Air Lease Corp (AL) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2014 Air Lease Corporation earnings conference call. My name is Sarah, and I'll be your operator for today. At this time, all participants are in listen-only mode, and 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, sir.

Good afternoon, everyone, and welcome to Air Lease Corporation's third quarter 2014 earnings call. This is Ryan McKenna, Vice President, and I'm joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Finance Officer.

Earlier today we published our third quarter 2014 results. 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, November 6, 2014, and the webcast will be available for replay 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 this conference call, including certain 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, November 6, 2014. 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. 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 pleased to report that Air Lease generated $0.58 of diluted EPS in the third quarter of 2014 compared to $0.46 in the third quarter of 2013, which is an increase of 26%. Our total revenues for the third quarter of 2014 were $262 million versus $216 million in 2013, an increase of 21.3% over the prior year. ALC's pretax income in Q3 2014 was $96.3 million versus $74.9 million in the prior year, which is a 28.6% increase.

We successfully increased the proportion of our fixed rate debt to 76.3% while maintaining a low overall composite rate of 6.7% which reflects the continued strengthening of our investment grade credit profile. The overall industry has remained healthy despite numerous macro headlines during the past few months. Passengers keep flying in record numbers, and airlines are remaining disciplined on capacity growth. On Tuesday, the International Air Transport Association, IATA, reported very strong year-to-date RPK growth of 5.9% and available seat kilometer growth of 5.7% versus the first nine months of 2013. Additionally, passenger load factors continue to track at a solid year-to-date levels of 80.3%.

When coupled with the recent reduction in jet fuel prices, these facts help to create an environment suited for strong airline financial results. As you can see from another quarter of consistently strong performance from ALC, our business prospects are not linked to news headlines or the health of any single airline, but rather the overall demand environment for aircraft and our ability to profit from fleet movements.

We continue to see strong demand for our new aircraft as well as healthy purchase bids for our used aircraft. As we have mentioned on prior calls, Air Lease has been focused on supplementing our core business model of purchasing, leasing, and selling aircraft with a strategic management business. I'm pleased to announce today that on Tuesday Air Lease entered into a long-term joint venture with Napier Park Global Capital US LP with committed equity and debt capital that is expected to acquire aircraft assets of approximately $2 billion by the end of year 2016.

The joint venture is named Blackbird Capital One and will be financed with up to $500 million in equity with the remainder financed by committed warehouse credit facility and other forms of debt financing. ALC owns 9.5% of Blackbird while 90.5% is owned by third party long-term institutional investors arranged by Napier Park. The entity will not be consolidated into ALC's books. We expect to sell approximately $500 million of used aircraft from our portfolio to the venture, and source the remaining aircraft from opportunities that our marketing team is developing in the normal course of our business.

Air Lease Corporation will provide comprehensive management services to the joint venture for a fee based upon assets under management. We believe that Blackbird Capital will complement ALCs core business and provide additional value to our shareholders. Through this vehicle, we will be able to better serve our airline customers who regularly ask us for additional leased aircraft beyond our current portfolio or beyond our available order pipeline or where we are nearing prudent customer credit risk limits for ALC.

Furthermore, this joint venture allows ALC and its new partners to capitalize on incremental profitable lease transactions that might otherwise be beyond the scope of ALC's own conservative leverage and ALC's approach to further enhance our investment-grade ratings. We congratulate the whole team at Napier Park for their hard work in helping create this new partnership, which would serve as a model for how we can continue to grow our management business. I refer you to our press release that we just issued concurrently with our earnings release and that provides more details on the Blackbird Capital One and its strategic value to ALC.

Owing to the strong financial performance of our Company since inception and the confidence that we share in our future and continued growth, Air Lease's Board of Directors declared an increase in our quarterly cash dividend to shareholders from $0.03 per share to $0.04 per share per quarter payable on January 5, 2015, to shareholders of record on December 12, 2014. At this time, I would like to turn this over to my colleague, John Plueger, our President and Chief Operating Officer, who will further discuss our operations and strategic positioning.

Thanks, Steve. During the third quarter, we delivered nine new aircraft from our order book and sold four aircraft from our fleet, ending the quarter with 212 aircraft owned in our portfolio. As we look forward to Q4, we have nine aircraft scheduled for delivery, which is typically a lighter period of deliveries than in Q2 and Q3. We are 100% placed in 2014 and 2015, and have now made more progress placing over 65% of our 2016 aircraft deliveries.

