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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                  

Commission file number 001-35121

AIR LEASE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (310) 553-0555

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

At November 9, 2012, there were 99,417,998 shares of Air Lease Corporation’s Class A Common Stock outstanding and 1,829,339 shares of Air Lease Corporation’s Class B Non-Voting Common Stock outstanding.

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Air Lease Corporation and Subsidiaries

Form 10-Q

For the Quarterly Period Ended September 30, 2012

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

Statements in this quarterly report on Form 10-Q that are not historical facts may constitute “forward-looking statements,” including any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. These statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in such statements, including as a result of the following factors, among others:

·                                          our inability to make acquisitions of, or lease, aircraft on favorable terms;

·                                          our inability to obtain additional financing on favorable terms, if required, to complete the acquisition of sufficient aircraft as currently contemplated or to fund the operations and growth of our business;

·                                          our inability to obtain refinancing prior to the time our debt matures;

·                                          impaired financial condition and liquidity of our lessees;

·                                          deterioration of economic conditions in the commercial aviation industry generally;

·                                          increased maintenance, operating or other expenses or changes in the timing thereof;

·                                          changes in the regulatory environment;

·                                          our inability to effectively deploy the net proceeds from our capital raising activities;

·                                          potential natural disasters and terrorist attacks and the amount of our insurance coverage, if any, relating thereto; and

·                                          the factors discussed under “Part I — Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011.

All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations. You are therefore cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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PART I—FINANCIAL INFORMATION

ITEM 1.                                          FINANCIAL STATEMENTS

Air Lease Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value amounts)

See accompanying notes.

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share amounts)

See accompanying notes.

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

See accompanying notes.

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Air Lease Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes.

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Air Lease Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.                                 Company Background and Overview

Air Lease Corporation (the “Company”, “ALC”, “we”, “our” or “us”) is incorporated in the State of Delaware and licensed to operate in the State of California. The Company is principally engaged in the leasing of commercial aircraft to airlines throughout the world. We supplement our leasing revenues by providing fleet management and remarketing services to third parties. We typically provide many of the same services that we perform for our fleet, including leasing, releasing, lease management and sales services for which we charge a fee, with the objective of assisting our clients to maximize lease or sale revenues. In addition to our leasing activities and management services, and depending on market conditions, we sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

Note 2.                                 Basis of Preparation

The Company consolidates financial statements of all entities in which we have a controlling financial interest, including the accounts of any Variable Interest Entity in which we have a controlling financial interest and for which we are determined to be the primary beneficiary. All material intercompany balances are eliminated in consolidation. The accompanying Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The accompanying unaudited consolidated financial statements include all adjustments, including only normal, recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows at September 30, 2012, and for all periods presented. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results expected for the year ending December 31, 2012. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Note 3.         Debt Financing

The Company’s consolidated debt as of September 30, 2012 and December 31, 2011 are summarized below (in thousands):

At September 30, 2012, we were in compliance in all material respects with the covenants in our debt agreements, including our financial covenants concerning debt-to-equity, tangible net equity, unencumbered assets and interest coverage ratios.

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The Company’s secured obligations as of September 30, 2012 and December 31, 2011 are summarized below (in thousands, except number of aircraft which are reflected in units):

Secured term financings

The Company did not enter into any additional secured term facilities during the third quarter of 2012. The outstanding balance on our secured term facilities was $675.2 million and $735.3 million at September 30, 2012 and December 31, 2011, respectively.

Warehouse facilities

In March 2012, a wholly-owned subsidiary of the Company entered into a $192.8 million senior secured warehouse facility (the “2012 Warehouse Facility”) to refinance a pool of eight aircraft previously financed under the Company’s non-recourse, revolving $1.25 billion credit facility (the “2010 Warehouse Facility” and together with the 2012 Warehouse Facility the “Warehouse Facilities”).

As of September 30, 2012, the Company had borrowed $1.1 billion under our Warehouse Facilities and pledged 39 aircraft as collateral with a net book value of $1.6 billion. As of December 31, 2011, the Company had borrowed $1.0 billion under the 2010 Warehouse Facility and pledged 38 aircraft as collateral with a net book value of $1.6 billion. The Company had pledged cash collateral and lessee deposits of $108.5 million and $86.9 million at September 30, 2012 and December 31, 2011, respectively.

