Air Lease Corp (AL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Air Lease Corporation earnings conference call. My name is Fab, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ryan McKenna, head of Strategic Planning and Investor Relations. Please proceed.

Good afternoon, everyone, and welcome to Air Lease Corporation's second quarter 2012 earnings call. This is Ryan McKenna, Vice President, Strategic Planning and Investor Relations. I'm done this afternoon by Steve Hazy, Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Financial Officer.

Earlier today, we published our second-quarter results for fiscal year 2012. A copy of our earnings release is available on the investor section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, August 9, 2012, and an audio replay will be available on our website. At this time, all participants to this call are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

Before we begin, please note that certain statements in the call, including answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including without limitation statements regarding our future operations and performance, revenues, operating expenses, other income and expense and stock-based compensation expense. These statements and any projections as to the Company's future performance represent management's estimates of future results and speak only as of today, August 9, 2012. 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 the 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 will use during the call, such as adjusted EBITDA and adjusted net income, are non-GAAP measures and have been adjusted to exclude charges relating to discounts on certain convertible notes and stock-based compensation expense, among other charges. A description of our reasons for using 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 we issued today. This release can be found in both the investors and the press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Steve Hazy.

Thanks, Ryan. Good afternoon and thank you for joining us today. I'm very pleased to report that Air Lease Corporation achieved a 250% increase in second-quarter 2012 earnings per share over 2011 second-quarter results. We also recorded a 315% increase in first half of 2012 EPS versus the first half of 2011, demonstrating execution of our strong growth plans.

During the second quarter, ALC saw stable lease demand for our new, advanced technology aircraft despite financial issues affecting Europe and the potential slowing of growth in China. The vast majority of our lease placements reflect airline aircraft replacements versus growth. It is important to take a long-term view of industry fundamentals rather than to be overly optimistic when the market is robust or overly concerned when the market is softer. The nature of our business is to sign long-term leases on aircraft that provide stable, multi-year cash flows which allows for consistent profit generation through the cycles. Over the past 18 months, Air Lease chose to place our new aircraft as soon as possible, as opposed to waiting for spot shortages of aircraft that might increase lease rates. This strategy has proven to be successful as we have locked in attractive lease rates on long-term contracts with less potential volatility resulting from forced placements in choppy economic environments.

This gives ALC the ability to pursue incremental growth transactions and seize upon well-priced opportunities. Air Lease's business plan is based upon a diverse but highly efficient mix of aircraft types that constitute an optimized commercial airliner portfolio that will maximize long-term profit generation. Our recent large order for the Boeing 737 MAX and the favorable economics associated with being a launch customer will complement our well-balanced order book, which now includes a A320, A321-ceos and a significant order for 50 neos; A330-200s and 300s, Boeing 787-9 Dreamliners, Boeing 777 300 ERs, Boeing 737-800 NGs, and, of course, the Boeing 737-8 and -9 MAX aircraft, along with Embraer 190s and ATR 72-600s. Our order book now includes approximately 300 of the most highly in-demand aircraft delivering over the next 10 years. John Plueger, our President and Chief Operating Officer, will now expand upon ALC's results and strategic positioning.

Thanks, Steve. During the second quarter, we took delivery of 20 aircraft from our pipeline and acquired three planes on lease to strategic customers, finishing the quarter with 137 aircraft spread across a diverse and balanced operator base of 65 airlines based in 37 countries. Our average fleet age decreased to 3.3 years from 3.4 years at the end of Q1. Our order book is designed to match the industry demand for aircraft, and therefore the second quarter is heavy on deliveries due to the heightened demand prior to summer for airlines in the Northern Hemisphere. And conversely, the third quarter is light as demand in midsummer trails off.

Excluding future pop-up transactions, we have 15 aircraft in our pipeline delivering through the remainder of this year with the majority coming during the fourth quarter.

We are happy with our success in securing forward lease placements of new aircraft. As of June 30, we were 100% placed for 2012 deliveries, 93% placed for 2013 deliveries, 96% placed for 2014 deliveries. Our marketing team's ability to place aircraft years ahead of their delivery serves as an important risk mitigator for the Company. During the past three quarters, the majority of our new aircraft lease placements were in Asia, including our two largest lease placements to date with Air China and China Southern. With these placements, we expect that our fleet distribution will continue to shift more heavily towards Asia over the next several years.

