Q3 2020 Air Lease Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Air Lease Corporation third quarter of 2020 earnings Conference call. At this time all participants are in listen only mode. There will be a presentation followed by a question and answer session.
Question during the session, you'll need to press far wanting or telephone if you require any assistance.
Please proceed with your thinking about fatherhood do what's kind of conference over to Ms. Mary Lynne do common.
Head of Investor Relations Ma'am, you may begin.
Thank you Hello, everyone and welcome to Air Lease Corporation earnings call for the third quarter of 2020. This is Mary list the Paloma and I'm joined this afternoon by Steve Harvey Our executive Chairman, John Plueger, Our Chief Executive Officer, and President and Greg Willis, Our executive Vice President and Chief Financial Officer earlier I believe.
Publish our results for the third quarter of 2020, a copy of our earnings release is available on the Investor section of our website at Www Dot Air lease Corp. Dot Com. This conference call is being webcast and recorded today Monday November nine 2020, and the webcast will be available for replay on our website at this time all participants.
This call are in listen only mode. Please note that each member the early teens speaking today is in a separate location in their respective homes. However, we expect the format of the call to remain the same including the Q and a session fortune instructions will be given at the conclusion of the call.
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. This includes without limitation statements regarding our future operations and performance revenues operating expenses stock based compensation expense.
Other income and expense items.
These statements and any projections as to the Companys future performance represent managements estimates for future results and speak only as of today November nine 2020. 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.
Risk factors that may affect our results.
At least corporation.
Any forward looking.
Duration in light of new information or future events. In addition, certain financial measures, we will be using during the call such as adjusted net income before income taxes adjusted diluted diluted earnings per share before income taxes and adjusted pre tax return on equity are non-GAAP measures a description of our reasons for utilizing these non-GAAP measures as well as our definition.
And the reconciliation to corresponding GAAP measures can be found in the earnings release and you say it's results can be found in actors and cross section of our website at Www Dot Air lease Corp. Dotcom unauthorized recording of this conference call is not permitted I would now like to turn the call over to our Chief Executive Officer, and President John Plueger.
Thank you Mary Liz good afternoon, everyone and thank you for joining us.
The encouraging news this morning on progress towards the development of an effective vaccine certainly bodes well for the airline industry and most importantly for humanity.
And while the leasing community is certainly being impacted by the stress in the global airline industry I'm pleased to report that April sees business today is holding up well and I believe this will continue to differentiate you will see from peers.
Our year to date revenues are up 3.9%, but down 7% for the third quarter, primarily due to a switch from accrual to cash basis revenue recognition for fiberboard lessees, resulting in about a 25 million dollar revenue and profit impact.
Our fully diluted earnings per share of $3.46 year to date at a dollar two for the third quarter or down, 5.7% and 23.9% respectively for the same revenue recognition reason.
In addition, we told you last quarter, we curtailed or aircraft sales efforts. This year in light of much lower capital expenditures on our order book aircraft, resulting in significantly lower level of aircraft gains on sales in 2020 versus 2019.
I'll touch more on capital expenditures later.
Our cash collections remains healthy at 86% for the third quarter and 89% year to date with an equally strong lease utilization rate of 99.6% in the third quarter.
During the quarter, we had no significant change to the 58% of our airline customers to which we have granted accommodations.
The repayments of deferred amounts are proceeding on track with approximately $60 million, representing 30% of the deferrals, having been repaid through today.
Finally, as we told you last quarter the pace of deferral repayments continues to exceed that of deferral requests.
Right now we are seeing limited requests for a second round of deferrals or what in some cases or initial requests.
The operating environment is evolving everyday so this could of course change.
But our deferrals through today represent only 3% of our total available liquidity at the end of the third quarter.
Furthermore, our lease placements continue to do well with 90% of our order book placed on long term leases for aircraft delivering through 2022.
Looking specifically at four deliveries from our wide body order book through the end of our contractual purchase commitments through today, we are approximately 75% placed.
Finally, with a young fleet on long leases, we have a low level of lease expirations over the next several years.
In this challenging environment. Our team has worked tirelessly to produce these results for our shareholders and we believe our results are representative of the resilient business model, we employ focusing on new aircraft from our order book and the strong investment grade balance sheet, we built over the past decade.
Most importantly, we remain confident in our ability to navigate the environment moving forward.
With this in mind and for the first time in our company's history. Our board of directors has authorized up to a $100 million share repurchase program and we are increasing our quarterly dividend.
As we've indicated previously we have a disciplined capital allocation strategy.
A share repurchase has always been evaluated in this context and now is the right time to consider it.
Our current equity <unk> debt to equity ratio net of cash is below our target or liquidity stands at an all time high exceeding $7 billion and our capital expenditures on aircraft have been below our original plans due to the factors I've already cited.
So what's the share repurchase authorization, we have the ability to invest directly in our own company demonstrating our continued confidence in LC and our ongoing commitment to increasing long term shareholder value.
Well, we're on the topic, let me expand a bit on capital deployment operationally.
While we were hopeful to deliver $1.3 billion of aircraft in the third quarter, we took delivery of only seven aircraft from our order book in the quarter totaling about 600 million.
Our growth continues to be curtailed by ongoing Max Groundings continued but improving industrial delays industrial delivery delays on the Airbus Athree 21, neo delivery delays or deferrals due to travel or other government restrictions.
Customer related ways and recent delays on several Boeing 787 aircraft due to recent notices on production aircraft requiring further inspection.
Right now, we do not anticipate taking delivery of any Max aircraft until the first quarter of 2021.
And through today, we have canceled orders, we had with Boeing for 19 Max aircraft.
For those Max aircraft, we have canceled each has been made on a case by case basis. After discussion with the airline and are in line with our contractual rights to do so.
We do have a high degree of confidence now in the return to service of them actually in the near term and we continue to work with our customers and with Boeing towards successful deliveries of our aircraft commencing in 2021.
In addition to our order book and stock buyback authorization. We're also starting to execute on additional capital deployment opportunities with respect to sale and leaseback transactions and the purchase of young single aisle aircraft.
We have been very disciplined in our approach having been patient to watch the landscape unfold with our customers and airlines globally.