Unsecured term financings

In September 2012, the Company issued $450.0 million in aggregate principal amount of senior unsecured notes due 2016 to Qualified Institutional Buyers in reliance upon Rule 144A under the Securities Act.  The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.5% per annum.

During the third quarter of 2012, the Company entered into three additional unsecured term facilities aggregating $6.4 million with terms ranging from two to four years and bearing interest at fixed rates ranging from 3.0% to 4.0%.

Unsecured revolving credit facilities

In May 2012, the Company entered into an $853.0 million three-year senior unsecured revolving credit facility (the “Syndicated Unsecured Revolving Credit Facility”). The Syndicated Unsecured Revolving Credit Facility will mature on May 4, 2015 and contains an uncommitted accordion feature under which its aggregate principal amount can be increased by up to $500.0 million.

Borrowings under the Syndicated Unsecured Revolving Credit Facility generally will bear interest at LIBOR plus a margin of 1.75%. The Company is required to pay a commitment fee in respect of unutilized commitments under the Syndicated Unsecured Revolving Credit Facility at a rate of 0.375%.

During the third quarter of 2012, the Company added two additional lenders to the Syndicated Unsecured Revolving Credit Facility and increased the aggregate principal amount by $90.0 million to $943.0 million.

The Company ended the third quarter of 2012 with a total of five unsecured revolving credit facilities aggregating $1.0 billion. The total amount outstanding under our unsecured revolving credit facilities was $330.0 million and $358.0 million as of September 30, 2012 and December 31, 2011, respectively.

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Maturities

Maturities of debt outstanding as of September 30, 2012 are as follows (in thousands):

(1)        As of September 30, 2012, the Company had $920.3 million of debt outstanding under the 2010 Warehouse Facility which matures in June 2013. The outstanding drawn balance at the end of the availability period may be converted at the Company’s option to an amortizing, four-year term loan and has been presented as such in the maturity schedule above.

(2)        As of September 30, 2012, the Company had $330.0 million of debt outstanding under our unsecured revolving credit facilities. The outstanding drawn balances may be rolled until the maturity date of each respective facility and have been presented as such in the maturity schedule above.

Note 4.         Commitments and Contingencies

Aircraft Acquisition

As of September 30, 2012, we had commitments to acquire a total of 291 new and one used aircraft for delivery as follows:

(1)    Of the 11 aircraft that we committed to acquire in the remainder of 2012, one Airbus A320/321-200 will be a used aircraft.

(2)    As of September 30, 2012, 14 of the Airbus A320/321 NEO aircraft and 25 of the Boeing 737-8/9 MAX aircraft were subject to reconfirmation.

Commitments for the acquisition of these aircraft and other equipment at an estimated aggregate purchase price (including adjustments for inflation) of approximately $16.4 billion at September 30, 2012 are as follows (in thousands):

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We have made non-refundable deposits on the aircraft for which we have commitments to purchase of $544.8 million and $405.5 million as of September 30, 2012 and December 31, 2011, respectively, which are subject to manufacturer performance commitments. If we are unable to satisfy our purchase commitments, we may forfeit our deposits. Further, we would be subject to breach of contract claims by our lessees and manufacturers.

Note 5.        Net Earnings Per Share

Basic net earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock; however, potential common equivalent shares are excluded if the effect of including these shares would be anti-dilutive. The Company’s two classes of common stock, Class A and Class B Non-Voting, have equal rights to dividends and income, and therefore, basic and diluted earnings per share are the same for each class of common stock.

Diluted net earnings per share takes into account the potential conversion of stock options, restricted stock units, and warrants using the treasury stock method and convertible notes using the if-converted method.  For the three and nine months ended September 30, 2012 and 2011, the Company excluded 3,358,408 and 3,375,908 shares related to stock options which are potentially dilutive securities from the computation of diluted earnings per share because including these shares would be anti-dilutive.  In addition, the Company excluded 2,114,957 and 2,613,989 shares related to restricted stock units for which the performance metric had yet to be achieved as of September 30, 2012 and 2011, respectively.

The following table sets forth the reconciliation of basic and diluted net income per share (in thousands, except share amounts):

Note 6.         Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring and Non-recurring Basis

The Company had no assets or liabilities which are measured at fair value on a recurring or non-recurring basis as of September 30, 2012 or December 31, 2011.

