Aircastle LTD 10-Q

ITEM 1. FINANCIAL STATEMENTS Aircastle Limited and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share data) (Unaudited) November 30, 2021 February 28, 2021 ASSETS Cash and cash equivalents $ 276,289 $ 578,004 Restricted cash and cash equivalents 2,740 2,594 Accounts receivable 73,073 82,572 Flight equipment held for lease, net of accumulated depreciation of $2,365,312 and $2,076,972, respectively 6,542,555 6,492,471 Net investment in leases, net of allowance for credit losses of $1,828 and $864, respectively 191,013 195,376 Unconsolidated equity method investments 36,587 35,377 Other assets 335,420 311,944 Total assets $ 7,457,677 $ 7,698,338 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Borrowings from secured financings, net of debt issuance costs and discounts $ 703,592 $ 768,850 Borrowings from unsecured financings, net of debt issuance costs and discounts 3,872,584 4,366,261 Accounts payable, accrued expenses and other liabilities 200,959 174,267 Lease rentals received in advance 52,887 58,013 Security deposits 72,608 80,699 Maintenance payments 498,995 519,178 Total liabilities 5,401,625 5,967,268 Commitments and Contingencies SHAREHOLDERS’ EQUITY Preference shares, $0.01 par value, 50,000,000 shares authorized, 400 (aggregate liquidation preference of $400,000) shares issued and outstanding at November 30, 2021 and no shares issued and outstanding at February 28, 2021 — — Common shares, $0.01 par value, 250,000,000 shares authorized, 14,048 shares issued and outstanding at November 30, 2021 and February 28, 2021 — — Additional paid-in capital 1,878,774 1,485,777 Retained earnings 177,278 245,293 Total shareholders’ equity 2,056,052 1,731,070 Total liabilities and shareholders’ equity $ 7,457,677 $ 7,698,338 The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 Aircastle Limited and Subsidiaries Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Dollars in thousands) (Unaudited) Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 Revenues: Lease rental revenue $ 156,088 $ 139,493 $ 425,802 $ 473,566 Direct financing and sales-type lease revenue 2,724 4,839 8,377 14,903 Amortization of lease premiums, discounts and incentives ( 8,867 ) ( 5,384 ) ( 20,026 ) ( 17,360 ) Maintenance revenue 33,510 24,843 81,204 121,508 Total lease revenue 183,455 163,791 495,357 592,617 Gain on sale of flight equipment 7,420 12,951 17,944 24,181 Other revenue 605 4,169 1,641 17,962 Total revenues 191,480 180,911 514,942 634,760 Operating expenses: Depreciation 84,526 86,845 250,308 262,806 Interest, net 50,515 59,945 163,965 173,996 Selling, general and administrative (including non-cash share-based payment expense of $0 and $0 for the three months ended, and $0 and $28,049 for the nine months ended November 30, 2021 and 2020, respectively) 17,141 14,403 48,714 70,897 Provision for credit losses 958 742 970 5,255 Impairment of flight equipment 69,111 9,867 110,926 299,551 Maintenance and other costs 8,660 4,207 24,275 14,044 Total operating expenses 230,911 176,009 599,158 826,549 Other income (expense): Loss on extinguishment of debt — ( 43 ) ( 14,156 ) ( 108 ) Merger expenses — ( 450 ) — ( 32,492 ) Other 63 — 57,682 ( 191 ) Total other income (expense) 63 ( 493 ) 43,526 ( 32,791 ) Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments ( 39,368 ) 4,409 ( 40,690 ) ( 224,580 ) Income tax provision 23,504 2,269 22,877 14,738 Earnings of unconsolidated equity method investments, net of tax 465 572 1,210 1,978 Net income (loss) $ ( 62,407 ) $ 2,712 $ ( 62,357 ) $ ( 237,340 ) Preference share dividends — — ( 5,658 ) — Net income (loss) available to common shareholders $ ( 62,407 ) $ 2,712 $ ( 68,015 ) $ ( 237,340 ) Total comprehensive income (loss) available to common shareholders $ ( 62,407 ) $ 2,712 $ ( 68,015 ) $ ( 237,340 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 Aircastle Limited and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Nine Months Ended November 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 62,357 ) $ ( 237,340 ) Adjustments to reconcile net loss to net cash and restricted cash provided by operating activities: Depreciation 250,308 262,806 Amortization of deferred financing costs 12,483 10,642 Amortization of lease premiums, discounts and incentives 20,026 17,360 Deferred income taxes 8,998 12,109 Non-cash share-based payment expense — 28,049 Collections on net investment in leases 11,727 12,953 Security deposits and maintenance payments included in earnings ( 58,480 ) ( 107,732 ) Gain on sale of flight equipment ( 17,944 ) ( 24,181 ) Loss on extinguishment of debt 14,156 108 Impairment of flight equipment 110,926 299,551 Provision for credit losses 970 5,255 Other ( 1,210 ) ( 1,991 ) Changes in certain assets and liabilities: Accounts receivable 4,059 ( 55,946 ) Other assets ( 23,305 ) ( 40,780 ) Accounts payable, accrued expenses and other liabilities 7,205 ( 1,875 ) Lease rentals received in advance ( 6,127 ) ( 54,608 ) Net cash and restricted cash provided by operating activities 271,435 124,380 Cash flows from investing activities: Acquisition and improvement of flight equipment ( 533,741 ) ( 134,263 ) Proceeds from sale of flight equipment 127,584 113,588 Aircraft purchase deposits and progress payments, net of deposits returned and aircraft sales deposits ( 11,361 ) ( 4,083 ) Other ( 64 ) ( 594 ) Net cash and restricted cash used in investing activities ( 417,582 ) ( 25,352 ) Cash flows from financing activities: Repurchase of shares — ( 25,536 ) Parent contribution at Merger — 25,536 Net proceeds from preference share issuance 393,347 — Proceeds from secured and unsecured debt financings — 1,193,871 Repayments of secured and unsecured debt financings ( 566,885 ) ( 1,027,164 ) Debt extinguishment costs ( 13,372 ) ( 108 ) Deferred financing costs ( 5,170 ) ( 6,358 ) Security deposits and maintenance payments received 63,012 63,443 Security deposits and maintenance payments returned ( 20,696 ) ( 48,162 ) Dividends paid ( 5,658 ) ( 24,025 ) Net cash and restricted cash (used in) provided by financing activities ( 155,422 ) 151,497 Net (decrease) increase in cash and restricted cash: ( 301,569 ) 250,525 Cash and restricted cash at beginning of period 580,598 171,437 Cash and restricted cash at end of period $ 279,029 $ 421,962 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 Aircastle Limited and Subsidiaries Consolidated Statements of Cash Flows (Continued) (Dollars in thousands) (Unaudited) Nine Months Ended November 30, 2021 2020 Reconciliation to Consolidated Balance Sheets: Cash and cash equivalents $ 276,289 $ 416,621 Restricted cash and cash equivalents 2,740 5,341 Unrestricted and restricted cash and cash equivalents $ 279,029 $ 421,962 Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized $ 151,743 $ 176,284 Cash paid for income taxes $ 308 $ 1,244 Supplemental disclosures of non-cash investing activities: Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets assumed in asset acquisitions $ 11,570 $ 29,869 Advance lease rentals, security deposits, maintenance payments, other liabilities and other assets settled in sale of flight equipment $ 14,765 $ 45,443 Transfers from flight equipment held for lease to Net investment in leases and Other assets $ 22,134 $ 6,584 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 Aircastle Limited and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity (Dollars in thousands, except share amounts) (Unaudited) Common Shares Preference Shares Additional Paid-In Capital Retained Earnings (Deficit) Total Shareholders’ Equity Shares Amount Shares Amount Balance, February 28, 2021 14,048 $ — — $ — $ 1,485,777 $ 245,293 $ 1,731,070 Net loss — — — — — ( 9,753 ) ( 9,753 ) Balance, May 31, 2021 14,048 $ — — $ — $ 1,485,777 $ 235,540 $ 1,721,317 Net income — — — — — 9,803 9,803 Issuance of preference shares — — 400 — 393,362 — 393,362 Preference share dividends — — — — — ( 5,658 ) ( 5,658 ) Balance, August 31, 2021 14,048 $ — 400 $ — $ 1,879,139 $ 239,685 $ 2,118,824 Net loss — — — — — ( 62,407 ) ( 62,407 ) Issuance of preference shares — — — — ( 365 ) — ( 365 ) Balance, November 30, 2021 14,048 $ — 400 $ — $ 1,878,774 $ 177,278 $ 2,056,052 Common Shares Preference Shares Additional Paid-In Capital Retained Earnings (Deficit) Total Shareholders’ Equity Shares Amount Shares Amount Balance, February 29, 2020 75,076,794 $ 751 — $ — $ 1,456,977 $ 578,461 $ 2,036,189 Amortization of share-based payments — — — — 28,049 — 28,049 Net loss — — — — — ( 26,539 ) ( 26,539 ) Payment of unvested shares at Merger ( 101,809 ) ( 1 ) — — ( 25,535 ) — ( 25,536 ) Parent contribution at Merger — — — — 25,536 — 25,536 Share cancellation and re-issuance at Merger ( 74,960,937 ) ( 750 ) — — 750 — — Balance, May 31, 2020 14,048 $ — — $ — $ 1,485,777 $ 551,922 $ 2,037,699 Net loss — — — — — ( 213,513 ) ( 213,513 ) Balance, August 31, 2020 14,048 $ — — $ — $ 1,485,777 $ 338,409 $ 1,824,186 Net income — — — — — 2,712 2,712 Balance, November 30, 2020 14,048 $ — — $ — $ 1,485,777 $ 341,121 $ 1,826,898 The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Note 1. Summary of Significant Accounting Policies Organization and Basis of Presentation Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is acquiring, leasing, managing and selling commercial jet aircraft. On March 27, 2020, the Company successfully completed its merger (the “Merger”) and is now controlled by affiliates of Marubeni Corporation and Mizuho Leasing Company, Limited (“Mizuho Leasing”). Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The Company manages, analyzes and reports on its business and results of operations based on one operating segment: leasing, financing, selling and managing commercial flight equipment. Our Chief Executive Officer is the chief operating decision maker. The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. However, we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2021. The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure subsequent to the balance sheet date of November 30, 2021, through the date on which the consolidated financial statements included in this Form 10-Q were issued. Principles of Consolidation The consolidated financial statements include the accounts of Aircastle and all its subsidiaries, including any Variable Interest Entity (“VIE”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. Risk and Uncertainties In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations to Aircastle. Market risk reflects the change in the value of financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of early lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of its business or to refinance existing debt facilities. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. 8 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 COVID-19 Pandemic 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 November 30, 2021, air travel was still down to approximately 53 % compared to 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. Even 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 January 7, 2022, our total deferrals, net of repayments, were $ 87,219 . These deferrals have been granted to nineteen customers for an average of six to twelve months of lease rentals and represent 15 % of Lease rental and Direct financing and sales-type lease revenues for the twelve months ended November 30, 2021. Of the total deferrals, $ 81,797 is included in Accounts receivable or Other assets as of November 30, 2021, with the balance representing future lease payments. Approximately 87 % of our total deferrals as of January 7, 2022, 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. Many 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 our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to grant additional deferrals to certain 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 January 7, 2022, six of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease 21 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 12 % of our Lease rental and direct financing and sales-type lease revenue as of and for the twelve months ended November 30, 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, lease rental revenue for certain customers may be recognized on a cash basis of accounting rather than the accrual method depending on the customers’ lease security arrangements. LATAM, our second largest customer, is included in the above group and represents 7 % of our net book value of flight equipment and 7 % of our Lease rental revenue as of and for the twelve months ended November 30, 2021. We have signed restructured leases for all thirteen of our LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process. During the second quarter of 2021, the Company entered into claims sale and purchase agreements with a third party for the sale of certain unsecured claims filed by various Aircastle entities against LATAM Airlines Group S.A. and certain of its subsidiaries in the Chapter 11 case captioned LATAM Airlines Group S.A., et al., Case No. 20-11254 (JLG) (Jointly Administered) (the “LATAM Bankruptcy”). The allowed amount of our unsecured claims was approved by the Bankruptcy Court and proceeds from the sales of these claims in the amount of $ 55,213 were received during the second quarter of 2021 and recognized in Other income (expense). Lease Revenue Recognition We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. 9 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 In certain instances, we may provide lease concessions to customers, generally 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 term 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. Should we determine that the collectability of rental payments is no longer probable (including any deferral thereof), we will recognize lease rental revenue using a cash basis of accounting rather than an accrual method. In the period we conclude that collection of lease payments is no longer probable, we recognize any difference between revenue amounts recognized to date under the accrual method and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue. Impairment of Flight Equipment We perform an annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis. A recoverability assessment is also performed whenever events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant change in an aircraft type’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted lease rental and maintenance payments, future projected lease rates and maintenance payments, transition costs, estimated down time, and estimated residual or scrap values for an aircraft. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2 – Fair Value Measurements. Management develops the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in projected lease rental and maintenance payments, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors. 