We remain right in the sweet spot of placing aircraft 18 to 36 months ahead of delivery, which gives us certainty that our aircraft have homes while still having inventory available for customers ahead of the extended backlogs at the manufacturers. We continue to see our airline customers in all regions of the world looking to modernize their current aircraft and create a strategic fleet plan many years into the future. Oil prices certainly factor into this thinking, but movements in the oil markets are difficult to predict.

The most effective way to hedge against fuel price volatility is with the most fuel-efficient and modern aircraft. Even as short-term market movements affect financial markets, our customers are taking long-term views on their needs over the next decade, which is helping demand remain very strong. Airbus and Boeing remain over committed with backlogs of approximately seven years' worth of production at current and forecasted production rates, and they remain over booked in many months compared to their ability to produce. Airlines continue to turn to us to deliver new aircraft, which are unavailable directly from the manufacturers.

With our firmly contracted pipeline and our investment grade credit profile, ALC is well positioned to thrive in a constantly evolving landscape, and we believe our management record over decades prove this out. We seem to profit in all market conditions.

Now, regarding sales activity we continue to see strong bids in the market and requests from buyers to purchase aircraft from our fleet, both young and midlife aircraft. We are ahead of our internal sales target year to date. We built a portfolio with attractive assets and strong customers, and those leased aircraft continue to be approached with healthy offers from buyers in the secondary market.

Looking across our customer landscape now, we remain watchful and alert concerning the health of all of our customers; and in particular, currency and political risks that our customers face as we look to the remainder of 2014 and into 2015 and beyond. In our fleet we still have not experienced significant customer issues regarding currency fluctuation. We're watching the global shifts in currency values and the strength of the US dollar could generate potential opportunities to acquire reasonably priced assets if current trends continue.

Along with the rest of the world, we are watching political events continue to unfold in Russia and the Ukraine, and I just want to remind everyone once again that ALC has minimal exposure to Russia with seven single aircraft across three lines, none of which are owned by Aeroflot. We have no forward or future deliveries to Russian airlines. And generally we feel good about our portfolio of aircraft, customers, regional exposures, and concentration limits. We've got the right balance. Let me turn this over now to Greg Willis, our CFO, who will walk you through our financial results that we believe further differentiates ALC. Greg?

Thanks, John. For the quarter, we achieved an industry-leading pretax profit margin of 37%, which generated diluted earnings per share of $0.58. In the third quarter, a significant portion of the capital expenditures occurred toward the end of the quarter, including two 777-300 ERs delivering during the last two weeks of the quarter. Due to the timing of the delivery, these aircraft will not meaningfully affect rental revenue until the fourth quarter.

On the financing side of the business, in September ALC completed a $1 billion offering of senior unsecured notes. This transaction was another milestone for ALC as it included our first $500 million tenured issuance at 4.25%. With this transaction we are continuing to lengthen the maturity profile of our debt in line with our financing strategy. Due to our strong credit profile, the volatility in rates and spreads that affected high-yield borrowers did not affect ALC's investment grade offering, which was significantly oversubscribed and closed at industry-leading rates.

I'm very pleased to report that our low composite cost of funds of 3.67% has been achieved even as we have increased the fixed rate portion of our debt to 76%, lengthened the maturity profile, and increased our unsecured debt percentage. The secured portion of our debt book has declined to 11% of total assets, representing 82% of our debt portfolio being unsecured. As we continue to execute our financing strategy, our investment grade credit metrics have continued to improve.

The third quarter was our second heaviest quarter in terms of capital expenditures for the delivery of new aircraft, and our debt-to-equity ratio ticked up modestly to 2.47 to 1. Our debt-to-equity ratio has quarterly cyclicality that matches our delivery stream but has no impact in our overall target ratio of 2.5 to 1. ALC is in a healthy financial position. Currently, we have $2.1 billion of liquidity, which was supplemented by $571 million of operating cash flow during the first nine months of the year and sales proceeds in excess of $320 million resulting from the sale of 14 aircraft. This concludes my review of the results and financing activities of the Company, and I will now turn it back to Ryan.

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

(Operator Instructions)

Our first question here comes from John Godyn from Morgan Stanley.

Thank you for taking my question.

