Aircastle LTD 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2019 , and in this report filed with the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars. All statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA and Adjusted EBITDA and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on our historical performance and that of our subsidiaries and on our current plans, estimates and expectations and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the SEC and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s 2019 Annual Report on Form 10-K and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances. WEBSITE AND ACCESS TO THE COMPANY’S REPORTS Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are available free of charge through our website at www.aircastle.com under “Investors — Tax Information (PFIC).” The information on the Company’s Internet website is not part of, nor incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC. 22 OVERVIEW Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of March 31, 2020 , we owned and managed on behalf of our joint ventures 283 aircraft leased to 84 lessees located in 46 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. In many cases we are, however, obligated to pay a specified portion of maintenance or modification costs. As of March 31, 2020 , the net book value (including flight equipment held for lease and net investment in leases, or “net book value”) was $7.56 billion compared to $7.79 billion at December 31, 2019 . Our revenues and net loss for the three months ended March 31, 2020 were $282.5 million and $34.2 million , respectively. On March 27, 2020, the Company successfully completed its merger (the “Merger”) with MM Air Merger Sub Limited, a Bermuda exempted company (“Merger Sub”), pursuant to the Agreement and Plan of Merger, dated as of November 5, 2019 (the “Merger Agreement”), by and among the Company, MM Air Limited, a Bermuda exempted company (“Parent”), and Merger Sub. As a result of the Merger, Aircastle’s shareholders (other than Marubeni Corporation and its affiliates) received cash consideration of $32.00 per common share and the Company is now controlled by affiliates of Marubeni Corporation and Mizuho Leasing Company, Limited (“Mizuho Leasing”). The Merger is not expected to result in any change of the Company’s business strategy and we believe the Company will benefit by having stable investors with a long-term investment horizon. We also may benefit by being affiliated with Mizuho Leasing, part of the Mizuho Financial Group, one of the largest Japanese financial institutions. Growth in commercial air traffic is broadly correlated with world economic activity. In recent years commercial air traffic growth has expanded at a rate 1.5 to 2 times that of global GDP growth. The expansion of air travel has driven the growth in the world aircraft fleet. There are currently approximately 22,000 commercial mainline passenger and freighter aircraft globally. In a normal economic environment, we would expect this fleet to continue expanding at a three to four percent average annual rate. Aircraft leasing companies currently own approximately 45% of the world’s commercial jet aircraft. The COVID-19 virus has had an unprecedented negative impact on the global economy, and in particular on the aviation sector. There has been a dramatic slowdown in air traffic, with many markets in near complete shutdown. According to IATA air travel is down to approximately 20% of normal levels and a recovery to pre-pandemic levels is not expected for several years. Substantially all of the world’s airlines are experiencing financial difficulties and liquidity challenges. While we believe the long-term demand for air travel will return to historical trends over time, the near-term impacts of the COVID-19 virus’ economic shock are material; the extent and duration of which cannot currently be determined. Airlines have been seeking to preserve liquidity through a combination of requesting government support, raising debt and equity, delaying or canceling new aircraft orders, furloughing employees, as well as requesting deferrals from lessors. We have agreed to defer near-term lease payments with certain of our airline customers, which they are obliged to repay over time. As of May 7, 2020, we have agreed to defer approximately $70.0 million in near-term lease payments with 35 airlines, including $18.5 million that appear in our Consolidated Balance Sheet as components of Accounts receivable, Net investment in leases, or Other assets as of March 31, 2020 . If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to extend further deferrals to some of our other customers or to extend the deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred. Subsequent to March 31, 2020, two of our customers entered judicial insolvency proceedings. We lease two aircraft to each of these customers, comprising an aggregate of $127.7 million of our flight equipment held for lease as of March 31, 2020. As of the date of this filing, our aircraft leases have been neither terminated nor rejected by the airlines. Accounts receivable from these customers as of March 31, 2020, is not material. We believe we have sufficient liquidity to meet all of our contractual obligations over