Good afternoon. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation Fourth Quarter 2024 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, press the star one again. 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, Krista, and good afternoon, everyone, and welcome to Air Lease Corporation's fourth quarter and full year 2024 earnings call. This is Jason Arnold. I'm joined today by Steven Hazy, our executive chairman, John Plueger, our chief executive officer and president, and Gregory Willis, our executive vice president and chief financial officer. Earlier today, we published our fourth quarter and full year 2024 results. A copy of our earnings release is available on the Investors section of our website at airleasecorp.com. This conference call is being webcast and recorded today, Thursday, February 13, 2025, and the webcast will be available for replay on our website. At this time, all participants to the call are in listen-only mode. Before we begin, please note that certain statements in this conference call, including 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, the impact of aircraft and engine delivery delays and manufacturing flaws, 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 the earnings release and 10-Ks we issued today. This release can be found in both the Investors and the press section of our website. Similar to last quarter, given ongoing litigation, we won't be able to take any questions about our Russia fleet insurance claims. Lastly, as a reminder, unauthorized recording of this conference call is not permitted. I'll now turn the call over to our Chief Executive Officer and President, John Plueger.

Thanks, Jason. Hello, and good afternoon, everyone. Thank you for joining our call today. During the fourth quarter, Air Lease Corporation generated revenues of $713 million and $0.83 in diluted earnings. Our results benefited from the continued expansion of our fleet, offset by lower end-of-lease revenue as compared to the prior year. I'm also happy to report that full-year 2024 revenue and ending fleet net book value reached record levels in the history of our company. We purchased 18 new aircraft from our order book during the quarter, adding $1.3 billion in flight equipment to our balance sheet. And we sold 14 aircraft for approximately $540 million in sales proceeds. The weighted average age of our fleet was stable quarter over quarter at 4.6 years, while the weighted average lease term remaining extended slightly to 7.2 years. Fleet utilization remains very robust at 100%. Our fourth-quarter deliveries came in better than expected as the OEMs pushed to achieve their own delivery goals and objectives ahead of year-end. On a full-year basis, the $5 billion in deliveries we received hit the midpoint of the $4.5 to $5.5 billion range we outlined to you at the beginning of last year. For 2025, we expect to receive $3 billion to $3.5 billion of new aircraft delivered from our order book with around $800 million anticipated to deliver in the first quarter of 2025. I would also note that approximately 80% of our deliveries expected for 2025 are Boeing aircraft. So any additional challenges emerging in Boeing's production efforts could be impactful. With the lower forecast expenditures on new aircraft deliveries for 2025 compared to 2024, Air Lease Corporation will have the ability to largely self-fund those deliveries from operating cash flow plus aircraft sales. This means reduced funding needs from the debt capital…

Thank you, John. I suspect to underscore John's comments, and my thanks to our team for their dedication to our company and our colleagues in the LA fires. I'm very proud of the way our team responded in offering help and assistance to each other, as well as family, friends, and neighbors in their communities. To overcome the tragic destruction witnessed in Los Angeles during January. We are very blessed to meet very pleased to report record revenues and fleet size during 2024. And view Air Lease Corporation as very well positioned for the current environment as we move forward in 2025 and beyond. Demand for commercial jet aircraft is really high. And our own fleet and large order consist of some of the most attractive commercial aircraft types on the market. Israeli airline customer meeting that goes by way of not having asked to find more aircraft for them. And nearly all of our leases maturing are being extended at very strong profitable lease rates. The phenomenon of lease extension rates exceeding initial new aircraft lease rate is truly exceptional. Second leases are typically signed with a step down in the lease rate. Given the depreciation of the aircraft over time. So it's pretty remarkable environment where lease rates are actually stepping up on a second lease to such high levels. As John noted, I do I do also point out that the drag of the lower yields of the restructured leases that we did during the pandemic and early deliveries in the pandemic season. Should begin to weigh less heavily on our overall fleet yield as the lower lease rate terms and and they extended at market rates with the existing airline or with a new airline. Demand for our new commercial aircraft is being further supported by…