I wanted to ask a couple of questions on Blackbird, which certainly seems like an exciting new opportunity. Steve, I'm not sure if you can elaborate on the asset management fees, or at least how they're structured. Do you participate in the upside maybe sort of like a hedge fund or private equity vehicle might be structured, or is it just a percentage of AUM? Anything you can offer just to help us understand how this might impact the P&L over time would be helpful.

First of all, I'd like to refer you to the detailed separate news release that we issued, which basically describes the structure of the transaction. In essence, this will magnify the cash flows from our management business. It will also give us an opportunity to sell aircraft into this vehicle, so it will serve a double purpose of increasing our earnings and it will also be an outlet for additional aircraft into this entity. We will get a management fee based on the asset value of the aircraft, and there are additional incentive fees based on the ultimate performance of the JV.

That's very helpful. And is there anything you can offer, and maybe I missed it in the release, or if it wasn't in there in terms of actually quantifying these fees so that we can think about at $2 billion what the P&L impact might be in 2016?

The P&L impact in 2016 will be positive. And it will depend on the number of units and the rate at which we add aircraft into the JV portfolio. But please understand that this is a private entity. We will have a minority interest in it. It will not be consolidated, and so the rate at which we have assets and the way we build up this portfolio will be the determinant on how quickly the management fee will ramp up.

John, we're not giving really any other forward guidance on structures or fees or how much or when. Good luck with the modeling. I understand your challenge.

I wish we could be more illustrative, but the goal is to basically build a portfolio of about $2 billion of aircraft based on a $500 million equity infusion, which is primarily coming from sophisticated institutional investors.

Fair enough. And if I could ask just one more on this, and I don't want to focus too much on the syntax, but it is called Blackbird Capital One LLC. Is this a template for future growth of this kind of revenue stream? Could we have Blackbird Capital two, three so on and so forth? Is this the future? Thanks.

I think the Blackbird is symbolic of ALC's leadership in the industry. The SR71 Blackbird was the fastest land airplane built by humanity. It was able to fly from LA to New York in one hour, so Blackbird symbolizes the speed, the performance capabilities that this fund and hopefully following transactions that will come out of this.

So the answer is yes, there could be future Blackbird Capitals two and three, et cetera.

Thanks a lot.

Jason Arnold from RBC Capital Markets

Hello. Congratulations, and I love the name Blackbird. That's awesome. Just a follow up on that. I don't know if there's any thought process in terms of timeline. I know you probably don't want to give out a lot of details and don't know necessarily yourselves, but could we get this ramped up to $2 billion say in two years' time or three years' time or is it shorter term, longer term? Any thoughts around that?

Jason, we'll just leave it to our comments within the release. It's $2 billion by the end of 2016. The rate at which that's deployed or built up would be based on a variety of factors, but at this time we just can't give any more color on the timing or how quickly it could be accelerated. Suffice it to say for the purpose of the venture, and for our own purposes, the quicker we do it the better, but we're going to do it prudently and with a view towards the return to the shareholders.

If all goes well, we'll be adding assets into this enterprise every quarter for the next couple of years

Super. Thanks for color on that. It's exciting. On another topic, I think you mentioned a little bit on this earlier, but a lot of industry talk about the decline in fuel prices, increasing demand for older aircraft perhaps impacting demand for younger. It seems like this view might kind of overlook the simple fact that older aircraft have used up some of their value already, have higher maintenance expenses, et cetera. So if you could maybe expand your thoughts on that into the equation here.

Older aircraft have a number of factors that affect the operating economics. Fuel is obviously a very large element in that, but there's also maintenance costs, there's reliability issues performance issues, and in many parts of the world there's environmental issues which have to do with emissions, noise regulations, and so on.

So, I don't think the short-term volatility in oil prices really impacts the long-term view of airlines that they have to keep monetizing airplanes. So, if an airline has a 25-year-old 747-400 that has 100,000 flight hours on the fuselage already, I don't think they're going to defer replacing that aircraft because oil prices have temporarily dipped.

Makes sense. Okay. Thanks a lot for the color and congratulations.

Next question comes from Jamie Baker from JPMorgan.

Good afternoon, gentlemen. Mark and I were wondering, first question on Blackbird. Will Air Lease participate in any of the purchase negotiations that the JV undertakes for new aircraft? I realize you're selling aircraft into the venture, but will the JV itself benefit from the relationships that Steve and John have with the manufacturers? And also what sort of customer concentration limits were you hitting? Since you called that out in the release, can you give us some examples of that?