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 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 COVID-19 and value deterioration. Recent Accounting Pronouncements In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform Topic 848 (“ASC 848”), in response to the market transition from the LIBOR and other interbank offered rates (“IBORs”) to alternative reference rates. U.S. GAAP requires entities to evaluate whether a contract modification, such as the replacement or change of a reference rate, results in the establishment of a new contract or continuation of an existing contract. ASC 848 allows an entity to elect not to apply certain modification accounting requirements to contracts affected by reference rate reform. The standard provides this temporary election through December 31, 2022, and cannot be applied to contract modifications that occur after December 31, 2022. Reference rate reform will primarily impact our lease and debt arrangements for which floating-rate lease rentals and interest expense are based on LIBOR. As of November 30, 2021, less than 1 % of our fleet have floating-rate lease rentals and, for the three and nine months ended November 30, 2021, 4 % of our interest expense was derived from floating-rate debt which is referenced to LIBOR. We have not adopted ASC 848 and are currently evaluating the election available to us under the standard. 10 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Effective, March 1, 2021, the Company adopted FASB ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The guidance aims to simplify the accounting for income taxes by removing certain exceptions to the general principles within the current guidance and by clarifying and amending the current guidance. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2020. This adoption did not have a material impact on our consolidated financial statements. Note 2. Fair Value Measurements Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. The following tables set forth our financial assets as of November 30, 2021 and February 28, 2021 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Fair Value Measurements at November 30, 2021 Using Fair Value Hierarchy Fair Value as of November 30, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique Assets: Cash and cash equivalents $ 276,289 $ 276,289 $ — $ — Market Restricted cash and cash equivalents 2,740 2,740 — — Market Total $ 279,029 $ 279,029 $ — $ — Fair Value Measurements at February 28, 2021 Using Fair Value Hierarchy Fair Value as of February 28, 2021 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Valuation Technique Assets: Cash and cash equivalents $ 578,004 $ 578,004 $ — $ — Market Restricted cash and cash equivalents 2,594 2,594 — — Market Total $ 580,598 $ 580,598 $ — $ — Our cash and cash equivalents, and restricted cash and cash equivalents balances, consist largely of money market securities that are highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy. For the three and nine months ended November 30, 2021, we had no transfers into or out of Level 3. We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate the carrying amounts of these assets may not be recoverable. Assets subject to these measurements include our investment in unconsolidated joint ventures and aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on the average of the market approach that uses Level 2 inputs, which include third party appraisal data and an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft discounted using the Company’s weighted average cost of capital. 11 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 We account for our investment in unconsolidated joint ventures under the equity method of accounting. Investments are recorded at cost and are adjusted by undistributed earnings and losses and the distributions of dividends and capital. These investments are also reviewed for impairment whenever events or changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary. Aircraft Valuation Impairment of Flight Equipment During the three months ended November 30, 2021, the Company recorded transactional impairment charges totaling $ 69,111 related to two narrow-body and one wide-body aircraft on lease to Garuda Indonesia, resulting from the lessee’s default on its lease obligations. The Company recognized $ 24,268 of maintenance revenue for these three aircraft. During the nine months ended November 30, 2021, the Company recorded impairment charges totaling $ 110,926 , of which $ 107,705 were transactional impairments, primarily related to six narrow-body and one wide-body aircraft. The impairment charges resulted from early lease terminations, scheduled lease expiration and a lessee default. The Company recognized $ 61,414 of maintenance revenue for these seven aircraft. During the three months ended November 30, 2020, the Company recorded transactional impairment charges totaling $ 9,867 , primarily related to the scheduled lease expirations of two narrow-body aircraft. The Company recognized $ 15,200 of maintenance revenue for these two aircraft. During the nine months ended November 30, 2020, the Company recorded impairment charges totaling $ 299,551 , of which $ 256,510 were transactional impairments, primarily related to thirteen narrow-body and five wide-body aircraft. The Company recognized $ 107,448 of maintenance and security deposits into revenue for these eighteen aircraft. The impairment charges were attributable to early lease terminations, scheduled lease expirations, lessee defaults, judicial insolvency proceedings, or as a result of our annual recoverability assessment. Annual Recoverability Assessment We performed our annual recoverability assessment of all our aircraft during the third quarter of 2021. No impairments were recorded as a result of our annual recoverability assessment – see the discussion above for further detail regarding transactional impairment charges recorded during the three and nine months ended November 30, 2021. Although we have completed our annual recoverability assessment, we will 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 estimated undiscounted 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. 