Thank you, Steve, and good afternoon, everyone. During the fourth quarter, Air Lease Corporation generated total revenues of $713 million which was comprised of approximately $639 million of rental revenue and $74 million of aircraft sales trading and other activities. Rental revenue was in line with the fourth quarter of 2023 and lease yields remained essentially flat. Revenues have benefited from the growth of our fleet. Offset by significantly lower end-of-lease revenue. As a reminder, we recognized $60 million in end-of-lease revenue in the prior period, which is compared to the current period was $6 million. We have messaged before, we continue to anticipate lower levels of end-of-lease revenue. Due to higher extension rates, attributable to the supply shortage of commercial aircraft. As John discussed earlier, this environment has led to higher lease rates on extensions and has served to increase the value of these aircraft in our fleet. Sales proceeds for the quarter approximated $540 million from the sale of 14 aircraft. These sales generated $65 million in gains. Representing roughly a 14% gain on sale margin. We continue to expect to see healthy margins towards the upper end of our historical range of 8% to 10%. Based on our current sales pipeline of $1.1 billion. These gains continue to reflect the significant value embedded in our fleet which we carry on the balance sheet at depreciated cost. Moving on to expenses. Interest expense rose by approximately $38 million year over year driven by a 37 basis point increase in our composite cost of funds to 4.14% year-end. Increased financing costs and higher debt balances were primary contributors to the year-over-year increase in interest expense. However, as compared to the third quarter of 2024, our composite rate declined slightly as we benefited from the Fed rate touch in 2024.…

Very much, Greg. This concludes our prepared commentary and remarks. For the question and answer session, we ask each participant to limit their time to one question and one follow-up. Krista, please open the line for the Q&A session.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone. And your first question comes from the line of Catherine O'Brien with Goldman Sachs. Good afternoon, everyone. Thanks so much for the time. So I think, you know, your comments on some of the puts and takes around lease margins and ROE, you know, China's a bit of a headwind this year. Some of the lease renewals are gonna be tailwinds over the coming years. Obviously, it's a bit of a slow-moving ship as you turn through the portfolio. But can you just walk us through, you know, what do you think gets you back to mid-teen adjusted pretax ROEs that you had before the pandemic, or do you think that's achievable? And just any rough sense of the timeline would be great.

Sure. Thanks, Katie. I'll take that, and then I'll ask Greg to comment. I think, yes, I do think we are gonna be able to achieve that mid-teens level that you spoke about but it's gonna take two to three more years. We've outlined the factors on the positive side and any headwinds. But given all that in consideration, I do believe that that's a reasonable time frame outlook in the two to three-year time frame.

Right. John in the...

Oh, sorry. Yeah. And I think, obviously, the big question is around the timing of interest rates and lease rates as well. I mean, but at the end of the day, we obviously, when it comes to capital allocation too, those are other factors that we have. I don't see any impediment to reaching our ROE targets over a longer period of time. It's just a question of how lease rates and interest rates evolve.

Got it. Makes sense. And then, you know, I'm assuming your comment on reaching your leverage target is based on just core business trends, but correct me if I'm wrong. You know, based on what you see in the market right now between incremental aircraft, M&A, or the value of Air Lease Corporation shares, if you were to get back to your target debt to equity faster than you currently expect, what will be the right choice for Air Lease Corporation shareholders? Thanks.

We'll make that determination as that comes in, Katie. But they're all on top of our list. Ideal capital allocation is very important. With a view toward maximizing the value to our shareholders. And once we get to the 2.5 area, which will hopefully happen sometime in the second half of this year, our board will consider multiple scenarios including initiating a buyback program.

And one other appendage to that, Katie, I mean, it should be obvious, but also you know, when you're looking at capital return to shareholders, our current stock price has a major bearing on that. And so we never predict where that will be, but obviously, as you know, that's a key consideration.

Thanks for that additional color, gentlemen.

Your next question comes from the line of Terry Ma with Barclays. Please go ahead.

Hey. Thank you. Good afternoon. So I appreciate the comments on the direction of the overall fleet. Lease yield over the next few years. But when you kinda factor in the forward curve, and your planned funding needs, should we expect the net spread margin to go up by a similar amount, or is that gonna be kinda depressed by just overall funding? Or interest rates?

Yeah. I think for 2025, we thought that we'd be around the same levels as we did in 2024. A lot of that depends on what happens with interest rates. I mean, it's nice to see a nice steady line up of the lease yields over time. Which I think has a it's a pretty powerful lever but it does take time to make its way through the business.

Got it. Okay. And then on the leases that you extended in the fourth quarter, like, should we expect kind of the incremental pickup in yield or rental revenue to kind of flow through in the first quarter? And then any more color on the cadence of the remaining renewals?

Yeah. I think those that were signed in Q4 will roll through in 2025. And then as we work through the $5 billion of airplanes that are rolling off over the next two years, I think that'll also provide an uplift to lease yields. So I think you should expect a steady grind higher on the top line. And then, I guess, finally, you need to factor in we don't see the market changing given the supply-demand dynamics, etcetera. Why? So we still see airplane shortages for long extending three to four years based upon what's going on on the production side. So I think that's gonna create a shortage of airplanes that is gonna contribute to both aircraft values and lease rates. Being strong for the next several years.

Got it. Thank you.

Yeah. And coupled Greg and John with the expirations of those leases, that were renegotiated during COVID, as those progressively liberate us and allow us to get back to market these rates either by extension or repositioning those aircraft to USCs. That will have a continual upward trend on the overall corporate lease yield.

Your next question comes from the line of Jamie Baker with JPMorgan. Please go ahead.

Hey. Good afternoon, gentlemen. So an argument that well, a debate that Mark Streeter and I were having because we don't really argue. Have you thought about even greater aircraft sales into this strong market? You know, as a means of, I don't know, potentially proving the value proposition of the equity or is the preference just to maintain current level of sales and then, you know, wait for that, you know, pickup and deliveries at some point down the road. That make sense?

Yep. Look. I think it's a... Yeah. Skills. I think it's... We are looking at that definitely. Sorry. Let me just quickly start. And then Steve will turn it over to you. As I said in my remarks, we're looking to be about $1.5 billion in sales in 2025. That's pretty close to the $1.7 billion we had in 2024. You know, sales programs are largely also opportunistic. In the prior quarter, I also talked about the fact that we're being approached from fairly significant buyers who wanna do larger scale managed portfolios. Yep. So with all these factors, we have to look at opportunities and what's in front of us. But generally speaking, I think we're biased towards keeping about the same level of sales proceeds that seems to be a good balance every year. If there is a strongly compelling reason why we should sell x amount of more. We'll take a look at it, but I think currently, our plans are to remain about our current levels.

Okay.

Steven, I think to add to that or Russ... Yeah. Jamie is that was that...

Go ahead. I think we're also very interested in developing structures where we still maintain the relationships with the airline customer, and bring in passive institutional investors into a managed structured vehicle. Well, we have a small equity stake but you have a large portion of the profitability in the end of lease disposition of those aircraft. And a sizable management fee during the tenure of these arrangements. So that could be an avenue where we may add some additional assets to and transfer them to these new entities.

Okay. That's helpful. All good points. Thanks, guys. And then second and I guess this gets back to the comment that Greg made in the prior question about, you know, the steady grind. You know, AerCap had this slide that showed the percentage of, let's call it, sort of cold, medium, and hot leases as a percentage of total for each year, you know, the cold leases being the least profitable, you know, and reflecting, you know, aircraft that were placed at the bottom of the market. And again, Steve, you've commented on this just a moment ago. But if we were to focus just on those less profitable leases, their lease. Would you have an estimate for 2024, 2025, and 2026 as to what percentage of the book they represent. Just, you know, just trying to put a visual behind the burning off of these leases as they are being overtaken by the stronger deals that you've been talking about ever since John's prepared remarks. Hope that's clear. Thanks in advance.

We don't have the page in front of us, but we're familiar with the numbers. And that's why we tried to give the color in the prepared remarks about a $5 billion worth of aircraft that were COVID era leases that are rolling off the next two years. I think you can take that as a ratio of the overall fleet. That was our attempt to give some color about how quickly the lease yield can move forward.

Okay. Very helpful. Thanks, everybody.

Thanks, Jamie.

Your next question comes from the line of Moshe Orenbuch with TD Cowen. Please go ahead.

Great. Thanks. Apologize for some of the background noise here, but as you look, John, at these lease renewals, that are going on, are those getting better in this environment? Like, in other words, if you think about, you know, where they'll be in 2025 and 2026 versus, you know, what you mentioned, you know, in terms of up slightly for narrow bodies, flat for wide bodies. Is that improving in this environment? Or, you know, has it peaked yet?

Yeah. The answer is unequivocally yes. The examples I gave on the extensions we executed in the fourth quarter on the single aisle, where the lease rates were higher than the initial term, and about flat on the wide bodies, both of those are against the backdrop. Of typically lease rates step down after the initial lease term on new aircraft, and so this is a very significant element that we see, and we see it continued continuing to strengthen in 2025 as we look at our leases that are subject to extension and that we're discussing right now, so we look at it on a very robust level.

Medical. But if you were at your leverage target today, and everything is as it was today, in other words, you know, a lower level of deliveries into 2025. You know, what would be at the top of your list? For, you know, for deploying capital. Would it be would you be looking at sale leaseback? Would you be looking at a stock buyback with stock is? Like, you know, could you maybe talk about that from a hypothetical standpoint?