First of all, Jamie, yes, Air Lease is involved, and we're the managers of the overall transaction. So, yes, of course we're involved in the purchase of aircraft and part, I think, of the attractiveness that the joint venture partners have to this venture is, in fact, we will bring all of our knowledge, experience, contacts, relationships to bear in this venture and to source aircraft. That was a key motivator for this. So that's quite easy.

And in terms of concentration limits, as you know we don't have any single customer and we are going to remain at below 10% of our assets -- revenue rather. We're not really super close to that with any one party yet, but we can see perhaps coming up with those limits in the future, and we didn't want to limit a capability that we have with a terrific customer who, without any lessor in the planet regardless of concentration limits would do more with. But, nevertheless, we're very focused on our investment grade credit rating and we're not going to blow any of those limits. So this gives us a fantastic tool to serve our additional customer needs.

The bottom line is throughout all aspects of our business we have more demand than supply. We would like to be able to supply more to our airline customers than what have available, and some of the limits have to do with possibly future limits we might be running up into in our credit profile. So this gives the ability to have the tool, deal with the same management team in a seamless transaction, a contingent source of capital to buy those aircraft, to acquire them from any source, and to continue ramping up our business. And since we're not consolidated, we only own 9.5%, we don't have the full impact of that on our balance -- we don't have any of that on our balance sheet and we just recorded under the equity method.

So it's a fantastic complement primarily to serve our customers more, to advantage all that we've been able to achieve, to be able to have additional capital firepower, but not to impact the fundamental tenants and disciplines that surround an investment grade company, which is our holy grail.

Got it. And second question again relating back to fuel, and I know, John, that you tried to head this off in your prepared remarks. And Steve just added some color in the previous question, but you did refer to fuel declines as temporary: temporary reductions in the price of fuel. What if fuel prices actually stay here. Would you imagine that the portfolio would need to look any different five years from now than what the current plan is? Have any customers even hinted that they might consider making revisions to their fleet needs if fuel stays here?

Jamie, this is Steve. I have not talked to one airline that either has contracted neos, maxes, or others new generation 787's, A350's that is talking about deferring those or changing their game plan. A lot of these aircraft, older airplanes are getting up to 25-30 years of age, and I think airlines plan to replace them.

The rate at which they replace them is something we'll have to see. I mean we've only had this trend in oil for a few months. And it could be a longer term trend of how it all shapes. But it is way too early to make long-term predictions about where oil prices are going. If you look back historically, we've had lots of ups and downs and airlines always need new airplanes.

I think in my remarks I specifically said that the oil prices do factor into thinking, but the oil markets are hard to predict. And really just a short-term market movement affect the financial markets. The main point that I made was that our customers are taken long-term views. So even if there was a long sustained depression in aircraft oil -- in fuel prices, we do not believe this is going to have a material impact on the need for a new aircraft. If you want to take an extreme case, for example look at Allegiant.

Allegiant started out with MD-80's, and yet as recently as yesterday are acquiring A319's and also now are looking for A320's. Well, there's still plenty of MD-80's available in the world if you want to just slap new engines on them, but the fact of the matter is that to Steve's point, don't forget that we have an industry-wide program dealing with aging aircraft that is called Corrosion Prevention and Control Program, CPCP, and basically this just means that as aircraft age, the frequency of interval of inspections and critical analysis, dipenetrant inspections, structural x-ray defraction analysis, things that take time, energy, and money, and cause dispatch delays, do factor in the equation.

So, at the end of the day with fuel still your largest expense on your P&L, even if fuel prices went down it's still going to be the major cost, why not continue to reduce fuel burn? And why not continue to enhance the dispatch reliability of your fleet. So, we see no evidence in the market today, nor do we foresee it in the near to medium term future that a sustained low oil price will do nothing more than improve the financial performance of the airlines without significantly impacting the demand for aircraft.

One more comment, Jamie, on that same subject. The industry is becoming more competitive in terms of the customer product offering, particularly in the international scene, in our trans-con markets in the US. So, one of the things the airlines need to think about is the customer product in the cabin, and this is where the new airplanes obviously offer a whole new dimension in competitiveness for the airlines.

And I think a lot of carriers are reluctant to spend millions and millions of dollars on an old 20-year-old aircraft where in many cases they cannot even be brought up to the standards of their new airplanes that they're introducing. So, this cabin service product is also another factor that will continue the path toward replacing the oldest airplanes.