the next twelve months. We have $1.1 billion of liquidity from cash on hand, working capital and/or available credit lines. We believe that our long-standing business strategy of maintaining conservative leverage, limiting long-term financial commitments and focusing our portfolio on more liquid narrow-body aircraft will enable us to manage through the COVID-19 crisis. Our portfolio of mainly mid-life, narrow-body aircraft should remain attractive relative to new technology aircraft due to their lower capital 23 costs in an environment of tight airline margins and low fuel prices. We believe our platform and personnel position us to effectively manage through the COVID-19 crisis and will able us to take advantage of new investment opportunities when they arise. Our Company employs a team of experienced senior professional with extensive industry and financial experience. Our leadership team members have an average of more than 30 years of relevant industry experience, including managing through prior downturns in the aviation industry, like the 2008 Global Financial Crisis and the September 11, 2001 terror attacks. Our business approach will be to remain differentiated from those of other large leasing companies. Our investment strategy is to seek out the best risk-adjusted return opportunities across the commercial jet market, so the volume and types of assets we buy will vary over time with market conditions. We plan to grow our business and profits over the long-term while maintaining a conservative, flexible capital structure. We prefer to have capital resources available to capture investment opportunities that arise in the context of changing market circumstances. As such, we limit large, long-term capital commitments and are less reliant on orders for new aircraft from aircraft manufacturers as a source of new investments than many of our competitors. Revenues Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from maintenance payments related to lease expirations, lease termination payments, interest recognized from direct financing and sales-type leases and gains on the sale of flight equipment. Typically, our aircraft are subject to net leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs arising during the term of the lease. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues. As a result of the COVID-19 pandemic, the Company has provided lease concessions to certain customers in the form of lease rental deferrals. While these deferral arrangements affect the timing of lease rental payments, the total amount of lease rental payments required over the lease is generally the same as that which was required under the original lease agreement. We account for the deferrals as if no modifications to the lease agreements were made, and record the deferred rentals as a receivable within Other assets in our consolidated balance sheet. We continue to recognize lease rental revenue for such receivables, to the extent collectability is probable. When collectability is not probable, the customer is placed on non-accrual status, and revenue is recognized when cash payments are received. Under a lease, the lessee is responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we typically do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee. Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such 24 costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. 2020 Lease Expirations and Lease Placements At March 31, 2020 , the Company had five off-lease aircraft and twenty aircraft with scheduled lease expirations in 2020. As of May 8, 2020 , of these 25 aircraft, we have thirteen aircraft, which account for less than 5% of our net book value at March 31, 2020 , still to be placed or sold. 2021-2024 Lease Expirations and Lease Placements Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2021-2024, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in leases) at March 31, 2020 , specified below: • 2021: 15 aircraft, representing 4%; • 2022: 28 aircraft, representing 9%; • 2023: 33 aircraft, representing 10%; and • 2024: 54 aircraft, representing 21%. Operating Expenses Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, SG&A expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations. Income Tax Provision We obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland and the United States. Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions. We have a U.S.-based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The CARES Act, among other things, includes provisions relating to net operating loss carrybacks, alternative minimum tax credit refunds, modification to the net interest expense deduction limitation and technical correction to the tax depreciation methods for qualified improvement property. While we continue to evaluate the potential application of the CARES Act 25 provisions, the CARES Act did not materially impact the Company’s effective tax rate for the three months ended March 31, 2020. Acquisitions and Sales During the first three months of 2020 , we acquired four aircraft for $82.3 million . As of May 8, 2020 , we have not acquired any additional aircraft. At March 31, 2020 , we had commitments to acquire 27 additional aircraft for $1.02 billion , including the acquisition of 25 new