Air Lease: Still A Mixed Outlook, Maintain Hold

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Passengers are sitting successful nan commercialized plane.


I previously wrote astir Air Lease Corporation (NYSE:AL) a fewer months back, highlighting my lukewarm views connected nan communal banal and constructive position connected nan preferred shares. The institution conscionable reported its fourth 4th results, and while they had a decent quarter, I don't spot thing that would alteration my position connected AL's prospects. I support a Hold standing connected nan banal and for illustration AerCap (AER) for those seeking vulnerability to nan sector. My reasoning is arsenic follows:

Adjusted metrics not useful for performance

The company's pre-tax, adjusted ROE was 11.0%, which seems compelling connected its surface. However, this ratio, and nan nett income down it, is simply a flawed metric successful my opinion. It backs retired aggregate important statement items that are perfectly recurring and worldly to nan company's business, including:

1. Amortization of indebtedness discounts and issuance cost: This is presently amounting to ~$50 cardinal per twelvemonth successful deferred financing costs. The institution is simply a serial issuer of indebtedness and will proceed to beryllium fixed its immense acquisition commitments and upcoming enslaved maturities. This is simply a costs that cannot beryllium ignored.

2. Income taxes: This is interesting, but again, fails to walk muster. The institution has managed to only salary astir $68 cardinal successful rate taxes connected $2.7 cardinal of after-tax nett income earned complete nan past six years, aliases astir 2.5%. These deferred taxes are rather meaningful from a rate travel perspective, but nan cardinal connection location is deferred. And nan expertise for nan institution to defer taxes successful perpetuity is reasonably to very improbable to bespeak reality.

3. Stock-based compensation: While non-cash successful nature, nan $4-6 cardinal per 4th of expenses do person existent consequences for shareholders, and there's nary logic to backmost them retired of nett income calculations successful my opinion.

All said, I estimate Air Lease's 2022 return connected equity, excluding nan effect of nan write-off of its Russian fleet and assuming a 20% taxation rate, to beryllium astir 7.5%. I estimate that return connected equity will proceed to beryllium astir nan 6-7% level going guardant and book worth per stock maturation will beryllium astir 6% per annum. I spot AerCap, connected nan different hand, achieving a return connected equity 100-200bps higher than Air Lease. I besides spot yearly book worth maturation for AerCap of 10%+ for nan adjacent fewer years, successful portion driven by my position that nan institution is good positioned to institute important stock buybacks now that they person reached their target leverage metrics post-GECAS acquisition. This should, successful my view, thrust AerCap to waste and acquisition astatine a premium to Air Lease's valuation.

Lofty plus waste targets

On its net call, nan institution group a target of $1-2 cardinal successful plus income for 2023. While guidance is very experienced, Air Lease has only approached nan little extremity of this scope successful 2 years since its founding complete a decade ago. So far, nan institution only has 4 craft carried astatine $153 cardinal designed arsenic held-for-sale, which is simply a mini caput start, but still leaves overmuch activity to beryllium done. In addition, arsenic described successful my anterior article, overmuch of these anterior income were to its Blackbird and Thunderbolt associated task entities, and nan securitization marketplace has remained closed fixed macro volatility.

The institution routinely achieved double-digit gains successful margins connected craft income successful little liking complaint environments wherever liquidity was abundant and nan superior markets were wide unfastened to craft issuance. However, to execute nan aforesaid aliases akin profits successful nan existent market, nan institution whitethorn request to either divest much craft and/or waste higher-yielding aircraft, foregoing nan net that these assets will make successful early years for gains successful nan present. A important information of caller deliveries nan institution took successful nan past mates years person apt been rendered untradeable by nan emergence successful liking rates.

Finally, guidance did allude to nan level of plus income being astatine slightest partially limited connected nan measurement of caller deliveries received from Boeing (BA) and Airbus (OTCPK:EADSY) comparative to their plan. While from a axenic rate guidance perspective this is understandable, from a superior allocation position it is frustrating that, peculiarly successful what they picture arsenic a beardown trading environment, and pinch nan banal still trading astatine a ample discount to book, that guidance does not much aggressively prosecute dispositions and usage nan proceeds to get shares. This was not mentioned, and seemingly is not connected nan horizon.

Refinancing into a higher liking complaint environment

The company's refinancing and purchasing needs are starting to wound successful nan shape of higher liking expense. The institution has astir $5.3 cardinal of indebtedness that matures successful 2023-24 pinch an mean fixed coupon of 2.7%. The 2 astir caller enslaved issues, each for $700 million, priced astatine 5.85% and 5.30% respectively, not including discount aliases issuance cost. Management has noted that location is simply a "lag" betwixt changes successful liking rates and changes successful lease rates, but was hesitant to return a guidelines connected really agelong nan catch-up takes and really good situated nan portfolio is to withstand these pressures. Interestingly, nan institution has drawn $1 cardinal successful costs from its ~$7 cardinal revolving in installments facility.

This is nan first clip since 2017 that nan institution has had nett drawdowns from its revolver astatine all, and nan first clip that those nett draws exceeded $100 cardinal since 2013. While nan drawn dispersed connected nan revolver is attractive, it is floating complaint successful nature, and to nan grade it remains outstanding and rates stay elevated, nan institution is apt to incur much liking connected these borrowings successful 2023 than it did successful 2022. While nan revolver provides elasticity successful position of rate management, nan much reliant they go connected it, nan much liking complaint vulnerability they person to woody with.


There remains a important magnitude of uncertainty based connected nan points highlighted above. I will proceed to show Air Lease stock, but I americium not overly bullish and spot imaginable for a challenging adjacent fewer quarters ahead. I support a Hold rating, pinch a value target beneath existent levels.

This article was written by

Grey Ghost Capital floor plan picture

Musings connected stocks and different securities pinch a attraction connected value, catalysts and asset-rich businesses, chiefly successful nan proscription space.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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