The average remaining lease term for our fleet has increased now to approximately seven years. Longer leases provide greater earnings visibility and stability with a slight trade-off in future recognition of overhaul revenue for accounting purposes, due to a higher number of reimbursable events that occur during lease term. Our lessees are performing well. We successfully removed our single A320 from Kingfisher without incurring a credit loss, and that aircraft has been re-leased. Situations like this exemplify the importance of a strong and proactive management team.

With that, let me now turn the financial review over to Greg Willis, who will walk you through the financial results in more detail. Greg?

Thank you, John. During the second quarter, our fleet generated $155 million in rental revenue, of which 4.4% was overhaul revenue. This is compared to revenue of $74 million, of which 3.4% was overhaul revenue in the second quarter of 2011. During the quarter, we successfully closed an unsecured $853 million syndicated bank facility. This is a three-year facility priced at LIBOR plus 175 with no LIBOR floor. Subsequently, we have grown our aggregate unsecured revolving bank facilities to $1 billion. The success of these transactions has helped drive our composite cost of funds to 3.84% at the end of the second quarter, down from 4.05% at the end of the first quarter.

We continue to execute on our plan to increase our debt-to-equity ratio at a measured pace but not to exceed 2.5-to-1. This will enhance the return on equity for our shareholders but with a dampening effect on pre-tax margin. As John mentioned, our business strategy is to order and deliver a large number of aircraft in the first half of the year. Accordingly, we put money in place to finance these aircraft through numerous transactions, including our successful $1 billion unsecured notes offering in March. This creates a timing difference where we have a full quarter of interest expense but only a partial quarter of rental revenues, due to the timing of the aircraft deliveries taking place throughout the quarter. Therefore, the full impact on the bottom line of these aircraft will be reflected in Q3 and beyond.

Our SG&A was $14.3 million for the quarter and continues to decline as a percentage of revenue as we continue to add aircraft to our fleet. We will continue to build a conservative and robust balance sheet to allow us the financial flexibility to deal with dynamic market conditions. This concludes my remarks and I will now turn it back to Ryan.

Thanks, Greg. This concludes management's remarks. For the question-and-answer session, each participant will be allowed one question and one follow-up. Now I would like to hand the call over to the operator. Operator?

(Operator instructions) Michael Linenberg, Deutsche Bank.

I guess just a couple questions here, and this is more of a big picture question for Steve, and this may be less relevant to you, since you have a young fleet and a lot of new aircraft. But, Steve, there's a decent number of anecdotes out there about the lifespan of an aircraft, and over the years there's been this view about whether a 25-year asset down to 15% residual value, whether or not that makes sense. And I would say that over the last 12 months or so, it seems like there has been growing evidence or a growing number of anecdotes about aircraft maybe being broken up sooner than what people thought, and as averages have been coming down.

And I'm just curious if that's more of a near-term blip. I mean, over the years, you've seen lots of airplanes go through these cycles. Or is it really a step function, given the quadrupling of fuel prices over the last 5, 6, 7 years? When we think about the assets and the length of -- the lifespan of these assets, are we actually in a period where maybe we are seeing a permanent shortening of the lifespan? Your thoughts on that?

That's a good question. Let me answer it in two parts. Let me answer the macro picture and then talk about our policy with respect to how long we hold onto these assets, which have obviously less of an impact on us because we hold these assets for shorter periods than a typical lessor.

If you look at the number of aircraft that have been scrapped or removed from service in the last, say, 24 months, probably less than 2.5% of that was consisting of aircraft like Boeing 737, their 600s; a few 737-700s, some early model A320s. 97.5% of the aircraft that were scrapped were 727s, 737-200s, DC-9s, older MD-80s, older DC-10s, L-1011s, 747-100s and 200s.

So the number of aircraft that I would say are currently in favor that have been removed from service is very minimal. In fact, the number of aircraft parked of those categories is also very minimal. There were certain circumstances in 2011 and 2012 where a runout -- for example, a 737-600 had more value if you break up the airplane and take the engines, the CFM 56-7 engines and the associated systems, APU landing gear -- if you aggregate the values of those different components, it was worth more than the aircraft in a runout condition.

So I would have to characterize that this is more the exception than the rule. We have seen no evidence that modern-day aircraft that are built today would have a useful life of less than 25 years, or 80,000 to 100,000 flight hours. There's just no evidence pointing to that. Now, obviously, as fuel prices go up the pressure will be greater to replace the older aircraft, the non-fuel-efficient airplane and less pressure on the existing generation 737 NGs, A320 family airplanes. So I would not consider this a panic condition, and at the last several conferences, including ISTAT, this issue was addressed by the appraisers, I think very effectively.