Well, from a hypothetical standpoint, I would just say based on where our stock is today, you know, we look at that very, very strongly. And it's a compelling value today. Having said that, as I said earlier, we'll make that determination at such time when we get to our debt equity ratio. But just know very certainly that this is a very strong possible avenue for the company. But again, we withhold our decisions on that until such time as we're where we wanna be.

Especially when you're selling aircraft at a 14% premium to their carrying values and your stock is starting to blow up.

Right.

Thanks.

Your next question comes from the line of Hillary Cacanando with Deutsche Bank. Please go ahead.

Hi. Thanks for taking my questions. So this question is one high level and not specific to your insurance situation. So I'm hoping you could answer it. But I was wondering if there's a ceasefire agreement between Russia and Ukraine, you know, could there be any impact to the lessors? I guess, you know, what's specifically do you think there's any chance that, you know, Russia can try to, you know, return the aircraft to the lessors, which I don't think the lessors would want. I don't know if that's even a possibility, but I wanted to see if there's any, like, high-level thoughts you could provide on a possible ceasefire.

Hillary, we're just not gonna comment on that. Sorry.

Okay. I figured that's much. And then I guess when you talked about, you know, taking two to three years to get to the mid-teen level returns, are you assuming, that interest rates remain at the same, you know, at the current level? You know, if there's an interest rate hike or if there's, you know, if there are more cuts this year, you know, will that two to three-year assumption change?

Yeah. I think a lot of it depends on where interest rates are. I mean, I think the mid-teen target is more of a longer-term target. Because there's nothing fundamentally different in our business today. It's just gonna take a little bit of time for that stuff to make its way through our $30 billion balance sheet. So if anything, I would emphasize that it's gonna take time to make it work its way through and some of it, of course, will depend on how quickly and in which direction interest rates move.

Got it. But also, the custom interest rates only affect our incremental borrowings. All of our existing bonds that were issued two, three, four years ago, and do not roll off in your screen. The interest rate on those bonds is what it is. We can't change that. But if interest rates improve for us, it will affect all of our short-term bank borrowings. And any new bond offerings? But as Greg said, that number would have to be pretty substantial to have a major impact on me. Portfolio debt. Coming down, you know, proportionally.

Got it. K. Great. Thank you very much.

Your next question comes from the line of Stephen Trent with Citi. Please go ahead.

Yes. Good afternoon. Gentlemen, and thanks for taking my question. A quick one here two quick ones here. First, when do you think about what we know about tariffs today, and I know there's not a lot of information, but is it conceivable that leasing could actually gain a little favor over aircraft purchases in the case of Airbus or Embraer customers here? That the impact of a tariff could be rolled over the long life of a lease as opposed to, you know, a one-time hit from, you know, purchasing on spot or and I know there's not a lot of information. I'm just sort of high level trying to get my brain around it. Thank you.

Well, the first answer is that any tariffs or taxes on these types of transactions involving leasing or financials, operating lease, the airline the lessee airline operator, is responsible for any such tariffs or duties or taxes. The second point I wanna make is that a very large percentage of Airbus aircraft are either manufactured in the US components, engines, avionics, and the same goes for Boeing. A lot of the components that go to Boeing aircraft are manufactured outside the United States. So it's gonna be a pretty complex calculation to figure out what percentage of an Airbus A321 is US made even if it's built in Europe, versus being built here in Mobile, Alabama. And the same thing with Boeing. I mean, big components of the 787s and 737s are manufactured outside the US.

Very helpful. Definitely appreciate the color. And just one other highlight. Well, one for you here. I think in some of the previous calls, you know, you guys have not expected aircraft supply to normalize for a couple of years. And what you're seeing in the tea leaves from your suppliers, you know, have your views on that changed at all? Do you still think we're a couple of years away from normalization of aircraft production? Thank you.

No. Views have not changed whatsoever. We see this as a multiyear, you know, over multi years, we don't see any change at all. We think aircraft are still gonna be short supply. The manufacturers are not gonna achieve nearly the rate of production that they would want to achieve or they would need to make up for the last several years. So we're quite convinced we're in this for a fairly long period of time.

Okay. Appreciate the color. Thank you.

Your next question comes from the line of Ronald Epstein with Bank of America. Please go ahead.

Hey. Good evening, guys.

Hi, Ron.

So maybe just following up on Steve's last question. Do you have any sense when the industry will actually be back in equilibrium? Mean, how long is it gonna take the industry to dig itself out of the hole in terms of the shortage of supply?