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. 12 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Financial Instruments Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and amounts borrowed under financings. The fair value of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature. The fair value of our senior notes is estimated using quoted market prices. The fair values of all our other financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of our financial instruments at November 30, 2021 and February 28, 2021 were as follows: November 30, 2021 February 28, 2021 Carrying Amount of Liability Fair Value of Liability Carrying Amount of Liability Fair Value of Liability Credit Facilities $ — $ — $ — $ — Unsecured Term Loan 215,000 211,728 215,000 210,290 Export Credit Agency (“ECA”) Financings 23,455 24,173 36,423 37,942 Bank Financings 684,436 706,651 738,353 740,086 Senior Notes 3,700,000 3,906,613 4,200,000 4,402,722 All our financial instruments are classified as Level 2 except for our Senior Notes, which are classified as Level 1. Note 3. Lease Rental Revenues and Flight Equipment Held for Lease Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at November 30, 2021 were as follows: Year Ending February 28/29, Amount (1) Remainder of 2021 $ 160,213 2022 608,279 2023 555,461 2024 423,515 2025 277,974 Thereafter 722,000 Total $ 2,747,442 _______________ (1) Reflects impact of lessee lease rental deferrals. 13 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows: Three Months Ended November 30, Nine Months Ended November 30, Region 2021 2020 2021 2020 Asia and Pacific 27 % 37 % 31 % 40 % Europe 31 % 34 % 34 % 31 % Middle East and Africa 5 % 6 % 5 % 7 % North America 15 % 12 % 15 % 11 % South America 22 % 11 % 15 % 11 % Total 100 % 100 % 100 % 100 % The classification of regions in the table above and in the tables and discussion below is determined based on the principal location of the lessee of each aircraft. The following table shows the number of lessees with lease rental revenue of at least 5% of total lease rental revenue and their combined total percentage of lease rental revenue for the periods indicated: Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 Number of Lessees Combined % of Lease Rental Revenue Number of Lessees Combined % of Lease Rental Revenue Number of Lessees Combined % of Lease Rental Revenue Number of Lessees Combined % of Lease Rental Revenue Largest lessees by lease rental revenue 4 34 % 4 31 % 5 34 % 4 29 % The following table sets forth revenue attributable to individual countries representing at least 10% of Total revenue (including maintenance and other revenue) based on each lessee’s principal place of business for the periods indicated: Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 Country Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Revenue % of Total Revenue Canada (1) $ — — % $ 24,338 13 % $ — — % $ — — % India (2) 23,051 12 % 22,455 12 % 63,569 12 % 75,951 12 % Indonesia (3) 26,581 14 % — — % — — % — — % Mexico (4) — — % — — % — — % 85,711 14 % _______________ (1) For the three months ended November 30, 2020, total revenue attributable to Canada included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $ 19,260 . Total revenue attributable to Canada was less than 10% for the three and nine months ended November 30, 2021 and for the nine months ended November 30, 2020 (2) For the three and nine months ended November 30, 2021, total revenue attributable to India included maintenance revenue totaling $ 3,609 and $ 5,608 , respectively. For the three and nine months ended November 30, 2020, total revenue attributable to India included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $ 6,080 and $ 16,251 , respectively. (3) For the three months ended November 30, 2021, total revenue attributable to Indonesia included maintenance revenue totaling $ 24,268 . Total revenue attributable to Indonesia was less than 10% for the nine months ended November 30, 2021 and for the three and nine months ended November 30, 2020. (4) For the nine months ended November 30, 2020, total revenue attributable to Mexico included maintenance and other revenue, including early lease termination fees and security deposits recognized into revenue, totaling $ 79,912 . Total revenue attributable to Mexico was less than 10% for the three and nine months ended November 30, 2021 and for the three months ended November 30, 2020. 