented about, I'm guessing, I think it was around 22-or-so percent, right, Greg? Of our overall business. And now we're down to about 13%, 12%, 13%, because we are mindful and have been watching, again since before the Russia-Ukraine invasion, we've been watching the political tensions increase along those regards. So we think it's going to be -- remain okay. But my point is, through our normal course of action, we've done this already, and I offered an example of China. Just know that every -- we continuously evaluate this risk on a regular and systematic basis. And as a result of that, for example, we did, as I mentioned, reduced -- have been reducing our China exposure. And we'll likely continue reduction of that proposed exposure for a while.

And just to add to John's comments, we deliberately had a policy of not leasing any aircraft to airlines in Russia that were government-owned. Secondly, we only had 2 aircraft in Ukraine, 1 Boeing 737-800 and 1 Airbus aircraft. And all of those aircraft were used in international operations, and we recovered those aircraft from Ukraine, at the very beginning of the invasion at the end of February. So we are extremely focused on these geopolitical risk elements. And unfortunately, none of us even in the intelligence community, could predict the massive impact of this invasion.

Thank you, and we have reached the end of our Q&A session. I would now like to hand the conference back to Mr. Jason Arnold for the closing remarks.

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

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.