Good afternoon. My name is Paula, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation's Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thanks, Paula. Good afternoon, everyone, and welcome to Air Lease Corporation's third 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 third 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, November 3, 2022, and the webcast will be available for replay on our website. At this time all participants to this call are in listen-only mode. Before we begin, please note, 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 and aircraft delivery delays, our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense lines. These statements and any projections as to our future performance represent management's estimates for future results and speak only as of today, November 3, 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, we may discuss certain financial measures such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pretax return on equity, which 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 airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I would like to turn the call now over to our Chief Executive Officer and President, John Plueger. John?

Well, thanks, Jason. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that ALC generated $561 million in total revenue during the quarter, up 7% relative to the same period last year, while our diluted EPS was $0.90 per share. Performance during the third quarter benefited primarily from the growth of our fleet and lower restructuring impact, partially offset by the loss of revenues and earnings from the 21 Russian aircraft we wrote off in Q1. We purchased 14 new aircrafts in the quarter, adding approximately $843 million of flight equipment and sold one aircraft, and I'll update you further on our aircraft sales shortly. We ended the third quarter with a lease utilization rate of 99.7%. The operating environment for ALC remains strong with commercial aircraft demand robust, benefiting from the continued momentum of air travel demand recovery, which has more than offset the impact of macroeconomic and geopolitical headwinds to date. Domestic passenger traffic continues to improve globally, but the snapback in international markets has been particularly strong year-to-date, benefiting from the further relaxation of travel restrictions that have previously significantly constrained it. As a result, demand for widebody aircraft continues to strengthen with a number of well-publicized large-scale global campaigns in process. The pace of our widebody lease placements has also accelerated. ALC has now placed all of its A330neo and A350-1000 orders profitably with only 7 remaining passenger widebodies left to place through 2025 and consisting of 787-10 and A350-900 aircraft. We expect both Airbus and Boeing to increase production rates meaningfully on 787s and A350s although we do not see this improving the delivery delay situation through 2023. Narrow-body demand meanwhile remains very high with limited remaining delivery positions from our order book through 2025 and beyond. As the OEMs,…

Thanks very much, John. First of all, I'd like to point out that our owned fleet of jet aircraft crossed the 400 mark in September, ending the third quarter at a total of 405 commercial aircraft. I want to take this opportunity to congratulate the ALC team on this achievement, and we look forward to receiving the remaining 412 new aircraft that we have on order with Airbus and Boeing through the year 2028. As John mentioned, we are very encouraged to see passenger traffic volumes continue to expand globally. The latest IATA traffic numbers released in October remained strong with total traffic up more than 60% year-over-year. Significant strength remains focused on the international markets which are up approximately 116% year-over-year as volumes continue to recover from the impact of the pandemic, though domestic traffic also rose meaningfully as well. Regionally with Asia Pacific that witnessed the most dramatic recovery figures. International revenue passenger volumes rose 449% year-over-year. Domestic traffic in Asia meanwhile improves significantly in Japan, which was up 112% over the prior year. India was up 55% and even China was up 45% versus the prior year following its many challenges with zero COVID policy. Domestic worldwide volumes are within approximately 10% to 15% of 2019 levels in most markets globally. But noteworthy to point out that it’s Brazil, which was the first large domestic market tracked by ITA to actually exceed 2019 levels. In fact, the South American market is particularly robust in general and we expect further strength in this market ahead. Global international traffic still has room for improvement and is still down around 30% versus 2019 levels, although we expect continue to improvement ahead as international routes reopen and further expand in the coming months. In view of these traffic trends as particularly…

