Good afternoon, my name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation Q4 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 will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thanks Greg and good afternoon everyone and welcome to Air Lease Corporation's fourth quarter and full year 2023 earnings call. I'm joined today by Steve Hazy, our Executive Chairman, John Pluger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today we published our fourth quarter and full year 2023 results. A copy of our earnings release is available on the investor section of our website at www.airleascorp.com. This conference call is being webcast and recorded today, Thursday, February 15th, 2024. 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 that certain statements in this conference call including certain answers to your questions are forward-looking statements within the meeting of the Private Securities Litigation Reform Act. This includes without limitation statements regarding the state of the airline industry, the impact of aircraft and engine delivery delays and manufacturing defects, our aircraft sales pipeline and our future operations and performance. These statements and any projections as to our future performance represent management's current estimates and speak only as of today's date. 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 pre-tax 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 our earnings release in 10-K that we issued today. This release can be found in the Investors section and Press section of our website at airleasecorp.com. As a reminder 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 very much, Jason. Good afternoon everyone, and thank you for joining us on our call today. I'm pleased to report that during the fourth quarter, ALC generated record quarterly revenues of $717 million, up approximately 19% relative to the same quarter last year, and we achieved $1.89 in diluted earnings per share, up 56% from last year's fourth quarter. Revenue for the full year of $2.7 billion was also an ALC record. Strong continued expansion of our fleet, increased sales activity at healthy gains, and higher end-of-lease revenue were the primary drivers of upside to revenue as compared to the prior year quarter. During the fourth quarter, we purchased 22 new aircraft from our order book, adding approximately $1.2 billion in flight equipment to our balance sheet, while we sold eight aircraft, totaling approximately $440 million in sales proceeds. The utilization rate on our fleet remains very strong at 99.9% for the full year 2023. In addition to revenue expansion during the fourth quarter, we also benefited from approximately $67 million net from the insurance settlement we received on four aircraft seized in Russia in the prior year, plus the equity interest in our managed fleet. We continue to vigorously pursue further insurance settlements as well as our insurance claims and litigation, but given these are largely legal matters, there's not a lot of extra color we can add on this topic. I will note that we believe strongly in the validity of our claims and continue to pursue all available options for recovery. Global air traffic continues to gain altitude, and there are no signs on the horizon of volumes weakening dramatically. Steve will expand upon this in his remarks. We're also seeing in recent months a rebound in the cargo and air freight markets, owing largely to…

Thank you, John, and thank you to all of you listening in on the Air Lease call today. I'd like to begin by congratulating, from deep in my heart, the Air Lease team on achieving several key records, including the highest revenue and sales proceeds as well as exceeding $30 billion in assets for the first time in our history. We've certainly come a long way from our start in 2010 when we had aspirations but no aircraft and only a handful of employees. ALC was built from our collective vision that airlines will require the newest technology, fuel efficient commercial aircraft release, and that these aircraft would be needed well ahead of any availability from the OEMs. Right now, we're observing both of these trends in a position that has rarely been so positively skewed in our favor. Airlines are in immense need for the highest demand new aircraft, and both Boeing and Airbus are practically sold out through the end of this decade. Our volume discount pricing on our fleet and order book was achieved well before the recent spike in industry orders and pricing, and gives us a tremendous advantage that few others possess. These factors also continue to support positive upside to lease rates and aircraft values in our fleet. Global airline traffic volumes remain very robust. Full year 2023, IATA traffic figures released earlier this month continue to show very strong expansion with total volumes rising 37% year-over-year. Domestic traffic was up 30%, and for example, domestic China in particular up a significant 147% versus the prior year. And most markets rose at very healthy pace. In fact, global domestic traffic hit all new highs in December with several markets like the U.S., India, Australia, and Brazil achieving mid-to-high single digit year-over-year growth rates in…