E-Jet E2 aircraft from Embraer, and we are in the process of documenting deferring our first E Jet E-2 delivery scheduled for the third quarter of 2020. Of this amount, approximately $125.8 million represents commitments for the remainder of 2020 . As of May 8, 2020 , we have commitments to acquire 27 aircraft for $1.02 billion . During the first three months of 2020 , we sold eight aircraft for net proceeds of $150.0 million , and recognized net gains on sales of $27.0 million . As of May 8, 2020 , we have not sold any additional aircraft. The following table sets forth certain information with respect to the aircraft owned by us as of March 31, 2020 : AIRCASTLE AIRCRAFT INFORMATION (dollars in millions) Owned Aircraft As of March31, 2020 (1) As of March 31, 2019 (1) Net Book Value of Flight Equipment $ 7,565 $ 7,645 Net Book Value of Unencumbered Flight Equipment $ 5,831 $ 6,298 Number of Aircraft 274 259 Number of Unencumbered Aircraft 234 228 Number of Lessees 84 86 Number of Countries 46 47 Weighted Average Age (years) (2) 10.1 9.4 Weighted Average Remaining Lease Term (years) (2) 4.7 4.5 Weighted Average Fleet Utilization during the three months ended March 31, 2020 and 2019 (3) 98.9 % 93.7 % Managed Aircraft on behalf of Joint Venture Net Book Value of Flight Equipment $ 324 $ 686 Number of Aircraft 9 15 (1) Calculated using net book value at period end. (2) Weighted by net book value. (3) Aircraft on-lease days as a percent of total days in period weighted by net book value. The decrease from our historical utilization rate for the three months ended March 31, 2019, was due to the early termination of the leases for eleven aircraft from Avianca Brazil and seven aircraft from Jet Airways. (4) Lease rental revenue, interest income and cash collections on our net investment in leases for the period as a percent of the average net book value for the period; quarterly information is annualized. The decrease from our historical portfolio yield for the three months ended March 31, 2019, was due to the early termination of the leases for eleven aircraft from Avianca Brazil and seven aircraft from Jet Airways. The calculation of portfolio yield includes our net investment in leases in the average net book value, and the interest income and cash collections from our net investment in lease rentals. 26 PORTFOLIO DIVERSIFICATION Owned Aircraft as of March 31, 2020 Owned Aircraft as of March 31, 2019 Number of Aircraft % of Net Book Value (1) Number of Aircraft % of Net Book Value (1) Aircraft Type Passenger: Narrow-body 246 75 % 229 73 % Wide-body 24 21 % 26 23 % Total Passenger 270 96 % 255 96 % Freighter 4 4 % 4 4 % Total 274 100 % 259 100 % Manufacturer Airbus 186 68 % 159 59 % Boeing 83 30 % 95 40 % Embraer 5 2 % 5 1 % Total 274 100 % 259 100 % Regional Diversification Asia and Pacific 89 37 % 85 37 % Europe 100 27 % 94 29 % Middle East and Africa 14 6 % 17 8 % North America 40 13 % 35 9 % South America 26 15 % 16 10 % Off-lease 5 (2) 2 % 12 (3) 7 % Total 274 100 % 259 100 % (1) Calculated using net book value at period end. (2) Consisted of one Airbus A320-200 and one Airbus A330-200 aircraft, which are each scheduled to be delivered during the second quarter of 2020 to lessees in North America and Europe, respectively, and one Airbus A330-200 and two Boeing 737-800 aircraft, which we are marketing for lease or sale. (3) Consisted of ten Airbus A320-200 aircraft, which were delivered on lease to a customer in South America during the second and third quarters of 2019, and two Airbus A330-200 aircraft, one of which was delivered on lease to a customer in South America during the third quarter of 2019 and one of which will be delivered to a customer in Europe during the second quarter of 2020. 27 Our top ten customers with respect to aircraft we owned as of March 31, 2020 , representing 112 aircraft and 42.4% of the net book value, are as follows: Customer Percent of Net Book Value Country Number of Aircraft LATAM 9.1% Chile 13 IndiGo 8.4% India 16 easyJet 5.0% United Kingdom 30 Iberia 3.6% Spain 15 Air Canada 3.6% Canada 6 Aerolineas Argentinas 2.8% Argentina 5 Interjet 2.6% Mexico 11 American Airlines 2.6% United States 7 AirBridgeCargo (1) 2.4% Russia 2 Jeju Air 2.3% South Korea 7 Total top ten customers 112 All other customers 162 Total all customers 274 (1) Guaranteed by Volga-Dnepr Airlines. We have one additional aircraft on lease with an affiliate. Finance We operate in a capital intensive industry and have a demonstrated track record of raising substantial amounts of capital over the last fifteen years. Since our inception in late 2004, we have raised $1.69 billion in equity capital from private and public investors. We also raised $17.55 billion in debt capital from a variety of sources including export credit agency-backed debt, commercial bank debt, the aircraft securitization markets and the unsecured bond market. The diversity and global nature of our financing sources demonstrates our ability to adapt to changing market conditions and seize new growth opportunities. We intend to fund new investments through cash on hand, funds generated from operations, maintenance payments received from lessees, secured borrowings for aircraft, draws on our revolving credit facilities and proceeds from any future aircraft sales. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive. See “Liquidity and Capital Resources — Secured Debt Financings” and “Liquidity and Capital Resources — Unsecured Debt Financings” below. 28 RESULTS OF OPERATIONS Comparison of the three months ended March 31, 2020 to the three months ended March 31, 2019 : Three Months Ended March 31, 2020 2019 (Dollars in thousands) Revenues: Lease rental revenue $ 198,920 $ 181,234 Direct financing and sales-type lease revenue 6,766 8,443 Amortization of lease premiums, discounts and incentives (5,696 ) (5,711 ) Maintenance revenue 46,552 16,401 Total lease revenue 246,542 200,367 Gain on sale of flight equipment 27,049 12,002 Other revenue 8,907 1,558 Total revenues 282,498 213,927 Operating expenses: Depreciation 89,705 84,735 Interest, net 61,507 63,463 Selling, general and administrative 62,382 18,000 Impairment of flight equipment 62,657 — Maintenance and other costs 4,756 7,404 Total operating expenses 281,007 173,602 Other expense: Loss on extinguishment of debt (3,955 ) — Merger expenses (32,210 ) — Other (112 ) (2,061 ) Total other expense (36,277 ) (2,061 ) Income (loss) from continuing operations before income taxes and earnings (loss) of unconsolidated equity method investments (34,786 ) 38,264 Income tax provision 149 3,098 Earnings (loss) of unconsolidated equity method investments, net of tax 714 (356 ) Net income (loss) $ (34,221 ) $ 34,810 Revenues Total revenues increased by $68.6 million for the three months ended March 31, 2020 , as compared to the three months ended March 31, 2019 . Lease rental revenue . The increase in lease rental revenue of $17.7 million for the three months ended March 31, 2020 , as compared to the same period in 2019 , was primarily the result of: • a $29.7 million increase in revenue, reflecting the impact of 52 aircraft purchased since January 1, 2019; and • a $2.6 million increase due to lease extensions, amendments, transitions and other changes. This increase was partially offset by a $14.6 million decrease due to the sale of 22 aircraft since January 1, 2019. Direct financing and sales-type lease revenue. For the three months ended March 31, 2020 , $6.8 million of interest income from direct financing and sales-type leases was recognized, as compared to $8.4 million recorded for the same period in 2019 , primarily attributable to the sale of two aircraft subject to direct financing and sales-type leases during the fourth quarter of 2019. 29 Amortization of lease premiums, discounts and lease incentives consisted of the following: Three Months Ended March 31, 2020 2019 (Dollars in thousands) Amortization of lease premiums $ (3,529 ) $ (4,037 ) Amortization of lease discounts 375 1,426 Amortization of lease incentives (2,542 ) (3,100 ) Amortization of lease premiums, discounts and incentives $ (5,696 ) $ (5,711 ) Maintenance revenue. For the three months ended March 31, 2020 , we recorded $46.6 million of maintenance revenue, of which $38.8 million related to four Airbus A330-200 aircraft on lease with South African Airways for which the Company initiated a process to accept early redelivery of the aircraft due to lessee default - see “Summary of Recoverability Assessment and Other Impairments” below. We also recorded maintenance revenue related to the scheduled lease expirations of three narrow-body aircraft during the three months ended March 31, 2020. For the same period in 2019 , we recorded $16.4 million maintenance revenue, primarily due to the transition of one narrow-body aircraft and two wide-body aircraft, in addition to cash maintenance revenue received for ten narrow-body aircraft. Gain on sale of flight equipment increased by $15.0 million to $27.0 million for the three months ended March 31, 2020 , as compared to gains of $12.0 million for the same period in 2019 . During the first quarter of 2020 , we sold eight aircraft, including the receipt of insurance proceeds for one aircraft, as compared to the sale four aircraft during the first quarter of 2019 . Other revenue increased by $7.3 million to $8.9 million for the three months ended March 31, 2020 , as compared to $1.6 million for the same period in 2019 , primarily due to $8.7 million of security deposits recognized into revenue related to the South African Airways Transaction, partially offset by lower service fees of $1.3 million primarily related to the liquidation of our joint venture with an affiliate of the Ontario Teachers’ Pension Plan. Operating expenses Total operating expenses increased by $107.4 million for the three months ended March 31, 2020 , as compared to the three months ended March 31, 2019 . Depreciation expense increased by $5.0 million for the three months ended March 31, 2020 as compared to the same period in 2019 . The increase is primarily the result of higher depreciation of $11.4 million due to 52 aircraft acquired since January 1, 2019, partially offset by a decrease of $6.6 million resulting from 24 aircraft sold since January 1, 2019. Interest, net consisted of the following: Three Months Ended March 31, 2020 2019 (Dollars in thousands) Interest on borrowings and other liabilities $ 58,426 $ 60,279 Amortization of deferred losses related to interest rate derivatives — 184 Amortization of deferred financing fees and debt discount 