We hope to start announcing some of these transactions soon.
Additionally, we are using our black for capital to venture as we evaluate and act upon these marketplace opportunities.
This not only provides us with adjunct aircraft investment capital, giving us added tools with our customers, but helps us manage our risk profile. In addition to generating management fees.
So as we evaluate our exposure is looking forward, we are utilizing blackbird capital too and good opportunities, which we would otherwise have to pass due to our own conservative customer credit or aircraft limits exactly fitting what blackbird capital too was designed to do.
Looking forward, we do see a continued difficult environment over the next several quarters with the airline industry as we go through virus resurgence and the winter season in the northern Hemisphere.
We expect to see further liquidity pressure on the airlines, which will likely lead to further insolvencies restructurings and deferrals. We're prepared for this we believe our young fleet strong balance sheet unparalleled relationships structuring tools and creativity will see us through.
At the same time this morning's positive news regarding a potential vaccine could improve their short term forward outlook.
Also we are monitoring the trade environment and political landscape.
We learned today that that you will in fact move forward unimposing, a 15% tariff on imports of all Boeing aircraft to begin tomorrow.
This reciprocal tariff imposed by the EU on the importation of Boeing aircraft is a threat to Max deployment into Europe, a key Max and 77 marketplace.
Ill see currently has up to five aircraft forecast for delivery into Europe between now and the end of 2021.
However, as we've seen in recent history. These deliveries may not all occur.
While our leases specifically say that such tariffs are the responsibility of the let's see it is vital that the leadership at Boeing and Airbus talk with their governments to work out a solution that is in the broader interest of each country and eliminates tariffs on a severely damaged airline industry fighting for recovery.
We are hopeful and optimistic that a solution eliminating tariffs on both sides of the Atlantic will be found.
Despite all these challenges now more than ever we have absolutely no doubt that the airline industry will recover.
The timing of recovery I leave to your own crystal balls.
We believe there is growing pent up travel demand charge.
China domestic passenger traffic has neared pre cobot levels in Russia domestic traffic has recently exceeded 2019 levels.
We see good domestic recovery trends in Vietnam, Korea, New Zealand, and most recently, even in Brazil and Mexico.
And while Europe traffic has recently retreated due to the resurgence in cases and the states restrictions leisure traffic entry Europe during the summer months was encouraging.
Here in the U.S. in October T. S say traveler throughput reached north of 1 million per day for the first time since traveler numbers dropped off in mid March.
And we also see in the U.S., a trend supporting stronger bookings for the upcoming holidays.
Country to country travel barriers due to quarantine restrictions and requirements remain the single biggest obstacle.
Reflecting this long term optimism our relationships with our airline customers and the young in demand aircraft, we own and have on order continued to be a differentiator for LC.
Our conversations with airlines around the world indicate that they are using this as a one time opportunity to re size and modernize their fleets.
Astute Airlines are looking at this opportunity to accelerate efficiency and environmentally sustainable and environment sustainability goals.
We are very much engaged in those conversations as airlines are focused on the modern fuel efficient and environmentally friendly aircraft from our order book delivering in 2022, 23 and 24.
This coupled with airline balance sheets and capital resources significantly being handicapped in the foreseeable future explains why we are witnessing a further shift towards leasing in.
In fact, one aspect of this pandemic crisis has emerged clearly and that is the role of the leasing industry.
It has strengthened considerably.
For many years I have said that the leasing industry provides a much needed buffer and capital provider to the airlines and Oems, we are seeing that unfold before our eyes today in a major way.
Our role is stronger and our voice is stronger than at any time in the past.
And with that let me turn the call over to Steve for additional commentary Steve.
Thank you John.
The pin demi quite cold with 19 with a negative worldwide impact is nearly impossible to plan for.
Not knowing what could be ahead of us.
Over the past decade, we had nearly laid the ground work and the foundation or.
For a resilient aircraft leasing platform.
Via our strategy of buying the most modern.
Fuel efficient aircraft.
Nurturing our airline customer relationships.
And maintaining a conservative financial profile with strong access to liquidity.
It is now.
We are in the midst of this pandemics impact.
At the foundation and the core tenets of our business that we prioritize leading up to COVID-19 again.
Giving us the wherewithal.
The transition successfully through this period.
You have confidence in our financial and operating performance.
And our ability to continue managing through this pandemic would robust liquidity.
In our share repurchase authorization.
A strong indication of the sentiment.
We're also pleased to further increase our quarterly cash dividend to our shareholders.
Approximately 7%.
From 15 cents per share to 16 cents per share representing 64 cents per share per year versus 60 cents per share this year.
This increased dividend will mark our 32nd.
Second a dividend since we declared our first.
In February of 2013.
And our eight.
Second of dividend increase over that term.
Thinking about the pandemic and its overall impact on the airline industry, it's easy to get discouraged.
But in my view.
It's become even more evident as to why the world So badly needs an airline business.
Well I have to cope with 19.
There were approximately 88 million jobs that were supported by <unk> worldwide.
It's important for you to have billion or 4% of the global GDP.
And last year, four and a half billion passengers were flown by the airlines worldwide.
If you look beyond passenger travel.
35% of global trade by value.
What's transported by air.
We have seen the kind of bottleneck.
It can be created in the cargo because fewer passenger jets applying.
The airline industry is a critical component of the world economy.
And together with technology the airline business has really changed the world in the last several decades.
Of course today, we're much more aware of the damage worldwide health care crisis.
Good cause but.
But in the long run the airline industry will emerge stronger and more value for the global economy.
The impact of the cobot, 19, pandemic or requiring airlines globally Valley.
Evaluate their strategies and priority once again.
Prior to COVID-19, many airlines were chasing market share.
And getting out of their comfort zone into markets that were in some cases less than profitable.
Once passenger demand collapse.
Your line cut back schedule significantly.
They focused on operating the youngest most fuel efficient aircraft the.
He began to announce accelerated retirements.
Differing deliveries with the Oems.
And reached out.
In mass to their governments and banks to obtain any and all capital available.
In addition.
Airline significantly reduce their cost and preserve cash.