If anything, Ron, we have been stretching out that time frame, not shortening it. I'll give you an example. The appetite of the airlines for spare engines to cover for engines that are in the shop for much longer periods and with longer lead times to overhaul facility to even just get in. Creates a shortage of new engines. Because today, a larger percentage of the production of CFM lead GTS engines, and even Rolls Royce Trent engines, are being allocated to cover airline operations today. AOGs today. And so that is a constraining factor on both Boeing and Airbus. Getting enough engines. To be able to increase production rates. So that's one factor. The second factor is that during the pandemic, a lot of the smaller subcontractors for both airframe and engines and avionics and DFE seats and galleys. Reduced their staffing. And cut back on their infrastructure, and now they're being asked again to ramp it up. Which means they have to invest more in machinery, in digital tools, get your hands on lever that's trained. And so those are all factors that are limiting the ability of the supply chain to get back to what you said was pre-pandemic loss? And it's not an overnight process, as you can imagine. But I would say the engine situation is the most visible to us in all the discussions we'd have with airlines.

And would you say the airlines are getting accustomed to flying older equipment meaning that maybe your leases will just last longer for the foreseeable period of time?

Yeah. That's we're seeing that particularly in North America. Where with the refurbished old Northwest Airlines A320. PO That's more than twenty five, in some cases, thirty years old. With a refreshed interior, the customer who gets on on a Jetway doesn't have any clue how old that aircraft is. Because most of them have been freshened up. So a lot of the 767s, earlier generation 737 to A220 to A221s. Are staying in service longer than what was originally anticipated. And this is to cover growth in traffic as well as the delays in the deliveries that they've contracted for. All of that leads to us being asked to provide more aircraft than we have. Where supply is limited and demand bar of Asus. Our ability to get enough new airplanes.

And then maybe just one last related question. And again, this would be constrained by the supply chain, of course. But it kind of all else being equal, do you think that the industry needs a third supplier now? Because it seems like two isn't enough.

Well, if you look at the size of the overall commercial jet population, and the forecast that it's gonna grow to about forty thousand airplanes. In the next six or seven years, there's definitely room for a third party. But I think that third party and the ones that that's talked about most of them are would need a partner in that program. That has financial key pockets. But that is one possible alternative, and I know the guys signed up Brazil are working on that very hard. The big question in our mind, Ron, is what engines would go on that airplane? Because if it's the same old catalog leap one a and one b. For the current GPS, which hopefully will get upgraded in 2027. What engine would somebody put on that? Because that is a big factor. There needs to be a step change improvement in the propulsion system. Not so much on Hubert, but more on reliability dependability. And life on the wing.

Yeah. That makes sense. Cool. Alright. Thank you.

Thanks, Ron.

Your next question comes from the line of Catherine O'Brien with Goldman Sachs. Please go ahead.

Oh, thanks so much for the follow-up. I just wanted to come back to the $5 billion number you gave. You know, it's really helpful to helping us think through, like, what percentage of book values you know, tied to these COVID era leases know, the backdrop over the next couple years, you know, just in very rough numbers, understanding might be different today. It doesn't sound like that's what you guys think. Sounds like you think it might even be better. But if you could snap your fingers and write those leases at today's lease rates, like, what would the upside be on that pool of aircraft? Thanks so much for the extra time.

It's hard to say because it depends on the airline. The length of the lease extension, or the economics of shifting the aircraft to another airline. But the numbers could be anywhere from 30% to 50% higher than the lease rates we currently enjoy. So as these leases come off that sort of charity period, I call it, to our customers to keep them alive. And kicking as those progressively come off, between now and the fourth quarter of 2026, we are gonna see marked improvement in the lease yields on those aircraft. Especially since they're being depreciated so the factor of the depreciated cost versus lease rate is gonna be improving every quarter. Once these charity curators are over.

Yeah. So doubly beneficial to lease.

Yep. But Greg can give you color Greg, can comment on you know, like, how much of this comes off every quarter or every six months?

Yeah. I mean, we gave some color that we thought that would modestly, you know, what that means is somewhere between 150 to 200 basis points in yield improvement over that period of time. Over the four-year period.

Per year, Greg, or the total period? Sorry. Total.

Keep in mind, Katie, we've got a basically, just about a $30 billion net book of aircraft. And so these significant lease rate increases are very, very helpful. But, you know, it's trying to steer a pretty big aircraft carrier. It just takes a little bit more time to push the carrier around versus a little speedboat.

Totally understood. Thanks again for the extra time.

Sure.

And that concludes our question and answer session. Mr. Arnold, I'll turn the call back over to you.

Thanks, everyone, for participating in our fourth-quarter call. We look forward to speaking with you again next quarter. Christa, thanks for your assistance. Okay. Please disconnect the line.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.