Since its inception in 2010, Air Lease (NYSE:AL) has been growing at a scorching pace with the company now owning a fleet of 200 aircraft. This growth has been backed by leverage, but has the company over-leveraged in its thrust for robust growth?
Leverage is high, but coverage is comfortable
As of FY2013, Air Lease reported a total debt of $5.853 billion and an adjusted EBITDA of $786 million. This translates into a relatively high debt to EBITDA of 7.4. Leverage for Aircastle (NYSE:AYR) and AerCap Holdings (NYSE:AER) was 6.8 and 6.9 respectively as of FY2013.
While the leverage seems high, the comforting factor for Air Lease is the fact that the company has a strong EBITDA interest coverage. For FY2013, Air Lease had an EBITDA interest coverage ratio of 4.2 and an operating cash flow to interest coverage of 3.5. This indicates that Air Lease is generating sufficient cash flow to service its debt comfortably.
Capital expenditure is high, but contract backlog provides cushion
Air Lease will continue to leverage with the company having 327 aircraft on order through 2023. I must mention here that Air Lease currently controls the largest order book in the aircraft leasing industry, and this gives them an advantage over peers.
For the 327 aircraft on order, Air Lease needs to pay $27.5 billion through 2023. This implies that debt will continue to increase. The offsetting factor for the debt comes from the expected cash inflow from existing and new aircraft.
As of December 2013, Air Lease has $6.2 billion future rentals under flight operating lease. The total forward order book through 2023 currently stands at $27.3 billion. Therefore, there will be enough contract backlog and cash flow cushion to cover for future debt. A high future rental makes debt procurement relatively easy for Air Lease.
Aircastle's and AerCap Holdings' future rentals under flight operating lease were $3.0 billion and $5.3 billion respectively as compared to $6.2 billion for Air Lease. This provides higher revenue visibility as compared to peers.
Valuations are attractive
Air Lease currently trades at an EV/EBITDA valuation of 12.3 as compared to an EV/EBITDA valuation of 9.6 and 12.3 respectively for Aircastle and AerCap Holdings respectively. While the valuation looks in line with peers, Air Lease holds an advantage in terms of robust growth as compared to peers.
None of the peers have an aircraft order backlog as significant as Air Lease, and this factor will drive revenue and EBITDA growth at a stronger pace as compared to peers. From that perspective, Air Lease looks attractively valued.
A relatively premium valuation for Air Lease can also be justified considering the fact that the company has the youngest fleet, holding a higher book value. As of December 2013, Air Lease fleet had an average age of 3.7 years as compared to 5.4 years for AerCap Holdings and 9.9 years for Aircastle.
Air Lease will continue to grow at a robust pace with a strong aircraft backlog. The company has leveraged to grow, but the coverage metrics are comfortable and this is not likely to hinder growth. Further, the future rentals receivable will ensure that debt servicing is smooth. Air Lease therefore looks attractive with a medium to long-term holding horizon.