I'd agree with that. Scott McCarty had a piece that touched on that in the Journal today, so it's a good point. John and Steve, listen, we both really appreciate the responses. Thanks so much.

Thanks, Jamie.

Moshe Orenbuch from Credit Suisse.

Thanks and congratulations to everybody, especially Ryan, on getting this venture launched. How should we think about whether this process is something where you're going to be able to add to your order book, satisfy from your existing order book, and, related, how much of your business would you want at some point in the future, say five years out, to be sourced from this type of management in JV, as opposed to actually owning the aircraft.

Generally speaking, we don't know what things are going to look like in 10 years. Our order book is what it is. One issue in aspect is that the order book, the backlogs are what they are. If we wanted to today, we wouldn't be able to get 15 more airplanes in 2017 or 2016 or 2018, they're just not there. It's more along the lines of where do we see the prudent balance between growing our own portfolio, these customer exposure limits that we're talking about, keeping our debt equity ratio in line with the balance towards returning the return to the shareholders and the Blackbird Capital that they need and want, and which we are incentivized in our fee structure to provide.

We don't have a blueprint that says 10% of our assets or 10% value of our assets going forward. It's more on an opportunistic transactional basis. We've already announced now that this Blackbird Capital One will be $2 billion through the end of 2016. Our current balance sheet is north of 10. So that's where we are today and where it goes in the future, it's not driven by a ratio, it's driven opportunistic by transactions.

Are I just want to point out that this entity, this JV entity, will not be entering into direct large-scale bulk purchase agreements with Boeing and Airbus. In other words, ALC continues to be the purchaser to the extent if there's any new aircraft involved they're coming out of our pipeline.

Got it. Just a slightly different direction. You talked a lot about the fact that you're still seeing great interest in replacement aircraft. Any shift regionally in where that's coming from or has it been consistent over the last several months?

It covers all regions. We're not seen any particular slowdowns. Now, right now with the drop in the ruble, I would say there's some issues there in the Russian marketplace because the dollar cost of either leasing or buying aircraft is going up for an airline that is collecting their revenues in local currency. But other than that, other than Russia and Ukraine, we're not really seeing any changes in the dynamics of demand.

Let me add a comment on China. A lot of Wal Street headlines over the summer about China economy slowing and banking sector stress, et cetera., we've got just as many active campaigns in China than we had a year ago.

China is building more airports than any country in the world by a huge factor in order of magnitude, and there is a very strong emphasis by the central government to continue to promote air travel. In fact, the government wants the three major airline groups, Air China, China Eastern, China Southern to expand the percentage of foreign travelers that they carry coming in and out of China.

Right now the majority of foreign traffic going into and out of China is still done by a foreign carriers. So a lot of general economic fluff about China and concerns, but all I'm saying is what we see in our business, what's coming in our door and the campaigns we're doing we just see little to no change.

Yes, Middle East is strong, Latin America is strong except for Venezuela, which is sort of like off the map for everybody right now. India has picked up since they've had a new leadership change. The economy seems to be doing better for the industry.

This talk about lowering the tax on jet fuel in India, which will help the airlines there aside from the lower oil prices. I would say across the board Europe is doing much better than the media portrays. There is a lot of activity in Canada. So I think overall I'd say things are in a fairly healthy environment.

Great. Thanks very much.

Next question comes from Vincent Caintic from Macquarie.

Thanks very much. Good evening. For the Blackbird joint venture, just to put it in a broad perspective, would the economics on this be comparable to other JV's, or how should we think about that? And I'm guessing that the fee should be at least much better than the 12 planes that you're already managing on your book?

Thanks for the question. We're really not commenting on the attractiveness of the economics. Obviously the limited partners made their full decisions based upon on an offering memorandum that had a lot of detail in it, and we believe it's a compelling economic return and we think it's a unique structure. But, again, it's a private vehicle. But we retain a 9-1/2% equity interest, as well.

So, we think we got the best of all worlds from Air Lease's point of view and we think that we can return -- make attractive returns to the investor. I don't really know how to answer other than to say that. We think it's a blueprint for future transactions that expand beyond Capital One. Ryan, anything else to add?

The only thing we would say, as John said, we think it's a unique structure in the marketplace and it supplements and takes the management business that the team has done for decades to the next level. And so we will grow it over time. As John said, opportunities present themselves in the marketplace, but it's very difficult to comment on sort of other people's structures. It's not really our job. We'll let our results as you see them unfold over coming quarters speak for themselves.