Thank you, Steve, and good afternoon, everyone. During the fourth quarter of 2023, Air Lease generated revenues $717 million, which comprised of approximately $644 million of rental revenues and $73 million from aircraft sales, trading and other activities. The increase in our total revenues was driven by the growth of our fleet $59 million in gains recognized from our sales activities and $60 million in end of lease revenue stemming from the return of 7 aircraft. Let me remind you that the earnings model in aircraft leasing includes not only the base rental payments that we recognized on a straight-line basis over the life of the lease, but also includes the earnings that we generate from Interlease payments and maintenance reserves as well as the gains that we record from the ultimate sale of the aircraft. These additional income streams serve to enhance the overall earnings profile of the business. Sales proceeds for the fourth quarter totaled approximately $440 million from the sale of 8 aircraft. As I just mentioned, these sales generated $59 million in gains, representing a 14% premium to our carrying value, which was higher than our long-term average of 8% to 10%, further demonstrating the strength of the market and the underlying value of the aircraft that we have in our fleet. I do want to point out that our gain on sale margins will vary somewhat quarter-to-quarter based on aircraft sold and market conditions. But it's also worth highlighting that we have a robust aircraft sales pipeline aggregating $1.5 billion for future aircraft sales at accretive valuations. This pipeline not only further reinforces the underlying value of our existing fleet, but also provides a meaningful addition to our liquidity position and is a catalyst to help us reduce our financial leverage, which I will discuss…

Thanks very much, Greg. This concludes our commentary and remarks. [Operator Instructions] Operator, please open the lines for the Q&A session.

Thanks Jason.[Operator Instructions] It looks like our first question today comes from the line of Catherine O'Brien with Goldman Sachs. Catherine, please go ahead.

Hey good afternoon, everyone. Thanks for the time. Totally understand that quarter-to-quarter, we should expect that gain on sale to bounce around, of course, but had a solid gain this quarter, up from last quarter. With everything that's going on with the MAX and GTF, should we expect supply to remain tight or maybe even get tighter as we move to this year? And should that translate to potentially keeping that gain on sale higher than the historical average. Just any color there on both the supply and demand side and thoughts on the gain that Air Lease could enjoy in that environment would be super helpful. Thanks.

Thanks, Catie. The answer is yes. We do believe that the supply will remain constrained. As to the impact on forward sales gain, I really can't comment too much. We've got a robust pipeline of $1.5 billion. All these things are taken into consideration. But I think there's no question in our mind that the supply will remain constrained.

For every airplane that we have for sale, we have multiple buyers. So it's been a very dynamic market. And it's led to a high level of liquidity in the secondhand market for aircraft and Air Lease is having a high-quality fleet will continue to enjoy significant gains when we dispose of these assets.

Okay. That's great. And then I was just hoping to get some more color on the returned aircraft and the end of lease revenue. I'm not sure if you can share this, but obviously, which airline and what type of aircraft would be helpful. And then just how should we think about the turnaround of getting those aircraft back out the door as you just spoke to, I'm sure there's plenty of interest and taking those aircraft off your hands. But what's MRO capacity like? Is that still pretty tight just in terms of the time line to get reconfiguration work done to get the back out of the quarter.

Your question is really two parts. Let me explain the first part. We have two types of leases. Many of our leases, the airline pays a monthly overhaul maintenance reserve for the usage of engines, airframe components, landing year and so forth. So there's a monthly cash inflow over and above the rental. And then we have some leases where that compensation comes at the end of the lease. So it's kind of a catch up. And so some of these transactions that you referred to was simply where the leases had come to an end or where we agreed by mutual agreement with the airline to recover the aircraft. And then we were able to obtain additional funds, keep all the security deposits and in effect, get the present benefit of the maintenance reserves that accrued during the life of the lease. And then the second question, MRO capacity is very tight. So we try to keep those transitions to an absolute minimum, and we try to lay off those expenses on the next airline rather than having to use ALC's resources.

Let me just add, Catie, that where we do have an expiration in my prepared remarks, I highlighted the fact that we have a very high rate of lease extension and that continues to be the case. There's not a lot many this year, but we have -- our historical average is 75% of our leases -- first run leases get extended. I don't know what the current percentage is today, but I would strongly imagine it's well north of 90% to 95%.

And just by way of example, one of the aircraft that was in this category was an A321 and the new lease that we signed with another airline as a follow-on, is paying us a higher rental rate than the original lease and the other aircraft being a 737-800, we had the same phenomenon with a new lease, had higher lease rates than at least that just expired.

That's great. Yes, I guess I was assuming those maybe were early returns, but wasn't factoring and maybe some of that was just coming to their natural end. That's all super helpful. Thanks for the time.

Thank you Catie.

And our next question comes from the line of Jamie Baker with JPMorgan. Jamie, please go ahead.

Good afternoon everybody. First one, probably for Greg on Russia. If you look at what you initially wrote off, not what the insurance claim was, but what you wrote off, where are we in terms of aggregate recovery inclusive of the $67 million disclosed in the fourth quarter? I mean if you were to express recovery as a percentage of book, we're hearing around $0.65, $0.70 on the dollar elsewhere. Just wondering if the Air Lease metric is consistent with that.