14 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Geographic concentration of net book value of flight equipment (including flight equipment held for lease and net investment in leases, or “net book value”) was as follows: November 30, 2021 February 28, 2021 Region Number of Aircraft Net Book Value % Number of Aircraft Net Book Value % Asia and Pacific 74 32 % 79 37 % Europe 99 31 % 92 27 % Middle East and Africa 10 4 % 11 4 % North America 35 16 % 28 12 % South America 24 12 % 26 13 % Off-lease 13 (1) 5 % 16 (2) 7 % Total 255 100 % 252 100 % _______________ (1) Of the thirteen off-lease aircraft at November 30, 2021, we have two narrow-body aircraft and three wide-body aircraft which we are currently marketing for lease or sale. (2) Of the sixteen off-lease aircraft at February 28, 2021, we have three wide-body aircraft which we are currently marketing for lease or sale. The following table sets forth the net book value of flight equipment (includes net book value of flight equipment held for lease and net investment in leases) attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of: November 30, 2021 February 28, 2021 Country Net Book Value Net Book Value % Number of Lessees Net Book Value Net Book Value % Number of Lessees India $ 696,703 10 % 3 $ 756,514 11 % 3 At November 30, 2021 and February 28, 2021, the amounts of lease incentive liabilities recorded in maintenance payments on our Consolidated Balance Sheets were $ 19,832 and $ 14,673 , respectively. Note 4. Net Investment in Leases At November 30, 2021 and February 28, 2021, our net investment in leases consisted of fifteen and fifteen aircraft, respectively. The components of our net investment in leases at November 30, 2021 and February 28, 2021, were as follows: November 30, 2021 February 28, 2021 Lease receivable $ 55,645 $ 67,075 Unguaranteed residual value of flight equipment 137,196 129,165 Net investment leases 192,841 196,240 Allowance for credit losses ( 1,828 ) ( 864 ) Net investment in leases, net of allowance $ 191,013 $ 195,376 15 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 The activity in the allowance for credit losses related to our net investment in leases for the nine months ended November 30, 2021 is as follows: Amount Balance at February 28, 2021 $ 864 Provision for credit losses 970 Write-offs ( 6 ) Balance at November 30, 2021 $ 1,828 At November 30, 2021, future lease payments on net investment in leases are as follows: Year Ending February 28/29, Amount Remainder of 2021 $ 4,073 2022 14,380 2023 9,539 2024 8,609 2025 7,680 Thereafter 21,682 Total lease payments to be received 65,963 Present value of lease payments - lease receivable ( 55,645 ) Difference between undiscounted lease payments and lease receivable $ 10,318 Note 5. Unconsolidated Equity Method Investments We have a joint venture with Mizuho Leasing which has nine aircraft with a net book value of $ 301,862 at November 30, 2021. Amount Investment in joint venture at February 28, 2021 $ 35,377 Earnings from joint venture, net of tax 1,210 Investment in joint venture at November 30, 2021 $ 36,587 On December 9, 2021, we entered into a loan agreement to provide the joint venture with a $ 1,500 unsecured loan facility, which bears interest at a rate of LIBOR plus 2 % and is payable on December 9, 2022. This transaction was approved by our management as an arm’s length transaction under our related party policy. 16 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Note 6. Secured and Unsecured Debt Financings The outstanding amounts of our secured and unsecured debt financings are as follows: At November 30, 2021 At February 28, 2021 Debt Obligation Outstanding Borrowings Number of Aircraft Interest Rate Final Stated Maturity Outstanding Borrowings Secured Debt Financings: ECA Financings $ 23,455 1 3.49 % 11/30/24 $ 36,423 Bank Financings (1) 684,436 31 2.19% to 4.55% 06/17/23 to 03/06/25 738,353 Less: Debt issuance costs and discounts ( 4,299 ) — ( 5,926 ) Total secured debt financings, net of debt issuance costs and discounts 703,592 32 768,850 Unsecured Debt Financings: Senior Notes due 2022 — 5.50 % 02/15/22 500,000 Senior 5.00% Notes due 2023 500,000 5.00 % 04/01/23 500,000 Senior 4.40% Notes due 2023 650,000 4.40 % 09/25/23 650,000 Senior Notes due 2024 500,000 4.125 % 05/01/24 500,000 Senior Notes due 2025 650,000 5.25 % 08/11/25 650,000 Senior Notes due 2026 650,000 4.25 % 06/15/26 650,000 Senior Notes due 2028 750,000 2.85 % 01/26/28 750,000 Unsecured Term Loans 215,000 1.58 % 02/27/22 to 02/27/24 215,000 Revolving Credit Facilities — N/A 12/27/21 to 04/26/25 — Less: Debt issuance costs and discounts ( 42,416 ) ( 48,739 ) Total unsecured debt financings, net of debt issuance costs and discounts 3,872,584 4,366,261 Total secured and unsecured debt financings, net of debt issuance costs and discounts $ 4,576,176 $ 5,135,111 (1) The borrowings under these financings at November 30, 2021 have a weighted-average fixed rate of interest of 3.21 %. Unsecured Debt Financings: Revolving Credit Facilities During the nine months ended November 30, 2021, we entered into various amendments for one of our unsecured