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Financial Instruments Not Measured at Fair Value

The fair value of debt financing is estimated based on the quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities, which would be categorized as a Level 2 measurement in the fair value hierarchy. The estimated fair value of debt financing as of September 30, 2012 was $4,351.1 million compared to a book value of $4,296.1 million. The estimated fair value of debt financing as of December 31, 2011 was $2,591.0 million compared to a book value of $2,602.8 million.

The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at September 30, 2012, but require disclosure of their fair values: cash and cash equivalents and restricted cash. The estimated fair value of such instruments at September 30, 2012 approximates their carrying value as reported on the consolidated balance sheet.  The fair value of all these instruments would be categorized as Level 1 of the fair value hierarchy.

Note 7.         Stock-based Compensation

In accordance with the Amended and Restated Air Lease Corporation 2010 Equity Incentive Plan (“Plan”), the number of stock options (“Stock Options”) and restricted stock units (“RSUs”) authorized under the Plan is approximately 8,193,088 as of September 30, 2012. Options are generally granted for a term of 10 years and generally vest over a three year period. There are two kinds of RSUs: those that vest based on the attainment of book-value goals and those that vest based on the attainment of Total Shareholder Return (“TSR”) goals. The book-value RSUs generally vest ratably over three to four years, if the performance condition has been met. Book-value RSUs for which the performance metric has not been met are forfeited.  The TSR RSUs vest at the end of a three year period.  The number of TSR RSUs that will ultimately vest is based upon the percentile ranking of the Company’s TSR among a peer group. The number of shares that will ultimately vest will range from 0% to 200% of the RSUs initially granted depending on the extent to which the TSR metric is achieved.  As of September 30, 2012, the Company granted 3,375,908 Stock Options and 3,862,608 RSUs of which 192,188 are TSR RSUs.

The Company recorded $7.1 million and $8.3 million of stock-based compensation expense for the three months ended September 30, 2012 and 2011, respectively.  Stock-based compensation expense for the nine months ended September 30, 2012 and 2011 totaled $24.5 million and $31.0 million, respectively.

Stock Options

A summary of stock option activity in accordance with the Company’s stock option plan as of September 30, 2012, and changes for the nine month period then ended, follows:

(1)         The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of our Class A Common Stock as of the respective date.

(2)         Options expected to vest reflect an estimated forfeiture rate.

Stock-based compensation expense related to employee stock options for the three months ended September 30, 2012 and 2011 totaled $3.0 million and $3.1 million, respectively. Stock-based compensation expense related to employee stock options for the nine months ended September 30, 2012 and 2011 totaled $8.8 million and $8.9 million, respectively.

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The following table summarizes additional information regarding outstanding and exercisable and vested options at September 30, 2012:

As of September 30, 2012, there was $8.3 million of unrecognized compensation cost related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of one year. To the extent the actual forfeiture rate is different from what we have estimated, stock-based compensation related to these awards will be different from our expectations.

Restricted Stock Unit Plan

Compensation cost for stock awards is measured at the grant date based on fair value and recognized over the vesting period.  The fair value of book-value RSUs is determined based on the closing market price of the Company’s Class A Common Stock on the date of grant, while the fair value of TSR RSUs is determined at the grant date using a Monte Carlo simulation model. Included in the Monte Carlo simulation model were certain assumptions regarding a number of highly complex and subjective variables, such as expected volatility, risk-free interest rate and expected dividends. To appropriately value the award, the risk-free interest rate is estimated for the time period from the valuation date until the vesting date and the historical volatilities were estimated based on a historical timeframe equal to the time from the valuation date until the end date of the performance period. Due to our limited stock history since the completion of our initial public offering on April 25, 2011, historical volatility was estimated based on all available information. The dividend distributions were estimated to be zero based on dividend distributions before the valuation date.

During the nine months ended September 30, 2012, the Company granted 404,644 RSUs of which 192,188 are TSR RSUs. The following table summarizes the activities for our unvested RSUs for the nine months ended September 30, 2012:

(1)  RSUs expected to vest reflect an estimated forfeiture rate.