There are short-term aberrations because a few airplanes that fall into this unique category can change people's mindset. But I think overall, we don't see really a significant change in the useful lives of these assets. Now, those airplanes that are ultimately eligible for cargo conversions even have longer life spans than 25 years.

Now, speaking about our strategy, we generally try to enjoy the useful life and earning productivity of these airplanes for the first third of their lives. So somewhere around 8, 9, 10 years, these aircraft are going to be removed from our fleet through disposition. And so we are less vulnerable to these type of residual value impacts in the latter stages of an aircraft's life.

Let me just add, from a depreciation perspective, we use a 25-year life. If we were to purchase a three-year old aircraft or a four-year-old aircraft, we simply depreciate that aircraft after its total life of 24 years. So let's say we bought a five-year-old aircraft. We would only depreciate it over 20 years. So when we first started our Company, we did buy some used aircraft in sale-leaseback to prime the pump, so to speak. I just want to make sure you and everybody understand -- we don't start the clock at 25 years from a used aircraft purchase. We actually start it from whatever it is in its life. And so again, if we bought the five-year-old airplane, we would only depreciate it for 20 more years.

Okay, great. And then just my second question, and maybe it's more of an observation -- there was a time where the majority of airlines that used the operating lease model were lower credit carriers. And it does seem that the operating lessors have really broken into the ranks of the investment grade or the higher credit carriers. Some of that may be that these companies are just much more comfortable in pursuing or utilizing the operating lease model, but some of this may just have to do with the fact that it may be the best source of financing available. So just any thoughts on that, Steve or John?

I think you are absolutely right. It's a combination of the two. I think most of the large, sophisticated airlines want to have a balanced fleet between ownership and lease. We've also seen some of the financing sources become a little more cautious, particularly the European banking situation has -- basically took a lot of players out of the marketplace. So recent placements that we've done, like with Air China and Cathay Pacific and Emirates and Norwegian and China Southern and Vietnam Airlines -- these are all solid companies. So obviously, our fleet will include airlines of the highest quality. We'll have airlines in developing countries; we'll have airlines that have different business strategies. But we see more and more of a trend among the large, successful airlines toward the operating lease as a viable alternative to just owning the aircraft or doing long-term leverage leases or other types of structured financing.

Okay, great, thanks.

Jason Arnold, RBC Capital Markets.

I was just curious if you could update us since the last call on your views on opportunistic portfolio adds. You obviously had a couple here this quarter. I'm just kind of curious if you are seeing more -- the more muted macro environment is offering more opportunities, or perhaps less. Just an update would be helpful.

Yes, Jason, we certainly are evaluating more opportunities. We are in the slow days of summer in terms of a lot of the industry takes a lot of August off, etc. But we continue, and in fact as we speak are evaluating a few of those opportunities. They are there. But again, our focus will be on very, very well priced, attractive assets. And we are constantly on the prowl for those.

So a nice part of our business, as you know, is we've got our core business already pretty well specked out for the foreseeable future. And now management's focus is to continue to source very, very well-priced, attractive transactions that will have good returns and are a strategic value to the Company. And as you have now seen, we were able to do three of those airplanes this past quarter and we are looking for more. So it's very much a focus of our team.

Excellent, thanks for the color on that. And just one quick follow-up -- this one is for Greg. It looked like there was a sequential uptick in the interest income/other categories. I was just wondering what drove that.

There was a combination between management fees recorded during the quarter as well as the cash that we were earning in our bank accounts resulting from the bond we raised at the end of March.

Okay, perfect, thank you, guys.

On that same point, I think you will continue to see the management fees grow because, as we add more aircraft to the aircraft that we manage for third parties, that number will grow over the next several years as supplemental revenue to our core leasing business.

Arren Cyganovich, Evercore.

We've seen some mixed results on credit from some of the leasing companies. One was saying that they saw delinquencies at the lowest level they have ever seen, and we've seen one large player that had almost a doubling of their delinquent accounts. Can you address where you are seeing the credit quality?

Sure. Actually, the credit quality of our portfolio we are very happy with. We've seen no increase in any arrears. In fact, what we call our sin list -- there's very few people on it, and the amounts are de minimis. And those amounts have not been changing, growing of any magnitude whatsoever. So that's why in my remarks, we said all of our leases are performing. We have a very active and robust process for monitoring that, but we are very happy with where we are so far.