revolving credit facilities that, among other things, expanded the size of the facility and split the commitment into two tranches. As a result, the existing $ 300,000 commitment was expanded to $ 365,000 , with $ 135,000 and $ 230,000 of the commitment allocated to Tranche A and Tranche B, respectively. Tranche A matured on the facility’s previously stated maturity date of December 27, 2021 and Tranche B will mature on February 28, 2023. On April 26, 2021, we entered into an amendment that increased the size of one of our revolving credit facilities from $ 800,000 to $ 1,000,000 . The stated maturity date for $ 900,000 of the total commitment was extended to April 26, 2025, and the remaining $ 100,000 commitment will mature on the facility’s previously stated maturity date of June 27, 2022. On April 26, 2021, we entered into an amendment that reduced the size of our revolving credit facility with Mizuho Bank Ltd., a related party, from $ 150,000 to $ 50,000 and extended its maturity date to July 30, 2022. Mizuho Bank, Ltd. is now a lender for our $ 1,000,000 revolving credit facility with a commitment in the amount of $ 100,000 . 17 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 On December 6, 2021, the Company entered into a $ 100,000 senior unsecured revolving credit facility with Mizuho Marubeni Leasing America Corporation, a related party. The facility bears interest at a rate of LIBOR plus 1.625 %, matures on December 6, 2023, and requires the Company to have a minimum of $ 20,000 revolving credit outstanding throughout the term of the facility. This transaction was approved by our Audit Committee as an arm’s length transaction under our related party policy. As of November 30, 2021, we had no borrowings outstanding under our revolving credit facilities and had $ 1,415,000 available for borrowing. Senior Notes due 2022 On July 30, 2021, we redeemed all of the $ 500,000 outstanding aggregate principal amount of our 5.5 % Senior Notes due 2022, including $ 12,604 of accrued interest and a $ 13,314 call premium. As of November 30, 2021, we were in compliance with all applicable covenants in our financings. Note 7. Shareholders' Equity On June 8, 2021, the Company issued 400 shares of 5.250 % Series A Cumulative Redeemable Perpetual Preference Shares, $ 0.01 par value, with a liquidation preference of $ 1,000 per share (the “Preference Shares”). The Preference Shares are perpetual and have no maturity date. Dividends on the Preference Shares, when, as and if declared by the Company’s board of directors are payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2021. Dividends will be payable: (i) from the date of original issue to, but excluding September 15, 2026 (the “original reset date”) at a fixed rate per annum of 5.250 %; (ii) from, and including, the original reset date to, but excluding, September 15, 2031 (the “2031 reset date”), at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 4.410 %; (iii) from, and including, the 2031 reset date to, but excluding, September 15, 2046 (the “2046 reset date”), during each reset period at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 4.660 %; and (iv) from, and including, the 2046 reset date, during each reset period at a rate per annum equal to the five-year treasury rate as of the most recent reset dividend determination date plus 5.410 %. Dividends on the Preference Shares will accumulate daily and be cumulative from, and including, the date of original issuance of the Preference Shares. The Company may not redeem the Preference Shares before the date that is 90 -days prior to the original reset date. The Company may, at its option, redeem the Preference Shares, in whole or in part, from time to time during the period beginning 90 -days prior to each reset date and ending on such reset date at a redemption price in cash equal to $ 1,000 per Preference Share, plus all accumulated and unpaid dividends (whether or not declared) to, but excluding, such redemption date. In addition, the Company may redeem the Preference Shares, in whole but not in part, at the Company’s option under certain other limited conditions. Except with respect to certain amendments to the terms of the Preference Shares, in the case of certain dividend non-payments and as otherwise required by applicable law, the Preference Shares do not have voting rights. On August 19, 2021, the Company’s Board of Directors approved a quarterly dividend for the Company’s Preference Shares in the amount of $ 5,658 , which was paid on September 15, 2021. Note 8. Related Party Transactions On April 26, 2021, the Company entered into an amendment that reduced the size and extended the term of our unsecured revolving credit facility with Mizuho Bank Ltd., a related party – see Note 6 for additional information. On December 6, 2021, the Company entered into a $ 100,000 senior unsecured revolving credit facility with Mizuho Marubeni Leasing America Corporation, a related party – see Note 6 for additional information. This transaction was approved by our Audit Committee as an arm’s length transaction under our related party policy. 