Labor reductions retirements and deferrals so.
The support provided by governments was crucial avoiding any type of bankruptcies and restructuring.
The intent hunger for capital by the airlines doing depend dynamic.
What impact the airline industry for many many years to come.
If you now look at the airline and aircraft lessor landscape.
The top aircraft less source have significantly stronger liquidity profile and higher credit ratings and even the airlines with the best credit rating.
Air lease is cost of funding is approximately 3%.
With the healthiest airline cost of funding significantly higher in many cases more than double than ours.
And im working with governments and banks to obtain financing.
Airlines that pledge.
Mortgage their most valuable assets.
Which has resulted in many depleting their borrowing capacity in the future.
The airlines seek guidance as to how to best modernized their fleet.
Not having to use traditional financing methods, which by the way will be more expensive and in many cases and achievable.
We do envision our partnership with the world's Airlines.
Having significant potential to expand and grow in the years to come.
In fact, we are already seeing that's taking place.
My recent and frequent travel to meet with airline customers all over the world indicate.
The airlines are focused on getting through this pandemic.
At the same time preparing and reshaping their fleet for the future.
Many are discussing which aircrafts or replace those that had been retire with some exploring aircraft types that they do not operate currently but they foresee as being integral to their fleet and operating plans moving forward.
With regards to specific aircraft and trends that we see the focus on domestic recovery is linked to a growing interest in me Airbus to 20 family.
Primarily the 820 that's 300.
Which ill be at 50 on firm order and 25 option.
We recently signed.
Well why our first eight to 20 placement in Europe.
The aircraft deliveries commencing in mid 2022.
And we have several exciting campaigns and progress there.
There are accelerating for eight to 20.
We hope to announce those deals formally in the upcoming weeks and months.
Our Airbus eight feet 21, Neo placements continue at a very good pace and.
Although Airbus has benefited in market share by the Mac rounding.
Our forward lease campaigns on a Max are gaining momentum.
Since we turned to service goes near and recent pricing incentives promulgated by healthy and Boeing.
Working jointly together I'm very specific cases have begun to yield traction.
Youth wide body aircraft remain under significant pressure.
Reflective of the global travel restrictions.
And relatively low demand.
That's the new wide body placements.
Trends towards smaller gauge side, we started well before the pandemic crisis continues.
As such.
By way of example, the Boeing 77 Dash nine remains a top performer.
So does the AC 5900.
Furthermore.
Let's see it's not profitably placed all of its remaining eight feet 30, Neo orders to airlines in the U.S. Europe and Asia.
As John mentioned before to today looking at all of our remaining wide body yet to deliver from older book aircraft.
Were approximately 75% place.
And that percentage is set to increase in the coming months.
Airlines are continuing to receive the aircraft they have an order from LLC.
Which they view as a backbone of their fleet now and as passenger traffic return.
Just in the last few months.
We delivered both narrow body and wide body aircraft various regions of the world.
For example, we have delivered eight feet 21, neo aircraft to air Arabia in the Middle East.
And to Vistar Airlines in India.
We've also delivered eight foot 80, 21, neo enlarge the long range version <unk>.
SCS Scandinavian Airlines flight carrier of Denmark, Norway, and Sweden era.
ARISTOTLE the flight carryover Kazakhstan.
The Airways based in the UK.
It's worth SATA eight doors airlines in Portugal.
There have also been delivery the wide body aircraft, including an AC 50, 902 European airline in France and.
In an athree hundred 51000.
Virgin Atlantic Airways in the UK.
Our aircraft are integral to airlines achieving their goals as it relates to efficiency.
And environmental sustainability.
The biggest impediment to getting these aircraft to the airline.
The manufacturers delays.
An arbitrary travel restrictions, which make it difficult to deliver aircraft to our customers.
I Echo John's comments that removal of border restriction is.
He is vital not only to enable the resurgence of international passenger traffic.
But to enable the broader aviation industry functional function normally and effectively.
Looking ahead for many of the reasons I just reviewed.
I believe there are significant opportunities that will be available for the aircraft leasing.
The leading aircraft less source.
I'd have to strong financial capabilities served.
Serve their customers.
And have.
Vital OEM relationship.
And the talent to help the airline this suite through this crisis.
John Greg and I, along with the rest of the early teen.
Continued to do our very best to help our airline customers navigate this environment.
Prepared and then just for the pent up demand that a weight on the other side the same Devon.
History of Air travel shows that after every time of stress.
Our industry go through a passenger recovery.
Cool, even stronger and stronger than before.
And with that I turn the call over to Greg Willis, our CFO to provide more detail on our financial performance.
Thank you, Steve and good afternoon, everyone and.
In the third quarter of 2020, AOCI generated total revenues of approximately $494 million and.
Including rental revenues of 468.
5 million of aircraft sales trading and other activities.
Rental revenues decreased by approximately 5% year over year. This was primarily due to 25.3 million in rental revenue is not being recorded its collection was not reasonably assured.
During the period, we converted approximately 6.6% of our fleet to a cash basis of accounting generally speaking at least receivables for these lessees exceeded our security packages.
And as such our ability to collect was no longer reasonably assured.
Accordingly, we are now only recognizing revenue on those lessees as we receive cash.
Given the uncertainty in the operating environment is difficult to predict how this might trend going forward.
What I can say is that as of today no additional lessees that have been placed on a cash basis and.
Continued to receive cash payments from all of these hill.
Finally, the majority of these airlines are in a form of reorganization and have expressed the desire to keep our aircraft.
As such we would expect these numbers to decrease as these airlines to complete their reorganizations, which we expect to take place in probably 2021.
Certainly if we will switch our revenue recognition for additional lessees to a cash basis of accounting. However, we gain comfort from the fact that unrecognized revenue as of September 30. It represented only approximately 1% of our total annual revenues in 2019.
Also contributing to a decline in total revenue was lower level of aircraft sales as John mentioned earlier on the call. Despite the challenging backdrop in the third quarter, we continue to try and generate strong margins and orally with our key portfolio metrics of lease term remaining and average age remaining.
Relatively constant.
Our portfolio.
Yield also remained stable after adjusting for the 25 million in unrecognized revenue.
Turning to expenses interest expense increased year over year, primarily due to the rise in our average debt balances driven by the growth of our fleet and the increase in our liquidity position, partially offset by decline in our composite cost of funds.
Our composite rate decreased to 3.1% from 3.4% in the third quarter of 2019.
Appreciation continues to track the growth of our fleet well actually in a decreased significantly in the third quarter down, 42% and $15 million relative to the same period last year.
Represents approximately 4.1% of total revenues.
The decrease was driven by our lower operating and transaction related expenses incurred during the period.
As John mentioned repayments of our previously granted deferrals continued to exceed that of new deferrals in fact since our last call. We have granted only 11.6 million incremental deferrals.
I want to reiterate that we believe are accommodations remain manageable relative to our liquidity position, which is the highest in our company's history at 7.2 billion.
End of the third quarter.
As I've shared before our balance sheet was originally designed to support $6 billion in aircraft investment annually right. Now we expect aircraft investments for all of 2020 to be approximately 2.5 billion with 1.1 billion expected to deliver in the fourth quarter.
However, we feel this number may ultimately be lower again did a sizable obstacles, which remain for the manufacturers.
As you heard from John we are beginning to execute on our aircraft investment opportunities outside our order book that are profitable and makes sense for AOCI over the long time still even with these incremental investments. We were we remain in excess liquidity position given our overall lower levels of aircraft purchases.
I feel it's important to note that we have a well balanced framework for which we analyze our decisions regarding capital allocation.
Our first priority since the since inception has been to maintain.
And grow a young fleet comprise of the most modern in demand fuel efficient aircraft. So that we can profitably grow our aircraft leasing business, while maintaining strong fleet metrics. We fundamentally believe this is the most sustainable way degree create long term shareholder value and we are pleased that since inception, we've invested over $30 billion in.
Aircraft that fit our strategy and we continue to do so today.
We've also been doing dedicated to maintaining an investment grade balance sheet utilizing unsecured debt as our primary form of financing.
And have $22 billion in unencumbered assets.
This year alone we have raised $3 billion in unsecured debt in the investment grade capital markets, helping us to achieve record levels of liquidity.
Finally, we have maintained our dividend policy and regularly evaluate share repurchases as appropriate to return excess capital to our shareholders.
It was in evaluation of this and given the continued manufactured delays and our robust liquidity position that our board of directors authorized up to $100 million share repurchase program through June 2021.
This market environment presents an opportunity for us to create significant value for our shareholders through the repurchase of our common stock while at the same time, we'll be making aircraft investments for the future to generate long term value for our shareholders.
Lastly, I would like to touch on financing, which has been vital and positioning us for where we are today in August you saw us opportunistically access the market once again to raise 700 million.
In senior unsecured notes at two and seven eight.
This issuance drove our liquidity position to a record level north of $7 billion, which includes our $6 billion revolving.
Credit facility.
Patently, we continue to benefit from these from three investment grade ratings from S&P Fitch in coal and we have no expectations to change our key financing targets at this time.
With that I will turn the call back over to merely as for the question and answer session of the call.
Thank you Greg. This concludes managements remarks for the question answer session. We ask each participant to limit their time to one question and one follow up I would now like to turn the call over to Paul to open the lines for the Q any session.
I never like to all participants you have a question at this time. Please press Star then the number one on your telephone keypad again, it's far one on your telephone keypad, well pause for just a moment to compile the <unk> roster.
Our first question is from most Youre in Bush with credit Suisse. Your line is open.
Great, Thanks, and certainly kudos on making the decision on the share repurchase authorization.
Hi, Pat.
I was just hoping that you could maybe expand a little bit in terms of the thought process and how much capital you would consider allocating to it you know the sale leaseback of purchases and you know you know clearly you've you've had far far less and deliveries from the order book than you had expected.
You know how you know how are you thinking about that for the next few quarters into it into Twentytwenty one.
Thanks, Moshe <unk> I'll take a first stab at that in terms of how much I think weve <unk>.
I hope, we made abundantly clear that we have a lot of ample liquidity.
So as opposed to dedicating how much we're much more focused on the specific transaction and that's going to create a good long term value and it's a good fit for us So I.
I think the way to look at it is we don't view ourselves in any way capital limited, but rather it's driven by the specific transactions that present themselves to us. So it's not as if we're saying.
We're going to devote this much money to doing this additional stuff rather you should look at it that we have all this money available and we will continue a disciplined approach to finding it on a transaction by traction transaction basis.
Yeah were also much more focused on quality.
And one of the things that we're looking for in potential sale leaseback transactions.
He is where we can couple of them.
A placement of our new aircraft from our own order book in other words.
Oh doing a transaction that mean wall a sale leaseback.
Of young aircraft at an airline customer then.
Then also coupling that with placement of these new planes.
Oh that will deliver in 2021, 22 23 and so on.
Oh God I do want to point out that we've looked at dozens and dozens of sale leaseback transactions.
And we're exercising a very high level of discipline on.
I understand the credit quality.
Asset.
And so we're being extremely careful and scrutinize every deal and that's why we really haven't we.
We focused our business on sale leasebacks.
That is really a supplementary activity or a mean I mean efforts to lead new airplanes.
Got it thanks.
And maybe as a follow up.
You kind of outlined sort of three separate you know kind of ways to look at that the ER revenue and cash that you're currently receiving a you know you talked about the fact that you had 25 million that went on a cash basis, but that no more it has gone that way in the fourth quarter.
You talked about the 86% realization or you know down from 89 year to date and 91 in the second quarter, but you also mentioned [laughter] deferrals, you know the new deferrals that were doing that repayments of old deferrals or exceeding kind of new deferrals is there a way to kind of put those three.
Different metrics together and you know and think about at what point.
You know, we're going to somewhat trough in terms of the.
You know and turned around and the other direction in terms of the revenue and cash received on.
On the portfolio like is there.
Because really there's no formula the majority of our deferral activity was negotiated between March and June.
That's when airlines had the biggest sort of drop off in their flying activities in revenue.
And most of those were designed to get paid back.
A significant part of the deferrals this year and.
And some of course, continuing to 2021, but.
There's no particular formula it's it's done on a case by case basis with each airline but.
But I can tell you now that the repayments that are coming back from the deferrals.
Arctic Sea.
Any new deferrals in fact.
The level of new deferrals physically died down to a trickle.
Although there could be additional requests coming in through the winter, but at the moment.
He he revenues coming in [noise].
The repayment of the deferrals Arctic.
Far exceeds any new Oh stations that were giving airlines group.
<unk> comment I know, Greg do you have any other comments on that.
[noise], Greg I think that I think that pretty much sums it up I mean, I think we watched it I think in a way to gauge the recovery I think you have to look at how airlines are doing and how traffic comes back how the the vaccine and treatment playing a role in the overall recovery the system I think overall with an 89.
9% collection rate year to date, I think thats been a very successful navigation of the the pandemic thus far.
And clearly we're watching we're looking for light in the tunnel and hopefully our airline customers in the rest of we'll get back to fine yeah. So most just one other to put a final cap on this as I said in my remarks look were going into the winter season, we do expect there to be more difficulty on more strain on the airline industry. So that you know we we.
We may we may have to increase our deferral balance I just don't know, but we've told you. What we are seeing through today with a you know with a cautionary note over the next two quarters, you know, which historically have been less for airlines in North America in terms of their traffic flows so.
You know, we don't have a crystal ball, but we're calling it today exactly as we see it [noise].
Thanks very much.
Our next question is from Vincent Sinisi with Stephens. Your line is open.
Hey, Thanks, Good afternoon, Thanks for taking my question [noise].
And nice to see the share buyback and so first wanted to touch on capital return.
On the share buyback.
In terms of your pace and how aggressive could you get that and then if you could remind us of your leverage target and when you think about the dividend. So nice to see the dividend increase how do you think about when you set that level going forward. Thank you.
Maybe Greg do you want to comment on that yeah sure. The way we look at it is right now given the cash on balance sheet strong liquidity position. The fact that were below our target debt to equity ratio on a on a net balance I gave us the <unk>.
Available capital to return to shareholders, because we've already demonstrated that you know those first two priorities that I touched on in my prepared remarks of maintaining a young fleet and retain maintaining a strong balance sheet.
We're taking care of and that right now is where we are with $800 million well see how that goes and we'll just continue to evaluate additional ones relative to.
Other opportunities in the marketplace, but this authorization is out for six months and.
Well continue.
As we go.
I mean, the the dividends that we paid this year or for the first nine months or roughly only 10% of our pre tax earnings.
So the the ratio of the payout is extremely modest compared to most.
Fortune 500 companies and.
Most of our capital and profit generation is being reinvested in the company.
Okay, great, thanks, very much and modeling.
Question or actually maybe okay. Two quick modeling questions, but first on the the 25 million of of of impact from the cash recognition. So that's just the reversal of prior accumulated unrecognized revenue right. So it doesn't have an impact and.
On future quarters, and then separately the SG expenses that 20 million. So its much much lower than it was historically just wondering if 20 million is a good quarterly run rate for the next couple of quarters well activity still low thank you.
Let me, let me tackle the $25 million to $25 million was a portion of the rental revenue that we weren't able to accrue this quarter. So those lessees as I mentioned did pay some portion in cash and that's reflected in the income statement, but we weren't able to accrue a full quarter worth of revenue because of the security package is being eclipsed.
So that's that's how I would look at that and then you know obviously, we have to evaluate how things go next quarter. Those airlines I would expect to remain on a cash basis.
However, I did mention that they continue to pay so we'll have to evaluate how much they paid and record that revenue next quarter.
Clearly we need to evaluate if more airlines go on a cash basis and I think it also.
Impact to the number in the fourth quarter, but that's that's to be seen.
With regards to your questions honest DNA. It was a very light quarter in terms of operating activity transitions transactional related expenses.
It's nice to see the expenses at that level.
But it's really too soon to say where that'll shake out next quarter.
Okay got it thanks very much.
Our next question is from Helane Becker with Cowen Your line is open.
Oh, thanks, very much operator, hi, everybody and thank you very much for your time today.
Just had a couple of questions I guess, that's all in the last [laughter]. My first question is I see that's airline companies have asked you to do power by the hour leases.
Which I guess, if you're not flying the aircraft that much maybe it makes sense, but could you just maybe explain or talk about whether that's going to be a trend we're going to see for the next couple of years or if it's just you know kind of a one off thing.
That don't make sense longer term sure let me start with that primary and also.
Lot of these PBH request that that we've seen in the industry.
I hate to some of the older aircraft.
They have lower levels of utilization to begin with.
Oh, So we don't think this is a permanent.
Phenomenon.
And we are striving we.
With our customers to.
Avoid as much as we can any kind of a lease.
Sure that's tied to the flight utilization of the aircraft.
Well, let me let me just add two really important comments or the PBH concept has been a tool that's been around for many many many years. So this is absolutely nothing new.
So as Steve indicated you know, it's being used very selectively.
Not pandemic live [laughter], all airlines, but the other extent or the other point I think is really important.
If you have the right aircraft those aircraft are being flown so even if you need to go to a P.H. structure for a period of time.
Your airplane if your airplane is being flown you're going to get paid and you're going to get the realization the value of the lease and you're going to get a get a good lease stream. So it goes down to the fundamental thing that we've been saying all along as if you have the right aircraft.
Then those aircraft to be flown and you will be paid for each hour and so you will be paid. So this is really a strong function of a the.
The desirability of aircraft in the Airlines fleet your aircraft and how much the airlines need them and want them going forward. So from that perspective, we actually feel pretty good.
Gotcha, that's that's very helpful and then just on.
On the repossessions.
How did you come to 100 million is not just the value of the assets.
The aircraft that you might be terms just to repeat what you said we.
Repurchase yeah, and some of the share reactors.
The share repurchase how did you come to the $100 million and share repurchase.
I can I can take that one it's the difference between where we are on our on our net debt to total equity versus our target and that Chris talked about $100 million of excess capital.
And that will evaluate that going forward based upon what happens with the Oems and the like and comparison to other.
Okay.
All right great. Thanks, very much everybody I appreciate the time thank you.
Yeah.
The next question is from Ron Epstein of Bank of America. Your line is open.
Hey, good evening guys.
Hi, Ron.
Couple of questions for you.
Maybe just maybe one on the collection rate.
How would the collection rate book, if you excluded receivables from previous periods. So if it was just.
Your receivables mustard.
Greg.
Yeah.
This is Greg I'm trying to think about how to frame it because.
A receivable is a balance sheet item. So to me the way I look at is you take the collection rate, which is 89%.
And you compare that against a month a year to date.
Rental revenue line and then you kinda derived <unk> receivable balance would be.
But I think it's important to note that that balance.
As a collateralized receivable.
Right. So to me, it's a little different than receivables and other industries that don't have that aren't collateralized.
So that's that's kind of why we report the collection rates the way that we do and we talk about the deferrals to give people the full context of what's going on with our customers. The other thing I want to mention wrong is that many of our lessees pay maintenance reserves.
So so let's say an airline owes us $100 in rent.
But only pays us 89, but maybe they're paying us overall reserves based on utilization so.
The <unk>, 89% is just on the on the lease payment you see what I'm, saying.
I do and that was my next we don't book a lot of the maintenance revenue. We don't book that into revenue. That's just something that we hold on to the next maintenance event.
Gotcha now that doesn't mean next question for you was if you look at that collection rate isn't.
Is there any way you can give us a feel for how much of it is.
Actual lease payments versus maintenance, yes.
No I don't think we break that out or Ron.
Yeah.
We just look at it let's put this way our total security to package package includes you know.
Cash security deposits, a cash maintenance reserves.
Under the credit letters of credit you know all the different credit enhancement tools that we have at our disposal. So if you just looked at it and it's in total and by customer I mean, when we when we start getting a balance owed to us that's above that level for that customer and we've always done. This by the way. This is not something unique to the covert.
Pandemic that has been a key litmus test for US we stop accruing and then we only record things as we receive them in cash, but I think I think he's I think ron's trying to get at how much of the receivable nowadays reserves versus rent and as you would expect.
Vast majority of our payments that are due to us or our rental versus risk.
<unk>.
Yeah got you and then maybe just one last one.
[laughter] given what's going on.
The industry right now can.
Can you pay for deliveries.
PDP you've made for aircraft pretty pandemic that have not been delivered or wont be delivered or wont be delivered for a while because of what happened.
And he has your money you can you can you reallocate those PDP bids to aircraft deliveries that you're going to say maybe in the near term we have restructured a PD piece with both Boeing and Airbus.
For a more realistic level taking into account.
The the actual projected deliveries versus contractual deliveries, but.
We have rebalanced or.
Our PDP.
Both of them taking to account.
Those realities that there's a difference between the contract month of delivery.
And what is the actual projected month of delivery.
Okay. So the specific example, like on the Max is a wrong as we told you a we've had had some acts cancellations I believe it's up to 19, though and.
And we had paid PDP is on those aircraft, but but but we either get them back in cash where there was allocated to balances due at delivery. So it's actually a pretty easy.
It's been a pretty pretty fluid environment, and we've had these discussions with the <unk> postponing it or what but it's fairly easy to work out these days.
Got you all right. Thank you.
The next question is from Catherine O'brien with Goldman Sachs. Your line is open.
Hi, Good afternoon evening, everyone. Thanks for the time.
Hey, Ron So I know you'd mentioned during the prepared remarks that lease expiries are we're pretty minimal coming up but can you just give us a ballpark figure over the rest of the year and its 2021, Yeah. You know I know some of your lease deferral agreement concluded extensions, maybe just you know taking into account those agreements and then just maybe.
Second question along that same theme you know their trend in terms of what airline they're planning to do at the end of these upcoming Expiries. You know should we expect most of these aircraft come back or where are you seeing you know given that the.
The relative age of your fleet or are we still seeing you.
No extensions here.
<unk>.
Yeah, I think extensions will still dominate the.
The lease returns.
Uh huh.
And.
You know historically, we had about 75%.
Read of extensions.
I think in the next two or three years I don't think it's going to be much different than that from everything we hear from the airlines.
And in terms of just the sheer number I think that was the first part of your question.
You know I believe by the through the end of 21.
I think it's somewhere north of about <unk> about 20 aircraft I could be wrong, we don't let it go on that.
But you know the the thing about it is we are in discussion with a lot of these airlines right now for the for the extension so throwing out that number is not something that you know we routinely do simply because it changes you.
You know pretty quickly a month to month to maybe 20 today and it maybe 14, you know by the end of the year. So.
You know these things don't forget when leases are expiring they usually are up for a extension a year before expiration.
So just pointing out that number doesn't necessarily reflect.
You know what the what the reality is whereas I believe and Gray correct me, but in our 10-Q filings we have to put in terms of lease expiry. The earliest available X free that an airline has or whether or not it's a currently contracted X ray or a limited number of.
Of <unk> early termination options and we can't really change that until we sign the final agreement for extension so.
No. It's a pretty small number anyway, you look at it but I just want to emphasize that these are subject to ongoing changes quite a bit.
Our tanks you.
As that information by the way.
Your body or how many aircraft are scheduled to come off.
Okay, Great I'll definitely take a lot tonight at that thanks for that color. That's that's been it's encouraging that you're expecting you.
You know similar percentage the extended her sparkle process given the backdrop, if I could just sneak one more in you know many airlines globally secured substantial new funding Petsmarts you know what if the capital markets are government support and we believe the data and the U.S.
Seeing a meaningful negative impact to demand for I think he said you know what are your conversations like hit.
Today with your airline customers, just given rising cases person versus what they're like back in March you know are they pretty different this time or airline so broadly being pretty conservative.
Yes, so time.
Well I will tell you that just in the last two days I received a call from one of our customers in North America, asking if I had any aircraft laying around that they could be it just take for the holiday season [laughter]. That's a good aligned we don't normally [laughter] normally get those kinda calls.