Thank you very much Steve, and good afternoon, everyone. In the third quarter of 2022, ALC generated revenues of $561 million, up 7% as compared to the prior year. This was comprised of approximately $541 million of rental revenues and $20 million of aircraft sales trading in other activities. The increase in rental revenues was primarily driven by the growth of our fleet, lower COVID-related lease restructuring losses and higher aircraft sales. However, this was partially offset by the loss of rental revenue from a Russian fleet resulting from the termination of our leasing activities in Russia earlier this year. Moving on to operating expenses, the interest expense line rose 7% year-over-year driven by an increase in our average debt balances. It is noteworthy to point out that while prevailing market interest rates have rose significantly over the past year. Our composite funding rate increased only fractionally up just three basis points to 2.85% as compared to 2.82% last year due to the fixed rate nature of our funding strategy. Depreciation continues to track the growth of our fleet, while SG&A rose as business activities have increased following the end of the pandemic, along with an uptick in some of our operating expenses, including the increase in our insurance premiums by approximately 4 million as we discussed during our last earnings call in addition to aircraft transition related expenses. We ended the third quarter with 87% of our debt at a fixed rate, which along with our strong investment grade credit ratings positioned us well for movements and interest rates over the intermediate term and also provides us broad and deep access to capital. As discussed in the past, our interest rate escalators on our forward aircraft deliveries help protect us from rising interest rates as well. Altogether, this approach…

Thank you, Greg. This concludes management’s commentary and remarks. For the Q&A session, we ask each participant to limit their time to one question and one follow-up that we are time constrained this afternoon. So we’ll be ending our call promptly at 5:30 p.m. and we’ll do our best to answer the questions now and follow up with anyone we can’t get to. Operator, can you please open the line for the Q&A session.

[Operator Instructions] Your first question comes from Hillary Cacanando of Deutsche Bank.

Hi. Thank you for taking my question. So just, I guess, in terms of the fixed rate that component going down to 87%, I guess, last quarter was 92%. I just wanted to get more color around that, why that has gone down? And at some point, would it make sense you've always had a natural hedge where you had a really high fixed rate component, and you never had to put a hedge on. But at some point, would it make sense to put on like a hedge to – hedge against interest against interest rate volatility? Thank you.

Hillary, this is Greg. We typically target about 30% utilization on our revolving credit facility that's $7 billion in size and which is floating rate. So as we continue to draw down on that revolver that fixed rate ratio will come down a little bit. Our long-term target for our fixed rate funding is actually 80% and right now we're significantly above that target. We don't anticipate doing any short-term hedgings of those draws on that line I think as long as we're meaningfully above our fixed rate target.

Okay. Got it. Thank you. And then I guess just on the sales activity. Is that a function of like the OEM schedule? So if you get your deliveries on time from OEM, you can go out and sell more assets? And if not, then you kind of scale back, you said how it works. What drives your sales activity?

It's typically a balance, right? I mean, in the past, it definitely has been driven by the significant delays that we've experienced from the OEMs, but as we continue to move forward and given that our elevated debt-to-equity position, we've restarted our sales activity program and intends for it to be more regular going forward.

Okay, got it. Got it. Thank you. It's very helpful. Thanks.

Your next question comes from Jamie Baker, JPMorgan.

Hi, good afternoon everybody. So I guess, John or Steve, Mark and I are wondering a point that AerCap made this morning was that the engine manufacturers are being asked to prioritize spare availability, which is apparently diverting resources away from new aircraft deliveries. Is that something you are also witnessing? And I assume if so, that's also going to have an impact on the delivery cadence going forward? Is it a real thing for you guys in other words?

Hi, Jamie. It's – yes. Yes, it is.

The short answer is yes, yes, yes.

Okay. I'll take it. Another data point, and this kind of builds on some of John's prepared remarks, but stored 787 availability is actually below that of stored 320neos and the context here being a potential widebody shortage. I think both the equity and the credit markets are finally cognizant of the narrowbody shortage. But how strong should we be – how strong would you describe the pending widebody shortage?

I think it's a very gradual process. It's not like an earthquake, but what we're seeing is two things. One, the recovery in international traffic is now beginning to gain momentum as more and more countries liberalize their travel restrictions. And we see Asia other than China, international growing very, very nicely. We've seen results from Korea, Taiwan, Japan, Southeast Asia, Singapore, things are crawling back to normalcy, and we expect by the middle of next year, those regions will be pretty well caught up on their international long-haul business. But remember, those airlines still have direct orders to successful carriers, but we are seeing more demand for replacing some of the oldest widebody aircrafts that are hitting 20 to 25 years of age.