18 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 During the three and nine months ended November 30, 2021, the Company incurred $ 951 and $ 2,866 , respectively, in fees to Marubeni as part of its intra-company service agreement, whereby Marubeni provides certain management and administrative services to the Company. The Company also entered into a parts management services and supply agreement with an affiliate of Marubeni under which we purchased parts totaling $ 2,682 and $ 4,640 during the three and nine months ended November 30, 2021, respectively . Note 9. Income Taxes Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland. The sources of income (loss) from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and nine months ended November 30, 2021 and 2020 were as follows: Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 U.S. operations $ 6,218 $ 15,291 $ 14,408 $ 28,188 Non-U.S. operations ( 45,586 ) ( 10,882 ) ( 55,098 ) ( 252,768 ) Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments $ ( 39,368 ) $ 4,409 $ ( 40,690 ) $ ( 224,580 ) Our aircraft-owning subsidiaries generally earn income from sources outside the U.S. and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland 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 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. The CARES Act did not materially impact the Company’s effective tax rate for the nine months ended November 30, 2021. The Company’s effective tax rates (“ETRs”) for the three and nine months ended November 30, 2021 and 2020 were ( 59.7 )% and 51.5 %, and ( 56.2 )%, and ( 6.6 )%, respectively. The movement in the ETR is primarily caused by changes in the mix of the Company’s pre-tax earnings/(losses) in its taxable and non-tax jurisdictions. The nine months ended November 30, 2021 included income from the sale of unsecured claims related to the LATAM Bankruptcy and certain impairment charges, which were recorded in a low tax jurisdiction. Further, the nine months ended November 30, 2020 included discrete items related to stock compensation and the impact of the CARES act. 19 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Note 10. Interest, Net The following table shows the components of interest, net: Three Months Ended November 30, Nine Months Ended November 30, 2021 2020 2021 2020 Interest on borrowings and other liabilities $ 47,152 $ 56,087 $ 153,287 $ 163,821 Amortization of deferred financing fees and debt discount 4,099 3,929 12,483 10,642 Interest expense 51,251 60,016 165,770 174,463 Less: Interest income ( 448 ) ( 71 ) ( 1,160 ) ( 467 ) Less: Capitalized interest ( 288 ) — ( 645 ) — Interest, net $ 50,515 $ 59,945 $ 163,965 $ 173,996 Note 11. Commitments and Contingencies Rent expense, primarily for the corporate offices and sales and marketing offices, was $ 405 and $ 1,213 for the three and nine months ended November 30, 2021, and $ 413 and $ 1,213 for the three and nine months ended November 30, 2020, respectively. As of November 30, 2021, Aircastle is obligated under non-cancelable operating leases relating principally to office facilities in Stamford, Connecticut; Dublin, Ireland; and Singapore for future minimum lease payments as follows: Year Ending February 28/29, Amount Remainder of 2021 $ 486 2022 1,768 2023 1,703 2024 1,735 2025 1,766 Thereafter 4,358 Total $ 11,816 At November 30, 2021, we had commitments to acquire 27 aircraft for $ 964,292 . Commitments, including $ 76,675 of remaining progress payments, contractual price escalations and other adjustments for these aircraft, at November 30, 2021, net of amounts already paid, are as follows: Year Ending February 28/29, Amount Remainder of 2021 $ 183,051 2022 410,296 2023 277,763 2024 61,189 2025 31,993 Thereafter — Total $ 964,292 20 Aircastle Limited and Subsidiaries Notes to Unaudited Consolidated Financial Statements (Dollars in thousands, except per share amounts) November 30, 2021 Note 12. Other Assets The following table describes the principal components of other assets on our Consolidated Balance Sheets as of: November 30, 2021 February 28, 2021 Deferred income tax asset $ 617 $ 637 Lease incentives and lease premiums, net of amortization of $78,182 and $75,126, respectively 55,013 75,169 Flight equipment held for sale 46,854 53,289 Aircraft purchase deposits and Embraer E-2 progress payments 67,246 52,092 Right-of-use asset (1) 7,473 8,056 Deferred rent receivable 58,625 69,103 Other assets 99,592 53,598 Total other assets $ 335,420 $ 311,944 ______________ (1) Net of lease incentives and tenant allowances. Note 13. Accounts Payable, Accrued Expenses and Other Liabilities The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our Consolidated Balance Sheets as of: November 30, 2021 February 28, 2021 Accounts payable, accrued expenses and other liabilities $ 61,368 $ 43,088 Deferred income tax liability 84,101 75,124 Accrued interest payable 44,554 43,676 Lease liability 10,231 11,003 Lease discounts, net of amortization of $45,557 and $44,887, respectively 705 1,376 Total accounts payable, accrued expenses and other liabilities $ 200,959 $ 174,267 21