And I think we're seeing a variety of different reports and one of the things like I made in my prepared comments I made in my prepared remarks is that I think we are seeing what I would call a trend and that and that is that our U.S. customers are telling us that the holiday bookings are looking better than what they had expected.
Got it. Thank you so much the time everyone.
Our next question is from Jamie Baker with JP Morgan Your line is open.
Hey, good afternoon, gentlemen, I'm very loose expanding on you know Johnson Steve's prepared remarks, you know you're in the business of backing airlines that have.
Viable business models and you've spoken we've spoken in the past you know how you.
Sought to avoid the mess that is Norwegian air shuttle so in light of the government, they're saying that further aid isn't in the you know the best interest of citizens.
How are you feeling about.
You more government aid globally, I mean should bad to airlines would be allowed to fail because like I said, Mark and I sort of thought that's where you were headed with some of your earlier remarks.
Well look up Jamie Norway's a unique situation.
That I don't think we can use that as a as a good example for the rest of the world first of all you've got a flag carrier there that's owned by the the the three countries, Sweden, Denmark, Norway and say, yes.
Secondly, recent developments, where that two airlines, notably with there.
And a new airline headed up by a broth and family they used to Evan who met the Carolina.
Are going to operate Norwegian domestic services. So the viewpoint of the Norwegian government in the last few weeks is it wait a second if there is competition in Norway, and SCS will not have a monopoly in case Norwegian shuts down.
As to newcomers that have announced coming into the Norwegian market.
With their that already has extensive operations to and from Scandinavia.
And an old line family that had an airline.
That was the largest domestic airlines.
In Norway before SCS acquired and so.
Now the government in Oslo sees that there could be three airlines.
Besides we to rule, which has the turboprops and the E jets operating in the Norwegian domestic market. So the.
Pressure to have more taxpayers' money.
One of them into an airline that's losing that money very rapidly mainly on their intercontinental business, which is almost shutdown, that's the rationale and Norway.
I'm not sure we can apply that same metric in every other country.
We do see selective governments.
Ah that are a little late I'm coming to help Airlines. For example, this morning I was talking to airlines in Poland, and the Czech Republic, where the governments have been little slow in coming around to providing aid but that is what's in the plan the.
Provide aid this coming winter.
So.
It's a really fluid situation.
And I think we'll continue to see some.
Levels of government aid on certain circumstances.
Which will allow the airlines to transition and survived through the winter.
But I think the massive aid is already behind us.
Well, Steve from from Air Lease's perspective, I mean are you better off longer term if the bad airlines are allowed to exit the market.
Well, let me just add let me just jump in here Jimmy I would tell you that in looking at you know for example, our customer base, but also with a view towards additional capital allocation on sale leasebacks.
We very much take into the calculus, where we think airlines are going to be successful and remain in a merge.
And one of the reasons, we've held off on a sale leaseback is because we are really very much concerned about concerned about who will survive and who will be getting government support and so that we can get an indication you know these government packages take time and these thing you very well know they they take time to unfold so that.
The very reason we have been very careful is that we are looking forward you.
You know I I think you know life as a balance we you know the governments and countries both for for employment.
And to see you know their.
International arrivals need strong airlines now where there's multiple airlines how much they get you know Vietnam as an example of that the government. There is pledged half a billion dollars towards all the airlines in Vietnam.
But you know were Alex we're just targeting where we think the survivors are going to be an even if an airline you know probably shouldn't be allowed to survive. You know for example, we took out our last aircraft. We only have one there in 18 out of South African that airline probably has no.
Basis to to revive the same thing with an air India. So the process of natural selection.
Is taking place and our job is to pick those that are going to be survivors.
As to the broader question, yes overtime over a long period of time, the nature of any industry under center industry.
Is that the better airlines, a stronger lines more stewed airlines low caught them out like that have that their cost control and have good management will survive and it's our interest to to pursue that we can't always call. It.
But we've got a pretty decent <unk> track record so far.
That's great John in for my second question and this is you know longer term, one as well, but you know recognizing that Boeing and Airbus don't make pivotal product decisions without bending <unk> air Lease's here. How are you thinking about the proposed larger single aisle Boeing aircraft, you know versus the one.
In time, you know middle of the market twin that was you know envisioned you know we have the money were played that announcement.
Oh I think in the current state of the Boeing company.
Any new aircraft like that where there's no engine that's been designed.
And there are serious questions about whether they can produce this aircraft and a competitive price.
I really think all these amounts were way premature and about <unk>.
We're having literally daily dialogue with Boeing and Airbus.
And we don't really see anything.
For the rest of this decade.
Frankly, our message to Airbus or Boeing.
It's the same to Airbus, which is get your house in order first.
Very thorough a answers. Thank you gentlemen, both be take care. Thanks.
Thanks, Thanks, Jamie.
The next question is from <unk> Patel with Keybanc. Your line is open.
Hey, good afternoon, guys I wanted to go back to the topic of capital allocation, you mentioned you'd looked at dozens of sale lease back to understand the credit quality of the assets. What are some of the factors, which is I guess prevented you from transacting, thus far and then what's what's changed that has you more excited to engage in.
The market now versus previously is that just you know.
Continued government support along with this morning's announcement on the vaccine or are there. Some other factors involved as well well I think I think there's really two factors that go into that one we analyze the quality of the aircraft being offered on sale leaseback.
Are they new aircraft, where they used aircraft.
What would be the condition that those airplanes would come off at the end of lease.
And then secondly, and more importantly financially if we did those transactions would they be accretive.
Through our company in other words would.
With the average yield on those transactions be equal to or better.
And the average portfolio lease yield of air lease is a total fleet composition.
Unless a transaction meets both of those criteria well.
Well as I said earlier, we want to see some new aircraft placement activity as well.
Not just providing this capital to the airline by buying their asset leasing it back.
So.
Transactions almost have to meet all of those criteria that make sense.
Yeah from our from our ROI perspective, let me add one more as to timing, which I think was a key part of your question look.
Look the simplest way to look at it is we wanted to make judgments as to who might be going back to their less source for accommodations restructurings referral. We didn't want to spend you know a big amount of capital initially in the early phases.