3,581 3,364 Interest expense 62,007 63,827 Less: Interest income (500 ) (364 ) Interest, net $ 61,507 $ 63,463 Interest, net decreased by $2.0 million as compared to the three months ended March 31, 2019 , primarily as a result of lower weighted average interest rates, partially offset by higher weighted average debt outstanding. Selling, general and administrative expenses for the three months ended March 31, 2020 increased $44.4 million as compared to the same period in 2019, primarily attributable to share-based compensation expense of $38.7 million recognized 30 as a result of the Merger and a provision for credit losses of $3.6 million related to the change in our allowance for credit losses since the adoption of ASC 326 on January 1, 2020. Impairment of aircraft. We recorded impairment charges of $62.7 million during the three months ended March 31, 2020 related to four Airbus A330-200 aircraft on lease to South African Airways. See “Summary of Recoverability Assessment and Other Impairments” below for a detailed discussion of impairment charges related to certain aircraft. No impairments were recorded during the three months ended March 31, 2019. Maintenance and other costs were $4.8 million for the three months ended March 31, 2020 , a decrease of $2.6 million compared to the same period in 2019 . The three months ended March 31, 2019 included higher than projected lessor contributions towards the cost of maintenance events for aircraft acquired with attached leases and costs for scheduled transitions. Other expense Total other expense increased by $34.2 million for the three months ended March 31, 2020 , as compared to the three months ended March 31, 2019 . The increase was primarily attributable to $32.2 million of legal and banking expenses related to the Merger and a $4.0 million loss on extinguishment of debt due to the early repayment of secured debt for five aircraft, partially offset by favorable mark-to-market adjustments on our interest rate caps of $2.0 million. Income tax provision Our provision for income taxes for the three months ended March 31, 2020 and 2019 was $0.1 million and $3.1 million , respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The decrease in our income tax provision of $2.9 million for the three months ended March 31, 2020 , as compared to the same period in 2019 , was primarily attributable to changes in operating income subject to tax in Ireland, the United States and other jurisdictions. The three months ended March 31, 2020, included net impairment charges of $9.3 million in a low-tax jurisdiction and a significant decrease in Bermuda income, primarily related to Merger expenses of $32.2 million. The three months ended March 31, 2020, also included discrete items totaling $3.0 million in tax expense. During the three months ended March 31, 2019, we reported a significant decrease in Bermuda income primarily relating to Avianca Brazil. Summary of Recoverability Assessment and Other Impairments Transactional Impairments In February 2020, the Company initiated a process to accept the redelivery of four Airbus A330-200 aircraft on lease to South African Airways prior to their scheduled lease expirations due to lessee default. As a result, the Company recognized impairment charges of $62.7 million and recorded $38.8 million of maintenance revenue, $5.9 million of lease rentals received in advance and $8.7 million of security deposits into revenue during the first quarter of 2020. Aircraft Monitoring List We monitor our fleet for aircraft that are more susceptible to failing our recoverability assessments within one year due to their sensitivity to changes in contractual cash flows, future cash flow estimates, and aircraft residual or scrap values. The COVID-19 virus has had an unprecedented negative impact on the global economy, and in particular the aviation sector. The extent and duration of the impact of the virus on air traffic, lease rental rates, and aircraft valuations is currently indeterminable. We will perform our annual recoverability assessment of our aircraft in the second quarter of 2020, and will have a particular focus on aircraft with near-term lease expirations and certain aircraft variants that are more susceptible to the impact of COVID-19 and value deteriorations. 31 RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS See Note 1 - “Summary of Significant Accounting Policies – Organization and Basis of Presentation” in the Notes to Unaudited Consolidated Financial Statements above. RECENT UNADOPTED ACCOUNTING PRONOUNCEMENTS See Note 1 - “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to Unaudited Consolidated Financial Statements above. LIQUIDITY AND CAPITAL RESOURCES Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations generate a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including: • various forms of borrowing secured by our aircraft, including bank term facilities, limited recourse securitization financings, and ECA-backed financings for new aircraft acquisitions; • unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes; • asset sales; and • contributions from our shareholders. Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory. During the first three months of 2020 , we met our liquidity and capital resource needs with $69.2 million of cash flow from operations, $650.0 million from our revolving credit facilities and $150.0 million of cash from aircraft sales. As of March 31, 2020 , the weighted-average maturity of our secured and unsecured debt financings was 3.1 years and we were in compliance with all applicable covenants. We have agreed to defer some near-term lease payments with certain of our airline customers. As of May 7, 2020, we have agreed to defer approximately $70.0 million in near-term lease payments with 35 airlines, which these airline customers have agreed to repay over time. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, government or other sources, we may need to extend further deferrals to some of our other customers or to extend the deferrals we have already made. We may ultimately be unable to collect all the amounts we have deferred. We believe we have sufficient liquidity to meet all of our contractual obligations over the next twelve months and have $1.1 billion of liquidity from cash on hand, working capital and/or available credit lines. In addition, we believe payments received from lessees and other funds generated from operations, unsecured bond offerings, secured borrowings for aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments over the next twelve months. 32 Cash Flows Three Months Ended March 31, 2020 2019 (Dollars in thousands) Net cash flow provided by operating activities $ 69,217 $ 106,360 Net cash flow provided by (used in) investing activities 92,404 (286,246 ) Net cash flow provided by financing activities 356,135 120,241 Operating Activities: Cash flow provided by operations was $69.2 million and $106.4 million for the three months ended March 31, 2020 and 2019 , respectively. The decrease in cash flow provided by operations of $37.1 million for the three months ended March 31, 2020 versus the same period in 2019 was primarily a result of $35.6 million of cash paid for Merger expenses and an $8.4 million increase in cash paid for selling, general and administrative expenses. These outflows were offset by a $6.1 million increase in cash received from maintenance revenue. Investing Activities: Cash flow provided by investing activities was $92.4 million and cash flow used in investing activities was $286.2 million for the three months ended March 31, 2020 and 2019 , respectively. The increase in cash flow provided by investing activities of $378.7 million for the three months ended March 31, 2020 versus the same period in 2019 was primarily a result of a $306.7 million decrease in the acquisition and improvement of flight equipment and a $93.7 million increase in aircraft proceeds from the sale of flight equipment. These inflows were offset by a $28.1 million increase in aircraft purchase deposits and progress payments, net of returned deposits. Financing Activities: Cash flow provided by financing activities was $356.1 million and $120.2 million for the three months ended March 31, 2020 and 2019 , respectively. The increase in cash flow provided by financing activities of $235.9 million for the three months ended March 31, 2020 versus the same period in 2019 was primarily a result of a $435.0 million increase in proceeds from secured and unsecured financings. These inflows were offset by a $206.3 million increase in secured and unsecured debt financing repayments. 33 Debt Obligations For complete information on our debt obligations, please refer to Note 7 - “Secured and Unsecured Debt Financings” in the Notes to Unaudited Consolidated Financial Statements above. Contractual Obligations Our contractual obligations consist of principal and interest payments on debt financings, aircraft acquisitions and rent payments related to our office leases. Total contractual obligations increased to $7.25 billion at March 31, 2020 from $7.03 billion at December 31, 2019 , primarily due to an increase in borrowings under our revolving credit facilities, partially offset by a decrease in aircraft purchase obligations. The following table presents our actual contractual obligations and their payment due dates as of March 31, 2020 : Payments Due by Period as of March 31, 2020 Contractual Obligations Total 1 year or less 2-3 years 4-5 years More than 5 years (Dollars in thousands) Principal payments: Senior Notes due 2020 - 2026 $ 3,600,000 $ 800,000 $ 500,000 $ 1,650,000 $ 650,000 DBJ Term Loan 215,000 — 60,000 155,000 — Revolving Credit Facilities 650,000 — 650,000 — — ECA Financings 48,994 14,399 20,664 13,931 — Bank Financings 959,772 89,156 183,502 648,533 38,581 Total principal payments 5,473,766 903,555 1,414,166 2,467,464 688,581 Interest payments on debt obligations (1) 741,693 234,250 317,388 147,989 42,066 Office leases (2) 14,592 1,860 3,629 3,432 5,671 Purchase obligations (3) 1,019,710 246,460 621,338 151,912 — Total $ 7,249,761 $ 1,386,125 $ 2,356,521 $ 2,770,797 $ 736,318 (1) Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at March 31, 2020 . (2) Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore. (3) At March 31, 2020 , we had commitments to acquire 27 aircraft for $1.02 billion , including 25 new E-Jet E2 aircraft from Embraer S.A. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. As of May 8, 2020 , we have commitments to acquire 27 aircraft for $1.02 billion . Capital Expenditures From time to time, we make capital expenditures to maintain or improve our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the three months ended March 31, 2020 and 2019 , we incurred a total of $10.1 million and $7.9 million, respectively, of capital expenditures (including lease incentives) related to the improvement of aircraft. As of March 31, 2020 , the weighted average age by net book value of our aircraft was approximately 10.1 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Our lease agreements call for the lessee to be primarily responsible for maintaining the aircraft. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft, such as lessee default, or a lessee fails to meet its maintenance obligations under the lease agreement. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee. 34 Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, including defaults by the lessees. Maintenance reserves may not cover the entire amount of actual maintenance expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors - Risks Related to Our Business - Risks related to our leases - If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease” in our 2019 Annual Report on Form 10-K. Off-Balance Sheet Arrangements We entered into a joint venture arrangement in order to help expand our base of new business opportunities. This joint venture does not qualify for consolidated accounting treatment. The assets and liabilities of this entity is not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. See Note 5 - “Unconsolidated Equity Method Investments” in the Notes to Unaudited Consolidated Financial Statements above. We hold a 25% equity interest in our joint venture with Mizuho Leasing and as of March 31, 2020 , the net book value of its nine aircraft was $324.5 million . Foreign Currency Risk and Foreign Operations At March 31, 2020 , all of our leases are payable to us in U.S. dollars. However, we incur Euro and Singapore dollar-denominated expenses in connection with our subsidiaries in Ireland and Singapore. For the three months ended March 31, 2020 , expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $7.6 million in U.S. dollar equivalents and represented approximately 12% of total selling, general and administrative expenses (or 18% when excluding share-based compensation expense, of which a large portion relates to employees domiciled in the U.S.). Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, our international operations and our exposure to foreign currency risk will likely increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases, we may enter into hedging transactions in the future to mitigate this risk. For the three months ended March 31, 2020 and 2019 , we incurred insignificant net gains and losses on foreign currency transactions. Management’s Use of EBITDA and Adjusted EBITDA We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business. We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants. The table below shows the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three months ended March 31, 2020 and 2019 : 35 Three Months Ended March 31, 2020 2019 (Dollars in thousands) Net income (loss) $ (34,221 ) $ 34,810 Depreciation 89,705 84,735 Amortization of lease premiums, discounts and incentives 5,696 5,711 Interest, net 61,507 63,463 Income tax provision 149 3,098 EBITDA 122,836 191,817 Adjustments: Impairment of flight equipment 62,657 — Equity share of joint venture impairment — 2,724 Loss on extinguishment of debt 3,955 — Non-cash share-based payment expense 38,727 2,726 Merger related expenses (1) 34,770 — Loss on mark-to-market of interest rate derivative contracts 114 2,080 Adjusted EBITDA $ 263,059 $ 199,347 ______________ (1) Included $32.2 million in Other expense and $2.6 million in Selling, general and administrative expenses. Limitations of EBITDA and Adjusted EBITDA An investor or potential investor may find EBITDA and Adjusted EBITDA important measures in evaluating our performance, results of operations and financial position. We use these non-U.S. GAAP measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of earnings (loss). Material limitations in making the adjustments to our earnings (loss) to calculate EBITDA and Adjusted EBITDA, and using these non-U.S. GAAP measures as compared to U.S. GAAP net income (loss), income (loss) from continuing operations and cash flows provided by or used in operations, include: • depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures; • the cash portion of income tax (benefit) provision generally represents charges (gains), which may significantly affect our financial results; • elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy; • hedge loss amortization charges; and • adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. EBITDA and Adjusted EBITDA are not alternatives to net income (loss), income (loss) from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP. You should not rely on these non-U.S. GAAP measures as a substitute for any such U.S. GAAP financial measure. We strongly urge you to review the reconciliations to U.S. GAAP net income (loss), along with our consolidated financial statements included elsewhere in this report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies. 36