Yes, this transaction was custom designed to fit our strategy and our game plan going forward. So, it's quite different than anything else that's been done before.

Got it. So when should we expect the fees to start coming online and hitting your P&L? Should that be fourth quarter or first quarter of next year?

Our goal is to close some aircraft transitions into the structure before the end of this calendar year.

Obviously it's November 6 today, so the numbers that will be coming in between November 6 and December 31, this is going to build over time with prudent transactions that we see in the marketplace. So expect a ramp up over the next two years as John and Steve both indicated and our acquisition plans for the entity.

In 2015 you'll begin to see a more meaningful impact.

Exactly.

Outside the JV, the aircraft that you have for delivery for fourth quarter 2014, could you give us more specific timing within the quarter of when we should expect that to impact and then also how we should think about aircraft sales going forward and typical gains on sale. Thanks very much.

Most of the events -- this is Greg Willis. Most of the CapEx is scheduled for October, November in terms of sales. We have some in the pipeline. We're working on them, but because at the end of the day the overall bid for, as John mentioned in his remarks, that the sale of these aircraft is very strong right now. So we're working to close some transactions, but beyond that I don't know how much more color you want to add, Steve or John.

I think he was asking about the revenue.

Clearly the CapEx is October, November.

In the third quarter a lot of our CapEx was back end loaded and as we indicated two of our new 777-300ER's delivered at the back end of September, where as in this quarter the deliveries are more in the front end of the quarter.

And you'll see just the CapEx numbers are different. Last quarter it was close to 7 -- north of $700 million I believe and this quarter it's just around $500 million, and that's in the filing, so smaller number this quarter.

Only one wide body this quarter. The rest are narrow bodies.

Great. Thanks very much.

Arren Cyganovich from Evercore ISI.

Thanks. Not to ask too many questions on Blackbird, but the deliveries that you have coming on over the next couple of years, are you looking to be making incremental purchases for Blackbird so that you're not decreasing the ramp of your existing fleet expansion at Air Lease overall?

Absolutely the case.

That's what I was hoping for. And then, Greg, you mentioned that the leverage was getting pretty high close to your target. I forget, are there covenants related to your debt outstanding that you can't go above that? And what kind of flexibility do you have to ensure that you're not going above your target range?

We have a target of 2.5 to 1 and we don't foresee ourselves exceeding that target. We've coveted 3 to 1 in debt to equity and given that Q4 is relatively light in terms of CapEx, as we just talked about at $500 million, you'll probably see some modest de-leveraging based upon the cash flows of the aircraft portfolio itself, as well as some sales activity.

Arren, it's John. I just want to remind you and all the others that it's very much our goal to ramp up the maximum efficiency of our business. One of the ways is through increasing the debt equity and we're pretty much right on track where we're going to be.

You're going to see some fluctuation based upon the delivery cyclicality quarter to quarter. The second quarter is always our absolute heaviest delivery period for the year, so you're going to see us bump closer to that 2-1/2 limit, and in other quarters we're going to be probably off that. But we've now ramped to the point of being very, very efficient and we are optimizing I think at our optimized capital structure as we have planned from the very beginning.

Absolutely.

3 to 1, so we're not even close to that, nor do we plan to approach that range whatsoever.

Right. I just wanted to make sure you have the flexibility which clearly you do. Thanks a lot.

Richa Talwar from Deutsche Bank

Hello, everyone. Thanks for your time. First, John, you touched upon this in your prepared remarks, but I was hoping you could elaborate. It seems like there's a strong view among the investment community that an appreciating dollar could have a negative impact on the aircraft leasing business, given that it results in aircraft assets becoming more expensive for non-US airlines, and also might negatively impact their financial health, since many of them have costs more tied to the currency than revenue. But there is also a view that a if you that a stronger dollar may increase the demand for aircraft as investors seek out dollar denominated assets as a good source of value.

So I was hoping to hear your thoughts on this and if you're seeing any impact one way or the other from a volatile affect environment?

I'll give you the short answer. The answer is no. We're not really seeing any measurable discernible impact on either side, meaning either more stress on paying lease rates that are dollar denominated. That's why I indicated that we haven't really seen any significant currency issues crop up from our customers, but nor on the buy side, to buy aircraft in dollars we don't really -- it's hard for us to point to any significant or any meaningful data point that says that that's going to make aircraft even more attractive.