Only to having spent it or by those aircraft in two or three or four or five months time, how the airline come back and say hey, thanks very much for buying it. We appreciate the sale leaseback transaction, but now we can't pay you yeah, we have the cash.
Great. So I think I think I think frankly, it comes down to what was going to come back to bite us.
And so that was a huge part in the calculus of our timing just to see how airlines were treating there.
They're they're they're lessors, particularly where we had not have any involvement without an airline or anything there yet, but just to see what was likely to unfold.
We don't want to spend a dollar or expecting a return when three months later, we have to rewrite the book.
The one other factor that weve looked at much more seriously than before.
Is the U.S. market, because if we purchased an aircraft.
You're in the U.S.
The tax depreciation allowance is is.
Better for lesser than a foreign aircraft that we lease to a an airline out of the U.S.
So our team is focused not only at global opportunities both from domestic opportunities.
Were not only is it financially attractive as a transaction standing on its own.
There also could be additional tax benefits.
Minimizing our our current tax liabilities.
In the year of acquisition of those aircraft.
So that's a new factor that has now become more visible in the way we evaluate some of these transactions.
Yeah. Thanks, that's really helpful color and then just following on to that in deploying capital. How do you how did the events of the past year impact your views around investing in dedicated freighters is this something that you might be willing to consider now.
Well look at this the freighter market has really helped pull a lot of airlines through particularly the larger airlines that do drive a big part of their.
There their revenue from freight.
You know longer term the freighter market, though has been much more volatile than has been dedicated primarily to older used aircraft and so.
The fact of the matter is if I look at our fleet some of the wide bodies now that we've already had many many cases over many airlines that have actually deploy those aircraft was wide bodies just for just for freight and cargo with.
Very little too low or low passenger count. So I think that will continue <unk> you know that that still today is a market for older aircraft for us both single aisle and twin aisle. So we don't have a lot of aircraft that are in the age category sort of north of 15 years that typically.
Airline or aircraft need to be in order to convert so I think it's.
A bit premature well certainly the freight market is stronger we just don't have a lot of candidate aircraft right now that we would look to convert or that we would necessarily look to buy.
Additionally, as.
The global economy, Kinda recovers and more wide body passenger aircraft go back in operation.
They carry the highest percentage of the cargo in their bellies.
Well, it's more a more passenger aircraft go back into service.
This pressure and shortage of cargo capacity will begin to diminish.
And and so we have a difficult time estimating how long this surge will last.
He cargo airplanes popularity, we think that as more and more wide body aircraft, we enter service.
That's going to create more capacity they will take the pressure off dedicated freighters.
Okay, great. Thanks, a lot like a time guys appreciate it.
I know last question is from Ross Harvey with Baby Your line is open.
Hi, Good evening all thanks for taking my question I know you've covered a lot in this to you and I have just one more from me I'm wondering can you comment on the New York delivery schedule. It looks like two aircraft moved from this year to next but there's an additional eight aircraft appear to have moved forward from the Irish figures.
My comments or not and then separately, whether we should expect a more mox cancellations in Q4 2021.
Or start times deliveries and your schedule to start up in dollars. Thanks.
Well the new aircraft I would just say that you know that's unfortunately become.
A common over the last several fourth quarters this year and last year and I believe in the one before that but you know there would have been industrial delays on the Neo program program and so.
You know it's every quarter every entity here. We've had this were a few aircraft spillover. So that's nothing new I will say I will say, though.
That's the delivery delays, the industrial delays by Airbus or improving.
You know our wide body aircraft are pretty much spot on time, but on the 321, neos, particularly out of which out of Homburg, primarily those the industrial picture is improving and on and on the Max.
You know my prepared remarks, I say each has been considered on a case by case basis and that will continue because we do have additional boxes that will go beyond their 12 month point of past two original delivery date and therefore.
We have the ability to cancel so its hard to say how much will be further canceled I think that I suspect that this virus news just like it is made the whole world feel better as I will also make some airlines feel better that's just speculation, but we may have a few customers that have the ability to cancer.
So because we give them the same right that we do on them access to the council and Airbus aircraft.
If they are on the fence. They may decide you know what maybe this is good news. So it's really hard to say, we'll just continue.
The progress we've been making on a case by case basis for the Max.
Yeah makes sense.
Let's see we have an aircraft that was supposed to deliver in December.
And it slips two or three weeks into a.
Early January.
We look at it more holistically, we have a 12 year lease.
Open aircraft delivered on January 10, instead of.
So December twentyth.
Oh, it's not really going to move the needle in terms of the total cash flows and revenue generation for a 12 year period.
Because the delay represents less than 1%.
The 144 months term of the lease and we still capture that total rent is just extend it out by a few weeks.
Oh, it really doesn't have a meaningful impact on on air lease.
If the aircraft flip from the end of the year into.
Into the first quarter of 21.
Yeah understood and a quick follow up if I may if say is to be done significant turning point in terms of Ireland's Dr. Fleet I'm too do you think it has been done in terms of production cuts and retirements to bring to market in tech when everyone again and say 2021.
Well, we have been very vocal ER for the last two years that we felt production rates were.
Way too optimistic and an overblown.
And we felt that a.
A certain part of the backlogs at both Boeing and Airbus were fictional rather than realistic and.
And I think it took the pandemic.
Oh, two to come to that realization that the backlog at some weaknesses.
And that is we felt that in cancellations and deferments, but I think.
That with the cutbacks in deliveries and production rates.
Across the whole spectrum.
Whether it's 777787.
If he thirtys Athree hundred Fiftys and then also single aisle.
We are creeping back toward equilibrium, but.
But at a very slow pace.
And we at air lease hope that by the spring and mid year 22.
Going to be back close to equilibrium.
That's our own internal projection.
In terms of production rates versus demand.
And I believe that both the Oems will make adjustments along the way.
Who.
To minimize the number of whitetail aircraft.
Great. Thank you very much thank you.
At this time I will turn the call back to Ms., Maryland, the Palmer for closing remarks.
Thank you everyone. That's it for our call today, we look forward to speaking with you again after the conclusion of the fourth quarter. Holly you can now go ahead and disconnect the line.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect have a great things they say.
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