And also, I just want to add that we stay in very close touch with our clients. It's kind of a hands-on approach, and so we are monitoring all of our lessees very, very closely. And as a result, we are not seeing any difficulties in our portfolio.

Great, that's helpful. And then my next question is on your debt capacity, if you have increased debt capacity very well over the past couple quarters. Do you have any idea of how far your current debt capacity in cash takes you through your order book right now?

It's pretty much through the end of next year. We have significant availability that's still there under our warehouse facilities. We have the revolvers, the three-year revolvers where we've had one large European bank come in just a few weeks ago. We have another institution that is coming in. So we have about $1.2 billion of liquidity, plus the internal cash flow generation over the next 12 months will probably exceed $600 million. So I think we're in pretty good shape.

We are also exploring the possibility at some point in the next few quarters to maybe sell one or two aircraft at a gain, just to demonstrate liquidity in our assets. So I think we are in pretty good shape and we can cover all of our CapEx between now and the end of next year from existing facilities as well as the cash flow generation from our portfolio.

We're also observing the capital markets, the interest rate environment, and obviously, we will tap those markets if we see attractive situations to get low-cost financing on an unsecured basis.

Very helpful, thank you.

Scott Valentin, FBR Capital Markets.

Just with regard to the A320 you guys release from Kingfisher, can you comment maybe on the lease rate? Did that come down from where it was with Kingfisher? And then just generally, I think the first half of the year, some of your peers commented that the A319/A320 lease rates were somewhat weaker. They seem to have stabilized, maybe are improving. If you can provide any color on that market, that would be helpful.

Yes, look, we leased that airplane out at market rates today. And since that original lease -- that was an airplane we bought from another leasing company when we first started. So that lease was done at an earlier time. So yes, the lease rate was lower, as we would expect. But it was in line or actually towards the higher end of the marketplace when we placed that aircraft.

Okay, and just -- I'm sorry?

Also, please keep in mind that all of our A320s that we have on order from Airbus have been placed on long-term leases. So we do not have a backlog of unplaced new A320s. All of our A321-200s are leased in 2012, 2013, 2014. Right now, we only have two units left in 2015, and those are under negotiation. So we have locked in long-term lease rates that are above the current market rates because of our advanced placement capability.

Let me just offer one just a little of big overall macro color, Scott. It's something we look at from time to time here, not regularly, but big picture. If you added up all of our firmly contracted leases today on the aircraft that we have both in our fleet and on future contracted aircraft deliveries to replaced them, just on what we've placed alone today, we have something on the order of more than $10 billion in cash revenue coming into this Company.

Okay, that's helpful, thank you very much.

Jamie Baker, JPMorgan.

This is actually Joseph Abboud here for Jamie. I had two questions for you. The first is, I know in the past you guys have identified the 190 as one of the strongest components in your portfolio in terms of lease rates. I was wondering, is that more a function of the customers or the actual aircraft? And if it's the latter, how should we think about the role of that aircraft in the portfolio going forward?

And then just the second question would be if you could update us at all on your negotiations with AIG or ILFC.

On the Embraer 190, currently we had the 31 aircraft that we've taken delivery of or are yet to be delivered during the balance of this year. They have been leased to a diverse group of airlines, all of them outside the US. What we found is that in this 100-seat category, the Embraer 190 family really enjoys virtually no competition at this point because the CRJ family is a smaller-sized airplane; it's got a much smaller fuselage; it doesn't have the range capability of the 190. And so, on a pure lease rate factor as a portion of our capital investment, the 190 family has performed really well. It continues to perform very well. And those aircraft were leased to airlines that either need that category of airplanes, or airlines that also have larger aircraft on lease from us.

So we continue to see a robust lease rate market for the 190 family. But at this point, our current commitment is only for 31 total aircraft and those deliveries will end in November of this year.

All right, that's great. And on AIG or ILFC, is there anything that you could provide us in terms of updates there, or is that just kind of where it was as of the last quarter?

That's pretty much where it was. There's really no updates.

We really are not in a position to comment on negotiations with AIG or ILFC at this point. There's nothing really we can report that would have a financial impact on the Company.

All right, that's great, thanks guys.

There are no further questions in the queue. I would now like to turn the call back over to Mr. Ryan McKenna for closing comments.

Thank you all very much for joining us on the call today. We appreciate it and we will speak with you next quarter.

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.