Certainly from our perspective a strengthening dollar is a great base to approach the market in terms of buying well-priced assets, but I think we also have to keep in mind that the airline industry has always been -- is and always has been dollar-denominated. Airlines are pretty good at looking at their currency. Some of them hedge currency. But when they buy an aircraft they to pay in dollars. When they lease an aircraft they have to pay in dollars. Fuel is paid in dollars. So, it's not such a big -- it's not like something that isn't well-managed already and that is unknown. But we just don't see any strong movements on either side of that equation.

I think the most important thing to us, yes, currency, et cetera, but the most important factor that we all have to look at is the continued discipline of the airlines, the financial discipline of the airlines and most importantly the capacity discipline of the airlines, and I think the airline has done a much better job today than certainly at any time in the past, certainly more than 10-15 years ago. It's that financial and capacity discipline that we need to keep watching to make sure that it says there, because that really at the end of the day is the biggest determiner of the overall state of the health of the airline industry.

And just to amplify what John said, airlines have become much more sophisticated in their revenue management tools, so in terms of adjusting fares almost on a daily basis and different buckets of fares, they can adapt the currency changes on ticket sales in a non-dollar-denominated currency. The airlines are much more better equipped in terms of technology to adjust their revenue management.

Okay. Thanks. And if I could just ask one more. The US has plans to end quantitative easing and the implication it has on interest rates long term. Those of you that low interest rates have been one of the factors propelling the strong demand for aircraft that we've seen in the last few years, so I was hoping to hear your thoughts on what a reversal of that trend means for your business once interest rates start to maybe escalate?

Well, to the extent that interest rates in general rise, the alternative cost for an airline acquiring a plane or leasing a plane will also be affected. So if interest rates were to rise 50 basis points 18 months from now and airline is looking at buying an aircraft, their financing costs will go up because of those market conditions. So interest rates and lease rates ultimately move in parallel, so we don't really see a negative impact on Air Lease so long as those interest rate increases are measurable and relatively modest over a short period of time.

In fact, I would add one more. If you look back in history, if and when and as interest rates rise, typically that is fuel demand for aircraft leasing. As the airlines want to be conservative on their balance sheet, they're not quite sure about that future, I think if you go back, at least our experience over 30 plus years is that when interest rates start rising, that's the very time that airlines seek to have aircraft leased because they don't have to worry about financing. They don't have to worry about paying the PDP's.

So really kind of a general simplicity of modeling our business. While there are exceptions, we have a very simple saying: In the good times airlines need us for our delivery positions. In the bad times they need us for our balance sheet and both work.

Absolutely, and one of the point to make is on the liability side of the equation. Our fixed floating ratio is 76% currently. Our long-term target is still 70/30, so I think we're very well positioned for a rising rate environmental when it eventually comes.

Great. That's very clear. Thank you.

Michael Rodnick from AMI Group.

Good afternoon, gentlemen. Congratulations on a great quarter. Quick question for you on the dividend. I see that you've raised it a cent: it represents 33-1/3%. But it really only takes your yield from about 0.32% to 0.43%. What's the purpose of having a dividend with your stock or associated with your stock? What's your strategy there?

Let me explain. A lot of our investors are institutional holders, mutual funds and other pension funds and so on, on a global scale. We also have many sovereign wealth funds that are investors, and quite a number of these institutions invest in companies that pay dividends and some are restricted from investing in public shares of companies that do not pay dividends.

We feel that the universal investors that can invest in Air Lease stock has been broadened by the fact that we've had a modest dividend. Based on our excellent profit performance, strong cash flows, and overall growing profitability, the Board of Directors felt it was timely to increase our dividend to $0.16 a share per year from $0.12.

Okay. Good. I think a growing dividend is a positive thing. It just seems like it's relatively small. But I guess it would still represent for you somewhere in the neighborhood of about $16.4 million as a cost to your shareholders.

Well worth having a much broadened shareholder base.

That represents a very, very small fraction of our overall cash flow. As Greg indicated, in the first nine months I think we had $590 million of cash flow. So this dividend, because of our prudent cost controls that we have undertaken is really not a significant negative in terms of our overall financial profile.

We also keep in mind our investment-grade ratings given that we have a tenure order book of approximately $30 billion.

Thanks, Michael, very much. And with that, concludes our remarks for the call today. Thank you, everyone, for your participation and we look forward to speaking with you during the 10-K release.

Everyone, you can disconnect and have a great day.