The Company recorded $4.1 million and $5.2 million of stock-based compensation expense related to RSUs for the three months ended September 30, 2012 and 2011, respectively. The Company recorded $15.7 million and $22.1 million of stock-based compensation expense related to RSUs for the nine months ended September 30, 2012 and 2011, respectively.

At September 30, 2012, the outstanding RSUs are expected to vest as follows: 2013— 954,757; 2014— 903,946; 2015— 256,254. As of September 30, 2012, there was $19.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted-average remaining period of 1.8 years.

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Note 8. Litigation

In April 2012, the Company was named as a defendant in a complaint filed in Superior Court of the State of California for the County of Los Angeles by American International Group, Inc. and International Lease Finance Corporation.  The complaint also names as defendants certain executive officers and employees of the Company.  Among other things, the suit alleges breach of fiduciary duty and misappropriation of trade secrets.  The complaint seeks an unspecified amount of damages.  The Company believes that it has meritorious defenses to these claims and intends to defend this matter vigorously. As of the date of this filing, the Company is unable to estimate a range of possible loss, if any, related to this matter.

Note 9.  Subsequent Events

On October 3, 2012, the Company issued an additional $50.0 million aggregate principal amount of 4.5% senior unsecured notes due 2016 to Qualified Institutional Buyers in reliance upon Rule 144A under the Securities Act.  The notes are senior unsecured obligations of the Company and bear interest at a rate of 4.5% per annum.  With the completion of this offering, the Company has sold and issued a total of $500.0 million aggregate principal amount of senior unsecured notes due 2016.

On, November 2, 2012, the Company added an additional lender to the Syndicated Unsecured Revolving Credit Facility and increased the aggregate principal amount by $100.0 million to $1,043.0 million.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview

Our primary business is to acquire new and used popular and fuel-efficient commercial aircraft from aircraft manufacturers and other parties and to lease those aircraft to airlines around the world. We supplement our leasing revenues by providing management services to investors and/or owners of aircraft portfolios, for which we will receive fee-based revenue. These services include leasing, re-leasing, and lease management and sales services, with the goal of helping our clients maximize lease and sale revenues. In addition to our leasing activities and management services, and depending on market conditions, we expect to sell aircraft from our fleet to other leasing companies, financial services companies and airlines.

During the third quarter of 2012, we have continued to build one of the world’s youngest, most fuel-efficient aircraft operating lease portfolios. During the three months ended September 30, 2012, we acquired an additional five aircraft from our new aircraft pipeline ending the quarter with a total of 142 aircraft (of which 73 were new aircraft and 69 were used aircraft), growing our fleet by 3.9% based on net book value.  The weighted-average age of our fleet was 3.4 years as of September 30, 2012 compared to 3.6 years as of December 31, 2011. We also managed three aircraft as of September 30, 2012.

The Company recorded $172.9 million in rental revenue for the third quarter of 2012, an increase of $82.4 million or 91.1% compared to the third quarter of 2011. This increase is a result of the full impact on rental revenue of the fleet of 137 aircraft acquired as of June 30, 2012 in addition to rental revenue for the five aircraft acquired during the three months ended September 30, 2012, for which the full impact will be reflected in subsequent periods.

During the third quarter of 2012, the Company entered into additional debt facilities aggregating $546.4 million, which included $450.0 million in senior unsecured notes, a $90.0 million addition to our Syndicated Unsecured Revolving Credit Facility and additional unsecured term facilities aggregating $6.4 million. We ended the quarter with total unsecured debt outstanding of $2.5 billion. The Company’s unsecured debt as a percentage of total debt increased to 58.6% as of September 30, 2012 from 31.7% as of December 31, 2011. We ended the third quarter of 2012 with a conservative balance sheet with low leverage and ample available liquidity of $1.47 billion. As part of our financing strategy we will continue to focus on financing the Company on an unsecured basis.

Our fleet

Portfolio metrics of our fleet as of September 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

(1)               Weighted-average fleet age and remaining lease term calculated based on net book value.

The following table sets forth the net book value and percentage of the net book value of our aircraft portfolio operating in the indicated regions as of September 30, 2012 and December 31, 2011 (dollars in thousands):

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The following table sets forth the number of aircraft we leased by aircraft type as of September 30, 2012 and December 31, 2011:

As of September 30, 2012, we had commitments to acquire a total of 291 new and one used aircraft for delivery as follows: