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 February 28, 2021. 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 Securities and Exchange Commission (the “SEC”) and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s Annual Report on Form 10-K fir the year ended February 28, 2021. 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. 20 OVERVIEW Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of May 31, 2021, we owned and managed on behalf of our joint ventures 259 aircraft leased to 77 lessees located in 43 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are generally subject to net leases whereby the lessee is responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. However, in many cases we are obligated to pay a specified portion of maintenance or modification costs. As of May 31, 2021, the net book value of our flight equipment (including flight equipment held for lease and net investment in leases, or “net book value”) was $6.58 billion compared to $6.69 billion at February 28, 2021. Our total revenues, net loss and Adjusted EBITDA were $165.8 million, $9.8 million and $148.3 million for the three months ended May 31, 2021, and $282.5 million, $26.5 million and $268.2 million for the three months ended May 31, 2020, respectively. Historically, growth in commercial air traffic has been correlated with world economic activity. Prior to the COVID-19 pandemic, commercial air traffic growth expanded at a rate 1.3 to 2 times that of global GDP growth. This expansion of air travel has driven the growth in the world aircraft fleet; and there are approximately 24,000 commercial mainline passenger and freighter aircraft in the world fleet today. Aircraft leasing companies own approximately 52% of the world’s commercial jet aircraft. Under normal circumstances, we would expect the global fleet to continue expanding at a two to four percent average annual rate. COVID-19 has had an unprecedented negative impact on the aviation sector, resulting in a dramatic slowdown in air traffic. While there have been some improvements in certain markets recently, according to IATA, as of May 31, 2021, air travel was still down to approximately 37% of normal levels and a full recovery to pre-pandemic levels is not expected for several years. Substantially all the world’s airlines have experienced financial difficulties and liquidity challenges, including many of our customers. While we believe long-term demand for air travel will return to historical trends over time, the near-term impacts of COVID-19’s economic shock are material; the extent and duration of those impacts cannot currently be determined. As the airline industry begins to recover, airlines continue to seek support from their respective governments, raise debt and equity, delay or cancel new aircraft orders, furlough employees, request concessions from lessors, and in certain cases, seek judicial protection. As of July 9, 2021, we have agreed to $111.7 million in total deferrals of lease payments with 22 customers. These deferrals have been granted for an average of six to nine months of lease rentals and represent 19% of Lease rental and Direct financing and sales-type lease revenues for the twelve months ended May 31, 2021. Of the total deferrals, $89.4 million is included in Accounts receivable or Other assets as of May 31, 2021, with the balance representing future lease payments. Approximately 76% of our total deferrals as of July 9, 2021, have been agreed to as part of broader lease restructurings. These generally include term extensions, better security packages, or other valuable consideration in exchange for near-term economic concessions. Some have repayment terms that extend beyond twelve months and in a limited number of situations, we have agreed to broader lease restructurings that do not include the full repayment of all of lease payments. If air traffic remains depressed and if our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to grant additional deferrals to some of our customers or extend the period of repayment for deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred. As of July 9, 2021, six of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease 22 aircraft, which represent 13% of our net book value of flight equipment (including Flight equipment held for lease and Net investment in leases, or “net book value”) and 11% of our Lease rental and direct financing and sales-type lease revenue as of and for the twelve months ended May 31, 2021. LATAM, our second largest customer, is included in this group and represents 8% of our net book value of flight equipment and 7% of our Lease rental revenue as of and for the twelve months ended May 31, 2021. We are actively engaged in these judicial proceedings to protect our economic interests. However, the outcome of these proceedings is uncertain and could result in these customers negotiating reductions in aircraft lease rentals, rejecting their leases or taking other actions that could adversely impact us or the value of our aircraft. Based on historic experience, the judicial process can take up to twelve to eighteen months to be resolved. As a result of these proceedings, the recognition of lease rental revenue for certain customers may be done 21 on a cash basis of accounting rather than the accrual method depending on the customers’ lease security arrangements. 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 primarily mid-life, narrow-body aircraft should remain attractive relative to new technology aircraft due to their lower capital costs in an environment of tight airline margins and low fuel prices. In addition, we believe that we have sufficient liquidity to meet our contractual obligations over the next twelve months and as of July 1, 2021, total liquidity of $2.88 billion includes $1.38 billion of undrawn credit facilities, $1.02 billion of unrestricted cash, $103 million of contracted asset sales and $375 million of projected operating cash flows through June 30, 2022. As of May 31, 2021, we have commitments to acquire 23 aircraft for $779.4 million between 2021-2025. We also believe our platform and personnel position us to effectively manage through the COVID-19 crisis and will enable us to take advantage of new investment opportunities when they arise. Our Company employs a team of experienced senior professionals with extensive industry and financial experience. Our leadership team members have an average of more than twenty 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. Fiscal Year 2021 Lease Expirations and Lease Placements At May 31, 2021, the Company had seventeen off-lease aircraft and 22 aircraft with scheduled lease expirations in fiscal 2021. As of July 9, 2021, of these 39 aircraft, we have eighteen aircraft, which account for 7% of our net book value at May 31, 2021, still to be placed or sold. Fiscal Years 2022-2025 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 fiscal years 2022-2025, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in leases) at May 31, 2021, specified below: • 2022: 19 aircraft, representing 6%; • 2023: 45 aircraft, representing 13%; • 2024: 53 aircraft, representing 21%; and • 2025: 38 aircraft, representing 17%. 22 Acquisitions and Sales During the three months ended May 31, 2021, we acquired two aircraft for $63.9 million. As of July 9, 2021, we acquired one additional aircraft. At May 31, 2021, we had commitments to acquire 23 aircraft for $779.4 million. Of this amount, approximately $134.5 million represents commitments for the remainder of fiscal year 2021. During the three months ended May 31, 2021, we sold three aircraft and other flight equipment for net proceeds of $63.4 million, and recognized net gains on sales of $9.0 million. As of July 9, 2021, we have sold one additional aircraft. The following table sets forth certain information with respect to the aircraft owned by us as of May 31, 2021: AIRCASTLE AIRCRAFT INFORMATION (dollars in millions) Owned Aircraft As of May 31, 2021 (1) As of May 31, 2020 (1) Net Book Value of Flight Equipment $ 6,584 $ 7,421 Net Book Value of Unencumbered Flight Equipment $ 5,400 $ 5,679 Number of Aircraft 250 274 Number of Unencumbered Aircraft 218 234 Number of Lessees 76 81 Number of Countries 42 45 Weighted Average Age (years) (2) 10.8 10.2 Weighted Average Remaining Lease Term (years) (2) 4.5 4.4 Weighted Average Fleet Utilization during the three months ended May 31, 2021 and 2020 (3) 93.1 % 96.7 % Portfolio Yield for the three months ended May 31, 2021 and 2020 (4) 8.4 % 10.3 % Managed Aircraft on behalf of Joint Venture Net Book Value of Flight Equipment $ 309 $ 322 Number of Aircraft 9 9 (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 May 31, 2021 and 2020, was primarily due to off-lease aircraft as a result of early lease terminations and scheduled lease expirations. (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 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. 23 PORTFOLIO DIVERSIFICATION Owned Aircraft as of May 31, 2021 Owned Aircraft as of May 31, 2020 Number of Aircraft % of Net Book Value (1) Number of Aircraft % of Net Book Value (1) Aircraft Type Passenger: Narrow-body 224 78 % 246 75 % Wide-body 22 18 % 24 21 % Total Passenger 246 96 % 270 96 % Freighter 4 4 % 4 4 % Total 250 100 % 274 100 % Manufacturer Airbus 166 64 % 186 63 % Boeing 77 34 % 83 36 % Embraer 7 2 % 5 1 % Total 250 100 % 274 100 % Regional Diversification Asia and Pacific 77 36 % 89 38 % Europe 92 28 % 99 26 % Middle East and Africa 10 4 % 11 4 % North America 28 12 % 28 10 % South America 26 13 % 26 16 % Off-lease 17 (2) 7 % 21 (3) 6 % Total 250 100 % 274 100 % (1) Calculated using net book value at period end. (2) Consisted of one Airbus A320-200 aircraft, one Airbus A330-200 aircraft, and one Boeing 737-800 aircraft, all of which were delivered to lessees in Europe during the second quarter of 2021, one Airbus A321-200 aircraft which was delivered to a lessee in North America during the second quarter of 2021, four Airbus A320-200 aircraft which are subject to confirmed letters of intent with customers in Europe or South America, one Boeing 737-800 aircraft which is subject to an executed lease with a lessee in Europe, and one Airbus A320-200 aircraft, three Airbus A330-200 aircraft, and four Boeing 737-800 aircraft, which we are marketing for lease or sale. (3) Consisted of one Airbus A319-100 aircraft which was sold in the second quarter of 2020, one Airbus A320-200 which was delivered to a lessee in North America in the second quarter of 2021, one Airbus A330-200 aircraft which was delivered to a lessee in Europe in the second quarter of 2020, one Airbus A330-200 aircraft which was delivered to a lessee in Europe in the second quarter of 2021, two Airbus A320-200 aircraft which are subject to confirmed letters of intent with a customer in South America, nine Airbus A320-200 and one Airbus A330-200 aircraft which have been consigned for sale, and three Airbus A330-200 aircraft and two Boeing 737-800 aircraft, which we are marketing for lease or sale. 24 Our largest customer represents approximately 8% of the net book value at May 31, 2021. The top ten customers for aircraft we owned at May 31, 2021, are as follows: Customer Percent of Net Book Value Country Number of Aircraft IndiGo 8.0% India 12 LATAM (1) 7.7% Chile 13 easyJet 4.1% United Kingdom 22 Iberia 3.9% Spain 15 Air Canada 3.7% Canada 5 Lion Air 3.5% Indonesia 7 Aerolineas Argentinas 3.0% Argentina 5 American Airlines 2.8% United States 7 AirBridgeCargo (2) 2.6% Russia 2 Jeju Air 2.5% South Korea 7 Total top ten customers 41.8% 95 All other customers 58.2% 155 Total all customers 100.0% 250 (1) LATAM filed for Chapter 11 in May 2020. (2) 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 sixteen years. Since our inception in late 2004, we have raised $2.1 billion in equity capital from private and public investors. We also raised $18.9 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 and unsecured 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. 25 RESULTS OF OPERATIONS Comparison of the three months ended May 31, 2021 to the three months ended May 31, 2020: Three Months Ended May 31, 2021 2020 (Dollars in thousands) Revenues: Lease rental revenue $ 132,125 $ 183,178 Direct financing and sales-type lease revenue 2,877 5,317 Amortization of lease premiums, discounts and incentives (5,325) (7,347) Maintenance revenue 26,477 76,630 Total lease revenue 156,154 257,778 Gain on sale of flight equipment 9,021 12,078 Other revenue 635 12,670 Total revenues 165,810 282,526 Operating expenses: Depreciation 82,391 89,212 Interest, net 58,037 58,726 Selling, general and administrative 15,589 47,451 Impairment of flight equipment 20,583 77,298 Maintenance and other costs 7,528 5,566 Total operating expenses 184,128 278,253 Other income (expense): Loss on extinguishment of debt (24) (8) Merger expenses — (32,069) Other 10 (17) Total other expense (14) (32,094) Loss from continuing operations before income taxes and earnings of unconsolidated equity method investments (18,332) (27,821) Income tax benefit (8,292) (551) Earnings of unconsolidated equity method investments, net of tax 287 731 Net loss $ (9,753) $ (26,539) Revenues Total revenues decreased $116.7 million for the three months ended May 31, 2021, as compared to the three months ended May 31, 2020. Lease rental revenue decreased $51.1 million as a result of: • a $39.9 million decrease due to early lease terminations and the recognition of lease rental revenue for certain customers using a cash basis of accounting rather than an accrual method – see Note 1 regarding our lease revenue recognition policy; • a $7.0 million decrease due to the sale of twelve aircraft since March 1, 2020; and • a $6.7 million decrease due to lease extensions, amendments, transitions and other changes. This was partially offset by a $2.5 million increase in revenue, reflecting the impact of seven aircraft purchased since March 1, 2020. Direct financing and sales-type lease revenue decreased $2.4 million, primarily attributable to the early lease terminations of eight aircraft and the transition of six aircraft to operating leases. 26 Amortization of lease premiums, discounts and lease incentives : Three Months Ended May 31, 2021 2020 (Dollars in thousands) Amortization of lease premiums $ (2,904) $ (5,093) Amortization of lease discounts 231 285 Amortization of lease incentives (2,652) (2,539) Amortization of lease premiums, discounts and incentives $ (5,325) $ (7,347) The decrease in amortization of lease premiums of $2.2 million for the three months ended May 31, 2021 as compared to the three months ended May 31, 2020, was primarily due to early lease terminations. Maintenance revenue . For the three months ended May 31, 2021, we recorded $26.5 million of maintenance revenue, comprised primarily of $21.7 million related to the scheduled lease expirations of two narrow-body aircraft and the early lease termination of one narrow-body aircraft. In addition, we recorded $4.8 million of maintenance revenue related to one narrow-body and one wide-body aircraft for which the customers are subject to judicial insolvency proceedings or similar protection. For the three months ended May 31, 2020, we recorded $76.6 million of maintenance revenue, comprised primarily of $38.8 million related to the early lease terminations of ten narrow-body aircraft and $36.8 million related to the scheduled lease expirations of three narrow-body and one wide-body aircraft. Gain on sale of flight equipment decreased $3.1 million to $9.0 million for the three months ended May 31, 2021, as compared to gains of $12.1 million for the three months ended May 31, 2020. During the three months ended May 31, 2021, we sold three aircraft, as compared to the sale of two aircraft during the three months ended May 31, 2020. Gain on sale for the three months ended May 31, 2020, was primarily attributable to the receipt of insurance proceeds for one aircraft which was disposed. Other revenue decreased $12.0 million to $0.6 million for the three months ended May 31, 2021, as compared to $12.7 million for the three months ended May 31, 2020. The three months ended May 31, 2020 included $12.8 million of security deposits recognized into revenue related to the early lease termination of seven narrow-body aircraft. Operating expenses Total operating expenses decreased $94.1 million for the three months ended May 31, 2021, as compared to the three months ended May 31, 2020. Depreciation expense decreased $6.8 million for the three months ended May 31, 2021 as compared to the three months ended May 31, 2020. The decrease is primarily comprised of $8.5 million resulting from thirteen aircraft sold since March 1, 2020 and lower depreciation related to aircraft subject to aircraft impairments. This was partially offset by a $1.4 million increase in depreciation due to seven aircraft acquired since March 1, 2020. Interest, net consisted of the following: Three Months Ended May 31, 2021 2020 (Dollars in thousands) Interest on borrowings and other liabilities $ 54,033 $ 55,739 Amortization of deferred financing fees and debt discount 4,191 3,311 Interest expense 58,224 59,050 Less: Interest income (35) (324) Less: Capitalized interest (152) — Interest, net $ 58,037 $ 58,726 Interest, net decreased $0.7 million due to lower weighted average interest rates and debt outstanding, partially offset by higher amortization of deferred financings fees. 27 Selling, general and administrative expenses decreased $31.9 million, primarily attributable to a decrease in share-based compensation expense of $28.0 million as a result of the completion of the Merger. The three months ended May 31, 2020 also included a provision for credit losses of $3.3 million related to the change in our allowance for credit losses. Impairment of aircraft. During the three months ended May 31, 2021, we recorded transactional impairment charges of $20.6 million related to two narrow-body aircraft. The Company recognized $21.1 million of maintenance revenue for these two aircraft. During the three months ended May 31, 2020, the Company recorded transactional impairment charges of $77.3 million related to ten narrow-body aircraft and one wide-body aircraft. The Company recognized $83.3 million of maintenance and security deposits into revenue for these eleven aircraft. See “Summary of Recoverability Assessment and Other Impairments” below for a detailed discussion of impairment charges related to certain aircraft. Maintenance and other costs were $7.5 million for the three months ended May 31, 2021, an increase of $2.0 million as compared to the three months ended May 31, 2020, primarily attributable to higher costs for scheduled and unscheduled transitions. Other expense Total other expense decreased $32.1 million as the three months ended May 31, 2020 included $32.1 million of legal and banking expenses related to the Merger. Income tax benefit Our income tax benefit for the three months ended May 31, 2021 and 2020 was $8.3 million and $0.6 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 the United States and Ireland. The increase in our income tax benefit of $7.7 million was primarily attributable to changes in the mix of pre-tax book income/(loss) in Bermuda, Ireland and the United States. Further, the three-month period ended May 31, 2020 included discrete items related to stock compensation and the impact of the CARES Act. Summary of Recoverability Assessment and Other Impairments Impairment of Flight Equipment During the three months ended May 31, 2021, the Company recorded transactional impairment charges totaling $20.6 million which related to two narrow-body aircraft and were the result of an early lease termination and a scheduled lease expiration. The Company recognized $21.1 million of maintenance revenue for these two aircraft. During the three months ended May 31, 2020, the Company recorded transactional impairment charges totaling $77.3 million, which related to ten narrow-body and one wide-body aircraft. The Company recognized $83.3 million of maintenance and security deposits into revenue for these eleven aircraft. The impairment charges and revenue were recognized as a result of the early lease terminations of nine aircraft and scheduled lease expirations of two aircraft. We plan to perform our annual recoverability assessment of all our aircraft during the fiscal third quarter for the nine months ended November 30, 2021. We continue to closely monitor the impact of COVID-19 on our customers, air traffic, lease rental rates, and aircraft valuations, and have and will continue to perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft. We have and will focus on our customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, aircraft with near-term lease expirations, and certain aircraft variants that are more susceptible to the impact of the COVID-19 pandemic and value deterioration. The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors. 28 If our estimates or assumptions change, including those related to our customers that have entered judicial insolvency proceedings, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in our recoverability assessments are appropriate, actual results could differ from those estimates. 29 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 have historically generated 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 • sales of common and preferred shares. 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 three months ended May 31, 2021, we met our liquidity and capital resource needs with $70.0 million of cash flow from operations and $63.4 million of cash from the sale of aircraft and other flight equipment. As of May 31, 2021, the weighted-average maturity of our secured and unsecured debt financings was 3.5 years and we were in compliance with all applicable covenants. We have agreed to defer lease payments with certain of our airline customers. As of July 9, 2021, we have agreed to defer approximately $111.7 million of lease payments with 22 airlines, which they are obligated 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 previously granted. We may ultimately be unable to collect all the amounts we have deferred. As of May 31, 2021, we hold $78.3 million in security deposits, $524.0 million in maintenance payments and $147.9 million in letters of credit from our lessees. We believe we have sufficient liquidity to meet our contractual obligations over the next twelve months and as of July 1, 2021, total liquidity of $2.88 billion includes $1.38 billion of undrawn credit facilities, $1.02 billion of unrestricted cash, $103 million of contracted asset sales and $375 million of projected operating cash flows through June 30, 2022. 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. 30 Cash Flows Three Months Ended May 31, 2021 2020 (Dollars in thousands) Net cash flow provided by (used in) operating activities $ 69,990 $ (44,475) Net cash flow provided by investing activities 4,549 17,848 Net cash flow (used in) provided by financing activities (9,534) 186,235 Operating Activities: The COVID-19 pandemic has severely impacted the demand for air travel over the past fifteen months, which has negatively impacted our customers’ financial performance. The impact of COVID-19, together with lease concessions given to many of our airline customers in the form of lease rental deferrals, has resulted in slower cash collections during the three months ended May 31, 2021 and 2020. Cash flow provided by operations was $70.0 million for the three months ended May 31, 2021 as compared to cash flow used in operations of $44.5 million for the three months ended May 31, 2020. The net increase in cash flow provided by operations of $114.5 million was primarily a result of: • a $98.7 million decrease in accounts receivable and other assets, primarily due to deferred lease rentals; • a $32.1 million increase in cash as the three months ended May 31, 2020, included higher banking and legal costs resulting from the Merger; and • a $7.2 million increase as the three months ended May 31, 2020, included advance lease rentals recognized into revenue, primarily due to lease terminations. These inflows were offset by a $39.9 million decrease in cash due to lower lease rental revenue resulting from early lease terminations and the recognition of lease rental revenue for certain customers using a cash basis of accounting rather than an accrual method. Investing Activities: Cash flow provided by investing activities was $4.5 million and $17.8 million for the three months ended May 31, 2021 and 2020, respectively. The decrease in cash flow provided by investing activities of $13.3 million was primarily a result of a $42.4 million increase in the acquisition and improvement of flight equipment. These outflows were offset by a $17.2 million increase in aircraft purchase deposits and progress payments, net of returned deposits and an $11.5 million increase in aircraft proceeds from the sale of flight equipment. Financing Activities: Cash flow used in financing activities was $9.5 million for the three months ended May 31, 2021 as compared to cash flow provided by financing activities of $186.2 million for the three months ended May 31, 2020. The net decrease of $195.8 million was primarily a result of a $253.3 million decrease in proceeds from secured and unsecured financings, net of repayments. These outflows were offset by a $38.1 million decrease in maintenance and security deposits returned, net of deposits received, and a $24.0 million decrease in dividends paid. Debt Obligations For complete information on our debt obligations, please refer to Note 6 – “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 decreased to $6.71 billion at May 31, 2021 from 31 $6.82 billion at February 28, 2021. The decrease in principal and interest payments was roughly offset by an increase in purchase obligations from February 28, 2021 to May 31, 2021. The following table presents our actual contractual obligations and their payment due dates as of May 31, 2021: Payments Due by Period as of May 31, 2021 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 2022 - 2028 $ 4,200,000 $ 500,000 $ 1,650,000 $ 650,000 $ 1,400,000 DBJ Term Loan 215,000 60,000 155,000 — — Revolving Credit Facilities — — — — — ECA Financings 27,164 7,478 15,632 4,054 — Bank Financings 720,388 72,478 288,189 359,721 — Total principal payments 5,162,552 639,956 2,108,821 1,013,775 1,400,000 Interest payments on debt obligations (1) 752,956 215,849 322,658 157,887 56,562 Office leases (2) 12,878 1,938 3,451 3,551 3,938 Purchase obligations (3) 779,372 175,031 453,016 151,325 — Total $ 6,707,758 $ 1,032,774 $ 2,887,946 $ 1,326,538 $ 1,460,500 (1) Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at May 31, 2021. (2) Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore. (3) At May 31, 2021, we had commitments to acquire 23 aircraft for $779.4 million. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. 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 May 31, 2021 and 2020, we incurred a total of $6.5 million and $7.1 million, respectively, of capital expenditures (including lease incentives) related to the improvement of aircraft. As of May 31, 2021, the weighted average age by net book value of our aircraft was approximately 10.8 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. Actual maintenance payments to us by lessees in the future may be less than projected as a result of several 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 Annual Report on Form 10-K for the year ended February 28, 2021. 32 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 are 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 May 31, 2021, the net book value of its nine aircraft was $308.6 million. Foreign Currency Risk and Foreign Operations At May 31, 2021, all 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 May 31, 2021, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $4.5 million in U.S. dollar equivalents and represented 28.9% of total selling, general and administrative expenses. 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 May 31, 2021 and 2020, 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. 33 The table below shows the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three months ended May 31, 2021 and 2020: Three Months Ended May 31, 2021 2020 (Dollars in thousands) Net loss $ (9,753) $ (26,539) Depreciation 82,391 89,212 Amortization of lease premiums, discounts and incentives 5,325 7,347 Interest, net 58,037 58,726 Income tax benefit (8,292) (551) EBITDA 127,708 128,195 Adjustments: Impairment of flight equipment 20,583 77,298 Loss on extinguishment of debt 24 8 Non-cash share-based payment expense — 28,049 Merger related expenses (1) — 34,637 Loss on mark-to-market of interest rate derivative contracts — 17 Adjusted EBITDA $ 148,315 $ 268,204 ______________ (1) Included $32.1 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; and • adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes which may not be comparable to similarly titled measures used by other companies. 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. 34