I think to date, we recovered about 10% to 12% of our $800 million charge that we took last year. I can't really comment about what the market is for claims in the marketplace. And ultimately, we're kind of limited about how much we can actually talk about our recovery efforts on the call.

Okay. Well, that's helpful. And then second, if I back out sale proceeds in the end of life revenue, it looks like lease yields are uninspiring. So at or near the lowest level since 2021, which seems, I don't know, a little inconsistent with how bold up everybody is on aircraft leasing. So what Mark and I were wondering, are lease extensions to blame for this? Is that what's potentially leading upside on the table relative to how strong market rates reportedly are?

No, I think it's really being driven by, as you sell off older airplanes. They typically are at the highest point of their yield in our life cycle. And as you layer on younger airplanes, they start off at their lowest and then as they age, the yield goes up. I think that is putting probably the main driver where it is because you're right, as John mentioned in his prepared remarks, we are seeing lease rates really start to get going.

And let me just add, as I stated in my prepared remarks, our lease placements are roughly two years ahead of the actual deliveries. So when you see this strengthening over the last year, you can just assume that what we're delivering, for example, this year were largely leases that we struck in 2021 and early 2022.

Understood. Thanks for the color, John. Thanks Greg.

Alright, thank you Jamie. And our next question comes from the line of Hillary Cacanando with Deutsche Bank. Hillary, please go ahead.

Hi, thanks for taking my question. In the past, you used to break out China separately in your press release. It looks like this time around you combined it with Asia. Could you discover what the exposure to China was in the fourth quarter? And if you're continuing to reduce the exposure to the country? Thank you.

Yes. We consolidated the reason because our exposure to China has gone down significantly below 10%. I think it was below 7% actually, and that's disclosed in the details of the 10-K. And I know that, that just hit the wire at 1:00 Pacific Time. So it doesn't surprise you that you weren't able to find a detail there, but that's the main reason.

Okay, got it. Thank you. And then previously, you said that the extension rate was about 90% given the tight market, has that increased at all in the recent quarter? And are you seeing any differences between the extension rates for narrow-body versus the wide-bodies? And then just in terms of economics, are you better off if the airlines extend and you have to incur the marketing costs? Or are you better off if you remarket those aircraft and maybe potentially get higher rates just given the tight market.

Yes, extension. The rates of lease extension have not softened. They continue to remain very strong, well north of 90%. I don't have the specific calculation in front of me, I believe that's pretty accurate. Lease rates in the extensions are going up for single aisle and tonal [ph] aircraft. And on that level, I wish we had more of them coming up this year. But we're seeing a nice appreciation in lease rates. Steve gave some specific examples in an answer to a previous question that we've experienced, where in a few cases, we've had leases extend, either extend at higher rates or to a new lessee at higher rates than the original leases.

Okay. And then just, I guess, in terms of economics, are you better off if they extend because you don't have to be in course of remarketing costs? Or could you get better rates if you remarket them?

That's a good question, and it's very much a case-by-case basis. We do look at that question on every single extension versus transferring to another carrier. So that is very much a part of the calculus.

Okay, got it. Thank you so much.

Alright thanks Hillary. [Operator Instructions] And our next question comes from the line of Terry Ma with Barclays. Terry, please go ahead.

Hi, thanks, good afternoon. I think in the 10-K, you called out 22 returned aircraft this year. Any color you can give on how many of those have actually transitioned versus how many aircraft that are waiting the transition?

Terry, what I would point you to is our utilization percentage, and that's at 99.9% and about -- I mean, almost all of our airplanes are subject to lease at the current moment. I think a lot of these were regular returns. So we had a customer lined up to take the airplane at the return check. So it's a pretty seamless operation.

Got it. So even the 7 aircraft that were returned this quarter, they should be earning rental revenue in Q1.

Yes.

Okay. Got it. That's helpful. And then you mentioned lease rates on new deliveries are higher. Is there any color you can give even ballpark, how much higher the lease rates on 2024 deliveries and 2025 deliveries are relative to what's on book today?

What you can do is you can look at -- there's a lot of appraisal data out there that has shown what's going on with lease rates. And I'm a little hesitant directing you to the appraisal data because they typically lag the market by 6 to 12 months, but they've been very vocal in their views on what's happening with lease rates, and you can see some very significant 10% to 15% increases in lease rates over the last period of time.