Jamie, I would also add, as I hinted at in my prepared remarks, there are many current campaigns, which are unfolding. I'll just give you several, which have been publicly written about, United Airlines upcoming campaign for 100 widebody aircraft, Air India reportedly 40 to 60 aircraft widebodies component, Saudi Arabia up to 50 twin-aisle aircraft. These are very, very significant numbers. And if it’s true, and usually there’s something when these kind of things are published, there’s – they’re not published out to twin-aisle, then that really adds further momentum, which is also why I stated that we expect both Boeing and Airbus to seek production rate increases, particularly in the 787 and the A350.

Yes, Jamie, the pending campaigns that Airbus and Boeing have, if you accumulate them in terms of the quantity of new aircraft, it’s almost three years of production of 787, 777X, A330neo and A350. So even if you take only a 50%, 60% success ratio, we’re looking at almost two years of production entirely going to these bulk orders that John described.

That’s a good perspective on that. Thank you very much gentlemen, Mark and I appreciate it. Take care.

Thanks.

Thanks.

Your next question comes from a line of Moshe Orenbuch of Credit Suisse.

Great, thanks. Greg, I guess I’m hoping you could kind of talk a little bit about the quarterly, not year-over-year, but quarterly progression in rental revenues was down slightly second to third quarter. I did notice in the Q that you said that there was like 6 million of cash basis interest that wasn’t received in Q3. And I guess there had been some interest received in the second quarter. Could you just talk about, talk about that and how we should think about the staging of the deliveries in Q3 and Q4? And what that means for the fourth quarter rental revenues?

Hi, Moshe. I think there was a little bit of noise in cash basis accounting. I mean, last quarter there was a pickup, this quarter we had a little bit of a loss and typically that has to do with the timing of cash payments, especially with some of our more trouble lessees. But I’d like to reiterate that the quantum of this is really quite small on roughly a $500 million revenue a quarter. But as you noted, it did cause a little blip in the yield, if you strip those items out. Yield was relatively flat Q3 to Q2. So I think we’re starting to head in the right direction, which is good. We’re looking forward again to position what we’re not talking about COVID-related matters. But you’re right, there was some – there was a blip in the road on some collections, but our team is working hard on it and I think we’re going to catch up. In terms of deliveries, I think, Moshe, it’s to be seen the timing of how the $1.2 billion in CapEx will roll through the quarter. There’s a lot of questions about the OEM’s ability to deliver and as we already chatted about with the engines manufacturers having significant issues as well. But the big question is what’s going to happen in December? But I would expect most of the stuff to be back and waited. [ph]

I just want to add that in October, we had quite a surge in cash collections of some of the airlines that failed to make their payments in the last week of September. So since we have the cutoff at September 30, it’s almost like an artificial thing because a few days later some of these guys paid in $3 million, $4 million, $5 million of catch ups. So it’s a snapshot, but it’s not indicative of a variance in the overall cash collection activity.

Thanks, Steve.

Your next question comes from the line of Mariana Perez Mora of Bank of America.

Good afternoon. So my question is in the wide body end market. So demand is quickly picking up and now given the lessons to learned from the narrow bodies ramp up in production, are you able to take that into account and get a better pricing during that demand – like that supply could be as challenging as within narrow bodies?

Yes. I mean that’s kind of the definition of supply constraint. So as I mentioned, we have less and less overall supply available. We’ve placed a good number of our wide bodies and that supply constraint is having an upward impact on our placement. So absolutely.

And if you were to compare leased rates today to pre pandemic leased rates, given interest rates today and this supply constraints, how’d they compare?

Well, it’s kind of variation on the math by aircraft types. Obviously, the single aisles are much stronger, but the twin aisles are coming up much better. And I would say are getting very close to parity, if not in a couple of cases in excessive parity to where they were in 2019.

But keep in mind that a lot of our wide body and even single out deliveries in 2022 were contracts that we actually entered into prior to the pandemic.

Perfect. That makes sense. Thank you.

Thank you.

Thank you

[Operator Instructions] There will be no further questions at this time. Mr. Arnold, I’ll turn the call back over to you.

Thanks, Paula, and thank you everyone for your time participating in our third quarter call today. I look forward to speaking with you again when we report fourth quarter results. Operator, thank you and please disconnect the lines.