Well, also, please be reminded that many of our leases that we wrote in 2021, 2022, had interest rate adjusters. So when the aircraft delivers, we look at the 5-year treasury or 7-year treasury or some benchmark and then the lease is adjusted not only for the escalation from the manufacturer also for the prevalent interest rates at the time of delivery. So based on the current interest rate situation, you can mathematically derive that aircraft delivering today are at a higher lease rate than they were 12, 18 months ago.

Got it. Thank you.

Okay, thank you Terry. And our next question comes from the line of Ron Epstein with Bank of America. Ron, please go ahead.

Hey good evening guys. Just a couple of quick ones, if I can. And you mentioned this a little bit in the prepared remarks before, but how long do you think it's going to take until the MAX gets back to some sort of regular rate of cadence, meaning and I guess this was asked in a sense before, I mean, how long do you think the supply and demand imbalance is going to be in the narrow-body market, right? I mean, it could be years, years, right? Are we thinking about this wrong?

No, you're right. I mean, the supply/demand invent, we do believe will go on for years. And Boeing is delivering MAXs today. The only question is how many production rate increases and at what pace they'll be able to increase that rate. As it's been publicized, the FAA has put a limit on that rate until it is more satisfied. It's -- so we really can't judge, Ron, when that -- that's anybody's guess as to when that restriction on production rate might be lifted. But Boeing is delivering MAXs. We're taking delivery of MAXs that the single-aisle shortage is going to be going on for quite some time.

Ron, one other point, the lease rates we're seeing for new MAX 8s and new A320neos are almost neck and neck. We're really not seeing a worst lease rate environment for new Max versus an A320. Now obviously, the A321 is a different animal. And then the 737 MAX is between the Dash 8 and the A321 rates. But the Dash 8 rates for new 737s and A320neos they're almost at the same level.

Got it. Got it. That was actually my next question. So thank you for that.

I know, I read your mind.

Yes, you did. It's quite successful. That was a good one. So the next question, the follow-on from that would be, if this is going to last for a long time, does this open the aperture for more A220s out there or more E2-195s, be it that there's some lift available there in the more near term?

Yes. I think it does. We've been successful in our 220 placements and at the same time, we're watching how the engine improvements are leading into the gear turbo fan, the 1500 that powers those airplanes. So I think, yes, there is some acceleration on both those aircraft types.

Yes. Ron, just to give you an example, if I look back in the last, say, 1.5 years on our A220 placements, for example, in Europe, they are replacing A319s, A320s, 737-700s. So they're replacing aircraft in that 130 to 180 seat size. In some cases, they're replacing larger aircraft. Like in ITA, for example, they're replacing some of their older A320 CEOs with A220s. We have a deal in the Czech Republic, while all their A320s are being replaced by A220s. In Bulgaria, we have 7 A220s replacing a combination of A319s and A320s. So airplane is really catching on. And with the recent orders from Lufthansa, you've got really now a very strong customer base here with Delta, JetBlue, Air Canada, in North America. The airplane is catching on. But it is production constrained.

Would you be supportive of a 220 and 500, the kind of mythical stretch of the airplane?

What kind of engines are you going to put on it?

You tell me.

I think, Ron, at this point in time, we're not overly optimistic or favoring an A220-500. We think the -- we think that the production of the A220-100 and 300 and the continued maturation of the engine on that airplane is sufficient for most markets these days. There's one or two airlines that would like it. But frankly, I think with all the strain and production rate pressure that Airbus is under, it's still got to deliver and certify the A350 freighter and the XLR, these are two big certification programs. Let's not put another pressure on the development or the supply chain that could take away time and attention or quality from Airbus.

And Ron, also, if you look at the infrastructure in Mobile and in Montreal, I just don't see that Airbus could build 30, 40, 50 of these a month. It just doesn't appear to be achievable with what's in place currently.

Got it. Thank you very much.

Thanks Ron. Our next question comes from the line of Catie O'Brien again with Goldman Sachs. Catie, please go ahead.

Hi, again thanks so much for the follow up. Just [indiscernible] some puts and takes of the other questions and had one on that spread. You timed the market really nicely in January with that unsecured deal, but you do have some sub-1% maturities, I think, rolling off this year. So guessing we'll continue to see the average cost of that move higher? And then on the rental side of the equation, as you noted, most of the aircraft are taking delivery of this year would have leases written in 2021, 2022 when we weren't quite yet in this really strong period, we're speaking to on lease rates. So I guess what I'm getting at would it follow that we should expect to see net spread perhaps compress a little bit before the tailwinds of the current lease rate environment drive expansion in 2025, 2026. Just any high-level thoughts there would be super helpful. Thanks again for the time.

I think it's really hard to say right now, especially given what's going on with the Fed and where interest rates are going to go. I think it's really hard to predict. We do have pretty good visibility of what's coming on the lease rate side, but we've really shied away from giving guidance on what direction our lease spread is going to go.

And we do have, what, about a $19 billion book of fixed rate liabilities already and those are not going to change too much. So even if we issue another $500 million or $700 million bond in the 4s or low 5s, it's not going to change the overall dynamics of our balance sheet.

Catie your estimation of how many Fed rate cuts there will be before the end of the year is probably much better than ours. All I can say is going into the end of 2023, it's clear that the market had priced in probably too many too aggressive of Fed rate cuts, but we do expect them this year. So again, your guess is as good as ours.

Yes. I'll leave that to the people smarter than me in the macro department here. But Okay. Thanks for the color. Thanks guys.

Thanks Catie. And our next question comes from the line of Stephen Trent with Citi. Stephen, please go ahead.

Hey good afternoon everybody and thanks very much for taking my question. Most of mine have been answered, but I was really curious about your aircraft procurement. I mean, not just for you guys but for the industry broadly, would you say, for instance, that lessors could start leaning more on obtaining planes through a little more through sale leaseback activity versus what's previously been the case. Or is that not so relevant for you guys because you already have such strong order books from the OEMs? Just was wondering what you see as the opportunity for the space as you procure aircraft. Thank you.

Yes. We've -- our business model has always been and will remain primarily as an order book-driven lessor. We have a very large order book that will go out through 2029. So we are not large players and never have been in the sale-leaseback marketplace. I don't see, in terms of the broad distribution, it's those who don't have order books, by definition, we'll have to do sale-leasebacks, but it's never been a huge part of our business, except for we do participate indirectly in some of the managed vehicles that we run for other investors. In some cases, the sale-leaseback marketplace presents certain opportunities for them. Classically, the returns and the lease rates and the sale-leaseback part of the business has been lower than on the order book part of the business. So we guided a little bit towards our managed vehicles, but we will always remain primarily a new aircraft order book lessor.

And we believe that, that business strategy results in a lower acquisition cost of aircraft then when you step into an airline's order with a markup to do a sale leaseback. So we believe we have significant capital cost advantage in the acquisition of these portfolios directly from the OEMs rather than through a third party.

Great, makes sense. And thanks very much for the color.

Right, thank you Stephen. And our final question today comes from Doug Runte with Deutsche Bank. Doug, please go ahead.

Thanks very much for taking the question from the fixed income side of the balance sheet. A question on the order book. There's an interesting split in the market among large thoughtful lessors as to whether you should line up at the tent at the air show to place orders or whether it's okay to place orders extending over the horizon past 2030. I'm wondering where you come down on that given that your order book commitment ends towards 2028, 2029.

Yes. We don't believe that joining this order frenzy is really a good strategy for us. If you truly believe that every one of those orders that have been placed in the last two years are going to get delivered on time and to the very airlines and institutions that have ordered it, then our strategy is probably flawed. But we don't believe that those hundreds of aircraft will wind up exactly where they were intended. There will always be pockets of opportunity. There will be airlines that will not be able to honor their obligations. So we think we can supplement our backlog as and when needed to cover that period 2028 and 2029. We're in really good shape over the next 4.5 years. So we're less worried about new aircraft in 2030.

Great. Thank you very much for that color and a quick follow-up, a little more granular. You have quite a few 777-300 ERs coming off lease in the next two to three years. Have you engaged in placement talks with that? Does it look like they will be extended or is there potentially going to be a need to reposition those to new operators?

Yes, those are going to be extended for the very most part, Doug. There's -- we're well underway on -- with several large carriers in that process.

We have pulled every one of our 777-300 ER SCs, Doug, and not a single one has expressed any interest in returning them.

Wow, that's terrific news.

Whether we extend them for 3 years or 5 years or 8 years and at what rate. That's the variable. It's not an if question, it's at what rate are we extending and for what term?

Terrific. Thank you for sharing that color.

All right. Thank you, Doug. And that concludes our question-and-answer session today. And with that, Mr. Arnold, I will turn the call back over to you.

Thanks, everyone, for your time participating in our fourth quarter call. We look forward to speaking to you again in May. Greg, please disconnect the line. Thanks for your assistance.

Thank you. This concludes today's call. You may now disconnect. Have a great day, everyone.